Thursday, January 29, 2015
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Have you thought about offering your customers wealth management services? The fee opportunities are attractive and the regulatory issues are more manageable than you might think.

Why should a bank’s board directors consider entering the wealth management business? For one, several of your competitors are already doing so. Wells Fargo already employs over 15,000 financial advisors and is looking to serve an even broader swath of the mass market than it already does. And, according to the American Banker, approximately 25% of all banks plan to offer wealth management services by the end of 2016, according to a survey conducted by that publication. If that survey data is representative across the banking industry, your board would not be in the leading edge if you are not considering the risks and rewards of building or acquiring a wealth management division.

This article assumes that U.S. community banks are not looking to compete directly with the largest private banks in advising billionaires on anything from buying a private jet to investments in complex derivatives. Instead, most community banks will offer basic wealth management services, including administering retirement assets held in 401(k) plans and IRAs, advice in setting up educational and health savings plans and perhaps basic trust services to assist in administering family trusts. Other service offerings, such as insurance, securities custody, securities lending, securities clearing and settlement, are sometimes considered part of wealth management or trust services, but this article does not discuss those other services because they are generally not a good fit for community banks, at least in the early stages of launching a wealth management division. Basic wealth management services are, at least in theory, a natural complement to the business of offering deposit services and loans to wealthier bank customers.

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Wednesday, January 28, 2015
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Ten years ago, business was booming for community banks—profitability driven by a hot real estate market, a wave of de novo banks receiving charters, and significant premiums paid to sellers in merger transactions. Once the community bank crisis took root in 2008, however, the same construction loans that once drove earnings caused significant losses, merger activity slowed to a trickle, and only one new bank charter has been granted since 2008. But as market conditions improve and with Federal Deposit Insurance Corporation’s (FDIC) release of a new FAQ that clarifies its guidance on charter applications, there are some indications that an increase in de novo bank activity may not be far away.

To understand the absence of new bank charters in the last six years, one must look to the wave of bank failures that took place between 2009 and 2011, which involved many de novo banks. Many of these banks grew rapidly, riding the wave of construction and commercial real estate loans, absorbing risk to find a foothold in markets saturated with smaller banks. This rapid growth also stretched thin capital and tested management teams that often lacked significant credit or loan work-out experience. When the economy turned, these banks were not prepared for a historic decline in real estate values, leading to a wave of FDIC enforcement actions and bank failures.

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Friday, January 16, 2015
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On December 24, 2014, the FDIC released its latest statements on what they consider to be “brokered deposits.”  In Guidance on Identifying, Accepting, and Reporting Brokered Deposits Frequently Asked Questions (the “FAQs”), the FDIC outlined their current views on what they will deem to be brokered deposits, formally stating positions that have been developing over the last few years but which had not previously been stated in writing.  For many FDIC-insured depository institutions (collectively, “banks”), the FAQs might have little or no impact.  For others, the impact could be significant.

Banks that have a large portfolio of brokered deposits know that they do, but these FAQs could expand the number of brokered deposits held by such banks.  It therefore is important to review the FAQs carefully to ensure that your call reports are accurate.  As discussed below, your volume of brokered deposits could even impact your FDIC insurance assessments.

There also may be those banks that believe they do not have any brokered deposits, except perhaps the reciprocal deposits obtained through CDARs, the Certificate of Deposit Registry Service.  This belief might not be accurate, and might be based on interpretations of the “primary purpose” exception that the FDIC does not share.  We recommend that every bank reconsider their brokered deposit holdings in light of the FAQs.

This article discusses the possible implications of having brokered deposits and the FDIC’s interpretation of what is or is not a brokered deposit as reflected in past FDIC Interpretive Letters and the FAQs.

The Brokered Deposit Rules and Consequences

Under Section 29 of the Federal Deposit Insurance Act (12 U.S.C. § 1831f) and its implementing regulation at 12 C.F.R. § 337.6, a “brokered deposit” is any deposit obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker.  A “deposit broker” includes any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions, or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties.  There are a number of regulatory exceptions to this definition, but the FDIC applies these exceptions very narrowly, as discussed below.

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Friday, January 9, 2015
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As we begin 2015, it is worth noting the various federal regulations that will or might take effect. This article summarizes the key regulations that took effect late in 2014, that will take effect in 2015, and that have at least some potential of taking effect in 2015. We focus here on those regulations directly impacting consumer financial services.

Rules Taking Effect in 2015 (and Late 2014)

Integrated Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z)

Perhaps the most significant new consumer regulations to take effect in 2015 are the integrated disclosure regulations under the Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) (the Final Integrated Disclosure Rule). Released on November 20, 2013, by the CFPB, the Final Integrated Disclosure Rule will be effective on August 1, 2015. 78 Fed.Reg. 79730, December 31, 2013. For loan applications received prior to August 1, 2015, the existing Regulation X and Regulation Z rules would apply and, for loan applications received on or after August 1, 2015, the new disclosure requirements would apply.

The Final Integrated Disclosure Rule consolidated the RESPA and TILA initial disclosures, and the RESPA and TILA loan closing disclosures for most closed-end consumer mortgage transactions, resulting in a single Loan Estimate disclosure and a single Closing Disclosure. The new rules do not apply to home equity lines of credit, reverse mortgages, or loans secured by a mobile home or other dwelling that is not attached to real property.

Countless articles and seminars have provided details of the Final Integrated Disclosure Rule, and vendors have stepped into the breach to provide the forms and systems needed to create new disclosures. This article therefore does not address the new Integrated Disclosure Rules in detail. However, a proposal issued on October 10, 2014, (the “October Proposal”) should be noted.

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Monday, January 5, 2015
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Effective January 1, 2015, Bryan Cave LLP elected 14 new lawyers to partnership in the firm. Bryan Cave’s strength and depth in advising community banks is further enhanced by the election of Jonathan Hightower to the partnership.

UFDJonathan Hightower is in our Atlanta office and focuses his practice in financial institutions law, including corporate, regulatory and securities work. Jonathan regularly advises community banks and their boards of directors on their strategic plans, including sale transactions, strategic mergers and capital raises, as well as on complex regulatory issues. Recently, Jonathan’s active transactional practice significantly contributed to Bryan Cave’s position in SNL league tables for Financial Institutions M&A for 2014. He primarily represents small to mid-sized community banks, including S Corporation community banks and bank holding companies.

Monday, December 22, 2014

Banks have increasingly used participation agreements over the last several decades to pool loans among multiple lenders—with an originating or lead bank selling a portion of the loan to one or more banks as loan participants.  Loan participations can inure to the benefit of both the lead and participating bank, allowing the banks to pool their resources. Through loan participations, lead banks obtain the opportunity to make larger loans to their customers without the obligation to carry the entire asset on their books, and participant banks obtain the ability to participate in larger loans or in different markets than would otherwise be available to them.

To facilitate a loan participation, the lead and participating banks typically enter into a written participation agreement to govern the relationship and the obligations owed to each other with respect to the loan. While often derived from bank forms that have been widely circulated and revised on an ad hoc basis over years, participation agreements can differ significantly in their terms and requirements. These terms are far from boilerplate and can have a critical impact upon the rights of the parties when there is a dispute over the administration of the loan or the collateral.

During the recent economic recession, disputes between originating and participating banks over loan participations have become all too common. These disputes have arisen most frequently because the banks involved find that when the loan is downgraded or the borrower defaults, the banks discover that they have differing interests in the handling of the loan. Some originating banks have a greater interest in working with the borrower in such situations than their participants. Some participant banks have a greater interest in pursuing an aggressive collection of the loan than their originating banks and sometimes vice versa. No situation is identical. Unfortunately, when the banks involved in such disputes have turned to their participation agreements for guidance, only then have they discovered that the time-worn forms that they have been using for years leave much to be desired. As a result, litigation has frequently ensued.

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Friday, November 14, 2014

For the past 15 years, trust preferred securities (TruPS) have constituted a significant percentage of the capital of many financial institutions, mostly bank holding companies.Their ubiquity, both as a source of capital and as a common investment for banks, made them a quiet constant for many financial institutions. Even in the chaos of the Great Recession, standard TruPS terms allowed for the deferral of interest payments for up to five years, easing institutions’ cash-flow burdens during those volatile times. However, with industry observers estimating that approximately $2.6 billion in deferred TruPS obligations will come due in the coming years, many institutions are now considering alternatives to avoid a potential default.

Unfortunately, many of the obstacles that caused institutions to commence the deferral period have not gone away, such as an enforcement action with the Federal Reserve that limits the ability to pay dividends or interest. It is unclear if regulators will relax these restrictions for companies facing a default.

So what happens if a financial institution defaults on its TruPS obligations? It is early in the cycle, but some data points are emerging. In two cases, TruPS interests have exercised the so-called nuclear option, and have moved to push the bank holding company into involuntary bankruptcy. While these cases have not yet been resolved, the bankruptcy process could result in the liquidation or sale of the companies’ subsidiary banks. Should these potential sales result in the realization of substantial value for creditors, it is likely that we will see more bankruptcy filings in the future.

Considering the high stakes of managing a potential TruPS default, directors must be fully engaged in charting a path for their financial institutions. While there may not be any silver bullets, a sound board process incorporates many of these components:

Consider potential conflicts of interest.
In a potential TruPS default scenario, the interests of a bank holding company and its subsidiary bank may diverge, particularly if a holding company bankruptcy looms. Allegations of conflict can undercut a board’s ability to rely on the business judgment rule in the event that decisions are later challenged. Boards should be sensitive to potential conflicts, and may want to consider using committees or other structures to ensure proper independence in decision-making.

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Monday, October 27, 2014
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With merger activity on the rise during 2014, some boards of directors are considering whether the time is right for their financial institution to find a strategic partner. These boards, particularly those serving institutions with less than $1 billion in assets, may believe their banks need to gain size and scope to maintain a competitive footing. However, these boards may also want to maintain the strategic direction of the institution or capture additional returns on their shareholders’ investment. For these boards, a merger of equals with a similarly-situated financial institution may hold the greatest appeal, as a combined institution could gain greater competitive resources and additional return for its investors than if it were to remain an independent institution. Although a merger of equals may be appealing to both management and the board, the particular circumstances required to execute such a transaction can often be elusive. A merger of equals may involve structural considerations that are slightly different from other acquisitions:

  • Geography. The merging institutions typically have complementary, rather than overlapping, market areas. Some commonality among the markets is helpful, but significant overlap can eliminate many of the synergies associated with a merger.
  • Competitive Advantages. A merger of equals may make sense for financial institutions that have different specialties or expertise. For example, a bank with a high volume of commercial real estate loans may be able to diversify into C&I by finding the right merger partner. Deposit pricing can also create attractive opportunities, with low-cost deposits from slower-growing markets funding loan growth in an adjacent market.
  • Enhanced Currency. Mergers of equals are usually stock deals, allowing the shareholders of each institution to maintain their investment in the combined company. The goal is for the value of the combined entities’ stock to receive an uptick in value at the conclusion of not only the initial merger, but also upon the ultimate sale of the combined institution.
  • Management Integration. Combining the management teams and the boards into an effective team for the surviving bank without bruising egos can be challenging. However, a common goal and meaningful relationships between members of the leadership team of the two institutions can be helpful in finding a path forward.

If two like-minded banks are able to identify each other, negotiating the terms of the transaction can be a complex process, as many management and cultural issues must be resolved prior to entry into the merger agreement. Who is going to be the chief executive officer of the combined institution? Who is going to be on the board? Often, new employment agreements will be negotiated in order to lock in the new management team through the integration of the two institutions. The merger partners should also use the negotiation process to formulate an identity for the resulting bank. While a strategic plan for the combined institution is not a component of the merger agreement, a merger of equals demands that the two merger partners work together to chart a future course for the combined company. Unlike other acquisitions, where the work of integration will begin in earnest following the signing of the merger agreement, formulating a management team, as well as the strategic and business plans of the combined bank, starts at the negotiating table in a merger of equals.

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Monday, October 20, 2014
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Many bank boards are considering a sale of their institution for a variety of reasons—heightened regulatory burdens, board and management fatigue, or an opportunity to partner with a growing bank are just a few. But while the financial crisis has taught important lessons about bank management, for many bank directors, the sale of their financial institution is uncharted territory. As you typically only have one opportunity to get it right, directors considering a sale should focus first on establishing a sound process around the board table.

Although it is rational for directors to worry more about specific aspects of the proposed deal than procedural matters, we have found that establishing an appropriate process for considering a possible transaction is often a prerequisite for success on the business issues. Moreover, in today’s world of heightened scrutiny of board actions, Directors cannot neglect procedure and expect to fulfill their duties of loyalty and due care.  In most states, fulfilling those duties gives directors the benefit of the business judgment rule, which insulates directors from liability provided the decision is related to a rational purpose.

In the context of a sale, most directors can meet their duty of loyalty by acting in good faith to achieve the best result for the company and its shareholders and by disclosing any conflicts of interest to the board prior to the beginning of the deliberations. But with respect to the duty of care, establishing a thorough process leading to a sale is key. A recent court case decided in Georgia provides a helpful roadmap.

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Wednesday, October 8, 2014
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Adding or upgrading mobile banking is a major project, as is simply changing a bank’s vendor or service provider for mobile banking. This article summarizes the steps involved in doing so.

The banking regulators have all issued guidance on outsourcing activities to third parties. By any measure, a mobile banking service provider is a significant or critical relationship for a bank. The data security demands are significant and the bank is subject to significant strategic, reputation, operational, transaction, and compliance risks, among other risks.

Time may be the single most important consideration. To get the best deal for your bank, start the process of evaluating potential providers, selecting a vendor and negotiation a services agreement 12-18 months before an existing contract is due to renew or before your bank needs to launch a new service.

Due to the significant and high risk nature of mobile banking services, a bank should engage in comprehensive due diligence of its proposed service providers. (And yes, it is recommended that the bank engage in due diligence with more than one service provider, both to ensure it understands the marketplace and also to ensure that it gets a “market” level of service and healthy competition for its business.) Comprehensive due diligence means reviewing financial statements, verifying the vendor’s relevant experience (success in implementing mobile banking for comparable banks) and reputation with comparable banks, the vendor’s regulatory relationships, results of past exams and audits, litigation history, performance issues, data security issues, and consumer complaint history. If the vendor will subcontract or outsource any part of the services, the bank should perform comprehensive due diligence on those subcontractors as well.

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