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

September 18, 2019

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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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Bank Directors Should Not Personally Approve Loans

June 4, 2019

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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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FDIC “Podcast” on the Financial and Banking Crisis

May 22, 2019

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In December 2017, the FDIC published a written history of the financial crisis focusing on the agency’s response and lessons learned from its experience. Crisis and Response: An FDIC History, 2008–2013 reviews the experience of the FDIC during a period in which the agency was confronted with two interconnected and overlapping crises—first, the financial crisis in 2008 and 2009, and second, a banking crisis that began in 2008 and continued until 2013. The history examines the FDIC’s response, contributes to an understanding of what occurred, and shares lessons from the agency’s experience.

In April 2019, the FDIC followed up on the written summary with a “podcast” covering the same. While I am a huge fan of podcasts, as at least partially reflected in hosting The Bank Account, one of my pet peeves is when someone calls an audio download a podcast, without providing any convenient way to download that audio to a podcast application so that it can easily be listened to in the car, at the gym, or on a walk.

(Full disclosure: I listen to most podcasts, including banking podcasts, while running.  I certainly can’t say that discussions of banking law motivate me to run any faster or farther, but I do at least listen to them at 1.5x speed.)

Rather than just complain (or ignore it), I decided to take action and created an rss feed for the FDIC’s podcast. Anyone should now be able to paste/enter https://bankbclp.com/fdic-podcast.xml into their podcast app of choice to subscribe to the FDIC’s Crisis and Response podcast. I’ve also published additional instructions on how to subscribe to the FDIC podcast with particular podcast applications.

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77 Percent of Bank Boards Commit this Mistake

May 20, 2019

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Last week, Bank Director published a piece titled “77 Percent of Bank Boards Approve Loans. Is That a Mistake?”

In case you didn’t get it from the title of this blog post, I think the answer is absolutely, 100 percent, yes! Bank Directors should not be approving individual loans, and Banks should not be asking their Directors to approve individual loans.

77 percent of executives and directors say their board or a board-level loan committee plays a role in approving credits, according to Bank Director’s 2019 Risk Survey. And Boards of smaller banks are even more likely to be involved in the loan approval process. According to the survey, almost three quarters of banks over $10 billion in assets do not have their directors approve loans, but over 80% of banks under $10 billion in assets continue to have board-approval of certain loans.

These survey results generally conform to our experience. Two weeks ago, Jim McAlpin and I had the pleasure of leading five peer group exchanges on corporate governance at the 2019 Bank Director Bank Board Training Forum. The issue of board approval of loans came up in multiple peer groups, but the reaction and dialogue were radically different based on the size of the institutions involved. In our peer group exchange involving the chairmen and lead directors of larger public institutions, one of the chairman phrased the topic along the lines of “is anyone still having their directors approve individual loans?” Not one director indicated that they continued to do so, and several agreed that having directors vote on loans was a bad practice.

A few hours later, we were leading a peer group exchange of the chairman and lead directors of smaller private institutions. Again, one participant raised the issue. This time the issue was raised in an open manner, with a chairman indicating that they’d heard from various professionals that they should reconsider the practice but so far their board was still asking for approval of individual loans. A majority of the directors in attendance indicated concurrence.

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The Misconceptions of Private Bank M&A

May 13, 2019

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Last week, Kevin Strachan joined me in the podcast studio to discuss the ability of privately held banks to use their securities as consideration to acquire another institution.

Sadly, since the last time we recorded a podcast, the patriarch of our banking practice, Walt Moeling, passed away.  Our previously posted memorial included several links to remember Walt, but of particular relatedness to the podcast, we encourage everyone to listen again to two earlier podcasts with Walt sharing his wisdom.  In December 2016, Walt joined us on the podcast to discuss, among other things, the future of the banking industry and what one regulatory change he would make if given unlimited power. Then, in March 2017, Walt spoke about establishing a sustainable sales culture.

Somehow, I was able to read the notes I had scribbled about Walt, and we then continued to discuss two common (and contradictory) misconceptions on private company merger and acquisition activity. 

The first misconception is that privately held companies can’t issue stock as merger consideration.  The second misconception is that privately held companies can issue stock without restriction as merger consideration.  We regularly hear both of these misconceptions when advising private companies on a potential merger transaction where they are looking to issue (or receive) private company stock.  While neither of these ideas are correct, the truth is messy and usually requires further discussion.

Among the topics covered with Kevin in this episode of The Bank Account are:

  • the additional flexibility of banks without holding companies (and the limitations of that flexibility);
  • SEC registration via merger;
  • Regulation A+ in mergers;
  • the state Fairness Hearing exemption; and
  • using Rule 506 of Regulation D to issue securities to the target shareholders.

For private companies considering an acquisition of another institution, further conversations with investment bankers and lawyers are almost certainly going to be needed, but this episode of The Bank Account can give you a head start in understanding some of the potential options that may be out there.

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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Georgia Noncompete Law Remains Enforceable

May 7, 2019

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In light of the continued merger activity within the state, including the blockbuster SunTrust/BB&T merger, we’ve seen a renewed focus on the enforceability of non-compete provisions – from banks looking to hire, from banks hoping to retain, and bank employees considering a change.

Image by Mohamed Hassan from Pixabay

Apparently, we’re not alone. On May 1, 2019, the American Banker published a story titled “What ruling on non-compete clauses means for banks — and job hunters.” The article looks at the potential impact of the the Georgia Court of Appeals’s decision in Blair v. Pantera Enters., Inc. (2019 Ga. App. LEXIS 114). Among other things, the article posits that “if BB&T and SunTrust want to enforce non-compete agreements with all their loan officers and wealth management experts stationed in Georgia, some of those contract provisions might not pass legal muster, according to legal experts.” While the enforceability of non-compete agreements is always subject to legal uncertainty, with the specific facts at play and the trial judge potentially playing a significant role, we think this vastly overstates the impact of Blair v. Pantera, particularly in the bank context.

Blair v. Pantera involved the enforceability of a non-compete provision against a backhoe operator. The court found, correctly and consistently with the Georgia Restrictive Covenants Act (O.C.G.A. § 13-8-50 et seq.), that he was not an employee under the statute against whom a non-compete could be enforced. Under the Georgia Restrictive Covenants Act, non-competes may generally only be enforced against employees that: manage the business, regularly direct the work of two or more other employees, can hire or fire other employees, are regularly engaged in the solicitation of customers or with making sales or taking orders, or meet the definition of a “key employee” under the statute. Under the statute, an employee must fit in one of these categories to sign a valid non-compete. See O.C.G.A. § 13-8-53.

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Public Comments Due Soon on Proposed Community Bank Leverage Ratio Rules

April 3, 2019

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The public comment period for the banking agencies’ capital simplification rules for qualifying community banking organizations (i.e. the Community Bank Leverage Ratio proposal) are due on Tuesday, April 9th.

As previously discussed, the regulators have proposed a new, alternative, simplified capital regime for qualifying institutions that will deem an institution to be well-capitalized so long as it maintains a leverage ratio of at least 9% and adequately capitalized so long as it maintains a leverage ratio of at least 7.5%. While initially proposed last November, publication in the Federal Register was delayed until February of this year. As a result the comment period for the rule ends on Tuesday, April 9, 2019. Comments can be submitted online through Regulations.gov.

Through the publication of this blog post, the primary comments online appear to be the appropriate threshold for the new Community Bank Leverage Ratio. As background, EGRRCPA, the statutory basis for the reforms, obligates the regulators to apply a threshold of between 8% and 10%, and the regulators proposed 9%. Most of the submitted comments, including several from community bankers, comments from the Kansas Bankers Association and the Independent Bankers Association of Texas argue for a lower 8% ratio. Conversely, the Mercatus Center has submitted a comment supporting a 10% ratio.

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In Memoriam: Walter G. Moeling, IV, 1943-2019

March 7, 2019

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It is with a very heavy heart that I write to report that our longtime friend and retired Partner, Walt Moeling, passed away peacefully on Monday night. Walt was at home and surrounded by family, including his wife Nell who has become a friend to many throughout the firm. Nell was Walt’s lifelong best friend and true companion, and is almost as well-known as Walt within the banking community in the Southeast for always being by his side and helping to grow his practice. Walt was important to our group, to the firm and to every person whose path he crossed. He was an incredible mentor to many, including our entire banking team.

Walt spent his entire legal career with our firm, starting out in the late 1960s with Powell Goldstein, an Atlanta-based firm that merged with Bryan Cave in 2009. In Walt’s near 50 years of active practice, he represented banks, thrifts, insurance companies and securities firms nationwide. In recent years he was nicknamed “the Godfather of Banking in the South” by a very prominent banking industry commentator.

Walt was widely recognized for his accomplishments as a leader in the legal field and banking industry and appeared in Who’s Who in America, in the South; American Law; Business and Finance; and as one of America’s Leading Business Lawyers by Chambers and Partners.

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Roleplaying as Chief Strategy Officers

February 4, 2019

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On January 25th, Jonathan and I returned to the studio to record the latest podcast for The Bank Account. We’re trying to live up to our commitment to podcast more often in 2019 then we did in 2018; nothing like setting a low bar!

We first briefly discuss the latest IRS regulations for the taxation of Subchapter S banks and the reactions that we’ve seen from our clients on tax reform. Generalization appears virtually impossible, as we’ve seen reactions ranging from terminating Subchapter S elections, doing transactions and forgoing Subchapter S elections, sticking with the status quo, and, as Jonathan puts it, “Sub S or Die.”

We then turn to a hypothetical scenario that both Jonathan and I think about from time to time; what if we decided to cease providing legal services and instead attempted to become bank officers. What would our first steps be as a new Chief Strategy Officer of a hypothetical depository institution. Jonathan suggests beginning with the question of whether the institution is a true “community bank,” with a provocative definition for the term. Per Jonathan, a “community bank” is one whose existence is self-justified, as an irreplaceable benefit to the community it serves. (Jonathan than proceeds with an approach that even he admits might be better suited for a visual presentation.)

I suggest instead that the first question should be what is expected/desired by the institution’s shareholders. Depending on the shareholder base and their expectations for the institution, different strategic approaches are called for.

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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Volcker Rule Impact When Crossing $10 Billion

January 14, 2019

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Under the Economic Growth, Regulatory Reform and Consumer Protection Act, depository institutions and their holding companies with less than $10 billion in assets are excluded from the prohibitions of the Volcker Rule. Accordingly, institutions under $10 billion may, so long as consistent with general safety and soundness concerns, engage once again in proprietary trading and in making investments in covered funds.

On December 21, 2018, the federal regulatory agencies proposed rules implementing this EGRRCPA provision. However, as previously noted, even pending finalization of these regulations, the regulatory agencies have also noted that they will not enforce the Volcker Rule in a manner inconsistent with EGRRCPA.

EGRRCPA, and the proposed rule, effect the exclusion of smaller institutions from the Volcker Rule by modifying the scope of the term “banking entity” for purposes of the Volcker Rule. The proposed rule excludes from being a “banking entity” any institution that has (i) $10 billion or less in assets and (ii) trading assets of 5% or less.

Neither EGRRCPA nor the proposed rule, however, addresses the impact on an institution when it goes over $10 billion in assets, either as a result of organic growth or via merger. The proposed rule does not even apply the tests on a quarter-end or other reporting period basis, much less an average balance or consecutive quarter requirement. The proposing release notes that they believe that insured depository institutions “regularly monitor their total consolidated assets” for other purposes, and therefore do not believe this ongoing test requirement would impose any new burden.

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