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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 Internal audits are conducted by just a few people, typically, they are reactionary, and they utilize outdated technology, if any technology at all.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

SNL Financial's De novo Digest Article

Posted by Wendell Brock on Tue, Sep 15, 2009

SNL recently published an article discussing the FDIC's new policy change on de novo banks. In "Extending Bank's Adolescence," author Christina M. Mitchell writes, the "change effectively extends adolescence for young banks, lengthening the period of increased regulatory supervision required for de novo institutions in a move that industry observers say will heighten the already considerable barriers to opening new banks." Over the past few years, the regulators have nearly shut down the flow of de novo bank openings with a drastic increase in regulatory scrutiny.  As the regulatory approval timeline continues to increase, the capital requirements and start-up expenses of opening a bank have climbed significantly. These challenges are keeping many potential investors on the sidelines, and too few of them are looking for other opportunities to enter the banking industry, such as Buying a Bank

To read Ms. Mitchell's full article click on the link: Extending Bank's Adolescence.

Topics: Buy a bank, Banking industry, Bank Regulators, Bank Regulations, bank investors, De Novo Banks, buying a bank

COP's August Oversight Panel Has Advice for Bank Acquirers

Posted by Wendell Brock on Thu, Aug 27, 2009

The Congressional Oversight Panel (COP), tasked with monitoring the Treasury's progress combating the financial crisis, has released an update on the continued risk of troubled assets in the banking industry. While the report doesn't address bank organizing groups specifically, its content does emphasize the challenges of evaluating target banks during this financial crisis.

Those challenges include valuing the target bank's troubled assets and identifying the reasons why those assets became troubled in the first place. In the general sense of the term, troubled assets are loans or securities that no longer meet (or perhaps never did meet) acceptable underwriting standards. The credit risk on these assets exceeds acceptable levels, repayment is questionable, and the aggregate asset value is far lower than originally assumed. Troubled assets commonly include:

 Mortgage-backed securities

 Whole mortgages in the bank's portfolio

 Securities backed by credit card receivables

 Securities backed by commercial mortgages

Community banks generally have more exposure to troubled whole mortgages.

Underlying causes

The bank organizing group does have a certain level of negotiating power when the target bank's balance sheet is weighted down with too many troubled assets. That's where the advantages end, however. Even before the negotiating begins, organizers must identify the underlying causes of the bad assets:

 Were these assets bad from the start, due to lax underwriting or borrower fraud? Did the bank willingly overlook missing documentation or red flags on credit histories? Was it simply an over-reliance on the assumption that collateral values would continue to rise over time?

 Or did these assets become troubled over time due to extreme weakening of collateral values or borrowers' credit qualifications?

Procedural changes and capital requirements

The organizing group is then tasked with devising the underwriting, workout and procedural standards that will:

 maximize the return on existing troubled assets

 add new, high quality loans to the portfolio

 minimize the addition of new troubled assets

Obviously, these are relatively complex objectives in this economic environment. Unemployment is still rising and the outlook for property values, particularly commercial property values, remains uncertain. Excessively timid underwriting can minimize the creation of new problems, but it's counter-productive; banks have to make loans to survive. The new management team simply has to find a way to originate loans that make sense.

Setting appropriate capital requirements is also a key step in evaluating the target bank. Ample capital can be a buffer for future loan losses, but organizers have to balance the capital needs with the availability of investor funds. Under current conditions, it is possible for organizers to meet their capital raise targets-but it isn't easy. The process takes planning, knowledge and expertise.

Next week, we'll discuss the accounting for troubled assets, as discussed in the COP report. You can access the full COP report here: http://cop.senate.gov/documents/cop-081109-report.pdf

Topics: Buy a bank, regulators, Bank Regulators, Loans, bank investors

Building Stronger Communities through Bank Acquisitions

Posted by Wendell Brock on Thu, Aug 13, 2009

The decision to acquire a bank in an underserved community is ultimately based on the investment value of the target bank. But determining that investment value is a tricky proposition; a low-income neighborhood may not offer much appeal currently, but infuse that low-income neighborhood with capital, and the situation might look quite different.

Residents of underbanked communities typically have their financial needs fulfilled by payday loan stores, check cashing establishments, and even unlicensed predatory lenders. The expense associated with these services creates inefficiencies in the cycling of cash within the community. In other words, predatory lenders can drain more money out of the community—through high finance and service charges—than they put into it.

A banking institution, however, can have the opposite effect. When a bank reaches out to underbanked consumers and educates them on the advantages of keeping a deposit account, that bank is also compiling assets that will be returned to the community in the form of loans. Those lend-able funds are the building blocks of home ownership and local business development.

Financial education creates financial efficiencies


Studies have repeatedly shown that financial education is a huge component of attracting and retaining underbanked consumers. A bank that operates effectively in a previously underserved community isn’t limited to showing consumers how to reduce their finance charges, however. The bank can also initiate programs to help consumers develop more efficient budgeting, spending, savings and even tax planning habits. Over time, those cumulative household savings can also be directed back into the community, through discretionary spending.

With a creative vision and effective outreach and education programs, then, a newly acquired bank can anchor a turnaround within an underserved community.

Overcoming the failures of previous banks


The challenges in initiating such a turnaround are large, but not insurmountable. If the target bank is already located within the underserved community, the bank organizers need to understand why that institution wasn’t previously effective. The product and service set, the brand image and the marketing programs (to name a few) need to be overhauled to address the needs and wants of local consumers.

If the target bank is to be relocated to the underserved area, the bank organizers must try to gain some insight from the history of banking in that community. Did previous banks or branches fail? If so, why?

Underserved communities and unbanked consumers obviously aren’t the low-hanging fruit of the banking industry. However, initiating real and positive change within a community is an endeavor that can be both rewarding and profitable. And, because there are many underserved locales in the U.S., the group of bank organizers that defines a workable model for one community has ample opportunity to roll out variations of that model to other areas.

Next week, we’ll discuss marketing strategies for attracting and retaining underbanked consumers.

Topics: bank buy out, Bank Opportunities, Community Bank, failed banks, Buy a bank, mergers and Aquisistions, underserved communities, bank acquisition, Bank Buyers, bank aquisition, underserved areas

How to Buy a Bank

Posted by Wendell Brock on Tue, Aug 11, 2009

An early decision bank organizers must address is whether to buy an existing bank or create a de novo bank. The right choice among these two options is always dictated by the particular set of circumstances faced by the group. At times, as circumstances and opportunities develop, bank organizers may even switch strategies in the middle of the process.

If the decision is made among the organizers to buy a bank, certain steps must be completed in order to get the transaction finalized. While each bank acquisition is unique, the steps generally fall into four major phases.

Phase One: corporation formation


Once the decision is made among the organizers to buy a bank, the group members create a stand-alone corporate entity. The newly formed corporation has two purposes: to purchase a bank and manage the organization’s funds. Other steps that are completed during this phase include:

•    Identification of the target bank
•    Negotiation of the purchase agreement
•    Sourcing and hiring of executive officers
•    Selection of a new bank location, as dictated by the business plan and/or assess the condition of the existing bank location

Phase Two: application


After the target is identified and the stock purchase agreement is in place, the group begins on the change of control application. The business plan within the application includes 10 separate sections; these sections are broken down and worked on until each is at least 80 percent or more complete.

Typically, each organizer must also complete an Interagency Biographical Financial Report (IBFR). This can be one of the most difficult sections; it must include each organizer’s personal and financial records for the previous two years and the current year, as well as projected records for the next year. The organizers should be compiling this information while the other sections of the application are being completed.

Phase Three: pre-file and comment letter  


Once the business plan is 80 to 90 percent complete, the organizers schedule a meeting with the regulating agency. At this meeting, the organizers must explain and defend their business plan to the regulators.

After the pre-file meeting, the group fine tunes and completes the business plan and sends it off to the regulating agency. The agency then has 30 days to make comments and request additional information. Once that request is made, the organizers have 30 days to compile the requested data.

Phase Four: Sell stock/capital and open doors

Often, when a bank is being purchased, a substantial amount (greater than 75 percent) of the capital must be raised by the time the application is filed with the regulators. In the current economic environment, regulators only want to approve “sure deals.” They are so busy with all the banking issues, that capital uncertainty is one issue they do not want to worry about in a purchase transaction.

For this reason, the organizing group is typically left with a private placement offering as the simplest way to raise the capital. Often this is done amongst the organizing group plus a few outsiders. The amount of capital required is dependent on the business plan approved. Typically, the regulators will require additional capital above the purchase price of the target bank to ensure that the new business plan has enough capital to succeed.

Once the capital has been transferred to the sellers of the bank, the doors may open “under new ownership.”

This is just a broad overview of the bank purchase process; each deal has unique circumstances that must be addressed. These circumstances could be legal in nature and involve counsel. Others are small details that can be easily overlooked by organizers. De Novo Strategy, Inc. has the experience and dedication to make the bank purchase project a reality and to help with every step.

Topics: bank buy out, Buy a bank, bank acquisition, bank aquisition, De Novo Strategy, organizers, capital, bank investors, buying a bank, bank applications

FDIC Proposed Policy Statement Regarding Failed Bank Acquisitions

Posted by Wendell Brock on Thu, Jul 16, 2009

Given the large number of bank failures over the last 18 months, the FDIC is seeing increased interest from would-be investors interested in purchasing depository assets of the failed institutions. Concern has risen at the regulatory level about whether these new bank owners and investors have the qualifications necessary to keep the acquired assets from returning to the failed assets pool. That concern has led the FDIC to issue a proposed policy statement that would, if adopted, establish a new set of qualifications for investment groups intending to purchase failed bank assets. 

The proposed standards address the following topics:

  • Ownership structure
  • Capital levels
  • Cross guarantees
  • Affiliate transactions
  • Continuity of ownership
  • Secrecy law jurisdictions
  • Limitations on the existing owners of the failed institution
  • Disclosure requirements

Key measures of the proposal

  1. Silo structures will not be deemed eligible for bidding.
  2. A Tier 1 leverage ratio of 15 percent is required and must be maintained for three years. After that, the institution must remain "well capitalized."
  3. The holding company must agree to sell stock or engage in capital qualifying borrowing to support the depository institution.
  4. Investors with interests in more than one FDIC-insured institution have to pledge to the FDIC their proportionate interests in each institution.
  5. Loans to investors or investors' affiliates would be prohibited.
  6. Investors would have to retain ownership in the institution for at least three years. The FDIC can approve exceptions.
  7. Ownership structures involving entities domiciled in bank secrecy jurisdictions will not be eligible bidders.
  8. Investors owning 10 percent or more of the failed institution will not be eligible bidders.
  9. Investors will have to disclose to the FDIC information pertaining to the size and composition of capital funds, the business plan, the management team, etc.

Bidders subject to proposed rules

Under the current proposal, these rules would only be applicable to certain types of bank acquirers, namely:

  • Private capital investors attempting to take ownership of deposit liabilities that are currently in receivership
  • De novo institutions applying for FDIC insurance in association with "the resolution of failed insurance depository institutions" 

Balancing capital needs with prudence

While the FDIC is conscious of the need to qualify bidders, regulators are also concerned about placing too many limitations on the inflow of new capital into the banking system. The banking system needs private investor capital. Are these proposed rules going to inhibit the flow of that new capital? Or will the new standards deliver the right amount of prudence? Feel free to sound off!

Read the full FDIC statement here: http://www.thefederalregister.com/d.p/2009-07-09-E9-16077 The proposal policy statement is open for public comments until early-August.

Topics: FDIC, failed banks, Buy a bank, Bank Buyers, Bank Regulators, bank investors, Bank Sales

Creating Value: Finding the Right People for the Job

Posted by Wendell Brock on Thu, Apr 02, 2009

Whether you intend to start a new bank or buy an existing one, you’re going to need some help. That help is found in the form of qualified organizers—the entrepreneurial individuals, who pursue the business plan relentlessly and, eventually, create value in the new banking entity.

The organizer’s responsibilities are varied and time-intensive (usually 10-20 hours per month). A de novo or purchased bank project doesn’t get off the ground well unless the team of organizers is focused and unified. This means the organizers must be ready to contribute productively to committee discussions and assist in making informed planning decisions. Those decisions cover a variety of topics, from branding to operations:  

•    Branding: The organizers build the new bank’s brand from the ground up, deciding what the bank’s mission will be, how it will differentiate itself, what the logo will look like, etc.  

•    Human resources: The organizers must recruit and hire a qualified management team.

•    Project management: A branch location must be selected and modified or built to suit the bank’s purposes. IT systems and other support vendors must be priced and selected, etc.

•    Operations: The team must select the products and services the bank will offer and strategize on how those products and services will be distributed and fulfilled.  

•    Bank Policies: The organizers/new board of directors assist management in drafting and approving the bank’s policies and procedures, a very critical part of banking.

Contributing insights and shaping decisions are just the beginning of the organizer’s responsibilities. However, a pivotal part of what the organizer does is raise capital—both by investing his or her own money and by recruiting more investors to the project. The recruitment process begins with the organizer contributing a sizeable list of names of potential investors. Once the capital campaign gets started, the organizers must be willing participate in their share of the weekly meetings to pitch the investment opportunity.  

The ideal organizers and where to find them

Obviously, not everyone is well suited to be a bank organizer. Decisions need to be made, networking needs to be done, and money needs to be raised. These tasks are not easily accomplished by someone who doesn’t have the right characteristics and skill sets. Ideally, your organizers will be:

•    Visible in the community
•    Opportunistic
•    Task-oriented
•    Motivated by challenge
•    Outgoing, enthusiastic
•    Able to juggle several projects at once successfully

Knowing what to look for is half the battle; the other half is knowing where to look to find it. The simplest means of locating potentially suitable organizers is to recruit within professions that typically attract the above qualities; below is a short list of professions:

•    B2C service providers: Contractors, plumbers, dry cleaners, car dealers, insurance agents, general contractors, financial planners, doctors, dentists, real estate agents

•    B2B service providers: CPAs, marketing consultants, real estate brokers, pharmaceutical account representatives, office supply representatives  

•    Niche business owners: franchise owners, hotel operators, ethnic market owners, retail store owners, technology providers

Here’s the big picture to remember when seeking out organizers. The organizers you select should operate successful businesses and have access to and represent the segments of the community your bank will serve. In addition, they must be motivated enough to stick with the project for the long-haul. And finally, it takes the right person to understand that starting a bank, or re-branding a purchased bank, is an enormously challenging, but ultimately rewarding endeavor.

Topics: Buy a bank, organizers, Start a bank, finding organizers, business owners, qualified organizers

Looking for Deals in All the Wrong Places?

Posted by Wendell Brock on Wed, Oct 08, 2008

 

The U.S. banking industry is caught in one of the worst crises in history. The momentous failure of Washington Mutual underscores how bad things have gotten: the bank's $307 billion asset base sharply exceeds the formerly largest failure of $40 billion Continental Illinois National Bank and Trust in 1984.   

Pressure from the ongoing liquidity crisis has pushed bank multiples down considerably, to the point that bargain hunting investors are out on the prowl. Prior to the present crisis, community banks were selling for somewhere between 2 and 3.6 times book value. Now, multiples have dropped below 2, hovering at about 1.85 times. The dip has created a scratch-and-dent sale of sorts, as investors can swoop in and purchase flawed community banks at a low price.

In early September for example, Yadkin Valley Financial Corp. announced that it would purchase American Community Bancshares Inc. and its American Community Bank subsidiary. The price tag on the deal was $92 million, just 168 percent of American Community Bancshares' book value.

In volatility there is opportunity

Prospective bank investors are recognizing that the best bargains can be had during the worst of times. Of course, the sale-priced banks do not come without significant problems that need to be worked out-but those problems are reflected in the pricing. So a cool-headed investment team with a clear strategy does have the opportunity to create substantial value. 

Investors should be prepared to face stiff competition on the best deals. The low multiples have caught the attention of investor groups of all types, from local community organizers to international investors. Most of these groups, by and large, appear to be focused on buying up the damaged goods, rather than building up from scratch.

Slow is smooth and smooth is fast

The old military quote, "slow is smooth and smooth is fast," articulates what's needed to take advantage of the opportunities in the marketplace today. The successful investor group will need to wade through competition from other investors, an increasingly stringent regulatory environment, the due diligence necessary to understand the bank's underlying problems and how much it will cost to fix them and, of course, the present liquidity crunch.

Preparing to purchase a bank under any condition is an effort that takes commitment and concentration. The added complexity created by today's environment is not to be taken lightly; in other words, this isn't the type of deal that can be phoned in. A team must be carefully assembled to provide sufficient levels of experience, talent and drive. The strategy must deliberate and focused. And, finally, the execution must be, above all, efficient.

Topics: Bank Opportunities, Buy a bank, Start a bank, Smarter Banks, Bank Mergers, Bank Sales

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