Ask a Utah banker about the Troubled Asset Relief Program, or TARP, and the first thing they’ll tell you is it is wildly misnamed. No bank’s marketing department would ever call a program that lends federal money to strong banks as “troubled asset relief.”
TARP quickly mutated from a true “bailout” program for the likes of GM, Chrysler, AIG and other imploding mega companies into a program to inject additional capital into the American banking system. “At first Treasury did make loans—termed ‘bailouts’ to troubled financial companies,” Utah Bankers Association President Howard Headlee says. “But then Treasury decided to try to stimulate the economy by investing the TARP money in healthy banks.”
“There haven’t been any troubled assets purchased,” Celtic Bank President Phillip Ware says of the latest permutations of TARP. “They decided to inject capital into healthy banks rather than buy assets from the troubled ones.”
And at the risk of misperceptions by citizens who don’t understand the distinction, some Utah-based banks have signed up for and are receiving more than a billion dollars in federal TARP money.
Beehive Banking Today
While Utah’s economy hasn’t escaped the national turmoil, it is not one of the states hit hardest by the housing implosion. Neighboring states like Arizona, Nevada, California and more distant trouble spots like Michigan and Florida are poster states for the housing collapse.
“Yes, we are experiencing some of the difficulties gripping the nation,” Wells Fargo economist Kelly Matthews reports. “But comparatively speaking, our housing situation is not nearly as bad.”
“The Utah banking system is clearly under stress,” state director of Financial Institutions Ed Leary adds. “Banks largely reflect the condition of the economy which in Utah is clearly stressed.” Leary points out that three banks heavily involved in real estate lending, American West Bank, ANB and Magnet, failed in the past year.
And the news for many local banks is grim, with lowered expectations for 2009. “The community is hunkered down,” Heber Valley Bank President Curtis Taylor says. “It’s not dead in the water, but it’s definitely slowed down.”
“It’s a time to be cautious,” adds Cache Valley Bank President Gregg Miller. “Our plan is to survive 2009.”
Show Me the Money
Miller’s two-branch Logan community bank is one of many in Utah to receive TARP dollars. The government buys dividend-paying, non-voting preferred stock in the banks, which leverage the new federal deposit into more lending money. At Cache Valley Bank, the money is going mostly toward refinancing existing mortgages. “When that market dries up, we will see a little traction with our small businesses,” Miller predicts.
At Zions Bank, Executive Vice President Rob Brough says, “We’re able to actively solicit loans for credit worthy borrowers.”
It’s hard to quantify and point to examples of additional lending created because a bank accepts TARP money. For one thing, banks grow invested capital into larger sums. For example, Zions Bank, which received $1.4 billion, is marketing to attract more deposits, which will increase the $1.4 billion into a much larger amount.
“Banks do not lend the capital they receive from TARP,” Headlee says. “Instead banks leverage this capital up to 10 to 12 times by collecting deposits which are lent in local communities.”
“That’s how banks work,” Matthews reports. (Wells Fargo has accepted $25 billion in TARP monies system-wide.) “Bank capital is intended to be leveraged to acquire a multiple amount of deposits and be able to grow the bank.”
The multiplier effect is just beginning and should continue to grow as banks lever up their new capital. That’s one reason why it’s hard to follow the TARP money. “You can’t follow a dollar through the balance sheet,” state regulator Leary observes.
Almost all nationally operated banks with branches in Utah have borrowed billions. Besides Zions, two community banks—Cache Valley in Logan and Frontier Bank in Park City—have received funding. Stable, healthy banks are allowed to borrow 3 percent of their risk-weighted assets. In Cache Valley’s case, that amounted to $4.7 million.
Similarly, most nationally based industrial banks in Utah—banks like CIT Financial and GMAC—are also TARP recipients. Smaller Utah-based industrial banks are sitting out this round of TARP funding.
Still, many Utah banks, although invited by Treasury to participate, have declined. Heber Valley Bank President Curtis Taylor filed the paperwork. “We had to put our oar in the water,” he says, adding that ultimately he and his staff decided, “We don’t need the capital. We don’t need it because of the rules—we don’t know what’s in the future.”
That’s exactly why Celtic Bank opted out as well. “We checked it out pretty carefully, bank President Phillip Ware says. “It could work for us—I wished it would work for us—but it won’t because of a clause we noticed right up front that says basically the Treasury reserves the right to change the rules in the future. We were nervous about that, because once the government starts changing the rules you don’t know what’s going to happen.”
Cache Valley’s Miller says, “TARP was a tough decision for us. It’s a bit of a Trojan horse—you let the government in and then worry about what they’re going to require. There’s a real issue of how much meddling you’ll want from the government.”
Some banks nationwide already have cold feet about going into business with the federal government. Iberiabank Corporation in Louisiana became the first to bail out of the program, returning the $90 million it received. It cited changes in the program and a belief that it put Iberia at a competitive disadvantage.
Northern Trust of Chicago, after taking heat for flying hundreds of clients and employees to its PGA-sponsored golf tournament in Southern California, also says it will return the $1.5 billion capital infusion it received. As the Treasury Department retroactively changes loan terms, more and more banks are sending the money back.
Besides perceived government meddling in their business, many bankers don’t like the terms. In exchange for a capital investment, the government gets preferred stock, which pays a 5 percent dividend. For most banks in today’s low interest environment, that’s a lot of money, and one reason Heber Valley Bank wasn’t interested. “If you don’t need the capital in the first place, that’s kind of expensive,” Taylor says. “We like to get it cheap and rent it out at higher rates!”
“Its not free money at all,” economist Matthews points out. “We have many funding sources less expensive than that.” At Celtic Bank, the numbers didn’t work either. “Five percent is not that good of a deal,” Ware says.
At Zions, that 5 percent on $1.4 billion amounts to annual dividend payments of $70 million. “It’s anything but a bailout,” Brough says. “Its not inexpensive.”
The 5 percent term applies to the first five years. After that, dividends jump to 9 percent, a figure designed to make sure banks repay the government before then.
“Some customers have the perception that it’s a bailout and not a good thing,” Taylor observes. “When in fact, it’s not a freebie at all. It’s expensive money, especially if you don’t need it.”
What to Bank On
With or without TARP funds as part of their capital base, 2009 will be a tough year for Utah bankers.
Utah Bankers Association’s Headlee puts a more positive spin on it. “Utah’s banks are well prepared for this downturn,” he says. “Despite all the rumors, we are still talking about earnings being lower than previous years—not losses.”
“My sense is we’re middle-of-the-road for bank conditions,” Leary says. “The majority of community banks have lent significant portions to construction loans and small commercial developments—both particularly hard hit.”
That’s the niche Celtic Bank has gone after and Cache Valley Bank, too. “Now we’ve got some issues with troubled assets because some of the businesses we serve are slowing down,” Ware says. “As that occurs, we’ll be in a bind across the board in 2009 to make any money unless we get interest rates and secondary markets coming back, and the general economy starts bottoming out.”
Still, economists keep going back to Utah’s unique demographics, which ease the pain as the economy worsens and may cause the state to rise out of the doldrums more quickly than elsewhere.
“Our housing situation is not nearly as bad—comparatively speaking,” observes Matthews. “We have this unique demographic profile of an 80,000 population increase per year, half natural and half in-migration. With that, we were creating 20,000 new households per year. Just natural population increase will at some point require us to build or buy more houses.”
And Matthews make another point: “If we’re able to maintain quality of education going forward, this natural population increase will become the employees of companies if we get to the point companies need to expand again.”
Those kind of broad demographic trends are not translating today as steady borrowers. Many new households are forming in the basements of mom and dad’s house, and new cars aren’t part of household formation, either.
Still, as tough as Utah’s 2009 economic picture is, there may be some hopeful signs. Utahns can always take heart that the economy is worse elsewhere. In recent months, Cache Valley housing prices actually increased, one of the few places in the country to do so. “We’re seeing opportunities come to us because other institutions are less willing to lend right now,” Miller says. “We’ve picked up a few good customers.” Still though, the watchword, even in the Cache Valley, is caution. “We have to be willing to accept less in return and limp through this year with our borrowers,” says Miller. “We have to be smart.”
At Zions, with banks in Utah and harder hit states like Arizona, Nevada and California, there’s been only a slight change in lending. “In the last quarter (of 2008) we saw significant loan demand decline. But in the first quarter it was starting to pick up across the board—small business, home refinancing—because of the interest rates,” Brough says.
The bottom line? Utah banks are not “troubled” despite many of them taking money from the misnamed “Troubled Asset Relief Program.” That money is in the process of being leveraged into far greater sums for general lending purposes in the banks’ territories. The problem at the moment is that loan demand, while fairly steady, is not growing.
“Utah is performing relatively well compared to many other states, even most of our neighbors,” Headlee says. “So when I see the strength of our banking community, I am confident that we will continue to out-perform as we proceed through our recovery.”
Except for a few notable failures like ANB and Magnet, Utah banks seem well capitalized and ready to lend large sums of money. But that cash is only going to go to borrowers with good credit and good track records at using money to grow their businesses.
After all, says Brough, “Nobody benefits from making bad loans.”