Banking & Finance Law Report

Archives: Community Banking

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FDIC Guidance on Brokered Deposits

Late last year, the FDIC released guidance on brokered deposits in the form of a series of frequently asked questions and answers (FAQs).  The guidance is available here: https://www.fdic.gov/news/news/financial/2015/fil15002a.pdf

The ostensible purpose of the guidance is to collect previously scattered views on various questions related to two primary subjects: what are brokered deposits and how they should be reflected on bank call reports. Brokered deposits impact assessments for deposit insurance.  For some institutions, the FAQs may have little impact but for others the FAQs will be important and required reading.

Although the FDIC called the release “guidance,” some commentators have suggested the material contains the first expression by the agency on a number of issues, including in particular further discussion on an important exception to the definition of deposit broker, the so-called “primary purpose exception” discussed below.… Continue Reading

FDIC Guidance on Agricultural Credits

At a time of relative affluence in the farming industry, the FDIC has issued a warning on a need for monitoring agricultural credits. FIL-39-2014 (July 16, 2014) suggests that banking institutions of all sizes should carefully consider a recent, negative projection by the U.S. Department of Agriculture.

While current market conditions are good, the projection suggests there will be a slowdown in the growth of the farming and livestock sectors and that agriculture may be affected by adverse weather and declining land values, among other factors.

The guidance suggests that financial institutions should work carefully with agricultural borrowers when they experience financial difficulties. The guidance states that the FDIC’s supervisory expectations previously expressed in a 2010 financial institution letter continue (although the letter is rescinded in light of the current letter).

Cash flow analysis, secondary repayment sources and collateral support levels must be considered in order to properly analyze agricultural credits, according to the guidance.

The guidance notes that smaller farms and ranches rely on the personal wealth and resources of the owners, including off-farm wages. A universal review of the financial strength of the credit is required.

The guidance also notes workout strategies must be specifically tailored for agricultural … Continue Reading

Personal Liability, Bank Directors and the Business Judgment Rule

Last April, a trade association for bank directors, the American Association of Bank Directors reported the results of a survey designed to measure the impact of concerns about personal liability on the decision of bank board members to resign and by individuals to turn down board seats on banking organizations.

One of the key concerns, the survey highlighted, is the possibility of an FDIC lawsuit against the directors if a bank failure occurs. The fear was bank directors would be liable for decisions made as directors notwithstanding what is commonly referred to as the business judgment rule. Generally, the business judgment rule shields corporate directors, including bank directors, from liability when board decisions result in losses to the corporation or to shareholders.

The AABD mentioned in particular a then pending lawsuit in Georgia arising out of FDIC claims related to the failure of Buckhead Bank. These claims against the directors sounded in simple negligence regarding the making of loans. And the directors had asserted the business judgment as a defense.

A few days ago the Georgia Supreme Court ruled on the matter and the decision is worth a review by bank directors and managers even though they don’t do business … Continue Reading

Intellectual Property and Banking – The Complications of Distinguishing Your Bank Name

Expansion of Banking: What happens when First National Bank is no longer First?

Ask any community banker and she will tell you that bank name disputes are on the rise. The Third Federal Circuit Court of Appeals attributes the rise of bank name disputes to “an outgrowth of aggressive and expansionist banking flowing from the Congressional liberalization… of national banking laws.” Citizens Financial Group, Inc., v. Citizens Nat’l Bank, 383 F.3d 110, 112 (3rd Cir. 2004). This case is one of many examples of disputes arising between two financial institutions, in similar geographic regions, operating under identical or a confusingly similar name (e.g., Citizens National Bank of Evans City and Citizens Financial Group, Inc.).

Today we are accustomed to large banks having developed into multinational corporations, such as JP Morgan Chase or Wells Fargo, but this growth occurred in most cases only in the late twentieth century. But the banking industry began with banks being purely local entities, the sole bank within a town or a smaller city as opposed to multi-branch banks within the same metropolis or state. For many banking organizations, this is still true. Within these towns, the use of names like First National Bank or … Continue Reading

Ohio Supreme Court Resolves Certified Conflict Regarding Oral Forbearance Agreements

Last Spring, we discussed on this blog a trifecta of noteworthy lending cases pending before the Ohio Supreme Court. Today, the Court resolved one of them, and in doing so also resolved a certified conflict among Ohio’s appellate districts regarding whether Ohio’s Statute of Frauds bars a party from relying on an oral forbearance agreement to defeat a judgment that was entered pursuant to a written contract. The court’s unanimous opinion in FirstMerit Bank, N.A. v. Inks, Slip Opinion No. 2014-Ohio-789, is available here.

Daniel Inks, Deborah Inks, David Slyman, and Jacqueline Slyman guaranteed that Ashland Lakes, LLC would repay a $3.5 million loan from FirstMerit Bank. When the LLC defaulted, FirstMerit sued the guarantors, and the trial court awarded judgment to FirstMerit based on confessions of judgment entered by the defendants under warrants of attorney. The Slymans and Inkses then appealed to Ohio’s Ninth District Court of Appeals on the basis that the confessing lawyer did not produce the original warrants of attorney. After filing that (ultimately unsuccessful) appeal, the Slymans and Inkses also moved the trial court for relief from judgment, arguing that FirstMerit was not entitled to recover because it had entered into an oral forbearance … Continue Reading

Banking & Finance Law Report Top 10: News and Trends from 2013

2013 was an active year for the Banking & Finance Law Report. Our authors covered a wide range of topics — from legislative and regulatory changes to court opinions to financing and bankruptcy matters in the healthcare, agricultural and oil and gas industries. To offer a glimpse into the news and trends of the past year, following is a synopsis of the 10 best-read articles of 2013.

1. Major Changes to Affirmative Action Requirements Become Effective March 24, 2014
by Mike Underwood

In just two months, financial institute and other types of employers will need to comply with new affirmative action rules that:

  • Require employers to gather and retain data showing the results of their recruiting and hiring efforts and to set numeric targets for hiring veterans and disabled persons
  • Include significant additional obligations for reviewing, analyzing and documenting good-faith efforts and results
  • Specify that employers must offer applicants the opportunity to self-identify as a covered veteran or disabled person before a job offer occurs

Many employers may face a real challenge identifying and networking with recruiting sources that can refer qualified candidates for their businesses. They also will likely need to adjust data collection, retention, and analysis processes. Read Continue Reading

It’s Easy, People: Read Before You Sign

In a decision that will warm the hearts of vendors everywhere, the Court of Appeals for Ohio’s Eighth Appellate District recently upheld the enforceability of personal guaranty language in a credit application. See Wholesale Builders Supply, Inc. v. Green-Source Development, L.L.C., et al., 2013-Ohio-5129. This decision also serves as a reminder to read before signing.

The form of credit application used by Wholesale Builders Supply, Inc. (“Wholesale”) with prospective customers included the following language:

BY SIGNING THIS AGREEMENT YOU ARE BOTH PERSONALLY AND CORPORATELY LIABLE FOR THE TOTAL OF YOUR PURCHASES BY YOU OR ANYONE DESIGNATED TO SIGN FOR YOUR PURCHASES ON YOUR ACCOUNT.

Defendant Green Building Technology, L.L.C. (“Green”), through its principal John A. Pumper (“Pumper”), executed one of Wholesale’s credit applications, and Green thereafter ordered and received goods from Wholesale, along with invoices from Wholesale.… Continue Reading

A Hypothetical in Agricultural Lending — Meet Farmer Bob, AgBank and Massive Grain Elevator

In this hypothetical, we will consider the following circumstances.

  • “Farmer Bob” grows wheat (i.e., crops)
  • “AgBank” has loaned Farmer Bob money secured in part by his wheat
  • “Massive Grain Elevator” wants to purchase Farmer Bob’s wheat

Can Massive buy the wheat and not get the shaft from AgBank? It depends. In 1985 Congress passed the Food Security Act; the provision 7 U.S.C. Section 1961, titled Protection for Purchasers of Farm Products (FSA), constitutes a wholesale preemption of the Uniform Commercial Code (UCC). UCC Revised Article 9-320(a) provides that:

“a buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations, take free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.”

In addition, Official Comment 4 to 9-320(a) provides that:

“this section does not enable a buyer of farm products to take free of the security interest created by the seller … however, a buyer of farm products may take free of a security interest under Section 1324 of the Food Security Act of 1985, 7. U.S.C. Section 1631″

Meanwhile, FSA Section 1324 provides that notwithstanding … Continue Reading

SEC Guidance for JOBS Act

Bankers and financial institution executives should note that the Securities and Exchange Commission has released guidance and other information regarding the Jumpstart Our Business Startups Act of 2012, or JOBS Act, that became law a few weeks ago.

The JOBS makes significant changes to how banks and other businesses can raise capital. It does this by:

·         Easing the IPO process and reporting requirements for emerging growth companies;

·         Reducing general solicitation and general advertising restrictions for certain private placements;

·         Creating a new $50 million small public offering exemption;

·         Creating a “crowdfunding” private placement exemption; and

·         Perhaps most importantly, for community banks and bank holding companies, increasing the number of shareholders a private company may have without having to publicly report under the Securities Exchange Act of 1934, including specific thresholds for banks and bank holding companies.

A summary of the JOBS Act is provided here.

The recent SEC guidance and other information is outlined below.Continue Reading

JOBS Act Impact on Community Banks

The U.S. House of Representatives, by a vote of 380 to 41, has passed the Jumpstart Our Business Startups Act, or JOBS Act [link to House Bill], in the form previously approved by the Senate last week [link to Senate Amendment]. The bill now goes to President Obama, who is expected to sign it into law. The JOBS Act could significantly impact community banks, among other businesses, regarding the categories summarized below.

SEC Registration

The JOBS Act increases the threshold for SEC registration from 500 shareholders of record to 2,000 shareholders of record for banks and bank holding companies. The increase allows some banks to raise capital by selling stock to new investors without having to register under Section 12(g) of the Securities Exchange Act of 1934.… Continue Reading

Historically Low Interest Rates Create Estate Planning Opportunities

For good or for bad, interest rates are currently near all-time lows, including the “applicable federal rate” (“AFR”) which is used to set minimum interest rates for certain gift and estate tax planning techniques. While bankers and financial institution executives routinely consider the implications of such low rates for their institutions, they also should carefully consider the opportunities these low rates create for their estate planning and for that of their customers. Community bank owners and executives, in particular should not overlook these techniques that may help persevere years of wealth creation.

The October 2011 AFR is 0.16% for short-term obligations (up to 3 years), 1.19% for mid-term obligations (more than 3 years, up to 9 years), and 2.95% for long-term obligations (longer than 9 years). Such low interest rates could make this a good time to consider several estate and gift tax planning strategies that are generally more beneficial during periods of low interest rates. Here are some common techniques for bankers to consider: … Continue Reading

FDIC REPORTS ON BROKERED DEPOSITS: NO CHANGE NEAR TERM

In early July, the FDIC issued a report on an important subject to many community bankers: brokered deposits. The report to Congress, dated July 8, 2011, was required under Dodd-Frank and describes its view of the present role of brokered deposits in banking. Critical, of course, is the FDIC’s observation that bank failures are frequently linked to brokered deposits.

Despite industry concerns that the present regulatory system for brokered deposits is outdated and poorly designed, the report concludes the present statutory scheme should not be amended or repealed.

Here is how the FDIC summarized the industry concerns it heard through the public comment process: (i) the brokered deposit statute creates liquidity problems if a bank becomes less than well capitalized; (ii) a combination of the statute and supervisory practices stigmatizes brokered deposits; and (iii) the brokered deposit statute is outdated and has not kept pace with technological change and innovation.… Continue Reading

Public Companies May Need to Amend Stock Option Plans Soon to Qualify for Exception to $1 Million Compensation Deduction Limit

Publicly traded companies may need to act quickly to review, and, if necessary, amend their stock option and stock appreciation right ("SAR") plans in order to preserve tax deductions for compensation in excess of $1 million paid to certain executives. The reason for this review is that the Internal Revenue Service (the "IRS") and the United States Treasury Department recently issued proposed regulations that clarify a few items with respect to the application of Section 162(m) of the Internal Revenue Code (the "Code") to such plans. One item relates to requirements that stock options and SARs must meet to qualify as performance-based compensation. Another item relates to a transition rule for companies that initially are privately held but that later become publicly traded companies.

As background, Code Section 162(m) limits the deduction a publicly traded company may take with respect to remuneration paid to its "covered employees"— its CEO and 3 most highly paid officers (other than the CEO and CFO)—to the extent that such compensation exceeds $1 million. The deduction limit does not apply, however, to qualified performance-based compensation. Publicly traded companies often structure their stock options and SARs in a manner to qualify as performance-based compensation.… Continue Reading

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