In the Money

By Lori Johnston April 30, 2011

Local bankers say they’ve seen signs, or at least a glimmer, that small business owners will clamor for an influx of capital in the next two years. And community banks, the primary source of funding for small businesses, want to be ready.

Banks that qualify can take advantage of a $30 billion U.S. Treasury fund that will help local business owners seeking money to expand, buy equipment, or own office and warehouse space.

The Small Business Lending Fund, approved by Congress and President Obama in 2010 as part of the Small Business Jobs Act, designates all-important Tier 1 capital—the core measure of a bank’s financial strength—to qualified community banks with less than $10 billion in assets.

“A lot of the banks have had to put the brakes on lending,” says Shaun Merriman, president and CEO of Gateway Bank of Southwest Florida, which has locations in Sarasota and Bradenton.

“In order for banks to open up their lending again, most of them need an infusion of capital,” he adds.

Access to inexpensive capital is key for community banks to compete against other banks when small business loan demand ramps up here. The Small Business Lending Fund offers incentives to banks that are in good shape, to encourage lending.

“Our country needs good community banks to make loans,” says Jim Kuhlman, president and CEO of Venice-based Florida Shores Bank. “It just allows us to do more of it.”

The program has a unique design that holds banks accountable for lending. It works like this: The Treasury Department will purchase Tier 1-qualifying preferred stock, or equivalents, in each bank, to provide capital. As banks increase lending to small businesses, the dividend rate the bank will have to pay out to the Treasury will decrease. The initial rate will be 5 percent at most, but could drop to 1 percent (in the case of a bank that grows its small business lending by 10 percent). But if a bank does not increase its lending in the first two years, the rate will rise to 7 percent.

Banks also must repay the funding, and if one doesn’t within 4 ½ years, the rate will increase to 9 percent. The less lending a bank does, the more expensive the capital becomes for banks participating in the program.

“It potentially is a very affordable resource for capital,” says Charles Brown, chairman and CEO of Insignia Bank, which has locations in Sarasota and Bradenton. “And capital is difficult to come by for community banks these days.”

Bankers such as Brown and Kuhlman say they are applying for the maximum amount—5 percent of their risk-weighted assets for those with $1 billion or less in total assets and 3 percent for those with $10 billion or less in total assets. The formula allows community banks to lend $10 for every dollar in capital. Brown is asking for $5.7 million, a sum that could amount to $50 million in loans, he says. Banks have until May 16 to apply.

Loosening Up The Capital

The fund is needed to help small- and mid-sized banks that have had a difficult time raising capital after the financial meltdown, says Paul Merski, senior vice president and chief economist for the Washington, D.C.-based Independent Community Bankers Association, which represents 5,000 banks. At the same time, bank regulators have been forcing banks to hold higher levels of capital than a few years ago. Some banks have had to slow lending in order to preserve their capital, turning away small businesses with low credit scores and little collateral.

“A lot of the banks that are still doing well are not taking the chances that if something happens [when lending], it could quickly erode the required capital ratio,” Merriman says. “They’re saying, the banks that are healthy, we’re going to provide you this capital so that you can go ahead and start lending again.”

As the economy continues to recover and small business loan demand returns, banks are going to need that capital, Merski says.

“So the program is really designed with the ability to meet small business lending needs as the economy starts coming back to life and growing,” he explains.

Merriman, who says he has been lending to small businesses, anticipates needing more capital in about a year, if loan demand rises. “If I get this money, I could probably delay another capital raise for at least a year, if not, perhaps two,” he says. “The reason that’s important is right now, nobody wants to invest in community banks. They’re like, ‘It’s too much of a risk.’ It allows us to continue growing the banks while the investment community is not quite ready.”

Brown expects that over the next two years, he’ll see “tremendous opportunities” to loan due to the resurgence in the economy.

Still, at press time, only 7 percent of the nation’s community banks had applied. Locally, only a handful of banks are participating and expecting this spring to determine whether or not they will be able to use the program.

Meanwhile, the reasons vary for those that aren’t participating. Either they’re too big (such as Fifth Third Bank, for example), or they are on the FDIC’s “problem list.” Others don’t believe the loan demand is there yet, Merski says.

Florida Shores Bank, which focuses on small business lending, has been providing loans, but finding borrowers who qualify has been the challenge. “Unfortunately, because we do hold the quality of our loans very near and dear, over the last year or so, [if we looked] at 10 loans, we may do two or three,” Kuhlman says.

Banks examine historical performance to determine future performance, and it’s been difficult for small businesses to demonstrate they’ve had a couple of good years. With the money from the Small Business Lending Fund, some bankers may feel more confident in making loans.

The last thing a bank wants to do right now is to take any risk that would result in a loss, Gateway’s Merriman says. “[The fund] really is an enticement for the bank to lend money.”

As the economic recovery continues to trickle down to Southwest Florida, bankers expect to see an increase in small business revenue, propelling more businesses to seek extra funding to hire more employees and expand. Bankers anticipate the medical, wholesale and retail sectors to be more in need of loans than construction, which is still lagging.

Lending opportunities are likely to emerge as companies look to buy commercial space because of lower real estate prices and an overabundance of properties, bankers say. Banks typically lend small businesses in the region anywhere from $250,000 lines of credit to multimillion-dollar loans for owner-occupied commercial space, for example.

Some have criticized the fund as another bank bailout, which local bankers are quick to defend, pointing out that it’s not available to all banks.

This is entirely to give banks more capital to make more loans. If you are a bank on the edge, you’re not going to get it. It’s for the better banks; it’s more capital, as opposed to TARP, which was capital for worse-off banks,” Kuhlman says. “[The SBLF] is for healthy banks to help with the credit crunch. The other was just to ward off death.”

As loan demand grows, the fund could help many community banks keep pace. Small businesses have historically led the country out of recession, through innovation and being the first ones to hire, Kuhlman says.

With the fund money, banks can supply businesses with newfound opportunities to grow and hire—businesses that haven’t had access to credit because their cash flow was low, due to trying to survive over the last few years.

Brown adds that the fund will help lower the cost of borrowing for small businesses because banks will be competing more aggressively to attract customers.

“Community banks lend locally. As they are able to lend more money in the market, the more capital for growth and expansion is available to small businesses,” says Tom Ray, CEO of Encore National Bank, which has locations in Sun City Center, Naples, Fort Myers and Port Charlotte. “This growth helps produce jobs, which in turn builds local demand for other goods and services. As a result, the market expands and the process continues to support future growth.”

“[The fund] is potentially a very affordable resource for capital, and capital is hard to come by for community banks these days.”

Charles Brown, Chairman and CEO of Insignia Bank

“Community banks lend locally. As they are able to lend more money, the more capital for growth and expansion is available to small businesses.”

Tom Ray, CEO of Encore National Bank

“If you are a bank on the edge, you’re not going to get [the money]. It’s for healthy banks to help with the credit crunch.”

Jim Kuhlman, President and CEO of Venice-based Florida Shores Bank

“If I get this money, I could probably delay another capital raise for at least a year, perhaps two.”

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