Jan. 19--Evans Bancorp, which last month declined a federal government investment, would have been so overcapitalized if it had accepted the money that it couldn't provide adequate returns to shareholders, its CEO told an audience of real estate professionals last week.

The Angola-based community bank turned down $11.9 million from the U. S. Treasury last month, even after it had been approved for the investment.

That may have put it in the minority. But Evans CEO David Nasca said the bank had carefully considered the pros and cons of taking part in the Capital Purchase Program. And despite the cheap cost of capital and worries about public perception, the negatives outweighed the benefits.

In particular, the bank was already overcapitalized, with a ratio of 11.19 percent of equity to assets when the regulatory standard to be "well-capitalized" is 8 percent. Adding the government money would have raised that to 14 percent.

"It's very difficult to provide returns to shareholders if you're sitting on that much capital," Nasca told commercial real estate officials at the CB Richard Ellis Western New York MarketView program.

Nasca's remarks came as the banking industry is under fire by politicians and others for largely sitting on their new capital instead of lending it out in communities as Congress originally intended. With the initial $250 billion essentially allocated, banks have also largely refused to divulge exactly how they are using the money, raising public ire even further.

As a result, as Congress considers releasing the rest of the money, there are more calls for lawmakers to tighten the rules, impose more restrictions so the money isn't used for acquisitions or executive pay, and mandate more disclosures. Early last week, the Federal Deposit Insurance Corp. instructed banks it regulates to document and publicly report how they use the government money.

Such steps could make the program less appealing for the industry, potentially defeating its purpose. Since banks don't lend their capital on a dollar-for- dollar basis but rather "leverage" it -- lending about $10 to $12 for every $1 in capital -- it may not be easy to identify how the money is used, and it's not clear what Congress might mandate.

"Some of the restrictions might cause banks some pause," said John Ziegelbauer, national managing partner for Grant Thornton LP's U. S. financial institutions practice. "It's difficult to track how a bank uses the money because it's difficult to segregate it. And it's going to take some time before banks make the loans. Banks would be irresponsible if they just turned around and tried to suddenly lend all this money."

The issues pondered by Evans mirror the debate at banks across the country, as executives consider whether to participate in the initiative. Although it's part of the broader $700 billion Troubled Assets Relief Program passed by Congress in October, Nasca said it's not a bailout but an investment.

More than 257 institutions have received $192 billion from Treasury so far, with at least hundreds of more transactions or applications still pending. By contrast, only a handful have publicly said they rejected the money or even declined to apply in the first place.

According to the 16th annual Bank Executive Survey by Grant Thornton, 47 percent of banks are interested in the program, including 44 percent of private banks, 58 percent of publicly traded banks, and one-third of depositor-owned mutual savings banks. However, that survey began in November, before the criticism and pressure surfaced.

"At the time, they weren't talking as much about all the restrictions," Ziegelbauer said. "But in the couple of months since, they have been."

jepstein@buffnews.com

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