What small businesses need to know
about participating in the Small Business Lending Fund
from the U.S. Treasury Department
The United States Treasury Department (Treasury) recently released guidance materials for C corporations to participate in the Small Business Lending Fund (SBLF), created as part of the Small Business Jobs Act of 2010. The SBLF is the $30 billion fund administered by the Treasury, that encourages lending to small businesses by providing Tier 1 capital to qualified community banks. The program was designed specifically for community banks (meaning banks, thrifts, and bank and thrift holding companies) with assets of less than $10 billion (Treasury will publish separate terms for mutual institutions, S corporations and community development loan funds).
Terms of the SBLF
The SBLF enables certain community banks to increase the amount of qualified small business lending they provide by increasing the amount of capital such banks have on their balance sheets. Community banks receiving capital through the SBLF can leverage that capital and thereby lend a greater amount of money to small businesses than the total amount of capital provided by the Treasury through the SBLF. Under the SBLF, Treasury will provide such capital to participating community banks by purchasing Tier 1 qualifying preferred stock or equivalents in those participating community banks. If a community bank's total assets were $1 billion or less at the end of calendar year 2009, that bank may apply for SBLF funding in an amount equal to up to 5% of the bank's risk-weighted assets. If a community bank's total assets were more than $1 billion, but less than $10 billion, that bank may apply for funding in an amount equal to up to 3% of its risk-weighted assets. However, community banks that are on the FDIC's problem bank or similar list (that is 4 and 5 rated banks) or have been removed from that list in the previous 90 days are ineligible to participate in the SBLF.
Payment of Dividends
Community banks receiving funding through the SBLF pay for the capital provided by paying dividends on the preferred stock or equivalents held by Treasury. Initially, the dividend rate will be, at most, 5 percent. The price a bank pays for the SBLF funding, however, is reduced as the bank's amount of qualified small business lending increases. The term "qualified small business lending" is defined as any of the following, but only if the original principal and commitment amount is $10 million or less and the loan is not to a business with more than $50 million in revenues:
- Commercial and industrial loans
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Loans secured by owner-occupied nonfarm nonresidential real estate
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Loans to finance agricultural production
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Loans secured by farmland
If a bank's amount of qualified small business lending increases by more 10% or more, then the rate will fall to as low as 1 percent. If a bank's amount of qualified small business lending increases by less than 10%, then the rate will be set between 2% and 4 percent. However, if the bank's amount of qualified small business lending does not increase in the first 2 years, the rate will increase to 7 percent. After 4 1/2 years of participation in the SBLF, the dividend rate will increase to 9% until the bank repays the entire amount of the SBLF funding. Repayment of the SBLF funding must be made in payments of at least 25% of the original funding amount.
CPP/CDCI Refinancing
Community banks participating in either the Capital Purchase Program (CPP) or the Community Development Capital Initiative program (CDCI) under the Troubled Asset Relief Fund may apply to refinance its outstanding CPP and CDCI securities through the SBLF. To be eligible for refinancing, the community bank must:
- Be in material compliance with all the terms, conditions and covenants of its CPP or CDCI agreement
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Be current on its dividend payments to Treasury
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No previously have missed more than one dividend payment
In addition, all outstanding CPP and CDCI securities must be refinanced or repaid in full at the time of refinancing.
Application Deadline
The deadline for participating in the SBLF is March 31, 2011, and if a community bank wishes to participate, it should submit an application, which can be found on the Treasury's SBLF website, no later than 5:00 p.m., E.S.T., on the deadline. Submitting an application, however, does not obligate a community bank to participate in the SBLF, as a bank may withdraw its application at any time prior to entering into an agreement with Treasury. In addition to submitting an application to Treasury, a community bank wishing to participate in the SBLF must submit a small business lending plan of approximately two pages to its primary federal regulator and, if applicable, state regulator. The federal regulator will forward the small business lending plan to Treasury. The lending plan should describe how the bank intends to use the funding to address small businesses and should provide a description of the basis for the bank's lending goals and how it intends to achieve those goals.
Other Institutions
Treasury has not yet released specific guidance for S corporations, mutual institutions and community development loans funds. Terms for such institutions will likely vary from those set forth for C corporations, and separate application dates will apply for those institutions.
Additional Information
Winthrop & Weinstine, P.A., actively counsels and works with community banks in connection with all aspects the various funding programs administered through Treasury. Should you wish to discuss any aspects of the SBLF, or the application process for the SBLF in greater detail, please feel free to contact any of the below attorneys in Winthrop & Weinstine's Community Banking practice.
Edward J. Drenttel
(612) 604-6675
edrenttel@winthrop.com
Patrick W. Weber
(612) 604-6673
pweber@winthrop.com
Anton J Moch
(612) 604-6671
amoch@winthrop.com
Winthrop & Weinstine, P.A.
Capella Tower | Suite 3500
225 South Sixth Street
Minneapolis, Minnesota 55402
www.winthrop.com
NOTICE:
This client alert is a periodic publication of Winthrop & Weinstine, P.A., and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your legal counsel concerning your situation and any specific legal questions you may have.