Tuesday, January 8, 2013
The Impact of the Financial Crisis on Community Banks
6/21/2011 Courtesy of Mendes and Mount, LLP
Introduction
Over the course of the past decade, community banks have become heavily concentrated in construction and development lending as well as commercial real estate lending due to an increase in competition for consumer credit, home mortgages, and credit cards. Now, two years into the financial crisis, and with the benefit of hindsight, it appears that the increased competition was met with loosening of underwriters standards, and poor management. As a result, over 150 banks failed in 2010, almost 50 banks have failed thus far in 2011, and we will continue to see high levels of bank failures, particularly among community banks, for the next few years. In fact, billions of dollars in commercial real estate loans made prior to the financial crisis has still yet to mature, many of which are underwater and will be difficult to refinance.
Not surprisingly, a wave of litigation resulting from the failure of community banks has commenced. With the economic conditions remaining unsettled, and with the probability of more community bank failures on the horizon, the FDIC will continue to investigate banks and bring additional lawsuits in the coming years.
Insurers that have provided Directors and Officers (“D&O) liability coverage to community banks are concerned over FDIC litigations and their aggregate exposure to financially distressed community banks. Additionally, many Insurers are reluctant to provide D&O coverage for such risks. Therefore, some community banks are experiencing displacement issues with regards to the carrier community, and new Insurers are sought to provide D&O programs.
While there has been a considerable increase in cost for D&O coverage, the expected FDIC litigations will not likely affect financially sound financial institutions, including community banks, from procuring D&O coverage. However, “problem institutions” are struggling to obtain coverage, and will likely continue to struggle until they can shore up their financial viability.
This article examines the causes of the failure of community banks in the wake of the financial crisis, and the resulting investigations and litigation being pursued by the FDIC as well as private investors. Additionally, the article provides helpful statistics concerning the recent bank failures, and also provides several case studies of banks that have failed during the current financial crisis.
Causes of Community Bank Failures
It is not surprising that many of the community banks that have failed during the recent financial crisis have had similar characteristics. Many have suffered because of loan losses from construction and development lending as well as commercial real estate. An analysis of the financial statements of community banks, prior to their failure, demonstrates that the banks had a significant percentage of non-performing loans in the areas in which their lending was heavily concentrated – construction and development, and commercial real estate. Because the lending at the failed banks were so heavily concentrated in these portfolios, the banks were not prepared to deal with non-performing loans, and the resulting loan losses.
Many companies have shut down during the recession, vacating shopping malls and office buildings financed by the loans, which has resulted in delinquent loan payments and defaults by commercial developers. While there has already been a significant amount of community bank failures through 2011, because the losses to commercial real estate appear to develop at a later stage, continuing losses to commercial real estate will likely lead to further bank failures in the coming years. In fact, the Congressional Oversight Panel has suggested that commercial real estate loan losses will significantly increase over the course of the next several years, impacting the stability of community banks, and likely leading to more community bank failures.
While economic conditions have undoubtedly contributed to the recent bank failures, similar to the Savings and Loan (“S&L”) period, we have found that internal problems such as poor management has substantially contributed to bank failures as well. Our experience demonstrates that high risk business strategies, poor underwriting, which fails to adhere to the bank’s guidelines, including poor documentation, and inadequate management oversight all contributed to the recent failure of many community banks. In fact, because many directors and officers defend claims by arguing that they could not predict the market collapse, most FDIC lawsuits attempt to develop evidence of dishonest conduct, failure to follow internal policies, and failure to establish and adhere to adequate underwriting policies.
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Small Biz Worried About Legal Costs - RocketLawyer.com
NOT an Endorsement, just a Resource for Small Business! I am in the process of speaking with staff of RocketLawyer.com as a well to better understand the services that they provide. From what I gather, RocketLawyer.com provides a bit more of a hands on type of service than say LegalZoom.com but again you still need to do your homework!
Small Biz Worried About Legal Costs - RocketLawyer.com Check out the INC 5000 List 2012
Small Biz Worried About Legal Costs - RocketLawyer.com Check out the INC 5000 List 2012
Monday, January 7, 2013
The Buyers Are Back: M&A Poised to Rebound in 2013
By Tim Sprinkle | The Exchange – 4 hours ago.. .Courtesy of Yahoo Finance-January 13, 2013
The last 12 months have been a mixed bag for the corporate mergers and acquisitions (M&A) market.
According to M&A analysis publication Mergermarket, global M&A activity was down 2.7% in 2012 and saw the lowest deal values across the board since 2010. In the U.S., the overall market fell 4.7% for the year with $768.9 billion worth of deals, while private equity buyouts slipped 13.3% to a two-year low.
All of this bodes well for the year ahead.
“Cautious confidence is gaining among M&A practitioners for 2013,” said Giovanni Amodeo, global editor-in-chief for Mergermarket. “While a full recovery is yet to be seen, the recent agreement to avoid the fiscal cliff in the U.S. and the increased stability in the Eurozone are all positive events that can encourage corporations to do more transactions.”
Strong Fundamentals Remain
But some analysts worry that the market isn’t entirely out of the woods yet. One concern is that the Q4 spike was due in part to corporates pushing to get deals done ahead of the capital gains tax uncertainty in 2013. As a result, the market could drop off sharply in Q1.
“If you were in the process of doing a deal in the second half of 2012 you would likely have pulled it forward to finish when there was more certainty,” says Martyn Curragh, PwC’s U.S. transaction services leader. “So that sucked forward some deals that would otherwise have closed in Q1, and it could take some time to catch back up.”
Still, Curragh says he’s “relatively optimistic” about the next 12 months and believes that the necessary fundamentals for a strong M&A market are in place. GDP growth is expected to be in the 2-3% range in 2013, up from 1-2% last year, and interest rates remain low.
“A year ago we saw plenty of cash on corporate balance sheets, private equity had a lot of money to invest, and interest rates were very low, so we thought we were set up for a pretty good year,” he says. “What got in the way of that were a lot of macroeconomic issues – the situation in Europe, uncertainty around the U.S. elections and the fiscal cliff.”
Absent those speed bumps, Carragh says, 2013 should line up to be the year that 2012 never was.
M&A attorney Andrew Apfelberg, with L.A. firm Greenberg Glusker, agrees.
“Many of the reasons people wanted to sell in 2012 remain,” he says, “and though they could not get their deals done in time for the December 31 cutoff, they still want to get them done before any other laws change. Also, they now have a few years’ worth of year-end financials since the trough in 2008 that they can show in diligence to tell the story that they survived the worse and climbed out of it.”
The Money Is Waiting
The buyers are ready. Private equity firms and other potential buyers are well positioned for an active M&A year – flush with cash and with access to more ready financing (especially for lower and middle market buyers) – and are generally more confident in the direction of the U.S. economy. If nothing else, at least now we know who will be running the show in Washington the next two years.
“With 30 years in this business I hesitate to say this, but interest rates are as low as I’ve ever seen,” says Larry Mock, managing partner with Atlanta-based private equity firm, Navigation Capital Partners. “And when purchase multiples remain the same but interest rates are low, as we’re seeing now, that’s a real advantage to the buyer.”
Whether or not rates stay low remains to be seen, as evidenced by the minutes of the Federal Reserve’s December monetary policy meeting released Thursday that suggested that the central bank’s quantitative easing programs may be coming to an end eventually. Still, Mock isn’t worried about that in the short-term – after all, the Fed in December announced plans to extend its monthly purchases of mortgage securities and Treasuries.
“I don’t think 2013 will be a year when we worry about interest rates,” he says, “but I’m very concerned about it beyond that. But that’s a problem for another day.”
Pension funds are also finding their way back into the private equity space after five years away, in search of better yields to meet their payout obligations. That’s good news for PE firms, where public pension funds often account for more than half of available funds, and is providing PE investors with a fair amount of new capital for investment this year.
“You either invest it or you lose it,” Mock says, “and we’re still at the front end of that trend. That should increase M&A activity and make for a good market in 2013.”
Sunday, January 6, 2013
New Rules Create Jobs for Attorneys at Hedge Funds
New York Law Journal - Wednesday-December 26, 2012- By Christine Simmons
Lawyers with Dodd-Frank Act and regulatory expertise are being wooed by private equity firms and hedge funds in need of an in-house compliance team. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, requires private equity and hedge funds to register with the Securities and Exchange Commission if they have at least $150 million in assets under management.
In addition, scores of regulations have been issued under Dodd-Frank and there are more to come. Only one third of the 398 requirements under Dodd-Frank have been written into rules, according to a Davis Polk & Wardwell analysis. Another third have been written into proposed rules while the final third have yet to be proposed.
"If the pace of new regulation continues the way we've seen in the last year or two, I think more and more [financial services] firms will be adding to their legal and compliance departments," said Adam Reback, a chief compliance officer at hedge fund J. Goldman & Co. "It means more filings, it means more leg work, it means more monitoring. You just need more people to get it done" and more resources.
The SEC reported in October that about 1,500 advisers to hedge funds and other private funds had registered with the agency since Dodd-Frank made it mandatory. As investment entities "saw these regulations, they started hiring," said Nora Jordan, head of Davis Polk's investment management group, who said she has seen full-time compliance officers with smaller hedge funds that didn't have these positions before.
"There are quite a number of other Dodd-Frank regs that will impact hedge and PE managers that haven't gone into effect yet, but none as far-reaching as the registration rule," said Marc Elovitz, a Schulte Roth & Zabel partner and chair of the firm's investment management regulatory and compliance group.
Among the rules not yet implemented under Dodd-Frank are those relating to record-keeping and certain short-sale disclosures, Elovitz said. Registration requires designating a chief compliance officer as well as implementing written policies and procedures, maintaining books and records, filing annual updates, and implementing a code of ethics, lawyers said.
Hedge funds and private equity firms must implement and test compliance procedures. While that can be handled by outside counsel, Jordan said, these firms "also need someone internally who knows where the weak points are and can tailor them and test them on a regular basis.
Before Dodd-Frank, many firms would simply name their CFO or COO as their chief compliance officer, said Jordan, but given the quantity and sophistication of the work involved, "very few are willing to take on that role." Some equity firms have used the compliance opportunity to create their first general counsel position, Elovitz said. Some of these positions are being filled by experienced lawyers from financial institutions that have contracted, Elovitz said.
"There are lawyers who have gone from financial institutions into hedge funds and private equity firms," he said, while others are coming from government and law firms. Jordan said clients have tapped several Davis Polk associates. In the last three years, eight of the 10 associates who left Davis Polks' investment management group went to hedge funds.
Many of them landed in the legal department, Jordan said, and some might have a dual role in compliance. The explanation for increased demand for attorneys in the compliance role is two-fold, Reback said. The first is the continual increase of regulations, and second, the culture of firms has shifted to asking compliance questions first before making business decisions rather than jumping into a decision, he said.
"The role of compliance in funds has evolved from a back office function to more of a middle or front office function" requiring involvement with the investment staff, Reback said.
The regulations have led to more interaction between hedge funds and outside counsel, he said, leading financial firms to pay law firms more in billable hours.
Hiring full-time compliance and legal advisers makes good business sense, said Steven Nadel, a partner in Seward & Kissel's investment management group. Asset allocators, such as pension funds, "have become more sophisticated and expect more from the infrastructure of the firms they're investing in. They expect there to be some legal type or compliance type filling a role in the firm," Nadel said.
Newly registered firms are also subject to SEC inspections, generally within two years, sometimes followed by "deficiency letters" that detail weaknesses, Jordan said. "You want to have a lawyer in place to help you prepare for these exams," Jordan said. "Those letters have always generated a re-look at whether the procedures and staffing is efficient." Gary Watkins, a partner at the ACA Compliance Group, a regulatory compliance consulting firm, said he foresees additional legal hiring by financial entities.
"Increased regulation leads to more responsibilities and in turn firms may look to increase their resources by hiring additional compliance personnel," Watkins said, noting that a majority of people hired into compliance at investment adviser firms are attorneys. Hedge fund legal recruiter David Claypoole at Parks Legal Placement predicted that over the next 18 months "there is going to be a strong demand for legal and compliance positions at asset managers."
Dimitri Mastrocola, a recruiter who heads the financial services legal search practice at Major Lindsey Africa, said up to half of the New York searches Major Lindsey has performed in 2012 on behalf of financial services organizations have a compliance focus, either seeking a compliance officer or CCO, general counsel, or staff attorney with compliance background. It wasn't like this a few years ago, he said.
At larger funds with complex investment strategies, a CCO who is an attorney can earn from $750,000 to $1 million, including base pay and bonus, Mastrocola said. A senior associate going in-house to a hedge fund or private equity firm could expect total compensation to be similar as under a law firm, in the $250,000 to $400,000 range, Mastrocola said.
David Sobel, a CCO at broker-dealer Abel/Noser Corp. and former private practice attorney, said as the web of regulations has become more complex, his workload has expanded by about 25 percent.
Walter Zebrowski, chairman of the nonprofit Regulatory Compliance Association, said the new regulations will "translate to tremendous amounts of employment opportunities" for young lawyers and transitioning professionals if they have the right expertise.
"In the last few years, compliance has become a new profession" within financial services, noted Zebrowski, an attorney and CPA who runs an alternative investment firm.
@|Christine Simmons can be contacted at csimmons@alm.com.
The Dodd-Frank Act:A Cheat Sheet, Morrison & Foerster
An Executive Summary of the Dodd-Frank - Jenner & Block
Dodd-Frank's Financial Outsourcing: New rules push business offshore, while taxpayer risk stays home. November 5, 2012
New York Law Journal - Wednesday-December 26, 2012- By Christine Simmons
Lawyers with Dodd-Frank Act and regulatory expertise are being wooed by private equity firms and hedge funds in need of an in-house compliance team. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, requires private equity and hedge funds to register with the Securities and Exchange Commission if they have at least $150 million in assets under management.
In addition, scores of regulations have been issued under Dodd-Frank and there are more to come. Only one third of the 398 requirements under Dodd-Frank have been written into rules, according to a Davis Polk & Wardwell analysis. Another third have been written into proposed rules while the final third have yet to be proposed.
"If the pace of new regulation continues the way we've seen in the last year or two, I think more and more [financial services] firms will be adding to their legal and compliance departments," said Adam Reback, a chief compliance officer at hedge fund J. Goldman & Co. "It means more filings, it means more leg work, it means more monitoring. You just need more people to get it done" and more resources.
The SEC reported in October that about 1,500 advisers to hedge funds and other private funds had registered with the agency since Dodd-Frank made it mandatory. As investment entities "saw these regulations, they started hiring," said Nora Jordan, head of Davis Polk's investment management group, who said she has seen full-time compliance officers with smaller hedge funds that didn't have these positions before.
"There are quite a number of other Dodd-Frank regs that will impact hedge and PE managers that haven't gone into effect yet, but none as far-reaching as the registration rule," said Marc Elovitz, a Schulte Roth & Zabel partner and chair of the firm's investment management regulatory and compliance group.
Among the rules not yet implemented under Dodd-Frank are those relating to record-keeping and certain short-sale disclosures, Elovitz said. Registration requires designating a chief compliance officer as well as implementing written policies and procedures, maintaining books and records, filing annual updates, and implementing a code of ethics, lawyers said.
Hedge funds and private equity firms must implement and test compliance procedures. While that can be handled by outside counsel, Jordan said, these firms "also need someone internally who knows where the weak points are and can tailor them and test them on a regular basis.
Before Dodd-Frank, many firms would simply name their CFO or COO as their chief compliance officer, said Jordan, but given the quantity and sophistication of the work involved, "very few are willing to take on that role." Some equity firms have used the compliance opportunity to create their first general counsel position, Elovitz said. Some of these positions are being filled by experienced lawyers from financial institutions that have contracted, Elovitz said.
"There are lawyers who have gone from financial institutions into hedge funds and private equity firms," he said, while others are coming from government and law firms. Jordan said clients have tapped several Davis Polk associates. In the last three years, eight of the 10 associates who left Davis Polks' investment management group went to hedge funds.
Many of them landed in the legal department, Jordan said, and some might have a dual role in compliance. The explanation for increased demand for attorneys in the compliance role is two-fold, Reback said. The first is the continual increase of regulations, and second, the culture of firms has shifted to asking compliance questions first before making business decisions rather than jumping into a decision, he said.
"The role of compliance in funds has evolved from a back office function to more of a middle or front office function" requiring involvement with the investment staff, Reback said.
The regulations have led to more interaction between hedge funds and outside counsel, he said, leading financial firms to pay law firms more in billable hours.
Hiring full-time compliance and legal advisers makes good business sense, said Steven Nadel, a partner in Seward & Kissel's investment management group. Asset allocators, such as pension funds, "have become more sophisticated and expect more from the infrastructure of the firms they're investing in. They expect there to be some legal type or compliance type filling a role in the firm," Nadel said.
Newly registered firms are also subject to SEC inspections, generally within two years, sometimes followed by "deficiency letters" that detail weaknesses, Jordan said. "You want to have a lawyer in place to help you prepare for these exams," Jordan said. "Those letters have always generated a re-look at whether the procedures and staffing is efficient." Gary Watkins, a partner at the ACA Compliance Group, a regulatory compliance consulting firm, said he foresees additional legal hiring by financial entities.
"Increased regulation leads to more responsibilities and in turn firms may look to increase their resources by hiring additional compliance personnel," Watkins said, noting that a majority of people hired into compliance at investment adviser firms are attorneys. Hedge fund legal recruiter David Claypoole at Parks Legal Placement predicted that over the next 18 months "there is going to be a strong demand for legal and compliance positions at asset managers."
Dimitri Mastrocola, a recruiter who heads the financial services legal search practice at Major Lindsey Africa, said up to half of the New York searches Major Lindsey has performed in 2012 on behalf of financial services organizations have a compliance focus, either seeking a compliance officer or CCO, general counsel, or staff attorney with compliance background. It wasn't like this a few years ago, he said.
At larger funds with complex investment strategies, a CCO who is an attorney can earn from $750,000 to $1 million, including base pay and bonus, Mastrocola said. A senior associate going in-house to a hedge fund or private equity firm could expect total compensation to be similar as under a law firm, in the $250,000 to $400,000 range, Mastrocola said.
David Sobel, a CCO at broker-dealer Abel/Noser Corp. and former private practice attorney, said as the web of regulations has become more complex, his workload has expanded by about 25 percent.
Walter Zebrowski, chairman of the nonprofit Regulatory Compliance Association, said the new regulations will "translate to tremendous amounts of employment opportunities" for young lawyers and transitioning professionals if they have the right expertise.
"In the last few years, compliance has become a new profession" within financial services, noted Zebrowski, an attorney and CPA who runs an alternative investment firm.
@|Christine Simmons can be contacted at csimmons@alm.com.
The Dodd-Frank Act:A Cheat Sheet, Morrison & Foerster
An Executive Summary of the Dodd-Frank - Jenner & Block
Dodd-Frank's Financial Outsourcing: New rules push business offshore, while taxpayer risk stays home. November 5, 2012
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