There are 7,604 banks and thrifts in this country, and the core mission of nearly all of them is to lend locally. As currently structured, however, nearly 40% of these institutions are barred from taking part in the Small Business Lending Fund, the government's latest attempt to stimulate the national economy from the community level on up.
Cursed by its status as a subchapter S corporation, Riverside Bancshares Inc. is one of that sidelined minority.
Riverside has no shortage of desire. It has discussed the matter with its lawyers and has even grown small-business loans by 10% in recent months to make sure it would qualify for the Treasury Department program's lowest possible interest rate. So far, such eagerness is in vain; the $60 million-asset Little Rock company is simply not allowed to apply.
Riverside lacks a term sheet, as are the nearly 2,400 other banking companies structured as subchapter S corporations. Include 476 mutuals and 38% of the $30 billion program's pool of possible participants are unable to apply.
"I've been keeping up with it since it was passed in September," said Stephen Davis, Riverside's chief executive. "Our tip to increase small-business lending was this program, and luckily we've found some good loans. We assumed our term sheet would have been out months ago."
The Treasury issued terms for C corporations in December, setting a March 31 deadline for applications for a program targeting banks with less than $10 billion in assets. The SBLF lets participants in the Troubled Asset Relief Program refinance Tarp funds, effectively pushing back the interest rate jump to 9% by two years. The program has a sliding interest rate scale that is dependent on expanding small-business lending.
The deadline has been extended to May 16. More than 600 banks have applied, but for mutuals and so-called S Corps, the Treasury has said it is still working on terms. S Corps and mutuals are unable to have classes of stock, making a Treasury investment complex.
For some observers, the delay is reminiscent of Tarp; S Corps and mutuals were unable to apply until early 2009, months after the program started in October 2008. With Tarp, the Treasury issued subordinated debt to S Corps, and the Federal Reserve issued an interim final rule allowing the debt to be treated as Tier 1 capital.
Mark Tenhundfeld, a senior vice president of the American Bankers Association, wrote in a Feb. 25 letter to Treasury Secretary Timothy Geithner that his group was concerned that S Corps and mutuals were "being placed at the end of the line … when it comes to their ability to participate."
The Independent Community Bankers Association issued a similar letter on Monday.
"The regulators have a road map of what to do with sub S banks," given the Tarp experience, said Bruce Toppin 3rd, a partner at Kennedy, Toppin & Sutherland and the executive director of the Subchapter S Bank Association. "That's why it is perplexing to me that there is no program for sub S banks or mutuals."
Toppin said his association is also pushing for legislators to allow S Corps to issue qualified preferred stock, which would make it easier to invest in such companies.
Paul Merski, the ICBA's chief economist, said the Dodd-Frank Act's Collins amendment, which toughens capital rules, might be a complicating factor for the treatment of S Corps and mutuals.
Merski said those problems should have been worked out by now, more than six months after the bill was passed. He said Congress made specific mention that the capital should be treated as Tier 1 equity, as it was with Tarp.
"Sub S and mutuals have unique corporate structures, but this was known from day one," Merski said.
While some bankers have revved up small-business lending in hopes of participating in the SBLF, others are more cautious.
Guy Colado, the CEO of the $101 million-asset Commerce National Bank & Trust in Winter Park, Fla., said his bank's capital is far too precious to launch into such a program independently.
Colado said he is worried that banks structured as C corporations have a head start. While regulators say the sheet could be out in a few weeks, Colado said he is concerned competitors' applications could be funded before he can apply.
"The Treasury came to Florida to present the SBLF program to Florida bankers at a town hall meeting, but there was nothing about sub S banks," Colado said, adding that he sent a senior lender to the meeting.
"So we got to hear about all of our competitors lining up and making plans to participate, and we aren't even invited to the party yet," Colado added.
