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TARP Community Development Capital Initiative Update

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.

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Becoming a Certified Community Development Financial Institution and Participation in the Community Development Capital Initiative

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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Treasury Expands TARP Program for CDFI's; Contemplates Private Matching Investments

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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Round 6 of TARP Capital Infusions

On December 23, 2008, the Treasury announced the completion of the sixth round of TARP Capital infusions.  The Treasury purchased a total of approximately $2.8 billion in securities from 49 financial institutions on Friday, December 19, and has now invested in 165 institutions, totaling $170.6 billion.  This leaves approximately $80 billion for the Treasury to invest under the TARP Capital program.

Round six marked the first time that funds were invested in institutions participating under the Treasury’s Non-Public terms.  These “non-public” institutions issued to the Treasury warrants, which the Treasury immediately exercised.  One institution, OneUnited Bank, of Boston, Massachusetts, qualified as a Community Development Financial Institution (a CDFI), eliminating the requirement to issue warrants to the Treasury.

Synovus Financial Corporation of Columbus, Georgia, received the largest infusion of the round, $967.9 million, while Monadnock Bancorp of Petersborough, New Hampshire, received the smallest infusion of the round, $1.8 million.

This round saw five new states, Colorado, Idaho, Iowa, New Hampshire, and Rhode Island,  join the ranks of states whose institutions have received funds under the TARP Capital program.  In total, 41 states and 1 U.S. territory are home to institutions that have received TARP Capital infusions.

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