Senior Banking Execs Share Thoughts & Advice
In March, the Chesapeake Chapter sponsored its annual panel discussion with banking executives from the region at the Tremont Grand Hotel in downtown Baltimore. This year’s panelists were Laura Gamble, President, Bank of America - Maryland, Hunter Hollar, President & CEO, Sandy Spring Bank, Wayne Hunley, SVP Corporate Banking, PNC and Mary Ann Scully, President & CEO, Howard Bank. Glen Wilson, President & CEO, Citizens National Bank moderated the discussion.Panelists responded to questions on a variety of topics including the economy, interest rates, risk management, regulatory issues and competition. The general consensus was the local economy was strong but caution flags are on the horizon. Mr. Hollar remarked that after years of lending under robust economic conditions it will be important for lenders to recognize those situations which may be affected by a downturn. He noted that “even a turkey can fly in a hurricane” and a bad loan can come along at any time. Ms. Gamble said the Pentagon’s base realignment and consolidation initiative will be beneficial to the region and local economy, further noting the positive impact of federal government spending in the region. She cautioned about cost of living issues and expressed concern over recent scrutiny of residential real estate investment activity. Rising interest rates surprised no one on the panel. Ms. Gamble expects them to stay high and warns of extended marketing periods for real estate projects. Ms. Scully indicated that speculative deals did not seem to be pervasive and that sound fundamental underwriting was key to managing the effect of rising rates. Mr. Hunley echoed that sentiment suggesting interest rate sensitivity analysis become more standard in underwriting. The responses to how their banks handled risk management issues varied as would be expected for the range of banks present, from a de nova community bank (Howard Bank) to the super regional status of Bank of America. The community banks (Howard and SSB) centralize overall risk management generally with one individual, the CEO. PNC and BofA have much broader organizational responsibility. PNC has had an Enterprise Wide Risk (EWR) Manager in place for over 4 years. Each unit within the bank develops a risk budget within certain tolerances and manages accordingly. Ms. Gamble indicated that for her organization, everyone is responsible for managing risk especially in areas that can be controlled: credit and operational. She noted that market risk was more difficult to control and stressed the importance of reputational risk. The topic of regulatory burden drew a consensus that it is both costly and time consuming, but there is not much to do except deal with them. The demands imposed by BSA and the Patriot Act in many instances conflict with privacy and client relations. Automating procedures was deemed the most appropriate solution. The final question posed to the Panel was an age eternal retrospective one: “If you had it to do all over again….” Laura Gamble responded with an emphatic “Yes,” saying that in 20 years she has worked in all segments of the business and that it was an excellent training ground for any business career. Ms. Scully too had no regrets whatsoever as the experience has provided her with variety and helped build strong technical, analytical, creative and people skills. Mr. Hunley remarked that it was a great place to start a career and good place to build and hone your selling skills. Mr. Hollar concluded the remarks by saying he would not change a thing and always liked the challenge of trying to see how his boss was thinking. Peter Hickling, SVP, Sandy Spring Bank
Dan Herr, SVP, Fidelity Bank
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2006 Regulator Panel Provides Insight
Regulator Panel featuring speakers from the major regulatory agencies and moderated by BankAnnapolis SVP Robert E. Kendrick can be summed up as being “most informative”. Here is a summary of the questions and responses from the event hosted by MBA and RMA on June 6, 2006. Hopefully, their response and insight are of value to you as we all move forward. The panelists were: Bill Spangler, Examiner Supervisor, State of Maryland
Spangler is a career Bank Supervisor with nearly 30 years of experience at state and federal bank regulatory agencies. As an Examiner Supervisor with the State of Maryland, he continues to work closely with state chartered banking organizations on identifying and resolving problem issues, and remains active in the development and training of examiners at that agency. Doreen R. Eberley, Federal Deposit Insurance Corporation
Eberley is the Deputy Regional Director, Risk Management, New York Region of the FDIC’s Division of Supervision and Consumer Protection. She is responsible for overseeing the FDIC’s bank supervisory activities in the Region’s Mid-Atlantic States. Maryann Kennedy, Assistant Deputy Controller, OCC
Kennedy became the Assistant Deputy Controller for the Wilkes-Barre Field Office of the OCC in May of 2000. She brings to this position over ten years of OCC experience, which followed eight years in the banking industry. Eugene W. Johnson, Jr, Vice President, Federal Reserve Bank of Richmond
As Vice President in the Banking Supervision and Regulation department, Johnson is in charge of safety and soundness examinations and inspections for community banks and bank holding companies in the Fifth Federal Reserve District. Joel Palmer, Assistant Regional Director, Office of Thrift Supervision SE Region
Palmer’s responsibilities include oversight of Compliance/CRA policy for the entire region covering Alabama, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, the District of Columbia, Puerto Rico and the Virgin Islands. He is also responsible for the Community and Consumer Affairs departments and for the safety and soundness aspects for thrifts located in specific geographic areas of the region. How are the banks that you supervise doing in terms of “Safety and Soundness”? Elaborate on Exam Trends and Exam Trouble spots.
All panelists stated in Maryland asset quality is good with little delinquency. Maryland banks have had good earnings and record high profits. Loan and deposit growth remain strong and 91% of institutions are rated 1 or 2. Trouble spots mentioned include: Commercial real estate concentrations in community banks; credit risk management not keeping up; internal audit shortages; and SOX cost burden and requirements. Vendor management concentrations will be reviewed closely by regulators, as to their scope of work, quality and cost versus performance. What operational risks and concerns do you currently see in the marketplace and how are banks dealing with them?
Consensus was Information Technology is the most critical element that needs attention today. Palmer stated in the technology race some banks may get left behind. A major area of concern is the internet which is open to fraud, so watch out! Eberley re-iterated IT Risk Assessment: know what the risks are and be prepared with mitigating strategies. Banks that lack internal controls or those who fail to enforce policies and procedures with regard to routine internal controls are vulnerable to impending fraud and operational risks. She further stated that 90% of action taken by the FDIC involves non-compliance in the BSA area. Spangler confirmed IT as a major risk while also raising concerns with regard to compliance issues and vendor management. Since many banks outsource compliance, loan review, information technology, etc., they need to really know their vendors and vendor reputation, and ensure they are getting satisfactory performance for the dollars spent. Data protection has compelling risks due to complex technology today and internal risks. Plans need to be in place if security information is breached. All regulatory levels are concerned with internal audits, internal controls, and vendor management. Ultimately, members of the Board of Directors in every Bank, are responsible for overall enforcement of policies and procedures to ensure bottom line return to their shareholders. The regulators stated that a separation of duties is necessary and banks do not seem to have enough staff to effectively handle all these areas. Examiners need to access these risks, sophistication of technology, knowledge of the internal staff and experience levels of the staff. What sort of loan fraud trends are your banks experiencing? And, do you have any recommendations about fraud in general that you can share with the group?
Generally speaking, the regulators reported that they were not seeing much in the area of loan fraud. Nothing pervasive, some isolated instances, sometimes with participations or straw borrowers and property flipping with the larger banks. Some references were made to mortgage lenders and appraisal values; that may need some scrutiny. One regulator stated seeing an inordinate increase in teller fraud. Johnson further noted trends in mortgage lending like falsifying income primarily on owner-occupied versus investment properties. He recommended reviewing and monitoring large loan volumes to one bank officer. Palmer recommended tightening up internal controls in construction lending because some inspections not being properly performed. Advances without following bank procedures should be monitored. What are the “hot” buttons regarding compliance? - Bank Secrecy Act – Regionally regulators noted fewer problems in this area. Hot buttons include enforcing internal controls, monitor independent testing, assigning designated BSA Officer, and implementing BSA and CIP training. Of note is concern with SAR reporting. Banks should be more attentive in identification and monitor reporting. Banks need to have a clear program established to file these reports. Monitor best practices - Examiners will be looking for tiered high-risk customers, watch lists etc. Finally, HMDA reporting needs monitoring for accuracy and procedures outlined and properly enforced.
- Anti-Money Laundering – Community Banks regionally rated “low risk.”
- Adherence to appraisal regulations – Renewed emphasis here by regulators on enforcing effective internal reviews, procedures/processes in place. Additional suggestions: be reasonable, make sure assumptions are realistic.
- CRE concentration proposal – With proposed guidance, examiners will look at how portfolio concentrations are being managed and segmented, geographically etc. Recommendation is that Banks should identify, measure, monitor and control portfolio concentrations; know how to properly risk rate portfolio and how to mitigate risks. Considerations: Are portfolios being stress tested?; Does the Bank have the proper back office?
How are your banks handling the risk generated by the rising cost of energy and its by-products? Discuss potential credit issues?
No current issues cited on commercial lending in this area. Maryland reflected an all time low 0.17% past due. However, the agricultural sector and the retail side are being impacted with the Northeast District, primarily Pennsylvania and New England significantly and negatively so. Some banks in these areas have not enforced strong underwriting standards and have lowered the D/I standards and are implementing innovative mortgage products etc. In a rising interest rate environment, with compromised underwriting, examiners anticipate an increase in past dues. They offered a recommendation to continue enforcing good underwriting skills. Any special concerns with the local Real Estate market in terms of valuations? Comment on Residential or commercial and non-traditional products.
No broad based concerns on residential or commercial products. The housing market is slowing, returning to “normalization”. Maryland runs one full percentage under national ratings, which is good and ranks 6th nationally for appreciation. Due to continued strong economy, there’s no “bubble” on the horizon. Examiners will be looking at the non-traditional products such as IOL’s. Caution advised using “auto valuations,” consider are these values being validated? More guidance is forthcoming on this. How are your banks handling the rising interest rate environment?
Overall, most institutions have done well managing margins. With thinning margins, set policy statement on managing risk, then follow it and banks should be ok. Stress test portfolios. Most Banks have adequately increased their Allowance for Loan Losses. What do you see as being the “hot” exam/compliance topics in the upcoming year?
BSA, HMDA, risk management practices, CRE concentrations, back room operations (due to 25-30% growth) and net interest margin pressures.
IT complexity and security, Consumer compliance (need processes and testing), Non-traditional products (watch out for unfair practices), factor authentications on internet applications, flood insurance (more stringent regulations underway). What keeps you awake at night?
Spangler: “Maintaining balance – as an examiner, not to impede customer service production, innovation etc. Being reasonable and fair”. Kennedy: “Risk management practices – staying ahead of the curve with changing complexities/growth etc.”. Johnson: “Easing of underwriting standards always a concern.” “Emphasis on growth – feeding frenzy and lack of infrastructure and support.” Palmer: “Tremendous regulatory burden for Banks; wondering if they are doing their job right.” Eberly: “91% rated 1 or 2.” “Two years since a bank failure since FDIC formed.” M. Jo Taylor
SVP, 1st Mariner Bank
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RMA Annual Conference
This years RMA Annual Risk Management Conference will be held at the Sheraton Chicago Hotel and Towers, Chicago, Illinois, October 21-24,2006. Speakers: George F. Will, world renowned newspaper columnist syndicated by the Washington Post since 1974, he is a regular contributing editor of Newsweek Magazine, in 1977 won a Pulitzer Prize for commentary in his newspaper columns and a founding panel member on ABC television’s This Week. Norman R. Bobins is the head of North America and senior EVP of ABN AMRO Bank NV. He is President and chief executive officer of LaSalle Bank Corporation, parent of LaSalle Bank. LaSalle Bank Corporation is one of the Midwest’s largest commercial banks and Chicago’s second largest bank with more than $110 billion in assets. LaSalle Bank Corporation is an indirect subsidiary of Netherlands-based ABN AMRO Bank N. V., one of the world’s largest banks, with total assets of EUR 855.7 billion and a presence in more than 3,000 locations in over 60 countries. Carl Tannenbaum is the chief economist for LaSalle Bank Corporation. Mr. Tannenbaum serves as a quote contact for a number of publications and provides commentary on business issues for CNBC, CNN and other media outlets. He is currently Vice President of the National Association for Business Economics, past chairman of the American Bankers Associations Economic Advisory Committee and is on the board of the Illinois Council on Economic Education. Conference Highlights include:
Update on Commercial Real Estate Markets, Best Practices in BSA and AML Compliance, Safe and Risky Industries, 2007 and beyond, Middle Market Credit and Lending Trends for Portfolio Management, Church vs. State, Portfolio Management, Economic Capital: How to allocate Capital to Business Units-Tackling the Problems of Diversification Benefits and Excess Capital, Methodologies for the Allowance for Loan Losses for Community Banks, Fraud Detection and Prevention, Update on Health Care Industry, Regulatory Panel, Balance Sheet Strategies in a Highly Uncertain Environment, Utilizing and Validating Automated Valuation Models (AVM’s). Bank Shareholder Value and Competitiveness Basel IA and Basel II, Legal Update and Bonding and Banking. To register: Online: www.rmahq.org
Phone: 1 800 677 7621
Fax: 215 446 4100 We look forward to seeing you there!
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