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.

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.

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.

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.

The Supreme Court of Georgia issued its latest opinion on March 13, 2019 in the continuing litigation over whether former directors and officers of the now defunct Buckhead Community Bank can be held liable for financial losses from commercial real estate loans.

The Georgia Supreme Court had previously advised a Georgia federal court, where the case was filed by the FDIC, that the directors and officers of the bank could be held liable if they were negligent in the process by which they carried out their duties. Following that opinion, rendered in 2014, the case returned to federal court, and a trial was ultimately held in 2016. In that trial, the jury concluded that some of the directors and officers were negligent in approving some loans and awarded the FDIC $4,986,993 in damages.

The trial judge in the case found that the defendants were “jointly and severally liable” for the award, meaning that the entire verdict could be collected from any one of the defendants. The defendants appealed contending that joint and several liability had been abolished by the General Assembly in 2005. The defendants also argued that the trial court should have given the jury the opportunity to apportion the damages among each of the defendants according to their respective degrees of fault. In considering the appeal, the United States Court of Appeals for the Eleventh Circuit again sought direction from the Supreme Court of Georgia on this new issue of law.

On Wednesday, in a 39-page opinion, the Georgia Supreme Court responded, providing answers to some, but not all, of the questions raised by the Eleventh Circuit. The Georgia Supreme Court held that joint and several liability can still be imposed in Georgia on defendants “who act in concert insofar as a claim of concerted action involves the narrow and traditional common-law doctrine of concerted action based on a legal theory of mutual agency and thus imputed fault.” The Supreme Court indicated that this was a very narrow exception to the usual rule that damages must apportioned among defendants.

Many of us who are native Southerners sat with mouths agape as we read the announcement of the $66 billion (!) all-stock merger of equals between super regional banks BB&T and SunTrust. Few of us who grew up in Georgia have not been personally impacted by these banks in some way or another. For me, my aunt worked at Trust Company Bank when I was a kid, and BB&T bought a local thrift (Carrollton Federal), making its way into our home market where it remains today. After college, law school barely beat out an offer to work in SunTrust’s commercial lending training program, and BB&T currently holds the mortgage on my home. With all of those ties, I feel somewhat nostalgic when reading that the bank will be rebranded as a part of the merger.

With that said, the real time business implications for all of us are even larger. The day before the merger, my friend Jeff Davis wrote a smart piece ($) detailing the virtues of merger of equals transactions in today’s world. BB&T recently discussed on its earnings call that it was accelerating cost savings initiatives in order to invest more in its digital offerings. With the announced merger, one can assume that the lab for digital innovation of the combined bank (to be based in Charlotte, a bit of a disappointment to the Atlanta community) will make a massive effort to transform the banking experience of the bank’s customers, a truly meaningful segment of the market. We have recently commented that the transformation of the Atlanta banking market is now a reality, and this combination promises to further evolve how many banking customers think of and interact with their banks.

With both college and professional (not to mention fantasy) football in full swing, we find many conversations with clients drifting to topics from the
gridiron at this time of year.  Given that many of us are devoting a significant amount of our personal time to following our favorite teams, many times business points are best illustrated at this time of year by using football analogies.

Certain sports agents have posited that the highest achieving football coaches could easily run Fortune 500 companies but instead chose to coach football for a living.  While that point is debatable, we can certainly draw from the talking points of today’s best coaches in setting a framework for approaching a merger transaction.  While we can’t deliver Nick Saban, Bill Belichick, or Kirby Smart to your boardroom, use these sound bites to your advantage in setting the tone for how your board addresses an M&A transaction.

1. 1. Trust the process. “The Process” has become a hallmark of the University of Alabama’s championship dynasty.  Coach Saban focuses on the individual elements that yield the best results by the end of the season.  Similarly, a well-planned process can be trusted to yield the best long-term results.  This simple point is among the easiest for boards to miss.  We are often concerned when clients engage in “opportunistic” M&A activity.  Instead, we prefer to see a carefully planned process that includes the following fundamental elements:
      * Parameters around the profile that potential partners should have, including market presence, lines of business, and size;
      * Clearly defined financial goals and walkaway points; i.e., those metrics beyond which no deal can be justified;
      * For sellers, the forms of consideration that will be acceptable (i.e., publicly-traded stock, privately-held stock, or cash); and
      * Selection of qualified advisors.
   2. Self-scout. Great football teams have an honest self-awareness of their strengths and weaknesses and grasp them on a deeper level than their opponents.  Buyers and sellers should also have a frank assessment of their shortcomings.  In planning for the M&A process, those weaknesses should be addressed in advance to the extent possible.  To the extent they cannot be fixed in advance of embarking on an M&A process, parties should provide a transparent assessment of their weaknesses to potential partners.  Doing so enhances credibility and builds trust in the other facets of due diligence.
   3. Know the tendencies of your opponent. On the other side of self-scouting is a great team’s ability to understand and address the weaknesses of its opponents.  While we never advise clients to think of M&A partners as adversaries, advance due diligence of a potential partner to identify their needs can certainly help lead to a successful transaction.  At its core, a good M&A transaction is about giving a potential partner something it does not have and cannot build for itself.  To the extent that parties can identify the needs of potential partners in advance of their initial conversations, they can speak directly to those needs at the outset, thus positioning themselves as an optimal partner in a crowded M&A field.

On July 1, 2017, significant amendments to the director and officer liability provisions of Georgia’s Financial Institution Code and Business Corporation Code will take effect.  These amendments, adopted as House Bill 192 during the 2017 General Assembly session and signed into law by Governor Deal in May, enhance the protections available to directors and officers of Georgia banks when they are sued for violating their duty of care to the bank.  The amendments also apply to directors and officers of Georgia corporations, including bank holding companies.

First and foremost, House Bill 192 creates a statutory presumption, codified at O.C.G.A. § 7-1-490(c) for banks and at O.C.G.A. §§ 14-2-830(c) and 14-2-842(c) for corporations, that a director or officer’s decision-making process was done in good faith and that the director or officer exercised due care.  This presumption may be rebutted, however, by evidence that the process employed was grossly negligent, thus effectively creating a gross negligence standard of liability in civil lawsuits against directors and officers.  This is a response to the Supreme Court’s 2014 decision in FDIC v. Loudermilk, in which the Court recognized the existence of a strong business judgment rule in Georgia but also held that it did not supplant Georgia’s statutory standards of care requiring ordinary diligence.  The Court interpreted the statutes as permitting ordinary negligence claims against directors and officers when they are premised on negligence in the decision-making process.  (As you may recall, Loudermilk also held emphatically that claims challenging only the wisdom of a corporate decision, as opposed to the decision-making process, cannot be brought absent a showing of fraud, bad faith or an abuse of discretion.  This part of the Loudermilk decision is unaffected by the new amendments.)  Many Georgia banks and businesses expressed concern that allowing ordinary negligence suits would open the door to dubious and harassing litigation.  The Court’s opinion noted these concerns but held that they were for the General Assembly to address.

As amended, O.C.G.A. § 7-1-490(c) and its corporate code counterparts will foreclose the possibility of ordinary negligence claims by requiring a plaintiff (which can be a shareholder, the bank or corporation itself, or a receiver or conservator) to show evidence of gross negligence, which the statutes define as a “gross deviation of the standard of care of a director or officer in a like position under similar circumstances.”   It is important to note that the actual standard of care that directors and officers must exercise is essentially unchanged.  As we have written in the past, it is important for a bank board in today’s legal and business environment to develop careful processes for all decisions that are entrusted to the board, and to follow those processes.  A director should attend board meetings with reasonable regularity and should always act on an informed basis, which necessarily entails understanding the bank’s business, financial condition and overall affairs as well as facts relevant to the specific decision at issue.  The new amendments should not be read as relaxing these requirements.  The only thing that has changed is the standard of review that courts will follow when evaluating a process-related duty of care claim.  By requiring plaintiffs to show gross negligence in order to defeat the statutory presumption, the amended statute should discourage the filing of dubious lawsuits, and also provide defendants with a strong basis for moving to dismiss such suits when they are filed.  Many states, including Delaware, recognize a gross negligence floor for personal liability either by statute or under the common law.  The amendments bring Georgia law more closely in line with these states.

On April 17, 2017, the Supreme Court of Georgia made yet another critical decision in a line of cases which together, create the framework for a guarantor’s liability for a deficiency after a foreclosure has been conducted. The case styled York et al. v. Res-GA LJY, LLC came before the Supreme Court in consideration of the questions of (i) the extent and limitations of guarantor waiver of rights under O.C.G.A. §44-14-161; and (ii)  whether a creditor may pursue a guarantor for a deficiency after judicial denial of confirmation of a foreclosure sale.

In York et al., the lender sought to confirm the foreclosure sale of real property located in three different counties in Georgia, which properties were used to secure five promissory notes evidencing loans made to several entities and guaranteed by individual guarantors affiliated with such entities. The court in each of the three counties denied the confirmation of the respective sale citing as the basis for such denial, the lender’s failure to prove that the sale garnered fair market value, as is required under O.C.G.A. § 44-14-161. Despite its lack of success at the confirmation proceedings, the lender pursued deficiency actions against the guarantors. The trial court in awarding judgment against the guarantors, concluded that the waiver provisions of the guaranties executed by the guarantors served to waive any defense that the guarantors may have had as a result of lender’s failure to successfully seek confirmation. On appeal, the trial court’s judgment against the guarantors was affirmed.

In Georgia, to pursue a borrower for a deficiency after a foreclosure, a lender is required to file a confirmation action within thirty (30) days after foreclosure and present (i) evidence that the successful bidder at the foreclosure sale bid at least the “true market value” for the property and (ii) evidence regarding the legality of the notice and advertisement and regularity of the sale.  See O.C.G.A. § 44-14-161.

The Georgia Court of Appeals issued its decision in HWA Properties, Inc. v. Community & Southern Bank, 322 Ga. App. 877 (746 SE2d 609) (2013) in July of 2013, finding that a creditor’s failure to obtain a valid confirmation of a foreclosure sale did not impair its authority to obtain a deficiency judgment against the loan’s personal guarantor if the guarantor waived the defenses otherwise available to the guarantor under O.C.G.A. § 44-14-161.  In 2016, the Georgia Supreme Court addressed two questions regarding this issue certified to it by the United States District Court for the Northern District of Georgia and agreed with the Court of Appeals in its reasoning, holding that Georgia’s confirmation statute “is a condition precedent to the lender’s ability to pursue a guarantor for a deficiency after foreclosure has been conducted, but a guarantor retains the contractual ability to waive the condition precedent requirement”.  See PNC Bank National Ass’n v. Smith, 298 Ga. 818, 824 (758 SE2d 505) (2016).

The FDIC’s lawsuit against former directors and officers of the failed Buckhead Community Bank, one of the most closely watched Georgia corporate governance cases in years, went to trial in October, 2016.  The jury returned a verdict of nearly $5 million against the defendants for their role in the approval of four large commercial development loans that later defaulted.  FDIC v. Loudermilk, No. 1:12-cv-04156-TWT (N.D. Ga. Oct. 26, 2016).  It was less than a complete victory for the FDIC, which had sought over $21 million in damages based on ten bad loans, but the verdict nonetheless represents a significant recovery against directors and officers of a Georgia bank.  The case is all the more significant because it was the first known jury trial to evaluate a negligence claim under the business judgment rule as defined by the Georgia Supreme Court earlier on in the proceedings.

Editor’s Note:  This piece is an excerpt from the author’s 2016 Georgia Corporation and Business Organization Case Law Developments, which addresses decisions handed down in 2016 by Georgia state and federal courts addressing questions of Georgia corporate and business organization law.  The year saw a large number of decisions involving limited liability companies, continuing a trend from recent years.  The Georgia Supreme Court addressed some interesting and novel questions of commercial law, including whether an out-of-state LLC (or corporation) can avail itself of the removal right that permits Georgia-based companies to shift certain tort litigation from the county in which it is brought to the county where it maintains its principal office, and whether a nonprofit corporation has standing to pursue a write of quo warranto against public officials.

Buckhead Community Bank was closed by the Georgia Department of Banking and Finance in December, 2009, during the heart of the financial crisis.  The FDIC was named as receiver for the Bank.  In 2012, the FDIC filed suit against the Bank’s former directors and officers, alleging that they pursued an aggressive growth strategy aimed at building a “billion dollar bank,” causing the Bank’s loan portfolio to become heavily concentrated in commercial real estate acquisition and development loans.  The FDIC’s allegations were highly similar to allegations it made in dozens of other cases involving similarly situated banks that failed during the Great Recession.  In all, the FDIC filed over 100 civil actions between 2010 and 2015 in its capacity as its receiver for failed banks throughout the country, 25 of which were filed in Georgia against directors and officers of Georgia banks.  The vast majority of these cases have settled.  In fact, Loudermilk was only the second of these cases to proceed all the way to trial, and the first in Georgia.

As the case progressed to trial, it eventually focused on ten specific loans that were approved directly by the defendants acting as members of the Bank’s loan committee.  As to each of these loans, the FDIC alleged that approving the loans violated the Bank’s own loan policy, banking regulations, prudent underwriting standards and sound banking practices.  For instance, it was alleged that some loans exceeded the Bank’s loan-to-value guidelines but were approved anyway.  Other loans were approved without certain documentation that the FDIC alleged was necessary, such as current financial statements of borrowers and guarantors.  Other loans were allegedly approved before the loan application paperwork was final.  There was no claim that any of the loans were “insider” loans that provided a direct or indirect personal benefit to any of the defendants.

Court Dismisses Website Accessibility Case as Violating Due Process, Since DOJ Still Has Not Issued Regulations

Recent court decisions from California and Florida may provide ammunition to retailers battling claims that their websites and mobile applications are inaccessible in violation of Title III of the Americans With Disabilities Act (the “ADA”). As we reported in a previous blog post, banks and other businesses have faced a wave of such demand letters and lawsuits.  Most of these claims settled quickly and confidentially.

However, a California district court recently granted Dominos Pizza’s motion to dismiss under the primary jurisdiction doctrine, which allows courts to stay or dismiss lawsuits pending the resolution of an issue by a government agency. In Robles v. Dominos Pizza LLC, U.S. Dist. Ct. North Dist. Cal. Case No. CV 16-06599 SJO, the court held it would violate Domino’s due process rights to hold that its website violates the ADA, because the Department of Justice still has not promulgated regulations defining website accessibility – despite issuing a notice of proposed rulemaking back in 2010.

The court stated that the DOJ’s application of an industry standard, the Website Content Accessibility Guidelines 2.0 (WCAG 2.0), in statements of interest and consent decrees in other cases does not impose a legally binding standard on all public accommodations. It also noted that those consent decrees indicated flexibility to choose an appropriate auxiliary aid to communicate with disabled customers, and suggested that Domino’s provision of a telephone number for disabled customers may satisfy this obligation. Retailers that do not have an accessible website should therefore provide a toll-free number serviced by live customer service agents who can provide all the information and services available on the website. It is important to keep in mind that customers are the most valuable asset of your business. Staring getting information from websites like Salesforce so that you learn how to improve your customer service. 

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On March 28, 2017, Jonathan and I sat down with Bryan Cave Colleagues Ken Achenbach and Crystal Homa in the latest episode of The Bank Account for a discussion focused on legislative changes in Georgia affecting banks, including modifications to Georgia’s business judgement rule and the Department of Banking & Finance’s Housekeeping Bill.

While the bills we discuss await the Governor’s signature (and subsequent effectiveness – July 1 for the business judgement rule change and 30 days after signature for the housekeeping bill), our team looks forward to the practical effect of these statutory changes.  As banking industry participants, we appreciate the efforts of the legislature to make Georgia an attractive state for banking.

As referenced in the podcast, we also encourage you to check out our prior The Bank Account episode about the role of bank directors post FDIC v. Loudermilk, and Crystal’s earlier post on providing banking services to minors.

You can also follow us on Twitter with Jonathan at @HightowerBanks, Crystal at @CrystalHoma and me at @RobertKlingler.  Ken cannot be followed on Twitter, as Ken’s thoughts cannot be limited to 140 characters.