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Category Archives: Commentary

Commentary: The End of Community Banking?

By Walt Moeling - Tuesday, June 29, 2010

On June 29, 2010, Sarah Wallace,  chair of the board of directors of First Federal Savings and Loan Association in Newark, Ohio, authored a passionate opinion piece in the Wall Street Journal titled “The End of Community Banking.”  While I agree with many of Ms. Wallace’s points, I do NOT see the end of community banking in the foreseeable future.

I do think that we are going to see tighter regulations and tighter credit than we saw in the five years before the financial meltdown – 2002 through 2007.  Those five years were the culmination of a world wide expansion of credit and leverage that began in the US around 1980, so we really had a great run.  Nonetheless, by 2002, a good number of observers would argue that credit availability was running somewhat out of control.

As Mrs. Wallace suggests, we will have tighter rules, but they will by nowhere near as tight as those that prevailed until the late 1980′s or early 1990′s.  During my career beginning in the late 1960′s, we have done away with limits on interest paid on deposits, most commercial usury limits, limits on branching and cross state expansion, certain caps on real estate lending, and we have expanded the lending limit in many cases from 10% of capital to 25%.  Most of these changes will not be reversed, and credit will continue to be available for borrowers who can demonstrate an ability to repay the loan.  However, I do not see banks going to the credit excesses of the 2002-2007 period, and there will be  people who might have gotten loans then who will not be able to get loans in 2011… and that is probably not all bad.

Wallace is chair of the board of directors of First Federal Savings and Loan Association in Newark, Ohio.Wallace is chair of the board of directors of First Federal Savings and Loan Association in Newark, Ohio.
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Changes to Loss Share Transactions Forthcoming

By Rob Klingler - Thursday, March 25, 2010

We understand that the FDIC is substantially changing the loss share formula structure, applicable to all bids made after March 31, 2010.  The material changes include:

  • Elimination of the “Stated Threshold” and 95%/5% loss sharing basis.  Accordingly, all loss sharing will be at a constant 80%/20% split (FDIC/acquiring bank) for all covered assets and all losses.
  • Bidders will now be expected to express the Asset Premium (Discount) component of their bid as a percentage of the book value of assets purchased, rather than a fixed dollar amount.
  • The “First Loss Tranche” will now be an element to be bid, rather then an amount calculated based on assets acquired and liabilities assumed.  Bidders will be expected to express the “First Loss Tranche” component of their bid as a percentage of the covered assets.  The “First Loss Tranche” will continue to represent the amount of losses the acquirer will absorb prior to the commencement of loss sharing.  Negative bids for the First Loss Tranche will not be accepted, although zero bids will.
  • As the “First Loss Tranche” will now be separately bid, the net equity position of the failed bank may cause an initial payment to be due to the FDIC at closing, particularly when assets passing to the acquiring bank exceed the deposit liabilities.  (Previously such an acquiring bank merely assumed 100% of the losses until the amount owed the FDIC was exhausted.)
  • The Initial Payment will be the sum of  the equity adjustment (assets – liabilities), deposit premium bid (in dollars), and the asset premium bid (in dollars). If the result of the calculation is positive, the acquiring bank will be required to wire the Initial Payment to the FDIC, while if it is negative, the acquiring bank will receive a wire of the Initial Payment from the FDIC.

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Regulators Issue Statement on Lending to Creditworthy Small Businesses

By Jerry Blanchard - Monday, February 8, 2010

On February 5, 2010, the federal banking regulators and the Conference of State Bank Supervisors issued an Interagency Statement on the Credit Needs of Creditworthy Small Business Borrowers.  The Statement builds upon principles set forth in the October 2009 Policy Statement on Prudent Commercial Real Estate Loan Workouts.  After noting the overall decline in loans to small businesses and the reasons for that decline the regulators suggested that lenders may have become overly cautious with respect to small business lending.  They encourage lenders to engage in prudent small business lending and that that examiners will not criticize lenders for working in prudent and constructive manner with small businesses.

The decline in small business lending has many reasons, not the least of which is that loan demand is actually down.  Lenders are also naturally cautious of lending to those businesses that are reliant solely on cash flow that has slowed due to the slowdown in consumer spending and the decline ion the personal wealth of the owners of the businesses.  Despite the assertions to the contrary by the regulators, lenders are concerned that there is a disconnect between statements from Washington, DC and what actually happens in the field when examiners are onsite at financial institutions.  Our experience seems to show that local federal regulators do not see any upside in being flexible when faced with making decisions about how to rate credits.  Lenders are therefore naturally reluctant to maker decisions based on guidance until they see it actually implemented on the ground.

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Boards and Strategic Planning in a Challenging Environment

By Walt Moeling and Dustin Hall - Thursday, September 10, 2009

Short-Term Planning for Recovery and Survival

(This post was authored by Walt Moeling and Dustin Hall.  A version of this post originally appeared in the August 2009 issue of the ABA’s Community Banker magazine.)

The grim economic prognoses we continue to hear about have an immediate impact in the bank board room. Boards must think about short-term planning for recovery and survival because virtually no bank is wholly immune from the current recession.  Although the problems may have started with residential real estate in the Sunbelt, they have gone much beyond that now, impacting banks throughout the country.

As a director you must plan for both long-term and short-term.  Long-term planning is tremendously important, and we hope to make it to the “long-term,” but short-term planning is critical today.

Short-term planning in this context deals with the reality of today’s marketplace.  The focus is not on earnings or even stock value, two traditional focal points for planning.  Instead, the focus is on capital management, liquidity, and asset quality.

Capital Management

Your short-term capital planning in the face of mounting losses cannot focus on today or yesterday; it must focus on tomorrow.  You must ask: Where are we going?  What will happen if housing prices drop for another two and a half years, as predicted by some?  Can our borrowers sustain a more prolonged recession?  If not, where will our capital be three, six, and nine months from now?  In essence, you must stress test your bank to see how far it can go.

A real problem for directors is assuming that capital today is as readily available as it has been for the past 15 years, or that they can sell the bank if there is a real problem.  Unfortunately, there is no public market, and virtually no private equity, for bank stock.  Those sources are presently closed, shall we say, for repair.  Instead, short-term capital is likely to be found only within the boardroom and from family and friends.

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Bryan Cave Submits Comment Letter on TARP Interim Final Rules

By Rob Klingler - Friday, August 14, 2009

On August 14, 2009, Bryan Cave LLP submitted a comment letter on the Treasury Department’s Interim Final Rule on TARP Standards for Compensation and Corporate Governance.

In addition to several technical revisions, we have recommended that Treasury:

  • permit TARP recipients to implement new commission compensation programs;
  • treat single-trigger change in control payments as retention awards as opposed to golden parachute payments;
  • add a $100,000 floor for consideration of an employee as a “most highly compensated employee;”
  • permit smaller reporting companies to use the SEC’s smaller reporting company rules for determining their senior executive officers;
  • modify its restrictions on tax gross-up payments;
  • clarify that the say on pay provisions do not apply to private companies; and
  • either clarify or eliminate the 162(m)(5) requirement.

The comment letter is currently being processed by the Treasury Department before being added to the public docket for the regulation, but you can read the complete comment letter here.

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Additional Clarity on TARP Approval Process & Standards

By Rob Klingler - Thursday, August 13, 2009

On August 6, 2009, the Office of the Special Inspector General for TARP (SIGTARP) published its report on whether external parties (i.e. politicians) unduly influenced TARP Capital Purchase Program decisions.  We will write more about that subject shortly, but the Report also provided the most detailed summary that we’ve seen of the factors considered by Treasury and the federal banking regulators in determining whether to approve a TARP application.

First, composite CAMELS ratings clearly played a significant role in determining the likelihood of success for any given institution.

  • 1-rated institutions were generally sent directly to Treasury for approval, and seemingly regularly approved for Capital Purchase Program funds.
  • 2-rated institutions with “acceptable performance ratios” were also sent directly to Treasury for approval, and again appear to have been regularly approved for funds.  2-rated institutions with “unacceptable performance ratios” were subject to further review by the interagency council, where at least three of the four federal banking regulators had to approve the application.  The Report states that the interagency council then analyzed “the viability of the institution based on the quantitative and qualitative  factors of the case” in determining whether to recommend approval to Treasury.
  • 3-rated institutions were originally treated like 2-rated institutions, but “relatively early in the CPP application review process,” Treasury decided that all 3-rated institutions needed to be reviewed by the interagency council.
  • 4- or 5-rated institutions were generally asked to withdraw, without the application being forwarded to the interagency council.

The Treasury would then make an independent evaluation of each application before making recommendations to the three-member Treasury Investment Committee.  The Treasury Investment Committee would then make a recommendation for final approval to the Assistant Secretary.  While only the Assistant Secretary can actually approve a TARP CPP application (all other actions are merely recommendations to approve), according to the Report, the Assistant Secretary had not rejected any recommendation forwarded by the Investment Committee for approval.

Performance Ratios

The Report also includes, as an Appendix, a copy of a “Case Decision Memo Template” that appears to have been the form used by the region/district level office of each federal banking regulator that reviewed TARP CPP applications.  The Memo provides further guidance on the specific performance ratios considered by the agencies.  In addition to CAMELS and CRA ratings, the  Memo called for an evaluation of the following performance ratios, both before and after a TARP infusion and both for the holding company and the largest bank subsidiary:

  • Tier 1 Risk-Based Capital
  • Total Risk-Based Capital
  • Tier 1 Leverage Ratio
  • Classified Assets/(Net Tier 1 Capital + ALLL)
  • (NPLs + OREO)/(Net Tier 1 Capital + ALLL)
  • Construction & Development Loans/Total Risk-Based Capital

While the first three performance ratios are consistent with the three historical measures of bank capitalization, the last three performance factors highlight the focus of the banking regulators on these ratios.

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To TARP or Not to TARP

By Rob Klingler - Tuesday, June 30, 2009

As noted by the Wall Street Journal (subscription required), a steady stream of small banks are still lining up for government money.

Since May 31, 20 small banks have received a total of $164.1 million in taxpayer-funded capital, according to the Treasury’s latest available figures.  Half of those banks got the money in the same week that 10 big financial institutions gave theirs back.

Analysts see no end in sight to the trend.  The recession and borrowers are squeezing most of the 8,200 federally insured commercial banks and savings institutions in the U.S., so even a dollop of TARP funds could make a difference.  Some banks are turning to the government to fill a void left by investors who are leery about pouring money into the sector, despite the rebound by bank stocks since early March.

Meanwhile, the rules and stigma of TARP that turned some executives such as J.P. Morgan Chairman and CEO James Dimon against the program are irrelevant to small institutions.

Their employees usually don’t fly on corporate jets or collect hefty bonuses that trigger outrage from taxpayers, customers and Congress.  And curbs on dividend payments are a modest price to pay for greater assurance that the banks can plow ahead with their core mission to gather local deposits, lend them nearby and support local charities, some recent TARP recipients said.

It’s certainly a stretch to say the executive compensation restrictions are “irrelevant” to small institutions, but community banks generally don’t have the excesses that have drawn public and congressional scorn.  With the deadline for smaller community banks to apply to participate under the TARP Capital Purchase Program extended until November 9, 2009, many institutions are taking a fresh look as to whether to apply, even as larger institutions are making a decision as to whether to seek to redeem the TARP investment they’ve already received.

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An Update on the Application Backlog

By Rob Klingler - Monday, June 29, 2009

Even as five of the eight initial Capital Purchase Program recipients have redeemed their TARP investments with the Treasury, hundreds of applications are still being processed, as reported by the American Banker on June 26, 2009 (subscription required).

The Government Accountability Office said in a June 17 report that the Treasury had received more than 1,300 applications from federal regulators as of June 12, and that fewer than 100 were still awaiting a decision. The GAO also said bank regulators are reviewing another 220 applications that have not yet been forwarded to the Treasury.

Of the banking agencies, only the Office of Thrift Supervision details the Tarp application process. Of the roughly 800 companies it oversees, the OTS said 302 have applied for capital injections. Forty-nine have gotten the money and 140 have withdrawn their applications. Another 71 are in some state of review while 42 have yet to be considered.

The Treasury may emphasize that “fewer than 100 are still awaiting a decision,” but that excludes over 200 applications that are haven’t even made it to the Treasury yet.  All told, there are probably 300 applicants that haven’t been told whether they are eligible to receive a TARP investment.

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Commentary: NYTimes Recognizes Community Banks

By Rob Klingler - Monday, May 18, 2009

The front cover of the May 17, 2009 issue of the New York Times Magazine asked “Are Small Banks the Future?“  As noted in the article, lending may have slowed at the largest banks, but at the other end of the financial system, there are 8,500 community banks, and most remain very strong.

In the midst of the worst banking crisis since the Great Depression, community banks have generally fared well. That’s because they typically shunned the lending practices that led to high default rates. They rarely participated in the securitization of loans, credit-default swaps and other overvalued financial products that put the global financial system in crisis. Instead, they stuck to the fundamentals. They considered the character and history of their borrowers. They required collateral. Without community banks, the current financial crisis would be a lot worse.

The focus of the mainstreet press, and the Treasury Department, continues to be on the largest institutions, whether it be the initial nine TARP Capital recipients, or the nineteen that underwent the stress test.  There is some rationality for this focus, the majority of assets, deposits and loans are held by these institutions.  But just like small businesses generally, community banks play a critical role in the American economy.

Community banks may have weathered the current crisis better than larger banks, but they remain an American oddity. Most other countries have 5 or 10 na­tional banks, and when they get in trouble, as they did in Iceland, it can be devastating. The balance in this country is tipped toward big institutions (the four largest control half the assets held by American banks and 40 percent of all deposits), but community banks still make 43 percent of all small business loans under $1 million. Since January 2008, fewer than 1 percent of all community banks have failed.

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Commentary: Demonstrating a Bank is Using TARP Capital to Lend

By Walt Moeling - Thursday, January 15, 2009

One issue that seems to be gaining traction is the need for banks to show how they are using TARP Capital, with a strong preference for the banks to be using TARP Capital to make loans.  While the fungibility of bank capital makes it virtually impossible to directly tie any particular dollar of capital with any particular dollar lent, that fungibility also gives great leeway to community banks to demonstrate the lending impact of TARP Capital.  Despite the political hot potato, we expect very few, if any, community banks to be criticized for their use of TARP Capital funds.

We do not believe that TARP Capital should fundamentally change the way in which bankers run their banks.  Solely because they have TARP Capital, banks should not approve loans that they otherwise would turn down.  However, any bank with additional capital, which TARP Capital provides, is in a better position to make or renew loans than that same bank would have been without TARP Capital.

A bank should be able to show that TARP Capital is “working” so long as its total loans are higher than they would have been without the TARP Capital infusion.  In recognition of the current economic environment and capital restraints, we believe many banks would be actively attempting to shrink the size of the bank were they not to receive TARP Capital infusions.  As a result, merely maintaining the current levels of loans could, in reality, be the result of TARP Capital increasing bank lending activity.  Even Barney Frank’s proposed reform legislation acknowledges that TARP Capital may simply minimize the decline in lending that normally accompanies economic recessions.  While this metric may be difficult for the Congressional Oversight Committee to accept, anytime the question is asked whether a new program is working, you have to make assumptions about what the situation would look like without the program.

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