Boston’s First Trade Union Bank, less than a year after opting not to take federal TARP money, was recently rapped by the Office of Thrift Supervision for having low capital levels and an elevated number of risky loans.

First Trade’s situation, stuck between trying to grow its operations and trying to keep its capital levels safely high, is not uncommon. Several banks have said they are getting contradictory messages with politicians urging them to ramp up lending, while regulators smack them down for being too risky.

As a result of a Jan. 7 agreement with the OTS, First Trade must quell regulator complaints by, among other things, forming a three-year plan that includes a road map for increasing reserves and shrinking its higher-risk loans in relation to its overall capital.

As of Jan. 20, the bank appeared to be making strides in that direction, announcing a $10 million capital raise with its 2009 earnings report, which also reported a $600,000 loss in net income last year. First Trade had applied for TARP funds in late 2008, but pulled its application in April 2009, citing TARP’s negative public image and the government strings attached.

First Trade President Michael Butler declined to speak about the OTS agreement, but confirmed the year’s events had put the institution in a “squeeze” between regulatory requirements and its own growth.

Changing Landscape

Seeing bigger banks pulling back on their own lending, $690 million First Trade sensed a growth opportunity. It launched a growth strategy of its own, Butler said, and has since increased deposits by 28 percent and total loans and leases by 20 percent, according to the FDIC.

At the same time, beginning in the first half of last year, capital requirements have gone up, thanks to new government emphasis on banks’ safety and soundness.

“What you’re hearing in the marketplace today is that the bar is being raised by the regulators and that the definition of a well-capitalized bank is changing,” Butler told Banker & Tradesman.

Tier 1 ratios, for example, are one benchmark for checking the health of a bank’s capital reserves in relation to its assets. A ratio of 6 percent or higher used to be acceptable for regulators, Butler said, but now the norm is to have a ratio of 8 percent. When announcing its $10 million capital raise, First Trade noted that its Tier 1 capital levels now stand at 8.73 percent.

With its growth in both lending and deposits, internal capital wasn’t keeping pace at the rate regulators wanted.

Butler said he does not regret the bank’s refusal of TARP funds, reiterating that the bad public perception and additional government involvement weren’t worth the capital infusion. First Trade originally thought it could use the money to ramp up its lending, but Butler emphasized it wasn’t a necessary component.

In retrospect, its absence didn’t do damage to the bank’s capital-raising abilities, anyway, Butler added, noting the bank’s success in raising $10 million on the open market.

Coming To Terms

That capital raise, however, doesn’t relieve the bank from its duties under the OTS agreement, according to First Trade spokesman Christopher Tremont.

Under its terms, the regulator has a firmer grasp on the bank’s day-to-day activities. The bank can’t originate or buy any loans classified as “Higher Risk” without the OTS’ approval, and also has to give the agency notice of any executive compensation contract changes.

First Trade also has to address OTS concerns with its own underwriting functions and credit administration. The bank also must improve monitoring of its loan portfolios.

Neal J. Curtin, a partner at Boston-based law firm Bingham McCutcheon, said it could be seen as ironic that a TARP-refusing bank was now having OTS capital issues, but “the conventional wisdom” in banking is that avoiding TARP was a good thing if possible.

The Obama administration’s newly announced tax on the 20 largest TARP-receivers doesn’t affect community banks, Curtin said, but that news served as affirmation for some that they were wise to keep free of government entanglements.

As for First Trade Union, Curtin said he could see the conflict between a desire to grow and a need to meet regulator demands.

“There is a real sense that the current wave of bank examinations is really poor, nasty, brutish and short,” Curtin said. “The bank examiners have toughened up in a period when you can make the argument they shouldn’t be.”