Pendulum Pusher

REVIEW SUMMARY
What. Gulf Coast community banker speaks up on FDIC committee.
Issue. Will the federal jobs bill include capital to spur small-business lending?
Impact. President Obama's $30 billion proposal to spur small-business lending is more doubtful.

As Congress debates a jobs bill and financial reform, a new federal committee of community bankers hopes to influence the small business funding program to free up lending.

That is, if Washington's partisan politics, or rising commercial real estate loan losses don't get in the way — two big “ifs”.

One of the biggest voices on the Federal Deposit Insurance Corp.'s 15-member advisory committee on community banking is Charlie Brown, chairman and CEO of Sarasota's Insignia Bank.

Insignia is a three-year old community bank with $130 million in assets. It's also the most highly capitalized bank ever formed in Sarasota, according to Brown.

With 8,000 community banks nationally and 167 in Florida, having a representative from Sarasota — what Brown referred to as “ground zero” for the real estate and financial crisis at a recent committee meeting — is a huge responsibility. And Brown knows it.

“I take it very seriously,” he says. “I want to make sure that what I perceive to be top issues are accurate, and that I don't respond to anecdotal war stories.”

The community banking committee is designed to make recommendations to the FDIC over a two-year period. In turn, the FDIC will be making recommendations to the treasury department to influence the jobs bill and financial reform legislation now in the Senate banking committee.

In regards to the proposed funding program, Brown says, “If it moves forward through Congress without any bells, whistles or additional strings attached, the indication that I have right now is it will be very favorable for the community banking industry and every community a community bank touches.”

But it has not been touched by the political process, something with which more and more Americans are disillusioned.

The president wants Congress to create a new small business lending fund by transferring $30 billion in Troubled Asset Relief Program funds to a new program separate from the much maligned TARP program — widely seen as a big bank bailout fund.

The small business lending fund would complement other Small Business Administration lending initiatives, including higher SBA loan limits plus tax cuts to encourage small businesses to invest, add jobs and raise salaries.

But on Feb. 11, Senate Majority Leader Harry Reid, D-Nev., came out against major provisions of a bipartisan jobs bill from the Senate Finance Committee. The House version, narrowly passed in December, is a $154 billion package.

According to the Wall Street Journal, Reid wants a $15 billion bill that excludes the president's proposal to use TARP funds for the small-business lending fund. Brown calls it “disappointing, but not unexpected in this political environment.”

The big disconnect
The community banking committee first met last October and held its second meeting Jan. 28 in the FDIC boardroom. Sitting two seats to the right of FDIC Chairman Sheila Bair was Brown, who was no wallflower.

Brown used the opportunity to weigh-in often while remaining respectful and even-tempered throughout the daylong discussion. He acknowledges, “It's professional, but it's pretty open commentary.”

Big on Brown's agenda is how bank examiners interpret commercial real estate loan guidance that was issued a few years ago.

He says there's a big disconnect, “the 'D' word,” as he puts it, between the flexible guidance regulators have advertised in evaluating commercial real estate loans, and examiners in the field who treat it as a hardened line in the sand.

“It was very clear in Washington that it was supposed to be guidance and not an absolute threshold,” Brown says.

That hard line is defined as commercial real estate loan portfolios not exceeding 300% of capital, so a bank, say with $10 million in capital, couldn't have more than $30 million in loans outstanding.

“They want the banks to get down to the 300%,” Brown says. “There's only two ways to do that, you either sell off loans, not renew the loan and hope they pay off, and you certainly stop lending.”

In the immediate wake of the financial crisis, bank regulators got the get-tough message. Then the pendulum swung too far limiting credit availability, and business investment, shutting down business expansion and curtailing employment. Brown is helping lead the push-back with the committee, and has big support.

In a Feb. 3 letter from Alex Sink, the state's chief financial officer, to Bair, the CFO wrote, “I ask that you and the FDIC explicitly communicate with examiners and regulators up and down the chain about the need for flexibility and understanding so that these billions of dollars for small businesses go to good use in our state.”

A few days earlier at the community banking committee meeting, Bair summed up her view, saying, “We want real economic activity through credit extension.”

Brown comes with banking genes. His father was a bank CEO in Ohio before moving to Florida, and Brown started out his career at BankOne after getting his finance degree from Ohio State.

His dad then recruited him to start a small business lending program at Charlotte State Bank 20 years ago, which became the second largest SBA lender in the state.
After his father became ill, and subsequently passed away, the family controlling the bank turned it over to the then 29-year old financier.

When Hurricane Charley ripped through Charlotte County in 2004, as devastating as it was to the community, it “generated” a new opportunity for Brown.

His bank had taken what was then the unusual precaution of creating a contingency plan for such an emergency and had installed a diesel generator among other precautions. The county sheriff's department ended up working out of the bank's lobby until it could reestablish a headquarters.

And Brown is not stranger to D.C.

In the aftermath of 9/11, U.S. Homeland Security was developing its plans, and its chief, Tom Ridge, called on Brown to help develop a template for disaster recovery plans. He was on the podium when Ridge rolled out the 9/11 Commission report.

Flexible guidance
Now, Brown finds himself near the front lines of developing an economic recovery plan. Community banks have a key role to play in enabling small businesses to create jobs by extending loans to credit-worthy borrowers.

It's likely no coincidence that only a few days after Brown's committee meeting regulators were urging banks to do just that when they issued a joint statement Feb. 5 showing concern for the shrinking of small-business lending brought on by overly aggressive supervision.

Sen. Jim Bunning, R-Ky., was quoted in a Feb. 6 Wall Street Journal story saying, “It's the Fed regulators that have stopped the flow of money out of the community banks to the small-business person.”

But there are 550 banks on the FDIC's problem list, and nearly 3,000 small banks may have to restrict lending due to commercial real estate loan losses according to a study by a Congressional Oversight Panel examining the TARP program.

Brown questions the criteria used to put the 3,000 banks on the list, saying it's based largely on the 300% rule being treated as a hard line that can't be crossed.

He argues that every community bank and its borrowers' business plans are different, which is why more flexible guidance is needed in evaluating commercial real estate loan portfolios. Brown say banks are using that guidance to restructure commercial real estate loans now that lower property values, geographic location, and type of industry are to be less of a consideration.

But it also appears some are not. A Gulf Coast commercial real estate investor tells the Review that a $1 million commercial land mortgage due for renewal in August won't be renewed by the lender, a regional out-of-state bank. Three partners purchased the prime property adjacent to the interchange of a major state road and an interstate highway in 2007 for $6 million. One key problem: the property recently appraised at $2.5 million.

Getting money flowing
Here are some details of how the Obama Administration's core proposal could work.

The administration's main plan would be to use the Small Business Lending Fund to offer capital investments to community and smaller banks with an incentive structure to support new small business lending.

One potential design for the proposal is the following:

• Banks would be eligible to receive up to 3% to 5% of risk-weighted assets;

• Banks with less than $1 billion in assets would be eligible to receive capital investments up to 5% of their risk-weighted assets;

• Banks with between $1 and $10 billion in assets would be eligible to receive up to 3% of risk-weighted assets.

• Existing Capital Purchase Program participants with less than $10 billion in assets would be permitted to convert their capital to the new program.

• The cost of capital would be reduced as lending increases: The dividend rate for a capital investment provided under the program would begin at 5%, but with reductions to as low as 1% if a bank demonstrates increased amounts of small business lending.

• Banks could receive a one percentage point decrease in their dividend rate for every 2.5% increase in incremental business lending they achieve over a two-year period, down to a minimum dividend rate of 1%.

• Banks would realize this reduction in dividend rate sooner if they make early, but consistent progress towards increased lending.

• For purposes of the program, banks would be able to receive the incentive on the basis of new lending beginning Jan. 1, 2010.

• After five years, the dividend rate would be increased to encourage timely repayment.

Jay Brady covers state and local government issues. He can be reached at [email protected], or at 941-362-484.