The banks are weighing the impact on existing shareholders and carefully reviewing the terms for taking part in the $250 billion slice of the $700 billion bailout.
"If you believe, as we do, that the next 12 months will be more difficult than 2008, then you want to continue to be in the position to lend funds and support your communities," said Bob Jones, CEO of Evansville-based Old National Bancorp, the state's largest locally based bank.
Old National will accept $100 million of TARP funds after being approved for up to $160 million.
One of Jones' primary concerns in accepting the government investment was making sure it wouldn't prevent Old National from raising its dividend for a 27th consecutive year. The bank, which recently agreed to buy 65 Charter One branches from a subsidiary of Royal Bank of Scotland Group without using government money, must make its case for the dividend hike to regulators. It would announce such a move at the end of January.
Other banks lining up for federal funds: Horizon Bancorp of Michigan City has agreed to accept $25 million; LSB Financial Corp. of Lafayette accepted $15 million; Columbus-based Indiana Community Bancorp, a subsidiary of Indiana Bank and Trust, accepted $21.5 million. Other banks, including Jasper-based German American Bancorp Inc., Evansville-based Integra Bank Corp. and Madison-based River Valley Bancorp, have applied and are waiting for word.
German American applied for $25 million but has yet to decide whether it will accept the money, said Mark Schroeder, the bank's president.
"It is reasonably priced capital but not low-priced capital," Schroeder said. "It's bargain-priced compared to the market, but compared to the price of raising capital a year ago, it is expensive."
The arrangements call for the government to buy preferred shares and also get warrants to buy additional shares to capitalize from any appreciation in the share price. The banks would pay a 5-percent dividend on the government's shares for the first five years. After that, the rate rises to 9 percent.
The additional capital would help German American do additional business and grow its balance sheet, but it also comes with some strings: Congress has some authority to change the contract by changing laws, Schroeder said. The requirements make sense to protect taxpayers.
"Clearly, the government wants to be paid off in relatively short order," he said.
Indiana banks might as well grab their fair share of the bailout cash and put it to work locally, said Mark Hardwick, chief financial officer for Muncie-based First Merchants Corp., which is waiting to hear back on its request for $116 million.
The bank filed jointly with Plainfield-based Lincoln Bancorp, which First Merchants has agreed to acquire in a transaction scheduled to close Dec. 31.
If accepted into the program, First Merchants will weigh the pros and cons before taking the infusion, Hardwick said. The cash would allow the bank to continue to lend in some cases where it might otherwise have had to scale back.
"The clear negative of any TARP money is dilution from an earnings-per-share perspective [since the deal would add preferred shares held by the government]," he said. "The real upside is just a strengthening of the capital base of the corporation. We're trying to weigh the right balance."
Meanwhile, Lincoln filed its own application to cover itself in case the $75 million merger falls through. Lincoln, which has 17 branches and $800 million in assets, is eligible for $21 million under TARP, while First Merchants, with 67 locations and $3.9 billion in assets, is eligible for $95 million.
Banks that pass up the opportunity to add capital now may regret it down the road, said Lincoln Bank President Jerry Engle, who plans to assume the role of market president for Indianapolis at the combined bank.
"The government has some strings, and they should if they give you that money," he said. "But if you don't take it now and you need it later, you may be out of luck."
But not every bank is jumping on board. First Farmers Bank & Trust of Converse proudly announced it will not seek or accept TARP funds.
"Despite economic uncertainty, First Farmers believes their adherence to long-held strategies of serving local depositors and borrowers will continue to reward stockholders, customers and employees," the bank said in a statement posted on its Web site.