Community Developments Investments (February 2013)
Case Study: How Idaho Put the SSBCI to Work
Barry Wides, Deputy Comptroller, Community Affairs, OCC
The number of women-owned businesses in the United States grew 44 percent from 1997 to 2007, a 2010 study by the Commerce Department found. These businesses now account for 30 percent of all U.S. firms.
When the Small Business Jobs Act (SBJA) was signed into law in September 2010, Idaho's economy was struggling. The state's real gross state product had decreased 3 percent in 2010, and the state's unemployment rate had reached 8.9 percent, up from 2.7 percent in March 2007. Most (71 percent) of the net loss in nonfarm employment occurred in small businesses.1
Under the SBJA formula, Idaho was eligible for an allocation of $13.2 million through the State Small Business Credit Initiative (SSBCI). The Idaho Department of Commerce was designated to implement the program. The Idaho Department of Commerce contracted the Idaho Housing and Finance Association (IHFA), a state-chartered organization, to administer the program.
Designing the Credit Enhancement Product for Small-Business Lending
An advisory committee comprising the Department of Commerce, financial institutions, and other state agencies made recommendations as to the best use of SSBCI funds to facilitate small-business lending. The advisory committee included representatives from the Idaho Bankers Association and others from community, regional, and large banks. The advisory committee established guidelines ensuring that any bank, regardless of size, could use the SSBCI-funded lending product and requiring that the program be easily administered by the state.
Rather than developing a product from scratch, Idaho officials took the practical approach of benchmarking a successful program operating in another state. They looked to Michigan because of its track record in designing and implementing credit enhancement products. The officials chose the collateral support program, among the options available for using SSBCI funds, because it met the requirement of being easy to use as well as useful in current market conditions.
In a collateral support program, the state opens a cash collateral account at a participating lender, enhancing borrowers' collateral coverage. The lender underwrites the loan, and the state underwrites the collateral support. Typically, the state and the bank negotiate the amount of collateral support needed. The collateral usually is provided in the form of highly liquid assets, such as cash or certificates of deposit, which are held in a custodial account at the lender. Term lengths vary, depending on the terms of the underlying loans.
The Idaho Collateral Support Program addresses declining collateral values and their impact on small-business loan quality, an important issue in Idaho at the time the program was launched. Rob Aravich, Senior Vice President of U.S. Bank and a member of the advisory committee, said the program "allows banks to lend to borrowers with a proper business use and the ability to repay the loan, but who don't have the value in inventory or other collateral that would make a lender comfortable."
Marketing the Idaho Collateral Support Program to Banks
Idaho and the U.S. Department of the Treasury reached an agreement in August 2011. The IHFA partnered with the Idaho Bankers Association for a lender training session in November 2011. "Nearly every bank represented by the IBA [Idaho Bankers Association] was there," said Cory Phelps, Economic Development Finance Officer of the IHFA. The meeting was also made available through conference call for those who could not participate in Boise.
The first meeting was aimed at chief executive officers, chief operating officers, and chief financial officers. "Basically, we took everyone through the Participant Guide," Phelps said, referring to the manual that described program procedures. "But we also had bankers from the advisory committee that participated in the program design talking to the other bankers about the program. We focused on examples. That really got the lenders engaged. It showed them how they could use the product in a straightforward way."
The initial lender training session was followed by regional meetings and one-on-one consultations that focused on the line lenders. The IHFA also scheduled individual meetings with banks' chief credit officers.
By the end of November 2011, five community banks had signed up to participate. By the end of December 2011, that number had increased to 11. As of July 2012, 23 financial institutions had registered. The early adopters were all community banks. The multistate regional and national banks followed in 2012.
Perspective of a Community Bank: First Federal Savings Bank of Twin Falls
The first bank to sign up was First Federal Savings Bank of Twin Falls. This community bank, founded in 1916, has $475 million in assets and 11 branches in south-central Idaho.
The commercial loan officers of the bank attended the first Idaho Collateral Support Program meeting in November 2011 and immediately recognized the value of the program to their business model. "We try to focus our lending on smaller businesses," said Alan Horner, President and Chief Executive Officer. "This is the bread and butter of community banks. We want to do more of these loans and are interested in tools that help us to do more of that."
Kai Mathews, a loan officer who attended that first meeting, thought the program was a good fit for First Federal's customers: "I work mostly with smaller credits—$50,000 or less. These customers often don't have a lot of assets. The Idaho Collateral Support Program helped us to better meet the needs of customers with not a lot of options."
The bank faced few hurdles to adoption. The program did not require any changes to credit policies, and the bank could use its own application materials and underwriting process. "The program is very easy to use," Mathews said. The IHFA would reach a decision to participate "in a matter of hours."
"Once we started submitting loans, we were surprised at how quickly it went," said Jason Meyerhoeffer, First Federal Executive Vice President and Senior Loan Officer.
The Idaho Collateral Support Program helps First Federal meet the needs of good borrowers. "The program was designed to encourage good lender underwriting," Meyerhoeffer said. "Banks still are taking 90 percent of the risk on the loan."
Perspective of a Multistate Regional Bank: KeyBank
KeyBank Idaho signed on to the program in the first quarter of 2012. The bank, which had not previously participated in a collateral support program, learned about the program at the lender training session that the IHFA held in November 2011. The bank's representatives believed it offered an effective, manageable solution for their customers.
The Idaho Collateral Support Program filled a specific and critical niche. "We had borrowers we wanted to lend to, that we wanted a relationship with. They were creditworthy borrowers that met our credit policies, with the exception of a collateral shortfall," said Chantel West, at the time Vice President and Senior Underwriter for KeyBank Idaho. "We were not going to use the program to hedge up a weak deal."
KeyBank has branches in 14 states across the Midwest, West, and Northeast, and each state has taken a different approach to using SSBCI funds. These differences create underwriting, credit policy, and compliance monitoring challenges for the multistate bank. "Normally we like to implement products across our footprint," said John Moshier, National SBA Segment Manager at KeyBank. "But it's good to have choices." The collateral support program can work in cases where a Small Business Administration (SBA) product cannot.
West and Shane Hahn, Senior Vice President and District Business Banking Leader at KeyBank Idaho, championed the program within the bank and said it took some persuasion to sell the program. "We had to dance to get the program approved internally," Hahn said.
KeyBank uses a community banking model in which loan decisions are made by local decision makers, but the reporting and risk functions are centralized. In the case of the collateral support program, there were questions about its scale and whether centralized reporting was appropriate. KeyBank uses an SSBCI-funded product only in Idaho, and reporting for the Idaho Collateral Support Program is being handled locally. KeyBank officials are exploring how they can use SSBCI-funded products in their other locations.
KeyBank expects to increase use of the program, but within limits. "We don't see this program as generating hundreds of millions of dollars' worth of business," Hahn said, "but for the right deal, this program can be a good fit. In addition, we see being on the list of participating programs as a competitive advantage for the bank."
Meeting the Community's Credit Needs
Bank representatives consistently point out how important participation in the Idaho SSBCI program was to the economic recovery in Idaho.
"In Idaho, a lot of businesses have been holding off expansion because of the state of the economy," said Horner, of First Federal Savings Bank of Twin Falls. "Many have just been waiting for the dust to settle. Business owners here tend to take a conservative view of things. They don't like to step farther than their stride. We were very aware of the value of this tool in promoting economic growth and responsible lending."
"We see our participation as being part of the community," said Hahn, of KeyBank. "Participating in the program may take some work up front, but it helps business owners who would have nowhere else to go. The program can be a big part of helping to grow the local economy."
U.S. Bank's Aravich also has a clear civic perspective on the program. The Idaho SSBCI is "good for the bank, good for our customers, and good for the economy," he said. "The SSBCI is an example where we can show how banks are willing to work outside the box to help the overall economy and country."
This publication is part of:
Collection: Community Developments Investments
Articles by non-OCC authors represent the authors' own views and not necessarily the views of the OCC.