As of the end of August 2018, two key provisions of The Economic Growth, Regulatory Relief, and Consumer Protection Act (aka the Crapo bill, S.2155, or increasingly, EGRRCPA) have become effective: the increase in the small bank holding company policy statement threshold and the increase in the expanded examination cycle threshold. Before looking at those provisions, I have to acknowledge the fabulous Wall Street Journal story by Ryan Tracy, “Can You Say EGRRCPA? Tongue-Twister Banking Law Confuses Washington.” Personally, I’m now leaning towards “egg-rah-sip-uh.”
On July 6, 2018, the federal banking agencies released an Interagency statement regarding the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act that provided guidance as to which provisions were immediately effective versus which provisions would require further regulatory action. Included in this guidance was confirmation that the banking regulators would immediately implement EGRRCPA’s changes to the Volcker Rule, freeing most institutions with total assets of less than $10 billion from the constraints of the Volcker Rule. The regulators noted that they “will not enforce the final rule implementing section 13 of the BHC Act in a manner inconsistent with the amendments made by EGRRCPA to section 13 of the BHC Act.”
Unfortunately, two of the more significant areas of regulatory relief for community banks, the respective increases in thresholds for the small bank holding company policy statement and the expanded examination cycle were not granted such immediate effectiveness. While EGRRCPA required the Federal Reserve to act on the expansion of the policy statement within 180 days, anyone familiar with the deadlines set forth in the Dodd-Frank Act for regulatory action would not be holding their breath.
Small Bank Holding Company Policy Statement Expansion. On August 30, 2018, the Federal Reserve published an interim final rule implementing the revisions to the small bank holding company policy statement. The Federal Reserve’s small bank holding company policy statement generally exempts such institutions from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level. The small bank holding company policy statement was first implemented in 1980, with a $150 million asset threshold. In 2006, it was increased to $500 million, and in 2015, it was increased to $1 billion. Section 207 of EGRRCPA called for the Federal Reserve to increase the threshold to $3 billion, and the interim final rule implements this change.
Our unannounced and unplanned summer hiatus is over, and Jonathan and I are back in the studio to provide the latest episode of The Bank Account. Between travel for various banking conferences, a full work plate, and a few summer vacations, we stepped away from the podcasting studios for a few months (or three months exactly), but now we’re bank and re-energized!
Before turning to the intersection of banking and fintech, we spend a little time on another industry focus for PKM that personally interests Jonathan and me, craft beverages. We also each select our “rest of life” beer: Terry selected Automatic by Creature Comforts Brewing Company, Jonathan selected a Sierra Nevada Pale Ale, and I went with a 420 Extra Pale Ale by Sweetwater Brewery.
Terry, Jonathan and I then turned to looking at some of the interesting interactions we’ve each seen between depository institutions and fintech companies. We looked at the strengths of each and how partnerships can help each thrive in the 21st century. We also examined some of the diligence items that are necessary in any such partnership.
The U.S. depository industry has continued its path of consolidation, but as of the end of 2017, there are still over 5,600 banks chartered in the United States. This represents a decline of just under 3,000 charters from 10-years earlier, as mergers, receiverships and a near complete dearth of de novo activity have continued to shrink the number of banks.
As of December 31, 2017, we had 5,679 depository institutions with $17.5 trillion in total assets. That represents a decline of 243 institutions an increase of $600 million in assets since the end of 2016, and a decline of 2,865 institutions and an increase of $4.4 trillion since the end of 2007.
The four largest depository institutions by asset size (JPMorgan, Wells Fargo, Bank of America and Citi) hold $7.03 trillion (up slightly from $6.84 trillion at the end of 2016). Those four now represent 40.1% of the industry’s assets, down slightly from 40.5% at the end of 2016; but up from 34.8% ten years earlier.
There are 120 additional banks that have assets greater than $10 billion, holding $7.45 trillion. Both of those numbers are materially higher than one year earlier; at the end of 2016, there were 111 banks in this category with $6.98 trillion in assets. The 124 largest banks now hold 82.7% of the industry’s assets. Ten years ago, there were 119 institutions with more than $10 billion in assets, and they collectively held 77.6% of the industry’s assets.
Since the beginning of 2018, there has been steady stream of significant deals affecting the Atlanta MSA.
January – Ameris Bancorp’s acquisition of Hamilton State Bancshares for $405 million, priced at 2.05x tangible book;
March – Renasant Corporation’s acquisition of Brand Group Holdings for $453 million, priced at 2.35x tangible book;
April – CenterState Bank Corporation’s purchase of Charter Financial Corporation for $362 million, priced at 1.95x tangible book;
April – National Commerce Corporation’s purchase of Landmark Bancshares for $115 million, priced at 2.22x tangible book; and
May – Cadence Bancorporation’s purchase of State Bank Financial Corporation for $1.4 billion, priced at 2.48x tangible book.
The landscape looking forward is significantly changed. Below is a pro forma list of the community banks (for these purposes, banks with total deposits of less than $15 billion) with the largest remaining presence in the Atlanta MSA.
On April 13 and 14, 2018, the Financial Services Corporate and Regulatory Team of Bryan Cave Leighton Paisner sponsored two teams at the Atlanta Ragnar Trail race. On this episode of The Bank Account, Jonathan and I discuss the Ragnar race, our thoughts about the Ragnar race, the ambiance of the Ragnar race, the decline of multi-bank charter bank holding companies, and a few final thoughts about the Ragnar race. We also give thanks to so many colleagues that helped us with the Atlanta Ragnar Trail race. In other words, if you’re interested about the Atlanta Ragnar Trail race, this is a great episode.
The BCLP Ragnar Teams
We divided into two teams, Team BSA (Bankers Speed Ahead) and Team AML (Awkwardly Moving Lawyers). On paper, it looked like it would be a tight race. However, the trails proved to be significantly different than running on paper. In addition, the Awkwardly Moving Lawyers became significantly more awkwardly moving (and slower) when our fastest colleague, Dan Wheeler, badly twisted his ankle on his first leg of the race. (As one banker commented, the lawyers were quite effective in ensuring that their clients would prevail.)
Team BSA finished in 21 hours, 51 minutes and 50 seconds; 23rd overall and 1st in the corporate team division.
The bankers that sped ahead were as follows:
Charlie Crawford, Hyperion Bank
Heath Fountain, Planters First Bank
Bo Brannen, Georgia Bankers Association
Nick Clark, Charter Bank
Jim Walker, PrimeSouth Bank
JW Dukes, Ameris Bank
Jackson McConnell, Pinnacle Bank
Dennis Zember, Ameris Bank
Several hours later, Team AML finished in 23 hours, 38 minutes and 19 seconds; 63rd overall and 6th in the corporate team division.
The awkwardly moving lawyers were as follows:
Ryan Barrow, Porter Keadle Moore (but an honorary lawyer for the weekend)
Charlie Crawford, Jackson McConnell, and Dennis Zember were the three fastest runners for the weekend from Teams BSA and AML, but I believe all had a good time.
Jonathan and I discuss two major deals for our us: the formation of Bryan Cave Leighton Paisner (BCLP) and the return or Barry Hester in this latest episode of The Bank Account.
Bryan Cave Leighton Paisner LLP is the result of the mergers of historically U.S.-based Bryan Cave LLP and historically U.K.-based Berwin Leighton Paisner LLP. As a truly global firm with over 1,600 lawyers operating literally around the clock, we believe Bryan Cave Leighton Paisner is well positioned to serve clients around the globe. Our blog is still available at BankBryanCave.com, but is also now available at BankBCLP.com. We’ll figure out over time what our branding looks like.
Barry Hester re-joins our financial institutions practice after serving for many years as an assistant general counsel for EverBank and TIAA FSB. In this episode of The Bank Account, we talk with Barry about his experience with the “good guy” and “bad guy” banking compliance laws. The “good guy” laws include the Servicemembers Civil Relief Act and the Military Lending Act, while the “bad guy” laws include the Bank Secrecy Act and Anti-Money Laundering laws. As noted in the podcast, Barry has already been busy contributing good content for our blog, with a post last week about FinCEN’s new FAQ on the Customer Due Diligence rules.
As discussed previously, we are sponsoring two teams, one of lawyers and one of bankers, for the Atlanta Ragnar Trail Run on April 13th and 14th. Sixteen of us will be taking turns running five mile legs at the Georgia International Horse Park over a 24-hour (or so) period. Team BSA (or Bankers Speed Ahead) will generally consist of our friendly bankers, while Team AML (or Awkwardly Moving Lawyers) will consist of our compatriots from the firm. I expect our next podcast will relay some interesting stories from the trails.
On March 14, 2018, the Senate passed, 67-31, the Economic Growth, Regulatory Relief and Consumer Protection Act, or S. 2155. While it may lack a catchy name, its substance is of potentially great importance to community banks.
The following summary focuses on the impact of the bill for depository institutions with less than $10 billion in consolidated assets. The bill would also have some significant impacts on larger institutions, which could, in turn, affect smaller banks… either as a result of competition or, perhaps more likely, through a re-ignition of larger bank merger and acquisition activity. However, we thought it was useful to focus on the over 5,000 banks in the United States that have less than $10 billion in assets.
Community Bank Leverage Ratio
Section 201 of the bill requires the federal banking regulators to promulgate new regulations which would provide a “community bank leverage ratio” for depository institutions with consolidated assets of less than $10 billion.
The bill calls for the regulators to adopt a threshold for the community bank leverage ratio of between 8% and 10%. Institutions under $10 billion in assets that meet such community bank leverage ratio will automatically be deemed to be well-capitalized. However, the bill does provide that the regulators will retain the flexibility to determine that a depository institution (or class of depository institutions) may not qualify for the “community bank leverage ratio” test based on the institution’s risk profile.
The bill provides that the community bank leverage ratio will be calculated based on the ratio of the institution’s tangible equity capital divided by the average total consolidated assets. For institutions meeting this community bank leverage ratio, risk-weighting analysis and compliance would become irrelevant from a capital compliance perspective.
Volcker Rule Relief
Section 203 of the bill provides an exemption from the Volcker Rule for institutions that are less than $10 billion and whose total trading assets and liabilities are not more than 5% of total consolidated assets. The exemption provides complete relief from the Volcker Rule by exempting such depository institutions from the definition of “banking entity” for purposes of the Volcker Rule.
Accordingly, depository institutions with less than $10 billion in assets (unless they have significant trading assets and liabilities) will not be subject to either the proprietary trading or covered fund prohibitions of the Volcker Rule.
While few such institutions historically undertook proprietary trading, the relief from the compliance burdens is still a welcome one. It will also re-open the ability depository institutions (and their holding companies) to invest in private equity funds, including fintech funds. While such investments would still need to be confirmed to be permissible investments under the chartering authority of the institution (or done at a holding company level), these types of investments can be financially and strategically attractive.
Expansion of Small Bank Holding Company Policy Statement
Section 207 of the bill calls upon the federal banking regulators to, within 180 days of passage, raise the asset threshold under the Small Bank Holding Company Policy Statement from $1 billion to $3 billion.
Institutions qualifying for treatment under the Policy Statement are not subject to consolidated capital requirements at the holding company level; instead, regulatory capital ratios only apply at the subsidiary bank level. This rule allows small bank holding companies to use non-equity funding, such as holding company loans or subordinated debt, to finance growth.
Small bank holding companies can also consider the use of leverage to fund share repurchases and otherwise provide liquidity to shareholders to satisfy shareholder needs and remain independent. One of the biggest drivers of sales of our clients is a lack of liquidity to offer shareholders who may want to make a different investment choice. Through an increased ability to add leverage, affected companies can consider passing this increased liquidity to shareholders through share repurchases or increased dividends.
Of course, each board should consider its practical ability to deploy the additional funding generated from taking on leverage, as interest costs can drain profitability if the proceeds from the debt are not deployed in a profitable manner. However, the ability to generate the same income at the bank level with a lower capital base at the holding company level should prove favorable even without additional growth. This expansion of the small bank holding company policy statement would significantly increase the ability of community banks to obtain significant efficiencies of scale while still providing enhanced returns to its equity holders.
Institutions engaged in significant nonbanking activities, that conduct significant off-balance sheet activities, or have a material amount of debt or equity securities outstanding that are registered with the SEC would remain ineligible for treatment under the Policy Statement, and the regulators would be able to exclude any institution for supervisory purposes.
Section 214 of the bill would specify that federal banking regulators may not impose higher capital standards on High Volatility Commercial Real Estate (HVCRE) exposures unless they are for acquisition, development or construction (ADC), and it clarifies what constitutes ADC status. The HVCRE ADC treatment would not apply to one-to-four-family residences, agricultural land, community development investments or existing income-producing real estate secured by a mortgage, or to any loans made prior to Jan. 1, 2015.
Jonathan and I discuss deal protections and considerations – from the initial emotions of deciding to sell through deal signing in this latest episode of The Bank Account.
This episode has, in my opinion, some great information for banks looking to undertake M&A activity, from either the buyer or seller’s perspective. But, I’m most impressed with our smooth transition from friendly banter about our upcoming Ragnar race to our substantive discussion. (Of course the face that I’m impressed only emphasises that I shouldn’t quit my day job.)
As noted on the podcast and previously, we are sponsoring two teams, one of lawyers and one of bankers, for the Atlanta Ragnar Trail Run on April 13th and 14th. Sixteen of us will be taking turns running five mile legs at the Georgia International Horse Park over a 24-hour (or so) period. Today we settled on team names: Team BSA and AML. Team BSA (or Bankers Speed Ahead) will generally consist of our friendly bankers, while Team AML (or Awkwardly Moving Lawyers) will consist of our compatriots from the firm. We’re pretty comfortable that the names will accurately reflect the results.
Jonathan and I are back in our studio, and took this opportunity to talk a little about what we’re seeing from our clients, particularly as it comes to reinvesting their tax savings into future opportunities. Before digging into substance, we first take a little time on the therapist’s couch to address Jonathan’s experience at the College Football National Championship Game. Only 190 days until college football is back!
With regard to tax reform savings, the go to resource for identifying the breadth of ways that banks are addressing is the American Bankers Association’s page at aba.com/EnergizingTheEconomy. As you can see from that list, the responses really run the gamut of possibilities, including salary increases, increasing employee benefits, greater charitable contributions, new positions and products, fintech investments and addressing margin compression.
As noted on the podcast, we are sponsoring two teams, one of lawyers and one of bankers, for the Atlanta Ragnar Trail Run on April 13th and 14th. Sixteen of us will be taking turns running five mile legs at the Georgia International Horse Park over a 24-hour (or so) period. More details to follow, but we’re certainly expanding away from traditional marketing efforts.
We also hope you’ll consider joining us in Macon, Georgia, on April 4, 2018, for the Georgia Bankers Association’s Current Expected Credit Loss (CECL) Workshop. We’ll be joining our friends from Mauldin & Jenkins to discuss upcoming regulatory changes and the impact of tax reform from a strategic perspective.
We hope you enjoy this episode of The Bank Account. This is the fourth and final podcast episode we recorded in Phoenix. As you can see (and hear), we stepped outside on the grounds of the beautiful Arizona Biltmore hotel and enjoyed beautiful February weather. Unfortunately, while the surrounding area seemed completely quiet before we started recording, once we hit record, every moving van, dump truck and other sound-making person, plant, animal and equipment seemed to invade our lovely spot. But we think the quality of the conversation with Jay (and the lovely weather and environment) more than makes up for any audio issues. We hope you enjoy the conversation with Jay as much as we did.
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