Last week we looked at the state of banking in Georgia based on the FDIC’s latest summary of deposits information, and now we turn our focus to Atlanta. The overall number of banks in the Atlanta Metropolitan Statistical Area (the 9th largest MSA in the country), fell from 138 to 97, a 30% decline. As in broader Georgia, this number overstates the decline of independent banking organizations, as the number of holding companies operating multiple bank charters in the Atlanta area fell from 4 to 1, with the number of unaffiliated financial institutions falling from 126 to 96 (a 24% decline).
The total amount of deposits assigned to branches in the Atlanta MSA rose from $95 billion to $146 billion, a 54% increase (as compared to a 43% increase for the entire state, and an increase of only 23% in the state but outside the Atlanta MSA). The total number of branches in the MSA fell from 1,342 to 1,294, a 4% decline. These effects combined to increase the average amount of deposits per branch in Atlanta from $71 million to $113 million, a 60% increase.
Like Georgia more broadly, between increasing total deposits and industry consolidation, Atlanta saw an increase in the number of larger institutions operating within the MSA. The number of institutions with more than $2 billion in deposits increased from 6 institutions to 12, while the number of institutions with between $500 million and $2 billion declined slightly from 10 to nine. The number of institutions with between $250 million and $500 million in deposits fell from 23 to 14, a 39% decline, the number of institutions with between $100 million and $250 million in deposits fell from 41 to 27, a 34% decline, and the number of institutions with less than $100 million in deposits fell from 42 to 30, a 29% decline. Consistent with these trends by asset size, but potentially inconsistent with a broader message of unending industry consolidation, the number of banks in the Atlanta MSA with more than 1% of the total deposits in the MSA increased from 9 to 14 banks (and the number of Georgia-based institutions with more than 1% of total deposits increased from 5 to 8).
Today’s economy presents numerous challenges to community bank profitability—compressed net interest margins, increased regulation, and management teams fatigued by the crisis. In response to these obstacles, many boards of directors are exploring new ways to reduce expenses, retain qualified management teams, and offer opportunities for liquidity to current shareholders short of a sale or merger of the institution.
For many family-owned banks, their deep roots in the community and a desire to see their banks thrive under continued family ownership into future generations can cause these challenges to be felt even more acutely. In particular, recruiting and retaining the “next generation” of management can be difficult. Cash compensation is often not competitive with the compensatory packages offered by publicly-traded institutions, and equity awards for management officials are unattractive given the limited liquidity of the underlying stock. All the while, these institutions should ensure that their owners have reasonable assurances of liquidity as needs arise or as investment preferences change. In combination, these challenges can often overwhelm a family-owned bank’s desire to remain independent.
Depending on the condition of the institution, implementing an employee stock ownership plan, or ESOP, may help a board address many of these challenges. While the ESOP is first a means of extending stock ownership to the institution’s employees, an ESOP can have other applications for family-owned banks.
The United States Court of Appeals for the Fourth Circuit, which governs North and South Carolina as well as Virginia, West Virginia and Maryland, has issued an important ruling in FDIC v. Rippy, a lawsuit brought by the FDIC against former directors and officers of Cooperative Bank in Wilmington, North Carolina. As it has done in dozens of cases throughout the country, the FDIC alleged that Cooperative’s former directors and officers were negligent, grossly negligent, and breached their fiduciary duties in approving various loans that caused the bank to suffer heavy losses. The evidence showed the FDIC had consistently given favorable CAMELS ratings to the bank in the years before the loans at issue were made. The trial court entered summary judgment in favor of all defendants, criticizing the FDIC’s prosecution of the suit as an exercise in hindsight. The Fourth Circuit, however, vacated the ruling as it applied to the ordinary negligence claims against the officers. In its opinion, the court held that the evidence submitted by the FDIC was sufficient to rebut North Carolina’s business judgment rule and thus allow the case to go to trial. The Court found that the evidence indicated that the officers had not availed themselves of all material and reasonably available information in approving the loans.
The decision is specific to North Carolina-chartered banks and is based on the historical development of the business judgment rule in that state. Nonetheless, there are certainly comparisons to be drawn to decisions from other states. The emphasis on allegations of negligence in the decision-making process echoes last year’s decision in FDIC v. Loudermilk, in which the Georgia Supreme Court held that it was possible to bring an ordinary negligence claim against bank directors and officers who engage in a negligent process in making a decision. While the Georgia Supreme Court in Loudermilk seemed to be of the view that it would permit claims to go forward against directors and officers who completely avoided their duties and acted as mere figureheads, the Rippy decision shows that in North Carolina, at least, the distinction between a viable case and one barred by the business judgment rule may be very fine indeed. For instance, the FDIC’s evidence consisted largely of expert testimony that Cooperative’s officers failed to act in accordance with generally accepted banking practices by, among other things, approving loans over the telephone before they had examined all relevant documents, and by failing to address warnings and deficiencies in the bank’s (generally positive) examination reports.
As lawyers regularly representing community banks, we are frequently reminded of the level of regulatory scrutiny and intrusion experienced by the industry, and at times the almost laughable results of strained regulatory interpretations. However, I think our health care lawyer colleagues may have us beat.
As explained in this Bryan Cave client alert on the Regulatory Guidance and Legal Implications Associated with the Transition to ICD-10, physicians and other health care providers are required to use an official system of assigning codes to diagnoses in the United States for billing and record keeping of health care services. Effective October 1, 2015, the ICD-10 code set replaced the former ICD-9 code set. The ICD-10 set includes over 68,000 diagnoses, and to say they are expansive and detailed significantly understates any rational interpretation of those concepts.
Here are a few examples of actual ICD-10 codes that are now available to physicians today:
- Struck By Turtle (W59.22XA)
- Spacecraft collision injuring occupant (V95.43XS)
- Swimming pool of prison as the place of occurrence of the external cause (Y92.146)
- Pecked by chicken, initial encounter (W61.33XA)
- Burn due to water-skis on fire, initial encounter (V91.07XA)
- Art gallery as the place of occurrence of the external cause (Y92.250)
- Opera house as the place of occurrence of the external cause (Y92.253)
- Problems in relationship with in-laws (Z63.1)
I’m not sure what you’re supposed to report if the patient is struck by a turtle thrown by an in-law, but please reach out to us if you have a bank regulatory question.
On September 28, 2015, the FDIC published the 2015 summary of deposits information. Using this data, we compared the deposit data for Georgia, comparing 2015 to 2005. Without even looking at the numbers, we knew the period would represent significant change, as the Great Recession had a significant impact on the banking industry, particularly in Georgia.
As a headline number, the total number of banks with branches in Georgia fell from 367 to 248, a decline of over 32%. However, as with many reports showing the number of bank charters, this number overstates the effect of consolidation as it also reflects internal holding company reorganizations in which multi-bank holding companies have consolidated into one bank charter. These internal consolidations reduced the number of bank charters in Georgia by 51, as the number of multi-bank holding companies fell from 18 to 6 (one of which combined their subsidiary bank charters after the reporting deadline for the 2015 summary of deposits). Notwithstanding the overstatement by the headline number, consolidation is certainly occurring in Georgia. The number of independent banking organizations in Georgia fell from 303 to 235, a decline of approximately 22%.
For Georgia, the total amount of deposits assigned to branches rose from $149 billion to $213 billion, a 42% increase, while the total number of branches fell from 2,642 to 2,482, a 6% decline. These combined to increase the average amount of deposits per branch in Georgia from $57 million to $86 million, a 52% increase.
On September 17, 2015, the CFTC entered into a settlement with Coinflip, Inc. d/b/a Derivabit and Francisco Riordan. As part of the settlement with Coinflip, the CFTC entered an Order which included findings and the imposition of remedial sanctions. The CFTC found that Coinflip operated an “options trading platform that connected buyers and sellers of standardized Bitcoin options and futures contracts.” By doing so, the company had violated the Commodities Exchange Act by operating a facility for trading options or processing swaps without being registered with the CFTC as a Swap Execution Facility or a designated contract market.
Coinflip advertised Derivabit as a “risk management platform . . . that connects buyers and sellers of standardized Bitcoin options and futures contracts.” Coinflip listed put and call options contracts as eligible for trading on the Derivabit platform. These contracts listed Bitcoin as the asset underlying the option and denominated the strike and delivery prices in US Dollars. Customers could place orders by registering as a user and depositing Bitcoin into an account in their name. The option contracts were settled using Bitcoin at a spot rate determined by a third-party Bitcoin currency exchange. Users could post bids or offers for the options contracts. Coinflip confirmed the bids or offers through the website.
The case is interesting because for the first time the CFTC publicly stated that Bitcoin and other virtual currencies are “commodities” subject to CFTC enforcement actions:
Section 1a(9) of the Act defines “commodity” to include, among other things, “all services, rights and interests in which contracts for future delivery are presently or in the future dealt in.” . . . The definition of “commodity” is broad. . . . .Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.
To regular observers of the CFTC, the Coinflip decision was not surprising. In May 2013, then Commissioner Chilton noted “[i]n essence, we’re talking about a type of shadow currency, and there is more than a colourable argument to be made that derivative products relating to Bitcoin fall squarely in our jurisdiction.”
The market views peer-to-peer lending as having great promise.
And, some banks are buying these loans in earnest.
Should your bank look closely at doing the same?
Since the financial crisis, a new generation of non-bank lenders has grown up to serve markets that banks either retreated from or have not been able to serve effectively. Lending Club is the best known example. Prosper is a company that pioneered the term “peer-to-peer” lending and originally saw its role as facilitating the loan of money from ordinary people to ordinary people.
Change happened quickly. Now, the more fashionable name for companies in this sector is “marketplace lender.” This term better describes the economics in which a wide array of non-bank lenders make loans in a multiplying array of asset classes and then sell those loans to professional investors. The share of these loans sold to professional investors is estimated at 80% and growing. Buyers include asset managers like BlackRock, hedge funds, business development companies, banks and even a specialized mutual fund. To feed investors’ voracious appetite for these loans, marketplace lenders have expanded beyond their original focus on unsecured personal loans into small-business loans, student loans, real estate loans and an array of other niche loan products, such as financing weddings (and divorces) and point of sale loans, including loans for cars and elective medical procedures. Most of these lenders rely heavily on technology in the underwriting, documentation and closing of these loans. Most operate almost exclusively online.
While marketplace lenders pose an immediate threat to some banks, most community banks are not affected from a competitive perspective. Smaller banks rarely have the ability to make these sorts of loans in a cost-effective manner. The CRE and C&I loans on which community banks depend are still largely unaffected. It still requires significant human involvement to underwrite and structure a large commercial loan.
Who Is An FDCPA Excluded “Creditor”?
The FTC Seeks to Overturn An 11th Circuit Ruling That A Bank Is.
Banking lawyers whose institutions acquire loans or card accounts may want to watch how this 11th Circuit putative class action case issue plays out. The FTC’s brief supports the plaintiffs’ class action bar, and the outcome of the appeal if reversed could further spur both regulatory enforcement activity and consumer class actions.
The FTC recently filed an amicus brief in a consumer’s appeal pending in the US Court of Appeals for the 11th Circuit, Davidson v. Capital One Bank, NA, Case No 14-14200. In the appeal, the 11th Circuit affirmed the Northern District of Georgia’s dismissal of Davidson’s claims (and those of a putative class) under the Fair Debt Collection Practices Act, 15 USC § 1692. The FTC now seeks en banc review to overturn the ruling. The FTC argues that the 11th Circuit misread the statute, decided contrary to several other circuits (the 3rd, 5th, 6th and 7th Circuits), and is placing consumers at risk. The FTC contends that the defendant bank clearly was a “debt collector” as defined by the statute.
The conundrum essentially turns on two issues: (a) the FDCPA’s exclusion of the “creditors” from the coverage of the statute and (b) whether the defendant bank was principally in the business of collecting debts owed to another. In the case, the defendant bank had acquired Davidson’s credit card account from another banking institution. The credit card debt was in default at the time of the acquisition. Some, including the FTC, would argue that this falls squarely within the definition of debt collector under the statute. However, the defendant Bank argued successfully that in the Davidson matter, the institution’s collection efforts only applied to debt it owned, not to another’s.
The statute uses the key phrase “to whom the debt is owed” in the exclusionary language regarding creditors. 15 USC § 1692a(6). Arguably in this case, once the bank acquired the credit card account, the debt is/was owed to that institution. This is precisely the basis on which both the Northern District of Georgia and 11th Circuit dismissed the claims. The rulings also note that the defendant bank is not principally in the business of collecting the debts of others.
One of the first things we do as lawyers when handling a problem loan is to review the loan documents. We do this because we will sometimes find defects in the loan documents that may alter the strategy the bank was going to take in its collection process. Instead of moving to foreclose, for example, a lender might be more inclined to enter into a forbearance agreement with an opportunity to clean up documentation defects. The following are some of the issues we typically ran across while handling problem loans originated during the Recession.
1. Term Sheets and Commitment Letters. The use of Term Sheets and Loan Commitments varied dramatically between banks and even within the banks themselves. For example, we found that if a bank did tend to use Term Sheets, the forms oftentimes were ones simply adopted by a particular loan officer, and not used uniformly across the bank.
Why care one way or the other? The problem arises in the use of internal loan approval forms that are inconsistent with the Term Sheet sent to the customer. In many cases, outside counsel attempted to document a loan based on the Term Sheet only to later discover discrepancies between the Term Sheet and the loan approval form. Such discrepancies often resulted in the lender believing that it had certain collateral or certain rights only to find out later on when the loan went into default that it had neither.
The inconsistencies were also fertile ground for borrowers and guarantors to generate defenses and counterclaims based on the documentation not accurately setting forth the deal. The original loan officer may or may not be available (or interested) to answer questions about exactly what occurred when the loan was being negotiated and later documented.
2. Signatures. Getting loan documents signed correctly is such an important foundation for enforcing a loan that it was always surprising when we reviewed a package and realized that documents had been signed incorrectly. Signature deficiencies are particularly troublesome when dealing with real estate collateral. For example, a Deed to Secure Debt might state on the front page that the Grantor is ABC, Inc. but when you get to the signature page it is signed by XYZ, Inc. Trying to foreclose on the real property in that situation is, shall we say, somewhat problematic, and can involve, among other things, a suit to “reform” the documents. Not exactly what a special assets officer wants to hear when he or she is expecting a simple, straightforward foreclosure action.
On Monday, September 14, 2015, the Georgia Supreme Court heard oral arguments in the case of PNC Bank, National Assoc. vs. Kenneth D. Smith, et al., Case No. S15Q1445.
As noted in our prior blog post, this case is of great interest to banks operating in Georgia which are involved in real estate lending. At issue is whether a lender may conduct a non-judicial foreclosure on real estate serving as collateral, and then pursue a guarantor without first pursuing a confirmation of the sale. In addition, the Court is being asked to consider whether a guarantor may waive such a requirement. In an earlier case, HWA Properties, Inc. v. Cmty. & S. Bank, 322 Ga. App. 877 (2013), the Court of Appeals held that a confirmation following a foreclosure sale is no longer a prerequisite to suing the guarantor for a deficiency when the guaranty waives such a confirmation. Several other panels of the Court of Appeals have since reached a similar conclusion.
The arguments yesterday were dominated by questions from the bench, most of which came from Justice David Nahmias. The questions asked by the Court revolved primarily around the following topics:
- Whether the word “debtor” in the Confirmation Statute should be construed to include guarantors;
- Whether the legislative history indicated that the General Assembly intended the Confirmation Statute to include protections for guarantors;
- The exact scope of the holding in an earlier decision by the Court, First Nat. Bank & Trust Co. v. Kunes, 230 Ga. 888 (1973), and whether the Court had already held that the protections of the Confirmation Statute extended to guarantors;
- The ramifications to lenders and borrowers from these holdings (as the Court put it, “the parade of horribles” alleged by each side); and
- Whether the sanctity of the right to contract by guarantors and lenders should be recognized in such circumstances.
It was not at all clear from the proceedings which way the Court may rule. Many of the justices did not ask any questions at all, and Justice Nahmias did not tip his hand during his usual intense questioning of both sides. A decision is likely within the next few months.