The common story is, generally, that TARP was bad – or at least not very helpful – for community banks.
Analysis, including a September study by SNL Financial, says that while large institutions have mostly returned their money and are thriving, community banks are likelier to fall behind on dividend payments, and are doing worse overall.
Massachusetts’ most famous Troubled Asset Relief Program recipient, OneUnited Bank, has failed to stay current on its dividend payments and is caught up in a national scandal for supposedly getting preferred treatment from politicians. Calls to OneUnited for comment on this story were not returned as of press time.
But the four other local banks that have quietly held on to their TARP investments have made their payments – Boston’s Mercantile Bank, Leader Bank in Arlington, Clinton Savings Bank and Somerville’s Central Co-operative Bank – appear to be doing relatively well. All spoke to Banker & Tradesman positively of TARP’s Capital Purchase Program as a safety net and growth engine.
“It’s still reasonably cheap capital. My alternatives for additional capital are not extensive,” said Charles Monaghan, president of Boston-based Mercantile Bank, which is in no rush to return its $4 million because it gives the privately held Mercantile more to work with. Otherwise the bank has two choices, according to Monaghan.
“Either my owners dip into their pockets, or I restrict my growth,” he said.
A Badge Of Honor
While TARP has failed to jump-start growth for many small banks around the country, return on assets (ROA), which measures profit, has been strong for most of the local group. One percent ROA is considered very healthy: Arlington-based Leader Bank had a return on assets of 1.28 percent at mid-year, according to the latest FDIC data, while Mercantile was at 0.96 percent after having steadily climbed in profits over the previous four quarters.
Clinton Bank wobbled in ROA to slightly below zero as of June 30, but had previously posted numbers in the respectable 0.50 percent range over the past year, similar to Somerville’s Central Co-operative Bank’s 0.59 percent in June.
“Anything positive’s good, right?” joked Robert Klingler, an associate and TARP Specialist with New York law firm Bryan Cave.
Klingler is based in Georgia, where none of the banks have returned their TARP dividends. But while Georgia might illustrate how the program has failed community banks, he pointed out that there is one potential benefit to being smaller: the dreaded public relations concerns tended to be diminished.
All four remaining Massachusetts TARP banks, excluding OneUnited, have assets below $600 million. At that size, Klingler said, they probably didn’t attract the same negative attention as some of their larger peers, and therefore didn’t see nervous customers or board members.
Banks may have had multiple reasons for quickly repaying their funds, but bad public relations dominates the list. Capital Purchase Program funds were doled out specifically to healthy institutions in order to spur lending, but its association with TARP soon poisoned it, banks say.
“We initially saw it as sort of a badge of honor, that we were identified as a healthy bank,” recalled Joan Reid, spokeswoman for Rockland Trust, but she noted that things quickly soured as the public made up its mind that all TARP recipients, even those in the Capital Purchase Program, had been bailed out. Rockland had no need for the extra money, she said, and returned it within just nine weeks.
Similar for Wainwright Bank & Trust in Boston, said CEO Jan A. Miller. Wainwright’s board was uncomfortable with the program’s public perception and wanted to get rid of the money as quickly as it could.
Worth The Trouble
By contrast, remaining TARP banks said they didn’t hear much fuss from customers.
With that negative aspect out of the picture, smaller banks can focus on the potential benefits of the program. For smaller institutions, that includes a more viable alterative than raising capital on their own, Klingler said.
“It’s far easier to raise $500 million right now than it is to raise $5 million,” he said. Simply put, a bigger institution can attract bigger investors who are comfortable putting down money to own 2 percent of a large, healthy bank. Not as many are eager to put down money and find themselves owning a major piece of a smaller bank, especially since smaller banks in general are struggling right now. Government money, by contrast, is still a good deal.
And of course, there’s the ever-present fear that the economic recovery, sickly as it is, might falter and send the country into a “double-dip.”
That fear “is not huge, but it’s there,” Klingler said. If there are no complaints from customers, it seems premature to hand back what could be a valuable capital cushion.
That’s the reasoning behind Clinton-based Clinton Saving’s decision to hang on to its $12 million, said Ellen McGovern, senior vice president of marketing. Clinton has been able to do some lending with its capital, although demand for loans has been low, she said. Still, with the economy still on shaky footing, it seems wise to keep the capital around.
For its part, Leader Bank has applied to return its TARP money and is awaiting regulatory approval, said President Sushil Tuli. Coming off a strong 12 months, the $350 million institution recently raised $7.1 million in additional capital through a private offering, which puts it in good standing for the near future.
Monaghan of Mercantile said his bank’s lending – which is almost entirely commercial – has grown 12 percent annually. With the bank doing well, he has no immediate plans to return the money.
“Even though it carries with it some stigma, the overall cost is actually quite modest in light of other alternatives,” he said.
