Only about 1 % of principal repayment to Treasury through 2011 under the TARP Capital Purchase Program (CPP) was the result of SBLF refinancing, according to latest Quarterly Report to Congress issued by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). Though the lion’s share of Treasury’s $4 billion investment under the Small Business Lending Fund was used for this purpose, the figure constitutes only a fraction of the $186 billion in CPP principal repaid thus far. About $20 billion in CPP securities remains outstanding.
The rest of the story is that the smaller CPP participants have been much slower to repay CPP obligations, and the SBLF was a major boost for those institutions. In all, 137 institutions exited TARP by refinancing their outstanding CPP investment using SBLF funds. Through December 31, 2011, 279 banks in all had exited the CPP program either by fully repaying CPP or by virtue of Treasury’s having sold the institution’s stock. So roughly half of all exits from the CPP – the first investments under which took place in 2008 – occurred during the three months of SBLF infusion in 2011. In contrast, by the middle of 2009, ten of the largest CPP participants had already repaid $68 billion worth of Treasury investment.
The average SBLF participant exiting the CPP program used $16 million in SBLF funds to refinance CPP obligations. Compare that to the median CPP investment among the 707 recipients under that program – $10.3 million - and you can see how the SBLF closed out very little of Treasury’s overall CPP investment but was the single most successful community bank TARP exit strategy to date.
Meanwhile, Treasury continues to make its case that the SBLF has also increased small business lending among participants – $3.5 billion (September 30, 2011) over a $35.9 billion baseline (the average for the four quarters ending June 30, 2010) – or about $10 million per bank. The average SBLF recipient (332 recipients in all) received $12 million.
On September 14, 2011, Treasury announced additional disbursements under the Small Business Lending Fund (SBLF). Total funding through the date of this release totals $2.38 billion to 191 institutions. This is not even 10% of the $30 billion authorized under the program. Treasury has stated in a whitepaper that 932 institutions ultimately applied for $11.8 billion in SBLF funding and that, as of September 1, it had issued preliminary approvals to all eligible and qualified applicants, 382 institutions in all for a total of $4.3 billion. Best case, then, Treasury expects to utilize only about 14% of the total SBLF pot but one-third of the funds requested.
The figures in Treasury’s whitepaper suggest that there will be a rash of SBLF closings in the next ten days. Under its enabling legislation, all SBLF disbursement must be made by September 27. The number of disbursements to date (191) is exactly half of the number of outstanding preliminary approvals (382). This will continue in dramatic fashion the exponential increase in the number of closings since the first wave (June (4), July (39), August (87), and September to date (61)).
The program remains a boon for Pennsylvania, home to the greatest number of SBLF recipients (16 institutions taking in an average of $10.4 million, eight of which used SBLF investment to redeem TARP funds). California, Illinois, and Texas each host 13 recipient institutions. By dollar amount, Illinois entities have enjoyed the most SBLF investment ($173 million, including the largest single investment under the program, $72.664 million to TARP-participant First Busey Corporation, parent to Busey Bank, Champaign, IL). Forty-one institutions in the Southeast have received funding so far (Alabama – 3, Arkansas – 3, Florida – 9, Georgia – 3, Louisiana – 5, Mississippi – 1, North Carolina – 3, South Carolina – 3, and Tennessee – 11).
The top twenty-five SBLF recipients have received $800 million through the program. Twenty-one of these (84%) used SBLF investment to redeem TARP funds and received an average injection of $38 million. While in all, 89 of the 191 SBLF recipients thus far (47%) have used this capital to redeem TARP funds, these recipients have received 63% of the dollars disbursed under the program.
Treasury is currently recruiting unpaid summer interns to help administer the Small Business Lending Fund (SBLF). Qualified undergraduate and graduate student volunteers “will be working closely with investment managers on the SBLF’s Application Review Team and will be expected to make a meaningful contribution to the program.”
While we are all happy to see Treasury develop talent and conserve its resources, we think this may send the wrong message. At a time when Subchapter S and mutual application guidelines are still unpublished, and over 600 SBLF applicants (all “healthy” and in a position to increase lending to America’s small businesses) are still waiting for disbursement of funds in “early 2011,” we would much rather be hearing about additional paid staffers who can actually get the program implemented. We wonder whether the added responsibility of training and supervising interns will improve existing personnel’s ability to roll out the SBLF.
On the other hand, perhaps the interns can provide the program with the spark it needs. Just don’t tell them about Senator Snowe’s plan to ruin their summer, too.
Senator Olympia Snowe (R-Maine) has introduced an amendment to the enabling legislation for the Small Business Lending Fund (SBLF) that would disqualify TARP recipients from receiving SBLF investment, move the program’s small business lending benchmark from the current four quarters ending June 30, 2010 to the calendar year 2007, establish a non-discretionary 10-year repayment deadline, and sunset the entire fund in 15 years. As drafted, however, investments made under the SBLF’s current terms would not be affected. That may give greater import to the recently extended application deadline for C corporation banks. The current version of the proposed amendment, SB 681, is available here. Senator Snowe says she would like to do away with the SBLF entirely but that her proposed “fixes” are more politically realistic.
Clearly these changes, if enacted, would make a limited program even more limited. Much of the interest among SBLF applicants to date has been from CPP/CDCI recipients looking to refinance TARP funds. In addition, while Snowe’s press release says moving the lending benchmark date back to 2007 “would address concerns that the existing [June 30, 2010] benchmark may be too low, by historical standards, and that an adjustment could result in additional small business lending,” the SBA’s 2011 report on small business lending (which is based on Call Report data) shows that such lending was $18 billion greater in 2010 than in 2006 and $50 billion greater in 2010 than in 2005.
We do not think this bill stands a substantial chance of passage as a standalone measure, although its attachment to the pending Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Reauthorization Act, as Snowe has also proposed, could give it a different outlook. The vote on the current SBLF legislation was sharply divided along party lines, with only two Senate Republicans in support (Voinovich-OH and LeMeiux-FL). We doubt Snowe will be able to gather bipartisan support in an election year for a measure that would hurt both small businesses and community banks in one fell swoop.
On March 30, 2011, Treasury announced that it was extending the deadline for C corporation banks to apply for participation in the Small Business Lending Fund (SBLF) program to May 16, 2011. Previously, this deadline had been established as March 31, 2011. According to the SBLF website, Treasury is still developing terms and guidance for mutual institutions, Subchapter S corporations, and community development loan funds. The site maintains that terms for such institutions and funds may vary from those currently published and that separate application dates will apply.
We have previously described the SBLF application requirements for C corporations, which are otherwise unchanged. As a reminder, eligible institutions must generally have had less than $10 billion in consolidated assets as of 12/31/09 and a composite CAMELS rating of 3 or better. In addition, any institution intending to refinance its TARP obligations with SBLF funds: (i) must be compliant with the material terms and covenants under its CPP/CDCI agreement; (ii) must be current in its dividend payments to Treasury; (iii) can’t have missed (i.e., can’t have been 60 days or more delinquent in) more than one dividend payment; and (iv) must fully refinance or repay its CPP or CDCI investment.
For banks that may still be considering applying for SBLF funds, we have had considerable experience with the application process and provide these general guidelines and anecdotal experience:
- Processing time is still an unknown. Even our clients that applied very early on in the program are still awaiting meaningful feedback. We understand that, to date, Treasury has received around 600 SBLF applications. Treasury previously announced that processing time would vary by applicant but that disbursement of funds would begin in “early 2011.” We are unaware of any disbursements thus far or how Treasury defines “early.”
- Interest from our Sub-S clients has been great, and we hope that Treasury will soon release application details applicable to such corporations.
- Most applicants of which we are aware have been TARP participants looking to refinance those obligations, but the program has some limitations in this respect even for very healthy banks. An SBLF investment is capped at 5% of risk-weighted assets for institutions with $1 billion or less in total assets and 3% of risk-weighted assets for institutions with more than $1 billion but less than $10 billion in total assets. At the same time, capital outstanding from prior CPP/CDCI investments will be deducted from these limits but must be used to repay a bank’s obligations under those programs, and SBLF participants must either repay or refinance outstanding TARP securities. Moreover, although total assets are measured as of the end of the fourth quarter of 2009, risk-weighted assets are measured as reported in the bank’s most recent Call Report. At least one of our clients hoped to refinance TARP funds through the SBLF but ran into a size trap here; it had declined in asset size since the end of 2009 such that its maximum SBLF investment would have been insufficient to refinance its TARP funds. As a result, it is unable to participate in the SBLF program.
- As we saw with TARP, we have seen certain SBLF applicants come under increased supervisory scrutiny possibly as a result of their SBLF applications. Applicants should be prepared for possible regulatory review beyond the contents of their application.
We will continue to follow the evolution of the SBLF and will post updates here as appropriate. In particular, we are monitoring the pending proposal by Senator Olympia Snowe (R-Maine) to amend the SBLF (and in short, make a limited program even more limited). If you have further questions about the program, please contact Katherine Koops, BT Atkinson, Barry Hester or any other member of the Bryan Cave Financial Institutions practice.
On March 30, 2011, the Treasury announced that the TARP Capital Purchase Program has now generated more money for taxpayers than it originally cost. Through March 30, 2011, the Treasury had collected, on behalf of the U.S. taxpayers, over$251 billion from the financial institutions that Treasury invested in through repayments, dividends, interest, and other income.
This exceeds the original investment Treasury made in these banks by approximately $6 billion, and Treasury currently estimates that the bank programs under TARP will ultimately provide a lifetime profit of approximately $20 billion to taxpayers.
We have attempted to emphasize the investment nature of the Capital Purchase Program since 2008, but the term “bailout” helps sell papers and has generally stuck. As we noted on October 30, 2008:
The emphasis should be on supporting the Government’s program to strengthen the entire banking system in order to enable banks to continue supporting their local community through this economic downturn. The program is designed to earn a return for the Government (and thus the taxpayer), and is thus not a “bail-out” at all.
Perhaps now that the Treasury has already recognized a positive return on its investment, the mainstream press (and the public generally) may begin to accept that TARP should not have been a four letter word.
Based on reports, we understand that previously certified Community Development Financial Institutions (CDFIs) have begun to receive approval to participate in the Community Development Capital Initiative (CDCI) Exchange Program. We have also received information that bank regulators and the Treasury Department are currently reviewing CDCI applications for additional capital, submitted by certified CDFIs, and decisions on such applications are forthcoming. At this time, however, we have not received any information on the progress of the CDFI certification process nor the CDCI application process for previously non-certified CDFIs.
On June 29, 2010, the Senate voted to commence debate on the Small Business Jobs and Credit Act of 2010, a bill passed by the House on June 17, 2010 which includes a $30 billion fund for small business lending through the provision of capital to community banks. This legislation would implement the program described in President Obama’s State of the Union address earlier this year. Obama has promoted the program by saying that it “takes money repaid by Wall Street banks to provide capital for community banks on Main Street” that can in turn help small businesses create jobs. In the latest version of the bill presented to the Senate, certain banks with less than $10 billion in assets would be eligible for government infusions of capital, dividend payments on which would decrease with increasing levels of small business lending. Banks are also generally permitted to use this capital to refinance existing TARP obligations. The substitute amendment currently before the Senate cuts out a provision of the House bill to permit eligible banks to amortize recent real estate loan losses over as many as 10 years.
The original Obama proposal called on Congress to transfer TARP money to create the fund, but the fund has evolved as a completely separate initiative. Acknowledging this possible confusion, Section 3111(a) of the bill specifically provides that the fund “is established as separate and distinct from the Troubled Asset Relief Program established by the Emergency Economic Stabilization Act of 2008” and that an institution “shall not, by virtue of a capital investment under the Small Business Lending Fund Program, be considered a recipient of the Troubled Asset Relief Program.” Proponents continue the political battle to detach this potentially negative association from a bill that would target recovery on Main Street.
The Small Business Lending Fund
Title III of the bill currently before the Senate establishes the fund and authorizes the government to make up to $30 billion in capital investments into eligible institutions. These investments would be similar to TARP infusions but would not result in executive compensation and other restrictions. Banks up to $10 billion in assets would generally be eligible to apply for funding. However, the Small Business Lending Fund will not be a source of capital for the banks most in need of additional capital. Banks on the FDIC’s Troubled Bank List (generally those with composite CAMELS ratings of 4 or 5) would be ineligible to participate. As with the Capital Purchase Program, the program is designed to provide assistance to otherwise healthy institutions. Each institution’s primary federal banking regulator will continue to have a significant say in whether the institution should receive any funds under the Small Business Lending Fund.
After the dust settled on the work of the financial reform bill’s conference committee, Section 171 — the capital treatment provisions added by Senator Susan Collins (R-Maine) — grandfathers securities previously issued by small and mid-size bank and thrift holding companies and otherwise phases in the heightened standards. In addition, the Federal Reserve’s small bank holding company policy statement (applicable to holding companies with less than $500 million in consolidated assets) is preserved. Accordingly, the Dodd Frank Act will not impact small bank holding companies so long as they remain under $500 million in consolidated assets. Other provisions of the Act regulate systemic risk and direct the Fed to establish counter-cyclical capital requirements and to force holding companies to act as a “source of strength” for subsidiary banks.
The amended Section 171 avoids placing significant and untimely capital needs on community banks. Although we do not expect further debate on this or any other provision of the Dodd Frank Act, the reconciled bill still needs to pass both houses of Congress and be signed by the President in order to become law.
The conference report does not modify the basic policy change proposed by Senator Collins — to subject holding companies to capital requirements at least as stringent as those applicable to banks. As we have discussed, this shift would exclude trust preferred securities and TARP CPP Preferred Stock from holding company tier 1 capital totals. The impact of this change cannot be understated since banks are already struggling to retire trust preferred obligations and to generally raise capital. However, the conference committee has significantly softened the impact via grandfather provisions, blanket exemptions and transition periods.
The Treasury Department is conducting a survey on how all TARP CPP recipients used the capital provided by TARP during 2009. Specifically, the Treasury is seeking to collect information to understand what actions institutions took, or were able to avoid taking, because of CPP funding. In addition to collecting feedback through the surveys, the Treasury will also publish summary balance sheet and income statement information from each institution’s regulatory filings.
Survey responses are due Thursday, April 15, 2010.
While responding to the survey is not required under the TARP CPP agreements or regulations, banks failing to respond are likely subject to possible criticism from their primary regulator. For example, FIL-1-2009 encourages state non-member banks to document how the CPP funds were used and encourages summarizing such information in public documents. While the Use of Capital Survey is not explicitly listed, FDIC examiners may take the failure to respond as an affront to their regulatory guidance.