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.

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.

One hundred and eleven, or 58%, of recipients to date have received individual disbursements of $10 million or less, averaging $5.28 million each. Only one-third of these smaller recipients used SBLF investment to redeem TARP funds.

As we have noted, recipient institutions have been well-capitalized and have generally had NPAs between 1-3%.  Only time will tell whether SBLF investment into such institutions will translate into increased small business lending and job creation.

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.

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.

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.

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.

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.

The investment vehicles, which could take the form of preferred stock, equity equivalent capital or debt, would have a ten-year repayment schedule and carry interest, an element proponents say will lead to taxpayer profit in the long run. To incentivize the use of this capital for small business lending, the dividend payments owed to the government on its investment would decrease with increasing use of the funds for such purposes.  Specifically, Section 3103(d)(4)(A) of the bill provides for an adjustment to the payable dividend rate within the first two years of the government’s investment from an initial 5 percent to as little as 1 percent.  That decrease would be triggered by a 10% or more increase in the bank’s small business lending during that period.  Smaller, incremental reductions are also contemplated.  Changes would be measured against the bank’s average amount of “small business lending” during the four quarters immediately prior to the bill’s enactment, minus adjustments for small business loan chargeoffs and gains due to merger, acquisition, or purchase.  Under the bill, “small business lending” generally includes all commercial, industrial, and agricultural loans for less than $10 million except any loan to a business with more than $50 million in revenues.

Institutions with less than $1 billion in assets would be limited to a capital infusion not greater than 5 percent of risk-weighted assets, less any TARP investment.  The cap would be 3 percent, less TARP funds, for the larger eligible banks ($1-10 billion).  Holding company limits would be based on consolidated asset totals.  Any funds could generally be used to refinance existing TARP investments, however (i) TARP recipients that are now on the Troubled Bank list would not be eligible for funds, and (ii) TARP recipients are not permitted to refinance if they have missed more than one dividend payment due under the CPP.

Loss Amortization Under the House Bill

Under the version of the bill passed in the House, “eligible” institutions would also be permitted to amortize losses and write-downs.  Accordingly, the capital hits resulting from losses and write-downs could be offset in future periods by future earnings. Importantly, the substitute amendment introduced by Sen. Harry Reid (D-NV) does not contain a comparable provision, the most significant departure from the bill adopted by the House.

Set forth in the House bill’s Section 113, the loss amortization provision would permit banks to amortize or write-down losses on certain OREO and NPAs secured by real estate on a quarterly straight line basis over—depending on measured increases in small business lending—between six and ten years.  Loans eligible for this amortization would be those originated between January 1, 2003 and January 1, 2008.  However, as discussed above, any bank on the FDIC’s Troubled Bank list would be ineligible to amortize losses or write-downs.  Accordingly, even if the Senate ultimately adopted the House provision, troubled institutions would not benefit.

Proponents have attempted to distinguish this specific proposal from the widely available and poorly supervised “forbearances” launched at the failing savings and loan industry in the 1980s.  Added by an amendment sponsored by Rep. Ed Perlmutter (D-Co.), supporters say this GAAP sidestep would have broad-reaching stabilizing effects on the economy at a fraction of the cost of TARP.  However, the ultimate impact would appear to be minimal given the exclusion of currently troubled banks.

Future of the Plan

As Congress considers this plan, regulators and commentators will continue to debate an underlying question:  is weak demand for small business loans the primary explanation for declines in such lending activity?  Other parts of this bill would extend $900 million to state programs encouraging small business lending, and a companion bill increases the permissible tax deduction for small business “start-up” expenses.  Some estimates are that banks could use the proposed fund to leverage up to $300 billion in small business loans.  All together, this proposal should generate an interesting follow-on debate to the “big bank” discussion that has dominated the larger and still-pending Dodd-Frank bill.

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.

First, Section 171(b)(5) fully exempts from the new standards: (1) securities issued to the federal government pursuant to the TARP program prior to October 4, 2010; (2) any Federal Home Loan Bank; and (3) holding companies subject to the Federal Reserve’s policy statement on small bank holding companies (generally, holding companies with less than $500 million in assets).  Importantly, the securities of any small bank holding company not otherwise exempted would become subject to heightened capital standards if its assets grew to beyond $500 million.

Second, Section 171(b)(4)(C) grandfathers securities issued before May 19, 2010 by: (1)  holding companies with less than $15 billion in assets as of December 31, 2009; and (2) by entities that were mutual holding companies as of May 19, 2010.  Pursuant to this grandfather provision, these entities will be able to continue to treat these securities as Tier 1 capital subject to existing Federal Reserve limitations through the life of the securities.

Third, Section 171(b)(4)(B) provides a phase-in for securities issued before May 19, 2010 by issuers that are not eligible for the grandfather provisions discussed above.  For these entities, securities issued prior to May 19, 2010 will become subject to the Dodd Frank Act’s heightened capital requirements over a three-year phase in beginning on January 1, 2013.   Conversely, any securities issued on or after May 19, 2010 will be immediately subject to the Act’s heightened capital standards unless otherwise exempted or grandfathered.

One important aspect of the implementation of these capital standard changes will be left to regulatory discretion:  the specific schedule for the three-year phase-in applicable to larger holding companies.  On the other hand, the reference to the Federal Reserve’s small bank holding company policy statement freezes this agency position “as in effect on May 19, 2010.”  Even if the Fed changes the view it expresses in this statement, this pending statute would arguably preserve going forward the Section 171 exception for holding companies with less than $500 million in assets.

Section 171(b)(6) also commissions a study by the Office of the Comptroller General  on the availability of capital to insured depository institutions with total consolidated assets of $5 billion or less.  The revised Section 171 preserves the requirement that federal banking regulators to develop capital requirements that address systemic risk, including the risk associated with derivative trading and asset concentration. Incorporating a House proposal, Section 165 would authorize the Act’s Financial Stability Oversight Council to impose a 15:1 leverage ratio on banks with $50 billion or more in consolidated assets that, in the view of the Council, pose a grave threat to the financial system.

Separately, the Act’s Section 616 would specifically authorize the Federal Reserve to establish capital requirements for  bank holding companies and other companies that directly or indirectly control banks.  This section would direct the Fed to make these requirements counter-cyclical “so that the amount of capital required to be maintained by a company increases in times of economic expansion and decreases in times of economic contraction, consistent with the safety and soundness of the company.”  This concept is popular with international regulators and would in theory build reserves for financial hardship during more profitable times.  In addition, Section 616 would codify a requirement that bank holding companies as well as other companies in direct or indirect control of FDIC-insured banks act as a “source of strength” in times of financial distress.

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.

In addition, Treasury will still pull the quantitative data from each recipients regulatory filings regardless of whether the institution responses to the Use of Capital Survey.  Accordingly, if an institution don’t respond, it will not be able to supplement the raw financial data with additional commentary.

We believe submitting short responses to the questions, highlighting overall approach without necessarily including substantive quantitative analysis, may be the best course of action.  Early in 2009, we posted commentary on how to demonstrate that a bank is using TARP Capital to lend; that guidance continues to be applicable.

In preparing their responses, recipients could also look at the aggregate SIGTARP survey results on use of funds to get an idea of how others will respond, as well as the individual responses made to SIGTARP.

Additional Information:

• Use of Capital Survey
• Annual Use of Capital Survey – PDF Form Instructions
• Treasury’s Frequently Asked Questions on Use of Capital Survey