Fed facility gives banks more room to make emergency loans

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Community bankers are praising a new Federal Reserve credit facility as a big step toward helping them make more loans under the Paycheck Protection Program.

The program, overseen by the Small Business Administration and Treasury Department, is aimed at small businesses hurt by the coronavirus outbreak. Many lenders had stopped approving loans under the $349 billion effort after hitting internal limits such as capital levels or program loans as a percentage of total assets.

A number of bankers said the Fed’s facility, announced on Thursday along with a term sheet, allows them to accept more applications and keep lending.

“This opens up more liquidity for us to process more loans,” said Todd Nagel, CEO of the $1.4 billion-asset IncredibleBank in Wausau, Wis., which has more than 1,000 applications to work through.

The facility is “what we were hoping for,” said Bruce Lee, president and CEO of Heartland Financial USA in Dubuque, Iowa. The $13.2 billion-asset multibank holding company stopped accepting applications after receiving 7,000 requests for $1.5 billion.

Banks will pledge program loans as collateral to the Fed, which will extend credit equal to the principal amount of the loans at a rate of 35 basis points. The program is initially limited to depository institutions, though the Fed said it is working to expand eligibility to other lenders.

While bankers would pay interest to the Fed, they can charge a 1% rate for the loans and receive origination fees from the SBA.

The facility is initially set to run until Sept. 30, though it can be extended.

The Fed's program will "absolutely help," said John Asbury, president and CEO of the $17.6 billion-asset Atlantic Union Bankshares in Richmond, Va. Atlantic Union had been looking at its options after realizing it had $1.5 billion in applications and capacity to "comfortably fund" $1 billion under the emergency loan program.

“We expected enormous demand, and that’s what we’re seeing,” Asbury said. "This is the most stressful situation I’ve ever seen. We do not want to fail our customers.”

Importantly, the pledged loans will not count toward a bank’s Tier 1 leverage ratio.

That was welcome news to Ron Quinn, CEO of Peach State Bank & Trust in Gainesville, Ga. Though the $266 million-asset bank had approved $26 million in loans under the program and had set up a facility with the Federal Home Loan Bank of Atlanta, it was reluctant to go beyond $50 million in originations.

Capital ratios were a big concern. Peach State’s Tier 1 leverage ratio was going to fall to 8.66%. With the new guidance, that ratio will stay closer to 10.45%, Quinn said.

Peach State secured a release from the Atlanta Home Loan Bank so it could pledge its loans to the Fed facility.

“The capital and liquidity issues are gone, and we can do some more lending,” Quinn said.

Nagel of IncredibleBank said the terms “will work because we do not have to worry about capital ratios."

A structure is also in place for banks to quickly repay the Fed.

Bankers said they can apply with the SBA to be paid for the forgiven portion of the loans if a borrower meets eligibility requirements seven weeks after the loan is originated. The SBA could take up to 15 days to review and pay out the funds, which could then be used to repay the central bank.

“I think they’re being fair when you consider the maturity and that 100% of it could roll off in a couple of months,” said Mark Marionneaux, president and CEO of the $240 million-asset Bank of Zachary in Louisiana.

“It’s intriguing and something we want to look into,” Marionneaux said, adding that his bank had approved 55 loans totaling $10 million while analyzing ways to secure more liquidity and avoid straining capital levels. “It’s a viable option.”

Marionneaux said that the Federal Home Loan Bank System offers a similar program for pledged loans that featured a slightly higher interest rate for bankers.

The unforgiven portions of program loans mature over two years, which Marionneaux said was a “reasonable” time frame.

The Independent Community Bankers of America, along with 30 state banking associations, said they were supportive of the facility, but they pressed the Fed to do more to support smaller banks looking to participate.

The Fed "should go further and provide advances against to-be-funded ... loans to further enhance the capacity of the program," the associations said in a Thursday press release. "Liquidity must not be an obstacle to the success of the program."

And some bankers are taking their time to review the terms before returning to lending.

"The devil is always in the details," Heartland Financial's Lee said.

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Community banking Paycheck Protection Program Coronavirus SBA Federal Reserve Treasury Department Small business lending
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