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The Bank Account’s Introduction to the Paycheck Protection Program

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Joining all the (far more) popular podcasts, The Bank Account is now recording from the host’s home. This episode features Partners Karen Fries and Mike Royle joining me in a presentation about the basic terms of the SBA’s small business forgivable loan program, the Paycheck Protection Program.

As the Paycheck Protection Program is changing rapidly, it’s important to note that guts of this presentation were recorded on April 9, 2020. While the funds have currently been exhausted for new PPP loans (pending Congress deciding when and how to allocate additional funds), the key terms of the loans and the forgiveness functions discussed in this podcast episode remain accurate, at the least as of the time of posting.

While our initial approach was going to be to engage in a debate on the merits of this practice, none of us ultimately wanted to take the side of justifying the practice; for different reasons, many of which are expressed on the podcast, we all believe that it is a bad idea for bank directors to personally approve loans.

For those interested in hearing more information about the Paycheck Protection Program in audio form, I highly recommend the Big Small Business Rescue from Planet Money. And if you’re craving more content, and prefer the last financial crisis, I’d also suggest the FDIC “podcast” on the 2008 financial crisis.

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SBA PPP Loan Approval Statistics

From launch of the Paycheck Protection Program on April 3, 2020 through the exhaustion of the originally committed funds on April 16, 2020, 4,975 lenders approved loans to over 1.6 million small businesses for over $342 billion. On April 17, the SBA published a Paycheck Protection Program Report with additional statistics on the approved PPP loans.

Excluding weekends (which probably isn’t fair, as I know a lot of bankers that worked non-stop the last two weekends), this amounts to over 160,000 applications approved each day, or more than $34 billion in loan proceeds each day.

The Report indicates the overall average loan size approved was $206,000. Assuming each applicant applied for the maximum PPP loan it was entitled to, this indicates that the average applicant’s monthly payroll costs were approximately $82,400.

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SBA PPP Eligibility Requirements

The SBA has made clear that businesses with 500 or fewer employees can apply for PPP funds, with certain exceptions. The number of employees for a business is generally determined by the average number of people employed for each pay period over the business’s latest 12 calendar months. For this determination, any person on the payroll must be included as one employee regardless of hours worked or temporary status.

However, for businesses with greater than 500 employees, there are still three possible ways qualify for PPP funds. This post analyzes the three additional methods for a business to qualify for PPP funds, based on the latest guidance from the SBA as of April 15, 2020.

Method 1: SBA Employee-Based Size Standards

Under the CARES Act, the SBA requires borrowers to have 500 or fewer employees or the number of employees specified per the SBA’s Size Standards table. Thus, a business with greater than 500 employees may still be eligible if it meets applicable SBA employee-based size standards for its primary industry. A business’s primary industry is denoted by its North American Industry Classification System (NAICS) Code. A list of all NAICS codes is available here.

For example, a business in the in the primary industry of natural gas extraction (NAICS Code 211130) with 1,000 employees would still be eligible for PPP funds because the applicable SBA employee-based size standard is 1,250.

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SBA PPP April 14 Interim Final Rule Guidance

On April 14, 2020, the SBA published an interim final rule that provides additional guidance regarding topics of confusion among both Payroll Protection Program (“PPP”) lenders and borrowers. This new rule supplements the first interim final rule, which was issued by the SBA on April 2, 2020, and specifically addresses the eligibility of self-employed individuals, partnerships, director-owned businesses, and legal gambling businesses. This post covers the updates detailed in the new interim final rule, based on the latest guidance from the SBA as of April 16, 2020.

Self-Employed Individuals

Eligibility

The new interim final rule makes clear that an individual may be eligible for a PPP loan if the individual:

  1. was in operation as a business on February 15, 2020;
  2. is an individual with self-employment income (such as an independent contractor or a sole proprietor);
  3. has a principal place of residence in the United States; and
  4. filed or will file a Form 1040 Schedule C for 2019.

The SBA has communicated that it will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.

We note that individuals should be aware that participation in the PPP may affect eligibility for state-administered unemployment compensation or unemployment assistance programs.

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TARP Exit Ramp for Community Banks: The SBLF

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.

 

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Small Business Lending Fund Map and Review

New investment under the Small Business Lending Fund ended on September 27, 2011, in accordance with its enabling legislation.  In the end, 332 institutions received over $4 billion in SBLF funds, and Treasury closed 97 deals worth $1 billion in the program’s final week of investment.  We have previously noted that recipient institutions were generally well-capitalized with low levels of non-performing assets.  While Treasury has published a version, we have developed our own interactive map of SBLF recipients:

Phoenix-based Western Alliance Bancorporation received the largest single investment under the program ($141 million).  More recipients were based in California (29) than anywhere else.  Only four entities based in Georgia received funding.  As one of those, Appalachian Community Enterprises, Inc., is a Community Development Loan Fund (CDLF), only three Georgia headquartered banks (two state-chartered and one national charter) received funding under the SBLF.

Pennsylvania entities did well under the program (23 recipients).  Pennsylvania had 208 FDIC-insured institutions reporting a total of $202 billion in total assets as of June 30, 2011 (compared to 246 institutions and $265 billion in total assets in Georgia).  While 73 Georgia banks have been closed since late 2000, only six Pennsylvania institutions have been closed during this time.  Pennsylvania has generally not faced the real estate-related asset quality problems that continue to plague many states.  In Florida, however, where 59 banks have failed since 2000, seventeen entities received SBLF funding. 

In that light, it is not clear to us why only three Georgia headquartered banks received SBLF funds. Based on Commissioner Braswell’s letter to Treasury Secretary Geithner, it may not be clear to anyone other than the Treasury.

In testimony before the Senate Small Business Committee on October 18, 2011, Geithner maintained that the SBLF has been a success.  Geithner argued that there were two reasons only $4 billion of the allocated $30 billion fund was disbursed:  (1) banks applied for only one-third of the available funds and (2) one-half of those that applied were not eligible to receive funding.

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Treasury Scrambles to Close SBLF Investments

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.

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A Statistical Look at SBLF Recipients To Date

On August 3, 2011, the Treasury released an updated transactions report that reflects a third round of Small Business Lending Fund (SBLF) disbursements.  To date, Treasury has invested over $590 million in 43 SBLF participants, an average investment of $13.7 million.  The largest single investment remains a $56.6 million boost for Eagle Bancorp, Inc., of Maryland.  Of the 43 investments thus far, 30 (70%) have been $15 million or less.  At least ten recipients, however, have been stand-alone banks or thrifts with less than $200 million in total assets (including Michigan-based Huron Valley State Bank with roughly $60 million in total assets as of March 31, 2011).

Twenty-four of the forty-three recipients (56%) have been CPP or CDCI participants that had outstanding investment from those programs as of December 16, 2010. 

Three of the recipients to date have been based in Alabama and two have been from Florida, while no disbursements have yet been made to entities based in Georgia, South Carolina, North Carolina, Tennessee, or Mississippi.  Top states have been California (5) and Pennsylvania (5).  Two recipients are based in Nebraska.

Asset quality is not surprisingly in pristine condition among recipient banks.  Non-performing assets as a percentage of total assets (NPAs) have generally been between 1-3%.  To our knowledge, no recipient had NPAs of more than 4% as of June 30, 2011. 

In addition, no recipient so far had a March 31, 2011 Tier 1 leverage ratio of less than 7.0% and only two had a Tier 1 risk-based capital ratio on that date of less than 10%.  The average March 31, 2011 Tier 1 leverage and risk-based capital ratios among recipients to date are 10.0% and 13.3%, respectively. 

We hope to see further use of the $30 billion SBLF pool in the coming weeks.  Based on our experience, we note that the SBLF closing process is tracking CPP/CDCI investments in at least two ways:  form-driven documentation with little room for negotiation and an aggressive closing timetable.  The Treasury’s authority to make SBLF investment expires on September 27, 2011.

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First SBLF Disbursements Announced

On Thursday, July 7, 2011, Treasury announced that two community banks and four holding companies have received the first $123 million in capital disbursements under the Small Business Lending Fund (SBLF).  The investments closed between June 21 and July 6, according to Treasury’s SBLF Transactions Report, and involved the following participants and amounts:

  • Community Trust Financial Corporation (Ruston, Louisiana) – $48.3 million
  • Level One Bancorp, Inc (Farmington Hills, Michigan) – $11.3 million
  • Pioneer Bank, SSB (Drippings Springs, Texas) – $3.0 million
  • ServisFirst Bancshares Inc. (Birmingham, Alabama) – $40.0 million
  • U&I Financial Corp (Lynnwood, Washington) – $5.5 million
  • Virginia Heritage Bank (Fairfax, Virginia) – $15.3 million

Treasury promises additional disbursement announcements in coming weeks.  As for the first wave of funding, the largest investment of $48.3 million was made in Community Trust Financial Corporation, Ruston, Louisiana, the $1.89 billion-holding company for the Louisiana-chartered Community Trust Bank.  This is also the only CPP/CDCI participant among the first-wave SBLF recipients.  At the other end of the spectrum, Pioneer Bank, SSB, a $106 million-Texas thrift, received $3 million.

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California Holding Company Announces SBLF Approval

First California Financial Group, Inc., Westlake Village, CA, holding company for the $1.8 billion First California Bank, announced last night that it has been approved to receive SBLF funding, “subject to the Treasury’s customary due diligence and closing conditions.”  According to the company’s press release, it expects to close within the next 30 days and will use the funds to refinance $25 million in CPP investment.  While no funds have been disbursed, we are aware of several similar preliminary approvals that have been issued within the last week.  The Treasury has stated that it will publish an online list of participating institutions on a rolling basis as funds are disbursed.

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