February 4, 2010

We were briefed last week by the ICBA about its efforts and have been able to find out the following so far about the President's new plan:

• $30 billion dollars transferred from TARP to a new Small Business lending Fund
• The Small Business Lending Fund will allow banks less than $1 billion in assets to receive capital up to 5% or risk-weighted assets; 3% for banks between $1 and $10 billion in assets. The banks would then pay a 5% dividend, but the dividend will drop to as low as 1% if they increase small business lending
•  A 1% decrease on the dividend rate for every 2.5% increase in incremental business lending over a two-year period
  Lending retroactive to January 1, 2010

We are strongly encouraged by the fact that the Independent Community Bankers Association (ICBA) strongly supports this plan, as it appears that this plan is a culmination of the December '09 meeting with the Administration. Assuming the ICBA is in touch with the needs of its membership, this plan appears to meet the Administration's desire to increase small business lending, and the community banks need to raise capital without the restrictions under the existing TARP program. By creating a new program and tying it to increased small business lending, it avoids the perception of another bank bailout.

Increasing small business lending by 10% based on a 2008-2009 baseline should be a drop-kick for banks that embrace the SBA lending programs. So, in effect, it is capital that pays a 1% dividend. In addition, the Administration cannot make SBA lending any more attractive than it is today without creating a perverse incentive to make bad loans. Arguably, we are already at that point since a bank can make a 7(a) loan with a 90% guarantee and sell its guaranteed portion at a premium as high at 110%.

A key provision is whether this program is only available to Camel 1 and Camel 2-rated banks. Many of the most active SBA lenders are under huge regulatory scrutiny right now. While the SBA is telling them to keep making new loans, the FDIC is singing a different tune. If it is only available for the strongest banks, it may not achieve its stated purpose.

This initiative does nothing to directly help community banks rid their balance sheets of their problem assets, which we believe is the single reason why banks have curtailed lending. However, if they are able to raise capital, banks are in a better position to begin moving these assets off their balance sheets. We would like to see some regulatory help to allow banks to shed their legacy assets, while spreading the capital hit over a longer period of time.

We remain cautiously optimistic and await Congressional action.

Jon Winick
President
Clark Street Capital Management, LLC