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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
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!
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
ed
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
0
1
2
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7
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.
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/
