Monday, April 26, 2010

Without federal aid, banks plot different course
By Dennis Cauchon, USA TODAY



BBVA Compass Bank, the nation's 15th largest, was one of the biggest financial institutions to survive the economic crisis without aid from the federal government's Troubled Asset Relief Program.

"We didn't have access to this money. We didn't need this money," BBVA Compass Chairman José María Garcia Meyer says. His bank didn't qualify for TARP because it's foreign-owned, by a Spanish company.

Without government help, the Birmingham, Ala.-based bank made a series of decisions that set it apart from many ofits government-assisted competitors.

The bank:
• Cut expenses sharply, including a 1,200-employee layoff that trimmed its workforce nearly 10%. Banks receiving TARP funds cut employment 3.9%, compared with a 6% drop in banks that got no aid.
• Boosted lending by 17%, by acquiring a failed bank and focusing on profitable sectors such as loans backed by the Small Business Administration. TARP banks cut lending 9.1% in the program's first year, the 12 months ending Sept. 30.
In fact, many banks outside of TARP plotted a sharply different course from those that received government help, according to an analysis of bank data by USA TODAY and American University's Investigative Reporting Workshop.

"It was definitely a tale of two worlds: banks that took TARP and those that didn't," says Michael Achary, chief financial officer of Hancock Bank, a $3.5 billion Mississippi bank that increased lending at the same time it cut costs.

Hancock Bank considered taking TARP money but decided against it. Instead, the company raised $175 million from private investors and generated additional capital through earnings. It increased lending at a time when many other banks cut back.

"The free market can take care of a lot of things better than government intervention," he says. His bank acquired the assets of a failed Panama City, Fla., bank in December.

More than 700 banking firms — owners of about 940 banks — participated in the program, receiving about $247 billion in federal investments. About 7,400 banks did not get financial help.

Many banks in TARP were larger and more heavily tied to real estate lending than those outside the program, bank data show.

Both categories — banks in TARP and those outside it — included a full range of institutions, big and small, healthy and sick.

Some banks wanted to join TARP but were rejected because of poor financial health. Others, including Hancock Bank, qualified for TARP money but decided against taking it.

A few large banks took TARP funds reluctantly, at the urging of regulators, to help restore faith in the financial system.

Bank analyst Bert Ely of Ely & Co. says it's difficult to know what role government aid played in shaping bank behavior. "The question is cause and effect. Banks participated for different reasons," he says.

Ely says he told banks not to join because they would regret the burdensome strings that come with government aid.

SVB Financial Group Chief Executive Ken Wilcox is one of those with regrets. He says his bank, Silicon Valley Bank, took TARP funds because, in the early days, it enhanced a bank's reputation for soundness. But the politics changed as the program came to be viewed by many Americans — as reflected in polls — as a bailout and sign of financial weakness.

Wilcox says his bank, a $13 billion institution based in Santa Clara, Calif., is working hard to lend money, but many companies don't want to borrow heavily in a weak economy. "We have more borrowers, but our total loans are down," Wilcox says. The bank repaid $235 million in TARP money in December.

Silicon Valley Bank lends to high-tech companies that need cash for short periods to fulfill new orders. As sales have fallen during the recession, companies have fewer orders and less need to borrow. Result: The bank's loan portfolio fell 12.5% in the year ended Sept. 30 and 4.7% more in the fourth quarter of 2009.

At the same time, Wilcox's bank has been flooded by more than $1 billion in new deposits from customers seeking a safe place to put money in a troubled economy. The new deposits are parked mostly in ultra-safe government securities rather than in business loans.

That will change when the economy turns around, Wilcox says. "Sales drive the economy, not debt," Wilcox says.

Financial strategist David Smick, author of The World Is Curved: Hidden Dangers to the Global Economy, says it may take years before banks start lending in larger ways to small and medium businesses. He says the government erred when it changed TARP from a program that took over bad loans to one that invested in banks.

"Washington blinked," Smick says.

Russell Weyers, president of Johnson Bank, a healthy $5.6 billion institution in Racine, Wis., that didn't take TARP funds and has increased lending, says taxpayers shouldn't be unhappy that struggling banks in TARP cut back credit. "Too much lending isn't fixed by more lending," he says.

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