Three Colorado banks have taken money from the federal TARP bailout program, but none say they were in a position to need a bailout.

Colorado Business Bank, Bankers' Bank of the West and First Western Trust Bank all made strong capital levels stronger with the federal capital injection, they say.

In fact, the emerging pattern with federal TARP - Troubled Asset Relief Program - money is that it's the healthiest banks who are getting the funds, while more troubled institutions may be deemed ineligible. Regulators stepped in at Greeley-based New Frontier Bank late last year and demanded new capital and new management. But that came from private investors, not from TARP.

"(The Treasury) doesn't want to put capital into banks where the capital is the only thing to save the bank from failure," says consultant Larry Martin of Banking Strategies. Martin wasn't speaking about New Frontier because he's subject to a confidentiality agreement.

"Regulators are reluctant to put money into those banks in case something happens to them," he said.

The three Colorado banks that took TARP funds won't be the last, says local banking attorney Ernie Panasci, who's advising clients on how to participate in the program.

"The level of interest is very high," Panasci, of Jones & Keller, said. "Banks are concerned about the potential for commercial real estate values to decline in the next two years. With the difficulty in raising new equity capital due to the lack of capital in all industries, banks are looking at TARP equity as a buffer for economic uncertainty in the coming year."

The TARP program began in the Bush administration last year as a way to get problem loans and other toxic assets off banks' balance sheets.

It morphed into a kind of investment fund that injected money into banks, in return for ownership stakes, in order to shore up the banks' capital.

BAILED-OUT BANKS

Three Colorado banks, none in a position to need a bailout, took money from the federal Troubled Asset Relief Program - TARP.

Bankers' Bank of the West

At year-end 2008, Bankers' Bank of the West had a risk-based capital ratio of 12.4 percent, high enough to be considered very well capitalized.

"We needed an insurance policy to continue to provide the products and services we provide to commercial banks," said Bill Mitchell, CEO of Bankers' Bank of the West.

Mitchell's bank serves 350 community banks in 11 states by buying their loans and managing lines of credit from the Federal Reserve. Yet it went ahead with a government investment, obtaining $12.64 million from the Treasury earlier this month.

The bank issued the government preferred stock that pays 5 percent interest, plus another batch of preferred stock, equal to 5 percent of the amount requested, that pays 9 percent.

Considering the costs of the stock, and the fact that the interest it's paying the Treasury is not tax-deductible, Bankers' Bank of the West figures it'll pay $4 million in interest over the next five years for participating.

"It's extremely expensive capital, but we did this as a good-faith investment for our banks," Mitchell said. "The government will do very well on this program."

First Western

Scott Wylie, CEO of First Western, said his bank borrowed on the same terms, but he doesn't think the capital is expensive at all.

"For a growth company like us to raise new equity, people are looking for 15 percent to 20 percent returns over time," Wylie said. "To get preferred stock from this program is an inexpensive form of capital."

First Western's assets nearly doubled in 2008 to about $450 million. At the same time, its capital ratio was above 10 percent, Wylie said.

"We were encouraged by the regulators to do it, so we asked our investment bankers and lawyers whether we should take it because of the possible stigma," Wylie said. "They said, 'You're already a kind of partner with government because you're highly regulated.'

"I don't really look at it as participating in TARP, because it stands for 'troubled assets.' They've done a really poor job of explaining to the public there's a capital purchase program where they're trying to get healthy banks to loan and grow."

CoBiz Financial

CoBiz Financial, the parent company of Colorado Business Bank, struck a deal with the Treasury in November. For its $64.5 million, it issued preferred stock to the government that pays 5 percent for the first five years and 9 percent after. Because the bank has publicly traded stock, it also had to give the Treasury warrants to purchase 895,968 shares of CoBiz common stock at an exercise price of $10.79 per share.

CoBiz shares have been battered in the financial crisis, down more than two-thirds from their 52-week high. The company ran into problems with its Arizona commercial real estate portfolio, and its Colorado loans are now showing signs of weakness. The company announced an $8.6 million net loss for its fourth quarter, thanks to a $23.44 million provision for loan losses. That followed a $5.34 million loan-loss provision in the third quarter.

By the end of the third quarter, before the provision, Colorado Business Bank still had a risk- based capital ratio above 12 percent. It was 14.5 percent at Dec. 31.

"The thought was we would take advantage of (TARP) and shore up our capital base," said CoBiz CEO Lyne Andrich.

"In this environment, more capital is always better than less. We're going to use it for growth. We believe this environment creates a lot of opportunities for acquisitions, but we didn't take the capital primarily for that purpose."

Finance Editor David Milstead can be reached at milstead@RockyMountainNews.com or 303-954-2648.

TERMINOLOGY

* Capital: A bank's capital is similar to its shareholders' equity, or its assets minus its liabilities. It's supposed to represent what would be left for shareholders if the bank were liquidated. Banking regulators have established lengthy rules for what banks can and cannot include in calculating capital, because capital is the basis for various ways of measuring a bank's health. The most solid form of capital is called "Tier 1" capital.

* Risk-based capital ratio: The ratio compares a bank's capital to its assets, with the various assets weighted differently based on their risk. Cash is not viewed as risky; loans are.

* Warrants: Similar to stock options, warrants give the holder the right to purchase stock in the future at a set price. Banks that get capital from the TARP program are giving the government warrants as part of the deal.

* Loan-loss provision: When banks determine that a loan might not be repaid, they take a charge against their profits and add that amount to a loan-loss reserve. If the loan indeed goes bad, it's then "charged off" and the amount in the reserve decreases.

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