Another Memphis-area financial institution has sold preferred shares to Uncle Sam as part of the Troubled Asset Relief Program unveiled last year to boost the banking system.
First Alliance Bank is the latest Memphis bank to sell a stake to the federal government, according to the most recent information available from the U.S. Treasury Department. First Alliance this month sold a little more than $3.4 million in preferred stock with warrants.
The warrants give the Treasury the right to buy banks’ stock at a set price whenever it wants in the coming years.
That investment is the centerpiece of the Capital Purchase Program, which itself is one chunk of the $700 billion in TARP funding Congress began allocating last year. The way the capital purchase program works in general is banks that are judged healthy enough to effectively put the federal cash to work sell non-voting shares of preferred stock to the government.
Companies such as banks issue preferred shares and stock held by common shareholders. One upside of the government holding preferred shares is that while common shares pay dividends in tandem with a company’s earnings, which are never guaranteed, the preferred shares will pay the government a fixed dividend of 5 percent for the first five years.
After that, the dividend rises to 9 percent, which means the recipients of the government money have an incentive to pay it back before the dividend payment bumps up.
The program was designed as a confidence booster for the financial markets. If the banks need the money, they’ve got it on hand. If they don’t need it, it still can be deployed in the future.
“We knew in the scope of our strategic plan for the bank two years ago that we would need to raise capital to continue to grow the bank and build our business,” said First Alliance president and CEO Hunt Campbell. “The opportunity to do that is still here today, but the prospective sources of capital have decreased and therefore we are evaluating all of our options.”
He said the bank feels good to have been approved to participate in the CPP program. In general, approval to participate is regarded among banks as a Good Housekeeping seal of approval.
The government wanted the money to go to healthy banks. Those are the institutions the government figured would be more likely to use the money to boost lending, as opposed to banks teetering on the precipice that might use the money to keep themselves afloat.