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A Recap of the AOBA M&A Simulation with FIG Partners

On the second day of Bank Director’s Acquire or Be Acquired (AOBA) Conference, we were honored to co-host with FIG Partners for the second year, the M&A Simulation.  The M&A Simulation is an exclusive, bankers-only, session at AOBA that attempts to walk through the initial stages of a bank merger.  Like last year, we divided the attending bankers into three groups, representing the boards of directors of three distinct participants: Bank A, a $700 million bank looking to sell, and Banks B & C, two larger potential acquirers.

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Immediately after the simulation, we sat down with Matt Veneri and Dan Flaherty with FIG Partners for a quick recap of the AOBA18 M&A Simulation on The Bank Account.

This is the second of several podcast episodes we recorded in Phoenix.  Sound quality isn’t quite as good as you may have come to expect as we’re back on an older microphone, but we jumped at the opportunity to be able to share our conversations with so many interesting colleagues at Acquire or Be Acquired.  We hope you enjoy the conversation with Matt and Dan as much as we did. We’re already planning a few new tricks for the M&A Simulation at the 2019 Acquire or Be Acquired Conference, and hope you’ll look to join us then.

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A Conversation with Rory McKinney of D.A. Davidson; Day 1 at AOBA

the-bank-accountFor the next several The Bank Account episodes, we’re on the road at Bank Director’s Acquire or Be Acquired (AOBA) Conference.  In our first installment from AOBA, we highlight our respective take-aways from the first day of AOBA and then sit down with Rory McKinney, Managing Director and Head of Investment Banking for D.A. Davison & Co. to discuss Rory’s outlook for bank M&A activity in 2018.

This is the first of several podcast episodes we recorded in Phoenix.  Sound quality isn’t quite as good as you may have come to expect as we’re back on an older microphone, but we jumped at the opportunity to be able to share our conversations with so many interesting colleagues at Acquire or Be Acquired.  We hope you enjoy the conversation with Rory McKinney as much as we did.

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Modifications to the California Homeowner Bill of Rights

On January 1, 2018, certain provisions of the California Homeowner Bill of Rights (“HBOR”) expired.  But contrary to what many assumed, the January 1, 2018 expiration date did not apply to all of the HBOR’s provisions, and many provisions have been replaced by new regulations.  We’ve prepared the below summary of some of the substantial changes to the law and how they will affect HBOR litigation in the future.

  • The new HBOR removes many of the distinctions between servicers conducting more/less than 175 annual foreclosures.  In most but not all respects, all servicers are treated the same going forward.
  • Changes in the private right of action/relief.
    • The HBOR still has a private cause of action, but only for material violations of section 2923.5 (pre-NOD notice requirements), 2923.7 (single point of contact), 2924.11 (dual tracking), and 2924.17 (accuracy of NOD declaration; substantiate right to foreclose).
    • Injunctive relief is available prior to the recording of a trustee’s deed.  After a trustee’s deed is recorded, a servicer may be liable for actual economic damage and the greater of treble or actual damages for material violations that are intentional or reckless.  Attorney’s fees are still available if the borrower prevails.
    • However, mortgage servicers who have engaged in “multiple and repeated uncorrected violations” of section 2924.17 are no longer liable for a $7,500 penalty.
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2017 Bank M&A Statistics

2017 Bank M&A Statistics

January 3, 2018

Authored by: Robert Klingler

It looks like we’ll end 2017 with a total of 263 bank and thrift transactions, representing a slight increase in the number of deals over 2016 (250), but well below 2014 and 2015 levels (307 and 294, respectively).  However, in light of the decline in total number of banks (and the dearth of de novo activity), 2017 basically equaled 2014 and 2015 transaction activity, with approximately 4.5% of institutions at the beginning of the year exiting through a business combination.  (2016’s 250 transactions represented approximately 4.0% of the outstanding banks at the beginning of 2016.)

Until and unless we see more de novo activities, it seems unlikely that we will return to 300 transactions in any given year.  However, on an annualized basis, the fourth quarter of 2017 saw 296 transactions!  Were 2018 to keep up that pace, over 5% of the remaining banks in the country would need to sell.  Each institution’s decision to sell remains subject to a number of unique considerations, but, if anything, it would seem the percentage of institutions selling in any given year would likely decline rather than increase going forward.

We are strong proponents of the proposition that “banks are sold, not bought.”  The fact that there remain a number of institutions looking to grow by completing acquisitions is thus unlikely to fundamentally change the number of transactions in any particular year.  Conversely, the age and stage of banks in the industry (and that of their management teams) remains a critical component of many sale determinations.  As we continue to see a shrinking universe of financial institutions, it stands to reason that we will also continue to see a decline in the number of institutions that decide a sale is the right strategic decision in any particular year.

2017 reflected, consistent with recent trends, a continued increase in the average price-to-book multiple paid in bank transactions.  While the average price-to-book multiple in 2014, 2015 and 2016 were each approximately 1.3 times book, average pricing in 2017 rose to almost 1.6x book.  This level of pricing likely continues to serve as a negative deterrent to de novo formation, as it’s much easier to build a broadly attractive investment model if it includes a sale for 3x book in 5 years (or less).  Looking at a more granular, quarterly, level, it would appear that the 2017 increase is likely tied to the “Trump bump” in bank stock prices.  The average price-to-book multiple rose to 1.4x in the fourth quarter of 2016 (which included pre-and post- Trump bump prices), and then jumped up 1.5x to 1.6x for each quarter in 2017.

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ICBA Negotiates Settlement with Plaintiff Group on Alleged ADA Liability

Numerous community banks that had received demand letters from the advocacy group Access Now alleging that their websites and mobile apps are inaccessible in violation of Title III of the Americans With Disabilities Act (the “ADA”) have now also received letters that those claims have been resolved under a settlement with the Independent Community Bankers of America (ICBA).

The settlement releases ICBA members and non-member banks with assets of $50 billion or less from all ADA claims concerning their electronic banking services, including online banking, mobile banking, ATM services, and telephone banking.  The settlement resolves numerous claims that Access Now had made through its counsel, Carlson Lynch Sweet Kilpela and KamberLaw LLC.  ICBA announced the news of the settlement directly to its members in November.

The settlement preceded an announcement by the U.S. Department of Justice (“DOJ”) that it is withdrawing all rulemaking concerning website accessibility under the ADA.  The DOJ first announced its intent to promulgate such regulations in 2010.  Its announcement leaves uncertain the issue of whether, and when, there will be a government standard for website accessibility.

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Tax Reform for Sub S Banks and a 2017 Year-end M&A Review

the-bank-accountOn the latest episode of The Bank Account, Jonathan and I analyzed the Rose Bowl, pitting Jonathan’s Georgia Bulldogs against Jonathan’s In-Laws’ Oklahoma Sooners.  With critical generational analysis, Jonathan won me over to support Kirby Smart and the Georgia Bulldogs; I simply have to support Generation X over a Millennial. We then turned our focus to on-topic banking issues: the impact of tax reform on Subchapter S banks and a look in review at the 2017 banking m&a market.

For Subchapter S institutions, tax reform offers/requires a re-evaluation of the tax consequences of a Subchapter S tax election.  While institutions regularly assess the overall tax difference involved in a Subchapter S tax election at the time of making the election, that analysis is often then put in the closet, and only rarely re-addressed upon future strategic decisions.  However, with the decline in the corporate tax rate to 21%, it now behooves Subchapter S institutions, particularly those that retain a significant amount of their earnings to support future growth, to update that analysis. Jonathan and I discuss some of the factors affecting that analysis, as well as the timing implications to make effective for 2018.

Looking at the final M&A statistics for 2017, it looks like we’ll end the year with a slight uptick in the number of deals (259, up from 250 in 2016), but remain significantly below 2014 and 2015 levels.   In addition, the average size of the selling banks in 2017 has declined significantly (almost 25% smaller, based on averages).  Jonathan and I discuss these trends, and make a few predictions on M&A going forward.

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CFPB’s Delay in Announcing Further Delay of the Prepaid Card Rule

The Consumer Financial Protection Bureau has issued a brief press announcement that the Prepaid Card Rule would be further revised and that the effective date for compliance will be further postponed from the current deadline in April 2018.

The announcement creates more worry than relief – it’s just a tease. The announcement did not say what changes would be made or when the new deadline will be. It only said that amendments to “certain aspects” of the rule would be coming “soon after the new year.”  No doubt the Bureau meant for this announcement to be helpful to someone, but it is not clear if anyone is actually helped.

Prepaid card issuers are scrambling to implement the systems changes and new business processes necessary to support the sweeping changes required by the rule. With this announcement, they must now wonder which of those efforts will turn out to be wasted, or perhaps need to be re-worked, and they can’t pause pursuing any specific implementation efforts until the actual amendments are published. Are they supposed to trust that the extra time to be allowed by the CFPB will be sufficient to accommodate this pivot?

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New Year, New You – What’s on Your Bank’s List of New Year’s Resolutions?

With the end of the year approaching, it is time to start looking forward to 2018 and putting together that list of New Year’s resolutions. This list of annual goals can be especially important for community banks because, let’s face it, times are a-changin’ and community banks cannot afford to ignore this, especially in the face of the ostensible juggernaut that is fintech. “New Year, New You” doesn’t have to be a mantra solely for individuals; it can also be a mantra for community banks who want to make 2018 a successful year. To get you started, we have provided some suggestions that may help you turn 2018 into a very positive year for your bank.

Don’t be Consciously Blind

With such a vast amount of information thrown at us every day, I think we are all guilty of becoming consciously blind. It’s true, all the information can overwhelm us, making us turn a blind eye and ignore what everyone has to say and assume if something really important happens, someone will tell us. As a banker, you cannot afford to do this. With the promulgation of new regulations and advances in technology, it is important for community banks to remain aware of the financial landscape and evolve. Whether this means meeting revised regulations or updating technology to meet your customer’s needs, make a resolution to stay abreast of information that may affect your bank.

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Acquire or Be Acquired 2018 M&A Simulation

We are looking forward to running the M&A Simulation at Bank Director’s 2018 Acquire or Be Acquired Conference with our friends at FIG Partners.  This is the second year we’ve teamed up with FIG Partners to present a simulation of the community bank merger and acquisition sale process.  We’ve identified the basics of this year’s fictional banks, and are looking forward to another exciting simulation.

The simulation is an exclusive session at Acquire or Be Acquired, is open to 45 bank attendees only and fills up quickly.  If you’re planning to attend AOBA and want to ensure your spot in the simulation, please contact us.  If you’re interested in attending and haven’t already registered the conference, please contact us to receive our sponsorship code for a $400 discount.

The 2017 simulation involved competing bidders for a billion dollar community bank, identified as Bank A.  Bank B, a $1.3 billion institution, offered a merger of equals opportunity, hoping that one plus one could equal three, while Bank C, a $6 billion institution with strong organic growth, was able to win the hearts and minds of Bank A with a strong all stock offer.  The simulation ultimately mirrored what we often see, small buyers must be very creative or seek opportunities that are not coveted by larger, more highly valued public buyers. See our write-up of the 2017 M&A Simulation for additional information.

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Bank CEO’s Success Strategies; A Conversation with DHG Financial Services

the-bank-accountOn the latest episode of The Bank Account, I had a conversation with Suzanne Donner and Bill Walton of DHG Financial Services to discuss their new whitepaper on the insights of top performing community bank CEOs.   DHG Financial Services conducted a series of interviews with the CEOs of 22 top performing community banks and has compiled their insights into a fantastic white paper.  I was honored to receive an advance copy, and was thrilled to have Suzanne and Bill join me to discuss their findings.

The financial performance of the 22 banks selected demonstrates that they’re doing something right.  ROAA for the group was 1.82% and ROAE was 18.19%.  At the same time, the banks enjoyed a Texas Ratio of less than 10% and an efficiency ratio of just 52.76%.

On the podcast, we discussed each of the three main areas of the white paper: areas in which the top performing community banks are clearly “ahead of the curve;” areas in which the banks are “on the curve;” and areas in which they see emerging risks. DHG’s research suggests that, collectively, these top-performing community banks are ahead of the curve when it comes to their strategic focus, talent caliber and relationships. They are on the curve (and for the most part, comfortably so), in their use of technology for the customer experience, determining success metrics and growth, and strategic planning.  Among the emerging risks and opportunities for community banks to shape the future, top performers generally focused on their responses to the emergence of millennials, as well as the advent of big data analytics.

I’m biased, but I think it’s a great conversation and a great white paper.  There are obviously a lot of resources out there about the industry, but I think this is close to a “must-read” for community bank executives and directors.

To request a copy of the full white paper, contact DHG Financial Services at benchstrength@dhgllp.com.

 

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