On December 9, 2009, Treasury Secretary Geithner exercised his discretion to extend the TARP program through October 3, 2010.  In his letter to Congress certifying the extension, Geithner indicated that the Treasury Department would limit new commitments in 2010 to three areas:

• mitigating foreclosure;
• “recently launched initiatives to provide capital to small and community banks, which are important sources of credit for small businesses”  (including additional efforts to facilitate small business lending); and
• increasing Treasury’s commitment to the Term Asset-Backed Securities Loan Facility (TALF).

The “recently launched initiatives to provide capital to small and community banks, which are important sources of credit for small businesses” presumably refers to the new capital program for community banks previously announced by President Obama on October 21, 2009. President Obama had indicated that the Treasury would be developing a program to provide TARP capital to community banks with less than $1 billion in total assets who committed to increase small business lending.  The capital investment, as proposed, would be limited to 2% of risk-weighted assets and would carry a 3% dividend rate for the first five years.  No indications were provided that the Treasury’s viability standard would be modified to permit additional banks to participate.

Secretary Geithner’s reference to this program is the first follow-up we’ve heard since Obama’s announcement.  As recently as last week, local FDIC officials were telling us that the program appeared to be “dead on arrival” in DC, and there appeared to be little support in Washington for further developments.  We understand the FDIC was advising interested banks to not anticipate any further action, and to seek capital elsewhere.

It remains to be seen whether Secretary Geithner’s letter to Congress represents a renewed interest in this program, merely a political statement indicating a focus on small business lending, or a simple preservation of flexibility going forward.

On October 21, 2009, President Obama announced the broad outlines of a new program to provide additional capital to community banks in an effort to spur lending to smaller business.

Actual facts about the new program are currently very sparse.  A review of the currently available information does provide some details that may be attractive to community banks that current have TARP CPP funds, as well as those that currently do not have funds.  However, it does not appear that there will be any change in the Treasury’s determination of which community banks are eligible for TARP funds; participating institutions appear to still need to be viable without the funds.

There are three basic sources of official information:

1. the text of President Obama’s speech in Landover, Maryland;
2. the press release announcing the speech; and
3. a fact sheet on the President’s Small Business Lending Initiatives.

Known Facts

• The funds will be available to “viable banks with less than $1 billion in assets.”  The announcement does not give any indication that the Treasury will alter its existing viability standards.
• Participants will be required to submit a small business lending plan explaining how the additional capital will allow them to increase lending to small businesses, and will be required to submit quarterly reports detailing their small business lending activities.
• The initial dividend rate will be 3% rather than the 5% required under the current TARP Capital Purchase Program.  The dividend will rise to 9% after five years, consistent with the existing TARP Capital Purchase Program.  Presumably, Subchapter S institutions will receive a comparable reduction in the rate paid on the subordinated debt.
• The amount of capital is limited to 2% or the institution’s risk-weighted assets.  This is less than the 3% permitted under the existing TARP Capital Purchase Program, and less than the 5% currently permitted for institutions that are less than $500 million in total assets.
• The Treasury is working to finalize program terms “in the coming weeks.”
• The Treasury will also determine how to handle existing Capital Purchase Program participants to allow them to replace existing capital with investments under the new program (effectively reducing their dividend costs in exchange for a commitment to increase small business lending).
• Community Development Financial Institutions (CDFIs), including CDFI credit unions, will be able to apply for funds with a dividend rate of 2% for eight years, after which it will increase to 9%.

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On May 21, 2009, the Treasury Department (without any fanfare) published a FAQ on the expansion of the TARP Capital Purchase Program for small community banks.  The FAQ expands slightly on Secretary Geithner’s remarks to the ICBA announcing the expansion.

Highlights of the FAQ include:

• Available to banks with less than $500 million in total assets (inclusive of all subsidiary banks for multiple bank holding companies);
• Deadline to apply is November 21, 2009;
• Maximum Capital Purchase Program investment is 5% of risk weighted assets;
• Institutions that currently have preliminary approval for 3% can seek expedited approval to receive up to 5%;
• No additional warrants need be issued beyond the warrants required for the investment of up to 3% of risk weighted assets; and
• Institutions will have six months from preliminary approval (but no later than December 31, 2009) to decide whether or not to accept the investment.

The front cover of the May 17, 2009 issue of the New York Times Magazine asked “Are Small Banks the Future?“  As noted in the article, lending may have slowed at the largest banks, but at the other end of the financial system, there are 8,500 community banks, and most remain very strong.

In the midst of the worst banking crisis since the Great Depression, community banks have generally fared well. That’s because they typically shunned the lending practices that led to high default rates. They rarely participated in the securitization of loans, credit-default swaps and other overvalued financial products that put the global financial system in crisis. Instead, they stuck to the fundamentals. They considered the character and history of their borrowers. They required collateral. Without community banks, the current financial crisis would be a lot worse.

The focus of the mainstreet press, and the Treasury Department, continues to be on the largest institutions, whether it be the initial nine TARP Capital recipients, or the nineteen that underwent the stress test.  There is some rationality for this focus, the majority of assets, deposits and loans are held by these institutions.  But just like small businesses generally, community banks play a critical role in the American economy.

Community banks may have weathered the current crisis better than larger banks, but they remain an American oddity. Most other countries have 5 or 10 na­tional banks, and when they get in trouble, as they did in Iceland, it can be devastating. The balance in this country is tipped toward big institutions (the four largest control half the assets held by American banks and 40 percent of all deposits), but community banks still make 43 percent of all small business loans under $1 million. Since January 2008, fewer than 1 percent of all community banks have failed.