The Massachusetts Treasury has begun inviting Massachusetts banks to participate in a new Small Business Banking Initiative, which seeks to place at least $100 million in state deposits with Massachusetts banks willing to increase their small business lending. The Treasury announced on March 10 that an open, rolling applications process for banks will begin in March and continue through at least September 1, 2011. The Treasury sent official Requests for Qualifications earlier this month to solicit participation from about 200 Massachusetts banks. Those banks selected to participate will enter into a memorandum of understanding (MOU) that will set the terms of their agreement with the Treasury. According to the program guidelines, each MOU will have a 2-year term, subject to the right of renewal by the Treasury for an additional period. The Treasurer, at his discretion, will have the option to extend the duration or increase the amount of funds allocated to the initial phase of the program as needed to successfully meet its objectives. To qualify for the program, a bank must be on the list of banks approved to do business with the Commonwealth of Massachusetts (as maintained by the Division of Banks), have a CRA rating of at least “satisfactory” and be adequately capitalized under the prompt corrective action provisions of the Federal Deposit Insurance Act and the FDIC’s capital regulations. Preference will be given to Massachusetts-chartered institutions. Deposits made to any one institution will not exceed $5 million under the program, and participating banks may accept less than $5 million.

Notes: To verify compliance with the objective of increased small business lending, participating banks will be required to disclose the number and dollar volume of their small business loans at the time the MOU is signed as well as data on those loans’ share of the bank’s overall loan portfolio. Each participating bank will subsequently be required to report qualifying loans to the Treasury on a quarterly basis, disclose publicly the aggregate number and dollar amount of its qualifying loans, compile on a semi-annual basis an analysis of the jobs created as a result of its qualifying loans, and meet with Treasury officials to assess the program results and the bank’s compliance with its terms. A “qualifying loan” for purposes of the program will be a small business loan determined to have resulted from the deposit of state funds in accordance with the MOU. In addition to the qualification criteria described above, participating banks will be expected to offer interest rates on state deposits no lower than the lesser of the prevailing 3-month LIBOR rate or Massachusetts Municipal Deposit Trust (MMDT) overnight rate at the time the MOU is signed. Rates will be adjusted quarterly, and interest earned must be wired to the Treasury quarterly. State deposits must be fully secured by insurance or collateralization, which may be satisfied by membership in the Depositors Insurance Fund or the Share Insurance Fund. In accepting deposits under the program, banks must commit to use the funds to increase their loans to creditworthy small businesses as defined in Section 57 of chapter 23A of the General Laws. Alternatively, banks may define a commercial loan of $500,000 or less as a small business loan.