) --

Heritage Financial Corp

(HFWA) - Get Heritage Financial Corporation Report

of Olympia, Wash., is more than twice as well-capitalized as

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

was when it repaid the $25 billion it owed the federal government in June, but CEO Brian Vance is in no hurry to pay back the Treasury.

"Additional capital is kind of like an airport runway: you can't have too long of a runway," Vance says, adding he wants what he admits could be considered an "expensive insurance policy" because he is still not convinced the economy has hit bottom. He hopes the Pacific Northwest will recover in the second quarter of next year, which would prompt him to consider returning the money.

Many other small and mid-sized banks appear to have a similar view. According to

SNL Financial

, more than 300 banks have a Tier One common equity ratio of more than 7.7%, which was JPMorgan's ratio at the end of the third quarter, after it exited the TARP's Capital Purchase Program (CPP). Though the Treasury appears to have quietly raised the capital requirements for exiting the CPP, there are still about 250 banks with a Tier One common equity ratio above the 8.5% level of

Bank of America

(BAC) - Get Bank of America Corp Report

, which issued $19.29 billion to pay off its TARP funds last week.

For big companies like

Wells Fargo

(WFC) - Get Wells Fargo & Company Report



(C) - Get Citigroup Inc. Report

, TARP is a political liability. Bank of America is repaying TARP in part to make it easier for them to find a new CEO, since some outside candidates for the job reportedly balked at the federal pay restrictions that go along with the additional capital.

These issues are less important to smaller banks, which is not to say that they aren't sensitive to criticism from the public over having accepted the government money.

"Every once in a while I hear that -- 'you guys got bailed out' and I kind of cringe," says Billy Duvall, CFO and Treasurer of

HopFed Bancorp


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in Hopkinsville, Ky. "I don't allow the word TARP to be used in front of me. It's Capital Purchase Program. We don't see it as welfare at all. We thought we were supposed to take it because we were a healthy bank and we were going to grow the banks more."

Duvall was annoyed when a rival bank in the region,

First Advantage Bancorp


used the fact that it did not accept TARP money in advertising campaigns.

"You don't stand out and gloat because it's not good for the industry and it's not good for the country," Duvall says. A call to First Advantage CEO Earl Bradley was not returned.

Indeed, so much criticism has been leveled at the TARP's Capital Purchase Program, it is easy to forget that government officials initially described it as a way to bolster healthy financial companies. Largely that is because Citigroup,


(AIG) - Get American International Group, Inc. Report

and a few other of the biggest recipients were clearly not healthy.

For banks that were not too big to fail, however, receiving money under the CPP was initially viewed as an indication of health, and small and mid-sized banks that did not want to take the money were concerned investors would think they had been rejected.

"It seemed like the public perception

of banks that took money under the CPP," flipped 180 degrees in about a week," says Dave Heeter, CEO of

MutualFirst Financial

(MFSF) - Get MutualFirst Financial, Inc. Report

in Muncie, Ind.

Still, many small and mid-sized banks seem to think having to endure the occasional taunt is not a good enough reason to exit the program. Though the 5% dividend they pay is not cheap, they say they have no better alternative, and they want to extra cushion both to protect against a weak economy and to pursue acquisitions or make more loans.

Indeed, Heritage Financial's Vance says that in addition to providing an extra cushion against a continued weak economy, the extra capital can be used to buy distressed institutions or to pursue lending or deposit-taking business left behind by troubled competitors.

HopFed's Duvall says there are essentially no failed banks to buy in Central Tennessee and Western Kentucky, but lending opportunities are certainly attractive as super-regional banks in his area are "running good business off."

Still, Duvall says HopFed would happily return the CPP money if its stock were trading higher than its current price of $9.81 per share, about 60% of its tangible book value.

"If we were trading at tangible book, or about $17 per share, we wouldn't be having this conversation," Duvall says.

Heritage Financial is trading above tangible book value, however, but Sandler O'Neill analyst Tim O'Brien does not quibble with CEO Vance's decision to hold onto the capital.

"The market doesn't fault him for that at all -- or it shouldn't fault him for that," O'Brien says, citing the same reasons given by Vance for hanging onto the capital: the still-weak economy, opportunities for growth, and the dilutive effect of an equity raise.

Many banks, then, may wait quite some time to pay back TARP. Like many small banks, HopFed's dividend increases to 9% on the fifth anniversary of the date it received the initial investment.

"That is a punitive dividend at that point," HopFed's Duvall says. "You don't want to be there then and wait 'til the last minute because you've got to think there's going to be a lot of banks running out the door to get out and raise the capital at that time."


Written by Dan Freed in New York