Weak Demand, Rules Crimp U.S. Small Business Lending Fund
A U.S. Treasury Department program to stimulate job growth by injecting $30 billion into banks for small-business lending has disbursed just $2.4 billion, with lenders and industry groups saying it fell victim to the sputtering economy and overly stringent rules.
President Barack Obama praised the Small Business Lending Fund last year as key to his efforts to create jobs by ensuring credit-starved companies got the loans they needed to expand. The program, which ends Sept. 27, rewarded qualified community banks with funding that cost as little as 1 percent if they boosted small-business loans by 10 percent or more. Treasury said it had given preliminary approval to $4.3 billion of the investments.
Weak demand and stiff requirements discouraged applications or prevented some banks from gaining access, according to community bankers, industry associations and state regulators. Some lenders that succeeded in getting funds said they have managed to meet loan growth targets by poaching customers from weaker competitors, providing little net benefit to the stalled economy.
U.S. consumer confidence dropped last week to the weakest point since the recession ended in June 2009, and the labor market showed few signs of improving. The Bloomberg Consumer Comfort Index fell to minus 52.1 in the period to Sept. 18 from minus 49.3. Today’s Labor Department report showed the average number of claims in the past month climbed for a fifth straight week, to the highest level since July 16.
“We met our 10 percent target and expect to do more, but, frankly, a lot of the customers we get we steal from the others,” said John Dalby, chief executive officer of Redwood Capital Bancorp (RWCB) in Eureka, California, which received a $7.3 million SBLF investment.
Some bankers and their advisers said that the Treasury was too restrictive in its application rules so that even some healthy banks were turned down.
“There are some well-run, well-capitalized banks people said ‘no’ to, and today they are scratching their heads asking, ’Why?’” said Lawrence Kaplan, a partner at Paul Hastings Janofsky & Walker LLP, which represents banks who applied to the program. “You have a controversial program but then you have a controversial implementation of a program.”
Frank Keating, president of the American Bankers Association, wrote a letter to the Treasury on Sept. 13, asking why “viable banks that are located in the hardest-hit parts of the country where economic growth is needed” weren’t accepted.
Ultimately, bankers said that the program wasn’t more widely embraced as few creditworthy small businesses want to borrow. The U.S. unemployment rate remained at 9.1 percent in August.
“Until you start to see the economy improve and job growth you won’t see lots of loan demand,” said Thomas Dorr, chief financial officer of Bank of Birmingham in Michigan, which received $4.6 million from the program. “You can’t force banks to lend.”
He said that his bank in Birmingham, an affluent area outside Detroit, has a small portfolio and needs to add $3.4 million in credits in the first year to hit its target.
More small-business loans are being repaid than renewed. Commercial and industrial loans of $1 million or less to small businesses fell to $283 billion at the end of June from $309.95 billion on June 30 of last year, according to a Federal Deposit Insurance Corp. quarterly report.
A growing number of businesses say they have all the financing they need. In its mid-year economic survey, released last month, the National Small Business Association said 64 percent of businesses reported having adequate financing, up from 59 percent a year earlier, and 36 percent said they were unable to obtain adequate financing, down from 41 percent.
Treasury said the program is needed. “We hear from small businesses that they want to expand and bring on new employees, but accessing capital is still a challenge,” Don Graves, the department’s deputy assistant secretary for small business, said in an e-mail. “The SBLF helps address that challenge by providing billions of dollars to Main Street banks.”
Keith Leibfried, CEO of First Federal Bank of Florida in Lake City, which received $20 million from the SBLF, said boosting loans was difficult because small businesses in his region were repaying loans, not seeking new ones, making it harder for him to expand his portfolio.
“Our loans are probably going to be refinancing the loans that were made by other institutions,” he said. “I’m not sure how many new borrowers are going to be generated from this effort.”
Under the program, banks with less than $10 billion in assets could apply after proving themselves healthy and getting approval from regulators. The Treasury makes investments in the banks, with the initial dividend set at 5 percent, and adjusted depending on the volume of increased small-business loans. If banks fail to increase lending, the dividend can rise as high as 9 percent.
Treasury said it gave preliminary approval to 382 banks under the program. As of Sept. 14, 191 banks received $2.4 billion. Of that total, 89 used the capital to repay taxpayer money they had received under the Troubled Asset Relief Program, according to an analysis by KBW Inc.
“It was a small program overall and to find only 382 banks nationwide eligible to participate was certainly disappointing,” said Ray Grace, North Carolina’s chief deputy commissioner of banks. He said 28 banks in his state applied for $447 million; Treasury approved seven for $99.2 million.
The program included a restriction that loans made under a separate Small Business Administration designation would not qualify in the calculations of overall credit growth for determining the dividend payments under SBLF. That would amount to permitting banks to double-count the loans, the Treasury said.
Then the Treasury decided that banks that previously had been prevented by their regulators from paying dividends to shareholders, a measure normally taken when the bank has poor earnings or has unhealthy levels of loan losses, would have to obtain waivers to participate in the SBLF.
“The application and term sheet made everything seem so easy,” said Jon Winick, president of Chicago-based Clark Street Capital Management LLC, which assists banks in applying for the program. “They got a lot of people to apply and then, as the rules came out, the program became less attractive.”
‘Disappointed’ in Pace
Treasury Secretary Timothy F. Geithner said in a hearing June 22 that he was “disappointed” in the pace of the program. “The regulators are being careful and that’s what you want us to do,” Geithner said at a House Small Business Committee hearing.
The Independent Community Bankers of America, which represents almost 5,000 institutions, sent the Federal Reserve a letter in August saying the central bank hadn’t given banks dividend waivers to participate in the program, jeopardizing approval of applicants.
The Fed responded in a letter to the ICBA that its responsibility is first to protect depositors and “respectfully declines to release the requirements of any informal or formal enforcement actions solely to facilitate participation in the SBLF program.”
In a white paper released on Sept. 6, Treasury said more than 40 percent of community-bank applicants failed to meet the minimum statutory requirements of the program.
Treasury said the dividend requirement was necessary. “Banks that increase their small-business lending pay lower dividends,” Graves said. “It simply would not make sense to invest in institutions that cannot pay dividends, as those banks would have little incentive to increase small-business lending.”
Banks that did get accepted into the program said they had more trouble finding qualified customers than raising capital.
“They have too much capital, if anything,” said Jennifer Thompson, an analyst at Portales Partners LLC in New York. “It does come down to the credit-quality issue. Very few creditworthy borrowers want loans because of the economy.”
Gregory Mitchell, CEO of Pacific Trust Bank in Chula Vista, California, said he is using $32 million of SBLF funds to fuel acquisitions so his institution can expand.
“We’ve been growing by taking business from our competitors,” said Mitchell, whose bank has $863.6 million in assets.
Some banks that have gotten funding attest to its usefulness. Tom Swenson, Chief Executive Officer of the Bank of Montana, in Missoula, Montana, received $1.46 million and said he has already made new loans to an auto dealer to finance energy-efficient equipment and facilities and to a brewery for recycling bottles.
“It’s very difficult to earn your way to more capital,” Swenson said. “This shot in the arm allows us to keep on lending and keep on growing.”
The loan the bank extended to Bayern Brewing Co. in Missoula, maker of beers like Dump Truck Summer Bock and Dragon’s Breath Dark Hefeweizen, enabled the brewery to buy new equipment that will make it possible to add jobs, said founder Jurgen Knoller.