Small Business Lending Fund Overview
Small Business Lending Fund Overview
The Treasury recently issued Term Sheets related to the Small Business Lending Fund (SBLF). As noted at the SBLF Resource Center (www.treasury.gov/SBLF), “the SBLF is a $30 billion fund that encourages lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. Through the SBLF, Main Street Banks and small businesses can work together to create jobs and promote economic growth in local communities across the nation.”
The following provides an overview of the terms of the SBLF and certain factors that should be evaluated and considered by institutions:
Who is eligible?
Insured depository institutions with total assets of less than $10 billion (and not controlled by a holding company with more than $10 billion in total assets) and banks and savings loan holding companies with total assets of less than $10 billion are generally eligible to participate. However, institutions on the problem bank list (generally banks with composite CAMELS ratings of 4 or 5) are not eligible. Total assets are measured as of Dec. 31, 2009.
Note: Term Sheets for mutual institutions, Subchapter S Corporations and community development funds have not yet been completed by the Treasury as of the date of this article was written.
The form of the funding is senior perpetual noncumulative preferred stock that will be classified as Tier 1 capital. Eligible and approved institutions with total assets of $1 billion or less may receive funding up to 5 percent of risk weighted assets (RWA) and institutions with total assets of over $1 billion and less than $10 billion may receive funding up to 3 percent of RWA. While total assets are measured as of Dec. 31, 2009, RWA for the purposes of funding is measured as of the most recent Call Report (or Thrift Financial Report) as of the date of the application.
As a result of a review of an application, the Treasury may determine an institution is eligible for participation in the SBLF, provided it raises separate matching funds from private sources. Capital raised after Sept. 27, 2010 may be included. If an institution is required to obtain matching funds, the maximum SBLF funding will be 3 percent of RWA and the private capital must be subordinate to the SBLF capital and carry terms satisfactory to the Treasury. The interest of private capital investors in participating in these situations may be limited.
Outstanding Preferred Stock from the Capital Purchase Program (CPP) may be refinanced into the SBLF, as long as the institution meets all of the eligibility requirements of the SBLF and other requirements as outlined in the Term Sheet. Simultaneous participation in both programs is not permitted. Any warrants issued in connection with the CPP program would remain outstanding. Unlike the CPP, the SBLF carries no executive compensation restrictions.
Qualified Small Business Lending
Qualified Small Business Lending includes: a) commercial and industrial loans; b) loans secured by owner-occupied nonfarm, nonresidential real estate; c) loans to finance agriculture production and other loans to farmers; and d) loans secured by farmland. Loans are deemed to be of a small business nature as long as the original principal and commitment amount is $10 million or less and the loan is to a business with less than $50 million in revenues. If any part of the loan is guaranteed by a U.S. government agency, the guaranteed portion is deducted from the loan amounts. In addition, any portion of a loan for which the risk has been assumed by a third party (i.e. portion of loans that have been participated) is also deducted from the loan amounts.
Institutions should also review FIL-90-2010, Underwriting Standards for Small Business Loans Originated Under the Small Business Lending Fund Program. The FIL notes that each participating institution’s board of directors should ensure its small business lending is consistent with safe and sound credit practices and supportive of the institution’s participation in the SBLF program. Applicable bank policies should address prudent loan portfolio diversification by establishing growth rates and concentration standards as a percentage of capital for different loan types, industries, borrower groups and collateral support.
The dividend rate during the first two years will be no more than 5 percent. With a 10 percent increase in small business lending over the baseline, the rate will drop to only 1 percent and lesser increases in qualified lending can cause the rate to drop to between 2 and 4 percent. The rate in the tenth quarter will continue until the end of the first four and one-half years. If the level of small business lending does not increase by the tenth quarter, the rate will rise to 7 percent. After four and one-half years following the initial funding, if the capital has not been repaid, the rate increases to 9 percent.
The baseline for measuring the increases in qualified lending will be the quarterly average of qualified small business lending for the four quarters ending June 30, 2010. As a result, an institution may already qualify for a lower dividend rate based on the growth of qualified lending between July 1, 2010 and the second calendar quarter preceding the funding closing date.
Failure to pay dividends on the SBLF funding carries varying consequences as outlined in the Term Sheets and all institutions should ensure they properly evaluate these provisions.
Application and exit
Applications should be submitted to the Treasury by March 31, 2011. Submitting an application does not obligate an institution to participate in the SBLF if approved. An institution may withdraw at any time prior to entering into a definitive agreement with the Treasury.
In addition to submitting the application to the Treasury, a small business lending plan must be provided to the applicable banking regulators, and it is expected that the plan would be approximately two pages in length. The plan should: a) address the needs of small businesses; b) specify the projected increase in small business lending; and c) provide for community outreach (i.e. advertising describing the availability and application process for receiving small business loans).
An institution may exit the SBLF any time by repaying the funds along with any accrued dividends (with approval of its regulators). Given the increase in the dividend rate to 9 percent after four and one-half years, institutions should be confident in their alternative sources of capital funding and their ability to execute their capital plan accordingly.
If there is a change in law that modifies the terms of this funding by the Treasury or the program in a materially adverse respect, an institution may, after consultation with the appropriate banking regulators, redeem the investment without impediment. One should expect that there will be changes in the law and institutions that participate should again be confident in their alternative sources of capital funding.
Participation in the SBLF requires an Initial Supplemental Report and Quarterly Supplemental Reporting along with quarterly and annual certifications by management. In addition, an institution’s auditors must certify on an annual basis that processes and controls used to generate the initial and quarterly supplemental reports are accurate (this is required for the years in which the first 10 supplemental reports are submitted). Institutions should evaluate this incremental compliance cost while evaluating the merits of participating in the SBLF.
For more information, please contact McGladrey & Pullen Partner Tim Tiefenthaler at 702.759.4050.