December 23, 2010
Authored by: Bryan Cave
On December 21, 2010, the U.S. Treasury published the application form, term sheet and other guidance for participation in the $30 billion Small Business Lending Fund (SBLF) that was authorized under the Small Business Jobs Act earlier this year. As a result, banks considering participation in the program have a variety of new resources available to them via Treasury’s website for the SBLF. These resources include:
- Fact Sheet
- Comprehensive Getting-Started Guide for Banks
- Preferred Stock Terms
- CPP/CDCI Participant Preferred Stock Terms
- Application Form and Instructions
- Lending Plan Form and Instructions
- SBLF Information Line: 1-888-832-1147.
A summary of the SBLF’s principal provisions follows, but is not exhaustive. Please see the documents listed above and Treasury’s SBLF website for more detailed information about the program and application process.
Asset size: Total assets of less than $10 billion as of the end of the fourth quarter of 2009. Holding company assets are measured on a consolidated basis.
Type of Institution: Current terms and guidance apply to insured depository institutions and their holding companies. Treasury is developing separate provisions for mutuals, S corporations and community development loan funds, which will have their own terms and application time frames.
Problem Banks Ineligible: An institution is ineligible if it’s on the FDIC’s problem bank list (or similar regulatory list) or has been removed from that list within the previous 90 days. Generally, this will include any bank with a composite CAMELS rating of 4 or 5.
CPP or CDCI Participants: An institution seeking to refinance its Capital Purchase Plan (CPP) or Community Development Capital Initiative (CDCI) investment via the SBLF: (i) must be compliant with the material terms and covenants under its CPP/CDCI agreement; (ii) must be current in its dividend payments to Treasury; (iii) can’t have missed (i.e., been 60 days or more delinquent in) more than one dividend payment; and (iv) must fully refinance or repay its CPP or CDCI investment. Simultaneous participation in the SBLF and CPP/CDCI programs is not permitted. CPP warrants will remain outstanding unless the issuer repurchases them.
Treasury Application: The application form is available on the SBLF website and is to be emailed directly to Treasury at SBLFApps@do.treas.gov, which is a confidential email address. The application may be withdrawn at any time without penalty.
Lending Plan: Concurrently with the Treasury application, applicants must submit a lending plan to their primary federal and, if applicable, state regulators. The lending plan is sent only to the regulators, not to Treasury. Email addresses are provided at the end of the lending plan form.
The lending plan must address: (i) how the institution intends to use SBLF funding to address small business needs in the communities it serves; (ii) a projected increase (or range of increases) in small business lending that it expects to achieve two years after the investment; and (iii) planned community outreach activities describing the availability and application process for receiving small business loans. The plan will be treated as confidential supervisory information and will only be used in the context of the SBLF. The plan should be succinct—the guidance refers to the lending plan as being “approximately two pages in length.” Pro forma income statements and balance sheets are not required.
See “Qualified Small Business Lending” below for the types of loans that are classified as “small business lending” for purposes of the SBLF.
Timing: The guidance states that in view of processing times, applications should be submitted by March 31, 2011. Based on the regulators processing of CPP applications, we would generally recommend that institutions not wait until that deadline, but rather submit applications much earlier in the process.
Action on Applications: Treasury will consult with applicable federal and state banking regulators to determine whether an institution is qualified to receive SBLF funds. Three potential outcomes are possible: (i) preliminary approval; (ii) preliminary approval contingent on matching funds; and (iii) “considered withdrawn.” In the first two cases, the applicant needs to inform Treasury of its intent to continue with the process, and Treasury and its counsel will work with the bank and its counsel to close and fund the investment.
Qualified Small Business Lending
“Qualified Small Business Lending” (QSBL) is the term used in the SBLF to describe the types of loans that can be counted in calculating the level of an institution’s small business lending activity, which in turn affects its dividend payments on its SBLF capital. QSBL is derived from an issuer’s Call Report, but includes more than just the Call Report categories of “loans to small businesses” and “loans to small farms.” QSBL includes all: (i) commercial and industrial loans; (ii) loans secured by owner-occupied nonfarm, nonresidential real estate; (iii) loans to finance agricultural production and other loans to farmers; and (iv) loans secured by farmland, so long as (A) the original principal and commitment amount is $10 million or less; (ii) the loan is not to a business with more than $50 million in revenues; and (iii) the amount excludes loan portions guaranteed by the U.S. government or for which a third party assumes risk. More specific information about the loan categories is available in the “Comprehensive Getting-Started Guide for Banks.”
Type of Security: Senior perpetual noncumulative preferred stock, liquidation preference $1,000 per share (“Senior Preferred”).
Regulatory Capital Treatment: Tier 1 capital.
Rank: Senior to common stock and pari passu with the most senior series of the issuer’s outstanding preferred stock.
Amount of Investment: Maximum of 5% of risk-weighted assets for institutions with total assets of $1 billion or less. For institutions with assets of more than $1 billion but less than $10 billion, the maximum is 3% of risk-weighted assets. Capital outstanding from prior CPP/CDCI investments will be deducted from these limits and must be used to repay the bank’s obligations under those programs. Holding companies must downstream at least 90% of the capital to their bank/thrift subsidiaries. Although total assets are measured as of the end of the fourth quarter of 2009, risk-weighted assets are measured as reported in the bank’s most recent Call Report.
Matching Investment: If preliminary approval is granted on a matching-funds basis, the matching capital must be raised from private, non-governmental sources prior to or concurrent with the SBLF investment. It must be in a dollar amount that equals or exceeds the amount of the SBLF investment, which in this case will be a maximum of 3% of risk-weighted assets regardless of asset size. Treasury must approve the terms of the investment, which must be subordinate to the SBLF capital but may, at Treasury’s discretion, carry a higher dividend rate than the SBLF securities. Capital raised after September 27, 2010 will be considered for qualification as matching funds.
Dividends: The Preferred Stock Term Sheet, Getting-Started Guide and other materials listed above contain detailed information on the calculation of dividends payable under the program. Here are the general parameters:
Baseline: In order to calculate the dividend rate, a “Baseline” is established when the SBLF funding is received. The Baseline is the average of QSBL amounts outstanding for the four quarters ending June 30, 2010. The initial Baseline remains constant throughout the investment, except that it will be increased to account for increases in lending resulting from mergers, acquisitions or loan purchases—i.e., sources other than additional lending to small businesses.
Dividend Rate for First Nine Quarters: The quarterly dividend rate for the first nine quarters after closing is set at 5%, but is recalculated quarterly and may be less depending on whether an institution has increased its QSBL by specified percentages as compared to the Baseline, as shown below:
Lending Increase Dividend Rate
Less than 2.5% 5%
2.5% up to 5% 4%
5% up to 7.5% 3%
7.5% up to 10% 2%
10% or more 1%
Calculations are based on Call Report data published in the calendar quarter before the initial receipt of funding or quarterly calculation of the dividend. Because Call Reports pertain to the quarter before the one in which they are published, the calculation will reflect the amount of loans outstanding as of the end of the second preceding quarter. For example, if the closing occurs in the second quarter of 2011, the initial dividend rate will be derived from the Call Report published in the first quarter of 2011, which would reflect loans outstanding at the end of the fourth quarter of 2010.
Because the Baseline is based on the four calendar quarters ending June 30, 2010, an institution may qualify for an initial dividend rate of less than 5% based on QSBL lending growth between July 1, 2010 and the end of the second calendar quarter preceding the closing date.
Dividend Rate After the First Nine Quarters: From the tenth quarter until 4.5 years after the closing, a constant rate will apply. If the amount of QSBL as of the end of the eighth quarter after closing reflects no increase over the Baseline, then the new dividend rate will be 7%. If it does reflect an increase, then the most recent quarterly dividend rate will continue to apply. In each case, the rate will adjust again, this time to 9%, after 4.5 years if the SBLF investment hasn’t already been repaid.
CPP/CDCI Repayment Incentive Fee: Depending on their QSBL performance, banks refinancing their CPP/CDCI investments may be required to pay an additional “repayment incentive fee.” If at the beginning of the tenth full calendar quarter after the closing date, the bank’s QSBL has not increased over its Baseline, then it must pay, at the beginning of the fifth anniversary of its CPP/CDCI investment, a fee of 2% per year on its total SBLF funding amount. This fee will continue to apply until 4.5 years after the SBLF closing and is designed to encourage participants to increase small business lending in order to realize an economic benefit from the refinancing.
Dollar Amount Limitations: If a QSBL increase results in a lower dividend rate, then the lower rate will apply to a dollar amount of SBLF capital only up to the dollar amount by which QSBL has increased. For example, based on the chart above, if the SBLF capital investment is $5 million and the QSBL increase is $4 million and represents 10% increase over Baseline, the new dividend rate would be 1%. That 1% rate would apply only to the $4 million QSBL increase, however, with the 5% rate applying to the remaining $1 million of the SBLF investment. In contrast, if the QSBL increase were $5 million instead of $4 million, the 1% would apply to the entire amount.
Repayment: Subject to prior regulatory approval, SBLF funds may be repaid at any time at liquidation value plus accrued but unpaid dividends and a pro rata portion of any repayment incentive fee. Redemption must be made in increments of at least 25% of the originally issued shares.
Dividend Payment/Stock Repurchase Restrictions: Unless otherwise restricted by regulators, the issuer may pay dividends on or repurchase pari passu or junior securities if, after the transaction, the dollar amount of its Tier 1 capital would be at least 90% of the amount existing immediately after the SBLF closing (as adjusted for net charge-offs or SBLF redemptions), subject to the following:
(i) From the second through tenth anniversary of the SBLF closing, for every 1% QSBL increase over the Baseline, the foregoing Tier 1 dividend threshold will decrease by a dollar amount equal to 10% of the SBLF investment.
(ii) Issuers that are not publicly traded cannot pay dividends on or repurchase pari passu or junior securities from the tenth anniversary of the SBLF closing until the SBLF securities are redeemed. The term sheet defines “publicly traded” as a company whose securities are traded on a national securities exchange and that is required to file reports under the Securities Exchange Act of 1934, as amended (i.e, 10-K and 10-Q reports).
Missed Dividend Payments: If dividends are not declared and paid for a given quarter, the issuer cannot pay dividends on or repurchase pari passu or junior securities during the current quarter and the next three quarters, although pari passu dividends may be paid in order to avoid a material covenant breach if Treasury is also paid.
After four missed payments, the board of directors must certify that the issuer used its best efforts to declare and pay dividends consistent with safety and soundness and fiduciary obligations. After five missed payments, Treasury may appoint an observer to attend board meetings, and after six missed payments, it may elect two directors if the SLBF investment is $25 million or more. In each case, the missed payments do not have to be consecutive, and observer/election rights expire after full dividends have been paid for four consecutive quarters.
Voting: Non-voting except that Treasury must consent to: (i) the authorization or issuance of senior securities; (ii) any amendment to the rights of the Senior Preferred; and (iii) any merger, exchange, dissolution or similar transaction that would affect the rights of the Senior Preferred.
Required Certifications: Issuers must provide Treasury with periodic certifications as to: (i) the accuracy of their supplemental reports to Treasury; (ii) their receipt of certain borrower certifications; and (iii) compliance with federal customer identification program requirements. They must also submit annual certifications by their auditors stating that the processes and controls used to generate issuer reports to Treasury are satisfactory. Certifications regarding executive compensation practices or other aspects of corporate governance are not required.