On November 21, 2018, the Federal Reserve, Office of Comptroller of the Currency and the FDIC jointly published a notice of proposed rulemaking (the “NPR”) to provide an alternative capital system for qualifying banking organizations.  Specifically, 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%.

The NPR seeks to implement the community bank leverage ratio (CBLR) mandated by Section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”).  EGRRCPA requires the regulatory agencies to develop a CBLR of not less than 8 percent and not more than 10 percent for qualifying community banking organizations, and provides that organizations that meet such CBLR will deemed well capitalized for all purposes.  EGRRCPA further provides that a qualifying community banking organization to be a depository institution or depository institution holding company with total consolidated assets of less than $10 billion.

Summary of the NPR

The NPR establishes five criteria for an depository institution or holding company to be deemed a Qualifying Community Banking Organization:

• Total consolidated assets of less than $10 billion;
• Total off-balance sheet exposures of 25% or less of total consolidated assets;
• Total trading assets and trading liabilities of 5% or less of total consolidated assets;
• MSAs of 25% or less of CBLR tangible equity; and
• Temporary difference DTAs of 25% or less of CBLR tangible equity.

Under the NPR, the numerator of the CBLR would be CBLR tangible equity.  CBLR tangible equity would be equal to total equity capital, determined in accordance with Call Report or Form Y-9C instructions, prior to including any minority interests, less (i) accumulated other comprehensive income (AOCI), (ii) all intangible assets (other than MSAs) including goodwill and core deposit intangibles, and (iii) DTA’s arising from net operating loss and tax credit carryforwards.

The CBLR denominator would be average total consolidated assets, calculated in accordance with Call Report or Form Y-9C instructions, less the items deducted from the CBLR numerator, except AOCI.  The NPR notes that the calculation is similar to the one used in determining the denominator of the tier 1 leverage ratio.

Under the NPR, a Qualifying Community Banking Organization may elect to use the CBLR framework at any time, so long as it has a CBLR greater than 9% at the time of the election.  Under the CBLR framework, the Qualifying Community Banking Organization will be considered well capitalized so long as it has a CBLR greater than 9%. A qualifying depository institution that previously elected to use the CBLR framework but has fallen below 9% will not be required to convert back to the regular capital system.  Instead, the following CBLR leves will serve as proxies for the PCA categories:

• Adequately Capitalized – CBLR of 7.5% or greater;
• Undercapitalized – CBLR of less than 7.5%; and
• Significantly Undercapitalized – CBLR of less than 6%.

The framework for Critically Undercapitalized would remain unchanged at a ratio of tangible equity to total assets of 2% or below.  Any institution that would be deemed Significantly Undercapitalized under the CBLR framework would be required to promptly provide its appropriate regulators sufficient information to calculate the PCA tangible equity ratio.

A little over 10 years ago, at the wise encouragement of Walt Moeling, we launched this blog.  From day one, the response from clients, referral sources, regulators and competitors has been amazing.

All in, we’ve published over 1,000 blog posts, authored by almost 100 different attorneys with the firm.  From BankPogo.com to BankBryanCave.com to BankBCLP.com, the site has evolved with the evolution of the firm, but has always been focused on providing usable advice to financial institutions across the country.

I’m thrilled with what we were able to build, but also refuse to just rest on our past accomplishments.  We are always on the lookout for areas of interest to our client, where we can partner with the financial institution industry to create value for all.  I think we all hope that such assistance will never again involve assistance with government investments in our depository institutions, but if it does, we look forward to building upon the expertise gained in the great recession.

Ten years ago, on October 13, 2008, the U.S. Treasury Secretary Henry Paulson effectively locked the CEO’s of the nine largest banks in the United States in a conference room and demanded that they accept an investment from the U.S. Government. Although we had front row seats for much of the activity over the ensuing years, reading the New York Times summary of that meeting from the following day still provides a sense of just how shocking all of this was.

While the U.S. Treasury simultaneously announced its intention to also provide the possibility of investments in other banks, it was a long wait for details, particularly for privately held and Subchapter S Banks.  Ultimately, over the course of the next 15 months, the U.S. Treasury invested $199 billion in 707 financial institutions across 48 states.  As of October 1, 2018, the Treasury has received over $226 billion back in dividends, repayments, auction proceeds, and warrant repurchases.

Of the $199 billion in investments in 707 institutions, as of October 1, 2018, only three investments, reflecting $24 million in original investments, remain in Treasury’s portfolio.  264 institutions repaid in full and another 165 refinanced into other government programs.  (The SBLF and CDFI funds were similar to the TARP CPP program, but were ultimately done under different congressional mandates.  While not necessarily representative of an ultimate cash return on the Treasury’s investment, each of these funds has also provided a strong return to the Treasury.)

10 Years ago today, on October 3, 2008, President George W. Bush signed the Emergency Economic Stabilization Act of 2008, creating the Troubled Asset Relief Program (TARP) and authorizing the expenditure of up to $700 billion.  Pursuant to its obligations under TARP, the Treasury still publishes regular reports on its investments and activities thereunder.  The Treasury has also published a TARP Tracker that provides an interactive and chronological history of TARP.

The various components of TARP were not developed (and then further streamlined) over the next year or so, but the 10-year anniversary of the overall program seems like an appropriate time to look at the overall results of the program.  (In fact, the very thought that TARP would become primarily a program of investments in banks 10 years ago would probably have been laughed at… everyone felt it was going to focus on purchasing toxic assets.)  Over the next several months, we’ll periodically look back on the developments (with the benefit of hindsight), including looking at the launch of this blog.

While $700 billion was initially authorized, the authorization was subsequently reduced to $450 billion.  Based on the latest Monthly Update published by Treasury, just over $440 billion was disbursed and only $70 million remains outstanding today.  Overall, the U.S. Treasury has received just over $443 billion in cash back as a result of its expenditures under TARP.

While overall TARP was actually profitable for the U.S. Treasury, when you break down TARP into categories of programs, one can see that the bank investment component (which is generally thought to be the most controversial aspect) was actually the most profitable.

Looking specifically at the various bank investment programs, the government invested a total of $245.1 billion.  Of that investment, it did recognize write-offs and realized losses of over $5.2 billion.  However, it also recognized over $35.7 billion in income (primarily dividends and profits on sold investments), resulting in a total cash return of $275.5 billion on its $245.1 billion investment.

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On September 28th, Jonathan and I recorded a brief podcast on the impact of regulatory reform on community banks in 2018.  Before turning to substance, I first congratulated Jonathan on his ability to combine two of our shared passions: college football and mergers & acquisitions.  Jonathan’s post on a Football Fan’s Guide to M&A Transactions is an excellent application of college football coaching strategies that can be applied in any strategic planning discussions by boards of directors of any organization.  His further exploration of some of the principles that other SEC teams bring to bear on M&A thinking on Twitter is also something I encourage everyone to read.

On substantive issues, we primarily focused on reforms enacted under The Economic Growth, Regulatory Relief, and Consumer Protection Act, or EGRRCPA, but also touched on the modernization of the Georgia banking code. Specific topics discussed include:

• the expansion of the Small Bank Holding Company Policy Statement;
• the relaxation of the reciprocal brokered deposit rules;
• Volcker Rule relief;
• the upcoming regulatory off-ramp (or at least rest stop, if not fully an off-ramp); and
• the increased threshold for the 18-month examination cycle and short-form call reports.

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.

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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!

Joining us in the studio is Terry Ammons.  Terry is a partner with Porter Keadle Moore LLC and the host of GroundBanking, PKM’s podcast on innovation in the financial industry.  If you’ve enjoyed The Bank Account, I suggest you also give GroundBanking a listen; I know I’ve enjoyed the first several episodes.

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.

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Jonathan and I discuss the evolving landscape for banking in our hometown, Atlanta, Georgia, in this latest episode of The Bank Account.

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.

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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.

• 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.

• Ryan Barrow, Porter Keadle Moore (but an honorary lawyer for the weekend)
• Megan Canning
• Crystal Homa
• Dan Wheeler
• Kevin Strachan
• Jonathan Hightower
• Sean Christy
• Myself

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.

In actual banking news, we discussed Hilary Burns story in the American Banker, “Do multiple charters still make sense?” In our discussion of the landscape of the U.S. banking environment last year, we touched on the statistical decline in multi-bank charters.

• In 2016, 632 charters were held by 241 multi-bank holding companies (representing 2.6 charters each).
• In 2006, 1,670 charters were held by 518 multi-bank holding companies (representing 3.2 charters each).

In 2018, we struggle (and in the podcast, the struggle is awkward silence) to provide any material benefit to the multi-bank charter structure.