On March 14, 2012, Treasury issued a press release announcing its intent to sell the preferred TARP CPP interests in six financial institutions on or about March 26, 2012. Specifically, the Treasury plans to sell its preferred stock positions in Walla Walla, Wash.-based Banner Corp., Charleston, S.C.-based First Financial Holdings Inc., Greensburg, Ind.-based MainSource Financial Group Inc., Stuart, Fla.-based Seacoast Banking Corp. of Florida, Los Angeles-based Wilshire Bancorp Inc. and Wilmington, Del.-based WSFS Financial Corp.
Consistent with prior discussions, Treasury is commencing activities to exit the federal government’s involvement in the TARP CPP program, with an initial focus on large investments in relatively healthy, public institutions. The Treasury’s results in this initial round of auctions is likely to influence policy and expectations going forward. If Treasury is only able to get 70 to 80 cents on the dollar in the auctions for these relatively healthy and public institutions, its appetite to engage in further sales could be severely limited (while the willingness/ability to settle individual TARP investments for a discount – either directly by Treasury or via a third party purchaser – may significantly increase).
The TARP investments selected by Treasury are each among the largest 50 TARP investments that currently remain outstanding, and represent approximately 2.5% of the currently outstanding TARP CPP investments. All six financial institutions selected by Treasury are presently current in their dividend payments (although Seacoast Financial had previously deferred its TARP dividends).
Just as many bankers believed that the worst of the enforcement environment was behind them, a threat of “new” Consent Orders for some state non-member banks has arisen. These “new” orders are not reflective of banks for which the regulators have identified new problems but are instead based upon the FDIC’s apparent decision that orders that were “led” by state regulators are not adequate for the FDIC’s enforcement purposes. To illustrate this point, the new orders we have seen thus far have been substantively consistent with the existing state orders.
This movement by the FDIC comes at an unfortunate time given overall downward trend in the number of FDIC consent orders being issued as banks continue to identify and manage their problems. From a practical standpoint, the publication of a new FDIC order may result in perception that a bank’s condition is worsening when in fact the bank is well on its way to compliance with the existing state order.
On March 12, 2012, Treasury released its February 2012 Dividends and Interest Report providing an updated look at the status of TARP CPP funds, including the first update following the February 2012 dividend due date under the terms of the TARP CPP investments. As of February 29, 2012, there were 163 TARP recipients that had missed at least one dividend payment (excluding any TARP recipients that have filed bankruptcy or who have been placed into receivership).
As a result of the missed dividends, Treasury has appointed a total of 13 directors to eight different institutions. In addition, the Treasury has appointed observers to an additional 39 institutions.
Although the Treasury has the right, under the terms of the TARP investments, to appoint two directors once a TARP recipient misses six dividend payments, Treasury has focused its efforts on the largest recipients. This likely partially reflects that it is not necessarily easy to identify qualified individuals who are willing to serve as directors of troubled financial institutions. Directors appointed by Treasury have the same rights and responsibilities as all other directors, and are not provided any additional legal or financial protection or benefit due to their appointment by Treasury. Treasury has only appointed one or more directors at institutions that have now missed at least nine quarterly dividend payments, and event amongst that group, have generally focused on the larger recipients, with a focus on those who are behind over $3 million in dividend payments. Based on the Treasury appointees that we’re aware of, the Treasury has identified highly qualified independent bank directors, that can act as a real benefit to the institution they’re being appointed to. As a general matter, they tend to be well-credentialed outside directors, frequently former bank executives that understand the condition of the bank. Technically, Treasury only has the right to appoint the directors at the holding company level, although we understand that Treasury has requested that they also be appointed to any subsidiary bank boards – and that most TARP recipients with appointed directors have done so, perhaps reflecting the quality of the appointed directors.
On February 24, 2012 the FDIC, in its capacity as receiver, filed suit against the former President & CEO as well as the former Sr. Vice President of the Retail Banking Group for Community Bank & Trust of Cornelia, Georgia. In the complaint, the FDIC seeks to recover losses in excess of $11 million that the FDIC alleges the bank suffered as a result of the defendants’ breaches of fiduciary duties, negligence, and gross negligence. For a copy of the FDIC’s complaint, click here.
Community Bank & Trust of Cornelia, Georgia failed on January 29, 2010. The Bank had been in existence since 1900, and had 36 branches across northeast Georgia at the time of its closing. Defendant Charles Miller became the CEO of the Bank in 2006, and during the time that he served as CEO, co-defendant Trent Fricks served as Sr. Vice President of a retail banking group of the Bank.
All of the claims in the FDIC suit relate to the Bank’s Home Funding Loan Program, and to losses allegedly caused by that program between January 6, 2006 and December 2, 2009. The complaint alleges that the Home Funding Loan Program developed through a relationship between defendant Fricks and Robert Warren, who owned several mortgage brokerage entities, collectively referred to as Home Funding Corporation. The complaint alleges that the Bank provided bridge loans to the customers of the Home Funding Corporation entities, who were ostensibly real estate investors, in return for a commitment letter from Home Funding Corporation to the Bank in which it agreed to purchase the loan back from the Bank at maturity. The loans related to purchases of investment single family residences in the Atlanta low end housing market, and were alleged to have been high risk, short term loans. The complaint alleges that defendant Fricks was directly responsible for the program, and personally approved the loans despite material underwriting deficiencies, and numerous violations of the bank’s loan policy, such as failing to obtain complete financial statements, failing to obtain appraisals, and exceeding the bank’s LTV ratio limit. Further, the complaint alleges that the numerous deficiencies and problems with the Home Funding Loan Program and with Fricks’ conduct were brought to the attention of CEO Miller, and he failed to act on any of the problems that were identified, allowing losses to continue to mount.
Although service to clients will always remain more important than peer reviews, we are proud to announce that partners Walt Moeling, Kathryn Knudson and Jim McAlpin were each selected for inclusion as bank regulatory attorneys in Georgia Super Lawyers 2012. Walt was further honored as one of the Top 100 attorneys in Georgia, while Kathryn was selected as one of the Top 50 female attorneys in Georgia. In all, attorneys in Bryan Cave’s financial institutions practice constituted half of the bank regulatory attorneys identified as Super Lawyers in Georgia. In addition, partner Rob Klingler was named to the Georgia “Rising Stars” list for 2012.
Super Lawyers lists the top 5 percent of attorneys in a state or region who have attained a high level of recognition and professional achievement. Honorees are identified through peer surveys, independent research and a blue-ribbon panel review. “Rising Stars” are chosen by their peers as being among the top up-and-coming lawyers (40 years old or younger, or in practice 10 years or less). Only 2.5 percent of the lawyers in the state were selected.
In total, 28 Bryan Cave lawyers in the Atlanta office were named Georgia Super Lawyers and an additional 11 were named “Rising Stars.” A complete list of Bryan Cave’s Super Lawyers and Rising Stars is available here.
The day when the board’s focus was limited to approving loans and marketing the bank in the community is long past. Today’s boards face a wide array of complex tasks, and, accordingly, the composition, structure and organization of the board must all be geared to facilitate the board’s performing its duties and functioning properly. This process today is lumped under the heading of “corporate governance.”
(For a printer-friendly version of this post, including a sample Director Self Assessment form, please click here.)
The concept of functioning properly, of course, is in the mind of the beholder, but it clearly includes the board’s performing its primary duties of enhancing shareholder value, selecting, compensating and overseeing management and implementing risk management policies.
Boards of publicly traded banks are now fairly well acclimated to the issues comprising corporate governance, and bank regulators are now bringing many of these issues into the community bank board rooms. The regulatory exam almost always includes as its foundation an assessment of the strength of the board, whose oversight is considered critical to the proper functioning of a healthy bank. As a result, it is important for community bank directors to understand corporate governance principles, which fall under three broad categories.
- Board Assessment—Is the board properly structured to provide optimal oversight to the bank?
- Director Independence—Is the board able to effectively review management recommendations and make its own independent decisions regarding the bank’s strategy?
- Management Review and Compensation—Does the bank have the right management team, and are those individuals compensated in a way that incentivizes them to implement the bank’s strategy?
Board Assessment
A review of hundreds of regulatory memorandums of understanding (MOUs) and consent orders has produced a clear starting point: Virtually every formal action begins with the requirement that the board increase its involvement and conduct an assessment of the performance and composition of management. The board’s assessment function, however, begins with the directors themselves. This self-assessment by the board is a logical starting point to ensure top board performance.
Bryan Cave has advised numerous clients concerning what to do when their data is accessed by an unauthorized party, lost, or accidentally disclosed. In recent years, the need for victims of data breaches to take immediate action has grown as how our clients respond within the first twenty-four hours following a breach has a dramatic effect on our ability to defend them in resulting investigations and litigation.
Because of the need for immediate action, the Bryan Cave’s Data Privacy & Security Team has launched a Data Breach Hotline that leverages our depth of knowledge and geographic platform to provide clients with access to an on-call member of the Team 24 hours a day, 7 days a week. A brief description of the service, which is open to all of our clients, can be found below.
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Bryan Cave is hosting the quarterly CPE and general membership meeting for the Atlanta Chapter of the Association of Certified Anti-Money Laundering Specialists on Thursday, March 15, 2012, from 2:00pm to 4:00pm. The event’s presentation is “Best Practices for BSA/AML Software Testing,” featuring Allan Cuttle, Director of Risk Management for ICS Risk Advisors.
All AML/CTF professionals in the region are welcome to attend.
March 15, 2012
2:00 PM – 4:00 PM
Fourteenth Floor
1201 W. Peachtree Street, NW
Atlanta, GA 30309
Parking is available at 14th Street and West Peachtree St.
$4 cash and cards accepted
Free for Chapter Members; $20 for Non-Chapter Members
RSVP Here
This event will include tips on pre and post software implementation issues, pitfalls, best practices, regulatory environment and expectations, along with testimonials on the value of this process to effective risk management.
The Dodd-Frank Wall Street Reform and Consumer Protection Act codified a form of the Transaction Account Guarantee (TAG) program initiated by the FDIC that extended unlimited deposit insurance coverage to certain no- or low-interest transaction accounts. Under the Dodd-Frank version, which expires on December 31, 2012, there is no cap on FDIC insurance for “noninterest-bearing transaction accounts.” As we have explained, qualifying accounts must meet the statutory definition and cannot have even the potential to be paid interest. Congress modified this definition at the end of 2010 in order to extend coverage for IOLTA accounts (which may pay interest).
The industry is beginning to draw attention to the statutory expiration of this unlimited coverage. As originally initiated by the FDIC in 2008, the program was intended to stabilize large deposits in a time of crisis within the financial system. The Dodd-Frank extension of TAG was completely paid for by financial institutions under the general deposit insurance assessment framework. Community banks have arguably benefitted the most from the unlimited coverage provisions because the corporate, non-profit, and government depositors holding most of the affected accounts may have more concerns (real or imagined) about the continued solvency of small banks than of big banks. Without the guarantee, smaller banks may have to rely more on pricing in order to retain these depositors, potentially exposing the insurance fund to greater risk.
By one industry estimate, more than half of all TAG account balances (over $500 billion) are already held by just 19 banks over $100 billion in assets. According to the FDIC, more than three-quarters ($191.2 billion) of Q4 2011 growth in domestic deposits was attributable to account balances subject to the guarantee. The 10 largest insured banks accounted for 73.6 percent ($140.7 billion) of the growth in these balances during this period. As of December 31, 2011, the average institution with less than $1 billion in assets had 15 covered accounts worth an average of $713,000. Although liquidity is generally less of a concern than it was in 2008, these large depositors are more likely to seek loans and otherwise bank with institutions holding their TAG-size accounts.
The questions, then, are whether the industry and its regulators are unified around this issue and whether legislators will have the stomach to extend the program in an environment where initiatives seens to benefit banks are politically sensitive. The original FDIC manifestation was optional, with participating banks paying for the coverage. Although the Dodd-Frank version is universal, again, banks have picked up the tab through the assessment process. Nonetheless, it is always possible that an extension of the program will be marred as a boon to banks and a burden to taxpayers.
Notwithstanding the position of former Chairman Sheila Bair and some currently within the agency that the program should only be further extended by Congress, the FDIC stands at the center of the issue and could always extend the program administratively. FDIC’s 2008 program was authorized under the FDI Act by a determination by the Secretary of the Treasury in consultation with the FDIC and the Federal Reserve that conditions of ”systemic risk” justified an exception to the least-cost-resolution requirements of the Act. It was extended by the FDIC in 2009 as a continued response to this finding, although at that time the agency also cited as “additional authority” more general statutory language relating to its mission. We believe there is footing for a similar, transitional extension of the program under this broader authority. In fact, when the FDIC extended the program in 2010 through the end of that year, it reserved the right to extend the program through 2011 without additional rulemaking. This was ultimately not necessary in light of Dodd-Frank, and we think an additional regulatory extension is unlikely to occur here without significant advocacy for it. The Independent Community Bankers of America and the American Bankers Association, for their part, have recently outlined their views on the issue.
Meanwhile, examiners are beginning to ask how banks are planning for the expiration of the program. Many institutions are balancing this expiration with Dodd-Frank’s repeal of the prohibition on the payment of interest on business checking accounts (and by extension Regulation Q). Challenging as this may be in a time of regulatory uncertainty, these considerations should also be evaluated along with Regulation D’s reserve requirements (where restructured accounts may become demand deposits).
On February 29, 2012, FinCEN released an advance notice of proposed rulemaking on customer due diligence and beneficial owners, proposing to make a customer due diligence obligation explicit for ALL customers (to “clarify, consolidate and harmonize” the federal banking agencies’ expectations) and extending the requirement to collect (and possibly verify) beneficial owner information for most or all customers as well.
FinCen’s advance notice of proposed rulemaking (ANPRM), seeks public comment on a range of questions regarding the development of a customer due diligence (CDD) regulation that would “(i) codify, clarify, consolidate, and strengthen existing CDD regulatory requirements and supervisory expectations, and (ii) establish a categorical requirement for financial institutions to identify beneficial ownership of their accountholders, subject to risk-based verification and pursuant to an alternative definition of beneficial ownership.” Comments received in response to the ANPRM will likely be influential in FinCEN’s development of a more formal and detailed proposed rule on the topic.
FinCEN is initially considering a CDD rule to cover banks, broker dealers, mutual funds, futures commission merchants, and introducing brokers in commodities, and thus the ANPRM is focused on those institutions. The scope of the ANPRM, however, includes all industries subject to FinCEN’s anti-money laundering (AML) program requirements. FinCEN believes that a CDD rule may be appropriate for all financial institutions under its purview and will consider extending a CDD rule to other types of institutions in the future. Thus, FinCEN is specifically requesting comments from all other financial institutions covered by FinCEN regulations as well, including providers of prepaid access and other types of money services businesses (MSBs), insurance companies, casinos, non-bank mortgage lenders and originators, and dealers in precious metals, stones and jewels.