business

Banker Bob Olson applied for TARP funds for his Minnesota bank and, gosh darn it, he's not backing down.

Olson is an Orono tax attorney and DFL activist who ran against Sen. Al Franken in the primary before switching to run against Rep. Michele Bachmann. He owns St. Stephen State Bank, a two-branch bank in St. Stephen, north of St. Cloud. Bankers are typically a reserved lot, but Olson is speaking out about what he sees as the lopsided allocation of funds to big banks under the $700 billion Troubled Assets Relief Program (TARP) created last fall.

The TARP program was intended to bolster bank lending and stimulate the economy, but the taxpayer-funded program has generated considerable controversy for rushing to dole out billions of dollars to the nation's large, publicly traded banks while leaving most small banks -- the back bone of local economies -- with their hands out.

At issue is the goal of helping "viable" healthy institutions make more loans with $250 billion from TARP's Capital Purchase Program.

But frustrated critics such as Olson say the government is using one standard for large banks and another for small ones.

Olson applied for one of the low-cost loans last fall. Since then, he said, staff at the Federal Deposit Insurance Corp. (FDIC) have called him at least five times urging him to withdraw his application rather than have it rejected. Olson said he's politely refused, each time. Olson said he's heard of other applicants fielding similar calls, though he doesn't know how many.

"It makes no sense," said Olson. "It hurts the economy. If small banks fail, the FDIC is going to have to come up with the money."

Three Minnesota-based banks have failed so far in the financial crisis.

The government won't release the number of Minnesota banks that have applied for TARP's Capital Purchase Program. Marshall MacKay, president of the Independent Community Bankers of Minnesota, estimates that at least 75 of the state's 420-plus banks have applied for TARP, and perhaps more than 100. Only 15 have received funds, which have totaled about $7 billion. Some banks have already repaid the money. U.S. Bancorp has already repaid the $6.6 billion in TARP investments that it got. So has TCF Financial Corp., which got $361.2 million.

Meantime, St. Stephen State Bank languishes in line.

Twelve shaky loans

Olson said he applied last fall for less than $1 million. He deserves TARP assistance, he argues, because the bank isn't so troubled that it's not viable -- and the FDIC knows that, he said. If Congress really wanted to juice lending across the entire economy, distressed community banks shouldn't be excluded, he said.

St. Stephen State Bank's troubles flow from 12 loans it made to small companies that are having trouble paying their bills because of the recession, Olson said. The shaky loans amount to about $2.5 million, which represents an unusually high figure of 10 percent of St. Stephen's loans. One struggling customer lost a contract to supply Target Corp., he said. Another supplies products for the faltering home improvement industry. Another makes cabinets.

Anticipating losses, St. Stephen shifted money to its loan-loss reserves, which hurt the bank's bottom line and drove down its capital. By the end of June, the bank's assets had shrunk to $25.9 million, and it had lost $801,000 for the year. Its capital ratios, key measures of a bank's ability to withstand future losses, left St. Stephen somewhat undercapitalized.

The bank can service his existing customers, but can't take new ones, Olson said. It's had to close one branch in Sauk Rapids and cut staff from 20 to 12.

In July, the FDIC smacked Olson's bank with a cease-and-desist order telling it to fix its balance sheet.

Olson said he's tapping St. Stephen's investors to raise more capital.

"It's not a good time to be passing the hat," he said. "If we don't come up with the money ourselves, we are going to have to really contract."

When FDIC staffers suggested that he withdraw the bank's TARP application, they said they've been told to approve applications only from well-funded banks that don't need the money, Olson said. That's a distinction they didn't make with large banks, he noted.

MacKay, with the Independent Community Bankers of Minnesota, said he couldn't comment on Olson's situation. But he said he knows local banks that should have gotten TARP investments and didn't. Olson has company in his frustration, MacKay said.

"If you really wanted the funds to stimulate the economy, it never got to the Main Street banks to do that in Minnesota," he said.

FDIC's criteria

MacKay said that the FDIC's office in Kansas City, which processes TARP applications from Minnesota's banks, told him that it evaluates applications based on the bank's ability to use and repay the money. He said small banks wouldn't be in as much trouble now if they had access to TARP funds last fall like the large, publicly traded banks.

"Should community banks have access to the capital that the Treasury laid out? Yeah, they should," MacKay said. "Otherwise you create an environment that's unfair, competitively."

FDIC spokesman David Barr downplayed his agency's role in TARP. The Treasury Department established the criteria for making TARP investments and a bank's "viability" is one of the considerations, Barr said. The FDIC follows the criteria when making TARP funding recommendations to Treasury, he said. Barr declined to explain the other criteria that goes into those recommendations, calling that "privileged information." He also wouldn't discuss whether FDIC staff has asked some small banks to withdraw their applications.

Barr said TARP applications get withdrawn for a variety of reasons, adding, "Information with respect to withdrawn applications is privileged."

According to a GAO report on TARP released in December 2008, "the program is intended to provide capital to those institutions that can demonstrate their overall financial strength and long-term viability."

It said regulators evaluate applications based on such factors as examination ratings, selected performance ratios and how banks plan to use the money. Banks that rank low are referred to a special council made up of people from four federal banking regulators who look at other factors, such as merger agreements or private equity investments, that might offset lower ratings.

For banks with the lowest ratings, the main regulator for that institution "may have further discussions with the applicants and encourage the institution to withdraw its application," the report said.

Olson and other bankers have been airing their TARP frustrations with lawmakers. Olson said he discussed it at general banking meetings with U.S. Reps. Keith Ellison and Erik Paulsen. Olson said he's trying to meet with Sen. Al Franken to discuss opening up the TARP program.

"If we don't do this, we're going to have a lot more community banks in trouble," Olson said.

Jennifer Bjorhus • 612-673-4683