Small banks resisting new round of federal money
| Saturday, Nov 07 2009 12:00 PM
Last Updated Saturday, Nov 07 2009 12:00 PM
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If the answer weren't so simple, local bankers might be agonizing over a difficult question with important ramifications for Kern businesses and the regional economy.
They and other community bankers across the country are being invited by the Obama administration to borrow federal money from the same fund used earlier this year to bail out some of the biggest names on Wall Street. The president wants the remaining pool of money -- some $138 billion of the original $700 billion in the Troubled Asset Relief Program -- to be lent to small businesses in need.
Worthy though that goal might sound, bankers see several problems with the proposal, not the least of which is the fact that demand for business loans is way down.
Bottom line: They don't need the money. Aside from that, they don't want it, for reasons that include tough terms and the stigma attached to accepting federal money.
The situation touches on many issues key to the ongoing economic malaise.
On one hand, the government wants banks to lend out more money; on the other, regulators are holding lenders to higher loan standards these days.
Meanwhile, businesses that may be interested in new capital are having a hard time qualifying for loans, partly because the downturn in real estate has devalued a primary form of loan collateral.
That's not to say no one is taking out business loans, or that banks are keeping a tighter grip on their money than before.
Growing anyway
For instance, Bakersfield's Mission Bank continues to extend lines of credit to local businesses and professionals, as well as finance commercial real estate projects and make certain U.S. Small Business Administration-backed loans, President and CEO Richard Fanucchi said.
In fact, Mission recently hired two new loan officers in hopes of reaching its goal of growing its business loan portfolio by about 17 percent to more than $140 million next year, Fanucchi said.
The bank doesn't need federal money to do that, he said, adding that Mission didn't apply for TARP money when it was made available earlier, either, because the program looked "cumbersome, expensive and burdensome in terms of reporting."
"We're continuing to lend, and our loans are stable and slightly rising," he said.
Porterville-based Bank of the Sierra is also doing what it can to lend businesses more money without applying for TARP money, President and CEO Jim Holly said. He mentioned two recent "sizeable" loans, one to a manufacturer of special-purpose trailers and another to a citrus packing house that wanted to invest in automation.
Even so, he said borrowers are hard to find because consumers are generally saving their money.
"You hear all this rhetoric and dialogue coming out of the Obama administration talking about stimulating lending," he said, when in fact loan demand is "very diminished."
One program, two targets
When President Barack Obama unveiled the plan in a speech last month, he said small financial institutions -- more so than large ones -- need capital to grow, according to a report by the Los Angeles Times. He said the government could help them do this in a way that supports small businesses.
To boost small business lending, it is "essential that we make more credit available to the smaller banks and community financial institutions that these businesses depend on. 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," the Times reported Obama as saying.
Obama's proposal is "a good start" but more incentives are needed to overcome the heightened risk of lending in this shaky economy, said Paul Merski, senior vice president and chief economist at the Independent Community Bankers of America, a trade group representing 5,000 banks nationwide. He suggested greater government guarantees on small business loans, cutting fees on such loans and tax incentives for banks that make them.
Tough terms
Terms of the TARP money are often cited as reason enough to avoid the program. In addition to requiring special accounting procedures, the program charges interest (5 percent originally but 3 percent for community banks). Participating banks must also give the government warrants that can be turned in for part-ownership of the bank, which would dilute existing shareholders' stock.
"There's really a strong bias against touching the TARP program anymore," Merski said. "It's largely been poisoned by the onerous rules and restructuring that've been put on it."
Executives at six community banks operating in Kern -- Citizens Business Bank, Mojave Desert Bank, Tri Counties Bank, Bank of the Sierra, Mission and Valley Republic Bank -- were interviewed for this report. All said they had no plans to apply for the new round of TARP money.
For Citizens, the decision not to apply is based partly on experience. The Ontario-based institution accepted $130 million in TARP money in December as a form of insurance, then paid back the government 5 percent interest plus $1.3 million to repurchase the stock warrants.
"We didn't necessarily make any money off that," President and CEO Christopher Myers said. "In fact, it cost us money to have that."
He and other bank presidents emphasized that loan demand is just too weak to justify such an expense.
"Loan demand is down. There's no question about it," said George Nagy, president and CEO of Mojave Desert.
To make things worse, he said, regulators are pressuring community banks to make only "squeaky clean" loans. That makes bankers hesitant to take a chance on a loan that might have been approved under previous, looser oversight, he said.
"i think that it has affected us," he said.
