Important Notices

May 31, 2011

DFI Guidance re Dividends under the Small Business Lending Fund

Several banks have made inquiries regarding the ability of certain banks described below to issue dividends to shareholders pursuant to the U.S. Treasury Department’s Small Business Lending Fund (SBLF). This is intended to provide guidance for those banks that require the approval of the Commissioner to issue dividends pursuant to the terms of the SBLF.

Generally, banks may make distributions to its shareholders pursuant to California Financial Code, Section 642, 643, or 644. Distributions made pursuant to Section 642 do not require the approval by the Commissioner. Distributions made pursuant to Section 643 require the prior approval of the Commissioner. Distributions made pursuant to Section 644 require the prior approval of the Bank’s shareholders and the Commissioner.

Many of the Department’s new bank licensees do not currently qualify to make distributions pursuant to Section 642 or 643, due to the lack of earnings. However, due to the stabilizing effect of the SBLF and the nature of that program, the Commissioner has determined that it may be appropriate for him to approve a dividend distribution through the reduction of contributed capital. Approval pursuant to Section 644, which involves the reduction of a bank’s contributed capital, may be granted if the bank shows evidence of, and the Commissioner makes findings on the following:

• The bank’s shareholders’ equity is adequate (as defined by California Financial Code, Section 660) after the distribution;
• The bank is “Well Capitalized” (as defined under Federal Prompt Corrective Action) after the distribution;
• The bank’s performance trends are positive; and
• The bank’s shareholders have approved the distribution.

After careful consideration, the Commissioner has determined that it would not be prudent to approve distributions for the term of a bank’s participation in the SBLF. Accordingly, a bank must apply for approval of each distribution that will be made pursuant to Section 643 or 644. If granted, the approval will be based on the facts and financial information at the time a bank submits its formal request to make a distribution to its shareholders, as well as the bank obtaining approval of the dividend by the bank’s shareholders, as necessary.

Please be assured that at the time a bank submits a formal request to make a distribution to its shareholders, the Commissioner will look favorably on any application that meets the above mentioned conditions. Applications filed pursuant to this announcement should be directed to the Department’s Licensing Division located in the San Francisco office at 45 Fremont Street, 17th Floor, San Francisco, CA 94105-2219. Should you have any questions, please contact Scott Cameron, Chief State Examiner, at 916-322-5962 or by email at scameron@dfi.ca.gov.