UPDATE 2-Sun Bancorp joins banks lining up to repay TARP

Wed Apr 1, 2009 5:27pm EDT

(Adds details, company comments, background)

By Sweta Singh

BANGALORE, April 1 (Reuters) - Sun Bancorp (SNBC.O) on Wednesday joined a rising number of U.S. regional banks that are repaying funds received under the government's Troubled Asset Relief Program (TARP).

Sun Bancorp had received $89 million as funds under the government's relief program and joins Evansville, Indiana-based Old National Bancorp ONB.N, Signature Bank (SBNY.O) of New York, and California's Bank of Marin Bancorp (BMRC.O) who have already repaid a total of $248 million.

"Since we don't need it, we view the repayment as an opportunity to support the government's efforts to create stimulus by giving these funds to another bank that needs the capital to maintain operations and increase lending," Thomas Geisel, chief executive, Sun Bancorp told Reuters in an email.

The move to repay funds as early as possible could undermine a key pillar of the Obama administration's financial recovery plan -- intended to stabilize the financial system, prevent a collapse of the banking system and bolster lending.

While the funds were mostly intended for banks that were weakened by the housing slump and the subsequent crash of credit markets, a significant portion of the $700 billion bailout ended up going to banks that described themselves as well-capitalized.

Now some of these banks with strong capital ratios are beginning to return the TARP funds to get out of restrictions like executive compensation caps imposed by the government.

Repayment means "less influence on your business model from the government," analyst Terry McEvoy of Oppenheimer & Co said.

Analysts also view the approval to return the TARP funds as a vote of confidence in the companies by regulators.

However, many are concerned that if healthier banks return government money to get out of newly imposed executive pay rules, weaker banks that cannot afford to return the funds will be stigmatized.

In a meeting with top U.S. bankers on Friday, President Barack Obama did not instruct the bankers to stop considering an early return of some of the bailout funds but asked them to exercise caution in doing so.

Though the smaller lenders are beginning to repay TARP funds, much of the attention has been on larger institutions like Goldman Sachs (GS.N) and Bank of America (BAC.N) who have announced their intentions to repay TARP funds. "The market has reacted favorably to those banks that have announced their intention to pay off TARP and actually did so," analyst McEvoy said.

The repayment signals that management feels confident that their capital levels, without the TARP money, will be enough to absorb rising costs tied to non-performing loans and execute their business strategy, McEvoy added.

Bank of Marin Bancorp Chief Executive said his bank did not really need the funds but was encouraged to take the money by the government to expand its lending.

"The restrictions that were put on us made it not the kind of capital we wanted to keep. We did not want to restrict the way we did business, it just was very difficult," Chief Executive Russell Colombo told Reuters by phone.

Wayzata, Minnesota-based TCF Financial Corp (TCB.N), on the other hand is still waiting for approval to repay funds.

"We believe participation in TARP has created a competitive disadvantage for TCF and it is in the best interest of our shareholders to redeem these shares," Chief Executive William Cooper had said.

In a note to clients, Morgan Stanley analyst Ken Zerbe wrote, "It is also possible that TCF Financial has not yet fully proven to the Treasury that paying back TARP capital is the right decision." (Editing by Ratul Ray Chaudhuri)