Small Business Lending Fund getting mixed reviews from bankers

By Danielle Douglas
Monday, January 17, 2011

Community bankers are debating the merits of the newly minted Small Business Lending Fund, questioning whether participation in the Treasury Department's program is more trouble than it's worth, or even necessary.

Under the program, part of the Small Business Jobs Act of 2010 enacted in the fall, the Treasury buys preferred stock in community banks that are then allowed to draw upon the $30 billion fund to lend to mom-and-pop shops. Banks with less than $1 billion in assets can tap the account for up to 5 percent of their risk-weighted assets, while institutions with less than $10 billion in assets can borrow a maximum of 3 percent.

The initial dividend rate would be around 5 percent, but could fall as low as 1 percent depending on how much banks lend to small businesses. If lending does not increase in the first two years, however, the rate would be hiked up to 7 percent.

"If you tell a bank they'll get to pay less by lending more, eventually they'll start making bad loans," said Bernard Clineburg, chief executive of Cardinal Bank in Tysons Corner. "Any program that incentivizes a company to take on that kind of risk is problematic."

Kathleen Murphy, president and chief executive of the Maryland Bankers Association, doubts that scenario would come to pass given the stringent regulatory oversight these days. But she has other concerns.

"I have members that participated in the capital purchase program for healthy banks and had the rules of the game change after they were part of the program. It left them with a bad taste in the mouth," she said. Some bankers, she continued, are also worried about the stigma associated with taking money from the government.

Not Ronald D. Paul, the chairman and chief executive of EagleBank in Bethesda. "Why wouldn't I take capital at 1 percent interest?" questioned Paul, a recipient of a $38.2 million injection from the Troubled Asset Relief Program. "We want to continue to grow and this cost of capital is very low."

Last month, Paul said he was considering using the Treasury's new lending fund to repay the $23.2 million balance of Eagle's TARP bill.

Indeed, the lending fund does present some appealing prospects for TARP recipients. Those that are up to date with their TARP dividend payments can convert the prior investment to the new program. In doing so, they would eliminate the executive compensation restrictions and possibly reduce their dividend payments.

Banks have until the end of March to apply for the program. Colleen Murray, a spokeswoman for the Treasury, would not divulge the exact number of applications thus far but said, "We have received a lot of positive feedback from community banks and expect strong participation in the program."

An internal poll recently conducted by the Independent Community Bankers of America, however, found that 70 percent of respondents had no intention of tapping the lending fund, either because they were well capitalized or weren't seeing loan demand.

While Cardinal closed more loans in December than any other month, Clineburg can attest to an overall lull in demand for credit. He suspects that some small businesses are still trying to regain their footing.

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