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2019 Banking Landscape – Charter Types

Whenever discussing bank charter types, I’m reminded of a comparison made by Walt Moeling. Walt would always say that the bank charter choice is like choosing between a Ford and a Chevy truck. There are strong, die-hard advocates for the superiority of one over the other. But either one is functionally adequate, and will enable you to get from location a to b. Of course, neither is going to be confused for a Lamborghini or a Maserati either.

Looking at the breakdown of charters as of the beginning of 2019, while the majority of all U.S. banks are state, non-member banks (i.e. with primary federal supervision by the FDIC), each charter choice appears to continue to have its advocates.

The Office of the Comptroller of the Currency, the primary federal prudential regulator for national banks, has earned a reputation as the regulator of the largest banks, but the underlying data doesn’t necessarily support that viewpoint. While all of the four largest U.S. banks are national banks, in all asset classifications, there remains a variety of bank charter, showing that no one charter type is necessarily better based purely on asset size.

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CFPB September 2019 Roundup

September 30, 2019

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CFPB September 2019 Roundup

September 30, 2019

Authored by: Douglas Thompson

Enforcement, Innovation, Consumer Data and Unconstitutionality

Director Kraninger and the Consumer Financial Protection Bureau have been busy this month. Summer is over, and back to school it is.

In addition to convening a symposium and two Director speeches, the Bureau released ten plus statements this month spanning enforcement activity, no action letter policy, innovation, and consumer data enhancements. Not to be overlooked, the Director also announced her position that the Bureau’s structure is unconstitutional. In this relatively short article, we cannot dive deeply into the specifics of each new development, but we can offer some highlights to help keep you abreast of Bureau changes. Definitely, more to come.

Enforcement: Two actions. One stipulated judgment. The Bureau’s actions assert (a) violations of Consumer Financial Protection Act of 2010 and Reg O in connection with allegedly deceptive and abusive mortgage assistance services and (b) violations of the Fair Credit Reporting Act, Regulation V and the CFPA in connection with allegedly improper debt collection practices. The former included a proposed stipulated judgment, which if entered, would resolve the matter by imposing civil money penalty and other relief. See September 6 and September 25 case announcements here.

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The So-Called Rise of Credit Union Buyers

The increasing number of banks selling to credit unions has been a hot topic at investor conferences, within the trade press, amongst clients, at trade associations events, and in conversations with investment bankers. To that end, I’ll be on the main stage at BankDirector’s 2020 Acquire or Be Acquired Conference discussing the new players in the bank M&A game.

And the numbers would appear to support that conversation…

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2019 U.S. Bank Landscape

2019 U.S. Bank Landscape

September 23, 2019

Authored by: Robert Klingler

The landscape of the banking industry in the United States continues to be highly concentrated when looking at asset sizes, but with the vast majority of the depository institutions continuing to be smaller institutions. As of June 30, 2019, approximately 84% of the assets held by depository institutions are held by less than 3% of U.S. banks.

85% of the banks in the United States, or 4,511 institutions, have less than $1 billion in total assets. 73% (or 3,855 institutions) have less than $500 million in total assets. 53% (or 2,799 institutions) have less than $250 million in total assets. 23% (or 1,230 institutions) have less than $100 million in total assets.

The concepts reflected above aren’t new. We showed the same thing in our Landscapes as of the end of 2016 and the end of 2017. In both of those reports, we attempted to look at the historical trends of consolidation (and that trend certainly continues). But this year, we’re taking a different tack and trying to dig deeper into the FDIC data. All of the data presented is based on the underlying data in the FDIC’s Statistics on Depository Institutions as of June 30, 2019.

As with all statistical reports, I’m well aware that all statistics can be massaged, with relatively innocuous adjustments, to tell different stories. Certainly, extremes can disrupt averages and otherwise minimize the value of the outcomes (or suggest that median or modal outcomes are more important than mean outcomes). Even if you never took a statistics class or have blocked all statistics concepts from your mind, I encourage you to check out Planet Money’s Modal American episode. The modal U.S. bank would have total assets of between $100 million and $250 million, would be taxed as a C-corporation, have a holding company and be a state-chartered, non-member bank. By comparison, the “average” bank would be $3.4 billion and the media bank would be the $228 million Bank of the Lowcountry, in Walterboro, South Carolina.

I am also reminded that no bank desires to be “average,” nor are investors generally looking for an “average” return. That said, I believe there is value in understanding what average is, and recognizing that expectations should be different for different institutions.

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Who Will be the Next Community Bank Acquirer of Choice in Georgia?

On September 13, 2019, the FDIC released the latest results of its annual summary of deposits survey data. The deposit market share data always presents an interesting view of the banking market, particularly when viewed over time.

As of June 30, 2019, roughly $256 billion in deposits were held in Georgia, up from $250 billion in 2017 and $197 billion in 2014. While total deposits are up, the number of banks and branches have each continued to decline. Five years ago, there were 259 banks with branches in Georgia; today (assuming completion of announced mergers), there are 208 banks with branches in Georgia. While the number of branches have also declined, the rate of decline is not as significant: 2,526 branches in 2014 to 2,254 branches today.

Image by Gerd Altmann from Pixabay

Deposits per branch have been steadily on the rise for years. In 2005, Georgia averaged $57 million per branch. By 2014, that number has risen to $78 million per branch, and today the figure is $114 million per branch.

Adjusting for announced mergers, the “big three” in Georgia (Truist, Bank of America and Wells Fargo) now hold roughly 55% of the deposits in Georgia. This is up from 53% two years ago and 51% five years ago, but down slightly if one were to include BB&T in the historical totals.

As of June 30, 2019, fourteen institutions have at least 1% of the Georgia deposit market share, one more than five years ago. Six additional banks in Georgia now have at least $1 billion in Georgia deposits, from 18 in 2014 to 24 in 2019 (and that’s excluding BB&T in 2019 based on its pending merger with SunTrust).

But as suggested by the headline to this post, I think the really interesting data is in the relative sizes of the banks with at least 10% of their respective total deposit bases in Georgia (i.e. banks in which Georgia represents a significant portion of their deposit base, whether they call Georgia home or not). We have not only seen a material decline in the number of these institutions, but the asset size distribution has radically changed over just the last two years.

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Signing the Mortgage Insufficient to Establish RESPA Standing

September 10, 2019

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To sue under RESPA, one must have signed the loan, not just the mortgage.

RESPA creates a cause of action but says only “borrower[s]” can use it. 12 U.S.C. § 2605(f). Accordingly, the Sixth Circuit joins the Fifth and Eleventh Circuits in holding that to have a cause of action under RESPA, a plaintiff must not only sign the mortgage, but also the loan. Keen v. Helson, —F.3d—-, 2019 WL 3226989 (July 18, 2019).

Image by Andreas Breitling from Pixabay.

A “borrower” is commonly understood and defined as someone who is personally obligated on a loan—who is actually borrowing money. Because the plaintiff had never signed the mortgage loan, as her ex-husband had, she could not maintain a claim under RESPA, even though she had an interest in the house that she mortgaged and her husband later transferred his interest in the house to her as part of their divorce, shortly before he died.

The Court noted that Congress could have said that “any person” injured by a RESPA violation could sue, or that “mortgagors” or “homeowners” could sue, but it chose not to do so and specified only “borrowers” could.

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The Plain Meaning of RESPA Regulations

If I should call a sheep’s tail a leg, how many legs would it have?

According to Abe Lincoln, “only four, for my calling the tail a leg would not make it so.” So begins the Eleventh Circuit’s opinion holding the motion to reschedule a foreclosure sale was not a motion for an order of sale within the meaning of the RESPA regulation governing loss-mitigation procedures.

The language of 12 C.F.R. 1024.1(g) prohibits a loan servicer from moving for an order of foreclosure sale after a borrower has submitted a complete loss-mitigation plan. Under the plain language of the regulation, a motion to reschedule a previously ordered foreclosure sale is no more a motion for an order of sale than a sheep’s tail is a leg!

This conclusion is reinforced by the construction canon favored by Justice Scalia, known as the “associated word cannon” in English, but more commonly referred to by learned colleagues as the “noscitur a sociis canon.” (Thank god for high school Latin helping me pass the bar!)

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The Risks of Assembling Consumer Information

In a case of first impression in its circuit, the Second Circuit held that a business may not be liable under the Fair Credit Reporting Act (FCRA) for publishing false information unless it specifically intended the report to be a “consumer report.” Kidd v. Thompson Reuters, —F.3d — (2019 WL 2292190, 5/30/19). It then held that  defendant Thompson Reuters established it did not have the requisite specific intent by showing that at each step in its processes it instructed its users and potential subscribers that its platform was not to be used for FCRA purposes, such as employment eligibility–but only for the non-FCRA purposes of law enforcement, fraud prevention and identity verification–and required them to affirm their understanding of that restriction. Accordingly, the Second Circuit Court of Appeals affirmed the granting of summary judgment to Thompson Reuters, even though its subscriber had used its inaccurate report to determine a job applicant’s employment eligibility.

The take-away: If your business regularly assembles consumer information, distributes it to third parties, and fears it may be used for a FCRA-related end that is not intended, your business should forbid such uses in its subscriber contract, monitor the actual uses of that information, and take adequate measures to stop FCRA-related uses when it learns of them.  

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Promoting Corporate Social Responsibility Through Lending

Financial institutions continue to develop products to encourage Corporate Social Responsibility (CSR) goals. The Loan Market Association has recently published Sustainability Linked Loan Principles to guide the use of loan instrument terms to promote the achievement of the borrower’s sustainability goals. As with disclosure and measurement associated with corporate disclosures intended to appeal to socially responsible investors, the success of such Sustainability Linked Loans in promoting better sustainability performance will largely depend on the borrower’s ability to set ambitious but realistic goals that are measurable and verifiable by third parties. 

Companies who have a deep and thorough understanding of their products life cycle (from all the raw material inputs through the end of the products useful life with the customer) will have the best chance of working with their lender to design sustainability performance targets that will actually move the needle.  As more of these loans are created, it will then be interesting to see how financial institutions report to their investors on how these lending products are improving the sustainability of their loan portfolios. 

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Bank Directors Should Not Personally Approve Loans

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Partners Jim McAlpin and Ken Achenbach joined me in the podcast studio to discuss the common community bank practice of having boards of directors approve particular loans.

While our initial approach was going to be to engage in a debate on the merits of this practice, none of us ultimately wanted to take the side of justifying the practice; for different reasons, many of which are expressed on the podcast, we all believe that it is a bad idea for bank directors to personally approve loans.

This spark that started this podcast was the recent BankDirector piece titled “77 Percent of Bank Boards Approve Loans. Is That a Mistake?” As I’ve written previously on BankBCLP.com, bank directors should not be approving individual loans, and banks should not be asking their directors to approve individual loans.

In addition to the podcast and the blog post, we also have a white paper titled Why Your Board Should Stop Approving Individual Loans.  That white paper analyzes what the board’s role should be in overseeing the bank, and why approving individual loans threatens this oversight. If boards keep approving loans, we’re next going to have to look into how to address our concerns via Instagram, courrier pigeon, or smoke signals.

During the podcast, I also mention our efforts to make the FDIC “podcast” on the financial crisis more accessible.

Please click to subscribe to the feed on iTunes, Android, Email or MyCast. It is also now available in the iTunes and Google Play searchable podcast directories.

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