An Update on The Dodd-Frank Act, Director Responsibilities and more

1. An Update onThe Dodd-Frank Act, Director Responsibilities and more October 7, 2011 Community Bank Executive Forum Tampa, Florida Presented by Robert E. Lee Garner, Esq. Stanley H. Pollock, Esq. Frank M. Young, III, Esq. Haskell Slaughter Young & Rediker, LLC Atlanta, Georgia Birmingham, Alabama 1

2. Dodd-Frank Act • The Preamble • To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes 2

3. (Dodd-Frank Act, cont.) • Dodd-Frank Act (the “Act”) was signed into law on July 21, 2010 • The Act has 16 Titles • Approximately 2300 pages • Requires promulgation of more than 250 rules/regulations • Requires approximately 65 studies • Most extensive legislative change since the 1930’s and much more… 3

4. (Dodd-Frank Act, cont.) • The Act Impacts banking organizations of all sizes • Financial Stability Oversight Council created to address systemic risk considerations • Orderly Liquidation Authority title creates federal receivership process – designed to end “too big to fail” – a new process • Expanded Federal Reserve System regulatory authority • Consumer Financial Protection Bureau created

5. Interstate Branching Authority Expanded • Section 613 of the Act • Under previous law national banks and state chartered banks limited in ability to branch de novo interstate • Old law permitted de novo branching where individual states “opt-in” 5

6. (Interstate Branching Authority Expanded, cont.) • The Act now permits national banks and state chartered banks to branch de novo interstate if: banks in target state could establish the branch • Impact on franchise value? • Market share considerations • Federal thrift authority to branch de novo nationwide remains unchanged • Thrift that converts to bank may keep established branches and establish de novo branches in that state

7. Transactions with “Insiders” • The Act adds a prohibition on the purchase of an asset from, or the sale of an asset to, any insider (e.g., directors, executive officers and principal shareholders) • Subject to exception if : • transaction is on market terms, and • if purchase or sale represents more than 10% of capital and surplus of bank, approval of non-interested directors is required 7

8. (Transactions with “Insiders”, cont.) • Definition of extension of credit revised to include credit exposure from: • Derivative transactions • Repurchase agreements • Securities lending transactions; and • Securities borrowing transactions • Effective July 21, 2011

9. H.R. 2056 • Field hearing of the Subcommittee on Financial Institutions and Consumer Credit held in Newnan, Ga. on August 16, 2011 • Failures have concentrated in certain states • Ten states have had ten or more bank failures • Proposed legislation questions FDIC’s procedures regarding resolving troubled banks

10. (H.R. 2056, cont.) • FDIC IG to investigate and report on impact of procedures of FDIC to resolved failed banks • GAO to analyze and report on underlying economic causes and effects of bank failures since 2008

11. (H.R. 2056, cont.) • A number of matters to be studied • effect of Loss Sharing Agreements • impact of “paper losses” (asset write-downs that cause banks to raise additional capital) • number of financial institutions placed in receivership due to asset write-downs • factors that examiners use to assess capital adequacy

12. (H.R. 2056, cont.) • A number of matters to be studied, cont. • success of FDIC examiners in implementing guidelines regarding commercial loan workouts • impact of Consent Orders on ability to raise capital among other matters

13. (H.R. 2056, cont.) • A number of matters to be studied, cont. • impact of FDIC policies on a number of matters • FDIC handling of potential private equity investments (i.e. number of banks approved to receive private equity investments; number of banks rejected from receiving private equity investments; and reasons for rejections

14. Well, How’s that Dodd-Frank Thing Working Out? • By the first anniversary of Dodd-Frank, 77% of the deadlines for rulemaking had been missed • Implementing all of Dodd-Frank was a monumental tasks with significant potential for unintended consequences

15. (Well, How’s that Dodd-Frank Thing Working Out?, cont. ) • Regulatory agencies, congress and affected industries agree that more time is needed to get the details right. Beyond that agreement, there are significant differences over what Dodd-Frank was meant to do or not do

16. (Well, How’s that Dodd-Frank Thing Working Out?, cont. ) • Dodd-Frank attempts to simultaneously reform the various regulatory systems that have been applied to a wide range of financial institutions and products for a number of years • Dodd-Frank grew out of the lack of a consensus about what caused the 2008-2009 financial crisis

17. (Well, How’s that Dodd-Frank Thing Working Out?, cont. ) • Legislators, regulators, academics, think tanks, industry commissions, consumer groups and the voting public each identified a range of factors contributing to the financial crisis • Dodd-Frank tried to address them all. And, as so often happens, provisions were added to Dodd-Frank that had nothing to do with the financial crisis

18. (Well, How’s that Dodd-Frank Thing Working Out?, cont. ) • The wide variety of fundamental changes demanded over a short period of time has stretched regulators to the breaking point • Dodd-Frank contains more than 300 provisions that expressly indicate that rulemaking is either required or permitted • Many of these provisions are discretionary

19. (Well, How’s that Dodd-Frank Thing Working Out?, cont. ) • Dodd-Frank Provisions, Cont. • Individual provisions may result in multiple rules • Rules may be issued to implement provisions that do not require rulemaking • 80% of Dodd-Frank rulemaking is assigned to four agencies: the Fed, the Commodity Futures Trading Commission, the New Consumer Financial Trading Commission and the SEC Let’s see how the SEC is doing . . .

20. Is the SEC Serious? • For over ten years, the SEC has emphasized the use of “plain English” • In July 2011, the SEC published its plan for meeting the requirements of the Plain Writing Act of 2010, which requires all federal agencies to use clear and concise language when preparing new or substantially revised documents

21. (Is the SEC Serious?, cont.) • “The SEC will focus on writing without ambiguity, using short sentences, active voice . . .” said the SEC official in charge of the plain English effort

22. (Is the SEC Serious?, cont.) • From the SEC’s September 9, 2011 report on the implementation of reform recommendations as required by Section 967 of Dodd-Frank • “Issued in March 2011, the [SEC] consultant’s study provided 16 optimization initiative recommendations designed to increase the SEC’s efficiency and effectiveness”

23. (Is the SEC Serious?, cont.) • “In the six months since the [consultant’s] study was issued, the SEC has developed the necessary program management and oversight infrastructure to address the next step in the agency’s ongoing multi-year change in initiative: Conducting a thorough analysis . . . and designing appropriate approaches for those recommendations selected for implementation”

24. (Is the SEC Serious?, cont.) • “Over the next six months, significant work will have been done within each workstream to analyze the [consultant’s] recommendations and recommend what, if any, actions should be taken”

25. (Is the SEC Serious?, cont.) • Finally, “The agency will focus on assessing the schedule, costs and management bandwidth required for each initiative; identifying cross-workstream integration points; and developing a detailed prioritization and implementation plan that sequences the various implementation activities”

26. Capital Considerations • Section 171 of the Act is known as the “Collins Amendment” • Dodd-Frank amended capital standards for holding companies (i) set insured depository institutions capital standards as the floor (ii) may not be quantitatively lower 26

27. (Capital Considerations, cont.) • Applies risk-based and leverage capital standards (currently applicable to insured depository institutions) on bank and thrift holding companies and systemically important nonbank financial companies • Trust preferred securities significantly impacted

28. (Capital Considerations, cont.) • Eliminates trust preferred securities issued on or after May 19, 2010 from Tier 1 capital • Three year phase-in period (beginning on January 1, 2013) for instruments issued before May 19, 2010 • Exemption for BHCs with less than $15 billion in total assets (consolidated basis) from deductions for Tier 1 capital for instruments issued before May 19, 2010 28

29. (Capital Considerations, cont.) • Exemption for BHCs with less than $500 million in total assets (BHCs subject to FRB’s Small bank Holding Company Policy statement) • small BHCs exempt from phase-in • may continue to count trust preferred securities as Tier 1 capital

30. (Capital Considerations, cont.) • Does not apply to preferred securities issued under TARP • continue to count as Tier 1 capital • Several studies and reports to Congress are required under Section 171 • GAO report to be submitted within 18 months after enactment

31. Raising CapitalDodd-Frank Did Not Help • Many banks are under pressure to raise capital • Parent bank holding companies sell shares of common stock and downstream capital to subsidiary banks • Frequently, bank holding companies owning community banks utilize the Reg D (“private placement”) exemption from registration under the Securities Act of 1933 31

32. (Raising Capital, Dodd-Frank Did Not Help, Cont.) • Disclosure requirements and costs of the offering documentation are less onerous than for a registered “public offering” • “Private placement” may be sold to unlimited number of “accredited investors” • “Accredited investor” is defined (among other ways) as: • any natural person with individual net worth (or joint with spouse) that exceeds $1,000,000

33. (Raising Capital, Dodd-Frank Did Not Help, Cont.) • Definition of “accredited investor” was changed by the Act to exclude the value of the Investor’s primary residence from the net worth calculation • Revised definition was effective upon enactment of the Act • Definition change has reduced the number of persons eligible for “accredited investor” status

34. Is Relief on the Way? • Several Congressional hearings were held in September, and legislation is being drafted in an attempt to allow smaller companies to use “crowd funding” techniques to raise capital without SEC registration

35. (Is Relief on the Way?, cont.) • Would allow companies to sell stock to a large number of investors so long as each investor is limited to a relatively small investment • General solicitation would be permitted (advertise your stock offering on the internet or in the newspaper)

36. (Is Relief on the Way?, cont.) • Remove the requirement that companies with 500 or more stockholders must register with the SEC • Investors need not be “accredited investors” • No mandated disclosure

37. (Is Relief on the Way?, cont.) • In mid-September, the SEC announced that it had formed an advisory committee on small and emerging business capital raising • President Obama has begun to tout the idea

38. (Is Relief on the Way?, cont.) • This would be revolutionary • But if flies in the face of philosophy of securities regulation • How will investors be protected from scam artists? • Do they need to be? • Has the advent of the internet made this inevitable?

39. Debit Card Interchange Fees • Under the “Durbin Amendment”, Federal Reserve to determine reasonable and proportional interchange fee • Amends Electronic Funds Transfer Act • Standards to be based on actual costs of entire transaction: • authorization, processing and settlement • Fed proposal released December 16, 2010 39

40. (Debit Card Interchange Fees, cont.) • Fed proposal would have reduced fees charged to merchants by banks • 12 cents per transaction (from current average of 44 cents) • comments solicited by Feb. 22. 2011 • more than 11,000 comments were received on the proposed rule

41. (Debit Card Interchange Fees, cont.) • Fed proposal would have reduced fees charged to merchants by banks, cont. • Final Rule was issued on June 29, 2011 (after April 12 scheduled date) • maximum fee is 21 cents per transaction and 5 basis points of the amount of the transaction • fraud prevention adjustment factor of no more that 1 cent per transaction • effective October 1, 2011

42. (Debit Card Interchange Fees, cont.) • Small card issuers (banks under $10 billion in total assets) are exempt • questions raised about effectiveness of exemption • control shifts from issuers to merchants

43. Ability-to-Repay Rules • The Mortgage Reform and Anti-Predatory Lending Act • New Section 129C of the Truth-In-Lending Act • New ability to repay requirements • New limits on prepayment penalties 43

44. (Ability-to-Repay Rules, cont.) • Includes any consumer credit transaction secured by a dwelling, except; (i) home equity lines of credit; (ii) timeshare plans; (iii) reverse mortgages; and (iv) temporary loans

45. (Ability-to-Repay Rules, cont.) • Reasonable and good faith determination based on verified documented information • Presumption of compliance for “qualified mortgage” Prohibit prepayment penalties unless mortgage is a prime, fixed-rate qualified mortgage and amount of payment is limited

46. (Ability-to-Repay Rules, cont.) • Special remedies for violations • Federal Reserve issued Proposed Rule on April 19 comments solicited by July 22 • Proposal will become finalized by the Consumer Financial Protection Bureau

47. Executive Compensation and Corporate Governance • “Say on Pay” • Requires non-binding shareholder advisory vote to approve executive compensation packages. • Effective for first annual meeting held after January 21, 2011 • “Say on Frequency” • Requires non-binding shareholder advisory vote to determine frequency of “Say on Pay” vote (1, 2 or 3 years) 47

48. (Executive Compensation and Corporate Governance, cont.) • Advisory vote on executive compensation in connection with merger, acquisition, consolidation, proposed sale of assets and other extraordinary transactions • Other Requirements • Adopt a compensation recovery policy; • Institute new standards of compensation committee independence; • Disclose compensation committee advisor information;

49. (Executive Compensation and Corporate Governance, cont.) • Other Requirements, cont. • Disclose the relationship between financial performance and executive compensation; • Provide internal pay equity disclosures comparing CEO pay to the pay of other employees; and • Disclose whether the company has an employee-director hedging policy • Formal compliance with these measures must await the promulgation of final SEC rules

50. Incentive-Based Compensation Practices • Section 956 of the Act • Joint agency proposal issued on April 14, 2011 • Purpose is to prohibit incentive-based compensation arrangements at a “covered financial institution” that encourage inappropriate risks by providing excessive comprehensive risks or that could lead to a material financial loss 50