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.

"Too many strings, too politicized," says French Hill, CEO of Delta Trust & Bank in Little Rock, Ark.

"We don't have a need for troubled asset relief – we don't have any troubled assets," adds Kevin Brady, CEO of Evans Bank in Angola, N.Y., near Buffalo.

Of the 8,195 banks and savings & loans insured by the Federal Deposit Insurance Corp., the vast majority, around 7,500, could be considered small, with less than $1 billion in assets. Evans Bank, for example, has $614 million in assets, mainly customer deposits; Delta Trust, $276 million in assets.

By way of comparison, Wall Street investment banking titan Goldman Sachs has nearly $900 billion in assets.

Meg Reilly, a spokeswoman at the Treasury Department, said it is too early to say how many community banks have expressed interest in the newest TARP initiative. But Reilly did point out that the single largest component of the TARP, the Capital Purchase Program (CPP) in which the government invests in banks to shore up their capital, has drawn solid participation from small banks.

Some $205 billion in CPP investments have been disbursed since last October when TARP began. Of the roughly 650 banks that have participated in CPP investments over 470 were considered to be small, the Treasury spokeswoman says.

TARP, indeed, comes with strings attached – for one thing, under the CPP terms, the federal government becomes a shareholder of any bank, trust or S&L that accepts such financing. Community bankers say they don't want to be beholden to any ad hoc government stipulations. Additionally, banks that take TARP money are automatically restricted in how they pay dividends and compensate employees.

Interviews with community bank officials reveal a more basic reason for their lack of interest in the most recent offering of taxpayer "bailout" cash; they say that contrary to perceptions at large they really don't have much demand for small business loans given the weak economy.

Small businesses -- the engine that drives America, some say -- have been widely portrayed in the media and on Capitol Hill as getting royally squeezed in the past year by tighter credit and lending standards. Bank examiners are said to be clamping down on unsuitable lending and a Federal Reserve Board survey of senior loan officers revealed expectations for tighter lending standards to remain in place through the middle of 2010. However, community bankers are quick to refute such "tight lending" characterizations as least as it concerns their institutions, and the businesses in their communities.

Says Delta Trust's Hill: "If there is a chilling effect on credit expansion for small businesses it is not due to poorly capitalized community banks. Community banks do not lack capital."

Delta has increased lending this year, Hill is quick to add.

"Small businesses don't need credit lines or loans, what they need is business, sales, customers," points out Bill Dunkelberg, chief economist at the National Federation of Independent Business, an organization representing 350,000 small companies most of them employing less than 10 people.

In the most recent NFIB monthly survey of members, only 4 percent of the 2,000 or so respondents report that "financing" was their number one business problem. Only 10 percent indicated that their borrowing needs were being met less than satisfactorily.

Dunkelberg also happens to be chairman of the board at Liberty Bell Bank, a community bank in Cherry Hill, N.J.

"We have money to lend," he says of Liberty's assets, around $180 million. "The demand isn't there. Community bankers from all over the country tell me the same thing."

Overall, loan demand from small businesses remains weak, confirms Melissa Sharp, an NFIB spokeswoman.

The recent NFIB study points to widespread postponement of investment in inventories and record low plans for capital spending among small businesses.

Even drilling down into regular small business borrowers – those small businesses that borrow at least once per quarter to meet cash flow needs – the picture isn't all that bleak. Just 14 percent of that category of respondents reported that it was harder to get a loan in September compared with August. Taking into account the financial carnage and subsequent economic fallout such a percentage is not all that dire, and not even much higher than one year ago, when 11 percent of respondents said it was harder, month over month, to get a loan. However, three years ago the number of respondents reporting that it was harder to get a loan month over month was a mere 3 percent.

On the heels of a cheap credit era in America during which many large commercial banks were seen as becoming far too lax with their lending standards, community banks can largely lay claim to being pillars of sound practices, with the majority of small banks in good health despite rising bank failure rates over the past two years

So far in 2009, the FDIC has reported 116 bank failures, compared with 25 failures last year, and only three in 2007. No banks failed in 2006 or 2005. This year's failure rate is the worst since 1992 when 181 banks failed. Just as the majority of banks overall are small, so too are the banks that have failed. Of the 116 failed banks so far this year the majority, 96, had assets under $1 billion, including the most recent flop, United Security Bank in Sparta, Ga. However, the vast majority of small banks, or more than 6,000 of them, are not considered being anywhere near possible failure, according to the FDIC which keeps a watchlist.

"The perception is that large banks always have a competitive advantage over smaller ones but the reality is often the opposite," explains Josh Siegel, CEO of StoneCastle Partners a New York-based private equity firm that specializes in community bank investments. "Small banks often earn higher yields on their loan portfolios and for the most part avoided the kinds of trouble that many larger banks encountered."

Even with cheap TARP money available, expansion-minded small banks have looked to private capital for financing.

Larger banks are pulling out of smaller markets, Siegel points out, which could spell opportunities for smaller banks looking to expand or buy up ailing rivals.

One segment of small/community banks that could be lured by TARP money are those that trade publicly. Most small banks that trade publicly are doing so at below book value, which means it is not the best time to being selling stock or using stock to do deals, notes NFIB's chief economist Dunkelberg. "Most community banks are going to steer clear of TARP but there may be some who see it as an attractive way to finance an expansion at a time when the stock isn't doing well."

"If we ever did take TARP money we might use it to take over some rival branches," admits BankTexas's Robinson. In addition to its headquarters in tiny Quitman, BankTexas has five other branches in the region northeast of Dallas. "To be honest, while we have considered TARP, like I said, it's not for us."