A new federal program that aims to boost small business lending is providing an added incentive for some Connecticut banks to participate.
The program allows community lenders to trade in Troubled Asset Relief Program (TARP) funds for cheaper capital with fewer government restrictions.
It’s a major bonus considering the negative stigma and onerous oversight that was attached to TARP money under the program created in late 2008 at the height of the financial crisis. TARP has been viewed widely as a bailout to the banking industry, particularly for the megabanks at the center of the crisis.
Two Connecticut financial institution are already taking advantage of the U.S. Treasury Dept. program, called the Small Business Lending Fund.
BNC Financial Group, which is the parent company of The Bank of New Canaan and The Bank of Fairfield, is receiving $11 million from the SBLF, which will help the banking company repay $5 million it borrowed from TARP and expand its small business lending.
And the parent of Farmington Valley lender Simsbury Bank & Trust Co. announced it has recieved the tentative green light for about $9 million in funds to help payback $4 million in TARP.
The trade-ins will also likely sharply reduce dividend payments both banks have to make to the federal government, while removing strict restrictions on executive compensation.
Meanwhile, Hartford-based Connecticut Bank and Trust Co., which is holding $5.4 million in TARP funds, has applied for $10.5 million in SBLF money.
Of the six Connecticut banks that received TARP funds, four still have the money, and it’s likely all of them are seriously considering the SBLF program, industry experts said.
“For most institutions, refinancing TARP with the Small Business Lending Fund makes a lot of sense,” said William Bouton, a partner at Hinckley, Allen & Snyder in Hartford. “TARP came with a lot of baggage, both structurally and reputation-wise. There is hope that the SBLF will not have those issues.”
The SBLF is a $30 billion program that aims to spur small business lending by providing capital to qualified community banks with assets under $10 billion.
It was enacted as part of the Obama Administration’s Small Business Jobs Act of 2010, with the hopes that the added capital will help create jobs and promote economic growth.
Hundreds of banks have applied to the program and the first dollars are just starting to trickle out. BNC Financial is the first Connecticut financial institution to qualify.
Bouton said the availability of capital remains an issue for some banks, which is why SBLF program would look attractive for institutions that qualify for it.
“If you don’t need capital you can get it,” Bouton said. “If you need it, it’s harder to get and it’s very expensive.”
Jay Forgotson, CEO of BNC Financial, said the new funds will allow the company’s banks to expand their small business lending footprint and make larger loans.
Forgotson said despite the tough economy, BNC has continued to lend, growing its asset base from $210 million in June 2008 to $440 million today. And the added SBLF funds should fuel even more growth.
“We are going to be able to leverage these funds and put more money into our communities,” Forgotson said.
The opportunity to repay TARP is an added benefit because BNC will no longer have to deal with the onerous oversight and executive compensation restrictions. At the same time, it will reduce the dividend payments BNC has to make to the federal government.
TARP recipients have been required to pay the Treasury Dept. a 5 percent dividend, which is scheduled to increase to 9 percent in a few years. The dividend rate on SBLF funding, however, will be reduced as a participating bank increases its lending to small businesses. The initial dividend rate will be, at most, 5 percent. But if a bank’s small business lending increases by 10 percent or more, the rate falls to as low as 1 percent.
“This becomes very inexpensive money,” said Forgotson, who added that BNC originally took TARP funds in 2009 as an insurance policy to buffer against the poor economy.
In Connecticut, six banks took money from TARP. Two of those have repaid the funds — Waterbury-based Webster Financial ($400 million) and First Litchfield Financial Corp. ($10 million), which was acquired by Danbury-based Union Savings Bank last year.
BNC will be the third bank to repay TARP once it closes on its $11 million from the Treasury Dept. Simsbury-based SBT Bancorp ($4 million), Salisbury Bancorp ($9 million) and the Connecticut Bank and Trust Co. in Hartford ($5 million), are the other three lenders still holding on to TARP funds.
David Lentini, CEO of the Connecticut Bank and Trust Co. in Hartford said his bank has applied for $10.5 million, which, if granted, would allow the bank to retire $5.4 million in TARP funds. Lentini said the SBLF program is attractive because it “has a lot less strings attached,” than TARP does.
