More than a year and a half after the federal Treasury Department began providing banks with extra capital at the height of the financial crisis, most Connecticut lenders that took the money are still holding onto it. Any they don’t appear to be in a hurry to pay it back, at least anytime soon.
Of the six Connecticut banks that received Capital Purchase Program funds, five still have the money.
The one bank that did repay its government aid — First Litchfield Financial Corp. — did so only after it agreed to be acquired by Danbury-based Union Savings Bank earlier this year.
Bankers say they aren’t rushing to repay the funds because credit markets remain tight, making it difficult to raise reasonably priced capital.
“The price we’d have to pay to issue securities and repay the funds now is well above what we are paying for the CPP funds,” said Martin Geitz, president and CEO of Simsbury Bank & Trust, which received $4 million in federal aid. “There continues to be very little capital out there at a reasonable price for banks our size.”
The Capital Purchase Program is part of the Troubled Asset Relief Program, which was created in late 2008 at the height of the financial crisis.
A key issue for Connecticut banks will be repaying the funds before the dividend they are required to pay to the Treasury Department goes up from 5 percent to a “very expensive” 9 percent beginning in 2013 or 2014.
To repay the funds, however, most, if not all, Connecticut banks will likely have to raise capital, a difficult task for community lenders in today’s market.
Small banks are often privately held or thinly traded and have limited access to capital markets. The distressed financial market is making it even more difficult to raise money.
Geitz said Simsbury Bank’s dividend payment will increase in March 2014, and the goal is to repay the federal aid before that time.
“We are going to try to repay the funds in a way that doesn’t hurt shareholders,” Geitz said, adding that when big banks repaid their government aid, their shareholders’ investments were diluted.
Market conditions are forcing Connecticut bankers to take a cautious approach when determining when and how to repay their federal funds.
“We are not in a tearing rush to do it,” Webster Bank CEO Jim Smith told analysts in a recent conference call. “We are taking a balanced approach that very directly considers the best interest of our shareholders and our objective is to raise the absolute de minimis amount of capital that may be required to complete the repayment.”
Waterbury-based Webster Bank, which received $400 million in CPP funds — by far the most of any Connecticut-based bank — has paid back $100 million so far.
While some Connecticut bankers aren’t ready to repay the funds, they are pleased with the impact the program has had. Their experiences, in many ways, contrast those of other banks around the country, which have had little or no help from the program, according to regulators overseeing the program.
One of the major goals of the CPP was to ensure that banks continue to lend throughout the recession. Geitz said having the extra capital allowed Simsbury Bank more flexibility in lending, offset the inevitable weakness among borrowers, and helped the bank grow and remain profitable.
Since September 2008, Simsbury Bank has seen its loan portfolio grow by 14 percent to $203 million, according to Federal Deposit Insurance Corp. data.
Simsbury Bank has also remained profitable, reporting a 33 percent increase in net profits for the second quarter of 2010. The bank has continued to pay a common dividend to shareholders, while keeping up with the dividend payment owed to taxpayers for receiving the CPP funds.
“We would not have been able to grow to that extent without the CPP,” Geitz said. “For us, it was important to access the capital so we could continue to lend to businesses at a time when other banks were pulling back.”
Rick Cantele, president and CEO of Salisbury Bancorp in Dayville, which received $9 million in government funds, echoed those sentiments.
“It really allowed the bank to continue to make loans and grow during these during these difficult times,” Cantele said. “I think for Salisbury Bank, the funds have worked as we intended them too.”
Salisbury Bank has seen its loan portfolio increase by 13 percent since September 2008, growing to $331 million.
A recent report from the Congressional Oversight Panel, however, took a more negative view of the national impact of the Capital Purchase Program. The report, which was published last month, said that there was little evidence that the capital injections helped the community bank sector or allowed those banks to increase lending.
The report evaluated 690 small banks — each with less than $100 billion in assets — that received CPP funds.
According to the report, those small banks appear to be no healthier than small banks that did not receive TARP funds. They are also having a difficult time making dividend payments to the government, a problem that will likely increase over time, the report said.
“So long as small banks remain weak, their lending to customers — especially to small businesses — will remain constricted and will have a dampening effect on any economic recovery,” the report concluded.
Connecticut banks have fared better throughout the recession than banks in most other states. There have been no bank failures in Connecticut since late 2008, although several small banks were acquired after facing financial challenges.
“The goal of the bank is to provide loans in good times and bad,” Geitz said. “I think we were able to do that.”
