Nine months after proposing the idea, the Obama administration is eagerly putting into place a $30 billion small-business lending fund that is the centerpiece of its efforts to spark lending in communities across the country.

Now they just need to get the banks on board.

So far, the response among bankers has been lackluster at best. Some said they can't get past the bitter memory of the Troubled Asset Relief Program, and have no interest in doing business with the government again — especially so soon after the Tarp experience.

"It's like all their programs," said Thomas O'Brien, the president and chief executive of State Bank of Long Island in Jericho, N.Y. "They're just subject to change and revision, and someday they'll turn around and attack or revile their participants, and I don't think any of us want to go through that anymore."

Yet the incentives signed into law in late September as part of the Small Business Jobs Act are alluring to one group: Tarp takers still enrolled in the program. That's because the law allows some banks that received funds through Tarp's Capital Purchase Program to refinance into the Small Business Lending Fund, where they have the chance to pay much lower dividends on the capital, said Joseph Longino, a principal in the investment strategy group at Sandler O'Neill & Partners LP.

Under Tarp, banks pay the Treasury Department a 5% dividend, and that will rise to 9% in 2013.

Through the new fund, banks with less than $10 billion of assets can apply for capital with an initial dividend payment of 5%, which could drop to as low as 1% for a few years as banks boost their lending.

"I think smaller banks that are laboring under Tarp and that believe … that there are small-business lending opportunities out there that they could tap — and therefore get the lower rate — are going to be the most interested in this program," Longino said.

There is a downside, though. After the first two years, banks that haven't increased their small-business lending will pay a 7% dividend for the next two and a half years. After that the dividend increases to 9% for all banks.

The program is free of warrants and Tarp-like restrictions on executive compensation. As with Tarp, banks on the Federal Deposit Insurance Corp.'s problem-bank list, or those that have been on the list within 90 days, are excluded from participation. The capital approval is on a case-by-case basis.

Though community banks have some practical concerns — such as how regulators will classify the capital, and whether enough loan demand exists to meet the program's thresholds — Longino said he didn't think the fund would carry the same stigma as Tarp.

Bankers, however, aren't so sure, and they have a mixed reaction to the new lending program.

Mike Menzies, president of the $161.5 million-asset Easton Bank and Trust in Maryland and a past chairman of the Independent Community Bankers of America, said his bank is considering applying for the funds. He said the program could be a valuable tool to help the smallest banks preserve capital so they're prepared to lend once loan demand returns.

But he acknowledged that many bankers worry about how they might be viewed if they accept the capital.

"I think that there is an inherent dislike of the notion that the media could paint the small-business loan fund as a form of a bailout," he said.

Michael Clarke, CEO of the $789.2 million-asset Access National Bank in Reston, Va., said he has no doubt that the program will increase the volume of small-business lending. But he is not sure his bank should be involved.

"We're still evaluating it," Clarke said, "because if you are unable to reach the thresholds of volume, then this capital will prove to be costly. We don't want to find ourselves in a trap where we almost feel obligated or forced to make loans that we otherwise wouldn't, just to meet the objectives of the program."

Clarke said that Access, ranked the top small-business lender in the D.C. area by the Small Business Administration, is more interested in provisions of the law that apply to SBA programs, such as higher loan guarantees and reduced fees, and an increase in the maximum size of SBA loans.

Also, while capital is available for banks with up to $10 billion of assets, observers said they don't expect many larger banks to apply under the new program.

Jeffrey Hare, a partner at the Washington law firm DLA Piper, said it took too long to get the program going. In the meantime, better capital-raising avenues opened up for larger banks, he said.

"It's an incentive, yes, and it has some value, but I don't necessarily get the sense that the industry is jumping up and down and anxious to get involved," Hare said.

The $2.8 billion-asset Bank of the Ozarks in Little Rock received $75 million in Tarp funds in December 2008, and repaid the investment in November 2009. George Gleason, the CEO, said the company has zero interest in more capital from the Treasury Department.

"I don't even know if we're eligible for it," Gleason said. "We haven't looked at it, and the reason is very simple: We're going to make every good loan that we can make, with or without the fund. So we're not going to mess with a government program."

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