Federal bailout program saddles banks with agonizing choice
Executives worry about how acceptance of rescue funds will affect public's perceptions.
Sunday, February 08, 2009
Stephen Wilson calls it the hardest decision of his 33-year banking career.
Wilson, chairman and chief executive of LCNB Corp., was weighing whether the Lebanon-based financial services company should take millions of dollars through the Capital Purchase Program, a component of the federal government's $700 billion financial industry rescue package.
Wilson is one of several local bankers who, along with their boards, has had to decide whether to tap the federal government for additional capital in exchange for preferred stock and warrants. In December, Hamilton-based First Financial Bancorp received $80 million and Washington Twp., Montgomery County-based Citizens National Bank of Southwestern Ohio received $2 million through the program.
Unlike other components of the financial-industry bailout, the CPP is aimed at providing money to banks that have capital on hand to cushion them against losses. Before it received the money, LCNB had a risk-based capital ratio of nearly 12.6 percent and the government infusion took it to 15.47 percent. Regulators consider banks with a ratio of 10 percent to be well-capitalized.
In making his decision, Wilson said he worried that taking the money might harm the public's perception of the bank and open it up to more government intervention.
"We're a very strong bank, well capitalized, etc.," Wilson said. "Yet, no matter how many times you tell the story, there are people who see it as a bailout, and why does a strong institution need bailed out?"
Fears over how deep the current recession might ultimately go tipped the scales toward taking the CPP funds, which the company will channel into loans, Wilson said.
With the economy in recession and people losing jobs, banks face a greater risk of loans going unpaid, said Steve Wyatt, chairman of Miami University's finance department. The government money protects healthy banks against as-yet unforseen losses so they can remain solvent, he said.
"You're probably better off getting the federal money and accepting the little bit of taint that goes with it in exchange for the assurance to your customers that you'll be around, particularly your commercial customers," Wyatt said.
With bank stocks getting pummeled, some institutions also see the CPP as a viable alternative to the equity markets when it comes to raising cash.
In the case of Citizens National, Sebastian "Seb" Melluzzo, president and chief executive, previously said the privately held bank wanted to raise more money for lending. But, when the bottom fell out of the financial markets, the bank decided to seek funds through the federal program.
Not all banks signed on.
Executives for NB&T Financial Group, a Wilmington-based bank, decided against taking government money because the bank has adequate capital and its loan portfolio remains sound, said John Limbert, president and chief executive.
"We just didn't need the capital," Limbert said. "That's a very awkward and alien thing to say as a banker, but, nevertheless, true."
The bank's leaders also didn't like some of the terms, such as limits on dividends and a bank's ability to buy back its own shares, Limbert said.
