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Banker & Tradesman “In Person” interview features Michael Krebs

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Michael K. Krebs, co-chair of the Banking and Financial Services practice group, was featured in Banker & Tradesman’s “In Person” interview on September 1. In the Q&A interview, Michael shares his insights on community banks, given his 29 years of experience.

Q: When you came into this industry, you mentioned you saw the first of three waves of mutual-to-stock conversions. Could you compare and contrast that first wave with what we're seeing today?

A: I guess a common theme that connects them is the need for banks to raise capital and for mutual banks, they have sometimes relatively fewer options. What I characterize as the first wave, in the '80s, the banks in Massachusetts were part of becoming subject to full FDIC insurance and they were required to increase their capital ratios, so that led to a growth in banks looking to convert.

At the time, the economy was relatively robust and they saw opportunities for growth and they were constrained in terms of how much they could grow without increasing their capital.

This current wave is driven by the same desire to increase capital. We can also put it in a broader regulatory context. As part of the Dodd-Frank Act, it took away an avenue of capital for many mutual banks. They would form mutual holding companies, and those companies would essentially borrow on issue subordinated debt. The industry term for that is trust preferred. The regulators were willing to count trust preferred as capital, and Dodd-Frank did away with that for most organizations above a certain size.

Even though some small community banks, in theory, could continue to take advantage of trust preferred, the market has really dried up, there's no longer a market for trust preferred because of the changes in Dodd-Frank, so that avenue for raising capital is now no longer available.

Q: Do you think the increasing regulatory burden on community banks will mean more consolidation in the years ahead?

A: I believe it will, and I can only share this anecdotally, but as we look back over the last 10 years of our practice, for example, we've done 21 mergers and acquisitions, so call that two a year.

Calendar year 2014, so far, we have worked on five deals that have been announced through August. I don’t know what’s in the pipeline for the rest of the year, there might be one or two more, but it’s clearly a more robust pace, and we, as a practice, expect that that will continue.

Q: In your view, what are going to be the top three issues for community banks looking ahead?

A: Capital we've talked about, and that will continue to be important. Given that trust preferred is no longer an option, for some banks it might be doing an IPO. For other banks, it might be borrowing subordinated debt at a holding company level and then contributing that as capital to their bank. For other banks, it might be doing an acquisition, but thinking about capital and how they try to manage capital.

The second category would be governance, and that’s a really broad term, but the regulators really across the industry are very focused on asking the question: does the organization identify and manage the risks inherent in this business? Do you have a risk management structure in place that allows you to sort of identify, quantify and manage those risks?

And third would be compliance. It’s just omnipresent. I think we see mostly community banks are feeling burdened by, to a greater extent than say 10 years ago, the additional compliance expectations. The regulators, even though they’ll say they’re trying to modulate the degree to which they regulate banks, what they expect for smaller banks versus larger banks, the things that emerge at larger banks as best practices, that tends to set the bar and the regulators do expect more of the smaller banks.

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