The fund comes with lower interest and fewer limitations, helping banks to boost lending.
Some of the bankers who took money from the Troubled Asset Relief Program during the financial crisis four years ago wished they hadn't because the interest rate was too high, the restrictions on pay and shareholder dividends were too cumbersome and TARP participation was bad for the bank's image.
Now those who replaced their TARP capital last year with new capital infusions from a different federal program, the Small Business Lending Fund (SBLF), are glad they did because the interest rate is lower and comes with fewer limitations. It has helped them increase lending and profits, they say.
"It is one of the better programs the government put out," said Anthony C. Weagley, chief executive officer of Union, N.J.-based Center Bancorp, the holding company for Union Center Bank and one of at least four New Jersey banks that paid off TARP with money from the fund.
The program to spur small business lending and create jobs, maligned by some as another taxpayer bailout for banks, and criticized by Republicans in Congress as unnecessary and too expensive, is receiving high praise from some bankers who signed up.
Banks have been eager to get out of TARP and many have done so by raising capital on their own. But some that couldn't raise enough capital on their own to pay it off turned to the SBLF, which is part of the Small Business Jobs Act signed into law in September 2010.
The Treasury has invested more than $4 billion in 332 banks and financial institutions, so they could make more loans to small businesses, and 137 of them used the money or part of it to pay off TARP -- which has done little to spur lending, according to an inspector general report.
The interest rate on the small-business lending program's capital funding, paid by the banks to the U.S. Treasury, can be as low as 1 percent, depending on the amount of loan growth. The interest rate on TARP is 5 percent and will increase to 9 percent in late 2013.
SBLF participants also have a strong incentive not to rely on the program for very long. After 4 1/2 years, the rate increases to 9 percent. And if lending does not increase in the first two years, the rate increases to 7 percent.
The banks that qualified to refinance their TARP borrowings through SBLF were "better capitalized and financially stronger than those that remained in TARP," the Inspector General said.
Small business lending boost
Since the program began in mid-2011, participants increased their small-business lending by $4.8 billion, or 13 percent, as of Dec. 31, according to the SBLF's April report to Congress.
The program gives banks with less than $10 billion in assets an incentive to make loans to businesses with less than $50 million in annual sales. These loans can include commercial and industrial loans, owner -occupied commercial real estate loans and farm loans.
Paul Van Ostenbridge, CEO of Midland Park, N.J.-based Stewardship Financial, holding company for Atlantic Stewardship Bank, said the program has been "a very positive experience."
The lender received $15 million from SBLF last year and paid off the $10 million it owed on TARP.
The funding is helping the bank make more loans, in addition to lowering interest payments, Van Ostenbridge said. The bank has added $15.4 million in qualifying small business loans to its books in the past year. "That was our main goal -- to spur additional loans," he said.
Design Display Group in Carlstadt, N.J., is one of the small businesses that benefited.
"[Atlantic Stewardship] gave us an opportunity when some of the bigger banks had more restrictions which would have delayed our funding and, in the end, could have meant not meeting our customers' demand," said John Bollbach, Design Display Group's chief financial officer. The company makes point-of-purchase displays and other custom products for wholesalers, manufacturers and retailers worldwide.
Bollbach declined to discuss the amount or the terms of the loan. But he said it allowed the company to spend about $500,000 last year on new equipment, including computerized cutting machines and a spray-painting booth, and the investment helped boost the company's sales 20 percent and made possible the hiring of 12 employees.
Program has strings attached
Not all bankers, however, are fans of the $30 billion Small Business Lending Fund.
"The program has not been what I would call a great success," said Frank Sorrentino, CEO of Englewood Cliffs, N.J.-based North Jersey Community Bank. "The usage has not been that great. There has been a hesitancy because of the additional regulatory scrutiny."
His bank did not take TARP or SBLF and was able to raise additional capital privately to support its growth, mostly from existing shareholders.
"If banks are doing what they are supposed to be doing, they should be able to raise the capital they need," Sorrentino said. "If the banks can't raise capital because they have problems, you are keeping banks alive that might be better served if allowed to merge or to close. You don't want to reinforce what may be a bad business plan or bad management."
Florida-based bank consultant Jim Angleton, president of Aegis FinServ Corp., said a big reason bankers have paid off TARP with SBLF funds is that the newer program has fewer strings attached. It has fewer restrictions on executive pay and shareholder dividends, for example, he said.
"It's all about the oversight," Angleton said. "Nobody wants Uncle Sam as a partner."