2014 Trends in Bank Mergers & Acquisitions, Social Media & Mobile Banking

©2014 Baird Holm LLP
Bank M&A Update
Regulatory Developments
Jonathan J. Wegner
jwegner@bairdholm.com
(402) 636-8340

Bank M&A: New & Improved!
• Stronger Pricing
• Lots of bidders
• Clean balance sheets
• Excess capital
– Stronger loan demand
– Fee-based business

Regulatory Highlights
• Social Media
• Mobile Banking

Bank M&A Today: To Acquire or Be Acquired?
MARKET DRIVERS

M&A 2013: U.S. Overview
Number of Deals % of Banks
2013 248 3.64%
23-Year Hist. Median 292 3.52%
1990-99 Hist. Median 491 3.90%
2000-07 Hist. Median 272 3.06%
Source: KBW

Pricing has begun to recover

But the market favors size

Rising costs reward efficiency

M&A drivers in banking today
Market Factors
• Low rate environment
• Strong agricultural
income
• Weak loan demand
• FCS/Credit Union
competition
• Decline in mortgage
revenues
• Succession issues
Cost Drivers
• NIM pressure
• Rising compliance costs
• Basel III capital
requirements
• Pressure on ROA/ROE

M&A drivers in banking today
Sellers turning to market
• Sellers presenting
cleaner balance sheets
– Lower credit marks
– Less OREO/Toxic Assets
– Higher ALLLs
• Pricing coming out of the
doldrums
• Better performing banks
are considering sale
Buyers are eager to close
• Activity is increasing
• Interest in M&A is high
• Strategic mergers are the
latest trend
• Buyers are maintaining
financial discipline

Bank performance improvement
• Strong equity market performance in 2013
– Over $1 billion up 83% (122% since 2011)
– Under $1 billion up 37% (60% since 2011)
• Pricing differential supported by underlying
financial performance
• Stronger currency for deals

But why still fewer deals?
• “Unrealistic” seller expectations
• Buyer’s unwilling to close bid-ask spread
• But…
– Earnings recovery
– Lower NPAs & reverse provisions
• Sellers unsure where to put proceeds

Underlying financials drive divide
• Assets: $100 million
• TCE: $9 million
• Net Income: $850,000
– ROA 0.85%
– ROE 9.4%
• DCF Value: $9.9MM
• Assumptions
– 5% growth rate
– 12% discount rate
– 9% capitalization rate
• Profile
– 110% P/TCE
– 11.6x P/E

Bank M&A Today: To Acquire or Be Acquired?
LEGAL TRENDS

Legal Deal Structures
• Broader use of P&A structure
– Excluded Assets
• Loans
• OREO
• Correspondent Bank Stock
– Escrows
– Contingent Liabilities

• Traditional stock/merger deals
– Special dividend to BHC of excluded assets
– Buyers causing sellers to form liquidating
LLCs / liquidating trusts
• Servicing provided by buyer

Buyer Protections
• Strong representations & warranties
• Affirmative covenants
– Board-meeting access
– Continuing due diligence
• Early involvement with regulators

• Key Economic Terms
– Minimum Equity and Premium Calculation
– Minimum ALLL
– AOCI & Unrealized Gain/Loss
– Data Processing Termination
– Deferred Compensation
– Price Protection

Current Legal Issues
• TARP/SBLF
• TRUPS
• Bank Stock Loans
• Mortgage repurchase
obligations
• FHLB borrowings
• HHI/Antitrust
• Regulatory orders
• BSA/AML
Compliance
• Fairness opinions
(stock deals)

Legal Issues
• Asset Quality
– Valuation of Investment Securities
– Types of Investments
– Adequacy of ALLL
– Push-down valuation impact on balance sheet

Legal Issues
• Post-Closing Protections
– Indemnification
– Escrow/Holdback
• 1-3 Years
– Non-competition

SOCIAL MEDIA

Defined
• Social Media: “a form of interactive online
communication in which users can
generate and share content through text,
images, audio, and/or video.”
– FFIEC Guidance

JP Morgan’s Epic Twitter Fail

• The good…

… the Bad…
• Did you have a specific
number of people’s lives
you needed to ruin before
you considered your
business model a
success? #AskJPM
• I have Mortgage Fraud,
Market Manipulation,
Credit Card Abuse, Libor
Rigging and Predatory
Lending. Am I diversified?
#AskJPM
… and the Ugly
• When Jamie Dimon eats
babies are they served
rare? I understand anything
above medium-rare is
considered gauche.
#AskJPM
• Does the sleaze wash off
with a regular shower, or do
you have to use something
special like babies tears?
#AskJPM

So Where’s the Love?

ICBA Top 50 in Social Media
• Engage with your customers.
• Popular Posts from MidWestOne
– 80%: non-profit event and
project information
– 15%: financial education
– 5%: donations made by the
bank and awards received by
the bank
Source: MidWestOne Bank website.

ICBA Top 50 in Social Media
Source: World Retail Banking Report 2014

Using Social Media Channels
• Use Social Media sites for education,
customer service, bank
announcements, and public service
announcements.

Using Social Media Channels
• Negative
feedback will
happen
• Best practice:
Acknowledge
negative
customer
feedback
ASAP.

Social Media “Command Centers”

Social Media Compliance “Likes”
• FFIEC Social Media Guidance
– Adopt tailored risk management program.
– Identify, measure, monitor, and control the
risks related to social media.

Social Media Compliance “Likes”
• Elements of Social Media Policy
• Governance structure
• Policies and procedures regarding the use and
monitoring of social media
– Methods to address risks from online postings, edits,
replies, and retention);
• Due diligence process, TPSP Management
• Employee training program
• Oversight process for monitoring posts
• Audit to ensure ongoing compliance
• Appropriate reporting parameters

Regulations: Not Friendly
• Ads/Disclosures
– TISA/Reg DD
– ECOA/Reg B
– FHA
– TILA/Reg Z
– RESPA/Reg X
– FDCPA
– EFTA/Reg E
– MAP/Reg N
• Privacy
– UDAAP
– GLBA
– COPPA
– FCRA
– TCPA
• CRA
• Reputation Risk
• TPSP Risk Mgmt

FFIEC Comments
• High Risk
– Integrating social media into customers’
online account
– Applications via social media portals
• Reputation Risk
– Comments by social media users
– Spoofing/phishing schemes
– Consumer complaints/inquiries

FFIEC Comments
• Guidance does not require financial
institutions to monitor and respond to all
Internet communications other than
communications on sites maintained by or
on behalf of the institution

MOBILE BANKING

Going Mobile
• Mobile Banking: a system that allows
customers to conduct certain financial
transactions via their mobile phone or
tablet.
• CFPB RFI – Mobile Usage & Unbanked
– 87% of the U.S. adult population has a mobile
phone (61% of these are smartphones).

Going Mobile
• Check account balances
• Receive alerts
• Locate ATM/Branch
• Transfer money between
accounts
• Mobile RDC
• Online chat
• Personal finance tools
• Coupons/discounts
• Person-to-Person payments
• Mobile picture pay
• Block card
• Order checks

Going Mobile
Consumers and Mobile Financial Services 2014, Federal Reserve

Going Mobile
• Compliance Issues:
– Fine Print
– T&Cs + Privacy Policy
– mRDC

Going Mobile: Fine Print
• Regs. B, E, M, Z, DD
– 2001 Interim Final Rules (rescinded)
• Email & 90-Day requirements
• Concerns regarding data security, identity theft,
and ‘‘phishing’’
– 2007 Rules (E-SIGN)
• Exceptions for electronic advertising, applications
(Regs. B, M, Z, DD)
• No “delayed” disclosures (e.g., telephone app)

• Disclosure Formatting Requirements
– “In writing”
– “In a form that the consumer may keep”
– “Clear and readily understandable”
• FRB’s E-SIGN Preamble
– Federal Register: 72 FR 63462

• FRB: “Conspicuous”
• Disclosures comply with the "clear and
conspicuous" requirement as long as they are
provided in a manner such that they would be clear
and conspicuous when viewed on a typical home
personal computer monitor.
• With regard to disclosures subject to specific font
size requirements, the disclosures must be
provided such that the required size requirement
would be met when viewed on a typical home
personal computer monitor.

• FRB: “Retainable Form”
– The Board believes that creditors satisfy the
requirement for providing electronic
disclosures in a form the consumer can retain
if they are provided in a standard electronic
format that can be downloaded and saved or
printed on a typical home personal computer

• FTC: “Clear and Conspicuous”
– Place the disclosure as close as
possible to the triggering claim.
– Account for various devices and
platforms.
– Incorporate the disclosure
whenever possible. If not
possible, make the disclosure
clearly on the linked page.

• FTC: Hyperlinks
– Make links obvious
– Label to convey the importance,
nature, relevance of linked info
– Consistent hyperlink styles
– Close proximity to claim
– Direct link to the disclosure
– Monitoring click-through rates
for effectiveness

• FTC: Other Best Practices
– Avoid scrolling or use text or
visual cues to direct consumers
– Review empirical research
– Respond to technical limitations
– Review total environment
– Display for sufficient duration
– Plain language and syntax

• CFPB Remittance Rule
– Disclosure requirements with regard to
grouping, proximity, font size, and segregation
not required for disclosures made through a
mobile application
– Expect presentation in a logical sequence,
that it be clear and conspicuous, and that it be
in equal prominence to one another

Going Mobile:
Fine Print
• CFPB “Know Before
You Owe” Initiative

Going Mobile: T&Cs
• Harmonize with Account Agreement
• Specific Terms for Functionality
– Consent to Contacts/Data Charges
– Limits on Usage
– Reliance on Information
– Disclaimers
– Security
– Right to Change Terms/Functionality

Going Mobile: T&Cs
• Online Privacy Policy should be updated
to reflect mobile
• Structure relationship to reflect terms of
service provider agreement

Going Mobile: mRDC
• Reg. CC warranties do not apply to mRDC
• Reg. E
– Warranties made to paying bank that item will
not be presented twice
– Paying bank may choose against which
presenting bank to make a warranty claim

Going Mobile: mRDC
• Federal Reserve proposed revisions
– Reg. CC does apply to mRDC
– mRDC bank makes warranty to all others that
item will not be presented again

Going Mobile: mRDC
• Risks in mRDC
– NSF
– Fraud
• Forgery
• Stolen Checks
• Altered Checks
– Duplicate Deposit
• Up to 75% of returns
• Up to 6 months to return or more

Going Mobile: mRDC
• Mitigating Risks
– KYC/CIP
• Database verification
• Out of wallet knowledge based questions
– Verify image based documentary evidence
– Track History
• Presenter/Issuer
• Fraud M.O.
– Restrictive Endorsement

Going Mobile: mRDC
• Mitigating Risks
– Track and Limit Usage
• Accounts per device / Devices per account
• Cards per account / accounts per card
• Accounts per person
• Accounts per geographic location
• Geographic location of usage
• Dollars per day/week/month
– Manual Review

Going Mobile: mRDC

Apple Pay

Apple Pay
• NFC Contactless Chip Card
– 220,000 Merchant Locations
– Liability Shift: Oct. 15, 2015
• Biometric Authorization
– Mathematical representation of fingerprint
– Encrypted on A Series chip

Apple Pay
• “Secure Element”
– Holds EMVCo Secure Token
– Token substitutes for 15/16 digit PAN
– Linked to Device ID for Authorization
• Integrated with Passbook
– Stores shipping details
– Populates for online purchases

Apple Pay
• Merchant Integration
– Visa, MC, DFS, Amex transactions
– No new agreements
– No fees (except tokenization security)
– Acquirers: TSYS, First Data, Vantiv

Apple Pay
• Issuer Penetration
– Big Issuers on Board
• Citi, B of A, Chase, Capital One, Wells, Amex
– Large Transaction Volumes
• 84% of Credit Card Volume
• 55% of Debit Card Volume

More Information
• http://www.slideshare.net/jonathanwegner/
• https://www.linkedin.com/in/jonathanwegner
jonathanwegner@bairdholm.com

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2014 Trends in Bank Mergers & Acquisitions, Social Media & Mobile Banking