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