Treasury investment in banks misunderstood, executives say

When news spread that Manitowoc’s Bank First National was receiving $12 million in so-called Troubled Asset Relief money from the federal government, some people familiar with the bank were puzzled.

“We had customers calling and saying, ‘You’ve always been a strong bank. Why would you take this money’” said Lisa O’Neill, chief financial officer for the bank. “There has been a real awareness campaign to say we were offered this money because we are a well-run institution.”

Confusion about the Troubled Asset Relief Program spans far beyond Manitowoc.

For more than a few reasons, starting with an early shift in priorities by the officials running it, TARP has become one of the most misunderstood and controversial parts of the federal government’s effort to revive the economy.

Originally intended to stabilize the financial system by getting troubled loans and investments off the books of important banks, the program quickly evolved into capital injections to strengthen banks of various sizes around the country. The infusions of taxpayer money, in which the Treasury buys shares of preferred stock in banks that win its approval, were meant to let banks build capital and, in turn, increase the flow of financing to businesses and consumers.

But the quick switch in strategy for the program, which already had been labeled a “bailout” in the media, muddied perceptions and stirred doubts about whether the government had figured out how to handle the financial crisis. Further complicating matters were statements by the Treasury saying the money was directed to healthy banks, even though some big troubled ones, such as Citibank, were major recipients.

Add to that the cries by Congress that participating banks aren’t making enough loans and reports of extravagances by some banks receiving the money, and it’s easy to see why people are scratching their heads about TARP.
Wisconsin recipients

So far eight Wisconsin-based banks have received funding via TARP. Despite public and congressional misgivings about whether it’s working, most of the Wisconsin banks say it is having — or will have — an impact.

Milwaukee’s Marshall & Ilsley Corp. said that from time it received $1.7 billion in government capital Nov. 14 until the end of December — the most up-to-date figures the bank has made public — M&I entered into roughly $1.3 billion in new credit throughout its markets.

“That’s a pretty strong number given the economic environment,” said Greg Smith, chief financial officer of M&I, the biggest bank based in the state.

Smith said M&I also is “taking very seriously” the TARP mandate to work with struggling mortgage borrowers, noting that in December the bank declared a three-month moratorium on foreclosures on owner-occupied homes.

The state’s second-largest bank, Associated Banc-Corp, of Green Bay, said that from mid-November — when it received its Capital Purchase Program investment of $525 million — through January it issued about $2.3 billion in new and renewed loans to customers.

Associated probably wouldn’t have done that much lending without the capital boost, said chief executive Paul Beideman, who noted that the bank already was well capitalized but took the money as “an abundance of caution.”

“It allows you to think about it more aggressively because you can indeed be more flexible,” Beideman said.
More lending planned

Bank First National’s O’Neill said the $12 million her bank received last month will support its strategic plan to increase lending by $50 million this year and again in 2010. She said the bank was encouraged by its regulator to participate in the Capital Purchase Program, and that even with the 5% dividend banks must pay the government, “it was one of the better ways to attract capital into the organization to facilitate executing our growth strategy.”

Banks like to point out that the money isn’t a handout. They must pay the Treasury a 5% dividend for the first five years and 9% thereafter. Just last week, for example, M&I said it will pay a quarterly cash dividend of more than $21.4 million to the U.S. Treasury.

Mike Daniels, president of Nicolet National Bank in Green Bay, said his bank never stopped making loans and never changed its underwriting standards as the economy slowed. Nicolet received almost $15 million in late December.

“We have made way over $15 million of loans since Dec. 23, both residential mortgages and new commercial relationships,” Daniels said.

Merlin Zitzner, chairman and CEO of The Baraboo Bancorporation, said his bank has turned more than half of its $20.7 million in TARP money into loans in Sauk County. He said deposits at his bank had been hurt by people who had moved their money to super-safe Treasuries — money that he argues left Baraboo and went to Washington, D.C.

“We saw it as an opportunity to get some of that Washington money back in our communities and finance economic growth,” Zitzner said.
Funds still flowing

Milwaukee’s Legacy Bancorp received $5.5 million on Jan. 30, and Medford-based Mid-Wisconsin Financial Services announced Friday that it received $10 million.

TARP funding is pending for Beloit’s Blackhawk Bank. It has received preliminary approval to get $10 million but still can turn down the money. Its CEO is having some second thoughts.

Regulations that come with the capital, including limits on executive compensation, added by Congress in passing economic stimulus legislation. “are making taking TARP money less and less attractive,” said Blackhawk CEO Rick Bastian.

If the new rules scare off Blackhawk, the government may lose out on a bank with exactly the kind of attitude lawmakers seem to want.

“We’ve kept our problem loans relatively low and so, unlike a lot of banks, including Citibank and Bank of America, we look at TARP capital as a way to sustain additional growth and to capitalize on the opportunities that inevitably take place in a market that’s as full of turmoil as the banking market is today,” Bastian said. “We would expect to do what the Treasury would love to see banks do, and that’s multiply that $10 million investment into $80-$90-$100 million in additional loans and investments.”

Some of the big banks in the first wave of TARP awards — none was from Wisconsin — reportedly signed on only because of arm-twisting by federal officials who talked of saving the financial system. Since then, regulators have encouraged many other banks to apply for the funding. So far more than 400 have taken the capital. But accepting TARP money comes with potential hazards other than limits on compensation.

Associated’s Beideman discovered that when a public uproar occurred after the Journal Sentinel’s Dan Bice reported this month that the bank was planning to reward 100 top-achieving employees with a trip to a plush resort in Puerto Rico. The bank canceled the trip in response to the criticism, although it said no taxpayer funds would have been used for it.

The unfavorable reaction here almost certainly was heightened by previous reports of travel, opulent expenditures and big bonuses by executives of other national banks that had received TARP funds.

Said Blackhawk’s Bastian: “It’s one of those things where people are asking me whether I’m buying an airplane with the $10 million or how much of that is going toward my office or how much is going toward a bonus. Not one penny of it.”