Boardman & Clark LLP—Banking Group

• Article Resources:

Small Business Jobs Act Provides Banks Opportunity to Raise Capital

On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010. The Act establishes a new $30 billion Small Business Lending Fund Program administered by the Treasury Department. Under the Program, the Treasury Department may purchase preferred stock and other debt instruments from community banks under terms which incentivize those banks to increase small business lending.

Banks and bank holding companies with less than $10 billion in consolidated assets are eligible to apply for investments, provided they are not currently on or recently removed from the FDIC problem bank list. Applications must include a small business lending plan describing how the bank's "business strategy and operating goals will allow it to address the needs of small business in the areas it serves, as well as plan to provide linguistically a culturally appropriate outreach where appropriate."

Banks with $1 billion or less in total assets may apply to receive up to 5% of their risk-weighted assets and Banks with more than $1 billion, but less than $10 billion may receive up to 3% of their risk-weighted assets. The initial dividend or interest rate paid to Treasury is 5%, but is adjustable within the first two years of the initial investment based on the bank's increase in "small business lending" during that period. Small business lending is limited to loans of $10 million or less to businesses with annual revenues of $50 million or less.

Increases in small business lending are measured against the average amount of small business lending reported by the bank's call reports for the previous 4 full quarters immediately preceding the date of enactment of the Act, minus small business lending charge offs, plus gains realized from mergers, acquisitions, and purchases of loans after origination and syndication. During the initial two year period, the bank's 5% rate is adjusted as follows:

• If small business lending increases less than 2.5%, the dividend or interest rate remains at 5%;
• If small business lending increases at least 2.5% but less than 5%, the dividend or interest rate is reduced to 4%;
• If small business lending increases at least 5% but less than 7.5%, the dividend or interest rate is reduced to 3%;
• If small business lending increases at least 7.5% but less than 10%, the dividend or interest rate is reduced to 2%;
• If small business lending increases by 10% or greater, the dividend or interest rate is reduced to 1%.

Generally, the bank's rate at the end of the initial 2 year period remains in effect for the 4 1/2 year period beginning on the date of investment. If the bank's small business lending has remained the same or decreased in the initial 2 year period, the rate increases to 7% for the remaining 4 1/2 year period. After the initial 4 1/2 year period, the rate increases to 9%. The preferred stock or other debt instrument must be repaid no later than 10 years from the date of initial investment.

Although the application process has not begun, banks and bank holding companies interested in participating should consider whether they are currently authorized to offer preferred shares and begin developing a small business lending plan. For additional information, please contact John Knight at (608) 283-1764.