The Small Business Lending Fund may be that gift from Congress to bankers they never expected.
After months of gridlock, legislators passed a small business bill last September that included $30 billion for small business loans.
Banks with less than $10 billion in assets can apply to the U.S. Treasury for the capital, and then use the money to lend to small businesses, as a way to generate relief for the economy. The reason it is so great for banks is that many of them still are saddled with Troubled Asset Relief Program money (TARP) and they are having a tough time raising capital, especially smaller, community banks.
This new fund will give them a chance to refinance out of TARP, save money in dividends paid to the government, and have the new money count toward Tier 1 capital to satisfy regulators. Even banks without TARP money can apply.
“It’s a no brainer,’’ said Christopher Annas, the president and chief executive officer of Meridian Bank in Devon, Pennsylvania.
His $400 million-asset bank would reduce dividends from $600,000 to $125,000 per year, by refinancing out of TARP into the small business fund.
The dividend rate on the new fund is from 1 percent to 5 percent, depending on how much the bank increases lending to small business. Banks that increase lending by less than 2.5 percent will pay 5 percent dividends on the fund. Banks that increase lending by more than 10 percent pay 1 percent. In contrast, banks must pay TARP dividends of 5 percent, no matter how much they increase lending.
Even the potential drawbacks of the new program seem hard to find. For instance, banks have two years to increase their lending to small businesses before they start paying penalties. With penalties, the rate is no more than 7 percent or 9 percent—and the higher amount is if lending doesn’t increase after four and a half years.
The banks are free to pay back the Small Business Lending Fund money at any time, without penalty.
So if it doesn’t work out, no worries.
“If you don’t need the capital right now, take it, you can use it next year,’’ Annas said.
If a bank is having trouble raising capital, the fund could equate to “deferring your capital raise for two or three years,’’ said Richard Maroney Jr., who co-manages the investment banking division of Austin Associates in Toledo, Ohio, and spoke at Bank Director’s Acquire or Be Acquired conference in Scottsdale, Arizona recently.
With 1 percent to 5 percent dividend rates, “over time, you could say that’s a pretty good cost of funds,’’ he said.
For instance, if a bank takes $10 million in small business lending money, refinances out of TARP and reduces its dividend from 5 percent to 1 percent, that’s a savings of $400,000 per year, Maroney said.
There are some requirements though:
- Any bank, thrift or bank holding company applying for the funds must have assets of less than $10 billion.
- The deadline to apply is March 31. However, there is no obligation to take the funds if applying.
- Each loan commitment can’t be more than $10 million.
- The loans must be given to businesses that make annual revenues of less than $50 million. Commercial and industrial loans are included. So are owner-occupied real-estate backed commercial loans and agriculture loans. SBA and other government-backed loans are excluded (no double dipping allowed).
- Reporting requirements include quarterly confidential statements to the U.S. Treasury and a two-page report to the primary regulator.