Financial Institutions Newsletter - March 2011

EDITOR'S NOTE

Welcome to the inaugural Morris, Manning & Martin Financial Institutions Newsletter. This month marks something of an anniversary as I celebrate my first year as Chair of the MMM Financial Institutions Team. It has been an extraordinary year in so many ways for our banks, from the passage of Dodd-Frank, to the continued distress in our banking industry and real estate markets, to the heightened regulatory scrutiny, to our clients' continuing efforts to replace real estate lending revenue with other sources of revenue, and beyond.

Over the past year, the MMM Financial Institutions team has been honored to assist our financial institutions clients with multiple successful capital raises, acquisitions of failed institutions, new branch openings and branch acquisitions, forward-looking strategic planning, and technology solutions, as well as a myriad of other exciting transactions. We are also pleased to report that we have had no financial institutions clients fail during the current economic crisis.

New Members

We are pleased to introduce you to the two newest members of the MMM Financial Institutions team:

Margaret Paradis. Margaret joins us from Baker & McKenzie in New York, and will be resident in our Washington, DC office. She will join our financial institutions team to focus on investment fund and asset management and alternative funds. She has significant experience in securities laws for public and private investment funds, as well as the related broker-dealer and banking law issues, the Investment Advisers Act of 1940, the Investment Company Act of 1940, and in-depth knowledge of the legal issues posed by the evolving mix of advisory, brokerage and banking services offered by financial firms. She is also a frequent commentator on the ramifications of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Nicole Ibbotson. Nicole joins our Atlanta office from Paul Hastings, and her financial institutions practice focuses on payment solutions, securities law issues, data security and privacy, and other regulatory matters.

Training Sessions

Our clients and other financial institutions have been very receptive to our ongoing training sessions. We have a number of complimentary programs that allow us to come to you and spend two hours educating your staff. Recent topics have included lending pitfalls, creditors' rights strategies, preparing for Dodd-Frank, and employment issues. If you're interested in setting up a training program, please call me to arrange one.

SBLF - The Small Business Lending Fund

With the March 31, 2011, application deadline looming, many of our clients are asking whether or not to participate in the Small Business Lending Fund ("SBLF") program. The SBLF promises to provide community banks with access to Tier 1 capital at rates between 1% and 5%, depending on the increased level of small business lending the bank enjoys. Much like TARP, the bank receives the funding by selling preferred stock to the US Treasury. But what exactly does it do and what does it mean for your bank? I think we would all agree that, in order to right our fragile economy, we need to promote job growth and stabilize real estate valuations. Without those foundations, our economy, and therefore our banking industry, remain susceptible to a more severe depression. Community banks also need to replace LLP what for many institutions has been their primary revenue source, real estate development loan revenue. Most community banks have been searching for replacement revenue sources, in the form of SBA lending, specialty finance, wealth management, and other products and services to shore up the balance sheet. Even if you have been successful in raising capital, new capital doesn't do you much good if you can't deploy it as an earning asset.

To encourage community bank participation in the SBLF, the cost of capital will start no higher than 5%. If a bank's small business lending increases by 10% or more, then the rate will fall as low as 1%, as shown on this chart below from Treasury:

The 1%-5% dividend rate is measured each quarter and can go down or up, but is locked in at the end of the 4th quarter. Similar to TARP, the dividend rate jumps to 9% after 4½ years to encourage redemption, although the capital is perpetual with no obligation to repay in full. Funding under the SBLF is scheduled to cease at September 27, 2011.

So how do you decide whether or not participation in the SBLF is right for your institution? The first question is to determine eligibility. Is your institution a community bank? For purposes of the SBLF, a community bank is defined as a financial institution with $10 billion in assets or less, as of December 31, 2009. If your institution has total assets of $1 billion or less, it may apply for SBLF funding that equals up to 5% of its risk-weighted assets. If your institution has assets of more than $1 billion, but less than $10 billion, it may apply for SBLF funding that equals up to 3% of its risk-weighted assets. Banks that currently have TARP and wish to participate in the SBLF must completely convert the TARP into the SBLF investment, since simultaneous participation in CPP or CDCI and SBLF is not permitted. This becomes problematic for those institutions whose TARP cannot be fully converted into SBLF funds, if for example your TARP amount exceeds the amount of SBLF capital for which you qualify, Also for TARP participants, there is also a pesky prohibition to participation for those that have missed multiple dividend payments by more than 60 days. Treasury has advised us that there is no guidance yet for institutions who have missed payments due to restrictions from their primary regulator, so stay tuned there. An institution is not eligible if it is on the FDIC problem bank list (or similar list) or has been removed from that list in the previous 90 days. Generally, this will include any bank with a CAMELS rating of 4 or 5. We have heard that 1 and 2 rated banks will have a good chance at acceptance, barring injury or other mitigating factors. 3 rated banks will be where the action is. For more information, please refer to the Requirements for CPP or CDCI Refinancing page on the Treasury's website.

The SBLF uses a different definition of small business loans than used for your call reports and defines small business lending as certain loans of up to $10 million to businesses with up to $50 million in annual revenues. Those loans include: commercial and industrial loans; owner-occupied nonfarm, non residential real estate loans; loans to finance agricultural production and other loans to farmers; and loans secured by farmland. For SBA loans, the guaranteed portion of such loans will be excluded from your calculation, so you may wish to consider refinancing after acceptance into the SBLF for lower guaranteed percentages on your existing SBA Loans, as that delta will be included as an increase in small business lending. To clarify, there is no imposed use of the funds you receive from SBLF, but you don't get the benefit of the lower dividend rates if the new capital is not deployed for small business lending.

The application itself is one page, with a three page Small Business Loan Plan. The basic instructions are at The Application Process page on Treasury's website. If you're approved, you have no obligation to participate, but you will typically be asked to close within 30 days of acceptance. The transaction documents remain a work in process.

To date, only C-corporations are eligible. Treasury is developing terms and guidance for mutual banks, Subchapter S corporations, and community development loan funds. Although we recognize that approximately one-third of all banks are Sub-S, Treasury does not yet have a plan in place for these institutions, citing issues such as single class of stock, few Sub-S banks having holding companies, and debt not counting as Tier 1.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.