One big question on the minds of many community bank CEOs at the moment is whether they should pursue funds from the Treasury Department’s Troubled Asset Relief Program (TARP). That certainly was evident among the bankers attending the recent ABA Community Bank Investor Conference in New York.

On one hand, most bank executives would like to have additional capital, even if their bank currently is considered well-capitalized. On the other hand, there is concern that tapping the TARP may send the wrong message to investors and customers – namely that the bank is having financial trouble.

A panel discussion involving two banking analysts and one institutional investor at the ABA conference tackled the TARP question. All three agreed that banks should tap the TARP for several reasons:

• It is an extremely low-cost source of capital.

• It is most likely a one-time-only offer.

• Most banks that take the TARP are strongly considering using it for M&A. That puts a target on the backs of those banks that do not participate. 

• As such, the panelists said they would not see it as a sign of trouble or weakness if a bank tapped the TARP. Just the opposite, in fact.

• Even if a bank is in a fairly good capital position now, it should take the additional capital, because the market and economy remain extremely volatile. As one analyst commented, "If a bank passes on an opportunity to take the capital, it had better be very, very confident in its capital position into the future."

From an investor relations and communications perspective, we agree with the panelists. Regardless of what the TARP was designed to do, the likely impact will be that it will spur M&A activity by bolstering the capital positions of relatively strong banks as they take out weaker peers. (And there is mounting anecdotal evidence that Treasury officials are, in fact, advising banks to use the TARP for M&A.)

In this environment, board members, investors and the broader financial community will have a greater comfort level about the future of those banks that tap the TARP, and may even come to view such banks as the leaders reshaping the industry landscape.

For banks that decide to participate in the TARP, we recommend issuing a press release informing the public of their decision. Messaging should center on the reasons for taking the TARP, namely that it provides “insurance” capital in a time of great uncertainty and, as such, is in the best interest of the company and its shareholders.

Include information in the release about your 3Q capital ratios and liquidity status. Make the point that your bank already was well-capitalized and that the TARP strengthens it further. This will go a long way toward combating any perceptions that accessing the TARP signals weakness.

As far as potential M&A activity, we recommend not specifically stating this intention, but rather saying that, in addition to shoring up operations into 2009, the additional capital will be used to support the bank’s strategic initiatives with regard to customer service, growth and enhancing shareholder value. (The argument can be made later that M&A is the best way to accomplish this.)

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