“There’s been a lot of misunderstanding about what TARP is about.” — C. Andrew Lawrence, CEO, Marine Bank & Trust, Vero Beach [Photo:Matt Dean]

Last year, as the recession deepened, David Bridgeman, CEO of Orange City-based Pinnacle Bank, didn’t like what he saw ahead. He says his bank was doing fine. But he and his board realized that Pinnacle — like plenty of other banks in Florida — would need more capital or would have to cut off lending if the recession continued too long.

The markets where bankers usually raise capital through stock offerings and the like were paralyzed, and so Bridgeman and Pinnacle turned to the only game in town, the Troubled Asset Relief Program created by Congress during the Bush administration (and now run by the Obama administration). Pinnacle applied for $4.4 million and got it in March.

Including Pinnacle, 100 Florida-based banks — roughly a third of the total — have applied for TARP funds. As of June, the Treasury has approved the applications of 18 banks that have borrowed a total of $223 million [“TARP in Florida”]. Most of the remaining 80 or so applications are pending.

Behind the numbers of applicants and non-applicants is a split between banks that see TARP money as an opportunity and those that shun it as dangerous business. Those CEOs who would comment about seeking TARP funds are unanimous that their banks are fundamentally healthy. TARP is borrowing, not a bailout, they say [“Payback”]. Some, like Bridgeman, are using their TARP money as a rainy day fund to continue lending. Others who borrowed TARP funds have used them to gobble up market share. All decry the stigma they believe TARP carries because of its association with the big, troubled banks, saying TARP was intended to keep healthy banks lending.

TARP: By the Numbers 1,800 — Number of institutions nationally that were initially eligible for TARP 100 — Florida-based financial institutions that have applied for TARP funds 18 — Florida-based institutions that have received TARP funds $223 million — Total TARP funds loaned to Florida banks 29th — Florida’s rank nationally in the amount of TARP funds received by its banks

Other Florida banks, however, have decided they want nothing to do with TARP — whose loans come with conditions that make the federal government a shareholder in the banks that borrow. The spirited split between TARP-seekers and TARP-avoiders was on display recently at a bankers meeting in New Orleans, says Ernest Pinner, CEO of CenterState Banks of Florida in Davenport. “Those who didn’t take it were saying how smart they were,” says Pinner, whose bank was the first in Florida approved for TARP, receiving $27.9 million in November.

While TARP’s impact on Florida’s overall economy is hard to assess, the next few years likely will reveal which bankers made the right choices: Will some bankers who avoided TARP money lose market share to those who took the risk of borrowing from the federal government and so had the capital to keep growing? Or will those free of part-federal ownership be more free to maneuver? And will all the banks who borrow TARP money be able to repay it as they plan within five years, or will some end up with the federal government as a business partner indefinitely? “It’s conceivable for some institutions there is no exit strategy,” says Rudy Schupp, CEO of 1st United Bank in Boca Raton, a TARP recipient.

Miami banking analyst and consultant Ken Thomas isn’t a fan of TARP. He says that when meeting with a bank’s directors, he writes on a board: “TARP = TRAP Desperate.” He tells directors to imagine an empty chair at their board table filled by Massachusetts Democratic Rep. Barney Frank. Because of the adverse publicity and government strings attached, “I generally recommend against doing it unless it’s absolutely critical,” says Thomas.

Concerns like those prompted Naples-based Bank of Florida to withdraw its TARP application this year, saying the program was being seen as a bailout of weak institutions rather than a way to help stronger banks lead local economic recoveries. The bank also cited the conditions the government attached to the funds [“Strings Attached”], potential costs and uncertainty whether the government might change the rules in midstream. In announcing the withdrawal, CEO Michael McMullan said TARP didn’t fit well with “our strategic initiatives, which include potential acquisitions,” and that the bank had sufficient access to capital without it.

“What TARP did was give us the capability to continue to make loans while we cleaned up the bank.” — Matt Brown, CEO, Premier Bank, Tallahassee [Photo: Ray Stanyard]

The banks that have taken TARP funds say the program is working well for them and their local economies, however. Ken Cherven, CEO of First Community Bank of America in Pinellas Park, calls the $10.7 million in TARP capital his bank received “runway. Capital is runway, and in brutal market conditions you want as much runway as possible.”

The TARP bankers say keeping their capital ratios healthy has enabled them to continue lending. Matt Brown, CEO of Premier Bank in Tallahassee, says Premier used its $9.5 million in TARP money to expedite the removal of problem real estate loans from the bank’s books. “What TARP did was give us the capability to continue to make loans while we cleaned up the bank,” Brown says. And as it cleaned itself up, Premier also used part of the TARP money to build its mortgage staff, growing from sixth to second in local residential mortgage market share.

Naples-based TIB Financial, meanwhile, spent some of its $37 million in TARP funds to buy deposits of Cape Coral’s failed Riverside Bank of the Gulf Coast from the FDIC and nine branches. The move increased TIB’s presence in Lee and Sarasota counties, giving it a total of 28 branches.

First National Bank of Nassau County in Fernandina Beach beefed up lending with its TARP money, using part of its federal funds to boost mortgage lending to $319 million in the first four months of 2009, up from $148.3 million in the first four months of 2008, says CEO Mike Sanchez.

“Capital is runway, and in brutal market conditions you want as much runway as possible.” — Ken Cherven, CEO, First Community Bank of America Pinellas Park

Other banks likewise are using TARP money to seize opportunities arising when competitors curtail lending or when business customers worry about their existing bank’s health. “We’re getting in front of clients we otherwise wouldn’t be able to get in front of. The worst of times for everybody else is the best of times for us,” says Gideon Haymaker, CEO of Seaside National Bank & Trust in Orlando ($543 million in assets). Haymaker is growing loans at $20 million a month and says he needed the TARP capital to continue growing. Seaside’s $5.7 million in federal money can be leveraged into $70 million in loans, he adds.

C. Andrew Lawrence, CEO at Marine Bank & Trust in Vero Beach ($140 million in assets), says TARP “was really a once-in-a-lifetime opportunity for us.”

Meanwhile, banks awaiting federal action on their TARP applications are left to fret, with their lending capacity depending in part on whom the government picks to get capital. Bradenton-based Horizon Bank waits for an answer on its application for $4.8 million in TARP money. CEO Charles Conoley says he can put it to work lending in Manatee County. After two competitors failed last year and other lenders cut back, he’s seeing the highest loan demand in years. Says Conoley of TARP: “I just wish I could use it.”

Alex Sanchez, president of Florida Bankers Association, says it’s a matter of choice. “There’s no stigma to receiving it or not receiving it at all,” he says.

Credit: What Bankers Say about Lending Standards and Loan Demand Businesses say banks aren’t lending. Banks say they’re lending but that loan demand is down. It turns out they’re both right. Banks haven’t ceased lending, but they have tightened standards on who qualifies for loans. In the commercial real estate area alone, banks have been tightening credit standards every quarter going back more than three years, according to the Federal Reserve Board’s April survey of bank senior lending officers. In overall business lending, the Fed reports a “very elevated” percentage of lenders continuing to tighten credit. Owners of businesses with less than $50 million in annual sales, the vast majority of Florida businesses, have seen tightening credit standards since January 2007. The credit is more expensive, and more collateral is required. But the banks also report weakening loan demand. In the commercial real estate loan segment, for example, the percentage of domestic banks reporting weaker demand is the highest since 1995, when the segment was first surveyed.

Payback

“I think the government is going to make a pile of money on the program.” — Gideon Haymaker, CEO, Seaside National Bank & Trust, Orlando [Photo: Brett Runion]

Talk to CEOs at the 18 Florida-based banks that have accepted money from the government’s Troubled Asset Relief Program and you’ll hear something very similar to what C. Andrew Lawrence, CEO of Marine Bank & Trust in Vero Beach, says — that TARP isn’t a no-strings-attached bailout. “People think somehow we don’t have to give it back,” he complains.

To receive TARP funds, banks sell the government non-voting senior preferred shares, in an amount equal to from 1% to 3% (soon to be raised to 5%) of the company’s risk-weighted assets. Bankers have to pay the U.S. Treasury a 5% dividend on their TARP funds for the first five years and 9% after that. Since the dividend is paid with after-tax money, the actual borrowing cost depends on the bank’s tax situation. Some pay not much more than 5%; others around 7.5%. Ultimately, the banks pay back the TARP loan by buying back their stock from the U.S. Treasury.

Florida bankers say that borrowing the money is cheap compared to the regular cost of a stock offering in normal times. Sid Spiro, CEO of Davie-based Regent Bank, calculates that his bank will pay 7.6% per year on the money for five years and, if it hasn’t bought back the shares after that, will still pay less than the 15% cost of raising equity capital through an offering.

Bush administration Treasury Secretary and former investment banker Hank Paulson, on whose watch the program was created, structured the terms like a good investment banker should: To make money for his client, the government. When the government makes TARP loans to widely held, publicly traded companies, it also gets the rights to buy common stock with a market price equal to 15% of the TARP money invested — so that the taxpayers can get some upside as bank stocks appreciate. As of June, the government-owned warrants wouldn’t generate a return at most, if not all, banks. The rules are different for privately held banks, but the government still gets a kicker. “I think the government is going to make a pile of money on the program,” says Gideon Haymaker, CEO of Seaside National Bank & Trust in Orlando.

A few of the Florida banks that have borrowed TARP funds expect to be able to buy back the government’s shares using their profits, but most predict they’ll use capital raised through private stock offerings or private borrowing. Most banks aim to buy back the government’s shares within five years — before the dividend rate they pay jumps from 5% to 9%.

“We can write the check tomorrow,” says Rudy Schupp, CEO of 1st United Bank in Boca Raton, of his “hyper-clean, low-problem-asset bank.” But less-healthy institutions may not be able to attract investors when the capital markets ease — leaving them with the government as a shareholder indefinitely, he says.

Strings Attached

To receive TARP money, financial companies must restrict executive pay and comply with rules on corporate governance, such as allowing shareholders a non-binding “say-on-pay” vote on executive pay. In Florida, Seacoast Banking, CenterState Banks of Florida and TIB Financial all held say-on-pay shareholder votes this year. The CEOs of the Florida-based banks who took TARP funds say they’re too small to run afoul of most of the strings the federal government attaches to TARP funds, including the “golden parachutes” for departing executives that have raised congressional and public ire toward some large-bank recipients. “Community banks don’t have that problem. I have yet to receive the first million in bonuses,” says Fernando Capablanca, CEO of Union Credit Bank in Miami.

Impact on Florida

Donald Phillips

Good luck calculating TARP’s impact on lending in Florida — big banks and small banks alike mix their TARP funds into their overall assets, so it’s all but impossible to say whether a given loan is being made with TARP money. The complaint nationally — that the big banks aren’t lending out the money they got through TARP — is echoed in Florida. Donald Phillips, managing director of Phillips Development & Realty, a Tampa apartment developer who organized a TARP forum in Tampa earlier this year, goes so far to claim that the big banks have “redlined” Florida. Worse, he says, they’re calling business loans even when borrowers can keep up interest payments. “A year and a half ago they were taking us fishing,” Phillips says. “Now they’re feeding us to the sharks. Most of the damage is being done by very large banks.”

Charles Conoley, CEO of Horizon Bank, says he can put TARP money to work lending in Manatee County, but he’s still waiting for an answer on the bank’s application for $4.8 million.

Not so, the banks respond. Wells Fargo reports that just its business banking division, catering to companies with $3 million to $15 million in annual sales, made $101 million in loans through April in Florida alone while its small-business banking division in Florida made $27.6 million in loans. Bank of America spokeswoman Nicole Nastacie says her bank has no Florida figures but “we clearly are lending.” Bank of America reported that nationally the bank made $183.1 billion in mortgages, commercial loans, consumer, home equity, small-business and other lending in the first quarter.

Local banks say demand for loans has fallen as in any recession. Banks can leverage every dollar of capital 10 to 14 times. So theoretically, the $223 million in TARP funding that went to Florida-based banks should be translating into $2.2 billion to $3.1 billion in lending in the state.

But that’s not necessarily new lending. Some banks are holding the money as a safety cushion or putting it into loan loss reserves. That’s allowed some to keep up their normal lending pace but not expand.

And here’s a troubling stat for any business in need of a loan: The combined market share of the 18 Florida banks that accepted TARP funds is just 1.44%. Phillips says he’s noticed smaller banks are aggressively going after business but says they lack the lending capacity for large loans. “We’re trying to fly F-18 fighters on a (Piper) J-3 Cub fuel allocation.”

Tarp in Florida

	Past Due* Loans	Foreclosed Real Estate (bank-owned)
Bank Headquarters	Q1 2009 (millions) % Change from Q4 2008	Q1 2009 (millions) % Change from Q4 2008	TARP Money / Uses	Bauer Rating**
Seacoast National Bank Stuart	$109.4 +25.8%	$12.7 +152%	$50 million, 12/2008 — efforts to obtain comment unsuccessful
First Community Bank of America Pinellas Park	$13.6 +3.4%	$3 +97%	$10.69 million, 12/2008 — grow lending and cover losses
Alarion Bank Ocala	$.507 -55%	$.329 NA	$6.51 million, ½009 — efforts to obtain comment unsuccessful
Seaside National Bank & Trust Orlando	$3.3 +46.7%	None	$5.68 million, ½009 — increase lending
First Southern Bank1 Boca Raton	$6.1 -59.2%	$7.5 +8,417%	$10.9 million, ½009 — would not comment	½
CenterState Banks of Florida2 Davenport	$20.8 +4.8%	$11.9 +164.9%	$27.88 million, 1½008 — boost capital cushion, modifiy existing mortgages, buy mortgage-backed securities, increase assets
Community Bank Destin Destin	None N/A	$2.6 -4.2%	$1.05 million, 2/2009 — holding company bought non-performing assets, continue growth	Too new to be rated
Bay Cities Bank Tampa	$19.2 +53.7%	$3.2 0%	$9.5 million, 2/2009 — efforts to obtain comment unsuccessful
Highlands Independent Bank Sebring	$10.4 +69.4%	$.988 +110%	$6.7 million, 4/2009 — expand lending and potentially acquire or develop branches
Marine Bank & Trust Vero Beach	$2.7 -.9%	None	$3 million, 3/2009 — grow loan portfolio and asset base	½
Pinnacle Bank Orange City	$4.1 +103%	$.350 -5.9%	$4.39 million, 3/2009 — additional safety capital and lending
Regent Bank Davie	$15.3 +74.2%	$1.4 +121%	$10 million, 3/2009 — capital cushion in the event the recession continues	½
1st United Bank Boca Raton	$9.0 +5.7%	None	$10 million, 3/2009 — boost lending and excess capital to draw on if loan demand improves
Premier Bank Tallahassee	$11 +11.2%	$5.4 +50.6%	$9.5 million, 3/2009 — step up lending and expedite removal of problem loans
Bank of Naples Naples	$ 7.4 +191%	$2 +4.9%	$4 million, 3/2009 — would not comment
CBC National Bank dba First National Bank of Nassau County Fernandina Beach	N/A	N/A	$9.95 million, 12/2008 — increase loan loss reserves and mortgage lending, to $319 million in the first four months of 2009 from $148.3 million a year earlier
First Peoples Bank Port St. Lucie	$11.3 +9%	$3.9 +127%	$5.8 million, 12/2008 — boost lending and set aside capital to sustain losses on loans
TIB Bank Naples	$45.3 +15.2%	$4.9 +13.8%	$37 million, 12/2008 — continue lending and acquire the branches and deposits of failed Riverside Bank of the Gulf Coast
* Non-accrual past due loans; borrower is 90 days behind on principal and interest, bank must set aside loan loss reserves ** Bauer Rating is based on a financial institution’s financial strength. Notes: In all cases, bank holding companies for these banks actually received the money. 1 First Southern announced in May it planned to get a $450 million capital infusion from Fortress Investment Group and two other private equity firms. 2 Bauer rating applies to CenterState Bank in Winter Haven, not its sibling banks. Source for past-due loan and foreclosed real estate information: Saltmarsh, Cleaveland & Gund, CPA