As it had previously indicated, on March 26, 2012, the Treasury Department announced the commencement of a modified dutch auction for the sale of the preferred stock it holds in six institutions:
- Banner Corporation, Walla Walla, WA (“Banner”)
- First Financial Holdings Inc., Charleston, SC (“First Financial”)
- MainSource Financial Group, Inc., Greensburg, IN (“MainSource”)
- Seacoast Banking Corporation of Florida, Stuart, FL (“Seacoast”)
- Wilshire Bancorp, Inc., Los Angeles, CA (“Wilshire”)
- WSFS Financial Corporation, Wilmington, DE (“WSFS”)
The link to each institution takes you to the preliminary prospectus on file with the SEC.
MainSource and Wilshire have both indicated that they have received regulatory approvals to submit one or more bids in the auction, while Banner, First Financial, Seacost and WSFS have each indicated that they do not intend to bid in their respective auctions.
With attorneys and staff worldwide, Bryan Cave attorneys are often quoted in the news. Recent Media Mentions of Financial Institutions Group attorneys include:
Klingler in American Banker
Atlanta Partner Robert Klingler was quoted March 15 in American Banker regarding an agreement reached between the U.S. Treasury Department and Pacific Capital. UnionBanCal has agreed to buy Pacific Capital for $1.5 billion in cash, with the Treasury getting about $165 million in exchange for its 11 percent stake. That would be about 90 cents on the dollar of the bailout money the Treasury invested in Pacific Capital through the Troubled Asset Relief Program. Klingler said the deal is probably a good one for the Treasury. “The ability to recoup an investment that is stressed at its face value is extremely difficult,” Klingler said. “If the bank goes into receivership, the Treasury is looking at pennies — and that might be generous. So the Treasury has shown a willingness to strike a deal that makes it more likely for the company to either find new capital or someone willing to acquire it.”
Moeling in SNL
Atlanta Partner Walt Moeling was quoted March 8 by SNL Financial regarding the fact that the FDIC increasingly has asked those bidding on failed banks to up their offers in order to help stem losses to the deposit insurance fund. The practice is called “the best and final round” and has been used in 14 failed-bank transactions since July 2011. The best and final round of bidding is a case of the FDIC acting like a “businessperson,” Moeling said. “They’re charged with getting the best price. They’ve done this some all along. I don’t think it’s truly exceptional but I think they’re very focused on the fact that they have a deposit insurance fund valuation issue here.” Click here to read the full article.
Blanchard in Safety and Soundness Report
Atlanta Partner Jerry Blanchard was quoted extensively March 5 in The Safety and Soundness Report regarding Pearson v. Delta Credit Union. Delta Credit Union in Atlanta was hit with a $75.4 million damage award in a lawsuit filed by a Florida developer. The two sides disagreed over what various terms of the loan documents meant, including whether the promissory note in question constituted a demand note. Commentators suggested that some of the problems could have been adverted by more artful contract drafting. Blanchard pointed out that if a note is called a demand note but contains terms and conditions that more closely resemble a term note there is a substantial risk that a court might conclude the parties entered into a term loan rather than a loan payable on demand.
On March 7, 2012, the FDIC filed an action against the former directors and two former officers of Broadway Bank (“Broadway”) of Chicago, Illinois. For a copy of the FDIC’s complaint, click here. Broadway was placed into receivership on April 23, 2010. The FDIC estimates that the losses to the Federal Deposit Insurance Fund due to Broadway’s failure will approach $400 million.
The lawsuit alleges that the D&O defendants embarked on “reckless” strategy of rapidly growing the bank’s assets by approving high-risk ADC and CRE loans without regard for appropriate underwriting and credit administration practices, the bank’s own loan policies, and federal lending regulations. The risks to the bank was exacerbated, the FDIC alleges, because many of the loans were for projects located outside of Illinois, and Broadway did not have sufficient staff to monitor those projects.
The FDIC is particularly galled by the D&O defendants’ approval of two “grossly imprudent” loans immediately following a meeting at which federal and state regulators warned the board about the risks of CRE lending. Those loans resulted in losses to the bank of approximately $12 million.
As part of an international law firm, the attorneys practicing in Bryan Cave’s financial institutions practice also have the advantages of an extremely deep bench in completing all types of merger and acquisition transactions. Bryan Cave is ranked among the top legal advisers for M&A work involving a U.S. target for 2011, according to recently released data by Thomson Reuters.
The firm is ranked sixth based on the number of transactions completed involving a U.S. target, with 101 completed transactions during the year. Additionally, the firm ranks 22nd for completed transactions worldwide with 116 deals closed.
Thomson Reuters, recognized as maintaining the most comprehensive database available on mergers and acquisitions, noted in its full report that while the value of worldwide mergers and acquisitions was up from comparable 2010 levels, the number of deals was down 5.5 percent compared to last year.
“Our transactional practice enjoyed a very impressive year in 2011 by any measure, especially relative to our peers,” said Bill Seabaugh, head of the firm’s Transactions Group. “Globally, 2011 was a down year for M&A activity, but Bryan Cave’s completed deal activity was up more than 20 percent compared to 2010, which was itself a very active year for us. These results confirm that our clients continue to see an exceptional combination of quality, service and value in our global transactional practice.”
Click here to view Bryan Cave’s rankings by Thomson Reuters.
On March 22, 2012, the U.S. Senate adopted H.R. 3606, the Jumpstart Our Business Startups Act (a.k.a., the JOBS Act) by a vote of 73 to 26. Prior to its passage, the U.S. Senate adopted Amendment 1884 proposed by Senators Merkley and Brown that replaced the “Crowdfunding” exemption contained in the house-passed legislation with a narrower provision. As the Senate and the House have adopted different versions, the House will have to consider and pass the Senate amendment before a bill could become law, or convene a conference committee to reconcile the House and Senate versions of the bill. (The Senate rejected by a voice vote Amendment 1931 proposed by Senator Reed that would have changed the SEC’s shareholder counting rules from record holders to beneficial owners.)
As the bulk of the JOBS Act was approved without change, our summary of the impact of the JOBS Act on community banks remains accurate.
The amended “Crowdfunding” provision includes significant restrictions on the potential utility of the new exemption, particularly for how it may have utilized by community banks. The ultimate utility of the Crowdfunding exemption will largely be tied to the implementing regulations to be adopted by the SEC. Under the Senate’s version of the JOBS Act, the Crowdfunding exemption would be available for up to $1 million in issuances in any 12-month period, require investors to purchase no more than 5-10% of their net worth in the issuance, and require the use of either a broker or “funding portal” as that term is defined in the bill.
On March 2, 2012, the FDIC, in its capacity as receiver for Freedom Bank of Georgia, brought suit against twelve (12) former directors and officers of the Bank, many of whom served on the bank’s Loan Committee. The complaint alleges that, because of the defendants’ misconduct, the FDIC, as receiver, is entitled to recover at least $11,050,623. Interestingly, Freedom was closed by the Georgia Department of Banking & Finance on March 6, 2009, thus the FDIC’s lawsuit was filed almost exactly three (3) years from the date that the bank went into receivership, which is the applicable statute of limitations. A copy of the FDIC’s complaint is available here.
The FDIC’s damage claim is based on losses from twenty-one (21) commercial real estate and acquisition development and construction loans which were approved by the bank from May 16, 2005 through June 20, 2007. The complaint alleges an undifferentiated laundry list of problems related to these loans, including, but not limited to, a lack of internal control in the loan policy limiting the amount of such loans, the absence of a requirement in the loan policy to conduct the global cash flow analysis of all contingent liabilities for the bank’s borrowers and guarantors, inadequate due diligence market research for loans outside the bank’s geographic area, insufficient analysis of ability to repay, failing to secure adequate collateral, incomplete or inadequate appraisals, and failing to ensure appropriate loan to value ratios.
While still in proposed form, and subject to significant political uncertainty, we offer this summary of the impact of the Jumpstart Our Business Startups Act (a.k.a., the JOBS Act). This summary is based on the version that passed the House on March 8, 2012, and was brought to the Senate floor on March 19, 2012. On March 20, 2012, the Senate failed to achieve sufficient votes to substitute the JOBS Act for the INVEST in America Act of 2012 (technically, it would have been the “Invigorate New Ventures and Entrepreneurs to Succeed Today in America Act of 2012,” but I think the acronym is a LOT better in this case), which contained some similar, but not identical, provisions. Accordingly, it appears that the JOBS Act, as adopted in the House, may be voted upon by the Senate this week.
Emerging Growth Companies
The bulk of the JOBS Act, and focus of most of the congressional debate, is on the creation of a new class of registered companies deemed “Emerging Growth Companies.” These registrants are not limited by business operations, and banks and bank holding companies could quality. An Emerging Growth Company would generally consist of newly public companies (IPO registration statement effective after December 8, 2011), with market caps of less than $750 million and total gross annual revenues (presumably interest income plus non-interest income for banks) of less than $1 billion. New registrants could quality for Emerging Growth Company status for up to five years following their IPO, at which time they would lose the advantages of being an Emerging Growth Company even if they otherwise continued to qualify.
An Emerging Growth Company would be exempt for the say on pay vote, as well as pay vs. performance and pay equality disclosures, and would not be required to have independent auditors attestations regarding internal controls under SOX 404. In addition, they would be eligible to generally rely on the scaled disclosures otherwise permitted for smaller reporting companies. In addition, an Emerging Growth Company would be provided the opportunity to initially file their draft IPO materials confidentially with the SEC and otherwise have greater flexibility in communications with regard to their IPO.
Modification of Securities Offering Exemptions
Within 90 days of passage, the SEC would be required to amend Regulation D and Rule 144A to permit general solicitation and advertising in Rule 506/Rule 144A offerings so long as the securities are only sold to accredited investors or qualified institutional buyers, respectively.
Over the past several years we have seen the regulatory agencies become much more focused on board oversight and performance. This is a natural point of focus for regulators in a time of crisis in the banking industry. The fiduciary and oversight obligations of members of boards of directors are well established, and there is a road map in the corporate records for following the actions and deliberations of a board. I would suggest, however, that a board of directors could receive a gold star for the quality of its minute records and its adherence to the established principles of corporate governance, and yet fall well short of being an effective working group.
This is the third in a series of articles of best practices for bank boards. (Parts 1 and 2 can be found here and here, respectively.) Over the past several decades my partners and I have worked with hundreds of bank boards. Regardless of the size of the entity we have noticed a number of common characteristics and practices of the most effective boards of directors. This series of articles describes ten of those best practices. The first two articles in the series focused on the best practices of selecting good board members, adopting a meaningful agenda, providing the board with the most useful information, encouraging board participation, and making the committees work. In this article I will discuss three additional best practices – meeting in executive session, making use of a nominating committee and director assessments, and participating in the examination process.
Best Practice No. 6 – Meet in Executive Session
It is not uncommon for the most passionate and meaningful discussion among board members to occur in the parking lot of the bank following a board meeting. Much more time is spent in these parking lot sessions discussing a possible sale of the bank and the compensation and performance of the bank CEO than ever takes place in the board room. The most effective boards of directors move these conversations to the board room by means of executive sessions. Whether monthly or quarterly, the independent (i.e., non-management) directors meet in executive session and set their own agenda for those meetings.
I have found that CEOs who welcome and facilitate such executive sessions never regret doing so. Executive sessions provide a structured forum for the independent directors to meet as a group and speak freely regarding matters of interest and concern to them. Many positive ideas and discussions can result from these sessions. If the CEO is also chairman of the board, a “lead director” can chair the executive sessions. A best practice is for the chairman or lead director to meet with the CEO following an executive session and report on the substance of the matters discussed.
Following the failure of over 400 financial institutions since the beginning of 2008, the FDIC has clarified its expectations with respect to collection and retention of bank documents by directors and officers of troubled or failing financial institutions for the purpose of explaining or defending their conduct. The FDIC’s Financial Institution Letter (FIL) released today sets forth the FDIC’s position that “[d]irectors and officers of troubled or failing financial institutions who remove originals or copies of financial institution records under such circumstances breach their fiduciary duty to the institution.” Presumably the FDIC would also object to a director or officer of a healthy bank copying and removing bank documents if the FDIC concludes that it is being done for improper purposes, although the FIL does not specifically address that issue.
Even though the guidance comes late in the game, we believe it is helpful for the FDIC to articulate its position on this matter to provide clarity to industry participants. We are disappointed, however, that the FDIC chose to issue this broad guidance through a financial institution letter (which cites no statutory authority or judicial decisions in support of its position) rather than through a formal rulemaking process whereby affected parties could offer comments.
Four class action complaints have been filed in the last two weeks against four different Georgia community banks alleging that the banks have violated the Electronic Fund Transfer Act. The complaints were filed in the federal courts and all allege that the banks imposed fees on consumers who withdrew cash from the bank’s ATMs and that the banks allegedly failed to post a physical notice on the ATMs that a fee would be imposed for such services.
The Electronic Fund Transfer Act requires both a physical notice at or on the ATM in addition to the electronic notice the customer receives on the computer screen when making the withdrawal. There are statutory penalties for a failure to comply with the Act. While there is no minimum penalty proscribed for a class action, the statute provides that in a successful class action, plaintiffs may recover up to “the lesser of $500,000 or 1 percent of the net worth of the (ATM operator),” plus attorneys’ fees and costs. There may be a defense to such claims when the bank maintains procedures reasonably adapted to avoid a failure to comply with the Act and the failure to comply was a “bona fide error.”
The attorneys associated with these cases have filed similar class actions, alleging the same violations of the Electronic Fund Transfer Act, against other banks, hotels and retailers around the country.