The Small Business Jobs Act of 2010 authorized a $30 billion Small Business Lending Fund ("SBLF") to provide Tier 1 capital to qualified community banks with assets of less than $10 million that agree to use the funds to increase small-business lending. In late December 2010, the U.S. Treasury ("Treasury") published information on its website regarding how banks and bank holding companies can apply for SBLF funds and the terms for receiving SBLF funds. The following documents and information can be accessed at http://www.treasury.gov/resource-center/sb-programs/Pages/Small-Business-Lending-Fund.aspx:
- Fact Sheet
- Frequently Asked Questions
- Comprehensive Getting-Started Guide for Banks
- Summary of Preferred Stock Terms
- Summary of Preferred Stock Terms for CPP or CDCI Refinancing
- Requirements for CPP or CDCI Refinancing
- Application Form and Instructions
- Description of the Application Process
- Lending Plan Form and Guides
Please note that the information published to date relates only to C corporation depository institutions and holding companies. The Treasury has not yet released the term sheets and application forms for Subchapter S corporations, mutuals, or community development loan funds. The following summary of the SBLF application process and terms is qualified by reference to the more detailed information on the Treasury's website.
Insured depository institutions, bank holding companies and savings and loan companies with total assets of less than $10 billion as of the end of the fourth quarter of 2009 may apply to be considered for SBLF funding. Holding company assets are determined on a consolidated basis. A bank may not apply to participate in the SBLF if it is on the FDIC's problem bank list or has been removed from that list within the past 90 days. Therefore, a bank with a composite CAMELS rating of 4 or 5 is typically ineligible to participate in the SBLF.
Eligible CPP Participants
A bank or holding company wishing to use the SBLF to refinance the investment made by the Treasury pursuant to the TARP Capital Purchase Program ("CPP") must:
- be in material compliance with all terms of its CPP agreement with the Treasury,
- have all dividend payments to the Treasury current prior to the SBLF funding, and
- not have missed (i.e., submitted more than 60 days after the due date) more than one dividend payment to the Treasury.
A CPP participant must fully redeem its CPP obligation under the SBLF and may not participate in both programs concurrently.
Applications and Lending Plans
All applications must be submitted by email to the Treasury (SBLFApps@do.treas.gov) no later than March 31, 2011, and may be withdrawn by the applicant at any time without penalty, even after participation approval is received from the Treasury. At the same time, an applicant must submit a lending plan to its federal regulator and any applicable state regulator by email using the email addresses indicated on the Lending Plan Form. The confidential two-page lending plan must describe:
- how the institution intends to use SBLF funds to address small business needs in the communities that it serves,
- expected increases in qualified small business lending (discussed below) that the institution expects to achieve two years after SBLF funding, and
- planned community outreach and advertising activities describing the availability and application process for receiving small business loans.
After the institution has submitted its application and lending plan, the Treasury will consult with applicable federal and state regulators to determine whether to grant preliminary approval to proceed with the SBLF funding. The Treasury may make preliminary approval contingent upon the institution receiving additional capital prior to the SBLF funding from private non-governmental sources in an amount at least equal to the SBLF funding. If matching funds are required, the Treasury must approve the matching-fund terms which shall be subordinate to the SBLF funding but may carry a higher dividend rate than the stock issued to the Treasury. Capital raised by an approved institution after September 27, 2010, generally counts toward any matching-funds requirement. CPP participants will not be considered for approval on a matching funds basis, although they may raise capital if they wish. If preliminary approval to receive SBLF funding is not granted by the Treasury, the application is considered withdrawn.
Qualified Small Business Lending
The types of loans that can be included in an institution's small business lending for purposes of the SBLF are defined as Qualified Small Business Lending ("QSBL") and include:
- commercial and industrial loans,
- loans secured by owner-occupied nonfarm, nonresidential real estate,
- loans to finance agricultural production and other loans to farmers, and
- loans secured by farmland,?
so long as (i) the original principal or commitment amount is $10 million or less, (ii) the loan is made to a borrower with $50 million or less in revenues, and (iii) the amount excludes loan portions guaranteed by the U.S. government or for which a third party assumes risk. An institution's QSBL is determined from its Call Report, but includes more than just the "loans to small businesses" and "loans to small farms" categories in the Call Report. Each of the four QSBL categories is described in more detail on page 11 of the Getting Started Guide on the Treasury's website.
Amount of Funding and Senior Preferred Stock Terms
Institutions with assets of $1 billion or less are eligible to receive not less than 1% and not more than 5% of their risk-weighted assets. Institutions with assets greater than $1 billion but less than $10 billion are eligible to receive not less than 1% and not more than 3% of their risk-weighted assets. Any institution required to obtain matching funds prior to SBLF participation is eligible to receive a maximum of only 3% of its risk-weighted assets. CPP participants must deduct the amount of their current CPP participation from these limits. Risk-weighted assets are measured as reported in the institution's most recent Call Report; however, total assets for determining whether an institution has less than $1 billion in assets are measured as of the end of the fourth quarter of 2009. If a holding company receives SBLF funding, it must downstream at least 90% of the SBLF capital received to its subsidiary bank(s).
The institution will issue to the Treasury senior perpetual noncumulative preferred stock with a liquidation preference of $1,000 per share which will count as Tier 1 capital ("Senior Preferred Stock"). This Senior Preferred Stock will rank senior to the issuer's common stock and pari passu with the most senior series of the issuer's outstanding preferred stock. The Senior Preferred Stock is nonvoting, other than consent rights granted to the Treasury if the issuer wishes to:
- authorize or issue senior securities,
- amend the rights of the Senior Preferred Stock, or
- enter into a merger, exchange, dissolution or other transaction that would affect the rights of the Senior Preferred Stock.
Dividends on Senior Preferred Stock
The Treasury will receive noncumulative dividends on the Senior Preferred Stock payable quarterly on January 1, April 1, July 1, and October 1 of each year. The dividend rate is determined based upon an institution's QSBL. A "baseline" QSBL is established when the institution issues the Senior Preferred Stock and is based upon the average of the institution's QSBL outstanding for the four quarters ending June 30, 2010. This baseline remains constant while the Senior Preferred Stock is outstanding but may be adjusted if the institution enters into a merger or acquisition or purchases loans. The dividend rate on the Senior Preferred Stock for the first nine quarters following issuance is generally 5%, but may be less in a quarterly period if the institution's QSBL has increased over the baseline QSBL, as described below:
Increase in QSBL Over Baseline 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%
The SBLF does not distinguish between refinanced loans and new loans. Calculations to determine whether an institution's QSBL has increased over the baseline in a given quarter are based upon the Call Report published in the calendar quarter before the initial receipt of SBLF funding or the quarterly calculation of the dividend. Since Call Reports relate to the quarter before the quarter in which they are published, the calculation will reflect the amount of QSBL outstanding as of the end of the second preceding quarter. For example, if the issuance of the Senior Preferred Stock occurs in the second quarter of 2011, the initial dividend rate will be calculated based upon the Call Report published in the first quarter of 2011 which reflects loans outstanding at the end of the fourth quarter of 2010.
If a bank is eligible for a lower dividend rate based upon the chart above, that lower dividend rate will only apply to the amount of the SBLF funding that equates to the dollar amount of the QSBL increase. For example, if a bank has issued $5 million of Senior Preferred Stock to the Treasury and its QSBL increase is $4 million which represents a 10% increase over its baseline, its new dividend rate would be 1%. However, that 1% rate would only apply to the first $4 million of Senior Preferred Stock and the original 5% rate would apply to the remaining $1 million of Senior Preferred Stock.
The dividend rate on the Senior Preferred Stock will remain constant from the tenth quarter following closing of the SBLF funding until 4.5 years after the closing. If an institution's QSBL as of the end of the eighth quarter after closing (which is reported in the tenth quarter) has not increased over the baseline QSBL, the new dividend rate will be 7%. If an institution's QSBL as of the end of the eighth quarter after closing has increased, then the most recent quarterly dividend rate will continue to apply based upon the chart above. If the Senior Preferred Stock remains outstanding after 4.5 years, the dividend rate will increase to 9% regardless of QSBL amounts.
Additional Repayment Incentive Fee for CPP Participants
CPP participants who refinance their amounts outstanding under the SBLF may be required to pay an additional repayment incentive fee. If a previous CPP participant has not increased its QSBL over its baseline by the beginning of the eighth full calendar quarter after the issuance of the Senior Preferred Stock, then the institution must pay a quarterly fee equal to 2% per year on the liquidation preference of its Senior Preferred Stock beginning at the first quarter after the fifth anniversary of its original CPP investment.
The Senior Preferred Stock issued to the Treasury may be redeemed by the issuer at any time subject to prior approval of the institution's federal regulator. The redemption price is equal to the liquidation value of $1,000 per share plus accrued and unpaid dividends and a pro rata portion of any applicable CPP repayment incentive fee. The Senior Preferred Stock must be redeemed in increments of at least 25% of the shares originally issued. If there is a change in the law that modifies the terms of the Senior Preferred Stock or the SBLF in a manner that is materially adverse for the SBLF participant, the issuer may redeem the Senior Preferred Stock without impediment after consulting with its federal regulator.
Subject to any required approvals of its regulators, the institution may generally pay dividends on and repurchase shares of its pari passu securities or junior securities, including its common stock, if after such dividend payment or share repurchase the institution's Tier 1 capital would be at least 90% of the amount existing immediately after the issuance of the Senior Preferred Stock. However, from the second through the tenth anniversary of the SBLF funding, for every 1% increase in QSBL over the baseline, this Tier 1 dividend threshold will decrease by a dollar amount equal to 10% of the Senior Preferred Stock. In addition, privately-held banks cannot pay dividends on or repurchase pari passu securities or junior securities after the tenth anniversary of the SBLF funding until all Senior Preferred Stock is redeemed.
Effects of Missed Dividends
If dividends are not paid on the Senior Preferred Stock in a quarter, the institution generally cannot pay dividends on or repurchase pari passu or junior securities during the current quarter and the next three quarters. After four missed quarterly payments, if the issuer was not subject to regulatory prohibitions on the payment of dividends, the issuer's board of directors must certify in writing that the issuer has used its best efforts to declare and pay dividends consistent with safety and soundness and fiduciary obligations. After five missed quarterly payments, the Treasury may appoint an observer to attend Board meetings. After six missed quarterly payments, the Treasury may elect two directors to the issuer's Board if the SBLF funding is $25 million or more. The missed quarterly payments are aggregate and need not be consecutive. When full dividend payments have been resumed for four consecutive quarters, the Treasury's observer rights and Board election rights will expire.
Certifications to the Treasury
A recipient of SBLF funding must provide the Treasury with periodic certifications relating to:
- accuracy of each supplemental report filed with the Treasury,
- receipt of certain borrower certifications,
- compliance with federal customer identification program requirements, and
- its auditor's annual certification stating that the processes and controls used to generate supplemental reports to the Treasury are satisfactory.
All certifications must be timely filed for an institution to be eligible for any dividend rate adjustment on the Senior Preferred Stock. SBLF participants must also file quarterly supplemental reports with the Treasury calculating QSBL amounts concurrently with filing each Call Report and must complete an annual lending survey. Certifications regarding executive compensation practices or other corporate governance practices are not required. The SBLF information published by the Treasury specifically provides that SBLF participation carries no executive compensation restrictions and does not require the issuance of any warrants.