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Bank Regulation Increases Under the HIRE Act

Posted by Wendell Brock on Thu, Aug 19, 2010

Many Bank’s don’t realize that the HIRE Act, signed into law in March, which was sold to promote jobs, also has implications for the banking industry. Namely, the offset provisions impose withholding and reporting requirements to expand offshore tax compliance by non US banks, thereby funding the cost of the act.

 

Tax penalty for failure to report

 

Under the new legislation, foreign financial institutions must enter into a reporting arrangement with the IRS to provide account information on U.S.-owned accounts. Institutions that refuse such an arrangement are subject to a 30% tax on any payment of interest, dividends, rents, salaries, gains, profits and other forms of income from U.S. sources. Excluded from this definition of “withholdable payments” are payments owned by publicly traded companies or businesses wholly owned by U.S. residents.   

 

An institution may obtain a waiver of withholding by certifying to the withholding agent that it has no substantial U.S. account owners. However, withholding agents are liable for the tax and are still required to collect it if they have any reason to believe such certification is false.

 

Terms of reporting arrangement

 

The accepted reporting arrangement defined in the act requires foreign financial institutions to provide the IRS with the following information for each U.S.-owned account:

 

  1. Name, address and TIN of each account holder
  2. If the account holder is a U.S.-owned foreign entity, the name, address and TIN of each substantial U.S. owner of that entity
  3. Account number
  4. Account balance
  5. Gross receipts and gross withdrawals from the account

 

With respect to Number 2 above, a substantial U.S. owner is: any U.S. individual who owns 10 percent or more of the stock of a foreign corporation; any U.S. individual who owns more than 10 percent of the profit or capital interests in a foreign partnership; or any U.S. individual who owns more than 10 percent of the beneficial interests of a foreign trust.

 

The institution does have the option to exclude reporting on individually owned accounts where the account holder has less than $50,000 in aggregate balances at that institution.

 

Individual reporting requirements

 

The legislation also requires individuals to comply with the new reporting regime. Individuals who own certain foreign financial assets worth more than $50,000 in aggregate must include the information listed above in their personal tax returns. Foreign financial assets are defined as financial accounts, as well as stocks or securities issued by a non-U.S. person, financial instruments or contracts issued by or counterparty to a non-U.S. person, or any interest in a foreign entity.  The IRS wants to know where US citizens are keeping their money and how much.

 

Basically, banks will chose to not to bear the risk being liable for the tax and withhold the 30 percent on all wire transfers/payments to offshore bank accounts and businesses that have not made the disclosure agreement with the IRS. If the bank makes the wire transfer and should have withheld the 30 percent but did not – they are liable to pay the 30 percent tax to the IRS.  If the bank makes the wire transfer, and should NOT have withheld the 30 percent, then it is the individual’s responsibility to collect the tax from the IRS, there is no liability on the bank for the mistake.

 

The HIRE Act’s reporting and withholding requirements apply to payments made after December 31, 2012. 

Topics: Bank, Banking, Bank Risks, regulators, tax laws, Banking industry

Small-dollar Loan -- Pilot Study Results Are In

Posted by Wendell Brock on Wed, Jul 07, 2010

Creation of Safe, Affordable and Feasible Template for Small-Dollar Loans

Small-dollar loan pilot

The Small-dollar Loan Pilot Project was a study to find if it is profitable for banks to offer small-dollar loans to their customers. Small-dollar loans were created as an option to expensive payday loans, or heavy fee-based overdraft programs.  This study opened up opportunities for small-dollar loans to be more affordable.    

Small-dollar loans have created a way to maintain associations with current costumers and opportunities to attract unbanked new customers.

Goals: The main goal the FDIC had in mind for small-dollar loans was for banks to create long-lasting relationships with their customers using the product of small-dollar loans. Many banks had another goal in mind in addition to the FDIC’s goal. Some banks wanted to become more profitable by producing the product while other banks produced the product to create more goodwill in their community. 

Where and how the study started: The FDIC found 28 volunteer banks with total assets from $28 million to nearly $10 billion to use the new product, offering of small-dollar loans. All were found in 450 offices in 27 states. Now, in the pilot study there have been over 34,400 small-dollar loans that represent a balance of $40.2 million. 

Template for small-dollar loans: Loans are given with an amount of $2,500 or less, with a term of 90 days or more. The Annual Percentage Rate is 36 percent or less depending on the circumstances of the borrower. There are little to no fees and, underwriting follows with proof of identity, address, income, and credit report to decide the loan amount and the ability to pay. The loan decision will usually take less than 24 hours. There are also additional optional features of mandatory savings and financial education.  

Long loan term success: Studies found that having a longer loan term increased the amount of success in small-dollar loans. This allowed the customer to recover from any financial emergency by going through a few pay check cycles before it was time to start paying the loan back.  Liberty Bank in New Orleans, Louisiana offered loan terms to 6 months in order to avoid continuously renewed “treadmill” loans.  The pilot decided that a minimum loan term of 90 days would prove to be feasible.

Often the bank will require the customer to place a minimum of ten percent of the loan in a savings account that becomes available when the loan is paid off.

Delinquencies: In 2009 the delinquency rates by quarter for small dollar loans were 6.2 in the fourth, 5.7 in the third, 5.2 in the second, and 4.3 in the first.

How to be most successful when producing small-dollar loans: The FDIC is reporting that the participating banks have found much success through small-dollar loans. But the most success came from long term support from the bank’s board, and the senior management. It is critically important to have strong support coming from senior management.

The small-dollar loan pilot has proven to be a great addition to bank’s loan portfolio, the FDIC hopes that it will spread to banks outside the pilot.

Profitability may depend on location: The FDIC has found the most successful programs are in banks located in communities with a high population of low- and moderate-income, military, or immigrant households. Banks in rural areas that did not have many other financial service providers also saw feasibility because of the low amount of competition.

Improving performance: Automatic repayments are a way to improve performance for all products not just the small-dollar loans.

 

 

Topics: Bank, FDIC, banks, Pay Day Loans, Banking, Bank Risks, Small Dollar Loans, Bank Executives, Loans, market opportunity, bank customers, Bank Asset

Bank Portfolio Management - Solve the Problems

Posted by Wendell Brock on Wed, Mar 10, 2010

It's a tangled mess in the financial jungle. In order to navigate the issues of portfolio management and compliance while still staying profitable and able to weather the market's unpredictable trends, financial institutions must arm themselves with the best information and resources. Yet many don't have either the knowledge or analytical resources to not only stay abreast of changing trends but also act on them in a timely and profitable manner. We have solutions.

New Rules, Economic Trends

A financial planner I know is now telling his older clients that the stock market is so volatile that it cannot be relied on as a stable platform for long term investing. Thus, the age-old saying that "assets are soft and debts are hard," has never been truer. In these difficult economic times, financial institutions need reliable information about their asset portfolio, including how the loans are matching up with the current value of the assets supporting the loans, along with the borrower's strength, all at a simple click of a mouse. 

By the time the CFO, CCO, CLO, CEO or any other member of the management team assembles enough information about the portfolio in a spreadsheet to make decisions, it seems the market may have changed enough to make the choice more difficult.  The analytics we can provide at a simple click of the mouse gives you 100 percent loan penetration and enough analytical information about your assets that your institution will have an objective defendable system to help manage the portfolio.  

Regulatory Requirements

The frequency and breadth of audits are increasing; requiring financial institutions to stay in a mode of continuous compliance, in one year's time they could be subject to internal and external loan review, IT audit, financial audit, CRA exam, and regulatory exams. Compliance is mandatory and with RiskKey, staying in continuous compliance is much easier.   

Industry Standards

There is a paradigm shift coming to financial institutions. Because lending is often formula driven, bankers need aggressively take on the roll of being asset managers. In addition to managing the loans in the portfolio, they need to manage the assets that support the loans. The tools and knowledge to help actively manage your portfolio are available with a simple, cost effective, mouse click!

Evaluate

With forward-thinking analytics, you can determine your portfolio's risk. These analytics provide a defensible probability of default within the portfolio, you can also stress test the portfolio along several different data inputs, including, percent of asset recovery, interest rate, fico score, and others. This basis can provide a direction as to the quality of the overall portfolio, all the while allowing the banker to zero in on the individual problem loans and assess their grade based on the institution's custom grading scale.

Act

Armed with a new, comprehensive understanding of your portfolio's risk, the analytics will subsequently locate the most pressing issues and provide options.

Assess

Finally, with your portfolio's risk evaluated and acted upon, you will have the tools and resources needed to clearly and concisely report your findings, to loan committees, the board of directors, and regulators.

Easy, Secure & Forthright

Working with us is simple. We take care of merging your data into a single platform. Your data will be protected and your analyses kept completely confidential. Our pricing is straightforward and simple.

People, Time & Action

Your employees should be generating revenue and managing accounts, not gathering statistics.  De Novo Strategy will allow your people to get back to profitable work. Our innovative practices are well beyond spreadsheets and simplistic reports. There's no laborious compiling of figures or making difficult assessments across a range of formats. Integrated reports and analyses mean less lag time between making a decision and executing it.

To learn more about Silverback Portfolio Analytics click and let us know. This will help you Build a Smarter Bank!

Topics: Bank, Bank Risks, regulators, Bank Regulators, Bank Asset, Regulations, Bank Policies, Compliance, Growth, real estate, Commercial Bank

Bank Asset Quality

Posted by Wendell Brock on Tue, Mar 02, 2010

The Risk Management Association (RMA) just released 2009 Q4 figures showing that the downward slide of bank asset quality is beginning to level off.

The RMA is a nonprofit with 3,000 institutional members whose goal is to implement sound risk principles in the financial sector. Their Risk Analysis Service data report was released in conjunction with Automated Financial Systems, Inc., and is the self-professed only gauge of comprehensive credit risk. The data utilize figures from 17 top-tier banks.

Showing Signs of Recovery

From the press release: "The leveling off of the deterioration of commercial asset quality from the third to fourth quarter is a positive indicator that the economy is showing signs of recovery," said William F. Githens, RMA president and CEO. "However, the business banking sector continues to be a concern and is substantially underperforming the middle market and large corporate lines of business."

But while the rate of decline in asset value for big banks is only beginning to level off, specialty lenders are enjoying quicker successes. AmeriCredit, CapitalSource, Allied Capital Source, and CIT Group all posted 52-week high stock prices (TheStreet).

CIT GROUP

CIT Group, a commercial lender to small and medium-sized businesses, took its first bond to market on February 26 after emerging from a brief, month-long Chapter 11 reorganization in December. The bond, offered at $667.2M, represents a portfolio transition from commercial-paper-backed to equipment leases. Hopefully, this shift will lead the way to longer-term solutions to loan portfolio instability and vulnerability.

CIT's bond is issued through the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF), also known as "Bailout #2." CIT got in on the Facility just before its rapidly approaching final monthly application deadline of March 4.

It's a start, but CIT needs to secure other, low-cost funding that doesn't come from the government. Their bankruptcy had followed on the heels of nine consecutive losing quarters that totaled over $5B.

Whether CIT Group-and other lenders-will be able to remain solvent after TALF's discontinuation remains to be seen. What we know, though, is that small businesses are counting on the success of CIT and similar lenders.

Word on the Street

A recent CIT report-auspiciously titled "Lessons Learned-A Case for Greater Optimism" -surveyed owners and executives of 220 American small businesses (as defined by annual revenues from $1M to $15M) about the close of 2009 and their views of 2010.

Key findings:

  • For 2009, 33% said their revenue "declined," and 26% said it "declined significantly"
  • 64% said it was harder today to manage their company's cash flow than it was 12 months ago
  • 90% agreed that current stimuli does not help them
  • For 2010, a whopping 53% expected their revenues to "grow," and 8% expected their revenues to "grow significantly"
  • 80% said they're now smarter about running their businesses
  • 70% said the recession made them better leaders

Bankers should look at a systems to stress test their loan portfolios in an effort to better manage the risk. There are systems in the market place that will stratify/custom grade loan portfolios, stress test the portfolio along various key data points (not just interest rate stress), provide the probability of loss a portfolio will incur. These systems offer many other items of information that are essential to managing the loan portfolio and its risk, to both the bankers and the regulators.

Topics: Bailout, Bank Risks, Bank Asset, stress tests, loan portfolio, Noncurrent loans, charge-offs

Next-generation Compliance for Banks

Posted by Wendell Brock on Wed, Feb 17, 2010

Compliance. An issue most bankers don't relish. Often times it is explained away as a necessary evil! This approach makes difficult for the bank to stay on top of compliance issues and often leads to problems with examiners. This leads to compliance waves where the compliance officer works to get things ready for an exam or audit then the work load relaxes until the next exam or audit.

Based on the current state of affairs, most banks' find themselves overwhelmed with compliance workloads; they have limited staff and schedules, along with the increase demands from examiners, who want more risk management. Internal audits are conducted by just a few people, typically, they are reactionary, and they utilize outdated technology, if any technology at all. The workload is not slowing down anytime soon-if anything it is increasing.

What we propose is a complete rethinking of compliance-to what is called "Next-generation Compliance"-this is where banks are proactive with compliance rather than reactive. It smoothes out the waves and distributes the work throughout the organization, which makes the compliance load much lighter and much easier to manage. Such a change must happen on three levels: a bank's operational culture, their level of collaboration, and the technology used in audits.

I. Culture

  1. 1. Devise a compliance strategy
  2. Get executives onboard with the strategy
  3. Promote all team members to be proactive
  4. Create metrics to quantify the value of proactive compliance
    • Does compliance result in an increased speed of reporting?
    • Quality compliance management response?
    • The larger scope includes overall compliance simplicity?
    • Money and time saved?

 II. Collaboration

  1. 1. Include people from multiple departments in compliance audits
  2. Standardize process across all areas of compliance audits
  3. Be flexible, and have reasonable expectations
  4. Make your auditors business-focused, independent, strategists
    • They shouldn't be on an island
    • Promote productivity
  5. Communication with regulators
    • Involve them in the process early so they understand the improvements from the positive changes

III. Technology

  1. 1.Reassess your current compliance tools
    1. Is technology working efficiently for you?
    2. Break from the spreadsheet! You can't properly collaborate from a spreadsheet - there are easier ways
  2. Increase use of collaboration tools to centralize the compliance audit workflow
    1. With them, everyone can discuss and facilitate improved risk management
  3. Track the use of audit recommendations
    1. What good are recommendations if they aren't used?
    2. Provide continuous up-to-date analysis/status of risk management

Compliance and Banking

Regulators are asking for more risk management and compliance, but banks aren't able to address this increased workflow with more manpower. With tighter operating budgets, the solution is working smarter. Often times when a bank is not able, to deliver properly on compliance issues it results in the issuance of an MOU or a C&D to the bank. Restoration plans and strategies may be implemented and managed through continuous compliance.

If you're buying a bank, the regulatory hurdles are less. But modifying an existing bank's compliance processes requires a team effort; it's all about building a smarter bank!

If you're starting a bank, a culture of compliance can be built from the ground up as your institution evolves. A blank slate is easy to work with. But at the same time, new banks are subject to harsher regulatory scrutiny, which means compliance has to be a priority.

To learn more about Next-generation Compliance, click the link for more information. 

Topics: Buy a bank, Bank Risks, regulators, Bank Regulators, Bank Regulation, Regulations, Bank Policies, Risk Management, Bank Regulations, Building Smarter Banks, Start a bank, Smarter Banks, Restoration Plan, distressed banks, Compliance, Next-generation Compliance

Bank Deals: FDIC-assisted vs. Unassisted Purchase Transactions

Posted by Wendell Brock on Thu, Jun 11, 2009

While the current economic and regulatory environment poses challenges for start-up banks, it also creates some unique opportunities for bank acquisitions.

A few years ago, comparing the potential of bank start-ups to that of bank acquisitions might have quickly led an investor to believe that de novo was the way to go. But as desperation and uncertainty in the industry rise, seller price expectations have fallen. Combine this trend with regulators’ increased scrutiny of new bank applications, and the scales are tipping in favor of buying a bank, rather than starting a new one.

Selective purchase, short timeline

Investing groups have two ways to go in a bank purchase: participate in an FDIC-assisted transaction or buy a bank without the government’s help. In an FDIC-assisted transaction, the buyer can acquire deposits, branches and, maybe most importantly, customer relationships, without getting stuck with bad assets. This is an advantage, but the buyer must also contend with public opinion related to the former bank’s failure. Once the transaction becomes public, those purchased deposits may shrink as customers head elsewhere.

Assisted transactions also present a very short window of opportunity. The FDIC notifies and collects blind bids from suitors within just a few weeks. Further, due diligence and negotiations occur before any public announcement is made.  

Trends in the FDIC’s “Problem List” indicate that the availability of FDIC-assisted transactions will likely increase this year. As of the end of the first quarter, the problem list included 305 banks and thrifts. That’s up from 252 at the end of the year and 171 in September of 2008.

Taking the bad with the good


Many insured institutions will remain off the problem list, but will seek a change in ownership or additional capital anyway. Opportunistic organization groups that are willing to dig in and evaluate asset quality, stability of deposits, and the competitive landscape, among other things, could turn up some workable deals. Unlike the assisted transaction, the unassisted deal rarely presents the chance to buy assets selectively. But, if the publicity is properly managed, buyers can minimize customer defections related to the “failed bank” stigma.

Clearly, due diligence in these transactions must be extensive. In the current environment, pricing cannot be justified by multiples; buyers are tasked with looking beyond book value and earnings to evaluate a bank’s incremental earnings power. This is no small task, given the uncertainty about economic conditions, collateral values and the regulatory environment. Since due diligence may actually lead to more questions than answers, buyers must be highly disciplined in valuating their prospective targets and ready to walk away from deals that don’t make sense.

FactSet Mergerstat LLC has reported that at least 285 U.S. financial institutions were sold last year, which is just 54 percent of the number of transactions reported in 2007.

Topics: Bailout, FDIC, Bank Opportunities, Banking, Bank Risks, Bank Regulators, Bank Regulations

FDIC’s Annual Plan: Insurance Fund and Risk Management

Posted by Wendell Brock on Thu, May 01, 2008

As we know, the FDIC is an insurance company-its primary purpose is to insure the deposits of the banks in the United States. Because the FDIC provides the insurance, the FDIC gets to make many of the rules! (Congress, of course, has its hand in rule-making also.) After all, if a bank fails, this creates a crack in the financial system. If many banks fail or an extremely large bank fails, then we experience a financial earthquake. The FDIC's job is to make sure we do not experience a crack, let alone an earthquake. This is one reason is why starting a new bank is so difficult. The regulations are tough, the experience bar for management to clear is very high, and the barriers to entry are difficult. Again, all of this is to protect the public's trust in where people place their money.

So in difficult times, as we are experiencing now, the strategic plan of the FDIC is in place to guide the regulators in managing the complex issues they experience in the financial/banking environment. The targeted loss reserves are between 1.15 and 1.50 percent of estimated insured deposits. The loss reserve is the insurance fund, which is financed by charging the banks an insurance premium based on the risk exposure of the bank and its insured deposits. This premium is derived from the FDIC's Financial Risk Committee (FRC) assessments, quarterly failure projections and loss estimates. The FRC analyzes the risk exposure of the insurance fund based on the risks of the insured banks. When bank loans go bad, the risk exposure of the bank goes up and the FRC reevaluates the risk of the fund. This, in turn, sets a new premium for the bank and for other similar banks.

The FDIC reviews the assessment history of all failed banks on an ongoing basis to determine if the system is working properly. In 2007, after much research and testing, a new risk-based assessment system was implemented through the modification of FDIC systems and business procedures. This updated system is designed to measure the risk of individual banks more accurately, which allows for the assessment of fees that are more in line with the risk level. Currently, the FDIC is the primary regulator for 5,197 state-chartered banks that are not members of the Federal Reserve System or are national banks or thrifts which are regulated by the OCC and OTS respectively.

Because of the complexity of the analysis that is required to develop accurate pricing and review the effectiveness of new regulations, the FDIC will require additional staff. Further demands will arise from the combining of the Bank Insurance Fund and the Savings Association Insurance Fund; the merger affected 48 information systems and resulted in some changes in deposit coverage. As a result, the FDIC will require new analysis techniques and will be tasked with extensive testing of the systems. All of these systems are necessary to manage the risk of consumers and businesses not being able to pay their debts, while keeping consumer and commercial deposits safe and accessible.

This enormous balancing act adds to the challenge of starting a new bank. The risks to a new bank are great because they have new capital to employ; new banks need assets on the books and many deposits to help fund the new loans. However, because of the strict regulatory controls, new banks succeed more often than not. It is rare that a de novo bank fails. If the right organizers and bank board, management team, business plan and capital are in place, chances are great that a de novo bank will succeed.

By Wendell Brock, MBA, ChFC
De Novo Strategy, Inc. 

Topics: FDIC, Bank Risks, Risk Management, Deposit Insurance Fund

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BankNotes© is published by De Novo Strategy as a service to clients and other friends. The information contained in this publication should not be construed as legal, accounting, or investment advice. Should further analysis or explanation of the subject matter be required, please contact De Novo Strategy at subscribe@denovostrategy.com.