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Too Small to Succeed or Ownership Structure to Thrive?

April 4, 2016

Authors

Robert Klingler

Too Small to Succeed or Ownership Structure to Thrive?

April 4, 2016

by: Robert Klingler

Two recent federal banking agency reports show very different pictures of the banking environment for community banks.  In “Too Small to Succeed? – Community Banks in a New Regulatory Environment,” the Federal Reserve Bank of Dallas lays out the “apparent” rising regulatory burden confronting banks today.  In contract, “Financial Performance and Management Structure of Small, Closely Held Banks,” published in the FDIC Quarterly, provides an empirical analysis of the success of closely held community banks in the FDIC Kansas City, Dallas and Chicago regions.

Lots of Community Banks Remain

As a reminder (which often seems forgotten in these discussions), the U.S. banking industry is still full of community banks.  As of December 31, 2015 (the latest data available), there were 6,182 insured depository institutions in the United States (banks and thrifts, exclusive of credit unions).  Only 107 of those institutions had more than $10 billion in assets; 595

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How to Get the Most out of Annual Board Reviews

January 12, 2016

Authors

Jim McAlpin and Michael Shumaker

How to Get the Most out of Annual Board Reviews

January 12, 2016

by: Jim McAlpin and Michael Shumaker

There has never been a more challenging time to be a bank director. The combination of today’s hugely competitive banking market, increased regulatory burden and rapid technological developments have raised the bar for director oversight and performance. In response, an increasing number of community banks have begun to assess the performance of directors on an annual basis.

Evaluation of board performance is done in many ways, and ranges from an assessment by the board of its performance as a whole to peer-to-peer evaluation of individual directors. Public company boards are increasingly being encouraged by institutional investors and proxy advisory firms to conduct meaningful assessments of individual director performance. The pace of turnover and change on most bank boards is slow, and more often the result of mandatory retirement age limits than focus by the board on individual director performance. This may be untenable, however, as the pace of external change

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How the New FDIC Assessment Proposal Will Impact Your Bank

September 9, 2015

Authors

Jonathan Hightower and Michael Shumaker

How the New FDIC Assessment Proposal Will Impact Your Bank

September 9, 2015

by: Jonathan Hightower and Michael Shumaker

In June, the Federal Deposit Insurance Corp. (FDIC) issued a rulemaking that proposes to revise how it calculates deposit insurance assessments for banks with $10 billion in assets or less. Scheduled to become effective upon the FDIC’s reserve ratio for the deposit insurance fund (DIF) reaching a targeted level of 1.15 percent, these proposed rules provide an interesting perspective on the underwriting practices and risk forecasting of the FDIC.

The new rules broadly reflect the lessons of the recent community bank crisis and, in response, attempt to more finely tune deposit insurance assessments to reflect a bank’s risk of future failure. Unlike the current assessment rules, which reflect only the bank’s CAMELS ratings and certain simple financial ratios, the proposed assessment rates reflect the bank’s net income, non-performing loan ratios, OREO ratios, core deposit ratios, one-year asset growth, and a loan mix index. The new assessment rates are subject to

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Congress Makes Capital Requirements Easier for Small Banks

April 6, 2015

Authors

Jonathan Hightower

Congress Makes Capital Requirements Easier for Small Banks

April 6, 2015

by: Jonathan Hightower

Author’s Note: On April 9, 2015, the Federal Reserve adopted a final rule to implement the changes discussed below.  The final rule will be effective 30 days after publication in the Federal Register.

For many years, bankers have asked the question, “What size is the right size at which to sell a small community bank?”  Some offer concrete asset size thresholds, while others offer more qualitative standards. We have always believed the best answer is “whatever size allows an acquirer’s profits and capital costs to deliver a better return than yours can.” While that answer is typically greeted with a scratch of the head, a recent change in law impacts the answer to that question for smaller companies. Given a proposed regulatory change by the Federal Reserve, a growing number of small bank holding companies will soon have lower cost of capital funding options that are not available

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Keys to Success in the FDIC’s Definition of Community Bank

July 10, 2013

Authors

Dan Wheeler and Jonathan Hightower

Keys to Success in the FDIC’s Definition of Community Bank

July 10, 2013

by: Dan Wheeler and Jonathan Hightower

In a recent strategic planning meeting, a bank chairman opined that “community banking is dead.” He is not the only banker and his is not the only bank grappling with this concern. After that meeting, we solicited the input of many of our peers in the industry. Were increasing expenses and shrinking margins killing community banks? Was the ever-quickening pace of technology too much for community banks to overcome? Were the building regulatory demands insurmountable for community banks? As we asked our peers these questions, many of them gave multi-faceted answers based on different assumptions of exactly what was meant by “community bank.” 

Around the same time, the FDIC proposed its own definition of “community bank” as a part of its Community Banking Study, which was published in December 2012. This study not only defends the viability of community banks but also

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OCC Releases Stress Testing Guidance for Community Banks

October 22, 2012

Authors

Jonathan Hightower

OCC Releases Stress Testing Guidance for Community Banks

October 22, 2012

by: Jonathan Hightower

On October 18, 2012, the OCC released stress testing guidance  for national banks and federal savings associations with $10 billion or less in total assets.  While the regulatory authorities clarified in May of this year that the Supervisory Guidance on Stress Testing for Banking Organizations with More than $10 Billion in Total Consolidated Assets would not apply to community banks, the OCC has now confirmed that the stress testing requirements in Dodd-Frank have “trickled down” to community banks, at least to those regulated by the OCC. The guidance states that appropriate stress testing should be performed at least annually.

Fortunately for community bankers, the stress testing guidance is greatly scaled back from the rules applicable to larger institutions, and the requirements are flexible in many respects. The guidance specifically states that the OCC does not specifically endorse any particular stress testing model and that

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TARP Extension – Capital for Community Banks?

December 10, 2009

Authors

Robert Klingler

TARP Extension – Capital for Community Banks?

December 10, 2009

by: Robert Klingler

On December 9, 2009, Treasury Secretary Geithner exercised his discretion to extend the TARP program through October 3, 2010.  In his letter to Congress certifying the extension, Geithner indicated that the Treasury Department would limit new commitments in 2010 to three areas:

  • mitigating foreclosure;
  • “recently launched initiatives to provide capital to small and community banks, which are important sources of credit for small businesses”  (including additional efforts to facilitate small business lending); and
  • increasing Treasury’s commitment to the Term Asset-Backed Securities Loan Facility (TALF).

The “recently launched initiatives to provide capital to small and community banks, which are important sources of credit for small businesses” presumably refers to the new capital program for community banks previously announced by President Obama on October 21, 2009. President Obama had indicated that the Treasury would be developing a program to provide TARP capital to community banks with less than

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President Obama Announces Additional TARP Capital for Community Banks

October 21, 2009

Authors

Robert Klingler

President Obama Announces Additional TARP Capital for Community Banks

October 21, 2009

by: Robert Klingler

On October 21, 2009, President Obama announced the broad outlines of a new program to provide additional capital to community banks in an effort to spur lending to smaller business.

Actual facts about the new program are currently very sparse.  A review of the currently available information does provide some details that may be attractive to community banks that current have TARP CPP funds, as well as those that currently do not have funds.  However, it does not appear that there will be any change in the Treasury’s determination of which community banks are eligible for TARP funds; participating institutions appear to still need to be viable without the funds.

There are three basic sources of official information:

  • the text of President Obama’s speech in Landover, Maryland;
  • the press release announcing the speech; and
  • a fact sheet on the President’s Small Business Lending Initiatives.
  • Known Facts

    FAQ on Expansion of TARP Capital Purchase Program for Small Banks

    June 2, 2009

    Authors

    Robert Klingler

    FAQ on Expansion of TARP Capital Purchase Program for Small Banks

    June 2, 2009

    by: Robert Klingler

    On May 21, 2009, the Treasury Department (without any fanfare) published a FAQ on the expansion of the TARP Capital Purchase Program for small community banks.  The FAQ expands slightly on Secretary Geithner’s remarks to the ICBA announcing the expansion.

    Highlights of the FAQ include:

    • Available to banks with less than $500 million in total assets (inclusive of all subsidiary banks for multiple bank holding companies);
    • Deadline to apply is November 21, 2009;
    • Maximum Capital Purchase Program investment is 5% of risk weighted assets;
    • Institutions that currently have preliminary approval for 3% can seek expedited approval to receive up to 5%;
    • No additional warrants need be issued beyond the warrants required for the investment of up to 3% of risk weighted assets; and
    • Institutions will have six months from preliminary approval (but no later than December 31, 2009) to decide whether or not to accept the investment.
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    Commentary: NYTimes Recognizes Community Banks

    May 18, 2009

    Authors

    Robert Klingler

    Commentary: NYTimes Recognizes Community Banks

    May 18, 2009

    by: Robert Klingler

    The front cover of the May 17, 2009 issue of the New York Times Magazine asked “Are Small Banks the Future?”  As noted in the article, lending may have slowed at the largest banks, but at the other end of the financial system, there are 8,500 community banks, and most remain very strong.

    In the midst of the worst banking crisis since the Great Depression, community banks have generally fared well. That’s because they typically shunned the lending practices that led to high default rates. They rarely participated in the securitization of loans, credit-default swaps and other overvalued financial products that put the global financial system in crisis. Instead, they stuck to the fundamentals. They considered the character and history of their borrowers. They required collateral. Without community banks, the current financial crisis would be a lot worse.

    The focus of the mainstreet press, and the Treasury Department,

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