Q&A: Why Mechanics Withdrew From Participation in the CCP
Q. Mechanics Bank announced a few weeks ago that it would participate in the Capital Purchase Program. Why did it withdraw on January 23rd?
A. Although Mechanics Bank applied for--and received--approval for $60 million of capital under the CPP early in January, new measures have since been adopted or are under legislative consideration that materially alter the circumstances that existed at the time our Board approved participation. We believe the momentum is toward provisions that create too much risk and could be too costly.
Q. Did the Bank's condition change? Is that why Mechanics Bank is withdrawing?
A. As we have said before, we continue to be very well capitalized and do not need this additional capital. Our original decision to participate was made primarily to ensure greater flexibility in a deteriorating economy. However, given that the Treasury can unilaterally alter the program terms at any time--and there's evidence that proposed changes would expose participating banks to greater risk--we believe at this point that the risks outweigh the benefits.
Q. What new measures approved or under consideration have created concern for the bank?
A. The Treasury and Congress have enacted or are considering significantly more restrictive rules for banks that accept TARP/CPP, including limiting shareholder dividends, marginalizing executive pay and--by far of the most concern to us--telling banks how, what and to whom they must lend money.
Q. Why has the Treasury begun to change the rules of the program?
A. Unlike other provisions of the Troubled Assets Relief Program (TARP), the CPP was only open to strong, healthy banks, and was intended to inject capital into the system to create more stability. Initially, there were few restrictions on use of the funds. But since then, new loans have failed to materialize as rapidly as regulators and legislators may have hoped. We believe the rule changes are intended to increase the number of loans being made.
Q. Why not take the money and make loans with it?
A. We already have plenty of liquidity to make loans--and our net lending has increased over the past few months. As we have said all along, we don't need additional capital. Our primary reason for accepting the CPP capital was to give ourselves more flexibility in the event of a further downturn in the economy. But if taking CPP capital means being forced to compromise our underwriting standards to satisfy Treasury lending mandates, the risks outweigh the benefit. We plan to continue to make sound loans that benefit the businesses and individuals in our community.
Q. Why did you agree to take the money in the first place?
A. Although we announced we had decided to participate, we withdrew from the CPP before signing the Securities Purchase Agreement, issuing preferred stock to the Treasury, or receiving any capital. We are very well capitalized and did not need this additional capital, so our original decision to participate was influenced by the desire for greater flexibility in a deteriorating economy. But because the Treasury can unilaterally alter the program terms at any time, we now feel that the risks outweigh the benefits.
Q. With so many risks associated with taking the Treasury investment, why did other banks choose to participate?
A. We can't speak for other banks, but we can say that there may be good arguments on both sides. We certainly did not make our initial decision lightly, nor have we reversed it lightly. We believe that the situation has changed sufficiently, however, to warrant this reconsideration.
Q. Did most healthy banks opt to participate?
A. We really don't know. Every bank had to make the decision based on their particular circumstances. We are choosing what we feel is the best course for Mechanics Bank.