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Business Over Breakfast: The Atlanta Public Schools Cheating Investigation

October 4, 2011

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On Wednesday, October 12, 2011, Bryan Cave’s Atlanta office will host a Business Over Breakfast event focused on the Atlanta Public Schools cheating investigation.  The results of a state investigation into an alleged culture of test score manipulation by teachers in the district were released in July of 2011 and have attracted national attention.  Prior to the July release of the state’s findings, the Southern Association of Colleges and Schools (SACS) placed the system’s high schools on accreditary probation based on alleged governance and leadership deficiencies.

As one of the state’s largest school systems works to preserve its accreditation, join Bryan Cave for a panel discussion on the future of the district and the impact of the cheating investigation on students, education, and business.  WABE 90.1 FM’s Rose Scott will moderate, and panelists will include Jay Bookman of the Atlanta Journal-Constitution, Dr. Thomas Smith of Emory’s Goizueta Business School, and Representative Kathy Ashe of the Georgia House of Representatives.  Breakfast and registration begins at 7:30 am, with the panel scheduled to speak from 8:15 through 9:15am.

More information is available online, and you can register online as well.

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Treasury Scrambles to Close SBLF Investments

September 16, 2011

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On September 14, 2011, Treasury announced additional disbursements under the Small Business Lending Fund (SBLF).  Total funding through the date of this release totals $2.38 billion to 191 institutions.  This is not even 10% of the $30 billion authorized under the program.  Treasury has stated in a whitepaper that 932 institutions ultimately applied for $11.8 billion in SBLF funding and that, as of September 1, it had issued preliminary approvals to all eligible and qualified applicants, 382 institutions in all for a total of $4.3 billion.  Best case, then, Treasury expects to utilize only about 14% of the total SBLF pot but one-third of the funds requested.

The figures in Treasury’s whitepaper suggest that there will be a rash of SBLF closings in the next ten days.  Under its enabling legislation, all SBLF disbursement must be made by September 27.  The number of disbursements to date (191) is exactly half of the number of outstanding preliminary approvals (382).  This will continue in dramatic fashion the exponential increase in the number of closings since the first wave (June (4), July (39), August (87), and September to date (61)).

The program remains a boon for Pennsylvania, home to the greatest number of SBLF recipients (16 institutions taking in an average of $10.4 million, eight of which used SBLF investment to redeem TARP funds).  California, Illinois, and Texas each host 13 recipient institutions.  By dollar amount, Illinois entities have enjoyed the most SBLF investment ($173 million, including the largest single investment under the program, $72.664 million to TARP-participant First Busey Corporation, parent to Busey Bank, Champaign, IL).  Forty-one institutions in the Southeast have received funding so far (Alabama – 3, Arkansas – 3, Florida – 9, Georgia – 3, Louisiana – 5, Mississippi – 1, North Carolina – 3, South Carolina – 3, and Tennessee – 11).

The top twenty-five SBLF recipients have received $800 million through the program.  Twenty-one of these (84%) used SBLF investment to redeem TARP funds and received an average injection of $38 million.  While in all, 89 of the 191 SBLF recipients thus far (47%) have used this capital to redeem TARP funds, these recipients have received 63% of the dollars disbursed under the program.

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A Statistical Look at SBLF Recipients To Date

August 5, 2011

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On August 3, 2011, the Treasury released an updated transactions report that reflects a third round of Small Business Lending Fund (SBLF) disbursements.  To date, Treasury has invested over $590 million in 43 SBLF participants, an average investment of $13.7 million.  The largest single investment remains a $56.6 million boost for Eagle Bancorp, Inc., of Maryland.  Of the 43 investments thus far, 30 (70%) have been $15 million or less.  At least ten recipients, however, have been stand-alone banks or thrifts with less than $200 million in total assets (including Michigan-based Huron Valley State Bank with roughly $60 million in total assets as of March 31, 2011).

Twenty-four of the forty-three recipients (56%) have been CPP or CDCI participants that had outstanding investment from those programs as of December 16, 2010. 

Three of the recipients to date have been based in Alabama and two have been from Florida, while no disbursements have yet been made to entities based in Georgia, South Carolina, North Carolina, Tennessee, or Mississippi.  Top states have been California (5) and Pennsylvania (5).  Two recipients are based in Nebraska.

Asset quality is not surprisingly in pristine condition among recipient banks.  Non-performing assets as a percentage of total assets (NPAs) have generally been between 1-3%.  To our knowledge, no recipient had NPAs of more than 4% as of June 30, 2011. 

In addition, no recipient so far had a March 31, 2011 Tier 1 leverage ratio of less than 7.0% and only two had a Tier 1 risk-based capital ratio on that date of less than 10%.  The average March 31, 2011 Tier 1 leverage and risk-based capital ratios among recipients to date are 10.0% and 13.3%, respectively. 

We hope to see further use of the $30 billion SBLF pool in the coming weeks.  Based on our experience, we note that the SBLF closing process is tracking CPP/CDCI investments in at least two ways:  form-driven documentation with little room for negotiation and an aggressive closing timetable.  The Treasury’s authority to make SBLF investment expires on September 27, 2011.

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13 Questions to Ask about Durbin Rules and Prepaid Products

After almost a year of debate on whether to unwind the legislation and delay its implementation, the Durbin Amendment to the Dodd-Frank Act will soon be implemented by the Federal Reserve Board’s final rule on debit interchange or “swipe” fees.  Judie Rinearson explains in flow-chart format how the final rule, most of which takes effect October 1, 2011, applies to prepaid card programs.  Her article “The Effect of the Fed’s Final Rule on Your Prepaid Program:  The 13 Questions You Must Ask” was originally published by Paybefore.

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Happy Birthday, Dodd-Frank

A year ago today, the Dodd-Frank Act was signed into law.  Today the Consumer Financial Protection Bureau “stands up,” the Office of Thrift Supervision has 90 days to live, and the Comptroller General’s study on the independence of presidentially appointed inspectors general of certain federal entities was due to Congress (don’t worry if you missed that last one).  For many provisions of the Act, the legislation requires that implementing rules were to be finalized by today.  As few of the hundreds of required rules have actually been proposed yet alone finalized, there is an argument that those aspects of the law requiring rules by today are not yet effective.  Provisions of the law that are certainly effective today:

We will continue to follow rulemaking and enforcement of the Act and provide updates linked to our dedicated Dodd-Frank page.  Regulators (and Barney Frank) are celebrating the law’s milestone today by testifying before the U.S. Senate on how the Act has improved supervision.  Stay tuned.

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First SBLF Disbursements Announced

July 12, 2011

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On Thursday, July 7, 2011, Treasury announced that two community banks and four holding companies have received the first $123 million in capital disbursements under the Small Business Lending Fund (SBLF).  The investments closed between June 21 and July 6, according to Treasury’s SBLF Transactions Report, and involved the following participants and amounts:

  • Community Trust Financial Corporation (Ruston, Louisiana) – $48.3 million
  • Level One Bancorp, Inc (Farmington Hills, Michigan) – $11.3 million
  • Pioneer Bank, SSB (Drippings Springs, Texas) – $3.0 million
  • ServisFirst Bancshares Inc. (Birmingham, Alabama) – $40.0 million
  • U&I Financial Corp (Lynnwood, Washington) – $5.5 million
  • Virginia Heritage Bank (Fairfax, Virginia) – $15.3 million

Treasury promises additional disbursement announcements in coming weeks.  As for the first wave of funding, the largest investment of $48.3 million was made in Community Trust Financial Corporation, Ruston, Louisiana, the $1.89 billion-holding company for the Louisiana-chartered Community Trust Bank.  This is also the only CPP/CDCI participant among the first-wave SBLF recipients.  At the other end of the spectrum, Pioneer Bank, SSB, a $106 million-Texas thrift, received $3 million.

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California Holding Company Announces SBLF Approval

June 21, 2011

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First California Financial Group, Inc., Westlake Village, CA, holding company for the $1.8 billion First California Bank, announced last night that it has been approved to receive SBLF funding, “subject to the Treasury’s customary due diligence and closing conditions.”  According to the company’s press release, it expects to close within the next 30 days and will use the funds to refinance $25 million in CPP investment.  While no funds have been disbursed, we are aware of several similar preliminary approvals that have been issued within the last week.  The Treasury has stated that it will publish an online list of participating institutions on a rolling basis as funds are disbursed.

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Summer Interns to Staff SBLF

Treasury is currently recruiting unpaid summer interns to help administer the Small Business Lending Fund (SBLF).  Qualified undergraduate and graduate student volunteers “will be working closely with investment managers on the SBLF’s Application Review Team and will be expected to make a meaningful contribution to the program.” 

While we are all happy to see Treasury develop talent and conserve its resources, we think this may send the wrong message.  At a time when Subchapter S and mutual application guidelines are still unpublished, and over 600 SBLF applicants (all “healthy” and in a position to increase lending to America’s small businesses) are still waiting for disbursement of funds in “early 2011,” we would much rather be hearing about additional paid staffers who can actually get the program implemented.  We wonder whether the added responsibility of training and supervising interns will improve existing personnel’s ability to roll out the SBLF. 

On the other hand, perhaps the interns can provide the program with the spark it needs.  Just don’t tell them about Senator Snowe’s plan to ruin their summer, too.

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Senator Snowe's SBLF "Fix"

Senator Olympia Snowe (R-Maine) has introduced an amendment to the enabling legislation for the Small Business Lending Fund (SBLF) that would disqualify TARP recipients from receiving SBLF investment, move the program’s small business lending benchmark from the current four quarters ending June 30, 2010 to the calendar year 2007, establish a non-discretionary 10-year repayment deadline, and sunset the entire fund in 15 years.  As drafted, however, investments made under the SBLF’s current terms would not be affected.  That may give greater import to the recently extended application deadline for C corporation banks.  The current version of the proposed amendment, SB 681, is available here.  Senator Snowe says she would like to do away with the SBLF entirely but that her proposed “fixes” are more politically realistic.

Clearly these changes, if enacted, would make a limited program even more limited.  Much of the interest among SBLF applicants to date has been from CPP/CDCI recipients looking to refinance TARP funds.  In addition, while Snowe’s press release says moving the lending benchmark date back to 2007 “would address concerns that the existing [June 30, 2010] benchmark may be too low, by historical standards, and that an adjustment could result in additional small business lending,” the SBA’s 2011 report on small business lending (which is based on Call Report data) shows that such lending was $18 billion greater in 2010 than in 2006 and $50 billion greater in 2010 than in 2005.  

We do not think this bill stands a substantial chance of passage as a standalone measure, although its attachment to the pending Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Reauthorization Act, as Snowe has also proposed, could give it a different outlook.  The vote on the current SBLF legislation was sharply divided along party lines, with only two Senate Republicans in support (Voinovich-OH and LeMeiux-FL).  We doubt Snowe will be able to gather bipartisan support in an election year for a measure that would hurt both small businesses and community banks in one fell swoop.

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Treasury Extends SBLF Application Deadline for C Corporation Banks

On March 30, 2011, Treasury announced that it was extending the deadline for C corporation banks to apply for participation in the Small Business Lending Fund (SBLF) program to May 16, 2011.  Previously, this deadline had been established as March 31, 2011.   According to the SBLF website, Treasury is still developing terms and guidance for mutual institutions, Subchapter S corporations, and community development loan funds.  The site maintains that terms for such institutions and funds may vary from those currently published and that separate application dates will apply.

We have previously described the SBLF application requirements for C corporations, which are otherwise unchanged.  As a reminder, eligible institutions must generally have had less than $10 billion in consolidated assets as of 12/31/09 and a composite CAMELS rating of 3 or better.  In addition, any institution intending to refinance its TARP obligations with SBLF funds: (i) must be compliant with the material terms and covenants under its CPP/CDCI agreement; (ii) must be current in its dividend payments to Treasury; (iii) can’t have missed (i.e., can’t have been 60 days or more delinquent in) more than one dividend payment; and (iv) must fully refinance or repay its CPP or CDCI investment.

For banks that may still be considering applying for SBLF funds, we have had considerable experience with the application process and provide these general guidelines and anecdotal experience:

  • Processing time is still an unknown.  Even our clients that applied very early on in the program are still awaiting meaningful feedback.  We understand that, to date, Treasury has received around 600 SBLF applications.  Treasury previously announced that processing time would vary by applicant but that disbursement of funds would begin in “early 2011.”  We are unaware of any disbursements thus far or how Treasury defines “early.” 
  • Interest from our Sub-S clients has been great, and we hope that Treasury will soon release application details applicable to such corporations.
  • Most applicants of which we are aware have been TARP participants looking to refinance those obligations, but the program has some limitations in this respect even for very healthy banks.  An SBLF investment is capped at 5% of risk-weighted assets for institutions with $1 billion or less in total assets and 3% of risk-weighted assets for institutions with more than $1 billion but less than $10 billion in total assets.  At the same time, capital outstanding from prior CPP/CDCI investments will be deducted from these limits but must be used to repay a bank’s obligations under those programs, and SBLF participants must either repay or refinance outstanding TARP securities.  Moreover, although total assets are measured as of the end of the fourth quarter of 2009, risk-weighted assets are measured as reported in the bank’s most recent Call Report.  At least one of our clients hoped to refinance TARP funds through the SBLF but ran into a size trap here; it had declined in asset size since the end of 2009 such that its maximum SBLF investment would have been insufficient to refinance its TARP funds.  As a result, it is unable to participate in the SBLF program.
  • As we saw with TARP, we have seen certain SBLF applicants come under increased supervisory scrutiny possibly as a result of their SBLF applications.  Applicants should be prepared for possible regulatory review beyond the contents of their application.

 We will continue to follow the evolution of the SBLF and will post updates here as appropriate.  In particular, we are monitoring the pending proposal by Senator Olympia Snowe (R-Maine) to amend the SBLF (and in short, make a limited program even more limited).  If you have further questions about the program, please contact Katherine Koops, BT Atkinson, Barry Hester or any other member of the Bryan Cave Financial Institutions practice.

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