Community development banks caught a break in the Treasury Department's rescue plan when they alone were exempted from issuing warrants to the government in exchange for capital injections, and they intend to take full advantage.
The cost of issuing warrants would have made participation in the Treasury's Capital Purchase Program nearly impossible for banks designed to serve residents and businesses in low-to-moderate-income areas, said Jeannine Jacokes, senior policy adviser to the Community Development Bankers Association.
With the warrant requirement removed, a "significant" number of eligible community development banks have submitted applications to receive government capital or intend to do so by Monday's application deadline.
"We are incredibly happy that Treasury recognized the role that … [community development] banks can play in the economic recovery," she said.
Ms. Jacokes said she expects many of the banks to put the capital to work quickly, since the people and businesses that community development banks serve are "already living on the edge" in terms of savings.
"Given the current climate, the more capital they can get to lend in their communities, the better," Ms. Jacokes said. The banks "are certainly not going to be sitting on their money."
Other community development banks are also considering using the Treasury capital on acquisitions.
Dozens of banks and thrifts have won approval to receive Treasury funds, and it is believed hundreds more have applications pending. Publicly traded banks that participate in the program will issue to the Treasury a mix of preferred shares — paying a rate of 5% for the first three years, and 9% after that — and warrants for common stock.
The rules are different for privately held banks. Instead of taking warrants to purchase common stock, the Treasury would take warrants to purchase additional preferred stock. The warrants, which would be exercised immediately, would pay a 9% dividend.
The warrant requirement was likely eliminated for community development banks because when Congress passed the Emergency Economic Stabilization Act of 2008, the framework of the bailout, it instructed the Treasury to consider "providing financial assistance to financial institutions, including those serving low- and moderate-income populations and other underserved communities."
Community development banks differ from traditional banks in that they have access to the Community Development Financial Institutions Fund, a Treasury division that provides financial assistance to institutions that work in underserved areas. In exchange for their outreach efforts in low- and moderate-income areas, community development banks can get direct investment from the fund and are eligible for tax credits.
About a third of the nation's roughly 60 community development banks are ineligible for the Treasury program because they are structured as Subchapter S corporations or as mutual thrifts. (The Treasury has yet to come up with a mechanism for including those institutions, which cannot issue preferred shares.)
The $143 million-asset City First Bank of D.C. in Washington has applied for $3 million in Treasury funds. Dorothy Bridges, City First's president and chief executive officer, said it would use the money to "spur new loan growth in our commercial lending area."
"We are looking to extend credit, and this gives us more of an opportunity to do that," Ms. Bridges said. "And for the niche we play in, there is always a demand for credit."
Ms. Bridges, who took over as CEO in September, has set a goal of building City First into a $200 million-asset bank within the next three years.
She said the extra capital would also allow City First to take a bigger role in loan participations and increase its visibility through marketing.
"It would give us a chance to build our standing in the community," Ms. Bridges said. "We have a good window to tell people we are open for business."
While City First plans to grow organically, the $600 million-asset Southern Bancorp in Arkadelphia, Ark., plans to use at least part of its expected $11 million from the Treasury on acquisitions in the Mississippi Delta and New Orleans area.
"We like to look for communities to help," said Brent Black, Southern's chief financial officer. "With the money, we want to expand our mission and expand our organization."
Under Southern's business model, the company takes a part of its earnings and reinvests them through community grants and school donations.
Those types of pay-it-forward programs are what make community development banks "very unusual cats," said Robert McKean, the president and CEO of the $200 million-asset Albina Community Bancorp in Portland, Ore.
"We are balancing a social mission with a for-profit motivation," Mr. McKean said. That is why it was so important not to have warrants attached to the preferred shares, he said.
"It would have been an added layer of cost," Mr. McKean said. "We serve markets that tend to be more fragile than most, so our cost structure tends to be higher anyway, with smaller loans, more hand-holding, and a lot of deals in tandem to offset the risk."
Some observers have said it is possible the warrant exemption could encourage some traditional banks to reorganize as community development banks. The Treasury is giving banks until Monday to apply for certification as community development financial institutions.
Since warrant exemption is capped at investments under $50 million, Ms. Jacokes said she is not expecting many banks to rewrite their missions in order to become community development banks. But, she said, converting might make sense for those banks that already serve low- and middle-income communities.
"There could very likely be other banks that are doing CDFI work but just haven't self-identified," she said.
