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Interview with a Community Banking Professional
Nathan R. BattsNathan R. Batts   
Vice President & Counsel

North Carolina Bankers Association 


Q: What has surprised you most as Counsel of the North Carolina Bankers Association?
A: I've been surprised by the pace of the change that has swept through the industry in the seven years I have worked for the association. I've seen firsthand the effects of the subprime meltdown, the crisis on Wall Street, and Congress's attempt at fundamentally changing how financial institutions are supervised and examined. When I was first learning banking law, I naively assumed that the structure was well-established and changes would be sufficiently incremental that I would have time to absorb it. The core principles are sound, but operationally this is a business that is steadily reinventing itself.   

Q: What resources does the NCBA provide for its community bank members?
A: As a trade association, the NCBA serves its members in three main areas: government relations, regulatory compliance assistance, and continuing education. The NCBA is a voice for the industry to legislators and bank regulators at the state and federal level, helping to build consensus. In a bank's day-to-day operations, the NCBA also plays a role by providing expert compliance assistance and training and networking opportunities for bankers.

Q: What are the biggest problems to community banks? How are some community banks overcoming these hurdles?
A: Two of the biggest hurdles right now are overregulation and ever-changing capital requirements. The two are linked. Laws and regulations have become too complicated and prescriptive. Something is terribly wrong when banks are spending more time and money on compliance than on activities like lending that bring in revenue. The related issue is bank capital ratios. Bank capital from sources like shareholder equity helps to cushion the bank from losses on its loans. It is critically important that a bank have a strong amount of capital, but if you set the capital requirements too high you begin to stifle the ability of a bank to make new loans and stay in business. The industry is working with legislators and regulators to try to identify areas where regulations can be simplified. The second issue is tougher to overcome.

Q: Everyone keeps saying that community banks need to consolidate to be profitable. Do you agree? If so, what do you think the average "community bank" will look like in 5 years? 10 years?
A: The most successful banks are the ones that have carved out a niche and continue to innovate. A bank may differentiate itself by having the broadest range of services, the best customer service, the largest number of branches, the lowest costs, the most unique advertising. I have asked much the same questions and heard countless opinions from various experts. Some people hold up a smartphone and say that it is the future of the banking, others are convinced that there is still a place for personal service at the branch level. While large banks have economies of scale, community banks under $10 billion in assets are exempt from many of the requirements of the Dodd-Frank Act, so that helps to level out the playing field to a degree. I firmly believe that there are opportunities for community banks without regard to asset size. If there is a defining characteristic of those banks that will be the most successful in the next 5 to 10 years, I would predict that they will be the ones that continue to invest in and leverage new technology.

Q: The federal government seems to be pushing the banks to repay TARP. Do you think this will continue? If so, what will be the ultimate effect on community banks?
A: Much of the pressure seems to be coming from the Treasury Department. Out of the over 700 banks that received funding through the TARP program, approximately 400 are still in the program. Larger institutions have greater access to the capital markets and have generally been able to raise funds to pay off the TARP investments in them. Without the same access, many community banks will continue to remain within the TARP program for the foreseeable future. The TARP program has made billions for the federal government. One of the results that we will likely see is continued consolidation as some banks facing the prospect that their TARP dividend requirements will eventually reset higher consider potential mergers.

Q: Community banks do a lot of things right and do not get publicity. Can you share with us a few of those things?
A: I am very proud of the work that community banks do in the area of financial literacy. Each year, the NCBA's member banks sponsor deserving middle school age children to attend Camp Challenge, which is a traditional summer camp experience that includes courses to help kids learn the basics of how to save and manage money. Thousands of kids have attended the camp, and it would not be possible without the financial support and volunteer hours provided by bankers from across the state. I also believe that banks too often go unrecognized for their role in promoting affordable housing. Through the NCBA's subsidiary Community Investment Corporation of the Carolinas, banks have joined together in loan participations that total hundreds of millions of dollars for the construction of affordable and senior housing. And when it comes to community causes, community bankers are at the forefront in helping raise money and in volunteering. I know in my own community, for example, that local banks are supporters year after year in Warmth for Wake, which provides fuel to Wake County residents during the winter months.  

Q: What do you see as the course of regulation over the next several years?
A: More of it. I see the regulatory burden increasing before it gets any better. There are some encouraging signs at the state level. The North Carolina Commissioner of Banks and the General Assembly are working on a comprehensive update to the state's banking laws to modernize it and hopefully reduce unnecessary regulatory burden. A lot of uncertainty remains at the federal level though. I continue to watch the new Consumer Financial Protection Bureau to see if it will add to the regulatory burden or begin to simplify it. Guarded optimism is the most that many bankers can have at this point.


Nathan Batts is Senior Vice President and Counsel for the North Carolina Bankers Association, a trade association for banks that are headquartered or have branches in N.C. He joined the NCBA in January 2005 and works as a banking lawyer, providing regulatory and compliance assistance to member banks of the NCBA. Nathan also focuses on federal legislative issues and is a registered lobbyist in N.C. He received his undergraduate degree from the University of North Carolina at Chapel Hill and his law degree, with a concentration in business transactions, from the University of Tennessee, Knoxville. While at the University of Tennessee, Nathan participated in the Clinical Program and served as an Editor of the Tennessee Law Review. 


Bark Worse Than Bite?


In April's edition, we discussed the FDIC's $900 million lawsuit against Washington Mutual and its former executives. Well, it was settled last week against three of the former executives when they agreed to pay $64 million. Importantly, this sum is mostly made up of surrendered claims to golden parachutes, bonuses and retirement funds, rather than cash that the executives would have to pay out-of-pocket.



Spilman - Attorneys At Law

Dear Friends:

Spilman's Community Banking Group is proud to be celebrating our first birthday. And like any birthday, we find ourselves looking back over the past year and making goals for the next. When we formed the group from our stable of experienced and knowledgeable attorneys, we believed that we were building something unique and positive for the community banking industry. We are grateful that it has been received and recognized as such; for example, Valley Business Front, a Roanoke, Va. publication, named Spilman as its "Legal FrontLeader" due to our development of the Community Banking Group. We intend to build on this success in the upcoming year and be an even better resource for those in the community banking industry.

As part of our desire to be a top resource for you, this is the fifth Community Banking Excellence e-newsletter. We hope you have found them to be relevant and timely, but we want to know if you think these objectives have been fully realized. To that end, we need your help. I am attaching a link to a short survey, which should take less than 5 minutes to complete. The information collected in this survey will help us ensure this newsletter is helpful, timely and relevant to those of you in the industry. We would appreciate your candid feedback, which will help us improve future editions.

Finally, I would like to thank all the community bank leaders who agreed to share their insights over the past year. The interviewees taught me a lot, including that although community bankers are under a lot of pressure and stress, they love their job and their communities. Unfortunately, many predict that 2012 will most likely not be one in which community banks find much relief, but I hope that this inspiring spirit will not be lost.

On behalf of Spilman's Community Banking Group, I would like to wish all of you a safe and happy holiday season and a prosperous 2012.


Click here to be taken to our reader survey.




Potential Pitfalls of Upstream Guaranties

by Amy King Condaras 

Subsidiary guaranties, also commonly known as upstream guaranties, are instruments used for the benefit of lenders and borrowers alike. Upstream guaranties benefit borrowers and lenders because they enable borrowers to obtain more favorable terms and enable lenders to lend based upon a larger asset pool to secure debt. Despite these benefits, there are potential pitfalls that lenders must be aware of when documenting any upstream guaranty, particularly when an upstream guarantor will not be receiving any of the proceeds being loaned. Potential risks include avoidance of an upstream guaranty due to lack of consideration or a determination that the guaranty was fraudulently conveyed in the event the guarantor files for bankruptcy.

If consideration does not move directly between a lender and an upstream guarantor, an upstream guarantor may argue that the loan to their parent corporation does not provide it a direct benefit and, as a result, the guaranty is unenforceable for lack of consideration. One answer to this argument is to document in the upstream guaranty the benefits that will be received by the upstream guarantor, such as their ability to use any equipment being financed. The question of consideration is particularly problematic when the upstream guaranty is provided after closing and is not part of the initial loan transaction. Lenders should make sure to document that the loan was made in anticipation of the upstream guaranty and that it would not have been made absent this assurance.

Fraudulent conveyance arguments arise when at the time an upstream guaranty is provided the guarantor insolvent or without adequate capital, and the upstream guarantor did not receive equivalent value for the guaranty provided. If the guarantor was insolvent at the time it granted the upstream guaranty, the upstream guaranty may be avoided in a bankruptcy proceeding. Further, under bankruptcy law, upstream guaranties may be found to be constructively fraudulent if provided (1) within two years from the date bankruptcy was filed, (2) in exchange for less than reasonably equivalent value and (3) when the upstream guarantor was in poor financial condition. Therefore, even if an upstream guarantor is solvent when it grants an upstream guaranty, the upstream guaranty may be determined to be constructively fraudulent based on these three requirements.

Read the full article on our website.


Creditors' Rights
Avoiding the "Lender as Landlord" Scenario
by W. Eric Gadd 

Unfortunately, as we all know, foreclosures are necessary. But foreclosures, by their nature, involve a certain degree of unpleasantness and challenges.

A particularly thorny set of challenges arises when the foreclosure involves income producing property, especially residential rental property.

The Problem.
Imagine this all too familiar real world scenario: as security for a loan, the borrower grants the bank a deed of trust lien against the borrower's apartment building. As additional security for the loan, the borrower grants the bank an assignment of leases and rents. After a period of time, the borrower defaults on the loan. The bank exercises its rights under the assignment of leases and rents and notifies the borrower's tenants that all rent coming due should be paid to the bank until further notice. Unfortunately, pursuant to the terms of leases entered into by and between the borrower and his tenants, the cost of utilities such as electricity, water and natural gas were included in the monthly rent. Now effectively cut off from the income stream that the borrower used to pay for the utilities (assuming, of course, that the borrower actually was paying the utilities in the first place) by virtue of the bank exercising its rights under the assignment of leases and rents, the borrower allows the utilities to become delinquent. Shut-off notices are issued. Through no fault of their own, nor the bank's, the building's tenants face the loss of some of their most basic utilities. Winter will soon be upon us, and the tenants are looking for someone to step up and remedy the situation. The tenants do not want to hear that that the utilities were established in the name of their landlord, and that the bank is simply exercising its contractual rights under the assignment of leases and rents. They want answers. They want their lights back on.

Read the full article on our website.