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Treasury Extends SBLF Application Deadline for C Corporation Banks

On March 30, 2011, Treasury announced that it was extending the deadline for C corporation banks to apply for participation in the Small Business Lending Fund (SBLF) program to May 16, 2011.  Previously, this deadline had been established as March 31, 2011.   According to the SBLF website, Treasury is still developing terms and guidance for mutual institutions, Subchapter S corporations, and community development loan funds.  The site maintains that terms for such institutions and funds may vary from those currently published and that separate application dates will apply.

We have previously described the SBLF application requirements for C corporations, which are otherwise unchanged.  As a reminder, eligible institutions must generally have had less than $10 billion in consolidated assets as of 12/31/09 and a composite CAMELS rating of 3 or better.  In addition, any institution intending to refinance its TARP obligations with SBLF funds: (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., can’t have been 60 days or more delinquent in) more than one dividend payment; and (iv) must fully refinance or repay its CPP or CDCI investment.

For banks that may still be considering applying for SBLF funds, we have had considerable experience with the application process and provide these general guidelines and anecdotal experience:

  • Processing time is still an unknown.  Even our clients that applied very early on in the program are still awaiting meaningful feedback.  We understand that, to date, Treasury has received around 600 SBLF applications.  Treasury previously announced that processing time would vary by applicant but that disbursement of funds would begin in “early 2011.”  We are unaware of any disbursements thus far or how Treasury defines “early.” 
  • Interest from our Sub-S clients has been great, and we hope that Treasury will soon release application details applicable to such corporations.
  • Most applicants of which we are aware have been TARP participants looking to refinance those obligations, but the program has some limitations in this respect even for very healthy banks.  An SBLF investment is capped at 5% of risk-weighted assets for institutions with $1 billion or less in total assets and 3% of risk-weighted assets for institutions with more than $1 billion but less than $10 billion in total assets.  At the same time, capital outstanding from prior CPP/CDCI investments will be deducted from these limits but must be used to repay a bank’s obligations under those programs, and SBLF participants must either repay or refinance outstanding TARP securities.  Moreover, 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.  At least one of our clients hoped to refinance TARP funds through the SBLF but ran into a size trap here; it had declined in asset size since the end of 2009 such that its maximum SBLF investment would have been insufficient to refinance its TARP funds.  As a result, it is unable to participate in the SBLF program.
  • As we saw with TARP, we have seen certain SBLF applicants come under increased supervisory scrutiny possibly as a result of their SBLF applications.  Applicants should be prepared for possible regulatory review beyond the contents of their application.

 We will continue to follow the evolution of the SBLF and will post updates here as appropriate.  In particular, we are monitoring the pending proposal by Senator Olympia Snowe (R-Maine) to amend the SBLF (and in short, make a limited program even more limited).  If you have further questions about the program, please contact Katherine Koops, BT Atkinson, Barry Hester or any other member of the Bryan Cave Financial Institutions practice.

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Treasury Officials Address Small Business Lending Fund in Telephone Briefing

We previously summarized Treasury’s December 21, 2010 release of application and other details regarding the Small Business Lending Fund (SBLF). On January 11, 2011, Bryan Cave attorneys participated in a 45-minute telephone briefing given by SBLF Director Jason Tepperman and Deputy Assistant Secretary of Small Business, Housing and Commercial Development Don Graves, Jr. Mr. Tepperman presented an overview of the program and addressed questions regarding Treasury’s prior SBLF release.

In no particular order, here are a few “nuggets” of information that were conveyed in response to participant questions:

  • Processing Time.  Processing time will vary by applicant, with disbursement of funds to begin in “early 2011.” Transaction documents are still in development, however, and will be posted on Treasury’s SBLF website as soon as they are available. Treasury expects that the $30 billion fund will meet anticipated demand, so it does not expect to have to “ration” investments among participating banks.
  • De Novo Eligibility.  So long as they meet the general eligibility criteria (less than $10 billion in assets, not on the FDIC’s problem bank list, etc.), de novo institutions can apply, even if they are subject to dividend restrictions. Banks will be evaluated on a case-by-case basis in conjunction with applicable federal and state regulators.
  • Baseline Calculation. The “Baseline,” which is the average of Qualified Small Business Lending (QSBL) amounts outstanding for the four quarters ending June 30, 2010, is the metric for determining small business lending increases and thus dividend rates payable to Treasury under the program. In calculating the Baseline, participants should use end-of-quarter balances as reported in Schedule RC-C of the Call Report as opposed to averages over the quarterly period. In other words, the calculation would average the QSBL amounts reported as of 9/30/09, 12/31/09, 3/31/10 and 6/30/10 to compute the Baseline. Participants need to go back and cull from those Call Reports the particular types of loans that are included in the QSBL definition—they include more than just the Call Report categories of “loans to small businesses” and “loans to small farms.”  Because the Baseline calculation is included in the enabling legislation, there isn’t flexibility on the dates and loan categories that are included.
  • TARP Dividend Issues.  Similarly, the requirement that applicants proposing to use SBLF investment to refinance CPP or CDCI funds be current in TARP dividends and not have missed more than one payment is set by the enabling legislation and will not be excepted. Note that the requirement relating to missed dividends refers to “more than one”—i.e., “two or more” missed payments (or payments more than 60 days delinquent).
  • Participations and Government Guarantees.  Portions of loans for which the risk is assumed by a third party (e.g., portions of loans that have been participated) and guaranteed portions of government-guaranteed loans are not included in Baseline or QSBL calculations. If the guaranteed portion of a loan is lowered during its term, however, the additional non-guaranteed portion will count as a QSBL increase.
  • Additional Guidance to Come.  Additional guidance is forthcoming on the 90% holding company pushdown requirement for TARP participants; the impact of post-SBLF funding growth that results in borrower or loan relationship size exceeding eligibility criteria; treatment of portions of lines of credit approved but not used prior to SBLF funding; and required borrower certifications under the program.

As a reminder, the SBLF application deadline is March 31, 2011.  Based on our experience with CPP funding, we recommend that institutions apply sooner rather than later as this deadline approaches. We will continue to follow the implementation of the SBLF and relate important developments here and of course on an individual basis if you feel that this program might be a fit with your institution.

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Treasury Releases Small Business Lending Fund Application, Term Sheets and Guidelines

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:

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.

Eligibility

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.

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Senate Adopts Small Business Lending Fund

On September 16, 2010, the Senate adopted H.R. 5297, the Small Business Jobs Act of 2010, which includes the creation of the $30 billion Small Business Lending Fund.  The House passed the Senate’s version of the bill in full on September 23, 2010, thereby sending it to President Obama for his signature.  This legislation would (finally) implement the program described in President Obama’s State of the Union address (and first announced almost one year ago) from the beginning of the year to provide additional funds to community banks to lend to small businesses.

The version of the legislation is generally comparable to the version the Senate began considering in July but contains many differences from the version previously adopted by the House in June.  Most significantly, the Senate-adopted bill does not permit eligible institutions to amortize losses and write-downs on certain OREO and NPAs secured by real estate.  For convenience, we have posted the text of the Small Business Lending Fund provisions contained in the Senate-passed bill.

Eligibility.

Under the terms of the Senate-adopted bill, eligible depository institutions with $10 billion or less in consolidated assets (as of December 31, 2009) may apply to receive a capital infusion of up to between 3% and 5% of the institution’s risk-weighted assets, less any existing TARP CPP or CDCI funds.  Institutions with $1 billion or less in consolidated assets are eligible for up to a 5% investment, while those institutions between $1 and $10 billion are only eligible for 3%.  (Under TARP, only institutions with $500 million or less in consolidated assets were eligible for capital up to 5% of risk-weighted assets, so this potentially represents an increase in available funding for institutions between $500 million and $1 billion.)

Institutions on the FDIC’s problem bank list are explicitly excluded from eligibility under the Small Business Lending Fund.  The bill defines the problem bank list as the list of depository institutions having a current CAMELS composite rating of 4 or 5, or such other list designated by the FDIC.  The bill explicitly emphasizes that merely because a bank has a CAMELS rating of 3 or better does not limit the discretion of the Treasury Department to deny an application for funds.

Matching with Private Funds.

The Small Business Lending Fund explicitly authorizes the Treasury and federal regulators to consider making an investment conditioned on private matching investments.  This authorization is not available for institutions that are specifically ineligible (i.e., those on the troubled bank list) but rather is only available to otherwise eligible institutions that the regulators or Treasury determine not to recommend to receive capital infusions.

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Regulators Issue Statement on Lending to Creditworthy Small Businesses

On February 5, 2010, the federal banking regulators and the Conference of State Bank Supervisors issued an Interagency Statement on the Credit Needs of Creditworthy Small Business Borrowers.  The Statement builds upon principles set forth in the October 2009 Policy Statement on Prudent Commercial Real Estate Loan Workouts.  After noting the overall decline in loans to small businesses and the reasons for that decline the regulators suggested that lenders may have become overly cautious with respect to small business lending.  They encourage lenders to engage in prudent small business lending and that that examiners will not criticize lenders for working in prudent and constructive manner with small businesses.

The decline in small business lending has many reasons, not the least of which is that loan demand is actually down.  Lenders are also naturally cautious of lending to those businesses that are reliant solely on cash flow that has slowed due to the slowdown in consumer spending and the decline ion the personal wealth of the owners of the businesses.  Despite the assertions to the contrary by the regulators, lenders are concerned that there is a disconnect between statements from Washington, DC and what actually happens in the field when examiners are onsite at financial institutions.  Our experience seems to show that local federal regulators do not see any upside in being flexible when faced with making decisions about how to rate credits.  Lenders are therefore naturally reluctant to maker decisions based on guidance until they see it actually implemented on the ground.

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President Obama Proposes $30 Billion Small Business Lending Fund

Carrying through with his announcement in the State of the Union, on February 2, 2010, President Obama provided the outlines of a proposed $30 billion Small Business Lending Fund to provide capital to community banks, with incentives to increase small business lending.  As proposed, the program will require Congressional approval to move the funds outside of TARP, which should remove the applicability of the executive compensation and governance restrictions and is also hoped to remove the stigma associated with TARP funds.

Based on the initial fact sheet, the terms appear generally comparable to the financial terms under the Capital Purchase Program, with reductions in the dividend rate for the first five years triggered by increases in small business lending.  Every 2.5% increase in small business lending through December 31, 2011 over 2009 levels would trigger a 1% decrease in dividend rate, down to a minimum rate of 1%.

Banks with less than $1 billion in assets would be eligible to receive a capital investment of up to 5% of their risk-weighted assets.  Banks with between $1 and $10 billion in assets would be eligible to receive a capital investment of up to 3% of their risk-weighted assets.  Participation in the program will require approval by the bank’s primary federal regulator, although no details are available as to the standards that will be employed.

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TARP Extension – Capital for Community Banks?

On December 9, 2009, Treasury Secretary Geithner exercised his discretion to extend the TARP program through October 3, 2010.  In his letter to Congress certifying the extension, Geithner indicated that the Treasury Department would limit new commitments in 2010 to three areas:

  • mitigating foreclosure;
  • “recently launched initiatives to provide capital to small and community banks, which are important sources of credit for small businesses”  (including additional efforts to facilitate small business lending); and
  • increasing Treasury’s commitment to the Term Asset-Backed Securities Loan Facility (TALF).

The “recently launched initiatives to provide capital to small and community banks, which are important sources of credit for small businesses” presumably refers to the new capital program for community banks previously announced by President Obama on October 21, 2009. President Obama had indicated that the Treasury would be developing a program to provide TARP capital to community banks with less than $1 billion in total assets who committed to increase small business lending.  The capital investment, as proposed, would be limited to 2% of risk-weighted assets and would carry a 3% dividend rate for the first five years.  No indications were provided that the Treasury’s viability standard would be modified to permit additional banks to participate.

Secretary Geithner’s reference to this program is the first follow-up we’ve heard since Obama’s announcement.  As recently as last week, local FDIC officials were telling us that the program appeared to be “dead on arrival” in DC, and there appeared to be little support in Washington for further developments.  We understand the FDIC was advising interested banks to not anticipate any further action, and to seek capital elsewhere.

It remains to be seen whether Secretary Geithner’s letter to Congress represents a renewed interest in this program, merely a political statement indicating a focus on small business lending, or a simple preservation of flexibility going forward.

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President Obama Announces Additional TARP Capital for Community Banks

On October 21, 2009, President Obama announced the broad outlines of a new program to provide additional capital to community banks in an effort to spur lending to smaller business.

Actual facts about the new program are currently very sparse.  A review of the currently available information does provide some details that may be attractive to community banks that current have TARP CPP funds, as well as those that currently do not have funds.  However, it does not appear that there will be any change in the Treasury’s determination of which community banks are eligible for TARP funds; participating institutions appear to still need to be viable without the funds.

There are three basic sources of official information:

  1. the text of President Obama’s speech in Landover, Maryland;
  2. the press release announcing the speech; and
  3. a fact sheet on the President’s Small Business Lending Initiatives.

Known Facts

  • The funds will be available to “viable banks with less than $1 billion in assets.”  The announcement does not give any indication that the Treasury will alter its existing viability standards.
  • Participants will be required to submit a small business lending plan explaining how the additional capital will allow them to increase lending to small businesses, and will be required to submit quarterly reports detailing their small business lending activities.
  • The initial dividend rate will be 3% rather than the 5% required under the current TARP Capital Purchase Program.  The dividend will rise to 9% after five years, consistent with the existing TARP Capital Purchase Program.  Presumably, Subchapter S institutions will receive a comparable reduction in the rate paid on the subordinated debt.
  • The amount of capital is limited to 2% or the institution’s risk-weighted assets.  This is less than the 3% permitted under the existing TARP Capital Purchase Program, and less than the 5% currently permitted for institutions that are less than $500 million in total assets.
  • The Treasury is working to finalize program terms “in the coming weeks.”
  • The Treasury will also determine how to handle existing Capital Purchase Program participants to allow them to replace existing capital with investments under the new program (effectively reducing their dividend costs in exchange for a commitment to increase small business lending).
  • Community Development Financial Institutions (CDFIs), including CDFI credit unions, will be able to apply for funds with a dividend rate of 2% for eight years, after which it will increase to 9%.
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Commentary: NYTimes Recognizes Community Banks

The front cover of the May 17, 2009 issue of the New York Times Magazine asked “Are Small Banks the Future?”  As noted in the article, lending may have slowed at the largest banks, but at the other end of the financial system, there are 8,500 community banks, and most remain very strong.

In the midst of the worst banking crisis since the Great Depression, community banks have generally fared well. That’s because they typically shunned the lending practices that led to high default rates. They rarely participated in the securitization of loans, credit-default swaps and other overvalued financial products that put the global financial system in crisis. Instead, they stuck to the fundamentals. They considered the character and history of their borrowers. They required collateral. Without community banks, the current financial crisis would be a lot worse.

The focus of the mainstreet press, and the Treasury Department, continues to be on the largest institutions, whether it be the initial nine TARP Capital recipients, or the nineteen that underwent the stress test.  There is some rationality for this focus, the majority of assets, deposits and loans are held by these institutions.  But just like small businesses generally, community banks play a critical role in the American economy.

Community banks may have weathered the current crisis better than larger banks, but they remain an American oddity. Most other countries have 5 or 10 na­tional banks, and when they get in trouble, as they did in Iceland, it can be devastating. The balance in this country is tipped toward big institutions (the four largest control half the assets held by American banks and 40 percent of all deposits), but community banks still make 43 percent of all small business loans under $1 million. Since January 2008, fewer than 1 percent of all community banks have failed.

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Stimulus for Small Businesses — Unlocking the Credit Market

On March 16, 2009, the Treasury announced the terms of new program, Unlocking Credit for Small Businesses, aimed at helping jump start credit markets for small business loans.  The program includes the following significant provisions:

  1. The Treasury will purchase up to $15 billion in securities backed by Small Business Administration (SBA) loans;
  2. The SBA may guarantee up to 90% of Section 7(a) loans, which are loans to support the business operations of small businesses;
  3. The SBA will temporarily eliminate loan fees for certain Section 7(a) loans and 504 Program loans, which provide long-term financing to directly support economic development within a community;
  4. The largest Financial Stability Plan Assistance recipients must weekly report their SBA lending activities, and all financial institutions may have to monthly report their SBA lending activities; and
  5. The Treasury will issue guidance for the tax-related provisions, aimed at providing liquidity to small businesses and encouraging investments in small businesses.

Together, these provisions are aimed at increasing small business lending, which is extremely important in these flagging economic times because small businesses have generated approximately 70% of net new jobs annually over the past decade.  These provisions should also provide a liquidity boost for community banks, credit unions, and small lenders, who together account for approximately 40% of all SBA-backed loans, by allowing these institutions to sell existing SBA loans and then to extend more credit to other borrowers.

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