TARP covers in case of rain

Seven Nebraska banks took the plunge earlier this year and accepted a buy-in from a new shareholder: Uncle Sam.

Bank officers say that so far the new part-owner is working out, backstopping them in a time of economic uncertainty.

In some cases, the government's money has generated new business and even a few new jobs. In other cases, the arrangement has been a money-loser because of the dividends the banks pay to the U.S. Treasury.

“It was cheap insurance,” said Karl Randecker, president of First State Bank of Gothenburg. “If we didn't take it then, we could never take it. We thought it was too much of a risk not to take it, because we were so unsure about the economy.”

It was an unusual step in an unusual time. The nation's financial system was reeling from a near-collapse last fall, unsettling even financially healthy banks like these agriculture-heavy lenders.

But the title of the federal program seemed ominous: Troubled Asset Relief Program. What would customers think if their local banks became part of the “TARP”?

The goal of TARP's Capital Purchase Program, however, was not to bail out the banks but to make money available to creditworthy borrowers through sound institutions. Participating banks received an amount of capital in proportion to their size, boosting their basic financial support so they could continue lending money and even expand lending.

In return, the U.S. Treasury would receive shares of stock in the banks as well as dividend payments four times a year.

“Accepting that capital purchase was more of a just-in-case,” said Marnie Herrmann, senior vice president of Lincoln-based Security First Bank.

“What if things really do get crummy and we for some reason are going to need that capital? Here's the chance to have some and put the bank in a better position to weather a longer storm.

“As it turned out we haven't needed the additional capital and have been able to fund loan demand just fine.”

The funds haven't been magic for the seven Nebraska banks participating.

As a group, their loans were up 3.4 percent from Dec. 31 to March 31 over the preceding year, but profits were down by one-fifth. Only Banner County Bank in Harrisburg had higher quarterly net income.

The banks have put more money than usual into reserves for possible loan losses, according to their March 31 reports to the FDIC. And all banks except one held more bad loans or repossessed real estate on March 31 than they did on Dec. 31.

At First State Bank, total loans are down, Randecker said, partly because some farm borrowers are paying down their debt thanks to good revenue.

“When the TARP came out, the real reason for it was to stabilize the system, and it did do that,” he said. “I know things still aren't whoopie out there for the average guy.

“It's almost impossible to spur lending when the whole country is going through a downsizing of their debt and a depreciation of assets. To think that lending's going to get spurred by this TARP is really a misnomer. We've seen borrowers pull in their horns.”

But bank executives said the extra capital gives their loans more backing and ensures that customers who qualify for loans will get them.

First State Bank hired three people in the Omaha metro area partly because of the TARP money. First State expanded its mortgage lending here and in Denver, said Mike Mancuso, who heads the department.

“We would have a limited funding mechanism without the TARP money,” he said.

The bank is packaging $8 million in new home mortgages to sell on the secondary market, said Bob Kment, Omaha market president.

The bank made 150 mortgage loans in May and June, more than twice as many as in all of 2008, partly because of low interest rates but partly because of the bank's TARP funds.

“For us it was about having a bigger and stronger war chest,” Kment said.

For Pathway Bank in Cairo, the added capital helped the bank cope with some loan losses it hadn't expected, said Thomas Emerton, president and CEO. Loan problems required the bank to put $2.4 million into its reserves in the first quarter of this year and charge off $1.2 million in bad loans.

The FDIC levied an extra assessment on all banks to shore up its deposit insurance fund as bank failures expanded this year. That extra cost contributed to losses at Pathway Bank for the fourth quarter of 2008 and first half of 2009, a reversal from the past five years when it doubled in size and profits grew as well.

“We'd kind of grown to the point where we needed more capital,” Emerton said. “It's difficult to raise capital in a small community bank, particularly a bank of our size and our type,” which mostly lends to agriculture-related businesses.

The TARP money, he said, “allowed us to keep the growth we had and not face having to shrink the bank. It keeps us in a position where, if there are quality loans out there, we can compete for them.”

Like the other bankers who commented for this story, Emerton said the program's restrictions on executive pay won't have an impact because salaries already are well under the limits.

At Banner County Bank, the new capital supported some but not all the additional $5 million the bank loaned this year compared with a year ago, said Roger Wynne, president and CEO. That represents a 21 percent increase in loans.

“We're not getting rich with the (TARP) money, but it seems to be carrying itself,” he said.

Some customers, who had heard terms like “troubled” and “bailout,” asked why the bank was taking part in the program.

“I didn't lose a customer over it,” Wynne said. “I told them if we were in trouble we wouldn't have qualified for it. Then they feel at ease.”

Adams Bank of Ogallala can lend about $120 million more than it would have without its $12 million in TARP capital, CEO Todd Adams said. Of that total, $10 million stayed at the bank's Nebraska offices, and the rest went to a mortgage loan office in the Denver area, Adams said.

So far, loans are up nearly $60 million or about 17 percent compared with last year, despite the slower economy, he said. Loans increased 15 percent in 2008 over 2007.

“Without this program, we probably wouldn't have been able to make as many loans as we have,” Adams said. “We don't want to get to the point where we had creditworthy borrowers and weren't able to lend them money. All of us are trying to do our part with the economy and get it going and moving forward.”

The bankers said they plan to keep the capital for the time being. They will pay it back in five years, when the dividend rate increases sharply, if not before.

Paying it back earlier will depend on economic conditions, they said. For example, if interest rates increase, then the dividends paid on the TARP capital will be relatively low and the banks would be more likely to wait the full five years.

Security First Bank is considering an early pay-back because it hasn't needed the capital so far and the dividend payments are an added cost, said Herrmann.

Adams said his bank would keep the money for five years if strong loan demand continues.

“It will have done what it was intended to do, to keep people lending,” he said. “I think that by getting credit to our creditworthy customers, that helps them keep people employed and expand their business. It's helping the economy.”

Contact the writer:

444-1080, steve.jordon@owh.com