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Financial turmoil in the third and fourth quarters of 2008 led three state chartered banks in the greater San Fernando Valley area to apply for assistance from the $700 billion Troubled Asset Relief Program.

Considered by some a “bailout,” the program allows the federal government to help strengthen financial institution’s balance sheets by investing in or insuring troubled assets such as subprime loans.

Hundreds of banks and businesses in the U.S. signed-on. To date, the federal government has committed $549.4 billion, according to the New York Times.

California Oaks State Bank in Thousand Oaks received $3 million from the program on Jan. 23; First California Financial Group (parent of First California Bank) $25 million on Dec. 19; and Mission Valley Bank in Sun Valley secured $6 million on Dec. 23.

TARP recipients pay a return on the federal government’s investment and adhere to increased oversight and rules governing things like executive compensation. As a result, some institutions have re-paid or committed to re-pay the funds as soon as they could.

But local banks are not returning funds, at least for now. While increased oversight is cumbersome, the money is doing what it was intended to do: give the banks greater financial stability, ability to lend, and in one case, the capital to acquire assets of a failed financial institution.

“Having capital is not all that bad,” said C.G. Kum, president and CEO of First California Bank. “In Q4 2008, TARP was the cheapest capital at that time. Not only was it the cheapest, but it was one of the only sources.”

Kum said First California Bank was not going to participate in TARP, but regulators encouraged it. The $25 million was used to acquire some of the deposits and assets of Redlands, Calif.-based First Centennial Bank, which the FDIC shut down in January.

“It was a low-risk way to acquire deposits and six branch offices in markets that we wanted to grow into,” said Kum. “So the way I look at it is we got a significant benefit from the TARP.”

The downside is rules have changed dramatically since First California received funds in December. Some of those include caps on executive compensation, reporting requirements and oversight of the amount and types of loans banks can make.

For now, First California Bank is lending conservatively. “Opening the tap doesn’t make a lot of sense in this economic climate,” said Kum. “It all boils down to risk in investments.”

California Oaks State Bank President and CEO John Nerland said the $3 million TARP infusion strengthened California Oaks’ capital position and helped the bank continue to lend. The bank’s “sweet spot” is loans in the $500,000 to $1 million range. And it’s working on growing core deposits to overcome a 105 percent loan-to-deposit ratio.

“The end of the third quarter 2008 was a challenging time and this was kind of an insurance,” said Nerland, adding, fortunately, the spike in past due payments was fairly short-lived and many of the troubled loans worked themselves out.

California Oaks has tightened its underwriting. It’s looking at each loan application on an individual basis and making sure there are primary and secondary sources of re-payment before signing off.

One frustrating part of the program, according to Nerland, is that the federal government continually changes the forms banks are required to fill out to report financial activities. So California Oaks spends a lot of man hours adapting to the new formats.

And, community banks have the same rules as big banks on executive pay caps. Nerland said most community bank CEOs do not earn an exorbitant salary, so not being able to access additional financial perks can be a real disincentive.

Another drawback is debunking the public perception that TARP is a freebie for banks, he said. “It’s important for people to know that this was not a handout, because the government got stock in our company,” Nerland said.

Prior to federal funds Mission Valley Bank had fully leveraged its capital and was borrowing from the Federal Home Loan Bank system to meet loan demand, said Tamara Gurney, president and CEO of Mission Valley.

“Given the economic cycle we were in, the equity and debt markets were closed,” she said. “We had no alternative…either shut the spigot and do no more lending or go to the government.”

Mission Valley’s designation as a Community Development Financial Institution allowed it to accept TARP funds without warrants –securities entitling the federal government to buy a proportionate amount of stock in the company, said Gurney. Warrants would have made accepting the money cost prohibitive.

The capital has been a positive for Mission Valley. The bank has leveraged it to make millions of dollars in loans and plans to make $8 million in loans in the next 30 days. It also launched a troubled debt re-structuring program for existing clients.

But constant rule changes, lack of clarity on executive compensation, and reporting requirements are time consuming and costly, said Gurney, adding she has had to travel to Washington D.C. five times to deal with some of the issues.