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WOULD A PRESIDENT SANDERS BE ABLE TO BREAK UP THE BIG BANKS?

FTN FINANCIAL PORTFOLIO ADVISORS

Contents 8 12 16

V O L U M E 1 0 5 • N O . 5 • M AY 2 0 1 6

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Features

Columns

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4

The ripple effect

Message from the President CFPB is drawing attention — and not in a good way

Texas bank investors taking a wait and see approach following drop in oil prices

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12 Regulatory scrutiny alert

Chairman’s Forum Thanks for the memories

CRE lending may lead to more required capital

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16 Leveraging advanced analytics

Banker to Banker Texas Republic Bank celebrates 125th anniversary

The focus is on combating bank risk & fraud

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20 Can you outrun the bear?

Your Advocate Would a President Sanders be able to break up the big banks?

How to avoid being caught by cyber criminals

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36 Community Banker Spotlight

Compliance Hotline Big changes for small creditors this spring

50 years of building relationships

John L. Snider Immediate Past Chair

Departments

W. David Lacy Community Bankers Council Chair

24 News & Trends

William C. Helms Regional Bankers Council Chair

34 Partner Focus

Robert L. Upchurch, III Government Relations Council Chair Kenneth L. Burgess Jr. Chairman

EDITORIAL OFFICES: 203 West 10th Street, Austin, Texas 78701-2388 512-472-8388 fax 512-473-2560 www.texasbankers.com

Jim R. Purcell Vice Chair

James D. Dreibelbis Treasurer

Olivia Carmichael Solis Editor Katherine Kolstedt Art Director Jocelyn Carby Associate Editor Jamie Tanner Assistant Editor

@TEXASBANKERS

J. Eric T. Sandberg Jr. TBA President/CEO

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T E X A S B A N K I N G • M AY 2 0 1 6

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TEXAS BANKERS ASSOCIATION

BOARD OF DIRECTORS R. MARK BAIN, First United Bank, Lubbock

ERICSANDBERG

DEAN O. BASS, Spirit of Texas Bank, SSB, College Station

TBA PRESIDENT & CEO

GEORGE G. BRUNS, USAA Federal Savings Bank, San Antonio

MESSAGE FROM THE PRESIDENT

KENNETH L. BURGESS, JR., FirstCapital Bank of Texas, N.A., Midland DANNY B. BUTLER, Jefferson Bank, San Antonio

CFPB is drawing attention — and not in a good way

s

CINDY CAMPBELL, First National Bank, Southlake TIMOTHY J. COOPER, First State Bank, Spearman R. TERRY CULLEN, CTFA, First National Bank in Port Lavaca MORRIS E. DEFRIEND, The Farmers State Bank, Groesbeck GREG DODDS, Texas Bank, Brownwood

Six years after passage of the Dodd-Frank Act, our voice is finally being heard by an increasing number in Congress and especially in the judicial system where the overreach of the Dodd-Frank Act and especially the activities of the misnamed Consumer Financial Protection Bureau are drawing increased attention. TBA has long and vociferously opposed the Dodd-Frank Act well before it finally passed in July 2010. Our General Counsel John Heasley read and analyzed the entire 2,000-page bill — something not many people have done — and he specifically advised that while the legislation was purported to cure Wall Street abuses, it was actually going to do great harm to the very banks providing financial support to communities both large and small. John went on to explain how even banks with more staff and capital to deploy to comply with new regulations would be unnecessarily damaged, while smaller banks would be disproportionately put into a regulatory quagmire that would make many sell or merge. Since 2010, we have lost 144 charters in Texas and more than 1,600 across the U.S. The Texas Banking Commissioner starkly advised the Finance Commission at its April meeting that this amounts to one bank vanishing per business day. We have fought for change at every meeting with members of Congress since that time, including the first opportunity for change presented at the November 2010 general elections. Congressman Pete Sessions from Dallas was in charge of the House election effort to obtain a Republican majority that year and we were glad to lend support to that goal. In the 2014 elections, Republicans retook the majority in the Senate, but were unable to achieve the 60-vote margin necessary to ensure congressional passage of legislation overturning what has unfortunately continued to be treated as a legislative achievement. During the interim, however, many in Texas, including TBA and State National Bank in Big Spring, have continued to raise questions about the operations and constitutionality of the CFPB. It takes leadership and “guts” to sue the government and we are very proud our 2016-17 Chairman Jim Purcell, who is the CEO of that bank. The bank’s case challenges not just the CFPB but several other important aspects of the Dodd-Frank Act. Just last month, in a separate case against the CFPB, a sitting three-judge panel on the U.S. Court of Appeals for the D.C. Circuit also questioned the constitutionality of the CFPB and asked how Congress could legally create the agency in a format distinct from other independent federal regulatory agencies. see “Message from the President,” p. 28

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RONALD D. BUTLER, II, First Financial Bank, N.A., Abilene

T E X A S B A N K I N G • M AY 2 0 1 6

WADE C. DONNELL, The National Bank of Texas at Fort Worth JAMES D. DREIBELBIS, Woodforest National Bank, The Woodlands ROBERT R. FRANKLIN, JR., CommunityBank of Texas, N.A., Houston JESSE LEE HAGGARD, III, The First National Bank of Trinity WILLIAM C. HELMS, BBVA Compass Bank, Houston JOHN L. HOLT, JR., NexBank Capital, Inc., Dallas ROBERT W. HOXWORTH, First National Bank Texas, Killeen WILLIAM DAVID LACY, Community Bank & Trust, Waco RANDY MCCURLEY, The First State Bank of Mobeetie PAUL S. MOXLEY, Texas Regional Bank, McAllen JIM R. PURCELL, The State National Bank, Big Spring JOE QUIROGA, Texas National Bank, Edinburg CHARLOTTE M. RASCHE, Prosperity Bank, Sugar Land MARK S. REILEY, Icon Bank of Texas, N.A., Houston J. MARK RIEBE, Texas Bank Financial, Weatherford KATHERINE RODRIGUEZ, CPA, Moody National Bank, Galveston RAYMOND H. RUST, III, Commercial Bank of Texas, N.A., Nacogdoches REAVE J. SCOTT, Coleman County State Bank JOHN L. SNIDER, Shelby Savings Bank, SSB, Center STEVE STAPP, R Bank, Round Rock GARY B. TAYLOR, Texas Bank and Trust Company, Longview ROBERT L. UPCHURCH, III, First State Bank of Bedias GARY P. VAN DEVENTER, Security State Bank, Anahuac DON R. WATERS, Liberty Bank, Hurst CEE YAGER, Worthington National Bank, Fort Worth

Expressed opinions in any signed article of Texas Banking are those of the author and do not necessarily reflect the viewpoint of editors or the Texas Bankers Association on the subject. While this magazine makes reasonable efforts to establish the integrity of advertisers, it does not endorse advertised products or services unless specifically so stated. Texas Banking © 2016, Texas Bankers Association. Articles may not be reproduced or reprinted without the expressed written permission of the Texas Bankers Association. Texas Banking (ISSN 0885-6907) is published monthly by the Texas Bankers Association, 203 W. 10th St., Austin TX 78701-2388. Periodicals Postage Paid at Austin, TX and at additional mailing offices. POSTMASTER: Send address changes to Texas Banking, Texas Bankers Association, 203 W. 10th St., Austin TX 78701-2388. Annual dues of TBA members include $20 for each one-year subscription to Texas Banking. Annual rates for additional subscriptions are $48 for member banks and $96 for non-members.

KENBURGESS TBA CHAIRMAN CHAIRMAN’S FORUM

g

Thanks for the memories

Growing up, I remember listening to Bob Hope sing a song titled “Thanks for the Memories.” In my younger years, I didn’t really appreciate the song. As I now have more years under my belt, this song has gained more significance. The past year serving as your chairman has given me a number of great memories and the opportunity to meet many new people. I heard many great stories about your banks and I have also heard the challenges you are facing trying to serve your customers and your communities as a result of Dodd-Frank and the negative mindset toward our industry since the economic crisis. Beginning the year, I had three major areas I wanted to focus on. 1. Elevate TBA’s ability to serve and engage with our members. 2. Increase banker engagement in the legislative and regulatory process. 3. Increase communication and collaboration with industry partners. With the help of TBA staff, the TBA Executive Committee and TBA Board members, we made progress in each of these areas. In the first area of focus, the board approved the addition of three new member relations officers to assist Donny Palmer in TBA’s member outreach efforts. Michele Carfello joined TBA to serve banks in the South Texas area of the state, while Zach Malone joined TBA to serve primarily the North Texas area. Work is continuing to find an additional staff person to serve the West Texas area. When fully staffed, each of our member relations officers will have approxi-

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T E X A S B A N K I N G • M AY 2 0 1 6

Vice Chair Jim Purcell presents Ken Burgess with a resolution of appreciation from the TBA Board.

mately 110 to 115 banks under their watch. During the year, I spent about four days with each of our member relations officers calling on banks in their areas. I heard great stories from member banks about how they are serving their customers and communities. I also heard stories from many banks that are no longer able to offer mortgage loans due to the complexity that now exists because of the new mortgage rules and requirements. In some cases, these banks were the only option for the people living in their communities. I also heard from some of you who refuse to let the current environment get you down and have found ways to succeed at high levels in spite of the challenges you face. Those stories inspired me. The many challenges being faced by our industry call for a significant increase in the level of involvement from industry members. TBA staff and officers worked hard this year to increase banker involvement in PAC campaigns, letter writing for legislative and regulatory efforts and direct

face-to-face contact with lawmakers and regulatory officials. While we are nowhere close to where we need to be, we did make progress with a good BankPac year and an increase in attendance at the ABA Government Relations Summit in Washington, D.C. Our industry will only succeed in advocacy efforts when all industry partners are pulling in the same direction. Members of our Executive Committee met with members of the IBAT Executive Committee early in the year to discuss opportunities to work together when possible to support our industry. We had several discussions during the Texas legislative session with regard to banking issues, which arose in an attempt to be on the same page. We reached out to other industry members to facilitate more open discussions about how we can work together. The TBA Board took some very significant steps in the making of $250,000 challenge grants to the banking school program at Sam Houston State University and the new banking school program at Texas A&M, respectively. These are very important programs to help develop the talent that will carry our industry into the future. I commend this year’s Board of Directors for their foresight. I have heard others who have served as chair of TBA talk about how short the year is. I can totally agree after my year in the position. It seems like we just started on some of the initiatives mentioned above and the year is already over. But it has been a great year and one that I have fully enjoyed. I can truly say, “Thanks for the Memories”!

By Craig R. McMahen and Mike Zimmerman

Bank M&A in Texas experienced a sharp slowdown in 2015 due to uncertainties in the state’s economy and a significant drop in stock prices. In addition to the number of transactions being down, there has been a dearth of large deals, with only two transactions greater than $100 million in deal value announced in the past two years. Traditional Texas bank buyers and

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T E X A S B A N K I N G • M AY 2 0 1 6

select out-of-state bank buyers continue to seek suitable targets in Texas. However, both groups have run into sellers that have valuation expectations that do not reflect the recent drop in buyers’ stock prices. By January 2015, Texas bank stocks had traded down as much as 40 percent from their highs, almost in lock-step with the price of a barrel of oil. Although energy lending expo-

sure varies widely (from 1 percent to 15 percent of loans) investors sold the entire group indiscriminately. Crude oil fell from a high near $105 per barrel in June 2014 to $55 per barrel in January 2015. After a brief uptick, oil prices continued their slide to a 13-year low of $26.14 on Feb. 11 of this year and have since rebounded over 50 percent to a recent high near $40 per barrel.

Exhibit 1: Energy Exposure of Texas Banks (as of Dec. 31, 2015) Energy Loan Detail % Energy Amount % of % of LLR / ($mm) Loans TCE Loans

Company Cullen/Frost Bankers, Inc.

$ 1,760

15.3%

85%

3.1%

Green Bancorp, Inc. LegacyTexas Financial Group, Inc.

$ $

287 524

9.2% 8.5%

86% 84%

6.1% 2.3%

Texas Capital Bancshares, Inc. Comerica Incorporated Independent Bank Group, Inc. Prosperity Bancshares, Inc. Hilltop Holdings Inc. First Financial Bankshares, Inc.

$ 1,200 $ 3,070

7.1% 6.3%

83% 44%

2.7% 4.0%

$ $ $ $

205 399 180 97

5.1% 4.2% 3.6% 2.9%

62% 26% 13% 15%

4.1% 2.4% 4.4%

Allegiance Bancshares, Inc. Southside Bancshares, Inc.

$ $

45 33

2.7% 1.3%

21% 9%

2.4%

6.5% 4.9%

51% 41%

3.8% 3.9%

Average Median Source: SNL Financial, Company SEC filings, and KBW Research.

Exhibit 2: Price Performance of Texas Banks (Since June 2014 Peak) FFIN

SBSI ABTX

(7%)

(7%)

HTH

CMA

PB

LTXB

CFR

TCBI

IBTX GNBC KRX

0% (1%) (10%)

(9%)

(24%)

(30%)

(28%) (31%) (32%) (32%)

(40%) (50%) (52%) (54%)

(60%) Source: SNL Financial as of 4/6/2016.

Exhibit 3: M&A Deal Value in Texas Since 2000 $5,000 $4,335

$4,500 $4,000 $3,500

$3,022

$3,000 $2,500 $2,143 $2,000

$1,718 $1,635

$1,710

$1,500 $1,000 $500

$1,221 $954 $690

$926 $558 $494

$249

$437 $25

$174

$16

$0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD Source: SNL Financial; dollars in millions.

@TEXASBANKERS

Market performance It has been a difficult year for bank stocks nationwide, both large cap banks, as measured by the Keefe Bank Index (BKX) and small cap banks, as measured by the Keefe Regional Bank Index (KRX). Year-todate, the BKX is down 13 percent, underperforming the KRX, which is down 7 percent. Through the first half of February, the BKX was down more than 20 percent compared to the 17 percent decrease in the KRX. The driving force behind the decline in bank stocks has been a perceived slowdown in the global economy. During the first quarter, we saw declining growth numbers out of China, concerns about asset quality in Europe, a continued drop in oil prices and a Federal Reserve that appears more dovish even after a December rate increase.

(13%)

(20%)

In addition to concerns about energy loans, investors are concerned that the ripple effect will lead to vacancies in commercial real estate and lower prices for residential real estate, which could damage the fundamentals and balance sheets of the Texas banks. Overall, bank stock investors are taking a “wait-and-see” approach and have been unwilling to make big bets on the Texas banking sector. The sell-off in Texas bank stocks widened the bid-ask spread between buyers and would-be sellers. As a result, total M&A deal value in Texas dropped to $437 million in 2015 — the lowest in four years — and $26 million in the first quarter of 2016. However, the underlying fundamentals of Texas banks remain resilient and high levels of capital, solid credit quality and stable earnings should lead to stabilized stock prices and M&A activity over time.

Nationwide bank M&A The nationwide M&A market remains healthy, which is a good future indicator for Texas bank M&A activity.

T E X A S B A N K I N G • M AY 2 0 1 6

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Exhibit 4: Year-to-date Bank Stock Performance vs. the Market 5.0%

(5.0%) -11% -17%

(15.0%)

-23% (25.0%) 12/31/2015

1/15/2016

1/30/2016

KRX ( -7%)

2/14/2016

2/29/2016

SPX (+1%)

3/15/2016

3/30/2016

BKX ( -13%)

Source: SNL Financial; as of 4/6/2016.

Exhibit 5: Nationwide Bank M&A Activity 350

$120

$109

300

$100

250

$71

$80

200 $60 150 100

$36

$29

$27

50

$17

$10

$1

$14

$13

$40

$19 $20

0

$0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Number of Deals

Aggregate Announced Deal Value ($bn)

Source: SNL Financial.

24,000

12.00%

18,000

9.00%

12,000

6.00%

6,000

3.00%

0

1 9 9 0

Institutions

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8

2 0 1 0

# of Mergers/ # of Institutions

Source: SNL Financial and FDIC.gov.

2 0 1 2

2 0 1 4

0.00%

M&A Deals as a % of Institutions

Exhibit 6: M&A Volume vs. Total Institutions

Number of Institutions

Once Texas-specific M&A headwinds subside, activity should trend upward consistent with the rest of the nation and prior trends. In 2015, nationwide M&A activity was the highest since 2008 with 284 announced transactions and a 41 percent year-over-year increase in aggregate deal value to $27 billion. The deal value increase was largely driven by five deals that accounted for 54 percent of 2015 deal value. These five deals highlight an emerging trend of large bank buyers returning to M&A, including BB&T, KeyCorp, M&T and Royal Bank of Canada. The fact that these buyers have been able to navigate the regulatory environment is significant and we expect large bank buyers to remain active in the future. The rate of consolidation as a percentage of the number of banks increased in 2015. The number of transactions equated to 4.6 percent of total institutions at the start of the year, compared to the average rate of consolidation of 3.1 percent over the last 25 years. Aggregate deal value increased for the third consecutive year; however, total consideration remains well below pre-crisis levels. Aggregate deal value averaged $66 billion per year between 2002 and 2008, whereas aggregate deal value averaged $14 billion per year between 2009 and 2015. Most large bank buyers have been on the sidelines since 2008, having to focus on increased regulatory burdens and stress tests, including the Comprehensive Capital Analysis and Review (CCAR) and the Dodd Frank Act’s Stress Test (DFAST). Pricing multiples have also steadily increased, from a median of 1.1 times tangible book value in 2011 to 1.4 times tangible book value in 2015. Buyers remain fairly disciplined on pricing, but in 2015 there was an increase in the percentage of deals announced with tangible book value earnback periods of greater than four years.

Long Term Median

Exhibit 7: Nationwide P/TBV Multiples 2.50x

2.18x 2.25x

2.10x

2.00x 1.60x 1.50x

1.17x 1.20x 1.10x 1.15x 1.22x

1.34x 1.41x

1.00x 0.50x 0.00x 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: SNL Financial.

Exhibit 8: Earnback Periods Getting Longer Percentage of Deals Since 2013 Based on Respective Earnback Period

37%

26%

27% 47% 35%

18%

37%

38%

36%

2013

2014

2015

< 3 Year Earnback

4-5 Year Earnback

> 4 Year Earnback

Scale: Buyers seek scale through acquisitions to increase efficiency and profitability; sellers look to offset increased regulatory pressures and compliance costs and to boost shareholder returns. Capital: There was only one bank IPO in Texas during 2015 and we expect the IPO market to remain challenging in 2016. Private capital remains scarce and expensive for smaller banking institutions. Growth: Partnering with larger institutions helps community banks boost growth in flat economic environments. Revenue challenges: Regulators continue to take aim at fee-based revenue streams; the “lower-forlonger” interest rate environment hurts smaller institutions that traditionally rely on spread income. Increased expenses: Necessary investments in regulatory compliance and technology put pressure on smaller banks. The pace of announced M&A transactions has slowed in Texas; however, the health of the nationwide M&A market is a good indicator that the fundamental drivers for merger activity remain in place. We expect conversations to remain frequent among buyers and sellers as banks continue to evaluate their strategic options.

Source: SNL Financial and Company SEC filings; includes transactions since 1/1/2013 with deal values

Craig R. McMahen is a managing director in the

between $50 million and $500 million.

Investment Banking Department of Keefe, Bruyette & Woods. After 23 years in New York City, he opened an office in Austin, where he leads the

As shown in Exhibit 8, 47 percent of select deals with values between $50 – $500 million in 2015 had earnback periods greater than four years versus 37 percent and 27 percent in 2013 and 2014, respectively. The tangible book value earnback period is the amount of time that it takes for the combined entity to earn back the initial tangible book value dilution resulting from an M&A transaction. Currently, investors are placing more focus on the earnings per share accretion than the earnback period.

@TEXASBANKERS

Drivers of consolidation remain, though current impediments exist Texas banking is in a period of adjustment that is stalling M&A transactions in the near-term, but the long-term drivers of M&A remain in place. Sellers will slowly adjust pricing expectations and realize the benefit of accepting buyers’ stock at lower valuations. While the bid-ask spread widened as a result of the sell-off of public Texas bank stocks, the following catalysts will continue to drive M&A:

investment banking team for the Southwest. Mike Zimmerman is a director in the Investment Banking Department of Keefe, Bruyette & Woods. Zimmerman joined KBW through the 2013 merger with Stifel and relocated to the Austin office in 2014, following seven years working in Stifel’s financial institutions group in St. Louis. Together, McMahen and. Zimmerman serve as trusted advisors to community and regional banks on buy-side and sell-side mergers & acquisitions and capital raising efforts, including IPOs, follow-on equity offerings, debt offerings and preferred stock offerings for banks and thrifts throughout Texas, Oklahoma and Louisiana.

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REGULATORY

SCRUTINY ALERT CRE lending may lead to more required capital By Lisa Getter

Be prepared to raise additional regulatory capital if your bank can’t prove to examiners that your commercial real estate concentrations are well-managed — and can also withstand an economic downturn. Regulators announced in December that they “will pay special attention to potential risks associated with CRE lending” in 2016. Banks that don’t have adequate risk management practices and capital strategies to quantify and manage CRE concentrations will likely be required “to raise additional capital to mitigate the risk associated with their CRE strategies or exposures,” regulators advised. Banks whose strategic plans call for an increase in CRE lending should stress test their portfolios to see if they have sufficient capital under severe economic scenarios. Maryann Hunter, deputy director of the Federal Reserve Board’s Division of Banking Supervision and Regulation, said even small banks should start using scenario analyses if they have concentrations. “You probably want to do some ‘what ifs,’” she told bankers attending the Federal Deposit Insurance Corporation’s community banking

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conference in April. She said banks must understand what would happen to their portfolios if values change and reserve for potential losses. Examiners will focus on risk management practices and growth strategies at banks with concentrations, whether they are in CRE or even oil and gas. If your concentrations are growing, regulators

emphasized that they want to make sure your reserves are keeping pace.

Extra scrutiny even if levels are beneath threshold The CRE warning is broad: Banks that will come under regulatory scrutiny do not need to have exceeded concentration limits. Banks must merely be contemplating an

increase in CRE loans, have already increased CRE lending or “operate in markets or loan segments with increasing growth or risk fundamentals,” regulators said. Under joint regulatory guidance issued in 2006, examiners will subject a bank to increased supervision if their total reported loans for construction, land development and other land represent 100 percent or more of the bank’s total risk-based capital, or total commercial real estate loans represent more than 300 percent of capital, and the outstanding balance of the CRE loan portfolio has increased by at least 50 percent during the prior 36 months.

Implications for acquisitions Acquisitive banks should take special notice of the concentration warning. Many potential acquisitions will also result in a crossing of the 300 percent threshold, especially if they are cash-heavy transactions and are dilutive to tangible book value. There are already rumblings that the CRE focus will result in more intense regulatory scrutiny during the M&A approval process. Look for regulators to make an example of a bank or two to send a message to the market. It is highly recommended that acquiring banks be prepared to demonstrate in their regulatory appli-

Banks with Regulatory Concentration Issues 450

Number of Banks

400

405

350 300 250

349

318

298

200 150 100 50 0 Construction Cencentration Over the Limit

CRE Concentration Approaching the Limit

cation that they have the infrastructure from a capital management and risk management perspective to manage concentration risk. Regulators emphasized in December that banks need the right strategies “to ensure capital adequacy and allowance for loan losses” that support a bank’s lending strategy and are consistent with the level of CRE risk in their portfolios. The regulators advised banks to perform “market and scenario analyses” to quantify the potential impact of changing economic conditions on asset quality, earnings and capital – in other words, forward-looking capital stress tests. Regulators noted that competitive pressures are contributing to “historically low capitalization rates and rising property values.” In a downturn, those higher initial collateral values would fall. Regulators noted that the quality of CRE portfolios remained strong, based on non-performing loans and charge-off rates. Because of those “reassuring trends” in asset-quality metrics, regulators said that many banks are increasing their concentration levels. But they are also decreasing their underwriting standards, with lessrestrictive loan covenants, extended maturities, longer interest-only payment periods and limited guarantor requirements.

Source: Invictus Consulting Group Analysis

@TEXASBANKERS

T E X A S B A N K I N G • M AY 2 0 1 6

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Why regulators are concerned The CRE levels are of utmost concern because post-mortem reviews of community banks that failed during the 2008 financial crisis showed similar concentrations — yet regulators did not act in time to save the banks. Congress and watchdogs will be monitoring how regulators react to an impending CRE crisis this time around. “With commercial real estate, we have seen concentrations growing again. This was clearly a source of problems back in the earlier part of the 2000s, leading into the financial crisis,” Hunter said at last month’s FDIC conference. “We are very committed to not getting behind the eight-ball on that very issue again.” An overlooked Government Accountability Report, which was issued last June, discussed the failure of regulators to oversee rising CRE concentrations at banks prior to the financial crisis of 2008. The 71-page report, “Lessons Learned and a Framework for Monitoring Emerging Risks and Regulatory Response,” discussed how bank supervisors embraced forward-looking supervision as a solution. It revealed that the GAO would monitor how bank supervisors monitor warning signs in the future. The GAO report offers some clues about how forward-looking bank supervision will affect banks. Regulatory staff, for instance, told the GAO that they had previously been reluctant to downgrade the management component if earnings and capital were strong, a mistake it has since realized. Examiners are now directed to use the management score in the CAMELS composite to reflect a bank’s underlying risks. Federal Reserve staff told the GAO that “the stress test is the best way to communicate to bank management that risks have built up and need attention, because it is data driven.” The December regulatory statement on CRE challenges outlined how banks can survive an economic down-

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turn, even with concentrations. The regulators advised that they expect bank boards to be involved in setting proper risk management policies and procedures. Boards of directors or the appropriate board committee must approve concentration limits and review credit risk management practices and underwriting standards.

Review growth strategies With an increased regulatory focus and, more importantly, declining gross yields on CRE loans, banks should also consider utilizing their available capital in M&A transactions, advises Invictus Chairman Kamal Mustafa. Properly identified and structured transactions can not only provide better capital yields, but they would also help present and future concentration issues. Community banks are stuck between a rock and a hard place because many banks have concentrations merely because of their geographic footprints, a factor regulators acknowledged at last month’s conference. One way out may be to acquire banks that don’t have the same concentration issues. The December guidance said that regulators may ask community banks with “inadequate risk management practices and capital strategies to develop a plan to identify, measure, monitor and manage CRE concentrations, to reduce risk tolerances in their underwriting standards, or to raise additional capital to mitigate the risk associated with their CRE strategies or exposures.” The guidance pointed out that banks that survived economic downturns did the following: • Conducted global cash flow analyses based on reasonable assumptions of rent and other items to ensure borrowers could repay their loans. • Performed stress testing of their CRE loan portfolios to quantify the impact of changing conditions on asset quality, earnings and capital. • Had lending strategies and limits for concentrations, as well as a

method to assess whether those strategies would work in different market conditions. • Gave boards adequate reports on those lending strategies so they could assess how they would change in a downturn. • Continued to monitor a borrower’s ability to service debt as loans converted from interest-only to amortizing payments, or as interest rates rose. • Implemented procedures to monitor the volatility in supply and demand for CRE during business cycles. • Maintained management information systems that gave the board and management enough information to identify, measure, monitor and manage concentration risk. • Had processes to review appraisal reports to support appropriate market value conclusions. The 2006 interagency guidance also outlined best practices for managing CRE concentrations. It stressed that boards or board committees must establish policy guidelines and an overall CRE lending strategy “regarding the level and nature of CRE exposures acceptable to the institution, including any specific commitments to particular borrowers or property types, such as multifamily housing.” Once those policies were in place, the board needed to ensure that management had the right procedures and controls to comply with the lending strategies. Regulators advised that banks include contingency plans to reduce or mitigate concentrations in case markets changed, such as using loan participations, whole loan sales and securitizations. If the contingency plan included selling or securitizing CRE loans, banks were also advised to evaluate their ability to access the secondary market. Lisa Getter is the partner in charge of communications at Invictus Consulting Group, a data-driven strategic consulting firm that specializes in M&A analytics, capital planning and stress testing.

The focus is on combating bank risk & fraud By Steven Simpson

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In 2007, no one would have predicted that regulatory pressures and risk management oversight could have increased as much as they have since the financial crisis. One major lesson learned over the past nine years: financial institutions must do a better job of predicting and halting risk and loss before it ever happens. Enter advanced analytics For decades, banks have used predictive analytics to detect and identify fraudulent activity, cyber threats and potential loan delinquencies. However, descriptive and predictive analytics uses statistical data and machine-learning techniques to identify the likelihood of future outcomes based on historical data. Unfortunately, what happened in the past is not a reliable indicator of the future. Today, the focus is on leveraging advanced analytics to forecast future events and behaviors, allowing financial institutions to conduct what-if analyses to predict the effects of potential scenarios. Advanced analytics enables financial institutions to ask critical questions around risk management (why, how and what happens next). Advanced analytics capabilities enable transparency into the challenges associated with managing various risks in bank operations, regulatory compliance, cyber security, lending, credit and so much more. By using analytics to measure, calculate, spot and predict risk, financial institutions can create a solid risk management program that keeps their institution and their customers’ information safe. Risk managers that want to greatly increase their knowledge of inherent risks impacting the bank with risk-based action are doing so by defining, understanding and effectively managing the institution’s ability to handle exposure to risk.

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Five ways advanced analytics is fueling greater risk management Action-centric dashboards: For small and mid-sized banks, identifying potential risk is a critical component to their risk management program since capital is not always available. By gathering customer data and using advanced analytics, financial institutions can interpret clean data to better identify risk factors of borrowers. This is more than just targeting customers based on credit scores and loan delinquencies or even borrowing history. Advanced analytics provides insight into those buyers who are most likely to be loyal customers for years to come. Example: Most banks have a risk management dashboard. Dashboards fuel feedback much more powerfully than a simple Excel file. Imagine being able to slice and dice the data to see overall concentrations of a particular loan type or loan amount. What if you could analyze the timing of loans renewing or if they should not renew or be repriced? Can you evaluate this easily with your simple data analysis metrics? Can you answer critical questions such as when do these loans renew so the bank can either reprice or choose to not renew? One should divide renewing loans into three segments (at least): those above the weighted-average-rate (WAR), those below WAR for unprofitable customers and those below

WAR but for profitable customers. Knowing the overall profitability or loss of the relationship is critical. Perhaps segment by collateral types or industry where concentrations are already high. Do you have the primary deposit relationship? Is this a strategic customer? Analytics answer these critical questions so you can detect red flag activity and help grow loan portfolios. Simple Excel dashboards won’t facilitate the ability to clearly view data trends — and much time is spent on the creation of such dashboards versus their automation. After identifying interesting trends or spotting potential risks monitored on the risk management dashboard, the financial institutions can dissect the data by region, branch, line of business, officer, collateral type and much more. Advanced analytics enables the financial institution to paint the real picture of customers based on behavior, trends and characteristics associated with risk. Risk reporting tools: Regulators are looking for more sophistication in risk management. Banks need a powerful, robust analytics system that delivers real-time risk combating and reporting tools with not only the ability to move through the data (dashboard functionality) provided by an underlying Data Lake technology (a storage repository that holds a vast amount of raw data in its

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native format until it is needed), but also by an advanced analytic platform that delivers statistically derived alerts and recommended actions. Halting fraud with riskbased action: Information used in risk management decisions should be comprehensive, accurate, accessible and based on high-quality data. Advanced analytics software enables management teams, auditors and examiners to analyze the bank’s customer data to gain insight into how well internal controls are operating and to identify transactions that indicate fraudulent activity or risk of future fraud. Advanced analytics also provide an effective way to be more proactive in the fight against fraud. Using indicators of fraud within the data can curb fraudulent activity faster and stop it before it has grave consequences to the financial institutions. Example: Key questions advanced analytics will help bank management uncover are: how much check fraud did the bank have last year or was there fraudulent activity; what percent was customer versus business-based? If it was a higher percent of consumer involvement, what product line was involved? To help avoid placing the wrong customer with the wrong product, what were the characteristics of such customers to avoid in the future? If fraudulent activity was performed by a small business customer or a corporate customer, perhaps the bank can generate non-interest income, improve retention and totally eliminate check fraud by having a specific customer list to promote positive pay. Providing positive pay can also give customers peace-of-mind that they will not fall victim to check fraud. Beyond simple algorithms, an advanced analytic platform will quickly identify changes in deposit behavior, check volumes, total withdrawals and other key indicators of fraud that are out of the normal routine based on standard deviation over the course of three or more months.

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Coping with regulatory reform: Many banks may not be properly measuring credit and market risk or using analytics-driven information for credit and underwriting decision-making. Analytic capabilities developed for Basel III can innovate bank offerings such as services, pricing, portfolio management and more. Consistent with Basel accords, is the bank tracking from an ALLL to an Expected Loss (EL); are you ready for CECL? Does ALLL methodology incorporate the ability to use risk rating, balance, LTV, DTI and collateral type? Dodd-Frank Act Stress Testing (DFAST) is here. Basel guidelines mandate retention of risk and transaction data for three to five years; and Sarbanes-Oxley requires firms to maintain audit work papers and required information for at least seven years. Advanced analytics can better aid in the reporting on enterprise-wide exposures. From the Sarbanes-Oxley Act to the Dodd-Frank Act, regulatory pressure is reaching new levels. Innovative financial institutions have realized that the key to optimizing their operations and meeting the regulatory pressures is maintaining an efficient and comprehensive data infrastructure. Example: According to the American Banker, risk analytics can help banks address some of the unintended consequences of regulation. For example, scenario analysis can help them better assess the impact of increased capital requirements, such as restricted lending and reduced levels of capital available to generate income, as well as the resulting shifts in their customer base and product portfolio. Identifying and developing the right skills is also essential to using risk analytics effectively. It is not just the technical and quantitative capabilities that are in short supply, it is the business knowledge needed to build meaningful data models. Financial institutions that are now leaders in credit risk were ahead of the pack in setting up teams dedicated to analytics.

Detecting cyber threats: Cyber attacks and fraud result is serious financial losses that range from recovery costs, regulatory fines and customer distrust. Today, financial institutions have the tools to better handle fraudsters and cyber criminals. Thanks to advanced analytics, financial institutions can stop cyber threats and fraud in their tracks in real time. Example: With advanced analytics, financial institutions can search for patterns in transaction data. This helps to quickly create and search for algorithms and compare records of data and source of transactions (geo location and IP addresses). Financial institutions can even create a risk scorecard to establish patterns and relationships, making non-intuitive connections between sources of data.

Connecting advanced analytics to better risk management and prevention Preservation of profits is the best cure to manage risk. Self-assess the financial institution’s current practices and ask: Does the financial institution have loyalty measures or derived retention measures? What about accurate profitability measures with risk-based weights and capital costing so that the institution is making the correct data-driven decisions?” The investment and adoption of modern risk management capabilities found in advanced analytics is an opportunity, not a burden or an expense. Advanced analytics, dashboards, modeling capabilities and high-performance risk monitoring is the key to an effective risk management program. Getting your management team united on the necessary steps to implement a program within your financial institutions should be high on your priority list. Steven Simpson is senior vice-president — financial institutions at Saggezza, a global solutions provider that develops and implements leading analytics products. He can be reached at [email protected].

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D

o you know how fast a grizzly bear can run? Could, say, Usain Bolt, the fastest human ever to run a race, outrun a grizzly bear? The answer is decidedly no; in fact, if you Google “outrun a bear,” the following is what pops up as the first search result:

“Despite rumors to the contrary, black and grizzly bears can outrun a human on ANY terrain, uphill or downhill … Try to retreat slowly.” In many ways, cyber criminals are like grizzly bears. You can’t outrun them and, unfortunately, the only thing that happens when you try to retreat slowly is they keep on coming. So that’s the bad news. The good news is found in one of my favorite maxims (applicable to cybersecurity and long walks in the woods): “When you’re running away from a bear, you don’t have to be faster than the bear, you just have to be faster than the other people running away from the bear.” Cybercrime is a business, and cyber criminals are looking for the highest rate of return on their investment of time and resources. Reducing cyber risk is therefore not a matter of being the equivalent of Usain Bolt — the fastest man alive — but rather being “faster” (harder to exploit) than most of the other potential victims that a cyber criminal might target. Although not a universal truth, if your infrastructure is harder to hack than the next guy’s, the attackers may turn their attention elsewhere. 20

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CAN YOU

OUTRUN

THE BEAR? How to avoid being caught by cyber criminals By Greg Schaffer

So, how “fast” are you? Historically, it’s been hard to measure how fast (secure) your bank really is or how fast (secure) your suppliers, partners and vendors are. But knowing the speed (security prowess) of your entire ecosystem is essential. Cybersecurity is not an individual event – it’s more like a relay race. And if one of your partners gets caught by the bear, he might trip you up and bring you down, too! Unfortunately, most cyber risk assessments have been so subjective that it has been hard to know how good everyone on your relay team truly is. Largely based on the specific skills and areas of expertise of the teams that performed the work, and typically dependent upon a single standard as a measuring stick (or no standard at all), cyber assessments have often provided a myopic view of cyber risk. And they presented only the most limited ability to assess your organization’s progress over time or compare the capabilities of partners and vendors in an apples-to-apples way.

What is a cyber risk assessment? A cyber risk assessment is a comprehensive review of your critical business functions to evaluate whether you have put in place the people, processes and technology

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necessary to protect your and your clients’ critical data (nonpublic personal information, credit card data, logins and passwords, certificates, etc.). This type of review should leverage international standards built to help critical infrastructure companies like financial institutions protect their critical assets (e.g., ISO 27001/2, COBIT 5, NIST 800-53). An effective cyber risk assessment will enable your executive leadership to understand your institution’s cybersecurity capabilities and right-size your team and tools to meet the threats, vulnerabilities and risks facing your business.

Defining miles per hour As a former assistant secretary for cybersecurity with the Department of Homeland Security, I saw firsthand the difficulty of identifying common elements of cyber risk and solid metrics to measure strengths and weaknesses in cybersecurity, both in the public and private sectors. We desperately needed a yardstick against which the “speed” (security prowess) of any entity could be reliably, consistently and repeatedly measured. Thankfully, I also saw the incredible, ongoing public-private partnership efforts in the financial services sector as many financial

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We desperately needed a yardstick against which the “speed” (security prowess) of any entity could be reliably, consistently and repeatedly measured. institutions partnered with the National Institute for Standards and Technology (NIST) to build the NIST Framework for Improving Critical Infrastructure Cybersecurity (available at: www.nist.gov/cyberframework/). To continue the analogy, the NIST Cybersecurity Framework has finally introduced a universal yardstick for measuring “miles per hour,” giving companies a common lexicon and methodology for evaluating identifiable, discrete areas (functions, categories and subcategories) that apply across all enterprises. By defining these identifiable, discrete areas (e.g. asset management, governance, risk management strategy, etc.) as well as specific best practices tied to those areas (do you have an automated inventory of your physical assets and software and do you have a risk management strategy?) the framework outlines a common set of expectations for financial institutions and other critical infrastructure companies. It also acts as a “Rosetta Stone” for the plethora of international cybersecurity standards, allowing entities that have historically used different measuring sticks to be directly compared.

How fast is my bank? So, now that “miles per hour” has been defined, what do you do? You find out if your organization is slow, fast or in the middle somewhere. Now that the NIST Framework is in place, assessment firms should be able to identify, at a granular level, your organization’s strengths, weaknesses and areas for improvement across the five NIST Cybersecurity Framework Functions (Identify, Protect, Detect, Respond and Recover). They should be able to do this regardless of what security standard your organization used to design its program or how many different organizations using divergent standards were merged together to create what you have today. This type of detailed and quantifiable information allows senior executives and board members to make

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measurable, tangible, risk-based decisions about cyber risk just like they do with other operational risk areas today.

Assess your relay team But it does not end there. Since the Framework can be used as a yardstick to measure any organization’s execution against all of the most commonly used standards, you should also be able to assess and compare all of the members of your relay team. Assessment firms should be able to compare how you rate for each of the NIST Framework functions, categories and subcategories and how your partners and vendors rate. This gives you the ability to oversee your lines of business, products, partners and vendors using the same requirements, expectations and methodology. For the first time you can assess the speed (security prowess) of your entire ecosystem in a consistent, repeatable way. And you know the best part of the story? Now that there is a common framework, firms can leverage the capabilities of today’s digital, on-demand technologies to assess how “fast” (secure) you are for far less than they ever have before. You can still pay $200,000, $250,000 or $300,000 for an assessment if you want to do so, but why not leverage today’s technology to execute a detailed, repeatable NIST Framework-based assessment for a fraction of the cost and use the capital you save to procure the tools, technology and people you need to keep your systems and data safe and safely ahead of your competitors (and the bears)? Greg Schaffer is CEO and founder of First72 Cyber (www.first72cyber.com), a risk management and analytics solution company focused on the intersection of cybersecurity risk and vendor risk management. Schaffer also served as assistant secretary for Cybersecurity and Communications at the U.S. Department of Homeland Security, where he oversaw its cybersecurity responsibilities across the .gov domain, public private partnerships, information sharing and government-wide incident response.

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INDUSTRYNEWS Broadway Bank Care Corps increases good works

Wimberley market manager LuAnn Long (Left) and Dripping Springs personal banker Elizabeth Nicholson clear debris from a home that was lost along the Blanco River after the devastating Memorial Day 2015 floods in Wimberley.

Passionately committed to serving communities through good works, the Broadway Bank Care Corps proudly lives out the founders’ 75year mission of giving back to those

in need. Care Corps actively seeks out ways to help families and individuals throughout the many communities where they live and work. In 2015, Care Corps had an

even greater reach and impact than in previous years. “Being well-organized and committed to doing good really can make a difference. As soon as news broke of the devastating floods in Wimberley, our Care Corps volunteers stepped in to clear debris and offer relief,” said Jim Goudge, Broadway Bank chairman and CEO. Different crews of Care Corps volunteers kept returning for several weekends during the summer led by Broadway Bank Wimberley Market Manager LuAnn Long. Broadway Bank customers were among the displaced residents they helped after the flood. In 2015, 63 percent of Broadway Bank employees worked together to benefit 138 charitable projects. Altogether, that’s 13,561 hours these employees donated of their valuable time, at a dollar value of $312,852.27. Leveraging the impact of the volunteer hours, Broadway Bank corporate contributions were more than $652,000 through approximately 668 separate donations to 454 local community organizations. These donations benefit a great variety of causes, ranging from healthcare organizations, school districts, education and youth programs, to civic organizations, local arts programs, social services, community enrichment organizations and many more. This year, Broadway Bank celebrates 75 Years of Good, honoring the legacy of giving back that all began in 1941 when Col. Charles E. Cheever Sr. and Elizabeth “Betty” Cheever opened the doors of Broadway Bank. “With a continued gratitude for the customers and communities that have helped us remain stable and strong, our Care Corps takes the lead in giving back and we look forward to another 75 years of being here for see “Broadway Bank,” p. 30

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IBC Bank and Commerce Bank make record United Way donation IBC Bank and Commerce Bank, together with employees across Texas and Oklahoma, donated more than $375,000 to United Way in 2015. The donation will fund much-needed social services throughout the 87 communities the banks serve. “This is a perfect example of IBC and Commerce Banks’ ‘Do More’ philosophy,” said International Bancshares President, Chairman of the Board and CEO Dennis Nixon. “We not only do business across Oklahoma and Texas, but we also live in the towns we serve and understand the needs of the communities. Our customers are our neighbors and we have a stake in their success just like they have a stake in ours. This is how strong, compassionate communities are built, through the contributions of the people who live in them. I couldn’t be more proud of my colleagues for their generosity and commitment to their neighbors.” Seventy United Way agencies, such as the American Red Cross, Big Brothers Big Sisters, Boys & Girls Clubs and the Salvation Army, will use the funds to provide meals, counseling, safe recreational activities, shelter and more to those who might otherwise go without these essential services. United Way of Texas President and CEO Adrianna Cuéllar Rojas called the IBC and Commerce Bank efforts inspirational. “These are the kinds of donations that can trigger community-wide change,” she said. “IBC and Commerce Bank are well-respected members of the communities they serve. They make it possible for our agencies to change the lives of the people we serve throughout Texas and Oklahoma and inspire them to succeed.”

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Stronger Bonds. To learn more about stronger bonds insured by National, visit nationalpfg.com or call 914-765-3333.

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INDUSTRYNEWS Austin Bank recognized eight years in a row with award

Present at the 2016 Best Companies to Work for in Texas ceremony are front row, left to right, Pat Davis, Maebeth Cotton, Shaunna Nolen, Lisa McCoy and Kelly Tunnell. Back row, left to right, are Keenan Martin, Natalie Lynch, Patty Steelman and Jeff Austin III.

Austin Bank was recently named one of the 2016 Best Companies to Work for in Texas. The bank was recognized and honored March 29 at the Texas Association of Business Awards dinner in Austin. This is the eighth consecutive year for Austin Bank to receive this award. Companies from across the state entered the two-part process to determine the Best Companies to Work for in Texas. The 2016 list is comprised of 100 companies that benefit the state’s economy, its workforce and businesses. Austin Bank ranked #8 in the medium-sized company category. “Austin Bank is especially proud to receive this honor because it came from the input of our employees,” said Jeff Austin III, vice chairman of the board. “The success of our bank has been built by a wonderful team of dedicated, professional employees. Our employees are the face of Austin Bank not only within the bank, going the extra mile to serve our customers, but also out in our communities helping others. To support our employees and their vital contributions, it is our goal to provide the best possible workplace environment,” said Austin. Austin Bank is a community bank with an excess of $1.5 billion in assets. Headquartered in Jacksonville, Austin Bank serves the needs of families and businesses with more than 450 employees in 31 locations, 22 cities and 11 counties. During 2015, Austin Bank employees gave countless hours of volunteer service, and the bank contributed more than $400,000 in direct support of local education, the arts, literacy, health and housing needs.

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We Wish to Welcome and Thank Our Newest Associate Members

Kershner & Co. 431 Midsummer Dr. Gaithersburg, MD 20878-5227 Phone: 301-258-7475 [email protected] www.kershnerandco.com Kershner & Co. is a nationally recognized executive search firm that specializes in the financial services sector. With a focus on community banking, we work in partnership with our clients to attract, assess and recruit C-Suite executives and directors, always maintaining the highest level of ethical standards and confidentiality. BMO Harris Bank, N.A. 770 N. Water St. (NW18) Milwaukee, WI 53202-0002 Phone: 414-765-7995 [email protected] http://commercial.bmoharris.com/ industry-expertise/ correspondent-banking/ BMO Harris Bank Correspondent Banking combines proven industry expertise with the committed resources of a leading global financial institution. We provide our more than 300 clients with a full suite of services tailored for community financial institutions, including credit products, treasury management,

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Alston & Bird LLP 1201 W. Peachtree St. NE, Suite 4900 Atlanta, GA 30309-3466 Phone: 214-922-3505 [email protected] www.alston.com Alston & Bird is a leading law firm whose core practice areas are corporate, tax, intellectual property and complex litigation, with national industry focuses that include financial services, technology, health care, manufacturing, life sciences and energy. The firm has built a reputation as one of the country’s best employers, appearing on Fortune magazine’s ranking of the “100 Best Companies to Work For” 17 consecutive years. The firm has offices in the U.S., Beijing and Brussels.

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safekeeping, international banking (letters of credit, foreign exchange, foreign item processing) and interest rate swaps. We work to understand our clients’ goals and deliver solutions to benefit their organization and clients.

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RR Donnelley 1800 Lakeway Dr., Suite 118 Lewisville, TX 75057-6438 Phone: 716-553-4999 [email protected] www.rrdonnelley.com For more than 150 years, RR Donnelley has been working side-byside with customers to craft innovative, award-winning solutions for virtually any print or print-related need—from personal checks for your customers to regulatory documents, direct mail, commercial print and more. Banks choose RR Donnelley for an unmatched array of products, services and solutions that help them grow their business.

Power Temp Systems 914 Gemini St. Houston, TX 77058-2704 Phone: 281-286-3303 [email protected] www.powertemp.com Power Temp Systems Inc. is the original and largest supplier of portable power distribution products. Since 1991, we’ve developed a complete line of portable electrical products that use the latest technology and are engineered to all NEC, MSHA, OSHA and NEMA safety standards. Our products allow you to get your locations back up and running during a power outage safely and quickly. Be open for business sooner and protect your bottom line with a solution from Power Temp Systems.

BrandProtect 5090 Explorer Dr. Mississauga, ON L4W 4T9 CANADA Phone: 866-721-3725 gmancusi-ungaro@ brandprotect.com www.brandprotect.com In a world where the enterprise attack surface has extended far beyond the traditional security boundary, BrandProtect™ delivers critical cyber security intelligence and mitigation for online activity that directly threatens an institution’s executives, employees, IP, physical locations and more. BrandProtect provides security operations with something they do not have today: Protection Beyond the Perimeter™. BrandProtect provides proprietary threat detection technologies backed by military-grade threat analysts and

ServisFirst Bank 850 Shades Creek Parkway, Suite 200 Birmingham, AL 35209-4463 Phone: 205-423-2717 [email protected] www.servisfirstbank.com ServisFirst is a full-service commercial bank focused on commercial banking, correspondent banking, cash management, private banking and the professional consumer market, emphasizing competitive products, state-of-the-art technology and a focus on quality service. Recently, the bank announced its benchmark of success of accumulating over $5.1 billion in assets. The bank offers sophisticated cash management products, Internet banking, home mortgage lending, remote deposit express banking and highly competitive rates.

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INDUSTRYNEWS Citizens National to acquire Kilgore National Citizens National Bank in Henderson recently announced that it has entered into an agreement to acquire Kilgore National Bank, a Kilgorebased community bank with total assets of $83 million as of Dec. 31. Citizens National Bank, established in 1930, is a $1.7 billion community bank that serves East and Central Texas with its network of 28 branches. Established in 2000, Kilgore National Bank has grown to three full-service locations serving the East Texas communities of Kilgore, Tyler and Troup. Brad Tidwell, president and CEO of Citizens National Bank, said, “Citizens National Bank is proud to partner with Kilgore National Bank and its out-

standing team of bankers. We are very excited about the opportunity to serve the customers of KNB and bring to them the CNB experience.” Larry Haire, president and CEO of Kilgore National Bank, added, “Kilgore National Bank was created as a de novo charter in the latter part of 2000. Kilgore National Bank is truly a locally owned community bank with 154 local investors including Citizens National Bank. Our goal then and now is to provide the highest level of personalized customer service along with the best up-to-date technology for everyone’s convenience.” Subject to regulatory approval, the transaction is expected to close during the third quarter of this year.

Bill White retires from Finance Commission

TBA President and CEO Eric Sandberg offers a toast to Barbara and Bill White.

The Texas Bankers Association hosted a reception April 14 for Bill White, who recently retired as chairman of the Finance Commission of Texas. Present at the event were bankers, representatives of financial services trade associations and employees of the agencies the Finance Commission oversees. Also honoring White were Department of Banking Commissioner Charles Cooper, Consumer Credit Commissioner Leslie Pettijohn and Commissioner Caroline Jones of the Texas Department of Savings and Mortgage Lending.

Message from the President continued from page 4 This case law development has the potential to allow for the eventual creation of an oversight board to supervise the actions and budget of the CFPB — something we applaud and have encouraged since its creation. Of course, the best remedy yet would be to return jurisdiction over consumer protection at banking institutions to the supervisory agencies where it worked fine prior to the Dodd-Frank Act.

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Regulatory burden continues to restrict mortgage lending Eighty-six percent of the typical bank’s mortgage loans made last year were “qualified mortgages,” according to the American Bankers Association’s 23rd annual Real Estate Lending Survey. Despite an increase in non-QM lending, the survey results revealed that 72 percent of respondents expect the Consumer Financial Protection Bureau’s mortgage lending rules will continue to cause a reduction in credit availability. The results, released last month, show that more than a quarter are restricting lending to within QM and about half are making non-QM loans only to targeted markets or with other restrictions. The most likely reason for a mortgage loan not meeting QM

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standards was high debt-to-income levels followed by lack of required documentation. “While banks continue to grapple with the overwhelming amount of new regulation in the mortgage space, we’re pleased that the market has shown some resiliency and adjustment,” said Robert Davis, ABA executive vice president. “Despite regulatory and economic headwinds, community banks have proven to be strongly committed to first-time homebuyers.” The survey also revealed some positive results. The 159 respondents, 68 percent with assets less than $1 billion, reported the highest percentage of loans to first-time

homebuyers in the survey’s 23-year history. Foreclosure rates at surveyed banks continued to drop from 0.57 percent in 2014 to 0.37 percent in 2015, while the average delinquency rate for single family homes decreased from 1.76 percent to 1.27 percent. The 30-year fixed-rate mortgage remains dominant in bank lending, holding steady at 47.4 percent of all loans in 2015 compared to 50.5 percent in 2014. According to the survey, bankers are most concerned about increased regulatory burden, including TRID and other compliance concerns, followed by economic uncertainty and the interest rate environment.

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INDUSTRYNEWS Austin Bank plays host to Jeb Hensarling Chairman Jeb Hensarling of the House Financial Services Committee visited Austin Bank in Jacksonville in April to hear first-hand from customers and bank employees how the Dodd-Frank Act has negatively impacted the community. “The undeniable truth is the economy still isn’t working like it could and should for East Texans,” Hensarling said, noting that “many remain stuck in the slowest and weakest economic recovery of their lifetimes.” “The climate of uncertainty created by these excessive regulations is harming our economy and destroying opportunities for growth,” he added. Local real estate agent Mike McEwen told Hensarling that Dodd-

Frank implemented procedures that have complicated the home purchase process from beginning to end — creating frustration for the buyer, lender, real estate professionals and the companies that conduct real estate closings. He also told Hensarling that DoddFrank has made achieving the American dream of homeownership a greater obstacle. “This entire piece of legislation needs to be reevaluated with the goals of keeping the home buying process above-board and making the purchase of a home a more achievable objective for those who want to live the American dream,” McEwen said. Hensarling responded that he is

Chairman Jeb Hensarling (top right) listens to Austin Bank employees and customers discuss the Dodd-Frank Act.

working to develop legislation “that will bring relief to hardworking Americans weighed down by their own government.” “In short,” he said, “it will enable banks to provide the financial resources and opportunity East Texans need to achieve their version of the American dream.” The hour and a half meeting included insight from the Austin Bank team. For example, Crystal Bateman and Brenda Williams showed the congressman a stack of disclosures used before TRID and a much larger stack after TRID.

Broadway Bank continued from page 24

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good,” said Jeannette Flores Westbrook, senior vice president Broadway Bank community reinvestment manager. Flores Westbrook also leads the Care Corps, which has grown into a well-recognized organization in all the communities where Broadway Bank operates. Scholarships of $2,000 each were awarded to five students currently attending local universities. Through the Broadway Bank Stuff The Bus program, employees collected 2,724 pounds of school supplies and more than $4,000 in monetary donations for local children. Our employee mentors worked with at-risk youth one-on-one through the Big Brothers Big Sisters program and the San Antonio Youth Literacy Reading Buddy Program.

Legend Bank celebrates opening of Bowie Banking Center

Legend Bank held a ribbon cutting April 21 to celebrate the grand opening of the new Bowie Banking Center at 101 W. Tarrant. The beautifully designed facility includes historical features highlighting the community’s heritage, as well as new, state-of-the-art functionality. The Bowie Banking Center building is reminiscent of banking in the early 1900s, when Legend Bank was founded as First National Bank of Bowie. A classic teller station, metal ceiling tiles, hardwood and mosaic floors will give customers a picture of banking from over 125 years ago.

TBA calendar of events Ma y 4-6

132nd Annual Convention, Grapevine

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TBA Board member orientation, Austin

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TBA Executive Committee meeting, Austin

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TBA Board of Directors meeting, Austin

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2016 Texas Tour, McAllen, Corpus Christi and Victoria

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2016 Texas Tour, San Angelo, Abilene and Midland

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2016 Texas Tour, Lubbuck, Amarillo and Fort Worth

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2016 Texas Tour, Dallas, Sugar Land and The Woodlands

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2016 Texas Tour, Lufkin and Kilgore

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2016 Texas Tour, San Antonio

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2016 Texas Tour, Waco

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2016 Texas Tour, Austin

A u gu s t 24

2016 Texas Tour, El Paso

@TEXASBANKERS

T E X A S B A N K I N G • M AY 2 0 1 6

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INDUSTRYNEWS Internet access is key factor in financial inclusion Internet access is now the dominant factor in financial inclusion, overtaking other variables such as race or education levels in determining whether someone participates in the traditional banking system, according to BBVA Compass economists. Financial inclusion is a key measure in development economics. Policymakers have tried to guarantee that the most vulnerable groups in society have fair and equitable access to financial services by lowering barriers to participation, increasing financial literacy, eliminating discriminatory practices and improving the regulatory landscape. But the results of those efforts have been mixed, said BBVA Compass

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Chief Economist Nathaniel Karp and Senior Economist Boyd Nash-Stacey, with the U.S. ranking 23 out of 38 high-income nations in the percentage of people with a bank account. “Our research at BBVA Compass has found that giving Internet access to isolated families has the potential to increase the number of individuals with a bank account by 10 percent,” they said. “While race and education levels are still major factors in determining financial inclusion, Internet access is what matters most in a fastmoving and digital economy.” Their findings are based on exhaustive research they conducted in the development of their Financial Inclusion Metropolitan Index. The

FIMI is a multi-dimensional index that gauges the financial inclusion levels in more than 250 cities. Karp and Nash-Stacey said addressing the cost of Internet access is paramount. “Broadband in the U.S. is among the most expensive in the developed world, a stark irony considering it is the birthplace of the Internet,” they said. “In fact, the cost in the U.S. is almost twice as that in Finland, Denmark and Sweden.” Karp and Nash-Stacey discussed various options for increasing financial inclusion, including by lowering the price of Internet access through broadband subsidies and by encouraging more collaboration between different industries.

TBA PROFESSIONAL DEVELOPMENT TBA Schools & Conferences Real Estate Lending School SCHOOLS BSA/AML Compliance School Sept. 12-14, Austin June 13-15, San Antonio CONFERENCES Compliance Management CFO Conference School June 8-10, Lost Pines Aug. 8-9, Austin

Bank Director School Aug. 25-27, Richardson

May 2016 Commercial Loan Documentation Webinar

Senior Management Summit

July 26-27, Farmers Branch

HR & Operations Aug. 17-19, San Antonio

Marketing Sept. 21-23, San Antonio

July 13-15, San Antonio

Letters of Credit Webinar 17 1:30-3:30 p.m.

Certified Banking Security 3 1:30-3:30 p.m. (Part 1) Manager 4 1:30-3:30 p.m. (Part 2) 17-18 San Antonio

Managing in the Middle Webinar

Financial Literacy Summit

Call Report Basics Webinar

HR Webinar Series Webinar Seriers 3 1:30-3:30 p.m. (HR Compliance) 24 1:30-3:30 p.m. (HR Audit)

Untangling the Web of Fee Disclosures Webinar

23 1:30-3:30 p.m. 7 1:30-3:30 p.m. (Introduction) Check Handling Do’s & Don’ts Same Day ACH June 6 1:30-3:30 p.m. Webinar (Operational Schedules) Webinar 6 1:30-3:30 p.m. 8 1:30-3:30 p.m. June 13 1:30-3:30 p.m. Small Business Lending (Lending Schedules) Mobile Threats & Best 5 1:30-3:30 p.m.

Webinar

Cross-Channel Risk

9 1:30-3:30 p.m. (Part 1) Management 16 1:30-3:30 p.m. (Part 2) 25-26 Dallas

CRA Review & Update Webinar 10 1:30-3:30 p.m.

ACH Operations Webinar

10 Must-Have Customer Service Skills Webinar 25 1:30-3:30 p.m.

Information Security Basics

11 1:30-3:30 p.m. (Part 1) Webinar 19 1:30-3:30 p.m. (Part 2) 26 1:30-3:30 p.m. 24 1:30-3:30 p.m. (Part 3) New Overtime Rules

Dissection of Malware Webinar 12 1:30-3:30 p.m.

Advanced Cash Flow Analysis Webinar 13 1:30-3:30 p.m. (CRE) 20 1:30-3:30 p.m. (Global) All webinars are Central Time

Webinar 27 1:30-3:30 p.m.

Wowing Your New Hire Webinar 31 1:30-3:30 p.m.

Practices Webinar

Advanced Loan Documentation Webinar 1 1:30-3:30 p.m.

May 2016 Analyzing Financial Statements 2 16 Weeks

General Accounting 2 16 Weeks

Consumer Lending 9 16 Weeks

Economics for Bankers 9 16 Weeks

Law and Banking: Principles 9 16 Weeks

Principles of Banking 9 16 Weeks

Commercial Lending

9 1:30-3:30 p.m.

16 12 Weeks

New Accounts in Texas

June 2016

13 McAllen 14 San Antonio 15 Waco 16 Houston

The Banking Industry

27 Odessa 28 Abilene 29 Arlington 30 Tyler

The Top 10 Mistakes Webinar 14 1:30-3:30 p.m. (Financial Statements) 16 1:30-3:30 p.m. (Appraisals)

Certified Banking Security Technology Professional 14-15 Arlington

June 2016

All featured ABA courses are facilitated online courses. Course lengths vary from five to 16 weeks and are noted for each course. For full descriptions and a list of self-paced online courses, please visit our website at www.texasbankers.com. Email [email protected] with questions.

Accounting Essentials Webinar 17 1:30-3:30 p.m. (Bank Accounting)

6 4 Weeks

General Accounting 6 16 Weeks

Managing Funds, Liquidity & Capital 6 6 Weeks

Analyzing Bank Performance 20 7 Weeks

The Banking Industry 20 4 Weeks

CFTA Review 20 12 Weeks

Introduction to Trust Products & Services 20 5 Weeks

July 2016 The Banking Industry 5 4 Weeks

Banks Lines of Business 5 5 Weeks

Consumer Lending 11 16 Weeks

Economics for Bankers 11 16 Weeks

@TEXASBANKERS

T E X A S B A N K I N G • M AY 2 0 1 6

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PARTNERFOCUS Acquisition anyone? BY STEPHEN NIKITAS When it comes to help with managing money, there’s a lot of competition. Unfortunately, many financial institutions rely on serendipity when it comes to customer acquisition. However, you shouldn’t take a “maybe” approach to customer acquisition. Instead, be strategic and aggressive when it comes to growing your customer portfolio.

Promote checking accounts When acquiring new customers, you should always promote new checking accounts. Checking accounts often appeal to those who are new in their careers or have recently moved into the area. They may also appeal to consumers who are generally dissatisfied

with their current financial institution and are seeking a new relationship. A checking account provides approximately $268 a year in revenue to a bank. It also opens the door to those new accountholders acquiring more products and services as they grow in their relationship with the bank. Take the time to target accountholders with whom you have a likelihood of establishing strong relationships with multiple product offers to gain strong share of wallet.

Make doing business convenient Branch locations still play a large role in the banking relationship. Be sure to include messaging about the convenience of banking with you — whether

it is access through a branch, ATM or digital banking options. A consistent, multichannel approach works best when marketing to prospective customers.

Don’t forget the offer Finally, don’t forget to make an attractive offer when promoting a checking account. Many financial institutions are actively targeting new checking customers. In some cases, the offers are rich — as high as $500. Don’t let this intimidate you. 800-351-3843 [email protected] harlandclarke.com/MarketingServices Stephen Nikitas is senior strategy director for Harland Clarke.

Fiduciaries examine ‘in-house’ prime money market fund alternatives BY PAUL RICE On Oct. 14, long-looming SEC reforms to Rule 2a-7, governing Institutional Money Market Funds, are expected to take effect. While several fund companies have already adjusted their offerings, the remainder will be forced to comply with rules that, for Institutional Prime portfolios, will likely change both how these products are used and who will be using them. This is due to the elimination of Constant Net Asset Values (cNAVs) of $1 per share. Instead, share prices will become Variable (vNAVs) and begin to “float” with share prices calculated to 1/100th of one percent. Of greater concern are the requirements surrounding the liquidity levels of an Institutional Prime fund. Should the liquidity levels of a fund of this

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type drop below prescribed levels, boards of the funds are required to consider, or even take action, including requiring payments of up to 2 percent before redeeming shares or suspending redemptions for up to 10 days altogether. As a result of these concerns, many banks are seeking a suitable replacement, including the possibility of recasting a familiar, time-tested product, the deposit. This is not just your basic deposit that limits insurance to $250,000, requires collateralization for certain client types and ultimately proves to be expensive money for the bank. These are deposits through registry deposit programs such as TBA’s endorsed ANOVAFunds that can

extend FDIC Insurance to $30+ million, eliminate collateralization requirements and offer yields historically exceeding Government and Treasury Institutional Money Market Funds. ANOVAFunds is available standalone or can be linked with ANOVA’s Wholesale Funding Program into a fully functioning Reciprocal Exchange Deposits Programsm offering low-cost, stable deposits as well as a safe, liquid investment alternative for trust departments, large retail depositors, public sector and business clients. 888-266-8293, extension 6604 [email protected] www.anovafinancial.com Paul Rice, ANOVA Financial, has nearly 29 years of experience in the liquidity management industry.

100+ ENDORSED PRODUCTS AND SERVICES The TBASCO Board of Directors grants endorsement to select providers after a thorough vetting process has been completed by TBASCO staff. With TBASCO’s reputation for integrity and thorough due diligence, banks can trust TBA endorsed solutions.

Contact Wanda Stevens at 800-462-7295 [email protected] | www.texasbankers.com/tbasco

COMMUNITY BANKER SPOTLIGHT

50 years of building relationships KENNETHTURNER EXECUTIVE VICE PRESIDENT, STATE BANK OF JEWETT

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It’s safe to say relationships have been a big reason why Kenneth Turner has spent his entire 50-year banking career at the State Bank of Jewett. Turner, executive vice president, State Bank of Jewett, grew up in

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Donie and didn’t know many people in Jewett, a town of roughly 1,000 located in Leon County, before he started working at the bank. A 1963 graduate of Sam Houston State University, Turner was working odd jobs in Donie after graduation

but had yet to identify a career. “No sir, I didn’t even have a clue,” Turner says, when asked if he ever thought he’d be a banker. While he didn’t have a clue he’d end up a banker, what Turner did have was a friend, Dr. J. I. Dunn, who

was one of the directors of the State Bank of Jewett. “He asked me one day, ‘how’d you like to go work in the bank?’” Turner was hesitant at first because of his lack of relationships in Jewett but he agreed to take the job. Turner’s business administration degree and recommendation from Dr. Dunn were enough to convince the State Bank of Jewett to give him a shot. Turner remembers walking up to the bank with his suit and tie on the morning of Jan. 2, 1966 — his first day of work at the bank. He kept thinking, “What on earth am I doing here? I don’t know anybody.” “When I left at the end of the day and made that same walk, I knew I was going to stay and I’ve been here ever since. They were so nice and made me feel comfortable. They made me feel like I was needed there to help them and sure enough that’s what happened,” Turner says of the Oden and Hinton families who ran the bank.

Banking in Jewett Turner started off filing checks so he could see every name and put a face to the name of those customers. “When a customer came in, I wanted

to be able to call them by their first name,” Turner explains. “It wasn’t long until I had that down.” He estimates the bank had $2 million in assets when he started filing those checks in ‘66. When Alliance Bank Central Texas purchased State Bank of Jewett in 2007, the bank had $40 million in assets; Turner says the bank has grown more since then. After the 2007 merger, Turner was convinced to stay even though he had, at the time, made up his mind to go work his cattle ranch. “They said, ‘You’ve been running the bank; we’re not going to bother you. Continue to run the bank like you’ve always run it.’ It was a strong bank when they acquired it,” Turner says. Turner had a prior relationship with the people at Alliance Bank Central Texas and decided that they were people he’d like to be associated with. “I did stay and I’m glad I did. It’s been a good situation for them and me, too. Mostly for me,” he says with a hint of self-deprecating humor. On a sincerer note, Turner says, “I can truly tell you that working here in the bank, there’s never a day I’ve hated to come to work.”

Early life in Donie OPPOSITE PAGE LEFT TO RIGHT: 1 Turner’s grandson, Aidan Turner, son, Trent Turner, vice president of The Donie Bank, and grandson, Everleigh Turner, pose with Ken after a successful hunt. 2 Family is very important to Turner.

Turner’s daughter Kristi Clawson, grandson, Brady Clawson, and wife, Sandra Turner, attend a baseball game. 3 Alliance Bank Central Texas officers Todd

Moore (left), president and CEO, and Eric Shero (right), executive vice president and COO,

convinced Turner to continue his banking career. 4 The Oden and Hinton families made Turner feel at home and needed when he first began working at

the State Bank of Jewett. 5 Dr. J. I. Dunn, former

director, State Bank of Jewett, helped Turner land his job at the bank. Dr. Dunn and Turner are

pictured here at a 1986 open house. 6 Ken Turner

has worked at State Bank of Jewett since 1966.

@TEXASBANKERS

Turner experienced adversity growing up in Donie; his father died when Turner was 7 years old. “We knew if things were going to get better for us, we had to work,” Turner says of trying to make ends meet between himself, his mother and three older brothers. “So that’s what we did.” Turner’s mother cooked lunch at the local school. He and his brothers worked on farms and cattle ranches while they weren’t in school themselves. During the summer while he was in high school and college, Turner worked as a watermelon stacker. He could make $100 a day, following the watermelon harvesting season from the Valley all the way up into Oklahoma.

Hard work led to noteworthy accomplishments for the Turner family. “All four of us brothers graduated and got degrees,” Turner says with pride.

Life outside of banking Turner and his wife, Sandra, have been married for 50 years as of April 23. He says he couldn’t ask for a better partner. “Sandra was making twice the money I was as a flight attendant for American Airlines when we got married,” Turner points out. “She is semi-retired now after being in the real estate business.” They have a son and a daughter — Kristi and Trent. Kristi lives in Spring and is a flight attendant like her mother was at one point. Trent lives in Jewett and runs The Donie Bank, also owned by Alliance Bank Central Texas. Turner’s three grandchildren are his pride and joy: “If my grandchildren are playing ball, wherever they’re at I’m going to be there,” he says. “Whatever the grandchildren want to be involved in, that’s what I’m doing, too.” Whether it’s the cattle business, hunting, fishing or spending time with his grandchildren, Turner keeps himself busy when he’s not at the bank. One of his keys to success has been to leave the business of the bank at the bank at the end of the day.

What is your favorite book? The Bible Who is your favorite U.S. President? Ronald Reagan Who are your heroes? My mother, my three brothers, the Odens and Hintons from the bank and Dr. J. I. Dunn. What are your favorite sports teams? The Astros, Rangers, Texans and Cowboys. I also like to attend rodeos.

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DONNYPALMER TBA MEMBER RELATIONS OFFICER BANKER TO BANKER

Texas Republic Bank celebrates 125th anniversary

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Texas Republic Bank in Frisco recently marked 125 years of service with a reception and ribbon cutting at their new facility in Frisco. TBA Member Relations Officer Zach Malone and I attended the event, which was popular with customers and community leaders. While there are 25-plus other banks operating in Frisco, Texas Republic Bank is the only bank chartered in this fast-growing community. The bank originated in 1891 in Quanah in Hardeman County. The original charter was Quanah National Bank until 1910 when it merged with Citizens National Bank. In 1917, the combined banks became Security State Bank of Quanah and later Security National Bank of Quanah in 1923. Do I have you confused at this point? Finally, in 2001, TXRB Holding acquired the bank and branched into Frisco under the Texas Republic Bank banner. In 2005, the charter was moved to Frisco and, in 2009, CEO David Baty and Tim Cantrell acquired control of the institution. Many of the employees are shareholders so there is a great community feel among the staff. The Quanah location does business as Security Bank, a division of Texas Republic Bank. Hardeman County borders Oklahoma to the north, and the name Quanah is derived from Comanche Indian chief Quanah

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Donny Palmer (center) presents Texas Republic Bank CEO David Baty (right) with a TBA proclamation honoring their 125th anniversary. At left is Mike Simmons of the Frisco Chamber of Commerce.

Parker. Over the centuries, the area was inhabited by the Lipan Apaches, Wichita, Kiowa and Comanche Indian tribes.

Welcome new member TBA is proud to welcome this new member to our Texas Banking family:

Trinity Bank, N.A. Jeffrey M. Harp Chairman, President & CEO 3500 W. Vickery Blvd. Fort Worth, TX 76107-5618 Phone: 817-763-9966 www.trinitybk.com

Quanah was slow to develop even after the Fort Worth and Denver City Railway surveyed the town in 1884. The first settler was W.J. Jones and over time more and more ranchers and farmers were attracted by the cheap price of land. Prior to the Civil War, there were only a few buffalo hunters and ranchers that braved the isolation of the country due to the constant threat of Indian attacks. One of the main lines of business in the early days was cattle rustling. In time, other railways came through the area and Quanah became a major hub for cattle drives on the Dodge City Trail. Farming became prominent and for quite a while Hardeman County was the cotton capital of the state. This all began to change in the 20s and 30s due to droughts and crop failures. Oil was discovered during WWII, so many cash-poor farmers were able to pull out of the hazards of farming, which helped the overall economy. Wheat production flourished and the farming industry slowly recovered. Needless to say, the two markets are vastly different but this allows for diversification, which is always good for an institution. I have no doubt the bank will continue to serve its two markets as the enthusiasm we witnessed in Frisco was very positive. We wish David and his staff the very best as they prosper and expand in the future. [email protected]

JOHNHEASLEY TBA GENERAL COUNSEL YO U R A DV O C AT E

Would a President Sanders be able to break up the big banks?

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I first met Bernie Sanders in 1992. He had just been elected as the congressman from Vermont and was appointed to serve on the House Banking Committee where I worked. He was an amiable man and had the look and demeanor of an absentminded professor. Whenever he spoke at committee hearings he always talked about fighting for the needs of the working class in Vermont. His advocacy was a mild version of the class struggle. The now-Sen. Sanders was the last person I would have thought would be a contender for the nomination of the Democratic Party. One year ago, Hillary Clinton led Sanders in the polls by a margin of 75 percent to 15 percent. The fire-breathing Democratic Socialist is now winning primaries and is within striking distance of Secretary Clinton. His loss in New York will not cause him to back off. He is counting on young, white voters to help him in states like Indiana and California and will continue his fight through July. (Unlike Republicans, Democratic primary rules allow for the appointment of super delegates, a legacy of the McGovern debacle of 1968. Even if Sanders were to win more popular votes in primaries and caucuses the odds are still with Clinton.) Although class struggle and income inequality are mainstays for Bernie, he gets most of his traction and raucous responses at his rallies from attacks on banks. He calls for

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... [Sanders] gets most of his traction and raucous responses at his rallies from attacks on banks. limits on credit card rates and ATM fees, but the applause lines come from calls to break up the big banks. Bernie’s biggest foil in the debates has been Hillary’s speech-making habits. It is difficult for her to say she will be tough on the banks when she makes $8,000 a minute flattering the gentlemen at Goldman Sachs. It took Sanders a while to figure out a mechanism for how he would dismantle them. He eventually settled on using Section 121 of the Dodd-Frank Act. In a speech in January he laid out his plan: “Within the first 100 days of my

administration, I will require the secretary of the Treasury Department to establish a ‘Too-Big-To- Fail’ list of commercial banks, shadow banks and insurance companies whose failure would pose a catastrophic risk to the United States economy without a taxpayer bailout. Within one year, my administration will break these institutions up so that they no longer pose a grave threat to the economy under Section 121 of the Dodd-Frank Act.” Will the Section 121 tactic work? Probably not. The law allows the Federal Reserve to break up any large financial entity that poses a grave threat to the financial stability of the U.S. The Fed board of governors must all support a breakup and then a two-thirds vote is required by the members of the Financial Stability Oversight Council, which includes all of the federal financial regulators. This is where the going gets tough for Bernie. The Fed board is made up of seven people appointed by the president and confirmed by the Senate. They serve staggered, 14-year terms. The five Obama appointees have terms that won’t expire until after 2020. The next president will have the power to appoint a new chair and vice chair but not until early 2018. Even if Sanders is able to get Fed approval he would need to appoint a new slate of federal regulators that would need Senate approval. Of course, if Bernie can get the electoral revolution that he often rants about, all things are possible.

SILVIAGARCIAMAGGIO ASSOCIATE GENERAL COUNSEL, COMPLIANCE ALLIANCE COMPLIANCE HOTLINE

Big changes for small creditors this spring

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When the CFPB released its final rule on Small Creditor Balloon-Payment QMs, small creditors were relieved that the definition of small creditor had expanded and the end of the temporary exemption for Balloon QMs was pushed back to April 1, 2016. Then, Congress stepped in and passed the HELP Act (TITLE LXXXIX of the FAST Act) on Dec. 4, 2015, which required that the CFPB establish an application process to allow businesses and residents who apply to have areas designated as “rural.” In addition, the HELP Act required the word “predominantly” be struck from the language in Regulation Z that required that a lender act “predominantly” in a rural or underserved area in order to qualify as Rural or Underserved Small Creditor. The CFPB responded by creating an application system on March 3, 2016, and then by issuing an interim Final Rule, completely revamping the definition of Rural or Underserved Small Creditor on March 22, 2016. With all the changes that occurred between September and this spring, here’s what you need to know:

Sept. 21, 2015 Final rule: The September final rule was changed in large part by the March 22, 2016, interim final rule. However, a couple items are still important and in place as of the interim final rule. First, the threshold for qualifying

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small creditor originations was increased from 500 first-lien covered transactions to 2,000 first-lien covered transactions. Loans that the creditor or its affiliate originates and keeps in its portfolio are excluded from the loan origination limit. When determining whether a creditor and its affiliates extended more than 2,000 first-lien covered transactions, the creditor only counts

first-lien covered transactions in the preceding calendar year. A grace period was provided to allow certain creditors to operate as a small creditor or small creditor that operates predominantly in rural or underserved areas for applications received before April 1 of the current year.

The HELP Act required the CFPB to establish an application process that now allows lenders to apply to have areas designated as “rural.”

The HELP Act required the CFPB to establish an application process that now allows lenders to apply to have areas designated as “rural.” The act also removed the word “predominantly” in the rural small creditor qualification within 90 days of the passage of the FAST Act. The CFPB had interpreted the term “predominantly” in the September rule to mean a lender that makes more than 50 percent of its loans in a rural or underserved area to qualify as a Rural or Underserved Area Small Creditor. Thus, the removal of the term led to a new interpretation from the CFPB in the March interim final rule.

first-lien covered transactions that were sold, assigned or otherwise transferred, or were subject to a commitment to be acquired at the time of consummation. The rule maintained the asset limit of $2 billion (adjusted annually), but required that the creditor count not only its assets, but also the assets of any affiliate that regularly extended

Dec. 4, 2015 Helping Expand Lending Practices in Rural Communities Act (HELP Act):

March 3, 2016 Application process: As mandated by the HELP Act, the CFPB released the application process for an area to be designated as “rural.” It’s important to note that the HELP Act is set to sunset April 8,

2017. Therefore, applications will be accepted March 31, 2016, through April 7, 2018. Any application received on or after April 8, 2017, will only be reviewed at the CFPB’s discretion. There’s no set model application, so applicants need to create their application based on the process put forth in the March 3 release. Once received, the CFPB will evaluate whether the application was fully completed, that the application area isn’t already considered a rural area and that there’s not already an application for that area to be considered, or if an application has already been denied for that location. The CFPB approval process also includes publication of the application in the Federal Register and a public comment period of at least 90 days. The CFPB will then make a decision on the application within 90 days after the end of the comment period. Any applicant needs to provide information about the location (including the state) in which the area is located. The applicants must also attach information to support their conclusion that the area should be considered rural. The CFPB requires that applications include whether the Census Bureau, Office of Management and Budget, Department of Agriculture or State Bank Supervisor has or has not deemed this area rural and include supporting documentation. In addition, the applicant is required to provide information about the population by providing the number of persons per square mile data from the Census and supporting documentation. The applicant must also provide information about nearby areas that have a higher population density that has been deemed rural by the CFPB.

@TEXASBANKERS

The applicants will include their name, contact information and the fact that they are doing business in the state where the area they are applying for is located. They must include supporting documentation showing evidence that the applicant may do business in the state (e.g., a license from the state). No other personal information may be included and the applicants may request that their sensitive information be redacted in the Federal Register by making a request on the cover page of their application.

March 22, 2016 Interim final rule: After complying with the requirement to establish an application process, the CFPB released its interim final rule, which expanded the definition so much, it’s likely to exponentially decrease the amount of lenders who need to or would want to apply for that designation. As noted above, per the September rule, to be a small creditor that operates predominantly in rural or underserved areas for 2016, a creditor would need to extend more than 50 percent of its total firstlien covered transactions on properties located in rural or underserved areas in the calendar year 2015. The March interim rule now puts forth a one-loan test, which requires that the lender have made at least one loan in a rural or underserved area as defined by the CFPB. The one-loan test is determined by loans made in the preceding calendar year or, if an application was received before April 1 of the current calendar year, either of the two preceding calendar years. In addition to the one-loan test, the interim final rule changes the language relating to escrow in 12 CFR

1026.35(b)(2)(iii). That section exempted small creditors who make more than 50 percent of their covered loans during the preceding calendar year (or if the application was received before April 1 of the current calendar, the last two calendar years) in rural or underserved areas. Now that language has been changed to match that definition in 12 CFR 1025.43 by removing the “predominantly-lend” test language and replacing that with the one-loan test. Finally, the rule also added the HELP application process in the definition of “rural” area. The regulation will now include areas that: 1) Are not in an MSA per the Office of Management and Budget; 2) Are not located in a census block that is in an urban area per the U.S. Census Bureau; or 3) Have been designated as rural by the CFPB via the HELP application process, as discussed above. The interim final rule redefines which small creditors are deemed to operate in a small or underserved area, clarifies the exemption from HPML escrow accounts and redefines which areas are considered “rural.” It’s important to note that the rule has a 30-day public comment period, but it was effective as of March 31, 2016, so as to ease any issues between the final final rule and the April 1, 2016, temporary exemption deadline. With all the changes (and the expected final rule), it’s important to know which areas are deemed rural or underserved, to understand the lookback period for qualifying loans and to know whether your bank qualifies for the QM and escrow exemptions. Even if it is hard to keep up with all the changes, the expansion to a one-loan test is a bright spot in the regulatory heap for many community banks.

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BANKPEOPLE ABILENE

FIRST FINANCIAL BANK, N.A. Barry A. Wellins to executive vice president of retail banking. DALLAS

VERITEX COMMUNITY BANK Clay Riebe to executive vice president and chief credit officer. EL PASO

BANK OF AMERICA Kristi Marcum to market president. FORT WORTH

SOUTHWEST BANK Will Maberry to vice president-commercial lender. Rick Smith to vice president-mortgage loan originator.

the TBTmyWay Service Center. Janet Hedrick to vice president in the Trust and Investments Division’s retirement plan services. Debbie Fox to assistant vice president in the Trust and Investment Division. Chad Harkey to vice president and Bank Secrecy Act/AntiMoney Laundering/OFAC compliance manager. Jenifer Boyce to administrative officer and operations manager in the Gladewater branch. Angie Humphries to administrative officer and mortgage coordinator in the Marshall location. Tammy Gage to community relations officer. Ann Marie Brown to vice president in the Terrell location.

Barry A. Wellins

Clay Riebe

Kristi Marcum

Will Maberry

Rick Smith

Merideth Rowland

Chris Davis

Janet Hedrick

Debbie Fox

Chad Harkey

Jenifer Boyce

Angie Humphries

Tammy Gage

Ann Marie Brown

Toby Payne

David Bohne

MIDLAND LONGVIEW

TEXAS BANK AND TRUST COMPANY Merideth Rowland to senior vice president and Bank Secrecy Act/Anti-Money Laundering officer. Chris Davis to vice president in

COMMUNITY NATIONAL BANK Toby Payne to senior vice president. SAN ANTONIO

BROADWAY BANK David Bohne to CEO.

Send your promotions and new hire notices to [email protected]

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44

T E X A S B A N K I N G • M AY 2 0 1 6

BANKINGBYTES Average Breakdown of CRE Portfolio by Sector

“I was told that even though you played a key role in blowing up the economy, I needed to hire you. We needed to keep you all around because you were the only ones who really understood the mistakes that were made.” — Sen. Elizabeth Warren, speaking to Leonard Chanin, a former CFPB and Federal Reserve official, during a CFPB hearing on April 5.

Source:American Bankers Association Commercial Real Estate Lending Survey

Multifamily 28% Other 12%

“‘Too-Big-to-Fail’ is alive and well and ‘Too-Small-to-Succeed’ is the new normal for our community financial institutions.”

Office 18%

Healthcare 7%

— Tweet from Rep. Scott Tipton.

Retail 16%

“This week’s case neatly captured the unaccountable nature of this bizarre Beltway creature. The consumer bureau [CFPB] has been demanding that, for its alleged sins, New Jersey mortgage lender PHH should pay 18 times the amount ordered by the bureau’s own in-house administrative law judge. And why not, since the bureau reports to no one?”

Industrial 12% Hospitality 8%

INCLUDES: Storage Mixed Use Land Residential Religious Construction

— A Wall Street Journal editorial written after administrative law judge Brett Kavanaugh expressed concern about the CFPB’s “very unusual structure” of concentrating huge power in a single person.

INDEX TO ADVERTISERS For information on advertising in Texas Banking magazine, please email [email protected] Company Name

Phone

Page

Comerica Bank

214-828-5903

www.comerica.com

41

Compliance Alliance, Inc.

800-462-7295

www.compliancealliance.com

32

Country Club Bank

800-288-5489

www.ccbcm.com

45

Crowe Horwath

214-777-5250

crowehorwath.com/banking

5

CSI – Computer Services, Inc.

970-212-7138

csiweb.com/Secret

48

dh.com

23

First Tennesse Bank NA

800-453-7686

www.ftb.com

15

FTN Financial

800-456-5460

www.ftnfinancial.com

2

Hollerbach & Associates, Inc.

210-226-2556

www.hollerbach.com

29

J.B. Lloyd & Associates

800-964-0360

www.lloyd-ins.com

24

Kansas Bankers Surety

785-228-0000

www.kbsforbanks.com

39

National Public Finance Guarantee Corp.

914-765-3333

nationalpfg.com

25

Ncontracts

888-370-5552

www.ncontracts.com

47

Phase Engineering

800-419-8881

www.PhaseEngineering.com

44

Q2 Software, Inc.

512-560-3674

www.Q2ebanking.com/one-TBA

30

Texas Bankers Insurance Agency

800-318-4142

www.texasbankersinsurance.com

TIB

866-415-4842

Vantiv

214-762-5257

www.vantiv.com/financialinstitutions

28

Whitley Penn

214-393-9424

whitleypenn.com

31

D+H USA Corporation

46

Website

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