Any interest in TARP-based small business lending? (March 2010)

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Any interest in TARP-based small business lending? (March 2010)

Headache 1: Small business loan funding

President Obama recently 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?

Remedy 1
Laurie Stewart, president and CEO, Sound Community Bank, Seattle, Wash., $337.1 million-assets.

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.

Remedy 2
Rheo Brouillard, president and CEO, Savings Institute Bank and Trust Co., Willimantic, Conn., $864.6 million-assets.

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.

Remedy 3
Blair Hillyer, chairman and president, First National Bank of Dennison, Ohio, $163.8 million-assets.

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.

Remedy 4
B. Keith Johnson, chief executive officer, First Federal Savings Bank, Elizabethtown, Ky., $1.2 billion-assets.

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!

More answers appear on www.ababj.com

Headache 2: Making exams go better
Pass the Aspirin prescribers were asked: “Examinations have been a trying experience in this environment for most community banks. In your own recent exam, were there any steps that your bank took that helped ease the understandable tension?”

Remedy 1
Dan Blanton, president and CEO, Southeastern Bank Financial Co., Augusta, Ga., a two-bank holding company of $1.5 billion-assets with subsidiaries in Georgia and South Carolina.

It’s no secret that there have been plenty of regulatory orders issued—and published—dealing with banks in our area. We’ve taken the stand that we can learn from others’ experience. Every time an order affecting a bank in our region comes out, we go to the appropriate agency’s website to get hold of it, and parse it to see what the regulators seem to be expecting and what they find fault with. Then we hold that list up against our own operation, and see where we are strong and where we have some work to do. Using this real-world yardstick has stood us in good stead through this troublesome period, and is the best way we know of to prepare for an exam and to make sure it goes as smoothly as possible. These days, no banker can really say that what the bank examiners are looking for and looking at comes as a surprise, when you see that they publish these orders.

The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0310/index.php?startid=14