Banking Law

According to a recent American Banker article (paid subscription required), it looks like the $30 billion small business lending law enacted by Congress may be cocered with the same patina that slimed TARP.

So far, the response among bankers has been lackluster at best. Some said they can't get past the bitter memory of the Troubled Asset Relief Program, and have no interest in doing business with the government again ? especially so soon after the Tarp experience.

"It's like all their programs," said Thomas O'Brien, the president and chief executive of State Bank of Long Island in Jericho, N.Y. "They're just subject to change and revision, and someday they'll turn around and attack or revile their participants, and I don't think any of us want to go through that anymore."

[...]

Mike Menzies, president of the $161.5 million-asset Easton Bank and Trust in Maryland and a past chairman of the Independent Community Bankers of America, said his bank is considering applying for the funds. He said the program could be a valuable tool to help the smallest banks preserve capital so they're prepared to lend once loan demand returns.

But he acknowledged that many bankers worry about how they might be viewed if they accept the capital.

"I think that there is an inherent dislike of the notion that the media could paint the small-business loan fund as a form of a bailout," he said.

Michael Clarke, CEO of the $789.2 million-asset Access National Bank in Reston, Va., said he has no doubt that the program will increase the volume of small-business lending. But he is not sure his bank should be involved.

"We're still evaluating it," Clarke said, "because if you are unable to reach the thresholds of volume, then this capital will prove to be costly. We don't want to find ourselves in a trap where we almost feel obligated or forced to make loans that we otherwise wouldn't, just to meet the objectives of the program."

[...]

The $2.8 billion-asset Bank of the Ozarks in Little Rock received $75 million in Tarp funds in December 2008, and repaid the investment in November 2009. George Gleason, the CEO, said the company has zero interest in more capital from the Treasury Department.

"I don't even know if we're eligible for it," Gleason said. "We haven't looked at it, and the reason is very simple: We're going to make every good loan that we can make, with or without the fund. So we're not going to mess with a government program."

It's good to know that many community bankers (a) learned the lessons of the recent past so readily and (b) aren't masochists. However, one group of bankers is likely to be much more receptive: those already dangling on TARP's hook.

That's because the law allows some banks that received funds through Tarp's Capital Purchase Program to refinance into the Small Business Lending Fund, where they have the chance to pay much lower dividends on the capital, said Joseph Longino, a principal in the investment strategy group at Sandler O'Neill & Partners LP.

Under Tarp, banks pay the Treasury Department a 5% dividend, and that will rise to 9% in 2013.

Through the new fund, banks with less than $10 billion of assets can apply for capital with an initial dividend payment of 5%, which could drop to as low as 1% for a few years as banks boost their lending.

"I think smaller banks that are laboring under Tarp and that believe ? that there are small-business lending opportunities out there that they could tap ? and therefore get the lower rate ? are going to be the most interested in this program," Longino said.

There are no warrants this time around, either, so it's got that going for it.

Nevertheless, this doesn't seem to be something that is going to make the "splash" that TARP made. For that, thank (1) Members of Congress for changing the rules after the program was enacted and pontificating about how "bailed out" banks weren't lending; (2) articles in the main stream press that painted all banks that particpated in the "big bank" and "small bank" versions of TARP with the same broad brush; and (3) banks that didn't take TARP using that fact as a marketing ploy against those that did.

To me, the fact that the final bill didn't contain commercial real estate loss amortization provisions that were inserted in the initial House-passed version made it an exercise in futility for most community banks. As I noted previously, most of them who need the additional capital won't likely qualify for it. At this point, it appears that even those banks that would qualify for it aren't particularly interested in getting it. One more election year exercise in futility.