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Thanksgiving: Regulatory Relief and Tax Reform

the-bank-accountOn the latest episode of The Bank Account, Jonathan and I discuss two business reasons for bankers to be thankful this holiday season, the Senate’s proposed regulatory relief legislation and legislative efforts for tax reform.

The Senate Banking Committee has released the text of proposed legislation providing real regulatory relief to community banks.  With ten Republican co-sponsors and nine Democratic co-sponsors, the measure would appear to have better odds than prior regulatory reform actions.   That said, no action is expected until sometime in 2018, and we’re still a long way away from adopted legislation.  The proposed legislation provides for significant regulatory relief for community banks, including:

  • a regulatory “express lane” for community banks with sufficient leverage capital ratios;
  • a limited exemption from the brokered deposit restrictions for CDARS and other reciprocal deposits;
  • Volcker Rule relief for traditional banks will less than $10 billion in assets;
  • an increase in the Small Bank Holding Company Policy Statement threshold from $1 billion to $3 billion; and
  • an increase in the threshold for an 18-month exam cycle for healthy institutions from $1 billion to $3 billion.

Without attempting to predict how the tax reform legislation will ultimately end up, we also look at a few key provisions of the proposed house and senate versions of the Tax Cuts and Reforms Act.  One item discussed is the potential impact on deferred tax assets, including the likely hit to existing deferred tax asset valuations and the elimination of net operating loss carry-forwards going forward.  We also spend a fair amount of time addressing the need for all Subchapter S banks to begin the process of exploring the impact of the prospective reforms, particularly as it relates to the tax treatment for shareholders that are active in the bank’s management.  As Sub S elections have to be withdrawn by March 15th to be effective for the whole year, the time to start planning is now!

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All Dressed Up with No Place to Go

All Dressed Up with No Place to Go

November 3, 2017

Authored by: Robert Klingler

the-bank-accountOn the latest episode of The Bank Account, Jonathan and I discuss the prospects and alternatives for a small bank that finds itself without an interested buyer.   Frequently, we are finding clients and other depository institutions that have reached the internal decision that it’s time to sell, but when they check the market, the anticipated buyers are either not available, not interested, or at least not as interested as expected/hoped.

Before getting to those topics, we have a brief foray into me trying to avoid talking about college football, as well as updates on the proposed tax reform act and the announcement of the appointment of Jerome Powell to serve as Chair of the Federal Reserve Board.

Among the alternatives discussed:

  • A sale to a credit union;
  • A sale to a non-bank buyer;
  • A merger of equals, strategic merger, or stepping stone transaction; and
  • Longer term planning to set up the bank for a future sale.
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A Potpourri of Bank Regulatory News

On the latest episode of The Bank Account, Jonathan and I discuss a veritable hodgepodge of new regulatory pronouncements, including the CFPB’s small dollar loan rule and the OCC’s guidance on CRA ratings.  But before we got to the bank regulatory issues, Jonathan first had to seek my opinion on the new Florida Gator jerseys (pictured).  I’m actually fairly proud in my restraint.  For the handful of listeners who enjoy this banter, I encourage you to view these rejected Florida Gator uniforms.  For those that wish we’d stick with banking, I assure you my interest in discussing college football has reached another low after this weekend.

the-bank-accountWe also encourage our listeners to check out the American Bankers Association’s new podcast, the ABA Newsbytes Podcast.  While we’re happy for you to listen to our podcast over and over again, we recognize that it has diminished value starting with the third listen, and encourage you to explore other podcasts as well.

The potpourri of topics discussed include:

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Regulators Propose Simplification of Capital Rules

the-bank-accountOn the latest episode of The Bank Account, “Adding HVADC to our Banking Alphabet Soup,” Jonathan and I are joined by colleague Jerry Blanchard to discuss the new capital rules proposed by the federal banking regulators on September 27, 2017.  The newly proposed regulators propose to overhaul the HVCRE regime with a “new and improved” HVADC regime, while also increasing the amount of Mortgage Servicing Assets (MSAs) and Deferred Tax Assets (DTAs) that can be included in Tier 1 Capital.

As discussed yesterday, the new HVADC rule would likely expand the scope of loans that require elevated risk-weighting, but reduce the risk-weighting from 150% to 130%.  In addition, the new rules would eliminate the need (or risk-weighting benefit) to require borrower contributed capital (and to retain any internally generated profits from the project for the life of the loan).

The proposed rule for MSAs and DTAs would require 250% risk-weighting for such assets (as contemplated in the original BASEL III rules as of January 1, 2018 and proposed to be delayed in August), but would also allow financial institutions to include MSAs and DTAs as capital, each up to 25% of Tier 1 Capital (with no separate aggregate cap amongst them).

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Putting the Success in Succession

Putting the Success in Succession

September 26, 2017

Authored by: Robert Klingler

the-bank-accountOn the latest episode of The Bank Account, Jonathan and I draw from personal experiences at Bryan Cave as well as the experiences of our bank clients for a discussion about succession planning.  Succession planning is rarely a top regulatory concern, but good succession planning requires time to implement.  Accordingly, boards (and managements teams) should always be looking at (and planning for) a future where one or more executives (and/or board members) decides to retire.  With the age of the CEO often being a primary contributor to the decision to sell the bank, succession planning should be a fundamental part of the strategic planning discussion.

A few alternative titles we kicked around for this episode include:

  • Paying Millennials in Avocado Toast: The Podcast About Succession Planning
  • Succession Planning for Banks
  • The Bryan Cave Model: How Walt Moeling & Kathryn Knudson Rocked Succession Planning (and how you can too!)
  • “We” Mode: Smart Succession Planning
  • Succession Planning: Why It’s Important and How To Do It Right
  • Big Team, Little Me:  Succession Planning Tips
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Frenemies: Gaining Efficiency Through Shared Services

the-bank-accountBryan Cave colleagues Ken Achenbach and Sean Christy join Jonathan and me on this episode of The Bank Account to examine the ability of banks to gain efficiency through shared services.  Throughout the business environment, business are looking to out source all non-core competencies.  Ken and Sean explore the opportunity for banks to similarly explore the opportunity for banks to join forces to purchase outsourced services and invest in technology platforms together. By working together, banks can leverage buying power and share the burden associated with evaluating their vendor options.

You can follow most of us on Twitter.  Jonathan is @HightowerBanks, I’m @RobertKlingler, and Sean is @SeanChristy.  Following Ken on Twitter is difficult, as he has, so far, refused to access that part of the internet.  Our producer, Sam Katz, is @SamathaJill1.

Note:  This episode was recorded before the University of Florida announced it was cancelling this weekend’s football game against Northern Colorado due to Hurricane Irma.  The Gators drought in offensive touchdowns will therefore continue at least another week.  We hope everyone stays safe.

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The Sanity of Bank Directors

The Sanity of Bank Directors

September 1, 2017

Authored by: Robert Klingler

the-bank-accountOn the latest episode of The Bank Account, Jonathan and I address two items of significant interest in our office: (a) a recent Wall Street Journal opinion piece on the sanity of bank directors, and (b) the start the of college football season (not necessarily in that order).

When starting the podcast, we expected the podcast would offer listeners an opportunity to hear the conversations we have around the office on a wide variety of topics.

Today, that includes a topic that represents a significant part of our fall conversations, college football, with a particular focus on the SEC.  As a Georgia Bulldog, Jonathan brings his bizarre view of the world, while as a Florida Gator, I correct him (or at least that’s how I see it, and I write the blog posts).  If you want to participate in the conversation, please do not hesitate to reach out to either of us (Jonathan.Hightower@bryancave.com and @HightowerBanks or Robert.Klingler@bryancave.com and @RobertKlingler).

Following the football discussion, we get down to the real business of the day, the insanity of a recent Wall Street Journal Opinion piece.  On August 28th, the Wall Street Journal published an opinion piece by Thomas Vartanian titled Why Would Anyone Sane be a Bank Director?  Jonathan’s response, Why Sane People Serve as Bank Directors, is available here.  Jonathan and I walk through aspects of Vartanian’s analysis that we agree with… as well as the many portions that we strongly disagree with.  We also address a few other items related to the analysis of what should be involved in director’s roles on bank boards and the FDIC’s approach in litigation.

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HVCRE Lending: An Area of Regulatory Examination Focus

HVCRE Lending: An Area of Regulatory Examination Focus

August 24, 2017

Authored by: Bank Bryan Cave

the-bank-account

Jonathan and I are joined by our colleague, Jerry Blanchard, to discuss High Volatility Commercial Real Estate (HVCRE) Loans on the latest episode of The Bank Account.

HVCRE Loans are one of the areas of focus on regulatory exams, and we’re seeing increased attention to not only ensuring that a bank’s reported HVCRE loans are correct, but also that the bank has sufficient internal controls in place to monitor and track HVCRE lending.

Formal regulatory guidance on HVCRE lending is still rare, as the various regulatory agencies struggle to find consensus in an area that is fraught with technicalities and details.  Our colleague, Jerry Blanchard, has assisted numerous banks in evaluating overall HVCRE programs as well the application of the HVCRE requirements to countless loans.  In addition, he’s written extensively on the topic, including:

You can always follow us on Twitter.  Jonathan is @HightowerBanks, I’m @RobertKlingler, and Jerry is @Blanchard_Jerry.  Our producer, Sam Katz, is @SamathaJill1, and is not responsible for my inability to read simple copy at the end of this episode.

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Regulators Tackle Board Effectiveness and Overdrafts

the-bank-account

On the latest episode of The Bank Account, Jonathan and Ken Achenbach discussed the Federal Reserve’s proposed supervisory expectations for boards of directors.

Before digging into the Federal Reserve’s proposed guidance, Jonathan and Ken first discussed the CFPB’s statistical analysis of frequent overdrafters.  As noted in the CFPB’s analysis, “very frequent overdrafters account for about five percent of all accounts at the study banks but paid over 63 percent of all overdraft and NSF fees.”  They also touched on the CFPB’s prototype model forms for overdrafts.   As might be expected from the CFPB, the sample forms do a good job of highlighting the economic consequences of utilizing overdrafts, but not mention the potentially significant benefits (tangible and psychological) that can be provided by allowing such payments to proceed.

As noted by Jonathan and Ken, the Federal Reserve’s proposed supervisory guidance identifying expectations for boards of directors of banking holding companies would only apply to institutions with consolidated assets of $50 billion or more.  However, we believe the guidance is appropriate for all bank directors to look at, particularly as it draws on the Federal Reserve’s experience with approaches that improve bank governance.

Per the Federal Reserve guidance, effective boards are those which:

  1. set clear, aligned, and consistent direction regarding the firm’s strategy and risk tolerance;
  2. actively manage information flow and board discussions;
  3. hold senior management accountable;
  4. support he independence and stature of independent risk management (including compliance) and internal audit; and
  5. maintain a capable board composition and governance structure.

We believe this Federal Reserve guidance is consistent with our advice that boards need to get out of the weeds and focus on the big picture, a topic we have addressed on earlier podcasts as well.

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Dealing with an Unsolicited Offer

On the latest episode of The Bank Account, in preparation #SharkWeek, Jonathan and I discuss unsolicited offers and some of the approaches for bank boards to deal with them.  Topics covered include:

  • Senator Warren’s declaration that OCC Acting Comptroller Keith Noreika is a “swamp thing;”
  • unsolicited versus hostile approaches;
  • approaches to sell a bank, including full auctions, limited auctions, and negotiated transactions;
  • the need to have a current strategic plan and an understanding of the financial impact of such plan;
  • the-bank-accountthe value of having a Policy for Corporate Change to ensure discussions about offers to acquire the bank find their way to the boardroom for discussion by the full board;
  • dealing with an unsolicited offer in the middle of a negotiated transaction; and
  • the value of having experienced advisors, like Bryan Cave LLP, at your side as you address these issues.

You can also always follow us on Twitter.

Jonathan is @HightowerBanks and I’m @RobertKlingler.  Our producer, Sam Katz, is @SamathaJill1.

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