April 8, 2009
TARP, TALF, TALP, CPP, EESA, ARRA, PPIF, if I hear one more acronym that is going to march in to rescue the U.S. economy I think I am going to scream. Deciphering the alphabet soup of administration or legislative initiatives is a daunting prospect. Understanding the purposes and pitfalls of these government initiatives is an even greater challenge.
As a banker, I am used to living in an acronym world. Anyone that does business with the U.S. government gets used to these acronyms and the pages upon pages of regulations, codes and laws that go with them. Any bank that puts the FDIC logo on its front door automatically is in partnership with the government and agrees to cooperate with its voluminous regulations.
Our past board meetings have been consumed with discussions regarding CRA requirements, or GLB obligations or in meeting our QTL test. Last fall, a new acronym,
TARP, was forced into our lexicon. Initially, TARP was an irrelevant concept for our bank. After all, TARP stands for "Troubled Asset Relief Program" and its intention was to use government funds to buy the toxic assets off of the bank’s balance sheet.
Not having the toxic assets on our balance sheet we were largely uninterested in TARP. But, then the administration changed the game. The Treasury Department used a provision that was passed in the TARP portion of last fall’s Emergency Economic Stabilization Act(EESA) called the Capital Purchase Program(CPP). The CPP allowed the Treasury Department to take direct equity positions in financial institutions and bolster that bank’s capital.
It has been widely reported that the CEO’s of the top 20 financial institutions in the country were marched into a meeting in New York and told they were going to get this capital. Two of the CEO’s walked out of the meeting as they defiantly indicated that they didn’t need the government capital and weren’t going to take it. Reportedly, they were coaxed back into the room by then Secretary Paulsen and were persuaded out of a moral duty to the country to take the capital.
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Secretary Paulsen’s mission was clear in that New York meeting. He wanted to infuse capital into the banking system to help shore up the large banks that posed a systemic risk to the economy and to increase capital at the healthy banks so that they would continue to fuel the failing credit markets. He also wanted the healthy banks to be in a capital position to buyout or take over the interests of their weaker competitors. Unfortunately this last goal has now become a very controversial use of TARP funds but is in the broad, US consumers best interest
So, where did that leave Frontier Bank. Well, we still weren’t interested. While my moral compass did not want taxpayer funds to go to unhealthy institutions that had made poor choices, we didn’t need the capital and were performing just fine. We were going to sit on the sidelines and enjoy the benefits of being a relatively healthy institution that like everybody else is trying to navigate through the worst financial crisis since the "Great Depression".
But, then we got a call from representatives from the government encouraging us to take it. It slowly occurred to me and then to our board that we could find ourselves in real danger if we declined. After all, the government and the regulatory agencies that oversee the nation’s insured financial institutions, have extraordinary power. If in a moment they decide to raise the required capital ratios for a financial institution, we could be in a situation whereby we had to scramble for capital and be at a competitive disadvantage from those institutions that had taken TARP.
The problem was that we had no time to properly evaluate our options. The deadline for applying for TARP was in mid-November. As a healthy institution, we were approved in a couple of weeks and then had to immediately decide if we were going to take it as the last funding date of the year was in mid-December(It turned out that would be the last funding due to the administration change and new guidelines that were placed on TARP). We debated and discussed the hazards and benefits of taking it. More than one of us pointed out that TARP was an anagram for trap. In the end, we felt it was too big of a risk not to take.
Since taking the TARP last December, there has not been a day that has gone by that I wish I hadn’t. The rhetoric out of Congress that has been fueled by the greed and appalling behavior of some of the mega bank recipient’s executives has been difficult to stomach. Even some of the ardent initial supporters of the TARP plan such as Congressman Barney Frank and Senator Chris Dodd have turned in perfect political fashion to calling it a bailout.
Frontier Bank did not and does not need a bailout. We are profitable. While we have some problem loans for the first time in our existence, our ratios of non-performing loans or owned real estate are significantly less than any of our peers. As a result of our health, our deposits have grown by more than 40% in the last 8 months. Unfortunately, the Park Record left some of these details out of the story. However, as financial institutions are completely transparent, any consumer can look up the performance of our, or any, bank by logging on to FDIC.gov. We include that link on our web site at FrontierBank,FSB. Com.
We are also using the TARP funds for their intended purpose. We are working diligently to try to lend money in the communities we serve. You can see that for yourself as we have been running advertisements in this paper designed to bring in new loan requests. In this extraordinarily challenging environment it is not always easy to find safe opportunities to lend. I can assure you we are working very hard at it.
If any reader has any question regarding TARP, the banking system or the health of our institution, I would invite you to email me at Andy@elpaseobank.com(El Paseo Bank is our California subsidiary).
Andy Montgomery is the founder and Chief Executive Officer of "Western Community Bancshares, Inc." and its subsidiaries, El Paseo Bank in California and Frontier Bank in Utah. Originally founded in 1998, "Western Community Bancshares, Inc." has more than $300 million in assets in 5 branch offices.