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Four Things You May Have Missed about the PPP Change of Ownership Notice

As previously discussed, on October 2, 2020, the SBA published Procedural Notice 5000-20057 addressing Paycheck Protection Program Loans and Changes of Ownership. Based on a review of memos on the subject by other law firms and accounting firms, four items stood out as not being regularly addressed (in addition to some expressing the mistaken belief that buyers have to assume the PPP loan in any asset transaction).

1. Any Merger Triggers the Procedural Notice. 

The definition of a change of ownership includes any merger of the PPP borrower with or into another entity.  Even if the PPP borrower is the surviving entity and there is no change in shareholder ownership, it would appear to be pulled into the SBA Procedural Notice. Accordingly, either internal reorganizations or acquisitions could trigger the obligations of the Procedural Notice if structured as a merger.

2. Stock Transfers Between Existing Shareholders Can Trigger Procedural Notice. 

Stock transfers to affiliates and existing owners are covered, not just sales to new owners. Any change in shareholder composition that results in a greater than 50% change since the receipt of the PPP loan triggers a change of ownership of ownership under the Procedural Notice.

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PPP & Asset Sales: Is the Buyer Required to Assume the PPP Note?

No.

On October 2, the Small Business Administration published a procedural notice on changes of ownership for PPP borrowers. One specific area where we’ve seen confusion is whether the procedural notice requires a Buyer to assume all of the PPP Borrower’s obligations in an asset sale transaction. As discussed below, while the procedural notice does require the Buyer to assume the PPP loan obligations in an asset sale in order to obtain the SBA’s prior approval, so long as the SBA’s prior approval is not required, then the parties remain free to structure the asset transaction in whatever manner makes economic sense for the parties, including leaving the PPP loan obligations with the Seller.

Section 2.b. of the procedural notice indicates that, in connection with obtaining SBA pre-approval for a change of ownership, that SBA approval “will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.” The procedural notice goes on to indicate that the purchase or sale agreement “must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity, or a separate assumption agreement must be submitted to the SBA.” Accordingly, if SBA pre-approval is required in connection with a change of control structured as an asset sale, then it would be necessary to have the Buyer assume the PPP loan. However, this obligation is limited to circumstances in which SBA pre-approval is required.

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SBA Provides Guidance on Changes of Ownership of PPP Borrowers

On October 2, 2020, the SBA Office of Capital Access published Procedural Notice 5000-20057, which provides a framework to address whether SBA pre-approval is required for various changes of ownership under the Paycheck Protection Program, as well as the process for seeking that approval if needed. Any Paycheck Protection Program borrower looking at a potential change in control, whether via actions of the shareholders or direct action by the PPP borrower needs to be familiar with this guidance. In addition, anyone looking to acquire control of a PPP borrower should also review the guidance. While the guidance makes clear the possibility of preserving the potential for forgiveness of the PPP loan through a change of ownership, the Procedural Notice sets forth various approaches to obtain SBA pre-approval for the transaction (or to avoid the need for SBA pre-approval.)

Before outlining the key elements of the SBA guidance, we must note that this guidance is being published almost six months after the first PPP loans were issued, and two months after the SBA advised that guidance on changes of ownership would be issued “soon.” While one might hope that such delay at least allowed for clear and complete guidance to be published, I’m afraid the guidance may result in more questions than answers.

General Rule

Without expressing a basis for such obligation, SBA Procedural Notice provides that prior to the closing of any “Change of Ownership” transaction, the “PPP borrower must notify the PPP Lender in writing of the contemplated transaction and provide the PPP Lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.”

While only specifically requiring notification (as opposed to application or consent), this requirement would seem inconsistent with the SBA’s Frequently Asked Questions and Interim Final Rule permitting lenders to use their own promissory note and to include any terms not inconsistent with Sections 1102 and 1106 of the Cares Act, the PPP Interim Final Rules and Guidance, and SBA Form 2484. While the SBA general form of promissory note does require lender’s prior consent if a borrower “reorganizes, merges, consolidates, or otherwise changes ownership or business structure,” these terms were not defined and lender’s were expressly permitted to use other forms of note.

Changes of Ownership Defined

For purposes of the SBA Procedural Notice, “Changes of Ownership” are defined to consist of the following transactions:

  • an aggregate change in 20% or more of the ownership interests in the Borrower since date of SBA approval of the SBA loan (but for public companies, only need to include sales or transfers resulting in one person owning at least 20%) (stock transfers);
  • sale or transfers of 50% or more of the fair market value of the assets of the Borrower (asset sales); and
  • mergers with or into another entity (mergers).
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The So-Called Rise of Credit Union Buyers

The increasing number of banks selling to a credit union has been a hot topic at investor conferences, within the trade press, amongst clients, at trade associations events, and in conversations with investment bankers. To that end, I’ll be on the main stage at BankDirector’s 2020 Acquire or Be Acquired Conference discussing the new players in the bank M&A game.

And the numbers would appear to support that conversation…

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

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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On the BB&T/SunTrust Merger…

On the BB&T/SunTrust Merger…

February 7, 2019

Authored by: Jonathan Hightower

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.

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2018 Bank M&A Statistics

2018 Bank M&A Statistics

January 7, 2019

Authored by: Robert Klingler

2018 was only the fourth most active year over the last five years in terms of the number of insured institutions that agreed to sell. However, perspective is also important, as 2018 was also the fourth most active year over the last ten years, and the most active if measured as a percentage of institutions available to sell. 2018’s 262 bank and thrift deals ended up slightly lower than 2017’s 267 transactions. Based on the 6,670 insured banks and thrifts outstanding as the beginning of the year, 4.6% exited through a business combination.

Until and unless we see significantly more de novo activities, it seems unlikely that we will return to 300 transactions in any given year, as we last saw in 2014.  However, on an annualized basis, the second quarter of 201 saw 336 transactions!  Similarly, looking at a four quarter rolling total, we had more than 280 deals announced both between Q3 ’17 and Q2 ’18 and between Q4 ’17 and Q3 ’18. Each institution’s decision to sell remains subject to a number of unique considerations, but, all else equal, we would expect 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.

2018 reflected, consistent with recent trends – although perhaps not yet reflecting the year-end stock declines – 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 and 2018 has risen to 1.6x book, with 2018 slightly higher than 2017.  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). 

2018 marks the seventh straight year with over 240 transactions announced during the year, and the fifth straight year in which more than 4% of the institutions at the beginning of the year sold. Based on these trends, and without attempting to identify how the financial sector’s market decline will impact M&A activity, this would point to between 217 and 250 deals to be announced in 2018.

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A Holiday Buffet of Banking News

A Holiday Buffet of Banking News

December 28, 2018

Authored by: Robert Klingler

On December 27th, Jonathan and I returned to the studio to record the latest podcast for The Bank Account. We haven’t discussed New Year’s Resolutions, but we’ll try to return to a little more normalcy in 2019!

For those that have missing our voices, (a) please seek help… that’s not normal and (b) we were also recently guests on the ABA Banking Journal Podcast. In a lively conversation with Evan Sparks and Shaun Kern, Jonathan and I discussed our 2019 M&A Outlook for the ABA Banking Journal. For those of you who have missed that podcast (or article), I encourage you to listen/read before listening to this podcast, as we follow-up on some of these themes.

Our first substantive conversation on this podcast is a look at some of the transactions announced in the Metro Atlanta market in 2018. With State Bank’s merger with Cadence, Fidelity Bank with Ameris Bank, and National Commerce with CenterState, the Atlanta banking market, and particularly the M&A market, will look radically different in 2019 and beyond.

Following the M&A discussion, our attention turned to the newly proposed Community Bank Leverage Ratio. While it is solely a proposed rule and, if adopted in its current structure, will be an entirely optional framework for banks under $10 billion in assets, it also provides the potential for significant regulatory relief for those institutions that can take advantage of the capital (particularly risk-based) relief.

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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Getting to Yes: A Conversation About Deal Certainty

the-bank-accountJonathan 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.

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2018 Banking Trends with Raymond James

In our third podcast recorded onsite at Bank Director’s Acquire or Be Acquired (AOBA) Conference, we were honored to be joined by Bill Wagner and Matt Paramore with Raymond James.  Bill and Matt shared their outlook for 2018, including the potential of North Carolina serving as a potential preview for community banking across the country and the potential renewed entry of de novo participants.

the-bank-account

Another topic discussed with Bill and Matt is the impact of private equity monetizing some of their investments in financial institutions over the last several years, with the ability to monetize those investments with either M&A or by secondary security sales.  The ability for private equity to exit as reasonable pricing opens significant potential for management teams that believe that continued organic growth and returns can deliver long-term results for all shareholders.  We hope you enjoy this episode of The Bank Account.

This is the third 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 and, as you can see from the pictures, our recording “studio” was rather large.  But we think the quality of the conversation with Bill and Matt more than makes up for any audio issues.  We hope you enjoy the conversation with Bill and Matt as much as we did. 

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