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.
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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.
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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.
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On March 23, 2010, the Special Master for TARP Executive Compensation issued a letter to all financial institutions that received TARP CPP funds prior to February 17, 2009. The letter requests compensation data to permit the Special Master to review all bonuses, retention awards and other compensation paid to the institution’s senior executive officers and next 20 most highly-compensated employees from the receipt of TARP CPP funds through February 17, 2009.
In the event the Special Master determines that such compensation is inconsistent with the purposes of TARP or otherwise contrary to the public interest, the Treasury shall seek to negotiate with the TARP CPP recipient and the affected employee for appropriate reimbursements to the federal government.
The review is applicable to all institutions that received TARP assistance prior to February 17, 2009, even if the institution has repaid such funds. Institutions that received TARP assistance after February 17, 2009 are not included in the review. A complete list of the affected TARP institutions is included as an appendix to the Special Master’s letter.
Institutions must confirm receipt of the Special Master’s request no later than April 6, 2010, and must submit the required data and certification not later than April 22, 2010.
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On January 12, 2009, the FDIC issued a Financial Institution Letter, FIL-1-2009, addressing the use of funding from Federal Financial Stability and Guaranty programs. FIL-1-2009 was brought to the attention of one of our financial institution clients that is a pubic reporting company and a TARP recipient, during the course of its annual examination. Based on the guidance in the FIL, we advised the client to document and summarize the data that it had been monitoring on its use of TARP proceeds and also to include a fairly brief discussion summarizing that information in its Annual Report on Form 10-K. This advice is intended to address the suggestion in the FIL that state nonmember banks “summarize such information in published annual reports and financial statements. Including such information in public reports will provide important information for shareholder and public evaluation of participation in these programs.”
If you are a smaller reporting company that has not finalized your 10-K, you should consider adding this disclosure, or perhaps including it elsewhere in public releases or reports. Also, to the extent you have an examination scheduled in the coming weeks and months, be prepared for an inquiry concerning this FIL.
On February 3, 2010, the Treasury Department announced the final terms of the Community Development Capital Initiative (“CDCI”), a new TARP program that will invest lower-cost capital in certified Community Development Financial Institutions (“CDFIs”). A certified CDFI is a financial institution that works in markets that are underserved by traditional financial institutions and is certified by the Department of the Treasury’s CDFI Fund.
In order to become a certified CDFI, an institution must meet each of the following certification criteria:
Primarily Serve One or More of the following CDFI Designated Target Markets
1. Investment area, which includes, but is not limited to, geographic boundaries that (i) have a population poverty rate of at least 20%; (ii) have an unemployment rate 1.5 times the national rate; or (iii) are located within an Empowerment Zone or Enterprise Community.
2. Low-income targeted populations, which are comprised of populations with income of not more than 80% of the metropolitan area median family income, or, for rural areas, not more than the greater of 80% of either the area or statewide non-metropolitan median family income.
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On February 3, 2010, the Treasury Department announced enhancements to the TARP Capital Purchase Program for Community Development Financial Institutions (CDFIs). In addition to significant improvements for CDFIs, for the first time the Treasury Department has formally announced that it will consider private matching investments to determine bank viability – which could be a significant signal of how the Treasury might treat community banks under the proposed $30 billion Small Business Lending Fund.
Basic Program Terms
- CDFI’s can apply for capital equal to up to 5 percent of their total risk weighted assets.
- The dividend rate on the preferred stock will be 2% for eight years (as opposed to 5% for five years under the original Capital Purchase Program) before increasing to 9%.
- CDFI’s with existing TARP Capital Purchase Program investments will be eligible to transfer those investments into this program (effectively lowering the carrying costs of the capital and potentially providing additional capital, if desired).
- Consistent with the previous terms for CDFI’s, CDFI’s will not be required to issue any warrants or other additional equity kickers to the Treasury Department under the program.
Matching Capital
As noted above, for the first time the Treasury Department has formally recognized the possibility of institutions raising matching private capital to become eligible for TARP capital. Specifically, the new plan contemplates that if a CDFI might not otherwise be approved by its regulator, it will be eligible to participate “so long as it can raise enough private capital that – when matched with the Treasury capital up to 5 percent of risk-weighted assets – it can reach viability.” The new private capital will have to be junior to the TARP investment (i.e. common stock or preferred stock with lower preferences – although potentially higher dividend rates – than the TARP preferred stock).
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Carrying through with his announcement in the State of the Union, on February 2, 2010, President Obama provided the outlines of a proposed $30 billion Small Business Lending Fund to provide capital to community banks, with incentives to increase small business lending. As proposed, the program will require Congressional approval to move the funds outside of TARP, which should remove the applicability of the executive compensation and governance restrictions and is also hoped to remove the stigma associated with TARP funds.
Based on the initial fact sheet, the terms appear generally comparable to the financial terms under the Capital Purchase Program, with reductions in the dividend rate for the first five years triggered by increases in small business lending. Every 2.5% increase in small business lending through December 31, 2011 over 2009 levels would trigger a 1% decrease in dividend rate, down to a minimum rate of 1%.
Banks with less than $1 billion in assets would be eligible to receive a capital investment of up to 5% of their risk-weighted assets. Banks with between $1 and $10 billion in assets would be eligible to receive a capital investment of up to 3% of their risk-weighted assets. Participation in the program will require approval by the bank’s primary federal regulator, although no details are available as to the standards that will be employed.
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In his January 27, 2010 State of the Union address, President Obama renewed his call for using some of the TARP money for community banks in an effort to drive small business lending.
So tonight, I’m proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat.
This proposal would be consistent with President Obama’s speech last October in which he stated the broad outlines of a new program to provide additional capital to community banks in an effort to spur lending to smaller business, as well as Secretary Geithner’s extension of the TARP program.
We understand that government officials have indicated that additional details on the program will be rolled out by Treasury officials in the coming days. We have previously analyzed the known terms of such an expansion, based on the guidance provided last October.
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