Examiner-in-Charge School, Sacramento, CA

Examiner-in-Charge School Sacramento, California July 15 - 19, 2019

Monday, July 15 8:30 am

Introduction Baker Moseley, Arkansas State Bank Department Shaun Starr, Ohio Division of Financial Institutions

Review Pre-Course Exercise Baker Moseley Shaun Starr

9:15 am

Break

10:15 am 10:30 am

Pre-Exam Scoping Presentation Baker Moseley

Lunch

12:00 pm 1:00 pm 2:00 pm 3:30 pm 3:45 pm 4:30 pm

Distribute Case Study Materials Packet 1 Exam Management and Role as EIC Shaun Starr

Break

Case Study Prep Time/Meet with Senior Examiner

Adjourn

Tuesday, July 16 8:30 am

Review Prior Day / Distribute Case Study Materials Packet 2

Break

10:00 am 10:15 am

Analyzing the M Component Shaun Starr Rating the M Component Exercise Shaun Starr

11:00 am

Lunch

12:00 pm 1:00 pm 2:00 pm 3:30 pm

Team Prep Time

Mock Meeting with Bank Management

Rating the Composite Shaun Starr

Adjourn

4:30 pm

Wednesday, July 17 8:30 am

Review Prior Day

Conveying Examination Findings Baker Moseley

8:45 am

Exit Meeting and Writing Assignment Discussion Meeting with Senior Examiner/Individual Prep Time

10:30 am 10:45 am 12:00 pm 1:00 pm 4:30 pm

Lunch

Meeting with Senior Examiner/Individual Prep Time

Adjourn

Thursday, July 18 8:30 am

Exit Meetings – Schedule will be provided separately.

Lunch

12:00 pm 1:00 pm

Exit Meetings – Schedule will be provided separately.

Friday, July 19 8:00 am

Board Meeting, Joint Examinations and Enforcement Actions Baker Moseley

Break

9:15 am 9:30 am

Review Week Baker Moseley Shaun Starr

Adjourn

10:30 am

Examiner‐in‐Charge School Sacramento, California July 15 ‐ 19, 2019

Attendees California Department of Business Oversight Kurt Ang

kurt.ang@dbo.ca.gov

213‐220‐6310 213‐576‐7510 213‐415‐4501 213‐215‐3136 619‐964‐7567 213‐219‐7984 213‐576‐7617

Aileen Barlan‐Gaspar Michael De La Riva

aileen.barlan‐gaspar@dbo.ca.gov michael.delariva@dbo.ca.gov

Wanda Littles Omid Sadeghi

wanda.littles@dbo.ca.gov omid.sadeghi@dbo.ca.gov

Ann Vo

ann.vo@dbo.ca.gov

Shu‐Fen Weng

shu‐fen.weng@dbo.ca.gov

Delaware Office of the State Bank Commissioner Johnathan Charles

johnathan.charles@delaware.gov

302‐739‐4235 302‐739‐4235

Sulman Gill

sulman.gill@delaware.gov

Georgia Department of Banking and Finance Caitlyn Jackson

cjackson@dbf.state.ga.us

770‐986‐1633

Iowa Division of Banking Alexander German

alexander.german@idob.state.ia.us

515‐281‐4014 515‐281‐4014 515‐281‐4014 515‐281‐4014 515‐281‐4014 515‐281‐4014

Sage Ghent Austin Halls

sage.ghent@idob.state.ia.us austin.halls@idob.state.ia.us

Madison Lechtenberg

madison.lechtenberg@idob.state.ia.us deborah.pogemiller@idob.state.ia.us courtney.thompson@idob.state.ia.us

Deb Pogemiller

Courtney Thompson

Oklahoma State Banking Department Clint Duncan

clint.duncan@banking.ok.gov

405‐521‐2782

Texas Department of Banking Janet Dudley

janet.dudley@dob.texas.gov danny.salinas@dob.texas.gov

512‐475‐1300 512‐475‐1300

Danny Salinas

Instructors Arkansas State Bank Department Baker Moseley Ohio Department of Commerce Shaun Starr CSBS Education Foundation Staff Kim Chancy

bmoseley@banking.state.ar.us

501‐324‐9019

shaun.starr@com.state.oh.us

330‐620‐4697

kchancy@csbs.org

202‐802‐9554

EXAMINATION SCOPES

Last Report(s) of Examination

Contact with Bankers

Correspondence

Trade Association Materials

Supervisors, Fellow Examiners, Other Regulators

UBPR

Tools Used In Examination Scope Development

Items Worthy of Special Consideration

Leading and Lagging Indicators

Prior examination recommendations

Internal control issues

Changes in senior management and the Board of Directors

Board of Directors issues/actions

Violations of Laws and Regulations

Entrance into new product lines

Experience level and number of assisting examiners

Length of time allocated for the exam

Administrative Issues to Consider

Last time an experienced examiner reviewed a particular function

Last examination(s) – full scope vs. limited scope

Other Considerations • Time and personnel constraints

• Institution’s size,

complexity, financial condition and overall risk profile

Regardless, a good scope will answer these very basic questions.

Basic Elements of a Good Scope

Sometimes Why?

Who?

How?

What?

When?

Where?

WHO? • Identify who is responsible • Assign assisting examiners for each area of review • Denote whether it is an independent or joint examination • Management discussions

WHAT?

Explain the expected extent of review

Limited scopes usually identify specific tasks to be performed or perhaps concentrate on only one aspect of a department or function. Detail what assisting examiners are responsible for producing • Workpapers • Final report comments

Onsite

Offsite

Main Office Operations Center Loan Center ETC.

WHERE?

WHEN? • Schedule expected deadlines for comments

• Schedule update sessions

• Plan for updates with regulators and bank management

HOW?

• Complete work programs

• Indicate report format

• Specify expected sampling techniques

Reason for close scrutiny of a particular area

WHY?

Reason for the desired application of certain review techniques

Problem situations/banks

Reason for omitting an area

Joint Examination Scopes • Coordination is vital

• Schedule initial meeting

• Assign responsibility for first day letter, if applicable.

• Develop a joint scope that meets both agency’s needs.

Joint Examination Scopes- continued • Determine processing agency

• Assignment of oversight responsibilities still based on skill sets.

• Invite federal counterpart to join in on any pre-examination discussions with management.

• Division/sharing of EIC responsibilities.

Benefits of Sufficient Planning Exams are more likely to focus on material risks

Assisting examiners are better informed

Exam Management and Your Role as EIC

Pre- Planning

Examination Follow-up

Off-Site Week

EIC

Board Meeting

Onsite

Writing the Report of Examination

Exit Meeting

Pre-Planning

Familiarize Yourself with the Bank

Initial Contact with Management • Introduction • Sooner rather than later

Identify Key Risk Areas. • Draw conclusions on risks,

• Internal and external documents • Conversations with examiners and bank management

examination strategy, and assignments

Pre-Planning Continued

Requesting Examination Information • Draw conclusions on risks, examination

Determine Staffing • Subject matter experts • Sufficient to complete a timely examination

Creation of Scope Memo • Varies by department • At a minimum, should cover • Institutional overview • Risk assessment • Discussions with Management • Prior examination findings • Financial analysis • Assignments/logistics

strategy, and assignments

Off-Site Week

• Communicate with your exam team.

Communicate

• Organize your materials.

Organize

• Check your request list and follow-up • Complete as much exam work as possible.

Check

Complete

Onsite Encourage Communication • Open communication with management • Regular discussions with exam team to keep them on track • Keep your supervisor informed • Meetings, meetings, meetings Time Management • Maintain lists to keep on track • Allows you to organize thoughts for management discussions • Ensures potential issues are brought to resolution

• Serves as source for structuring exit meeting • Acts as reminder for items that need completed

Onsite - Continued Conduct Meetings • First day • Fact-finding • Director’s conferences Complete Your Assignments. • Management component • Other areas • Develop overall conclusions

• Update • Wrap up • Exit

Exit Meeting

Develop formal agenda.

Ensure your supervisor is in agreement with all conclusions.

Exit Meeting

Be prepared.

NO SURPRISES.

Exam Management & Your Role as EIC

Review/edit comments from other examiners. 1

Complete additional report pages. 2

Ensure ratings and conclusions are supported and accurate. 3

Be mindful of writing tips from your department. 4

Board Meeting

Formal written agenda.

Outline of significant items. Communicate and know your audience.

Preparation.

Examination Follow-Up

• Level of involvement may vary. • Review examination responses. • Provide feedback to examiners.

QUESTIONS?

Analyzing the M Component Evaluating Management

M

C A

E L S

Analyzing the “M” Component

Most important part of your analysis

Management consists of Board and Executive Management

The Glue that ties it all together

In-Class Exercises

Management / Board

The management assessment includes an analysis of the board of directors.

The board of directors is the source of all authority and responsibility.

Responsible for: • Formation of sound polices and objectives of the bank • Effective supervision of its affairs, and • Promotion of its welfare.

Management / Board

Various laws govern the election of board members and also govern transactions between board members and the institution

Directors should have ideas of their own and express them

Directors should have sufficient time to fulfill their responsibilities

Directors should be free of financial difficulties and possess personal integrity

Management / Board

A primary duty of a board is to select and appoint executive officers who are qualified to administer the bank’s affairs effectively and soundly.

Directors should avoid self-serving practices and conflicts of interest and place performance of their duties over personal concerns.

The board should ensure adequate MIS is in place to provide the board with accurate and sufficient reports to know bank’s condition.

Management / Board

Ensure appropriate internal control system and adequate auditing program is in place Supervision by directors does not mean the board is performing management tasks

Directors can be held personably liable for: • Breach of trust

• Negligence which causes loss • Misappropriation of bank assets • Dereliction of Duty • Failure to maintain reasonable supervision over the activities and affairs of the bank, its officers and employees

Senior Management

Risk – the potential for loss or gain resulting from a specific action

Risk is okay.

Must learn and evaluate management’s view of risk.

Does management understand the risk they

Management must identify, measure, monitor and control risk.

Do they have the balance sheet to take on this level of risk?

are taking and what could go wrong?

Component Rating Definitions

The capability of the board of directors and management, in their respective roles, to identify, measure, monitor, and control the risks of an institution’s activities and to ensure a financial institution’s safe, sound, and efficient operation in compliance with applicable laws and regulations is reflected in this rating.

Component Rating Definitions (cont.)

• Active oversight by the board of directors and management; • Competent personnel; • Adequate policies, processes, and controls taking into consideration the size and sophistication of the institution; • Maintenance of an appropriate audit program and internal control environment; and • Effective risk monitoring and management information systems.

Sound management practices are demonstrated by :

Component Rating Definitions (cont.)

Level and quality of oversight and support of all activities.

Ability to plan for, and respond to, risks that may arise from changing business conditions or the initiation of new activities or products. The adequacy of, and conformance with, internal policies and controls addressing operations and significant risks. The accuracy, timeliness, and effectiveness of management information and risk monitoring systems appropriate for the institution’s size, complexity, and risk profile

The Management rating is based on an assessment of the following factors:

Component Rating Definitions (cont.)

Assessment factors continued:

The adequacy of audits and internal controls.

Compliance with laws and regulations.

Responsiveness to recommendations from auditors and supervisory authorities. Management depth and succession. Extent that the board and management is affected by, or susceptible to, dominant influence or concentration of authority. Reasonableness of compensation policies and avoidance of self-dealing. Demonstrated willingness to serve the legitimate banking needs of the community. The overall performance of the institution and its risk profile.

Component Rating Definitions (cont.)

“1” Rating -

A rating of 1 indicates performance by management and the board of directors and strong risk management practices relative to the institution’s size, complexity, and risk profile. All significant risks are consistently and effectively identified, measured, monitored, and controlled. Management and the board have demonstrated the ability to promptly and successfully address existing and potential problems and risks.

Component Rating Definitions (cont.)

“2” Rating -

management

A rating of 2 indicates

and board performance and risk management practices relative to the institution’s size, complexity, and risk profile. Minor weaknesses may exist, but are not material to the safety and soundness of the institution and are being addressed. In general, significant risks and problems are effectively identified, measured, monitored, and controlled.

Component Rating Definitions (cont.)

“3” Rating -

A rating of 3 indicates management and board performance that or risk management practices that are less than satisfactory given the nature of the institution’s activities. The capabilities of management or the board of directors may be insufficien t for the type, size, or condition of the institution. Problems and significant risks may be inadequately identified, measured, monitored, or controlled.

Component Rating Definitions (cont.)

• Common characteristics of “3” rated M Components: – Poor financial performance – Heightened risk profile – Weak risk management practices – Elevated AQ concerns (rising, high levels of adversely classified) – Gaps in management – Repeat examination findings – Multiple violations / contraventions – Questions as to the sufficiency of staffing

– Dominant member of management – Lack of reliability in financial reporting

– Non compliance with an outstanding supervisory action – Absence of meeting minute documentation on discussions of significant risks

Component Rating Definitions (cont.)

“4” Rating -

A rating of 4 indicates management and board performance or risk management practices that are inadequate considering the nature of an institution’s activities. The level of problems and risk exposure is excessive . Problems and significant risks are inadequately identified, measured, monitored, or controlled and require immediate action by the board and management to preserve the soundness of the institution . Replacing or strengthening management or the board may be necessary.

Component Rating Definitions (cont.)

“5” Rating -

A rating of 5 indicates management and board performance or risk management practices. Management and the board of directors have not demonstrated the ability to correct problems and implement appropriate risk management practices. Problems and significant risks are inadequately identified, measured, monitored, or controlled and now threaten the continued viability of the institution. Replacing or strengthening management or the board of directors is necessary .

In-Class Exercise

Analyze the presented information and assess the M Component area.

See handouts • Institution A • Institution B • Institution C • Institution D • Institution E

Rating the Composite

Composite Rating Definition

• Managerial • Operational • Financial • Compliance

Careful evaluation of performance Key components to assess an institution’s financial condition and operations

• Capital adequacy • Asset quality • Management capability • Earnings quantity and quality • Adequacy of liquidity • Sensitivity to market risk

Composite Rating Definition

Composite Rating 1 • Financial institutions in this group are sound in every respect and generally have components rated 1 or 2 . Any weaknesses are minor and can be handled in a routine manner by the board of directors and management. These financial institutions are the most capable of withstanding the vagaries of business conditions and are resistant to outside influences such as economic instability in their trade area. These financial institutions are in substantial compliance with laws and regulations. As a result, these financial institutions exhibit the strongest performance and risk management practices relative to the institution’s size, complexity, and risk profile, and give no cause for supervisory concern .

Composite Rating Definition

Composite Rating 2 • Financial institutions in this group are fundamentally sound . For a financial institution to receive this rating, generally no component rating should be more severe than 3 . Only moderate weaknesses are present and are well within the board of directors’ and management’s capabilities and willingness to correct. These financial institutions are stable and are capable of withstanding business fluctuations. These financial institutions are in substantial compliance with laws and regulations. Overall risk management practices are satisfactory relative to the institution’s size, complexity, and risk profile. There are no material supervisory concerns and, as a result, the supervisory response is informal and limited.

Composite Rating Definition

Composite Rating 3 • Financial institutions in this group exhibit some degree of supervisory concern in one or more of the component areas. These financial institutions exhibit a combination of weaknesses that may range from moderate to severe ; however, the magnitude of the deficiencies generally will not cause a component to be rated more severely than 4 . Management may lack the ability or willingness to effectively address weaknesses within appropriate time frames. Financial institutions in this group generally are less capable of withstanding business fluctuations and are more vulnerable to outside influences than those institutions rated a composite 1 or 2. Additionally, these financial institutions may be in significant noncompliance with laws and regulations. Risk management practices may be less than satisfactory relative to the institution’s size, complexity, and risk profile. These financial institutions require more than normal supervision, which may include formal or informal enforcement actions . Failure appears unlikely , however, given the overall strength and financial capacity of these institutions.

Composite Rating Definition

Composite Rating 4 • Financial institutions in this group generally exhibit unsafe and unsound practices or conditions . There are serious financial or managerial deficiencies that result in unsatisfactory performance. The problems range from severe to critically deficient . The weaknesses and problems are not being satisfactorily addressed or resolved by the board of directors and management. Financial institutions in this group generally are not capable of withstanding business fluctuations. There may be significant noncompliance with laws and regulations. Risk management practices are generally unacceptable relative to the institution’s size, complexity, and risk profile. Close supervisory attention is required, which means, in most cases, formal enforcement action is necessary to address the problems. Institutions in this group pose a risk to the deposit insurance fund . Failure is a distinct possibility if the problems and weaknesses are not satisfactorily addressed and resolved.

Composite Rating Definition Composite Rating 5

• Financial institutions in this group exhibit extremely unsafe and unsound practices or conditions; exhibit a critically deficient performance ; often contain inadequate risk management practices relative to the institution’s size, complexity, and risk profile; and are of the greatest supervisory concern . The volume and severity of problems are beyond management’s ability or willingness to control or correct . Immediate outside financial or other assistance is needed in order for the financial institution to be viable. Ongoing supervisory attention is necessary. Institutions in this group pose a significant risk to the deposit insurance fund and failure is highly probable .

Changing Composite Ratings • Internal and external parties Communication

• Be thorough • Expect questions

Analysis

• Based on the analysis • Needed for ALL conclusions

Support

• Cannot over-communicate Communication

Questions

What are some tips/tricks for keeping everything organized during the exam process?

What are some best practices for bringing findings together at the end of the exam for both the exit meeting and report?

QUESTIONS?

Conveying Examination Findings

EXIT MEETING

Communication

• Critical to examination process

• Strength in both written and verbal communication is necessary

• Ability to vary communication styles is important

Purpose of the Exit Meeting

• Provide closure to exam

• Obtain verification of examination facts

• Alert management to items included in the Report of Examination

• Alert management to other items

Exit Meeting Tone and Format • Consistent with management discussions

• Consistent with the materiality of exam findings

• Consistent with the tone used in the Report of Examination

Meeting Agendas

Necessity of formal agendas • Office requirement • Numerous issues • Material recommendations Agenda Formats • Vary by state and federal agency • Concise and void of clutter • Spelling and Grammar

Additional Handouts

• Vary by state

• Know the practices of any participating federal agency

• Regulations, FILs, State Laws

• Ratio Tables

Meeting Disclosures

• No surprises – IMPORTANT!!! • CAMELS • Violations • Recommendations • Risk factors

Items Worthy of Discussion Only • EIC needs to be able to distinguish between discussion only topics and reportable issues • Recent instance of a poor banking practice • Prior poor practices • Corrections during the exam • Inadvertent Violation

Tips for a Successful Exit Meeting

• Encourage a dialogue • Familiarize yourself with ROE • Absolute agreement? • Keep management informed • EIC should update bank management on all items in process of review • Bring another examiner

Tips for a Successful Exit Meeting

• Leave no surprises

• Advise of any potential regulatory actions

• Advise management to respond

Subsequent Events • Advise bank management of any changes to individual CAMELS component ratings and/or composite rating

• Document the exit meeting discussion

WRITING THE ECC PAGE

You need to catch the readers attention!!

Most Critical Section of the Report of Examination

• First report section reviewed

• Sometimes the only section reviewed

Purpose of the ECC Page Comments

• Highlights critical findings

• Ranks the importance of examination findings

Purpose of the ECC Page Comments - continued

• Pull together the component ratings to form a composite rating.

Tone of ECC Page Comments

• Commensurate with the level of materiality of weaknesses reported.

• Consistent with the tone used in management discussions.

Influence Further Reading

• Highlight critical examination findings. • Avoid inclusion of immaterial findings. • Be as concise as possible. • Choose words carefully. • Use appropriate grammar and spelling.

ECC Page Format

• May vary between agencies and states

• Discuss the composite rating

• Identify the overall risk profile of the organization

• Present individual CAMELS components in order of importance

Main Topics

• Composite rating • Overall risk profile

• Highlight commitments made by management • Specify whether a management response is required

ECC Page Comments Assignment

Board Meetings, Joint Examinations and Enforcement Actions

Board Meetings

• Know your audience / Be Prepared – Many aren’t bankers and probably won’t understand our daily language • High points / Significant Issues – Don’t get bogged down in too much detail unless it is the main issue – Practice – Vet out your thoughts with co-workers – You are your office. Don’t pass the buck. • You most likely will not be alone – Your supervisors might have things to say. Have a plan worked out before hand

Board Meetings - Continued

• Other thoughts or experiences?

Joint Examinations

• More frequent now:

– Banks over a Billion in assets

– Problem banks or bank’s with identified issues

– Just to coordinate resources

Your role as EIC

• Early communication in planning • Which agency is the lead for processing?

• It is and should be a joint process • Coordinate staffing and resources • Should make it as seamless as possible for the institution • Remember both agencies will have bosses that have questions or want to be informed

Your Role - Continued

• Contact and meetings with bank management shouldn’t be conducted alone • Avoid disclosing conclusions until management until things have been vetted

Enforcement Actions

• What is an enforcement action?

• Why do bank regulators use them?

Types of Enforcement Actions

• Informal vs. Formal • Typically joint actions • Contents:

– Identifies parties to the document – References a specific examination – Requires signatures of the directors – Sets time frames for initiating change – Usually requires updated to the regulators

Informal Actions

• Regulatory Letter

• Board Resolution

• Memorandum of Understanding (MOU)

• Section 39 of the FDIC Act (FDIC)

Formal Actions

• Written Agreement

– Issued to state member banks – Signed by Regulators and Board

• Consent Order ( C & D) – Issued to state member and non-member banks – Signed by Regulators and Board – Requires bank to immediately stop inappropriate action or implement affirmative action

Formal Action – continued

• Capital component will likely need to address Prompt Corrective Action (PCA) – If bank doesn’t consent there would be a hearing with a Administrative Law Judge – Capital Directives – Removal of Officers and/or Directors – Civil Money Penalties (CMPs) – Termination of Insurance – There are many specific limitations that occur when a PCA capital category drops