TARP and the tale of two Long Island banks

With the U.S. financial system verging on collapse in 2008, two Long Island banks, State Bancorp in Jericho and Flushing Financial Corp. in Lake Success, borrowed a total of $107 million from taxpayers through the controversial Troubled Asset Relief Program.

Flushing Financial, parent of Flushing Savings Bank, grew its earnings during the crisis and repaid its $70-million government investment in December 2009 -- faster than Citigroup, which didn't fully pay up until December 2010.

State Bancorp, parent of State Bank of Long Island, lost money in 2009 and didn't repay the $37 million it received until 2011. Even then, the Treasury got back its money because State Bancorp was being taken over. The larger, acquiring bank, New Jersey-based Valley National Bancorp, wrote the check as part of the $222-million merger.

Quality of portfolios
Analysts say the banks' outcomes diverged because of the different quality and type of their loan portfolios. Flushing Financial was more solid because of a concentration of loans for rent-stabilized apartment dwellings, whose high occupancy rates produce stable revenues. State Bancorp also was hurt by what analysts and its last chief executive called the lingering effects of looser lending practices by previous management.

The fallout -- one local bank got stronger, the other bank's headquarters left Long Island -- shows how bankers' key task of judging a borrower's credit can have broad ramifications.

"There was nothing about [Flushing's] credit portfolio that would have you concerned if, for example, they were unable to get" TARP funds, said Matthew Clark, who analyzed both banks for securities firm Keefe, Bruyette & Woods in Manhattan. But State Bancorp's chief executive, Thomas M. O'Brien, "was involved in a turnaround story . . . he had to clean up the credit."

Despite the banks' divergent outcomes, analysts including Clark praised them both for making it through the recession without failing. The chief executives of both companies said they were able to do more lending during the crisis with TARP than without it.

President George W. Bush proposed and signed the 2008 Troubled Asset Relief Program. It had the support of the newly elected president, Barack Obama.

In all, 458 institutions, mostly banks but including some other companies, borrowed money under TARP, including giants such as Wells Fargo and Bank of America. The Treasury Department says it disbursed $414 billion under TARP and, as of last month, had recovered 77 percent, or $319 billion.

While Obama would later acknowledge TARP's unpopularity, calling it "about as popular as a root canal," he hasn't backed away from supporting it.

Many economists contend TARP helped prevent another Depression. But many Americans viewed TARP as a giveaway to corporations considered "too big to fail," a perception evidenced by both the tea party and Occupy Wall Street movements.

Pre-existing troubles
State Bancorp, founded in 1967, had 16 branches in Nassau, Suffolk and Queens and $1.6 billion in assets. When O'Brien, a banker on Long Island since 1977 at institutions such as North Fork Bank, became chief executive in 2007, his job included tightening up lending practices, he said.

Mark T. Fitzgibbon, who analyzed State Bancorp and Flushing Financial for the securities firm Sandler O'Neill & Partners in Manhattan, traced many of State's problems to loan approval practices of previous management, which resigned late in 2006. O'Brien described some of their real estate loan practices as "not stellar."

The previous chief executive, Thomas F. Goldrick, challenged those analyses, citing at least 36 consecutive years of growth in profits and assets. "I think the record of lending at State Bank speaks for itself," he said in an interview.

When the financial crisis peaked in September 2008, State Bancorp didn't need government money, O'Brien said. But federal regulators urged banks to consider taking TARP money, and State Bancorp decided to do so out of what he called "an abundance of caution."

"Lehman Brothers had failed, Merrill Lynch was on the edge," O'Brien said. "The economic world [seemed like it] was coming to an end."

State Bancorp lost $4.1 million in the final quarter of 2008, which helped drag down earnings for the year to $1.8 million from $6.2 million a year earlier.

State went $15 million into the red in 2009 as loans to real estate development projects went bad. "Real estate went down in value, so even if they did make a sale, it wasn't enough money," O'Brien said. The bank buttressed its allowance for loan losses that year by $39.5 million, twice as much as the year before, and eight times the level in 2007.

In a proxy statement issued last year, State Bancorp said that while its financial condition was improving, its prospects were difficult and it would take "years" to repay the TARP money on its own. The merger closed in January; O'Brien left the bank after the merger and is a consultant to Valley National.

Strong loan portfolio
Flushing Financial Corp.'s 17-branch Flushing Savings unit is 80 years old. Chief executive John Buran, a veteran of Fleet and Citibank, joined in 2001 as chief operating officer. Flushing, which has $4.3 billion in assets, got its TARP money near the end of December 2008.

In an interview, Buran said he viewed it as inexpensive insurance: "It was just a very scary time for anyone in the financial services industry."

Flushing's loans were in good shape going into the crisis -- it added nothing to its allowance for loan losses in 2007 -- but the downturn in the economy did lead to souring loans. It added $19.5 million to its allowance for loan losses in 2009 and $21 million in 2010. Buran said trouble spots in the portfolio were small commercial buildings and "multi-use" buildings containing stores and apartments.

Still, Flushing managed to report steady increases in net earnings from 2007 to 2009, when net income hit a record $25.6 million. That year, the bank issued $101.5 million in stock to repay the TARP money.

TARP's negative connotations, Buran said, were key to Flushing's decision to pay back the money quickly. "I'm not unhappy we did it at that time," Buran said, "and I'm not unhappy that we got out of it promptly."