On August 22, 2011, the FDIC filed a complaint in the U.S. District Court for the Northern District of Georgia against the former directors and executive officers of Silverton Bank, N.A. Silverton was declared insolvent and placed into FDIC receivership on May 1, 2009.
Silverton, formerly known as The Banker’s Bank, was not a traditional banking institution. It provided correspondent and clearinghouse services, among other financial services, to community banks only. Silverton was owned by investor banks, and its board was comprised entirely of experienced community bankers.
The FDIC’s account of Silverton’s failure contains many of the same hallmark allegations present in its prior D&O lawsuits:
- overly-aggressive growth goals;
- compensation that incentivized loan production regardless of asset quality;
- expansion of lending into unfamiliar geographic markets;
- heavy focus on risky CRE and ADC lending;
- significant weaknesses in loan underwriting and credit administration;
- ignored warnings from state and federal banking regulators; and
- complete disregard of deteriorating economic conditions.
As it has done in prior lawsuits, the FDIC has identified several failed credit transactions that it contends are examples of negligence, gross and a breach of fiduciary duty by the directors or officers who approved them. In total, the FDIC seeks damages in excess of $61 million for fifteen (15) specific credit transactions.
Although it contains some familiar allegations and case themes, the FDIC’s complaint against the Silverton D&Os is unique, both in substance and tone. For the first time in the current downturn, the FDIC seeks to hold directors liable for instances of what it describes as “corporate waste.” Specifically, the complaint recites several examples of Silverton’s “extravagant spending” while the economy was in decline, including: (i) the purchase of two corporate aircraft for the bank holding company; (ii) the construction of a new airplane hangar for the holding company on leased property; (iii) the construction of a “lavish” new office building, which Silverton occupied 20 months before the expiration of its then-current lease. The FDIC alleges that the directors who authorized these specific expenditures are liable for more than $10 million of “corporate waste.”
The tenor of the FDIC’s allegations against the Silverton D&Os is more strident than in its prior lawsuits. The FDIC is particularly critical of the Silverton board, which was comprised of CEOs or presidents of other community banks. That experience and specialized knowledge, the FDIC contends, imposed a heightened duty on the directors to discharge the duties owed to the bank.
With attorneys and staff worldwide, Bryan Cave often makes the news. Recent media mentions of attorneys in the Financial Institutions Group include:
Walt Moeling in SNL
Walt Moeling was quoted August 11 in an SNL blog post, a product of SNL Financial, regarding the slow down in bank failures (even as the problem bank list has shown no signs of shrinking). Moeling said a number of banks have nonperforming loans on their books that are current, but they have had time to write down the loans to levels closer to market values. In addition, some banks with a high likelihood of failing have recapitalized and should survive. “I think it’s strengthening. Banks that were really clamped down are coming out,” he said. “Not that all the problems are over. Some have bled so much that they’re not going to get a transfusion.”
John ReVeal in Bank Safety & Soundness Advisor
John ReVeal was quoted August 1 by the Bank Safety & Soundness Advisor concerning the final rule on preemption issued recently by the Office of the Comptroller of the Currency (OCC) — a last statement on what has been an opaque, legalistic debate carried out between the U.S. Treasury Department and the OCC. At stake were OCC powers that allow the agency to exempt (or preempt) national banks and thrifts from state consumer finance laws. Dodd–Frank legislation codifies what many consider to be a new, stricter standard. But does the Dodd-Frank standard compel the OCC to change its preemption standards? “What community banks can do is breath a momentary sigh of relief,” ReVeal said. “Preemption still exists. Everything we believed about preemption before Dodd-Frank is still true.” Now the OCC’s view will be tested in the courts. “We just need to watch the new laws and see how that plays out,” ReVeal noted.
With attorneys and staff worldwide, Bryan Cave often makes the news. Recent media mentions of attorneys in the Financial Institutions group include:
Walt Moeling in American Banker
Atlanta Partner Walt Moeling was quoted July 5 by American Banker regarding the recent drop in bank consent orders, formerly called cease-and-desist orders. Since the beginning of 2008, the Federal Deposit Insurance Corp. has issued 851 consent orders. The issuances peaked in November 2009, when the FDIC issued 51 consent orders. In May, just 10 banks entered into consent orders with the FDIC. “At this point, these banks should be getting a “Hallelujah” instead of a consent order,” Moeling said. “These are the survivors that are making it in a lousy market. It isn’t a reflection of the board’s performance, it’s a reflection of the market.” Click here to read the full article.
Judie Rinearson in PaybeforeLegal
New York Partner Judith Rinearson authored an article for the July edition of Paybefore Legal regarding key provisions of the Durbin Amendment to the Dodd-Frank Act. The Federal Reserve Board issued its much-anticipated final rule implementing the amendment on June 29. “And now the real work begins for the industry and its participants “changing programs, business models, disclosures, contracts and more to bring thousands of affected programs into compliance,” she wrote. “But before you can dig in, you need to know if your organization and its prepaid programs are covered by the Fed’s final rule. And if they are, what that means.” Rinearson’s article poses 13 questions to help clients identify whether their prepaid card program is eligible for the interchange exemption, fraud prevention adjustment and routing or exclusivity exemptions. Click here to read the article.
With attorneys and staff worldwide, Bryan Cave often makes the news. Recent media mentions of attorneys in the Financial Institutions group include:
Andreassen on Moneylaundering.com
DC Associate Kristine Andreassen was quoted June 7 by Moneylaundering.com regarding a report from the U.S. Senate Caucus on International Narcotics Control in which lawmakers criticize the U.S. Treasury Department for failing to adequately implement a portion of the Credit CARD Act of 2009. The lack of regulations governing the cross-border transportation of prepaid access products has hamstrung American efforts to combat Mexican drug-trafficking organizations, according to lawmakers. Andreassen said that the Financial Crimes Enforcement Network (FinCEN) ultimately must decide whether to require individuals carrying prepaid access devices to declare the actual or potential maximum value the products have before crossing the border. “One of the issues FinCEN has to account for is cards that cross the border empty, and are then reloaded on the other side,” she said.
Moeling in Atlanta Journal-Constitution, Bank Investment Consultant
Atlanta Partner Walt Moeling was quoted May 27 in The Atlanta Journal-Constitution regarding Georgia Rep. Greg Morris, who has been fined $5,000 by federal bank regulators after he made overdrafts not allowed because of his role as a bank director. Moeling said it’s a relatively minor violation. “Director overdrafts seldom impose any threat to the safety and soundness of a bank,” he said. “Nonetheless they are clear violations and the regulators will act when they find repeat offenders.” He also was quoted May 25 by Bank Investment Consultant regarding a growing group of acquisition-minded community banks, for whom fee-based businesses are looking like a more attractive way to bolster revenue than are traditional bank deals.
Rinearson in Franchise Law News
New York Partner Judith Rinearson authored an article in the current edition of Franchise Law News with tips on how to avoid the legal traps of promotional certificates. A spate of class-action lawsuits claim that the short expiration dates popular with “Groupon-like” gift certificate programs violate applicable laws. “Just because you are compliant with federal law, don’t think you are off the hook,” she cautioned. “With care in structuring these programs, and with good, clear disclosures in all marketing materials, these Groupon-like gift certificate programs can be a true win-win for both consumers and retailers.”
With attorneys and staff worldwide, Bryan Cave often makes the news. Recent media mentions of attorneys in the Financial Institutions group include:
Moeling in The Atlanta Journal-Constitution
Atlanta Partner Walt Moeling was quoted March 5 in The Atlanta Journal-Constitution concerning the high number of failed banks in Georgia, many of them concentrated within 70 miles of Atlanta. For the most part, the failed banks were heavily tied to the state’s once-booming housing market. “The banks that failed are a direct reflection of the economy that supported them,” Moeling said. Click here to read the full article.
Custer and Dempsey in The Atlanta Journal-Constitution
Atlanta Partner Bill Custer was quoted March 10 in The Atlanta Journal-Constitution for his representation of a syndicate of banks that held an $89.3 million loan on a large Arizona development that failed. Following a one-week arbitration last December in which Custer and Atlanta Partner Jennifer Dempsey represented the banks, a panel of arbitrators entered an award on Valentine’s Day against longtime Atlanta developer W. Harrison Merrill in the amount of $43.6 million. Unfortunately, the decision does not clear the way for banks, located primarily in the Southeast, to collect the money any time soon. A trial in the Superior Court of Pinal County, Ariz., later this year ultimately will be required to resolve the matter. Click here to read the full article.
A Letter to our Clients and Friends in the Financial Institutions Industry
Walt Moeling and Jim McAlpin spoke at the recent Acquire or Be Acquired Conference sponsored by Bank Director Magazine. Their topic was “The Path to Full Profitability by 2013.” In advance of their talk at the conference, Walt and Jim sought input from a group of industry observers on what they foresee as likely developments over the next few years. (A printer-friendly version of the Letter to Clients is also available.)
We thought you would be interested in what we heard in response to these questions, and the following is an excerpt from Walt and Jim’s presentation at the AOBA Conference:
Background
- There are more than 6500 commercial banks in the U.S. Only 500 of these banks have assets of more than $1 billion, and only 110 have assets of more than $10 billion. In other words, over 90% of U.S. banks have assets of less than $1 billion. Also of significance to this discussion, one third of U.S. banks have less than $100 million in assets.
- In connection with this presentation we sent a survey to a number of our contacts at investment banking firms and also to a group of bank consultants. We asked them to look forward over the next few years and project what the landscape will look like in community banking. We received responses from over 30 industry observers from across the country, and our respondents have allowed us to share their comments either with attribution or anonymously.
“What will the ideal community bank look like by year end 2013?”
- Adam Aspes of Sterne Agee provided an answer that sums up most of what we heard in response to this question: “The ideal community bank will either: (i) have a dominant market share in a rural slow growth market, or (ii) if located in an urban market, have enough scale and product offering to compete for deposits with the larger banks.”
- Jennifer Demba of SunTrust Robinson Humphrey responded: “Investors will value concentrated market share community banks, not fragmented networks.”
- One community bank consultant wrote in response “$1 billion in asset size will not be a large bank by 2013.” We consistently heard in response to this question that, in all but rural markets, a minimum necessary asset size will be $500 million.
- Chris Marinac of FIG Partners wrote: “While not universally applicable, in general we think the regulatory costs of operating a bank have increased such that it is difficult to produce adequate long-term returns for a bank below $500 million in assets. There are exceptions, and some private bank investors find a single-digit Return on Equity to be acceptable. However, we think the demands for 11% to 14% ROEs create a $ billion+ size threshold for surviving banks.
- Another investment banker told us that his firm has modeled the impact of increased compliance costs on smaller community banks: “If you assume an increase of [direct and indirect] compliance costs of $100,000, and then factor in growth of only 5% to 8% per year, it is hard for a smaller bank to get to 1% ROA, much less double digit ROE.”
With attorneys and staff worldwide, Bryan Cave often makes the news. Recent media mentions of attorneys in the Financial Institutions group include:
Blanchard in Atlanta Business Chronicle
Atlanta Partner Jerry Blanchard was quoted Nov. 4 in the Atlanta Business Chronicle in connection with a resurgence of energy from Georgia banks. The state has suffered numerous bank failures, and even those that did not go under have in large part been hibernating during the recession. But now they are starting to look for capital again, he said. “To the extent that everybody has been looking for light at the end of the tunnel, this is a little light,” Blanchard said.
Klingler in Banker & Tradesman.
Atlanta Associate Robert Klingler was quoted extensively Oct. 18 in Banker & Tradesman on the good and bad that small banks have seen since accepting TARP funds. Banker & Tradesman is a banking trade publication out of Massachusetts.
Moeling in American Banker
Atlanta Partner Walt Moeling was quoted Nov. 4 by American Banker concerning an announcement by our client Brand Group Holdings Inc. that it will raise up to $200 million through affiliates of Carlyle Group, Stephens Group LLC and Nonami LLC, owned by the Cousins family in Atlanta. Analysts say the deal is the first time in years that private equity has made a big traditional investment in Georgia, rather than using shelf charters or failed banks. “We haven’t had a significant infusion of capital in any Atlanta-based community bank in three years, essentially,” Moeling said. “The banks that are still standing may be battered and bruised but, by God, they’re still standing and the biggest hits have been taken.” Click here to read the article, republished by Bank Investment Consultant. He also was quoted Oct. 27 by American Banker on Ameris Bank, one of the few homegrown banks in Georgia to have bid successfully on multiple failed banks. Ameris just made its fourth failed-bank purchase in the past year – notable given that Ameris has had eight consecutive quarters of net losses largely owing to credit deterioration in real estate-related loans. Analysts say the bank has become a serial acquirer by proving it can handle these takeovers in its recession-battered market.
With attorneys and staff worldwide, Bryan Cave often makes the news. Recent media mentions of attorneys in the Financial Institutions group include:
Moeling in ABA Banking Journal
Atlanta Partner Walt Moeling was quoted in the October edition of the ABA Banking Journal concerning whether all banks should have a board-level “risk committee.” Currently, the Dodd-Frank Act imposes a risk-committee requirement on public bank holding companies (BHCs) of $10 billion or more. It empowers the Federal Reserve to impose such requirements on other public BHCs, but debate is growing as to whether all banks should voluntarily put these committees in place. “I think this is going to get into the examination process very quickly,” said Moeling, who thinks a risk committee isn’t necessary for small, simple community banks and should be reserved for more complex organizations.
Moeling in Atlanta-Journal Constitution, American Banker
Atlanta Partner Walt Moeling was quoted Sept. 28 in The Atlanta Journal-Constitution regarding Peoples Bank of Winder, which shut its doors this month, and Silverton – Georgia’s largest-ever bank failure. Both banks were led by Christopher B. Maddox when they closed. Click here to read the article. Moeling also was quoted Sept. 17 by American Banker (republished on Bank Investment Consultant online) concerning whether the rate of bank failures may be slowing. The Sept. 10 closure of Horizon Bank in Bradenton, Fla. – the 119th this year – was the first since Aug. 20. Moeling said that while “the frequency does” appear to be moderating, “if you look at the data and you look at the capital levels there are still banks chiming in at that under-2% level that’s going to produce a failure. We’re not seeing a real recovery.” Click here to read the full article.
With attorneys and staff worldwide, Bryan Cave attorneys often make the news. Sometimes media mentions highlight the firm’s involvement with notable clients, sometimes the individual accomplishments of attorneys and staff. Recent media mentions of attorneys in the financial institutions practice include:
Klingler in American Banker
Atlanta Associate Robert Klingler was quoted Aug. 4 by American Banker regarding the charges against Rep. Maxine Waters, and whether those charges might be of use to banks denied TARP funds. An ethics panel report alleges Waters may have broken rules when she helped a trade group arrange a meeting between then-Treasury Secretary Henry Paulson and executives of OneUnited Bank, an institution with financial ties to her husband and huge losses from the takeovers of Fannie Mae and Freddie Mac. Klingler said the government had a uniform standard for deciding TARP investments – essentially awarding funds to institutions that could prove their viability – and no one ever expected the system to be perfect. “We understand that the process will sometimes result in wrong outcomes,” he said, adding that those who believe they were treated unfairly could use the Waters investigation for “rhetoric” at best. “I don’t know that it is rhetoric that necessarily the public is happy with. Generally, the public is opposed to TARP. So hearing a bank whine about not getting TARP isn’t going to get the American public riled up.”
Moeling in National, Regional Publications
Atlanta Partner Walt Moeling was quoted in the August edition of US Banker on the moves being made by community banks to boost their capital ratios. “In this kind of market, the most successful banks that deal with their problems don’t just take one approach, they pull out the playbook,” Moeling said. “My most successful clients have cut expenses, sold branches, consolidated charters, disposed of nonbank activities.” Click here to read the full article. Moeling was quoted Aug. 10 by American Banker (reprinted by Bank Investment Consultant online) concerning a push of stock offerings expected this fall from community banks, particularly via private placements rather than public offerings. Click here to read the article. In addition, he was quoted Aug. 2 in The Atlanta Journal-Constitution regarding JPMorgan Chase & Co., which plans to open 10 new bank branches across the northern metro Atlanta area by the end of the year. Eight currently are under construction. Click here to read the article.