Community Banks Just Say No to TARP

Nov. 9, 2009— -- Even in an uncertain economy BankTexas CEO Troy Robinson feels comfortable making loans to small business owners.

That's mainly because Robinson knows his customers. BankTexas is headquartered in Quitman, Texas. Population: 2,000.

When the Obama administration announced last month that the Treasury Department had proposed earmarking billions of dollars of Troubled Asset Relief Program funds for "community banks," small, locally run institutions such as BankTexas, the initiative seemed sensible enough to Robinson. Why should only the big commercial banks get access to cheap money?

BankTexas, however, isn't biting.

"Well-priced strategic capital is nearly always a good thing," Robinson says. "But I'm probably not going to look at TARP."

Robinson isn't alone amongst his small bank brethren eschewing low-rate federal funds. Most community bank executives are signaling that they do not want or intend to tap any TARP money, according to Paul Merski, senior economist at the Independent Community Bankers of America.

"TARP is too onerous," Merski says. "Unless the costs, rules and restrictions are dramatically changed it's not an attractive option."

Opening the TARP specifically to community banks was designed to spur more lending to small businesses, a segment which by some estimates employs up to 90 percent of the American workforce. Small banks technically have been eligible for TARP funds (starting at a 5 percent interest rate plus warrants) since the program was created last year at the height of the financial meltdown. This more recent program proposal will feature a lower dividend rate, as low as 3 percent, as long as the banks applying for funds can produce details on their small business lending projects.

At a congressional hearing held earlier this year on small businesses and their impact on the economy, the ICBA's Merski told lawmakers that community banks make 20 percent of all small-business loans. And that's despite the fact that community banks only represent about 12 percent of all bank assets. About 50 percent of all small-business loans under $100,000 are made by community banks, Merski said.

Two weeks ago, President Obama outlined his proposal to boost small-business lending. In addition to providing capital to community banks using TARP funds, the plan aims to increase the maximum size of Small Business Administration-guaranteed loans.

"These are the community banks who know their borrowers, who gave them their first loan, who have watched them grow from down the street – not from Wall Street," Obama said at the time the program was introduced.

ABC News.com interviewed a half dozen community bankers from all parts of the country; none of them said they were going to seek TARP money.