A federal program that gave funds to community banks to help increase small-business lending is coming under fire this week after a watchdog report charged that banks used the funds to pay off bailouts and were not following through on promises to increase small-business lending. One Maine bank participated in the program in question.
‘Banks used small-business funds to pay off bailout’ read CNNMoney’s story. The headline, while accurate, is misleading. The story is not a simple one of banks pulling wool over regulators’ eyes.
In fact, banks that received funds from the Small Business Lending Fund, or SBLF, were “required” to use those funds to pay off their bailouts, according to Jon Prescott, CEO of Houlton-based Katahdin Trust Co., which has 17 offices in northern and central Maine, and a commercial loan office in Scarborough.
Katahdin Trust is one of 137 banks around the country — and the only bank in Maine — that both received bailout funds through the U.S. Treasury’s Troubled Asset Relief Program, or TARP, and later applied and received funds from SBLF, which Congress created as part of the Small Business Jobs Act of 2010.
Christy Romero, TARP’s special inspector and author of the April 9 report that generated the controversy over SBLF, confirms that banks were required to use SBLF funds to exit TARP. But that wasn’t the focus of her report.
Her report presents data that show that banks that used SBLF funds to exit TARP were much less effective at increasing small-business lending than non-TARP banks that received SBLF funds.
Out of those 137 former TARP banks that received SBLF funds, 24 have not increased small-business lending at all, while the remaining 113 only increased lending by an average of $1.13 for every SBLF dollar they received, according to the report.
The report points out that, by comparison, “banks that did not participate in TARP but received SBLF funding have increased small-business lending by more than three times that amount – $3.45 for each $1 in SBLF funds.”
Romero argues in her report that Treasury didn’t provide enough oversight to make sure banks were following through on increasing their small-business lending.
“To take that money and not fulfill the promise of increasing lending is a real problem,” Romero told the Bangor Daily News on Wednesday. “And while it was OK to take the money and pay off TARP, there should have been real support from the Treasury and federal banking regulators to help those banks to increase their lending. On top of that, when they didn’t increase lending there should have been enforcement.”
Katahdin Trust received $10.4 million in January 2009 through TARP’s Capital Purchase Program. It then received $11 million in August 2011 through SBLF, which was used to pay back the TARP funds, Prescott said.
“We were required to retire the Capital Purchase Program funds before we could get into the SBLF,” he said.
Katahdin Trust has performed better than most of its peers, increasing its small-business lending by 21.3 percent, from a baseline quarterly loan amount of $138.9 million — calculated by taking the average of the small-business loan amounts for each of the four quarters ending June 30, 2010 — to $168.5 million of small-business loans in the quarter ending Sept. 30, 2012, according to the Treasury’s Use of Funds report issued in January 2013.
That means Katahdin Trust loaned out $2.65 for every SBLF dollar it received.
“It was a good opportunity to bring in extra capital to Maine and put extra capital to work lending to small businesses around the state,” Prescott said.
While Katahdin Trust is above average among its peers, Romero argues that, in total, the program has not lived up to its promises.
“This was supposed to be a percentage increase of like 10 times the amount,” Romero said. “It wasn’t supposed to be a one-to-one increase.”
Deputy Secretary of the Treasury Neal Wolin in a September 2011 statement said the $4 billion in SBLF disbursed funds “will help propel lending by Main Street banks in many multiples of that amount.”
The Treasury argues that the SBLF has been successful. In total, SBLF organizations — 281 community banks and 51 community development loan funds, such as Coastal Enterprises Inc. in Wiscasset — increased small-business lending by a total of $7.3 billion, or 20 percent, according to the Use of Funds report.
Romero’s report also argues that the Treasury should have more enforcement of the program.
“Treasury should not just put money out there without the support that’s needed, and the enforcement that’s needed to ensure small businesses are the ones that benefit from this program,” she said.