Banks wary of TARP fund restrictions

Taking inexpensive capital from the Treasury Department sounded like a great idea when the credit and capital markets were frozen late last year.

But today, a growing number of banks are having second thoughts.

In its effort to spur lending and jump-start the faltering economy, the Treasury began offering billions of dollars of capital to the nation's banks in October. Through March, more than 530, including four in Hampton Roads, had signed up.

In exchange for funds from the Treasury's Capital Purchase Program, Monarch Financial Holdings Inc. and other participants issued preferred stock with a 5 percent dividend and warrants that would allow the Treasury to buy some of their common shares.

When it received $14.7 million from the Treasury in December, the Chesapeake-based parent of Monarch Bank called attention to the help it could provide to its customers.

"We are extremely proud that the U.S. Treasury chose to make an investment in Monarch," said Brad Schwartz, its executive vice president and chief financial officer, in a statement about the transaction.

Four months later, Monarch is weighing whether to repay the capital as quickly as possible, Schwartz said. Amid the turmoil in financial markets last year, "we took the capital as an insurance policy," he said. Congress, however, imposed additional rules for institutions receiving funds from the Treasury's Troubled Asset Relief Program, he said.

One change requires that banks receiving TARP funds allow their shareholders to vote on executive compensation. The outcome is advisory and isn't binding on the company's board. However, other requirements tucked into the economic stimulus package make more onerous demands on banks using the TARP program, including restraints on the use of bonuses, retention awards and incentive compensation for highly paid employees.

The stimulus legislation, which was signed into law in February, also requires the boards of companies receiving TARP funds to have a company wide policy regarding excessive or luxury expenditures for such things as entertainment, office and facility renovation, aviation and other transportation services.

What concerned him and other bankers, Schwartz said, was the possibility that more rules may be coming.

Since the end of March, six banks around the country have redeemed the shares they issued for the Treasury's capital, and four others are in the process of doing so, according to SNL Financial, a Charlottesville-based research and publishing company.

Almost two-thirds of the $303 billion of capital that the Treasury disbursed to stabilize the financial system and spur lending went to healthy institutions. However, repeated infusions of TARP capital for the crippled insurance holding company AIG and some faltering banks have stoked taxpayer anger.

Had it not been for parts of the TARP program, "I think conditions in the credit markets would have been much worse," said Jack Gibson, vice chairman and CEO of Hampton Roads Bankshares Inc., the Norfolk-based parent of Bank of Hampton Roads, Shore Bank and Gateway Bank & Trust.

Hampton Roads Bankshares attracted attention in December when it used part of the $80.3 million received from the Treasury to buy the Virginia Beach-based parent of Gateway Bank & Trust. As part of the deal, it paid two of Gateway's senior executives significant retention bonuses. The two companies struck a deal in September after Gateway had been severely weakened by losses on its holdings of Fannie Mae and Freddie Mac stock.

One problem, Gibson said, is that the availability of Treasury capital for healthy banks has been routinely confused with parts of the TARP program that provide capital for troubled institutions, such as AIG.

"We were all painted with a broad brush," and healthy banks were accused of seeking a bailout if they used any TARP funds, Gibson said. At Hampton Roads Bankshares, "we've learned to live in the world of TARP," including the restrictions on compensation.

TowneBank, too, will continue using the $76.5 million of capital it received despite the added restrictions. "We made an informed business judgment when we elected to participate" in the Treasury's Capital Purchase Program, said Bob Aston, chairman and chief executive officer of the Portsmouth-based bank. "We're satisfied we made the right decision, and we'll stay the course."

Earlier this year, Old Point National Bank tried to capitalize on public resentment over repeated injections of government funds into troubled institutions. In a series of ads, the Hampton-based bank declared, "We said NO to the Bailout."

The ads sought to communicate that Old Point remained strong and had the resources to continue lending, said Louis Morris, its president and CEO. The responses from customers and prospective customers were positive, he said.

Banks elsewhere in the nation have attracted attention by distancing themselves from the Treasury's capital programs. One, Worthington National Bank of Fort Worth, Texas, ran billboard ads saying, "Did your bank take a bailout? We didn't," said Derek Ferber, a research analyst with SNL Financial.

However, suggesting that use of the Treasury's Capital Purchase Program by well-capitalized banks is a bailout "is a huge stretch" and unfair to healthy institutions, Ferber said.

After years of concentrating on the Peninsula market, Old Point has been expanding its presence south of the James River. In early 2008, it opened a branch in the Hilltop area of Virginia Beach, its sixth in South Hampton Roads. In February, it broke ground for a seventh in Norfolk's Ghent neighborhood.

When the Treasury's Capital Purchase Program became available, Old Point figured it already had sufficient resources for continued expansion and loan growth. "We evaluated the program, considered the pros and cons, and came to the conclusion that we didn't need it," Morris said.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com