Enlarge This ImageThe Small Business Lending Fund has been dogged by criticism that it served as a backdoor exit for small banks propped up by government bailout infusions they had trouble paying back.
Lending data published by the Treasury Department this month provides some ammunition for the view: Banks that used SBLF capital to repay preferred stock issued under the Troubled Asset Relief Program increased small-business lending at a far lower rate than banks that had not received rescue funds.
The median former Tarp bank increased such credit, defined under the program as loans of $10 million or less to businesses with $50 million or less in revenue, by 8.4% from a mid-2010 baseline as of the third quarter, compared with 21.4% for non-Tarp peers.
Roughly 35.8% of the Tarp banks failed to increase small-business loans by more than 2.5%, compared with 18.1% for the non-Tarp banks.
Overall, the Tarp banks increased small-business loans by 5.1% during the period to $25.9 billion, while the non-Tarp banks increased their small-business loans by 20.9% to $12.7 billion.
Banks that rotated out of Tarp account for about half the institutions that received SBLF capital, and about two-thirds of the $4 billion of total disbursements. The disbursements were made from June through September, and were designed to spur small-business lending by offering progressively lower dividend rates according to the amount by which a bank increased such loans.
Small recipients of Tarp funds have been slow to repay the government generally, perhaps reflecting relatively weak access to capital markets.
In all, banks with less than $10 billion of assets got $14.6 billion of rescue infusions, and $11.1 billion was outstanding as of January last year. The $2.2 billion refinanced using the SBLF accounted for two-thirds of the decline in the outstanding amount through December, to $7.9 billion.
Meanwhile, large banks have repaid about $220 billion disbursed to them, leaving $9 billion outstanding in December.
Trying to judge the effectiveness of the SBLF in its goal of funneling credit to small businesses is more art that science. It is difficult to isolate the proportion of new lending that would have occurred anyway, or what volume might merely represent a shift from competitors without a funding advantage.
Leaving Tarp was a top priority for participants in any event.
Explaining his company’s interest in the program, CoBiz Financial Inc. Chief Executive Steven Bangert told investors in July, “It certainly buys us an awful lot of time, allows us to refinance out of Tarp without any dilution.”
The dividend on CoBiz’s Tarp preferred was due to reset to 9% from 5% in December 2013. The dividend on CoBiz’s SBLF capital will be no more than 5% through roughly the middle of 2016 if the company’s small-business lending is no lower than the mid-2010 baseline as of mid-2012.
Small-business loans under the Small Business Lending Fund definition were down 1.4% from the baseline at CoBiz as of the third quarter. SBLF capital accounted for about a third of the $2.4 billion-asset company’s tangible equity, and small-business loans accounted for about half of its entire loan portfolio.
Bangert said the company would be focused on achieving a lower dividend for the SBLF capital, which could be reduced to as little as 1% with a 10%, or roughly $74 million, increase in lending.
For banks like CoBiz, Western Alliance Bancorp and ServisFirst Bancshares Inc., small business lending under the SBLF definition accounts for a third to half of total loans, and failing to expand small business lending is more or less the same as failing to expand altogether.
One oddity of the SBLF is that it doesn't appear to be designed to effectively leverage federal dollars, as might be expected from a construct that provides capital to banks and uses them as intermediaries. That is, to reach the lowest dividend rate, or 1%, participants only need to increase their small business lending by 10%, not increase small business lending by some multiple of the injected capital. In the CoBiz example, that's $74.1 million above the company's small business loan baseline, or not too far off from a one-for-one relationship with the amount of capital the bank received, or $57.4 million. If and when CoBiz hits the $74.1 million target, it would have no incentive to further increase small business lending beyond what it would want to do otherwise, and could instead use the cheap financing to support other parts of its balance sheet. - Harry Terris, data editor, American Banker
If you were not a TARP bank, the calculus was different. You were taking government capital, and there was a potential stigma there. You might figure that the program would make sense for your bank at a 3% dividend rate, but not at 5%. If that were the case, you'd want to be pretty sure that your small business lending was going to grow, or it wouldn't make sense to apply to SBLF. -- Kevin Wack, Capitol Hill Reporter, American Banker