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Late Surge in Signups for the SBLF

By: Katie Kuehner-Hebert

Bankers are finding lots of pluses to participating in the federal Small Business Lending Fund, including positive feedback within their communities for helping local companies recoup from the recession and create new jobs.

The $30 billion program was established as part of the 2010 Small Business Jobs Act, intended to encourage small business lending by incentivizing community banks with capital and lower dividend payouts to the government if they make more loans.

In July, the $112 million-asset Freedom Bancshares Inc. in Overland Park, Kan., received $4 million through the fund. President and CEO Kurt A. Knutson says the money will be used to make additional working capital loans, lines of credit, term loans and owner-
occupied real estate loans for privately held businesses in the greater Kansas City metropolitan area.

“This program fits very well within our core operating philosophy — we’ve made over $80 million in loans over the last five years, and we look at this as a really good opportunity to continue our growth,” Knutson says. “It allows us access to capital at a reasonable cost, to continue to support the communities we live in.”

The U.S. Treasury Department program is targeted to community banks that have $10 billion or less in assets. The department provides capital to participating banks by purchasing Tier 1-qualifying preferred stock or equivalents in each bank. To incentivize small business lending, the dividend rate a bank pays on the preferred shares is reduced as the bank increases its lending to that sector.

The initial dividend rate will be, at most, 5 percent. If a bank’s small business lending increases by 10 percent or more, then the rate will fall to as low as 1 percent. Banks that increase their lending by amounts less than 10 percent can benefit from rates set between 2 percent and 4 percent. If lending does not increase in the first two years, however, the rate will increase to 7 percent. After 4.5 years, the rate will increase to 9 percent if the bank has not already repaid the capital.

Knutson says the program has been well received by the public, and his bank has gotten positive press in the local media.

“People see it as an opportunity for us to support small businesses, by giving them money to create more jobs,” he says. “They also realize that community banks weren’t responsible for a lot of things that went wrong in 2008, yet we were responsible for helping to fix a lot of the problems.”

The $106 million-asset Pioneer Bank in Dripping Springs, Texas, in June received more than $3 million from the Treasury’s program. Jeffrey A. Wilkinson, president and CEO, says the bank has since generated some working capital lines of credit for businesses that are expanding as they come out of the recession.

“This gives us additional capital at a time when over the last couple of years the access to the capital markets for privately held community banks has gone backwards,” Wilkinson says. “This gives us more capacity to lend to companies that are just beginning to see the light at the end of the tunnel.”

At United Bank & Trust, a community bank with assets of $450 million in Marysville, Kan., the SBLF capital will be used to fund expected growth by the bank and its holding company, UBT Bancshares Inc., according to Leonard Wolfe, president and CEO. UBT applied for and received $16.5 million, or 3 percent of its risk-weighted assets.

Wolfe says United Bank & Trust has experienced significant growth over the past three years, with small business loans — including agriculture — representing the largest part of the growth. “We expect this trend will continue,” he adds.

While critics of the program have complained of delays and red tape, these haven’t been issues for Wolfe. UBT Bancshares applied for the funds early in this year and approval was granted in July. The company wasn’t asked for any additional information in the interim. “Although it took a long time to notify us of approval,” says Wolfe, “I would not label that issue as too much red tape.

“The biggest problem I see with the program,” he adds, “is banks that are not in a position to declare dividends without approval from their primary regulator are not eligible to participate in SBLF.”

Many banks are using the SBLF funds to redeem stock issued to the Treasury under the Capital Purchase Program. One of them, 1st Enterprise Bank in Los Angeles, received $16.4 million and simultaneously with the investment from the SBLF redeemed all 10,620 shares of preferred stock previously issued to the Treasury under the CPP.

The net result of issuing preferred stock under the SBLF and redeeming the preferred stock under CPP was an increase in the bank’s Tier 1 capital of approximately $5.8 million.

“We expect this additional capital will support our on-going commitment to providing credit to the business communities which we serve,” said John C. Black, CEO. “Due to our success in growing our loan portfolio over the past several years we have qualified for highly favorable terms under the SBLF, as demonstrated by an initial dividend rate of 1 percent. This program will provide significant benefits to our customers, shareholders and the southern California small business market over the coming years.”

Katie Keuhner-Hebert is a contributing writer in San Diego. Bill Poquette, editor-in chief, also contributed to this article.

Copyright (c) October 2011 by BankNews Media.