CONSIDERING TARP-LIKE SMALL BUSINESS LENDING HELP

Our Question: President Obama proposed transforming $30 billion in TARP funds into a separate, new "Small Business Lending Fund." How would your bank respond if this proposal were passed by Congress?

One banker's viewpoint: Unlikely to participate in anything labeled "TARP"

Here's how Laurie Stewart, president and CEO, Sound Community Bank, Seattle, Wash., $337.1 million-assets, "passed the aspirin."

Like most banks, we are conserving capital in reaction to the recessionary environment and the regulators' pressure to retain higher-than-required statutory minimums to be considered well capitalized. That means, given the difficult earning environment, that we have been forced to hold growth to a modest level in 2010. Meanwhile we are experiencing steady-albeit not robust-loan demand. Some of this demand is the result of other community banks in our area being forced to shrink their balance sheets. They are not renewing credits.

We would grow our small business, multifamily, and mortgage portfolios if we had access to additional capital. This would continue to support the recovery and could produce a win for borrowers; a win for the bank; and a win for the government. And, if you consider the likelihood that taxpayers would be the ultimate beneficiaries of a self-sustaining program that pays dividends, you have a genuine home run.

However, we would be unlikely to participate if this program was labeled "TARP" and subject to "after the fact" adjustments to terms and conditions, as TARP was.

UPDATE: On May 7, the Obama administration sent a draft bill to Congress that would create a $30 billion fund to provide capital for banks with assets under $10 billion to increase their small-business lending. The President had mentioned the program in his State of the Union address and provided some details on Feb. 2.   ABA generally supports the program and has been working with the Administration on it. But the association will raise concerns about the program's eligibility requirements and its formula to determine whether banks are meeting those requirements.

Now let's hear your views and ideas below!
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Blair Hillyer said:

I will be interested to see how many banks would really take the funds. Most of the bankers I talk to have plenty of money to lend and are suffering from excess liquidity. They can?t find quality commercial borrowers who are willing to borrow in the current environment, even with very low interest rates. Also, I can?t imagine that most community banks will want to take government money, given all the negative publicity surrounding the TARP funds. We don?t need the money at our bank; we need good quality loan requests. We?re not seeing those right now, and haven?t for several months.

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March 11, 2010
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B. Keith Johnson said:

What an opportunity this would be for those of us community bankers who are suffering from the fear of outgrowing our existing capital. We have no intentions of jeopardizing our well-capitalized status (currently 11.5% total risk-based capital), especially in light of the threat of a potential increase in the regulatory capital ratios and/or a commercial real estate bust. As a publicly traded company with a depressed stock price, our options for raising capital create too much dilution to the existing shareholders. Therefore we have made a strategic decision to quit growing our loan portfolio, which means we are now declining numerous good loan opportunities.
We would gladly participate in the Administration?s proposed Small Business Lending Fund by applying for $30 million to be used as follows: (1) $20 million would be used to pay off the TARP CPP funds; (2) $10 million would be a new capital injection into our $1.2 billion bank, building our total risk-based capital to approximately 12.5%. This would allow the Bank to grow our loan portfolio by $50 million, while still maintaining a 12% capital ratio. Consequently, our cost to participate in the program would decline to 1%, resulting from a 10% loan growth.
It seems like a ?no-brainer,? strengthening our capital position while strengthening our economy. This is a win-win for all!

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March 11, 2010
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Rheo Brouillard said:

The problem, at least in our market area, is not one where the banks are unable or unwilling to lend. We have plenty of money available and would like nothing more than to put it to good use. The problem is more that businesses are not looking to borrow. They have little or no reason to do so, since they are generally dealing with lower sales and a need to reduce expenses in response to the slower economy. As a result, they are not building inventory, buying new equipment, or expanding their operations.
If the government is interested in helping, then it would likely be better off (1) providing more guarantees so that we can help borrowers that can create jobs but whose balance sheets have been hurt by the recession and no longer qualify for conventional community bank financing ; and, (2) by providing tax incentives when companies do hire additional workers.
Getting people back to work is the most important task to getting the country out of the recession.

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March 12, 2010
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William Grant said:

This response is drawn from testimony given by Mr. Grant before Congress in early 2010. The entire testimony can be found on ABA's website, www.aba.com.

In this severe economic environment, it is only natural for businesses and individuals to be more cautious. Businesses are reevaluating their credit needs and, as a result, loan demand has fallen dramatically since the recession began. Banks, too, are being prudent in underwriting, and our regulators demand it. With the economic downturn, credit quality has suffered and losses have increased for banks. Fortunately, community banks like mine entered this recession with strong capital levels. ? however, it is extremely difficult to raise new capital in this financial climate.
The difficult recession, falling loan demand, and loan losses have meant that loan volumes for small businesses have declined somewhat this year. Let me be very clear here: even in a weak economy there are very strong borrowers. Every bank in this country is working hard to ensure that our customers?particularly the small businesses that are our neighbors and the life blood of our communities?get the credit they deserve. ?
There are some positive signs beginning to appear. We have heard from bankers that small businesses are returning to test the market for loans, even though they may not wish to borrow at the moment. It will take time for this renewed interest to be translated into new loans made, however. Previous recessions have shown that it typically takes 13 months after the recession for business confidence to return and credit to return to
pre-recession levels.
Both banks and their regulators are understandably more cautious in today?s environment. Bankers are asking more questions of their borrowers, and regulators are asking more questions of the banks they examine. Given the economic conditions, it is clear that the risk of lending is much greater today than several years ago when the economy was much stronger. This means that the credit terms are different today, with higher downpayments required, and smaller loans consistent with diminished collateral values. Banks are looking at the risk of a loan and re-evaluating the proper pricing of that risk. This is a prudent business practice and one expected by our bank regulators. But it means that some projects that might have been funded when the economy was stronger may not find funding today.
We recognize that there are some consumers and businesses in the current situation that believe they deserve credit that is not being made available. We do not turn down loan applications because we do not want to lend?lending is what banks do. In some cases, however, it makes no sense for the borrower to take on more debt. Sometimes, the best answer is to tell the customer no, so that the borrower does not end up assuming an additional obligation that would be difficult if not impossible to repay.
To help manage the risk of loss, lenders have lowered credit lines for businesses and individuals. However, even with the cutbacks in lines of credit, there is still $6 trillion in unused commitments made available by FDIC-insured banks to businesses and consumers. The utilization rates have declined for business lending, particularly, reflecting the decreased demand.?
ABA appreciates the initiative President Obama outlined in his State of the Union address that would help to resolve this issue by providing additional capital to small banks who volunteer to use it to increase small business lending. A key factor to this proposal is removing it from the rules and restrictions of TARP. Hundreds of banks that had never made a subprime loan or had anything to do with Wall Street took TARP capital with their regulator?s encouragement, even though they did not need it, so they could bolster their lending and financial position. Then within weeks, they were demonized and subject to after-the-fact restrictions. Community banks will be disinclined to participate if there is any possibility of TARP-related stigma being attached to it.

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