A lifeline that became a scarlet letter

For better or worse, TARP leaves legacy for industry

Pedestrians walk through New York's Times Square Nov. 25, 2008, under a glowing Bank of America marquee. Bank of America on Wednesday, Dec. 2, 2009, issued a statement saying it would pay back the $45 billion in government loans it received during the credit crisis last year and after the purchase of Merrill Lynch & Co.
Pedestrians walk through New York's Times Square Nov. 25, 2008, under a glowing Bank of America marquee. Bank of America on Wednesday, Dec. 2, 2009, issued a statement saying it would pay back the $45 billion in government loans it received during the credit crisis last year and after the purchase of Merrill Lynch & Co.

As the financial crisis took a steady grip on the banking world in the fall of 2008, officials at the U.S. Treasury were devising a plan to rescue the sector.

It was called the Troubled Asset Relief Program, TARP for short. Initially designed to buy up toxic assets from the balance sheets of banks around the country, it quickly became a forum for injecting money into troubled institutions to stabilize their funds and encourage lending to individuals and businesses.

The largest banks in the country were made to step up first and take money from the fund – Citigroup, Bank of America, Wells Fargo, JP Morgan Chase, and more. Then it went to smaller banks down the line.

Of the 30 financial institutions with at least one bank branch in McHenry County today, 13 of them received TARP funds. All but two have repaid their debts in full – First Midwest Bank, which received $193 million in TARP funds and has not repaid any of it, and Princeton National Bancorp, the parent company of Citizens First National. It received $25.083 million in TARP money and has not repayed any of it.

The most visible to take TARP funds locally is Wintrust Financial, the parent company of Crystal Lake Bank and Trust and State Bank of the Lakes. It operates six McHenry County branches in Algonquin, Cary, Crystal Lake, McHenry and Spring Grove. Since accepting $250 million in TARP funds in late 2008, Wintrust Financial has gone on a buying spree.

The holding company bought seven banks – Wheatland Bank, Lincoln Park Savings Bank, Ravenswood Bank, the Naperville branch of the National Bank of Brookfield, The Bank of Commerce in Wood Dale, First Chicago Bank and Trust, and Elgin State Bank – to go along with four mortgage servicing purchases.

Those buyouts include Professional Mortgage Partners, Woodfield Planning Corp., River City Mortgage and Great Lakes Advisors.

“We think that the opportunity in the banking industry, with the general consolidation taking place, that we were strong enough to take our community banking concept into more communities,” Wintrust Chief Executive Officer Ed Wehmer said.

But they did it taking some public criticism along the way, as the lofty goals of the TARP program quickly turned sour.

“At that point they were only giving it to healthy banks – if you didn’t take it, the market would think there was something wrong,” he said. “It turned around with the new administration – instead of a Good Housekeeping sign, it became a scarlet letter. It was disturbing. A couple of our directors said, ‘Look out. When you get in business with the government, bad things can happen.’ Sure enough, it changed and became a scarlet letter.”

Despite the turn, Wehmer said the bank’s involvement had been good for everyone. Wintrust raised $50 million of capital on its own before accepting the TARP money, then put it to use to increase loans and expand its presence in the Chicago area.

When the Treasury Department sold its warrants in Wintrust Financial – shares it was given in the bank when the bank was granted TARP funding – it saw a 20 percent return on its investment.

“In the two years our TARP was outstanding, the government made 20 percent on us, and we grew 40 percent,” Wehmer said. “Our loans were up 40 percent. We used the money for the purposes intended.

“The problem was when TARP came out, nobody could get capital. Our stock went from $60 to $9. I thought TARP, before it was villianized, it was brilliant. Everybody won. The only things that lost were [Fannie Mae and Freddie Mac].

“For us, the government made 20 percent. Where else could you make 20 percent on your investment in a recession? It was a wise investment on the taxpayers' part.”

But not everyone took that path. Home State Bank was among the 18 institutions in the county that did not choose to participate in the program, a decision that President and Chief Executive Officer Steve Slack hails today.

“The perception that we did not take money from the government was very posititive,” Slack said. “People would ask if we took TARP, and our answer was 'no.' And their answer was, ‘Good!’”

As a sub-S corporation entity, Home State was down the line of potential TARP recipients, and by the time its turn had come up, the public perception of TARP had focused on the scarlet letter Wehmer described.

“By that time, they already had gone through the big banks and C-corporations, and the rules kept changing all the way down the line,” Slack recalled. “But it didn’t matter. We decided from the start that we weren’t going to take the money. We put in money ourselves, actually, and that was a very positive thing for us.”

Slack said Home State Bank did not need the additional capital because its balance sheet was good and because the county atmosphere was not.

“Starting at that period of time, there was pretty much no activity in the market,” he said. “There wasn’t that big of a demand for loans. So it wasn’t the way we changed our lending, it was that there wasn’t the opportunity through ’09 and part of ’10.

“Right now, we’re seeing a significant increase in activity. The only thing that was really active in ’10 was the residential refinance market, which slowed down in the second half. Now we’re finally seeing some more commercial opportunities.”

Banks might have taken different approaches to TARP funds, but Wehmer said the program’s legacy – for his banks – would be the continued community expansion of the Wintrust product.

“We’re a consortium of community banks,” he said. “We’re big now, but we’re still small. In Crystal Lake, Lake Forest, we’re old-time banking, but we’re the second-biggest bank headquartered in Illinois.

“The Crystal Lake bank is still focused on that community, its parades and its businesses and its people. And as we move into different markets like the Elgin market, we’ll really focus on it.

“We’re old-fashioned operators when it comes to high service community banks. Everyone at our banks wants to pretend to be George Bailey.”

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