Valley banks weigh deal from U.S.

By Don Shilling

The plan calls for the Fed to receive preferred stock in community banks.

Uncle Sam could soon be a shareholder in some local banks.

The federal government wants to invest $250 billion in financial institutions, and that has the attention of Home Savings and Loan, First Place Bank and First National Bank.

Executives at those locally based financial institutions said Wednesday they want to hear more about the plan, which is part of the attempt to unclog the nation’s credit markets.

The funding is separate from the $700 billion plan to buy troubled loans from large investment banks.

In exchange for putting $250 billion into banks nationwide, the U.S. Treasury would receive preferred stock in the banks that would pay a dividend of 5 percent annually for the first five years and 9 percent after that.

Institutions the size of Home Savings would be eligible for an investment of between $20 million to $60 million, said Doug McKay, chairman and chief executive of the Youngstown-based company.

He said he’s interested in seeing the plan’s details because it could be a good way to jump-start the company’s loan programs, which have been reduced.

Riskier loan programs, such as home equity loans and business loans, have been cut in half in the past few months, McKay said. Mortgage lending hasn’t been affected and is running ahead of last year’s pace, he said.

Home Savings has less money to lend because it has had to keep more of its capital in reserve to meet stricter federal regulations, he said.

Federal and state regulators placed Home Savings under a cease-and-desist order in August because of problems it had with troubled loans. The order forced Home Savings to suspend dividend payments and improve risk management.

McKay said Home Savings has met all deadlines in the order and plans to meet all of the new requirements by the end of the year.

The Washington Post reported that the federal government isn’t looking to bail out troubled banks with the investments. The strongest and weakest institutions will not receive the money. Instead, institutions in the middle are targeted in the hopes that a little bit of money would boost their ability to compete, the story said.

Steve Lewis, president and CEO of First Place Bank in Warren, said he wouldn’t comment on the likelihood of his company accepting an investment but said it seems like an attractive way for any community bank to raise money. Obtaining money from other sources would be more costly, he said.

Banks typically borrow money from each other and from the Federal Home Loan Bank, but much of that lending has been curtailed. Lewis said mortgage lending is continuing normally because the companies that buy mortgages from banks on the secondary market are continuing to operate. Banks can sell their mortgages and then use that money to offer more mortgages, he said.

But business loans and home equity loans aren’t sold on the secondary market, so First Place isn’t seeking new customers for those loans because it would have to bring in new capital to make the loans, Lewis said.

Bob New, president of First National Bank in Hermitage, Pa., said he is studying the Fed’s offer and called it “very interesting.”

The key question for First National is whether the money could be used for expansion, such as acquiring other financial institutions, he said. First National doesn’t need the money to support its lending programs because it didn’t have large amounts of bad loans that it had to write off of its accounting books, he said.

In another program, the government also said it would guarantee unsecured loans that banks take out for their operations.

McKay said officials from the Federal Deposit Insurance Corp. called to gauge his interest in the guarantee program, and he said it sounded encouraging but he wanted more details on the type of loans being guaranteed.

shilling@vindy.com