Bill Poe Supervisory Compliance Examiner · Mortgage Loan Originator Co-Marketing Activities. ......

Bill PoeSupervisory Compliance Examiner

Texas SML Thrift Compliance Program

Started in 2012

Observation and Participation

Key Benefits

FDIC Consumer ComplianceSupervisory Highlights

Report covers examinations conducted in 2018

Summary of Performance

Most Frequently Cited Violations

Enforcement Actions

Summary of Overall Consumer Compliance Performance 2018

98% of all FDIC-supervised institutions rated satisfactory or better (1 or 2 rated)

100% of Texas SSBs rated satisfactory or better

Most Frequently Cited Violations FDIC Nationwide

Truth in Lending (Reg Z) 26%

Truth in Savings (Reg DD) 11%

Electronic Funds Transfer (Reg E) 10%

Flood Disaster Protection Act 9%

Most Frequently Cited Violations Texas SSBs

Truth in Lending (Reg Z) 20%

RESPA (Reg X) 20%

Truth in Savings (Reg DD) 13%

Recent Observations

Is it really “Free”?

E-Sign Act

Mortgage Loan Originator Co-Marketing Activities

Community Reinvestment Act

92% of Texas SSBs rated overall Satisfactory or better

Some seeing Poor performance in at least one section

Challenges

Opportunities

Bill Poe

Supervisory Compliance Examiner

bpoe@sml.texas.gov

512.964.8847

REPUTATION RISK

Susanna Blevins, CFE

Department of Savings and Mortgage Lending

A Brief History

1990s: Regulators

elevated reputation to

one of the eight

named perils

Credit Risk

Market Risk

Liquidity Risk

Operational Risk

Reputation Risk

Business Risk

Systemic Risk

Moral Hazard

A Brief History

1996: OCC defined reputation risk as “the risk to earnings or capital arising from negative public opinion”

2018: OCC expanded the definition

Reputation risk is the risk to current or projected financial condition and resilience arising from negative public opinion. The strength and level of transparency of a bank’s corporate and risk governance structure influence the bank’s reputation with shareholders, regulators, customers, other stakeholders, and the community at large. A responsible corporate culture and a sound risk culture are the foundation of an effective corporate and risk governance framework and help form a positive public perception of the bank. A bank that fails to implement effective corporate and risk governance principles and practices may hinder the bank’s competitiveness and adversely affect the bank’s ability to establish new relationships and services or to continue servicing existing relationships. Departures from effective corporate and risk governance principles and practices cast doubt on the integrity of the bank’s board and management. History shows that such departures can affect the entire financial services sector and the broader economy.

The Least Trusted Industry

2012: Edelman Insights found that financial

services and banking was the least trusted industry

2014: EY survey found reputation was a “very

important” deciding factor for trusting a financial

services provider

75% of consumers say there’s still a gap between

bank performance and consumer

expectation

Bassig, M (2019, April 2) What is Bank Reputation Risk Management? Retrieved from

https://www.reviewtrackers.com/bank-reputation-risk-management/

How do you want your story told?

Millennials

Largest generation in US history

Value convenience, mobile support and ease of use

Venmo, Paypal, Apple Pay, Google Wallet

How can banks protect its customers’ personal

information?

Consider social responsibility and environmental

friendliness when spending

Best Practices

Strategic Alignment

Provide effective Board Oversight

Consider diversity in skills and backgrounds

Consider continuing education

Stock ownership to ensure interests are aligned

Integrate reputation risk into strategy planning

Promote positive brand image

Financial donations

Volunteering opportunities

Best Practices

Cultural Alignment

Foster strong corporate values, supported by engaged

team members

Code of Ethics

Create a strong compliance culture

Practice integrity “on and off the field”

Best Practices

Quality Commitment

Focus on positive interactions with stakeholders

Goes beyond customers

Employees, lenders, regulators, shareholders, and community

Foster transparency

Clearly communicate fees and changes to products and

services

Set clear goals and encourage two-way conversation with

your employees

Ensure quality public reporting

Best Practices

Operations

Create a strong control environment

Prevent data breaches

Understand your competitive environment

Pay attention to online reviews, social media and

customer feedback

Do the right thing… Think of reputation as an

insurance policy!

Susanna Blevins, CFE

Supervisory Examiner

sblevins@sml.texas.gov

Prepared by: Andrea Kuhnert

Supervisory ExaminerThrift Industry Day

September 12, 2019

Strong performance over the past 5 years

Bank earnings saw an overall upward trend

ROAA and ROE both ended 2018 up, year-over-year

Two key drivers: Robust growth in net interest income and cut to the federal corporate income tax rate

Source: FRB Supervision and Regulation Report – May 2019

As interest rates trended up over the past several years, banks have managed their balance sheets such that yields on loans and securities increased at a faster pace than liability costs.

Source: FRB Supervision and Regulation Report – May 2019

Last quarter 2018 saw strong loan growth

Over the past 5 years, the banking system has expanded loans by nearly 30 percent.

C&I and nonresidential real estate loans have seen robust growth during this period- growing by nearly 40 percent

Source: FRB Supervision and Regulation Report – May 2019

Important measure of asset quality

Measure has seen marked improvement during the past several years, ending 2018 at roughly 1 percent, below its 5 year average of 1.6 percent

Source: FRB Supervision and Regulation Report – May 2019

Reacts to, but does not necessarily predict, economic conditions

Highlights areas of potential concern that warrant further supervisory monitoring

Source: FRB Supervision and Regulation Report – May 2019

Serves as a buffer for the financial industry

All banking portfolios maintained strong capital positions, although capital ratios declined slightly in 2018.

Influenced by capital distributions and growth in total assets

Source: FRB Supervision and Regulation Report – May 2019

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# o

f Exam

iners

that

report

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Concentration Type

Risk ID Survey

Which of the following concentration types are on the rise in your exam

area?

Q2 18 Q3&4 18 Q1 19

Brick and mortar consumer spending is keeping pace with E-Commerce

Real estate lending to retail is expanding

Retail commercial mortgage backed securities (CMBS) loans have the worst delinquency rates (although they are improving)

The type of retail matters: single tenants have performed better than malls

Focus should remain on fundamentals: repayment capacity and collateral values

Investment firm UBS estimates that 75,000 brick and mortar stores are likely to shut down by 2026 across the U.S.

◦ To date, closures have been largely a result of companies culling unproductive retail space to prioritize convenience over inventory and restructuring around most profitable stores.

The average U.S. household spent just over $5,000 online last year, a two fold increase from five years prior.

There was $245 billion of growth in retail spending from 2016-2018 of which $127 billion was attributed to E- Commerce.

The continued strength and profitability of retail lending contributes to the CMBS loan market.

◦ Outstanding retail loans currently make up approximately 27% of all outstanding CMBS notes while 25% of total net operating income for CMBS is tied to retail properties.

According to Frederick Cannon¹, global director of research at investment bank, Keefe, Bruyette & Woods, banks have half of the markets $571 billion in outstanding retail-related CRE loans.

CenterState Bank² estimated in early 2016 that nearly a quarter of community banks overall CRE exposure is related to retail property.

Mortgage Bankers Association’s 2018 annual report³ shows a positive picture of retail, noting that although retail property vacancy rates rose from 10% to 10.2%, rents were up 1.6%.

¹,² https://www.frbatlanta.org/economy-matters/banking-and-finance/viewpoint/2017/07/18/could-retailers-

struggles-extend-to-banks

³ https://www.mba.org/who-we-are/annual-report

3029

3389

3658

3838

3712

35203540 3552

3573

3720

3960

4171

4344

4472

2900

3100

3300

3500

3700

3900

4100

4300

4500

4700

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Real Estate Loans, All Commercial Banks ($ Billions)

4.69

2.92

2.27

5.02

5.72

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Industrial Lodging Multfamily Office Retail

1 YR Average Delinquency Rate by CRE Designation (%30 days +)

Drug Stores

Single Tenant

Strip Centers

Shopping Malls

Forecast appropriately

Adjust lending portfolios towards companies that have proven more resistant to E-Commerce

Struggling borrowers could be creditworthy consumers who have a willingness and capacity to repay their debts.

◦ In such cases, banks and borrowers may find it mutually beneficial to work constructively together.

Federal Banking Agencies recently updated existing supervisory guidance on evaluating bank’s efforts to renew or restructure loans to creditworthy CRE borrowers.

◦ Risk management practices for renewing or restructuring CRE loans should include a thorough financial review of the borrower to ensure appropriate repayment capacity and collateral value.

◦ Loan workout arrangements should be considered when feasible.

Andrea Kuhnert

Supervisory Examiner

ahenderson@sml.texas.gov

BE ON TARGETRegulatory Hot Topics

Stephany Trotti, CPA

Deputy Commissioner/

Director of Thrifts

September 12, 2019

By Texas Department of Savings and Mortgage Lending

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Regulatory Hot Topics

Management Succession

Concentrations

Fin Tech/Information Technology

Hemp Banking

Other Areas of Concern/Interest

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Management Succession

Lack of clear path for succession

Setting clear expectations for Board members

Diversity of members

Maximum age requirements

Stock ownership

Continuing Education

Providing incentives for directors to promote the Bank

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Concentrations

Asset Concentrations

CRE and ADC

Single industry exposure

Trending upward

Mitigation strategies

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Concentrations

Funding Concentrations

Update on Potentially Volatile Funding

Sources (PVF)

Single Source

Included in report when =10% or

more of TA

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Fin Tech

Largest Challenge to Banks Today

Creates an uneven playing field

Regulatory guidance does not

cover the evolving business model

What to do?

Work with your regulator

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Fin Tech

Online Tools

Portal of state agency guidance

https://www.csbs.org/state-regulatory-guidance-portal

Interactive map of agent-of-the-payee exemptions for money transmission laws

https://facts.csbs.org/msb/

Cybersecurity 101 Resource Center

https://www.csbs.org/sites/default/files/cybersecurity101_2019_final_with_links.pdf

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Information Technology

Common IT exam findings

End of Life Management

Business Continuity Planning

IT audit Policy

Wire Transfers

Project Management

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Hemp Banking

2018 Farm Bill

Texas House Bill 1325

Industrial Hemp Farming and

Production

Consumable Hemp Products and

CBD

If you have questions, consult

your regulator and/or legal

counsel!

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Other Areas of Concern/Interest CECL

Dodd-Frank: Sec. 1033

Exam Initiatives

Risk-Focused, Forward-Looking Safety and Soundness Supervision

FDIC National Rate Caps on Deposits

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Reference Tools

FDIC website

https://www.fdic.gov/

FFIEC

https://www.ffiec.gov/

FRB

https://www.federalreserve.gov/

CSBS

https://www.csbs.org/

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Questions and Answerscontact info: strotti@sml.texas.gov

Cell Phone: (737) 222-0265