On February 5, 2010, the federal banking regulators and the Conference of State Bank Supervisors issued an Interagency Statement on the Credit Needs of Creditworthy Small Business Borrowers. The Statement builds upon principles set forth in the October 2009 Policy Statement on Prudent Commercial Real Estate Loan Workouts. After noting the overall decline in loans to small businesses and the reasons for that decline the regulators suggested that lenders may have become overly cautious with respect to small business lending. They encourage lenders to engage in prudent small business lending and that that examiners will not criticize lenders for working in prudent and constructive manner with small businesses.
The decline in small business lending has many reasons, not the least of which is that loan demand is actually down. Lenders are also naturally cautious of lending to those businesses that are reliant solely on cash flow that has slowed due to the slowdown in consumer spending and the decline ion the personal wealth of the owners of the businesses. Despite the assertions to the contrary by the regulators, lenders are concerned that there is a disconnect between statements from Washington, DC and what actually happens in the field when examiners are onsite at financial institutions. Our experience seems to show that local federal regulators do not see any upside in being flexible when faced with making decisions about how to rate credits. Lenders are therefore naturally reluctant to maker decisions based on guidance until they see it actually implemented on the ground.
January Unemployment Numbers Released
On Friday, the U.S. Department of Labor released its monthly report showing that the unemployment rate unexpectedly declined in January to 9.7% from an unrevised 10% in December. However, nonfarm payrolls fell by 20,000 compared with a revised 150,000 decline in December. The two statistics are generated by different surveys, which explains how the unemployment rate improved despite a net loss of jobs. Jobs numbers are generated by surveying employers, while the unemployment rate is derived from a household survey.
Senate Financial Regulatory Bill
Senate Banking Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) have reached an impasse during their negotiations over the Senate’s financial regulatory reform bill. Dodd and Shelby conducted a meeting Thursday that they had hoped could result in progress toward releasing a bipartisan bill. The primary point of contention between Dodd and Shelby continues to be over a possible new consumer regulatory agency. Dodd announced on Friday that he is forging ahead without Shelby and will release a draft bill later this month with the hope of gaining Republican support later in the process.
Volcker Testifies Before Senate Banking Committee
On Tuesday, White House Economic Advisor Paul Volcker testified before the Senate Banking Committee regarding his plan to decouple what he calls “proprietary and speculative activities” from traditional banking activities. During his testimony, Volcker stated “hedge funds, private equity funds, and trading activities unrelated to customer needs and continuing banking relationships should stand on their own.” During the hearing Chairman Dodd expressed frustration about the timeliness of Volcker’s proposal in relation to the Committee’s work on the legislation. Following the hearing, sources indicated that Dodd is likely to drop or change many of the recommendations in the proposed Volcker rule.
IRS Announces New Section 409A Document Correction Program
Section 409A of the Internal Revenue Code of 1986, as amended (“Code Section 409A”) is spectacular in scope and notoriously difficult for even the most well-intentioned employers to satisfy. Any employer which maintains non-qualified deferred compensation plans for its employees has struggled with Code Section 409A, and may have concerns that some of its plans might not satisfy the attention to minutiae that Code Section 409A demands. On January 4, the IRS published its long-awaited program for correcting documentation failures under Code Section 409A.
For more information, please read the client alert published by Bryan Cave LLP’s Employee Benefits and Executive Compensation Practice on January 22, 2010.
Major Campaign Finance Development – Citizens United v. FEC Supreme Court Ruling
The Supreme Court yesterday handed down a landmark ruling in the Citizens United v. FEC case which could significantly transform the campaign finance system at the federal level. In Citizens United, the Supreme Court in a 5-4 ruling struck down the decades-old prohibition on corporate expenditures in connection with federal elections as unconstitutional under the First Amendment.
For more information, please read the client alert published by Bryan Cave LLP’s Election Law and Government Ethics Practice on January 22, 2010.
With attorneys and staff worldwide, attorneys in Bryan Cave’s financial institutions practice often make the news. Sometimes media mentions highlight the firm’s involvement with notable clients, sometimes the individual accomplishments of attorneys and staff. Recent media mentions include:
Blanchard in Atlanta Business Chronicle, Florida Business Journals
Atlanta Partner Gerald Blanchard was quoted Jan. 13 in the Atlanta Business Chronicle regarding Troubled Asset Relief Program (TARP) funds and how most TARP recipients have, in fact, repaid their debts with interest. He also was quoted Jan. 6 in the Palm Beach Daily Business Review (republished in the Miami Daily Business Review) on how new banking regulations out of DC could affect small community banks’ ability to lend money.
Klingler in U.S. Banker
Atlanta Associate Robert Klingler was quoted in the February edition of U.S. Banker on how to jump start the economy. The article focused on small business loans and particularly President Obama’s call to use TARP funds to make more capital available to community banks that agree to increase their small-business lending.
Moeling in Atlanta Journal-Constitution, ABA Banking Journal
Atlanta Partner Walt Moeling was quoted Jan. 21 in The Atlanta Journal-Constitution regarding how most bank depositors have emerged relatively unscathed from failed banks due in large part to the fact that the FDIC insures deposits up to $250,000 per account. He also was quoted in the December edition of the ABA Banking Journal concerning the commercial real estate (CRE) appraisal process. Many community bankers are waiting to see whether regulators might make the process of CRE exams and appraisals easier in the future.
Wheeler in Birmingham Business Chronicle
Atlanta Partner Jim Wheeler was quoted Jan. 15 in the Birmingham Business Chronicle on how many banks have successfully shed their books of unprofitable loans to interested buyers. Most also have sold their more valuable bad assets, he said.
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).
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.
The Federal Reserve has published an online reference site for directors titled the Bank Director’s Desktop. The site includes training and reference materials for new and experienced bank directors from all of the federal regulators.