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Banking and Financial Services Update, Vol. 7, Fall 2010

10.28.10

In this issue:

  • A New Wave of Bank Consolidation Soon Will Hit Shore
  • EFTA Lawsuits Against ATM Operators Have Gone Viral
  • Highlights of the Sixth Annual Southeastern Banking Seminar
  • A New Wave of Bank Consolidation Soon Will Hit Shore

A regulatory tide in Washington is set to bring about significant consolidation in the banking industry. Recent legislation has strangled many revenue sources for banks and, at the same time, increased the regulatory compliance cost burden on these same institutions. This legislation, combined with a somnolent economy, continued pressure on loan portfolios and general fatigue in the financial sector, has many in the industry predicting a large increase in bank mergers and acquisitions in the near future.

While there are numerous regulatory forces that are likely to drive the upcoming growth in bank mergers, a dominant force is the effect of recently enacted financial services reform legislation. Both the Credit CARD Act of 2009 and the Dodd-Frank Wall Street Reform and Consumer Protection Act will decrease revenue for banks while at the same time increasing costs. Stable fee revenue streams such as overdraft fees, interchange fees and certain credit card fees are limited by the new legislation, while banks' expenses will increase with the need for additional compliance personnel and improved systems in order to meet the requirements of the new laws. This will likely force a number of smaller banks that cannot assume these additional compliance costs, or that are marginally profitable, to sell themselves to larger or better capitalized rivals.

While the impact of the recently enacted legislation is certainly the main driver of a resurging bank merger and acquisition market, it is not the only factor. Should U.S. banking regulators adopt enhanced capital requirements, as they are expected to do, the combination of Basel III with tighter definitions of what will be accepted as Tier I capital and stingier capital markets are likely to accelerate consolidation. Further, the U.S. banking market is arguably oversaturated, in part the result of explosive growth in the early part of this decade. There are currently over 7,800 banking institutions in the United States. Competition has driven down bank profits and is a large factor in increased merger activity in the industry. Also, many in the banking industry are fatigued by the numerous challenges they currently face and will likely continue to face in the coming years. Because the U.S. economy has continued to perform sluggishly, many banks continue to work through problems in their loan portfolios and regulators continue to tighten their grip, some bankers are questioning whether they want to remain in the industry. Finally, growth opportunities are limited. In the past year, many banks were able to leverage closed bank deals with the FDIC to expand their portfolios and footprint. With bank failures slowing, and competition for failed banks increasing, the returns on failed bank investments are decreasing. Therefore, banks that are sitting on capital, or are looking to expand, must now look to the open bank market for targets with which they can merge or which they can acquire.

While growth in the bank merger market is expected, for a variety of reasons it may not be as robust as some people think. Although some compare the current banking crisis to the S&L crisis of the 1980s and 1990s, there will likely not be the same merger activity now because of a different regulatory environment. The 1980s and 1990s saw significant changes, both at state and federal levels, to branching and interstate banking laws, which opened the door to the mega-banks we know today. Ironically, Dodd-Frank imposed changes to the Reigle-Neal Act that may further limit bank merger activity. Section 613 of the Dodd-Frank Act specifically eliminates certain remaining interstate branching restrictions of Reigle-Neal that in the past required out-of-state banks to merge with established local banks in order to enter new states.

What does this mean to your institution? A changing market is often a market of opportunity. For acquiring institutions, there look to be numerous opportunities for the careful selection of a merger target. Acquirers will also be able to leverage their resultant increased size to offset compliance costs and increase product offerings. For those looking to sell, there is likely to be continued price pressure because of the number of other banks that are on the market. Finding competitors that may be interested in your geographic footprint or deposit base will help in getting a premium for your bank and maximizing your return. Those that are able to negotiate the sale of their institution sooner rather than later may also beat the merger rush. As always, those banks with good management, a well-defined strategic plan, capital strength and credit quality are more likely to gain regulatory approval and effect a smooth transaction.

Contributors: E. Marlee Mitchell and Christopher E. Siderys

EFTA Lawsuits Against ATM Operators Have Gone Viral

Perhaps Congress intended for every missing ATM fee decal to lead to a new class action lawsuit purporting to represent those consumers who used the ATM.  Perhaps Congress did not.  Either way, industry observers have seen such class action lawsuits become "viral."

The Electronic Funds Transfers Act, 15 U.S.C. § 1693, et seq. (EFTA), and Regulation E that implements EFTA, for years have required "ATM operators" (defined under EFTA) to post "on-machine" notices which disclose ATM transaction fees.  They require such physical notices, in addition to the "on-screen" notices, which require each ATM user to consent to any fees prior to completing any ATM transaction and withdrawing funds.  But, in recent months, a handful of class action law firms have filed (and continue to file) virtually identical lawsuits against banks, credit unions, and other financial institutions, as well as retailers, including gas stations, hotels, and casinos which provide space in their establishments for ATMs.  Each lawsuit alleges that an ATM user withdrew cash or made a balance inquiry at an ATM that was missing a decal disclosing transaction fees as required by the EFTA.  According to EFTA, a plaintiff can recover up to $500,000 or one (1) percent of the financial institution's net worth, whichever is less, as statutory damages if the ATM operator is determined to have failed to comply with the EFTA's disclosure requirements, including fee decals.  The ATM operator is also responsible for attorneys' fees and court costs.

EFTA provides defenses to an ATM operator when a fee decal goes missing, for example, as the result of vandalism, despite the operator’s good faith efforts to comply with EFTA.  15 U.S.C. §§ 1393m(c), (d).  To benefit from those defenses, ATM operators are advised to ensure their compliance with EFTA.  In particular, ATM operators are advised to account regularly for their ATM fee decals and to ensure that they have protocols to discover any missing decals.  The time is now for ATM operators to take proactive steps to safeguard themselves from becoming the next target for viral class action damages.

Among those steps, ATM operators should regularly complete inventories of their ATM fee decals that include checklists and high-resolution, date-stamped photographs to evidence that the decals are posted on each ATM.  To further assist in this effort, ATM operators should consider engaging their service technicians, cash replenishment vendors or other service providers to complete checklists that indicate that fee decals are posted on each visit to an ATM and whenever a fee decal is replaced.  In addition, ATM operators should complete installation checklists and photograph each ATM and its decals whenever an ATM is first installed or "swapped."

Should a fee decal go missing, the ATM operator should immediately dispatch a technician or vendor to replace the decal to close the date range for any class action.  But, before doing so, the ATM operator should ensure that the technician or vendor also checks and photographs the tackiness where the decal was removed as further evidence that the decal had been posted properly.

These proactive steps will assist ATM operators in providing its good faith compliance with the EFTA and, further, that any missing decal was the result of vandalism.

Contributor: Derek Edwards and Kevin Kidd

Highlights of the Sixth Annual Southeastern Banking Seminar

Waller Lansden's annual Southeastern Banking Seminar has become a summer highlight for banking industry professionals. On August 20, 2010, nearly 100 banking executives, industry leaders, regulatory officials and other members of the financial services sector gathered at the Waller Lansden Conference Center for the sixth annual seminar, a lively program of presentations, panel discussions and break-out sessions focusing on current industry trends and issues affecting financial institutions. The seminar featured an impressive lineup of speakers who shared their insight into recent developments and emerging issues within the financial services industry.

The program opened with Timothy L. Amos, Senior Vice President and General Counsel of the Tennessee Bankers Association, who provided an update on a broad range of legislative developments in Tennessee. Next on the program was "The Future Landscape of Banking" a panel discussion moderated by Waller Lansden partner Marlee Mitchell. Panelists DeVan D. Ard, Jr., president and CEO of Reliant Bank; Wynne E. Baker, banking member with KraftCPAs, PLLC; Brian D. Branson, Senior Vice President of Sterne Agee & Leach, Inc.'s Financial Institutions Group and Dan Hogan, Regional Vice President with Fifth Third Bank, addressed the challenges facing the banking industry in the wake of the Dodd–Frank Wall Street Reform and Consumer Protection Act. The panel discussed the negative impact on profitability caused by the increased cost of regulatory compliance coupled with decreased opportunities for revenue raising. The panel predicted a new wave of industry consolidation resulting from the pressures and costs of compliance with reform legislation and the implementing rules to follow.

The 2010 Southeastern Banking Seminar included four break-out sessions where attendees could gain valuable information on specific topics. Barry S. Marks, founding shareholder of Marks & Weinberg, PC, discussed opportunities in equipment finance; Glenn W. Perdue, member-in-charge at Kraft Analytics, LLC covered current developments in bank valuation; Kevin Kidd and Chris Phillips of Waller Lansden highlighted emerging trends in electronic payments systems and the Card Act of 2009; and Lela Hollabaugh of Waller Lansden discussed the impact of the Gulf Oil Spill on financial institutions, particularly with respect to borrowers in the Gulf region.

Carol Owen, a partner in Waller Lansden's Trial and Appellate Litigation practice, delivered a cautionary tale titled "Martinis, Madness and Self-Reports to the SEC: Avoiding the Litigation Nightmare" which highlighted the growing number of customer lawsuits against banks and financial institutions. Drawing from her extensive experience, Ms. Owen offered practical tips for averting disruptive and costly litigation. The program concluded with Scott Minerd, Chief Investment Officer of Guggenheim Partners Asset Management, who provided an economic update for attendees and offered his insight and expectations for the investment market in the months ahead.

Waller Lansden extends its sincere thanks to the speakers and panelists who participated in the 2010 Southeastern Banking Seminar as well as the attendees. We look forward to seeing you next summer at Waller Lansden's 7th Annual Southeastern Banking Seminar.