planning for asset growth: what to do at each asset …€™s practice focuses on corporate...
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Planning for Asset Growth:
What to do at Each Asset Threshold
ICBA 2018 Community Banking Live
Las Vegas, Nevada
March 13-17, 2018
Jason Rader
BKD, LLP
910 East St. Louis
Springfield, MO 65806
417-865-8701
Peter G. Weinstock
Hunton & Williams LLP
1445 Ross Avenue, Suite 3700
Dallas, TX 75202
214-468-3395
Beth Whitaker
Hunton & Williams LLP
1445 Ross Avenue, Suite 3700
Dallas, TX 75202
214-468-3575
68340201© Copyright 2018
PRACTICES
Banking and Finance
Financial Institutions Corporate and
Regulatory
Fair Lending
Consumer Financial Compliance and
Litigation
CONTACT
1445 Ross Avenue, #3700
Dallas, TX 75202
p 214.468.3395
EDUCATION
JD, Duke University School of Law,
1985
BA, State University of New York, 1982
BAR ADMISSIONS
Texas
CHAMBERSMartindale-Hubbell®AV Preeminent
Peter's practice focuses on corporate and regulatory representation of a wide range of financial institution franchises.
Peter's practice focuses on corporate and regulatory representation of small to large regional and national financial institution
franchises. During the past several years, Peter has devoted substantial time to regulatory, law enforcement and internal
investigations of financial institutions. He is Co-Practice Group Leader of the Financial Institutions Section. He has counseled
institutions on more than 150 M&A transactions, as well as provided representation on securities offerings and capital planning.
Relevant Experience
Representation includes:
• lead counsel in merger of equals creating a $13 billion bank;
• lead counsel on the North American Corporate Deal of the Year (Middle Market) – The M&A Atlas Awards – for Cascade Bancorp, Inc.’s
successful topping bid to acquire Home Federal Bancorp, Inc., a NASDAQ-listed bank; also, Finance Monthly Deal Maker of the Year
Award 2014 ;
• more M&A transactions than any firm over the last 16 years (according to SNL Financial, December 2016);
• number 1 in 2013 with 19 M&A transactions and in 2014 with 20 M&A transactions, number 2 in 2016 with 15 transactions (according
to SNL Financial);
• hundreds of capital offerings;
• hundreds of fair lending, CMPs, and other enforcement actions;
• testimony before Panel of the House Judiciary Committee regarding Operation “Choke Point” in July 2014; and
• myriad compliance issues before all of the federal bank regulatory authorities, including the CFPB; and negotiations of administrative actions.
For the last 20 years, he has served as co-editor of ICBA’s Newsletter, "SUBCHAPTER S: THE NEXT GENERATION.” He is
the author of numerous articles in law and banking publications. His article, “Acquisitions of Failed Banks – Present
Risk and Opportunity,” was voted the second best article appearing in The Risk Managers
Association Journal of 2011. He has spoken at over 200 banking conferences and
seminars, including for over the last 12 years, ICBA’s annual conference.
Mr. Weinstock is listed in Chambers USA “Leaders in Their Field” for banking.
Peter Weinstock
2
PRACTICES
Banking and Finance
Financial Institutions Corporate and Regulatory
Mergers and Acquisitions
EDUCATION
JD, Charleston School of Law, cum laude, Chief Justice, Moot Court Board, 2008
BA, Elon University, magna cum laude, 2004
BAR ADMISSIONS
South Carolina
Texas
Beth’s practice focuses on corporate transactions and securities and regulatory representation of commercial banks, holding companies, thrifts and other financial institutions, including mergers and acquisitions, joint ventures, debt and equity offerings, and corporate finance transactions.
Relevant Experience
• Lead counsel in rights offering by public company
• Structuring and raising equity and debt through public or private offerings.
• Shareholder matters including share repurchases/tender offers, responses to activist investors and related corporate governance planning.
• Advises clients on securities law compliance and reporting obligations.
• Advises publicly-traded clients on SEC and stock exchange compliance, public reporting and corporate governance matters.
• Advises clients on all matters related to the acquisition or sale of existing financial institutions and the acquisition, sale, establishment and relocation of branch offices.
• Awarded a top legal ranking in the U.S. for the 10th year in a row in SNL Financial’s league tables for bank and thrift legal advisers. (2016)
Beth Whitaker
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Jason L. Rader, CPA
National Industry Partner
As national industry partner for BKD National Financial Services Group and chair of the firm’s Financial Services Committee, Jason oversees a team of approximately 430 advisors who serve approximately 1,400 financial institutions. He provides accounting, audit, tax and consulting services for clients primarily in the financial services industry.
As the primary client service contact, he oversees numerous financial statement audits for financial services entities. In addition, he acts as the engagement quality review partner for a number of large financial institution clients around the firm. Jason also assists clients with U.S. Securities and Exchange Commission (SEC) and other regulatory filings, including implementation of and compliance with the Sarbanes-Oxley Act of 2002.
With more than 26 years of experience, Jason also performs nonfinancial statement audit engagements for financial institutions, including outsourced internal audit and directors’ examinations, Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) examinations, due diligence assistance and the handling of day-to-day inquiries regarding accounting and strategic issues.
He is a member of the American Institute of CPAs and Missouri Society of CPAs and an associate member of Missouri Bankers Association. He is a frequent guest speaker for these and other financial industry associations and a contributing editor for BKD’s financial services e-newsletters.
Jason is a 1991 magna cum laude graduate of Missouri State University, Springfield, with a B.S. degree in accounting.
Jason L. Rader
4
• $250 - $300 million• $500 million• $1 billion• $5 billion
5
Considerations for Different Asset Thresholds
CEO Survey - Size and Profitability
42%
50%
5%
3%
Based upon survey of 117 CEOs in July of 2017
92% think
size improves
profits
6
75.4%
69.1%67.4%
65.1%
61.1%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
<$100M $100M to $500M $0.5B to $1.0B $1B - $10B Big 4
Efficiency Ratio
Efficiency by Size
7
Median Data, % of Average Assets, LTM September 30, 2017 Consolidated HC
Larger, More Efficient Banks Tend to Perform Better
S-Corporation companies adjusted to C-Corporation status
Source: SNL Financial
Median ROA of all Banks and Thrifts
Assets 1990 2000 2010 2015 9/30/17
> $20B 0.42 0.83 0.35 0.94 1.07
$5-$20B 1.00 1.31 0.62 1.00 1.09
$2-$5B 0.94 1.11 0.56 0.92 1.03
$1-$2B 0.91 1.15 0.43 0.88 0.95
$500M-$1B 1.01 1.07 0.41 0.81 0.92
$250M-$500M 0.99 1.07 0.50 0.74 0.90
< $250M 0.78 0.97 0.23 0.62 0.80
8
Larger, More Efficient Banks Tend to Perform Better
S-Corporation companies adjusted to C-Corporation status
Source: SNL Financial
Median ROE of all Banks and Thrifts
Assets 1990 2000 2010 2015 9/30/17
> $20B 5.94 7.84 3.07 8.65 9.52
$5-$20B 13.46 17.18 5.26 8.81 9.11
$2-$5B 11.81 13.32 5.24 8.65 9.65
$1-$2B 12.03 14.42 4.77 8.52 9.20
$500M-$1B 11.33 11.91 4.54 8.06 8.65
$250M-$500M 11.70 12.05 5.11 7.46 8.29
< $250M 8.63 9.64 2.09 5.51 7.10
9
Industry Performance – 9/30/17 YTDUnder $1 Billion Over $1 Billion
ROAA (1) 0.84% 1.01%
ROAE (1) 7.61% 9.33%
Net Interest Margin 3.67% 3.45%
Efficiency Ratio 67.74% 60.68%
Net Charge-Offs/Average Loans 0.02% 0.06%
Nonperforming Assets/Total Assets 0.72% 0.67%
Loan Loss Provision Expense/Average Assets 0.05% 0.10%
Tier 1 Leverage Ratio 10.75% 10.00%
Loan Growth Rate 5.57% 8.04%
Deposit Growth Rate 2.36% 6.23%
Median for all commercial & savings banks(1) S-Corporation companies adjusted to C-Corporation status
Source: SNL Financial
10
III. Planning for $250 Million
• Staffing– Split Chief Lending Officer and Chief Credit Officer
– Chief Operating Officer
– HR Director – check the box
– Meyer Chatfield – 1 in 4 banks under $250 million believe compensation plans are not competitive, yet 57% say they do not pay enough to attract talent (31% unsure) – 82% of banks between $250 million - $500 million say they pay enough
– Internal audit still outsourced
– Treasury management
12
$250 Million
• Risk Management/Compliance– Empower CO
– Stress testing CRE and interest rate risk – OCC test/standards
– Outside credit review
– Validation of ALLL methodology
– Capital plan – second generation
– Cybersecurity
– Effective BSA/AML program
– CMS
13
$250 Million
• Board and Director Committees– Strategic plan/risk focused agenda
– Stop micromanaging
– Audit Committee – composition and role
– HR/Compensation Committee – composition and role
– Greater loan approval delegation to management
– Composition/sophistication of directors
14
$250 Million
III. Planning for $500 Million
• Applies to any insured depository institution that has total assets of $500 million or more as of the first day of its fiscal year (based on total assets as reflected in its most recent 12/31 Call Report).
16
12 C.F.R. Part 363
• Requirements:– Annual Audited Financial Statements
– Annual Report by Management on Compliance with S&S Laws and ICFR
– Audit Committee
17
12 C.F.R. Part 363
• Annual financial statements must be prepared in accordance with generally accepted accounting principles (“GAAP”), which must be audited by an independent public accountant.
• The independent public accountant:
– Should be registered or licensed to practice as a public accountant.
– Must have received, or be enrolled in, a peer review that meets acceptable guidelines.
– Must file such peer review with the FDIC, where the review will be available for public inspection.
18
Part 363 Requirements – Audited Financials
• When financial institutions have more than $500 million in assets, audited financial statements must include HUD-mandated testing and reports from audit firm– Very rigid set of governmental procedures– Bank must have controls over various origination, servicing
and quality control reviews– 90-day filing requirement after year end, which is incongruent
with FDICIA deadlines
19
Part 363 Requirements – Audited Financials
• The bank must prepare, as of the end of its most recent fiscal year, a management report, signed by its chief executive officer and chief accounting or chief financial officer, that contains:
– A statement of management’s responsibilities for:
• preparing the bank’s annual financial statements,
• establishing and maintaining an adequate internal control structure and procedures for financial reporting, and
• complying with S&S Laws
20
Part 363 Requirements – Management’s Report
– An assessment by management of the bank’s compliance with the S&S Laws during the year (including disclosure of noncompliance).
21
Part 363 Requirements – Management’s Report
• Management is to perform its own investigation and review of compliance with the S&S Laws.
• Management should maintain records of its determinations and assessments until the next federal safety and soundness examination, or such later date as specified by the FDIC or appropriate Federal banking agency.
22
Part 363 Requirements – Management’s Report
• Within 120 days after the end of its fiscal year,(1)
the bank must file with each of the FDIC, the appropriate Federal banking agency and state banking agency:– Two copies of an annual report containing audited annual
financial statements;
– The independent public accountant’s report; and
– Management’s statements and assessments.
23
Part 363 Requirements – Filing and Notice
(1) Within 90 days for a public company.
• Within 15 days of receipt, the bank must file a copy of any management letter or other report issued by its accounting firm (including written communications to the audit committee)
• Within 15 days, the bank must provide written notice of the engagement, resignation or dismissal of the accounting firm
24
Part 363 Requirements – Filing and Notice
• The bank must establish an audit committee of its board of directors.
• For a bank with total assets of $500 million or more but less than $1 billion, the members of the audit committee must be outside directorsand a majority must be independent of management.
25
Part 363 Requirements – Audit Committee
• An outside director is a director who is not, and within the preceding fiscal year has not been, an officer or employee of the bank or any affiliate of the bank.
• The audit committee should meet at least quarterly.
26
Part 363 Requirements – Audit Committee
The board of directors of the bank should:• Maintain an approved set of written criteria for determining
whether a director who is to serve on the audit committee is an outside director and is independent of management.
• Consider the independence issue not merely from the standpoint of the director, but also from the standpoint of persons or organizations with which the director has an affiliation.
27
Part 363 Requirements – Audit Committee
• ERM standards typically start to kick in with the regulators around $500 million in total assets
• Fine tune BSA/AML
• Three-year strategic plan, including risk appetites
• Capital plan with triggers
• Address cybersecurity exposure changing reliance to systems
• Automation of loan pricing
• Compensation structure
28
Enterprise Risk Management (“ERM”)
• Support staff for CO
• Management Risk Committee
• Dashboard and reporting to board
• More formal internal audit processes and expertise become necessary
29
ERM
• Operations– Revamp organization chart
– CEO stops handling loans
– “Independence”
– Loan and deposit compliance resources
– Expansion of Bank Secrecy Act (“BSA”)
– Mortgage department
– Documentation of accounting, risk, product decisions
– Paperless loan processing
30
$250 Million
• Chief Information Officer
• Internal Auditor
• Payments/Interchange Director
• Consider splitting the functions of the chief credit officer and the chief lending officer (if have not already)
• Strategic HR
• Treasury management
31
Staffing
• Retail/Internet banking
• Conduct staffing assessments
• Job descriptions
• Engage in succession planning
• Project manager
32
Staffing
• $3 mm loan delegation
• Fully functioning committees
• Ad Hoc project committees
• Training
33
Board of Directors
III. Planning for $1 Billion
Examination Frequency
35
• Examination frequency
– Generally, examined on a 12-month examination cycle instead of 18 months.
– For member banks, consumer compliance and CRA examination frequency increase from every three years to every two years
• Note: this is not applicable to all banks, just member banks.
Changes under Part 363
36
• Composition of Audit Committee
– Must be comprised of all outside, independent directors
• Management Report
– Must include an assessment by management of the effectiveness of the bank’s internal control structure and procedures as of the end of such fiscal year that must include a statement identifying the nature of the internal control framework
Changes under Part 363
37
• Internal Control Audit
– The bank’s accounting firm must examine, attest to, and report separately on the assertion of management concerning the effectiveness of the institution's internal control structure and procedures for financial reporting
Bank Holding Companies
38
• No longer qualify as Small Bank Holding Company
• Bipartisan legislation to increase threshold from $1B to $3B
• Must report regulatory capital ratios on a consolidated basis
• FR Y-9C and FR Y-9LP
Flood Insurance
39
• No longer qualify for the small lender exception
• Must escrow of all premiums and fees for any required flood insurance policies issued in connection with a loan that is made, increased, extended or renewed on or after January 1, 2016
• Measurement date – 12/31 of either of the two prior calendar years
2016 Proposed Regulation on Incentive Compensation
40
Overview of the 2016 Proposed Regulations
• Prohibits, with respect to “covered institutions,”
incentive compensation that encourages
covered persons, through excessive
compensation, to take inappropriate risks that
could lead to material financial loss
2016 Proposed Regulation on Incentive Compensation
41
• Uses a 3-tiered approach with requirements
increasing depending on size of the covered
institution
• Requires board of directors oversight of IC
arrangements
• Requires certain recordkeeping obligations of
covered institutions
2016 Proposed Regulation on Incentive Compensation
42
• For some covered institutions, implements
additional safeguards with respect to incentive
compensation:
– Downward adjustments
– Mandatory deferral
– Clawbacks
– Corporate governance and compliancerequirements
Call Reports and CRA
43
• Call Report: Ineligible for new streamlined report.
• CRA: No longer subject to the small bank performance standards, are no longer exempt from collecting information for small business or small farm loans purchased or originated by the bank, and must include additional information in its public file.
Management Interlocks and Diversity Policies
44
• Interlocks: Management official of a bank or bank holding company exceeding $1.5 billion in total assets may not also serve as a management official of an unaffiliated bank or bank holding company with total assets exceeding $2.5 billion.
Management Interlocks and Diversity Policies
45
• Diversity:
– Focused primarily on institutions with more than 100 employees
– Banks with 50 or more employees and FDIC-insured deposits of $50,000 or more must develop an affirmative action program
ERM
46
• Federal Reserve BHC examinations emphasis on risk and internal audit – greater focus on “independence”
• Establish key risk and leading risk indicators and integration of risk
• Provide dashboard reports to the board of directors
• Prepare three-year strategic plan, including risk appetite statement
ERM
47
• Adopt capital plan with appropriate triggers
• Conform risk management framework to regulatory standards
• Training geared to roles
• Do not let front line units break IT/compliance and Internal Audit
• Dashboards
• Loan covenants
Staffing
48
• Chief Risk Officer
• Management-level risk committee and/or board-level risk committee
• Director with risk management background
• Director with IT/cyber background?
• Strategic HR director
Bank Holding Companies
49
• Requests for Board Action or Applications
– Purchase by a bank holding company of its own securities
– Expedited board action on certain nonbanking proposals
– Certain merger or acquisition notices to the board
Board of Directors
50
• Nominating and Governance Committee
• Committee charters and functioning committees
• Annual evaluation
IV. Planning for $3- $5 Billion
Risk Management
52
• Strategic plan/risk appetite
• Capital plan and enhanced triggers
• Structure
• Risk inventory
Staffing
53
• Controller or treasurer
• Training czar
• Expansion of BSA and IT departments
• Vendor review function
• General counsel
• Enhanced treasury management
Staffing
54
• Wealth management
• Quality control?
• Chief innovation officer?
• Board support
• Data analysts
• Compliance specialists
Systems and Controls (Risk Ownership Management)
55
• Allocation of risk responsibility
– Frontline units
– Independent risk management units
– Internal audit
• Seat at the table
• Independence
• Quality control
• Training is no longer off the shelf
• Robust follow-up process
• Forward-looking testing
Stress Testing
56
• Enhanced beyond CRE and Interest Rates to KRIs and LRIs
• Models/Independent Validation
• D-Fast preparation
• Table top exercises
Incentive Compensation
57
• Interagency Policy Statement
• Deferrals
• Clawbacks
• S&S Factors
Board Oversight and Governance
58
• Strategic Plan – Appetite
• Risk Governance/Committee
• Active Oversight
• Challenge
• Committee Charters and Agenda
Board Oversight and Governance
59
• Board meetings
• Training
• Composition
• Audit committee at institutions with more than $3B in assets must include members with banking or financial expertise, must have access to own counsel and must not include any large customers of the institution.
• Evaluation
Questions?
Jason Rader
BKD, LLP910 East St. Louis
Springfield, MO 65806
417-865-8701
Peter G. Weinstock
Hunton & Williams LLP1445 Ross Avenue, Suite 3700
Dallas, TX 75202
214-468-3395
Beth Whitaker
Hunton & Williams LLP1445 Ross Avenue, Suite 3700
Dallas, TX 75202
214-468-3575