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A Unique Rationale for a Bank Robbery

September 8, 2016

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We don’t often post about crimes against banks, especially when they involve clients, but this story out of Kansas City deserves a wider audience.

A 70-year-old man is charged with robbing a Kansas City bank (located just down the street from the police headquarters), after handing a note to a teller indicating that he had a gun and demanding money.  He then proceeded to take the money and a seat in the bank lobby.

When I say he took a seat, I don’t mean he physically removed a chair, but rather that he simply sat down.

His rationale appears to be that he would prefer to live in a jail cell than with his wife, with whom he he’d had an argument.

You can read more about it in the Kansas City Star.

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Economies of Scale Encourage Continued Consolidation

The Federal Reserve Bank of St. Louis just published a short summary of research by economists with the Federal Reserve Bank of Kansas City concluding that compliance costs weigh “quite a bit” more heavily on smaller banks than their larger counterparts in the community banking segment.  Looking specifically at banks under $10 billion in total assets (where additional Dodd-Frank-related burdens are triggered), the study found that the ratio of compliance costs as a percentage of total noninterest expenses were inversely correlated with the size of the bank.  While banks with total assets between $1 and $10 billion in total assets reported total compliance costs averaging 2.9% of their total noninterest expenses, banks between $100 million and $250 million reported total compliance costs averaging 5.9% and banks below $100 million reported average compliance costs of 8.7% of non-interest expenses.

While nominal compliance costs continued to increase as banks increased in size (from about $160 thousand in compliance expense annually for banks under $100 million to $1.8 million annually for banks between $1 and $10 billion), the banks were better able to absorb this expense in the larger banks.  Looked at another way, the marginal cost of maintaining a larger asset base, at least in the context of compliance costs, decreases as the asset base grows.

With over 1,663 commercial banks with total assets of less than $100 million in the United States as of March 31, 2016 (and 3,734 banks with between $100 million and $1 billion), barring significant regulatory relief for the smallest institutions, we believe we will continue to see a natural consolidation of banks.  While we continue to believe there is no minimum size that an institution must be, we also consistently hear from bankers in the industry that they could be more efficient if they are larger… and the research bears them out.

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Too Small to Succeed or Ownership Structure to Thrive?

April 4, 2016

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Two recent federal banking agency reports show very different pictures of the banking environment for community banks.  In “Too Small to Succeed? – Community Banks in a New Regulatory Environment,” the Federal Reserve Bank of Dallas lays out the “apparent” rising regulatory burden confronting banks today.  In contract, “Financial Performance and Management Structure of Small, Closely Held Banks,” published in the FDIC Quarterly, provides an empirical analysis of the success of closely held community banks in the FDIC Kansas City, Dallas and Chicago regions.

Lots of Community Banks Remain

As a reminder (which often seems forgotten in these discussions), the U.S. banking industry is still full of community banks.  As of December 31, 2015 (the latest data available), there were 6,182 insured depository institutions in the United States (banks and thrifts, exclusive of credit unions).  Only 107 of those institutions had more than $10 billion in assets; 595 institutions had between $1 and $10 billion, 3,792 had between $100 million and $1 billion, and 1,688 had less than $100 million in assets.  (That’s not to say there isn’t significant concentration; the 110 institutions over $10 billion in assets hold over 81% of the assets in the industry.)

As indicated by the otherwise down-beat Federal Reserve paper, community banks (measured as having less than $10 billion in this analysis) have still maintained 55% of all small-business loans and 75% of all agricultural loans (and banks under $1 billion in total assets still provide 54% of all agricultural loans).  As pointed out by the Federal Reserve paper, community banks accounted for 64% of the $4.6 trillion of total banking assets in 1992, but accounted for only 19% of $15.9 trillion of banking assets in 2015.  While we have certainly had consolidation (both fewer banks, and larger banks), the community bank’s aggregate market ownership has, based on the Federal Reserve’s percentages and totals, actually gone up slightly from $2.9 trillion to $3.0 trillion.

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Supervisory “Concerns” with Shareholder Protection Arrangements

February 9, 2016

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In December 2015 (following years of sporadic and seemingly random criticism) of shareholder protection arrangements, the Board of Governors of the Federal Reserve System issued guidance that the Federal Reserve “may” object to a shareholder protection agreement based on the facts and circumstances and the features of the particular arrangement.  Federal Reserve Supervisory Letter SR 15-15 does not require submission of such arrangements to the Federal Reserve for comment prior to implementation, but rather directs institutions considering the implementation or modification of such arrangements to “review this guidance to help ensure that supervisory concerns are addressed.”

Supervisory Letter SR 15-15 casts a long shadow, with little clarity as to the line between acceptable and unacceptable arrangements. SR 15-15 cites a wide array of potentially objectionable shareholder protection arrangements, but then indicates that supervisory staff has “in some instances” found that these arrangements would “have negative implications on a holding company’s capital or financial position, limit a holding company’s financial flexibility and capital-raising capacity, or otherwise impair a holding company’s ability to raise additional capital.”  Presumably speaking only of these particular arrangements (although not clearly so stating), SR 15-15 states “[t]hese arrangements impede the ability of a holding company to serve as a source of strength to its insured depository subsidiaries and were considered unsafe and unsound.”

SR 15-15 provides a number of examples of categories of shareholder protection arrangements that have (sometimes) raised supervisory issues.  Some of these examples are entirely consistent with past Federal Reserve precedent and are generally impermissible in bank-related investments, including price protections in offering arrangements whereby a holding company agrees to a cash payment or additional shares to the investor in the event that additional shares are issued in subsequent transactions at lower prices.  These “down-round” provisions have always been viewed by the Federal Reserve as acting as an impermissible disincentive (and potential disabling mechanism) for a holding company to raise additional capital going forward.  (In a surprising move of clarity, the Federal Reserve guidance does, by footnote, specifically indicate that preemptive rights, or the right to participate in subsequent offerings to prevent dilution of ownership, does not, in general, raise any supervisory concerns.)

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11th Circuit Holds Reinstatement Letters Can’t Include Estimated Expenses

December 30, 2015

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Consumer borrowed money from Lender. Consumer defaulted, and Lender began to foreclose, including all the usual steps: arranging for property inspection, hiring counsel, etc. After about a year,Consumer sought to reinstate the loan, and asked Lender how much it would cost. Lender responded in writing, with an itemized list of expenses to be paid, plus an estimate of additional costs (clearly marked as estimates) that Lender may incur over the next month if it continued to exercise remedies. (After all, this would not be the first time in recorded history that a borrower swore it would make good on the loan – and then didn’t.)

Consumer paid the entire amount required to reinstate the loan, including Lender’s estimated out-of-pocket expenses. A few months later, Lender refunded the estimated expenses which it didn’t incur after all. What’s the big deal? Why is this unusual? Why are you reading this, and why did we write about it? Well, in the 11th Circuit, including any estimated future charges or expenses in a reinstatement letter (or a loan payoff, as your authors can’t see any reason why this remarkable ruling wouldn’t also apply to payoff letters) violates the federal Fair Debt Collection Practices Act if your loan documents don’t clearly allow for that inclusion (and most don’t – we checked). This is the ruling in Prescott v. Seterus, Inc., 2015 U.S. App. LEXIS 20934 (11th Cir. Dec. 3, 2015).

See Bryan Cave’s Bankruptcy & Restructuring Blog for more information about this opinion, and the steps that you can and should do to address.

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CFPB Denied

November 11, 2015

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CFPB Denied

November 11, 2015

Authored by: Robert Klingler

Invoking memories of Apple’s famed 1984 Superbowl commercial, a group called the American Action Network aired an anti-CFPB spot during last night’s Republican presidential debate. If nothing else, the spot should encourage further discussion of the role and impact of the Consumer Financial Protection Bureau.

The spot certainly portrays the CFPB in an evil light that is sure to please many in the banking industry, but its broader impact is less certain. A well-written piece by the American Banker offers several reasons why the ad could backfire, not the least of which is the hyperbolic nature of (and shortcuts taken by) the spot.

And former FDIC Chair Sheila Bair seems to agree.

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The State of Banking in Atlanta: 2015 vs. 2005

October 8, 2015

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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).

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And You Thought Bankers Had it Bad…

October 5, 2015

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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.

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The State of Banking in Georgia: 2015 vs. 2005

October 2, 2015

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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.

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