Tara HumstonAssistant Vice President

August 19, 2011

Small Business Lending and Regulatory Perspectives

Federal Reserve Bank of Kansas City

• Small Business lending statistics • Interagency Statement on Meeting the Credit

Needs of Creditworthy Small Business Borrowers

• Examiner assessment of government guaranteed programs and approach to reviewing guaranteed loans

Discussion topics

Federal Reserve Bank of Kansas City

Funding Sources For Small Businesses

Bank Loan

Earnings

Credit Cards

Vendor Credit

Private Loan

0% 10% 20% 30% 40% 50% 60%

49%

43%

37%

25%

21%

Source: National Small Business Association, 2011 Mid-Year Economic Report

19% of small firms use a 2nd mortgage as collateral for a business loan

Credit Cards

Bank Loan

Federal Reserve Bank of Kansas City

$256.5

$304.3

$65.8

$129.1

C&I Loans < $1 millionCRE Loans < $1 millionAg Loans < $500 thousandSmall Business Credit Cards

Total amount of small business lending: $756 Billion

$ Billions

Bank Lending to Small Businesses

Sources: Reports of Condition and Income, June 2011The Nilson Report, June 2011

Federal Reserve Bank of Kansas City

$ Billions

Credit Card data from The Nilson Report, June 2011Small Loan data from Reports of Condition and Income, June 2011

Small Business Lending by Bank Size

$238.8

$122.1

$67.6

$327.3

Under $1 B$1 to $10 B$10 to $50 BAbove $50 B

Total: $756 Billion

Federal Reserve Bank of Kansas City

Jun-06Jun-07

Jun-08Jun-09

Jun-10Dec-10

Mar-11Jun-11

560

600

640

680

720

760

240

256

272

288

304

320

644.6

694.7

717.4 710.6

666.3

636.2 624.4 626.6

Total Small Business Loans (Left Scale) Small Business C&I Loans (Right Scale)

Loans To Small Businesses Has StabilizedAlong With Small C&I Loans

$ Billions

Source: Reports of Condition and Income – Small Loan data

Federal Reserve Bank of Kansas City

$250M$1B

$10B$50B

> $50B0%

10%

20%

30%

40%

50%

60%

70%

80%

41.8% 34.6%30.3% 23.4%

15.2%

44.3%42.5% 39.6%

59.6%66.7%

Total Small Business Total C&I

Source: Reports of Condition and Income – Small Loan data*Note: The sample of banks used to calculate these trends was adjusted to eliminate distortions from acquisitions, including failed banks

More Community Banks Increased Small Business Lending,While More Large Banks Increased Overall Business Lending

(June 2010 – June 2011)

Bank Count: 4,340 1,502 412 47 33

% Increasing Lending

Federal Reserve Bank of Kansas City

Jan-05May-05

Sep-05Jan-06

May-06Sep-06

Jan-07May-07

Sep-07Jan-08

May-08Sep-08

Jan-09May-09

Sep-09Jan-10

May-10Sep-10

Jan-11May-11

0

5

10

15

20

25

30

35

40

45

50

50

52

54

56

58

60

62

64

66

68

70

Unsatisfied (Left Scale) Satisfied (Left Scale) No Loan Demand (Right Scale)

Small Businesses Report Little Demand for Credit

% of Small Businesses

8%

28%

64%

Source: NFIB Small Business Economic Trends (August 2011)

Federal Reserve Bank of Kansas City

Bankers Report Stronger Loan Demand From Small Businesses

Net Percentage Reporting Stronger Demand for C&I Loans

9.6

-63.5

25.5

Weakening

Strengthening

Source: Senior Loan Officer Opinion Survey on Bank Lending Practices (April 2011)

Dec-04Jun-05

Dec-05Jun-06

Dec-06Jun-07

Dec-07Jun-08

Dec-08Jun-09

Dec-09Jun-10

Dec-10Mar-11

-80

-60

-40

-20

0

20

40

60

Federal Reserve Bank of Kansas City

ConclusionsLending Activity to Small Business

• Small business credit appears to be available currently, with more banks showing increasing lending across credit products. Smaller banks in particular are focused on small business lending.

• Small businesses report show growing concerns other than credit availability. Small businesses are fairly satisfied with current financing options.

• Banking conditions are slowly improving with the industry showing better earnings and a lower level of problem loans on their books. This could likely bolster increasing levels of lending in future reporting periods.

Federal Reserve Bank of Kansas City

• Supervisory Expectations• Underwriting and Risk Management

Considerations• Examination Reviews

Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers

Federal Reserve Bank of Kansas City

• Guaranteed loans are viewed as credit enhancements on potentially weaker credits and are typically “passed” for classification purposes

• Examiners assess if improper practices may jeopardize the guarantee

• Guaranteed portions of credits are given preferential treatment based on risk calculations for capital standards – generally 20%

Examiner Approach to Review of Guaranteed Loans