When a Stock Valuation Can Add Value

By: Martina Dowidchuk, Senior Consultant

The stock market continues to remind us of its inefficiencies. Most banks saw their stock values decline last year despite the industry’s record levels of earnings, continuing growth, and strong asset quality levels. In fact, the month of December 2018 recorded the greatest monthly stock decline since 1931. The broad market index, the Nasdaq Composite Index, was down 9.5% for the month of December and the banks were impacted even more than the overall market with the Nasdaq Bank Index falling 14.1%. For the year 2018, bank prices declined by 17.9% as measured by the Nasdaq Bank Index. This market correction was caused by a combination of economic and political factors, as well as the market’s perception of their impact on the industry. The Nasdaq Bank Index has showed a considerable improvement since the end of 2018, but as of July 30, 2019, it continues to be more than 9% below the level it reached 12 months ago.

While there will always be external factors outside of any bank’s control affecting the market pricing, the intuitive fundamental relationships tend to remain true among broadly-traded stocks. Regardless of the overall market’s ups and downs, the market values of banks with a higher profitability, stronger growth prospects, and other positive fundamentals are typically higher when compared to banks with weaker performance. However, this is not always true for banks with a limited stock trading activity. To ensure that the improvements in the bank’s performance translate into the shareholder value, the earnings prospects and financial strength need to be proactively communicated to the proper audience so that investors realize the value of a community bank stock and the bank gets a proper credit for its performance.

One of the easiest and fastest proactive measures available is to obtain an independent third-party valuation of the bank’s stock. Professional appraisers use multiple valuation techniques that encompass both sound financial theory and the latest market realities. Different considerations are made depending on the type and purpose of the valuation. Some valuations may require a minority interest value (i.e., a trading value), while others may call for a controlling interest value (i.e., change of control value). A valuation report evaluates the bank’s performance from different perspectives and provides an immediate stock value estimate that can then be communicated to shareholders and potential investors, providing a base point for future trades, stock repurchases, employee stock ownership programs, etc. Furthermore, if the bank has not previously had a valuation of its stock completed, the result in many cases could be a significant, immediate increase in shareholder value as the bank and its shareholders realize the true value and potential of the stock.

For community banks, understanding and proactively managing the shareholder value can be vital for many reasons. Young & Associates, Inc. has been providing valuation services and advice encompassing a variety of transactions and valuation purposes for over 40 years. Our experience in merger and acquisition activities, bank formations, and other capital market transactions gives us the expertise to help our clients understand their market value and make informed decisions as they implement their strategic initiatives. For more information on how Young & Associates, Inc. can assist your bank in this area, give me a call at 330.422.3449 or send an email to mdowidchuk@younginc.com.

Succession Planning – The Key to Remaining Independent

By: Bob Viering, Senior Consultant and Manager of Lending Services

For many community banks today, remaining independent is the number one strategic priority. There are many reasons boards believe remaining independent is important: the board believes that the shareholders’ investment will be maximized over a longer time horizon; that the bank as an independent local bank can best serve the needs of the community; that the employees as a whole will be far better served (and have jobs) by remaining independent. These are all reasonable and sincere reasons.

So, if staying independent is important, why are an increasing number of banks selling today? One of the biggest reasons that banks sell is that the board is not confident that there is anyone ready to take over management of the bank. Developing a successor internally is a multi-year process to groom a talented individual to learn enough about the day-to-day responsibilities and skills needed to manage a bank successfully. Hiring a new CEO externally sounds easy, but to find that right person that not only has the skills and background to succeed and also can fit in the community and, most importantly, the bank’s culture can be a very challenging process, especially if you are in a rural community. If something happens that the CEO role is suddenly open, or the CEO decides to retire in a year or less, all too often there is not enough time to find that right person, and the easier decision is to sell while the bank is still running smoothly.

It sounds like having a plan on how the CEO position will be filled is the answer. We’ve seen very simple plans that are a few short paragraphs that basically say, “Joe and Mary can run the bank in the interim. If one of them is not the right person, we’ll just hire someone.” Even for a very small bank, it’s almost never this easy. Even if you believe one of the top managers has the “right stuff” to be the next leader, have you thought about what skills they may need to develop to be ready? Have they had any real experience leading a group or an important project that gives you confidence they can run the place? Can you picture that person standing up in front of your shareholders? Or representing your bank to regulators? Or allowing your other key employees to operate successfully? Can they run the bank when times get tough (and they always do)? If you answered positively to these questions, do you have a plan, with timeframes, to provide the types of training and experience so that they will be ready to take over?

Even if you are confident you have the right person to take over, or you start early enough to recruit your next leader, what about the next level of management? Are they ready to step up when Joe or Mary ascends to the top spot? Do you have a plan to develop that next level of management? As you step through the layers of your organization, it often becomes clear that there are other key employees that would impact your ability to run the bank smoothly if they leave. What do you do if your head of IT leaves? Is there a replacement? Can the functions be outsourced? Every organization has those key people; they may not even be mangers that are critical to the operation. What’s your plan if they are gone one day?

If you may be facing the expected change at the CEO level and you have other key people that are in sight of retirement, selling can seem like a simple, expedient solution. The key to not being backed into a corner when retirements occur, or when a key person leaving is a threat to the successful operation of the organization, is having a well thought out succession plan. A successful plan has the following elements: it identifies those key individuals in the bank needed to run the organization successfully; it identifies the skills and training needs for those individuals that have the ability to be promoted to more responsible positons, even the CEO role; it has a written plan with timelines for preparing the individual for that next step; and it is updated at least annually to verify that the plan is still the best plan for the bank and that the individuals are progressing as expected.

If you truly want to remain independent, then you must take the time, and it will take time, to develop a meaningful succession plan. Well done, it will take months to develop and time to groom and coach that next level of talent, to review and update your plan as required.

At Young & Associates, Inc. we are committed to the idea that we are all best served by having strong, well-run community banks. If you would like help in developing your succession plan or would like a critical eye to review your existing plan, reach out to us: we’ve got community banking’s back. To contact me, give me a call at 330.422.3476 or send an email to bviering@younginc.com.

Private Flood Insurance Update

By: Bill Elliott, CRCM, Senior Consultant and Manager of Compliance

As you are no doubt aware, the issue of flood insurance has been unsettled for the last 18 months, and the formal FEMA flood program is only approved until the fall. But, after a long wait, the regulators have published additional regulation for private flood insurance – which does not rely on Congress to do anything, and makes the presence or absence of the FEMA program less problematic for lenders.


The Biggert-Waters Act (2012) amended federal flood insurance legislation to require the agencies to issue a rule directing regulated lending institutions to accept “private flood insurance,” as defined by the act. In response to subsequent legislation and comments received regarding the private flood insurance provisions of the first proposed rule (2013), and the second proposed rule (November 2016), all prudential regulatory agencies finally issued the rule, effective July 1, 2019.

It remains to be seen how effective and efficient this will be, as it is a “work in process.” But some have told me that some of their customers have found lower flood insurance rates privately (meaning these policies may become more popular). Others have told me that they have had customers declined for private flood insurance based on the riskiness of the property location.

Summary of the Rule

The rule requires regulated lending institutions to accept “private flood insurance” defined in accordance with the Biggert-Waters Act. There are essentially three categories of private flood insurance.

Category One – Private Flood Insurance with “Compliance Aid” Language

If the following language appears on the flood policy, the lender may accept the policy without any further review:
“This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”

Although it remains to be seen how well this will work, we hope that most insurance companies will include this language, which will make it quite easy for lenders, as no additional effort will be required.

Category Two – Private Flood Insurance without “Compliance Aid” Language

The rule permits regulated lending institutions to exercise discretion to accept flood insurance policies issued by private insurers that do not meet the statutory and regulatory definition of private flood insurance. The conditions for acceptance include a requirement that the policy must provide sufficient protection of a designated loan, consistent with general safety and soundness principles, and the regulated lending institution must document its conclusion regarding sufficiency of the protection of the loan in writing.

The difficulty for lenders will be to determine whether these policies really meet these (and other) requirements. And although the regulation says “discretionary,” it does not appear that the regulators will just allow lenders to summarily reject these policies.

Category Three – Mutual Aid Societies

The agencies will now allow the acceptance of plans providing flood coverage issued by mutual aid societies. The rule defines “mutual aid society” as an organization:
(1) whose members share a common religious, charitable, educational, or fraternal bond;
(2) that covers losses caused by damage to members’ property pursuant to an agreement, including damage caused by flooding, in accordance with this common bond; and
(3) that has a demonstrated history of fulfilling the terms of agreements to cover losses to members’ property caused by flooding.

A regulated lending institution may accept a plan issued by a mutual aid society, as defined above, if the regulated lending institution’s primary federal supervisory agency has determined that such plans qualify as flood insurance for purposes of the act.

Requirement to Purchase Flood Insurance

There is nothing in the rule that changes the amounts of insurance required, or anything else. This simply allows more options and hopefully, over time, will make everyone’s life – lenders and borrowers – easier.

If you need any assistance in this area, especially private flood policies without the “compliance aid” language, please give us a call at 330.422.3450 or send an email to bille@younginc.com. We are always happy to help.

Capital Market Commentary

By: Stephen Clinton, President, Capital Market Securities, Inc.

July Market Update

July marks the beginning of the 11th year of the U.S. economic recovery that began in June 2009. Back then was the end of the Great Recession that followed the 2007-2008 global financial crisis. The current expansion has continued, uninterrupted, ever since. While the annual economic growth has not been remarkable, it has been stable. GDP growth has been around 2% for each of the years of the recovery. However, the recovery has led to a near 50-year low unemployment rate of 3.7% while holding inflation below 2%. Highlights on the economic front include:

  • On July 31, the Fed lowered its short-term benchmark interest rate by a quarter of a percentage point, the first rate cut since 2008. Previously, the Fed had conducted several rounds of raising rates as it expected inflation to surface due to the “full employment” conditions. Surprisingly, inflation has remained in check and concerns about the global outlook clouded by trade policy uncertainties allowed the Fed to concede that interest rates were too high.
  • The June quarter, for the second quarter in a row, saw industrial production decline at an annual rate of 1.2%. Capacity utilization for the industrial sector decreased 0.2 percentage point in June to 77.9%, a rate that is 1.9 percentage points below its long-run (1972–2018) average.
  • The trend in wage growth has slowed from late last year when wages were rising at their fastest rate in a decade. Average hourly earnings in June rose six cents, or 0.2 %. That kept the annual increase in wages at 3.1% for a second straight month.
  • Strong consumer spending in the second quarter helped bring the GNP growth to 2.1% in the second quarter. The growth in personal consumption expenditures were reported at 4.3%, compared to 1.1% in the first quarter.
  • Home price increases are cooling off after recording strong growth since the recovery began. The Case-Shiller National Home Price Index rose an annual 3.4% in May.
  • Big fluctuations in oil prices have occurred in 2019. First, prices surged 48.2% by April 25, due in part to rising tensions between America and Iran. Then prices plunged 20%, with headlines blaming slower global oil demand growth and weak manufacturing data.
  • The federal deficit is expected to top $1 trillion for the second year in a row. The principal factors leading to the deficits are the 2017 tax cuts while the federal budget exceeded the spending caps enacted by Congress in 2011 by $300 billion.
  • American farmers are hurting. Unusually heavy spring rains have delayed or completely prevented planting across many areas of the Midwest while trade disputes drag down agricultural exports and crop prices. The pain is spreading from farmers to businesses related to farming.
  • The stock market has been strong in 2019. The Dow increased 15.16% in the first seven months while the broader Nasdaq market increased 23.21%. Banks followed the upward trend, rising 15.06% as measured by the Nasdaq Bank Index. Banks are reporting strong financial results. Based upon the March FDIC Quarterly Banking Profile, banks increased their net interest income by 6% from the prior year leading to an improvement of profitability by 8.7%. Noncurrent loans are below 1% while banks increased their reserves for future loan losses. Capital ratios continue to climb. The Fed recently announced the results of its annual capital stress tests (CCAR) for large banks and reported no objections to any of their capital plans. This will allow for increased dividends and continued stock buyback activity for these banks.
  • Short-term interest rates have declined in 2019 with the 3-month T-Bill moving down from 2.45% at the end of 2018 to 2.08% at the end of July. The 10-year T-Note also declined from 2.69% to 2.02%. The yield curve is partially inverted, with the 3 and 5-year T-Notes trading below 2%.

Merger and Acquisition Activity

As of the end of July, bank and thrift merger activity was down approximately 10% from last year at the same time. The median price to tangible book for transactions involving bank sellers was 168%.

Capital Market Services

Capital Market Securities, Inc., has assisted clients in a variety of capital market transactions. For more information on our capital market services, please contact Stephen Clinton at 1.800.376.8662 or sclinton@younginc.com.

Improving the Interview of Job Applicants

By: Mike Lehr, Human Resources Consultant

Never have businesses had to do so much recruiting. Never have they spent so much money on it. Yet, they have never been worse at it. The interviewing of applicants highlights this demise.

Imagine going to a team meeting. It has no agenda. It has no planning. It has no pre-work. People just “wing it.” That’s today’s job interviews. More puzzling, these “meetings” play a key role in the buying of a $20,000 to $200,000 asset annually. In contrast, how much thought and planning went into the last technology purchase for only a one-time cost of $15,000?

Research shows these interviews are a waste. It shows that most times the winner is the applicant most like the interviewers, not the most talented, skilled, or experienced. Yes, some argue that this determines cultural fit. What is that culture though? What is fit? Ask a dozen senior employees. It’s highly likely the responses will lead one to conclude that a unifying culture does not exist.

How to Improve Interviews

To improve interviews, they require more thought, planning, and analysis. That includes asking applicants the same set of questions. Ugh! Most likely, if you’re like I am, my eyes rolled when I first heard this. Much of my thinking had to do with feedback from interviewees. They described straight-jacket interviews where interviewees couldn’t ask or say anything but what was on their prep sheet. Moreover, the questions appeared very similar from one interview to another in the same company.It’s only later after digging into the original design of this approach that I found that it was structured interviews gone awry. It’s not how we should apply them.

How Structured Interviews Work

Here’s how it should work. First, think about the job and the skills it needs. Don’t make a laundry list. Start out with the half-dozen key ones. Then, come up with scenarios that can actually happen in your bank in which the applicant will need those skills. Now, devise “what if” questions around them that would require the use of those skills.

Examples of Questions in Structured Interviews

For example, take the job of branch manager. Take the skill of customer service. Let’s say the scenario is a very upset customer at the platform over fees charged to her account. She is getting loud and stressing the teller or customer service rep. The question now becomes, “How would you handle this?”

As another example, take a customer service rep or teller. The aptitude you want is conscientiousness or integrity. The scenario here could easily be that he/she is out with coworkers in a public place. One of the coworkers starts talking about a customer. Yet, it doesn’t seem he/she is talking loud enough for anyone outside the group to hear. The question could become then, “What would you do if this happened?”

The Grading of Answers to Interview Questions

Once you have these questions, come up with your own answers and grade them. This is key because you’ve thought about the answers before any bias could set in. As the research shows, if we like the person, we are more apt to look at a response favorably even if it’s one we were lukewarm about beforehand.

Now, this doesn’t mean that answers falling outside of those are wrong. It just means you’ve established a guide for determining good answers. After all, if you’re looking for creative problem solving skills, answers that aren’t like yours are important.

Practically Applying Structured Interviews

As I described in my early experiences with this, it’s easy to go over the edge. The entire interviewing team doesn’t have to ask the same questions. In fact, it’s better if they don’t. You can decide who might be best at asking a question. The circumstances, scenario, and importance of that question to the interviewer will often make the decision for us.

This also doesn’t mean that interviewers can’t ask other questions. Some might work to make the interview more conversational as in the case of exchanging pleasantries. In this case though, the answers don’t matter or they count less. After all, if the question was that important, we should have thought of it before any interviews began.

Better Interviews Yield Better Employees

According to Bureau of Labor statistics, 95% of hiring activity aims at filling existing positions. Turnover is at record highs. While many factors contribute to this, such as more employers preferring to hire from outside rather than to promote from within, some are myths, such as increased mobility. According to the same statistics, people are just as likely to move out of state for a better job as they were in the late 1960’s.

So, we can’t use outside factors as excuses. Hiring outside candidates is risky. The data shows promoting from within is better, less costly, and yields better outcomes. Therefore, to remove the risk of hiring outside applicants, improving the interview is low-hanging fruit to lowering drastically that risk.

Yet, even with this it’s easy to bypass the interviews and not take them seriously. Just think of the outside candidate that the president or other employees know. Think of employee referrals. It’s a myth that they automatically produce better employees. Research doesn’t support it. They, too, need to go through the same rigorous interviewing process as lesser known applicants.

In the end, there’s an easy way to determine if your interviewing process is in good shape. Ask this question: Does it have the same or better planning, analysis, and research that went into the bank’s last major technology outlay?

For more insights and guidance on how to improve interviewing of job applicants, including advice on questions, you can reach Mike Lehr at mlehr@younginc.com.

Getting the Most Value from Your Information Security Risk Assessment

By: Mike Detrow, CISSP, Senior Consultant and Manager of IT

Just like technology, we have seen information security risk assessments evolve over time. Initially, risk assessments were focused on the core system as the main repository of customer data, as well as paper documents and PCs. However, financial institutions continue to use new technologies to store or process customer data, such as the cloud and mobile devices. Risk assessments must evolve along with technology to ensure that the threats and vulnerabilities associated with each information asset are properly identified and mitigated.
Many financial institutions began the risk assessment process with threat-based risk assessments, but have now moved to asset-based risk assessments or a hybrid of the two types. We do however still see some financial institutions using only a threat-based risk assessment. The use of a threat-based risk assessment alone does not provide the same value as the use of an asset-based risk assessment. This article will describe the differences between the two types of risk assessments and the benefits of using an asset-based risk assessment.
Threat-Based Risk Assessment
A threat-based risk assessment starts with the identification of a threat, such as “Inadequate Logical Access Controls.” An inherent risk rating is assigned, mitigating controls are identified, and a residual risk rating is then assigned. Does this threat only apply to the core system or does it also apply to files stored on the file server which also contain customer data? Are the mitigating controls the same for all of the institution’s information systems or are there different controls for the core system and the file server? During a review of a threat-based risk assessment, it can be difficult for directors, auditors, and examiners to verify that all of the institution’s information assets were evaluated during the risk assessment process. It can also be difficult for the information security officer to update a threat-based risk assessment when a new information asset is introduced into the institution’s environment.
Asset-Based Risk Assessment
In contrast, an asset-based risk assessment fixes these problems by identifying the specific threats/vulnerabilities and mitigating controls that are applicable to each information asset.
The asset-based risk assessment development process consists of the following steps:

  1. Obtain an inventory of all of the assets that store or process non-public information. (Assets may include, but are not limited to, paper documents, servers, workstations, network devices, removable storage devices, and software applications.)
  2. Classify the data that the asset stores or processes.
  3. Identify threats and vulnerabilities.
  4. Identify the likelihood of occurrence and impact rating for each threat and vulnerability.
  5. Assign an inherent risk rating.
  6. Identify the controls in place to mitigate each threat and vulnerability.
  7. Assign a residual risk rating based on the mitigating controls.
  8. If the residual risk rating exceeds the institution’s risk appetite, identify additional mitigating controls to implement.

During the risk assessment development process, it is important to ensure that enough time is spent identifying all of the reasonably foreseeable threats for each asset. Otherwise, the effectiveness of the selected mitigating controls will not be properly evaluated.

During the risk assessment development process, it is important to ensure that enough time is spent identifying all of the reasonably foreseeable threats for each asset. Otherwise, the effectiveness of the selected mitigating controls will not be properly evaluated.

Some examples of reasonably foreseeable threats include:

  • Unauthorized Physical Access
  • Unauthorized Logical Access
  • Man-made/Environmental/Natural Disaster
  • User Error
  • Social Engineering
  • Malicious Code
  • Hardware Failure
  • Service Provider Issues

Some examples of mitigating controls include:

  • Antivirus
  • Data Backup
  • Encryption
  • End of Life Management
  • Asset Disposal Procedures
  • Multifactor Authentication
  • Physical Security
  • Environmental Controls
  • Firewalls
  • Patch Management
  • Policies
  • Monitoring Procedures
  • Vendor Management

The image below identifies the typical format for an asset-based risk assessment.

Benefits of an Asset-Based Risk Assessment

  • Provides a more detailed view of the institution’s environment. By identifying each asset that stores or processes non-public information, directors and outsiders can gain significant visibility into the complexity of the institution’s environment, including vendor-hosted assets.
  • Clearly documents the assets that were evaluated. Directors, auditors, and examiners can easily see that each of the institution’s assets was considered.
  • Includes a lower risk for errors. By assessing the threats/vulnerabilities and mitigating controls associated with each specific asset, there is less of a chance that assumptions will be made about the mitigating controls for a specific asset.
  • Is easier to update. If a new asset is introduced into the institution’s environment, a new line item is created in the risk assessment to identify the threats/vulnerabilities and mitigating controls associated with the new asset. In addition, if a threat intelligence source identifies a new threat, it is relatively simple to identify which asset(s) the threat applies to and to document the implementation of new mitigating controls.
  • Assists with audit scoping. Rather than performing a full-scope IT audit each year, management can focus audits on the highest risk assets or most critical controls.

While it may take some time to transition from a threat-based risk assessment to an asset-based risk assessment, the data obtained from an asset-based risk assessment will generally be more valuable to the institution by providing better visibility of current control deficiencies, simplification of updates, and more focused audits.
For more information on this article, or to find out more information on how Young & Associates, Inc. can assist your financial institution, contact Mike Detrow at mdetrow@younginc.com or 330.422.3447.

Proposed Rulemaking – Changes to the Appraisal Threshold for Residential Real Estate-Related Transactions

The OCC, Federal Reserve Board, and FDIC (collectively, the agencies) jointly issued a notice of proposed rulemaking titled Real Estate Appraisals, dated December 7, 2018 which was published in the Federal Register for a 60-day comment period. The Appraisal NPR proposes to increase the threshold for residential real estate transactions requiring an appraisal from $250,000 to $400,000. Evaluations would still be required for transactions exempted as a result of the proposed threshold. In addition, the agencies are proposing several conforming and technical amendments to their appraisal regulations.

The agencies are proposing to define a residential real estate transaction as a real estate transaction secured by a single 1-to-4 family residential property, which is consistent with current references to appraisals for residential real estate.

The proposed rule would amend the agencies’ appraisal regulations to reflect the rural residential appraisal exemption in the list of transactions that are exempt from the agencies’ appraisal requirement. The amendment to this provision would be a technical change that would not alter any substantive requirement, but the proposal would require regulated institutions to obtain evaluations for transactions secured by residential property in rural areas that have been exempted from the agencies’ appraisal requirement pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act, commonly known as the rural residential appraisal exemption, and would fulfill the requirement to add appraisal review to the minimum standards for an appraisal.

With the proposed increase in the threshold, it is expected that many institutions will now utilize internal staff to prepare evaluations for transactions that are less than $400,000, so it might be time to revisit the Interagency Appraisal and Evaluation Guidelines (Federal Register, Vol. 75, No. 237), as well as the Interagency Advisory on Use of Evaluations in Real Estate-Related Financial Transactions (FDIC, FIL 16-016). While the Guidelines state that an evaluation is not required to be completed by a state-licensed or state-certified appraiser or to comply with USPAP, the evaluation preparer should, however, be knowledgeable, competent, and independent of the transaction and the loan production function of the institution. Evaluations may be completed by a bank employee or by a third party. In smaller communities, bankers and third-party real estate professionals have access to local market information and may be qualified to prepare evaluations for an institution.

An evaluation should provide a reliable estimate of the market value of the property and, therefore, the approach or approaches used in an evaluation should be appropriate to the property being valued, and the intended use, so it may be appropriate to omit one or more of the three approaches to value. If the income approach is the primary approach for a tenant-occupied, income-producing
property, it may be appropriate to omit the sales comparison approach and the cost approach.  Similarly, if the sales comparison approach is the primary approach for a single-family residence, it may be appropriate to omit the cost approach and the income approach.

The Guidelines provide information regarding the minimum content that should be contained in an evaluation. Unlike an appraisal report that must be written in conformity with the requirements of USPAP, there is no standard format for documenting the information and analysis performed to reach a market value conclusion; but like an appraisal report, the evaluation should contain sufficient information to allow a reader to understand the analysis that was performed to support the value conclusion and the institution’s decision to engage in the transaction.

Appraisal and Evaluation Reviews
The proposed rule would make a conforming amendment to the minimum requirements in the agencies’ appraisal regulations to add appraisal review. The agencies propose to mirror the statutory language for this standard. As outlined in the 2010 Guidelines, which provide guidance on the review process, the agencies have long recognized that appraisal review is consistent with safe and sound banking practices.

The agencies are proposing to implement the appraisal review provision in Section 1473(e) of the Dodd-Frank Act, which amended Title XI to require that the agencies’ appraisal regulations include a requirement for institutions to subject appraisals for federally related transactions to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). While most institutions follow the guidance, the proposed rule would implement this statutory requirement.

For more information on this article or on how Young & Associates, Inc. can assist with the appraisal review process, contact Kyle Curtis at 330.422.3445 or kcurtis@younginc.com.

Avoid Getting Swept Away in the Flood of Enforcement Actions

By: William J. Showalter, CRCM, CRP, Senior Consultant

We seem to be in a bit of a lull in flood insurance rule enforcement by the financial institution regulators. There were only 15 enforcement actions with civil money penalties (CMP) totaling $523,961 in 2018. So far this year, we have had only two such enforcement actions, with total CMPs of $10,550. But, we probably should not expect this trend to continue, especially with all the flooding events we have seen recently, including our unfortunate neighbors along the Missouri River. These events tend to get the attention of Congress and the supervisory agencies.

Keep in mind that enforcement of many rules, including those involving flood insurance, seem to run in cycles. After another apparent lull in flood insurance enforcement actions a couple years ago, the Federal Reserve Board (FRB) issued an Order for a Civil Money Penalty in late May 2017 against SunTrust Bank for $1,501,000 to enforce requirements of the regulations implementing the National Flood Insurance Act. This is thought to be the largest CMP for flood insurance shortcomings. Coupled with 11 other much smaller enforcement actions by the FRB, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC), the total civil money penalties assessed for flood insurance rule violations by mid-year 2017 totaled nearly $1.8 million – and by the end of that year, we had seen 29 enforcement actions with a total of nearly $2.8 million in CMPs.

The original National Flood Insurance Act was passed in 1968, and established the National Flood Insurance Program (NFIP). The Flood Disaster Protection Act of 1974 (FDPA) was enacted to strengthen the NFIP by involving lending institutions in the insurance process.

The NFIP was developed as a way to reduce federal expenditures related to disasters caused by flooding. The program consists of floodplain management plans that affected communities must implement and a flood insurance program to protect properties in flood hazard areas. The intent of the NFIP is to reduce federal outlays for disaster assistance by making those who choose to develop properties in flood-prone areas bear some cost to protect against the flood risks involved, rather than allowing them to rely solely on federal aid.

Part of the NFIP is a system of requirements and restrictions on federal assistance of all kinds to flood-prone areas. This assistance ranges from direct federal lending to loan guarantees, to insurance for deposit accounts. The latter is the connection for many mortgage lenders with the NFIP.

The National Flood Insurance Reform Act of 1994 (NFIRA) comprehensively revised the two federal flood statutes – the NFIA and FDPA – and required federal supervisory agencies to revise their flood insurance regulations. The objective of the changes was to increase compliance with flood insurance requirements and participation in the NFIP, and to decrease the financial burden on the federal government, taxpayers, and flood victims.

The NFIRA authorizes the regulators to impose civil money penalties when a pattern or practice of violations under the NFIA is found. The act requires that civil money penalties be imposed of up to $350 for each violation in such cases. The civil money penalty cap was increased significantly by the Biggert-Waters Flood Insurance Reform Act of 2012, enacted July 6, 2012. The former $350 per violation maximum was raised to $2,000 per violation. Lenders should remember that there can be multiple violations for each covered loan.

Consent Orders
The regulators charged that the financial institutions targeted by the 15 enforcement actions last year were engaged in patterns or practices of violations of various provisions of the flood insurance regulations. Most of the orders give us at least some picture of the violations found by regulatory personnel. These violations of flood insurance rules include failures to:

  • Provide notice about availability of and requirement for flood insurance
  • Provide timely notice about availability of and requirement for flood insurance
  • Require flood insurance coverage
  • Require adequate flood insurance coverage
  • Maintain flood insurance (allowing it to lapse)
  • Escrow premiums (when other property costs are escrowed)
  • Comply with force placement requirements
  • Provide notice regarding lapse and force-placed coverage
  • Provide timely notice regarding lapse and force-placed coverage
  • Obtain force-placed coverage

Avoiding Problems
What can you do to keep your bank or thrift off the ever-growing list of financial institutions being hit with flood insurance enforcement actions? One important way is to establish an effective flood insurance compliance program and make sure that lending staff follows it. Hold them accountable for failures.

At a minimum, your flood insurance compliance program should:

  • Ensure that there is an effective process in place for determining the flood hazard status for improved real property or mobile homes securing any loans, both consumer and commercial, whether the process be one of in-house readings of up-to-date flood maps or outsourced determinations by a professional firm that guarantees its results.
  • Ensure that your institution has performed appropriate due diligence in selecting its flood hazard determination vendor and monitors its performance, and that the vendor guarantees its results and uses the current Special Flood Hazard Determination Forms (SFHDF) to document its determinations.
  • Order or perform flood determinations early in the loan process. This can be done soon after the lender decides to approve the loan.
    Ensure that loan files contain complete and current SFHDF and acknowledged customer flood notices, where applicable.
  • Ensure that collateral properties are insured in the proper amount before loan closing, including appropriate coverage for any senior mortgagees.
  • Remain current on flood map and hazard determination changes, and stay insured throughout the life of the loan.
  • Ensure that coverage is maintained for subsequent financings (increase, extension, renewal, refinancing) of the subject properties.
  • Train all affected staff in their responsibilities under the bank’s flood insurance compliance program, assign appropriate accountability, and enforce staff responsibilities.

This last point is especially important. Training is the foundation for implementing and maintaining a strong flood program. Ensure that all appropriate staff is trained in the requirements of the flood insurance laws and rules that impact their jobs and provide them with refreshers periodically.

Establishing and maintaining a strong flood insurance compliance program can help your bank or thrift stay afloat during any flood of enforcement actions. For more information on this article and/or how Young & Associates, Inc. can assist you in this area, contact Bill Showalter at 330.678.0524 or wshowalter@younginc.com.

The Value of Internal Audit Through a Fresh Set of Eyes

By: Jeanette McKeever, CCBIA, Consultant & Internal Audit Operations Manager

There is risk in every aspect of the banking industry and the regulatory environment seems to continually change. As to the governance and control functions of the banking industry, it may be refreshing to the board of directors, audit committee, and executive management to have their internal audit function re-assessed and validated though a fresh set of eyes to assure that the controls in place are functioning as intended.

A strong internal control system, including an independent and effective internal audit function, is part of sound corporate governance. The board of directors, audit committee, senior management, and supervisors must be satisfied with the effectiveness of the bank’s internal audit function, that policies and practices are followed, and that management takes appropriate and timely corrective action in response to internal control weaknesses identified by internal auditors. An internal audit function provides vital assurance to a bank’s board of directors (which ultimately remains responsible for the internal audit function, whether in-house or outsourced) as to the quality of the bank’s internal control system. In doing so, the function helps reduce the risk of loss and reputational damage to the bank.

All internal auditors (whether in-house or outsourced) must have integrity and professional competence, including the knowledge and experience of each internal auditor and of team members collectively. This is essential to the effectiveness of the internal audit function.

We encourage bank internal auditors to comply with national professional standards, such as those issued by the Institute of Internal Auditors, and to promote due consideration of prudent issues in the development of internal audit standards and practices.

The scope of the internal audit function’s activities should ensure adequate coverage of matters of regulatory interest within the bank’s audit plan.  Regular communication by the audit committee, management, and affected personnel is crucial to identify the weaknesses and risk associated to assure that timely remedial actions are taken.

Young & Associates, Inc. can independently assess the effectiveness and efficiency of the bank’s internal controls and processes to provide value and assurance that the internal control structure in place operates according to sound principles and standards.

For more information on how we might provide internal audit services specific to your bank’s needs, whether it is outsourced or co-sourced, please contact me at 1.800.525.9775 or e-mail jmckeever@younginc.com.

The CFPB in the Future

By: Bill Elliott, CRCM, Senior Consultant and Manager of Compliance 

With the change in management of the CFPB, we are seeing changes in how they operate. When they published their Regulatory Agenda for Fall 2017 (late as usual – it appeared in January 2018), they restated what Section 1021 of the Dodd-Frank Act specified as the objectives of the Bureau, including:

  • Providing consumers with timely and understandable information to make responsible decisions about financial transactions
  • Protecting consumers from unfair, deceptive, or abusive acts and practices and from discrimination
  • Addressing outdated, unnecessary, or unduly burdensome regulations
  • Enforcing federal consumer financial law consistently in order to promote fair competition, without regard to the status of a covered person as a depository institution
  • Promoting the transparent and efficient operation of markets for consumer financial products and services to facilitate access and innovation

They stated that their work in pursuit of those objectives can be grouped into three main categories:

  1. Implementating statutory directives
  2. Other efforts to address market failures, facilitate fair competition among financial services providers, and improve consumer understanding
  3. Modernizing, clarifying, and streamlining consumer financial regulations to reduce unwarranted regulatory burdens

Implementing Statutory Directives

In this area, the CFPB is continuing efforts to facilitate implementation of critical consumer protections under the Dodd-Frank Act. They listed three efforts under way. They include:

  • Regulation C (Home Mortgage Disclosure Act)
  • Mortgage servicing changes
  • Continuing to improve the TRID portion of Regulation Z

The CFPB also listed other projects that are “in the works,” but probably nowhere near completion.

Other Efforts To Address Market Failures, Facilitate Fair Competition among Financial Services Providers, and Improve Consumer Understanding

In this area, the CFPB said they were considering rules, such as:

  • Payday loans, auto title loans, and other similar credit products
  • Debt collection
  • Overdraft programs on checking accounts
  • Prepaid financial products
  • Modernizing, streamlining, and clarifying consumer financial regulations

Many of the regulations are approaching 50 years old and are out of date with the current world. For instance, Regulation B allows you to turn down a customer for not having a land line phone in the home. That was fine in the 1970s, but probably not relevant now. Updating this and many other regulations is overdue, including looking at the effectiveness of some of the more recent changes, which they say they will be doing.


We will have to wait and see what happens. As with all bureaucracies, and based on their past performance, changes are likely to appear slowly. In general, it appears that “new regulations” may slow down a bit, giving us in the industry a chance to catch up.

Young & Associates, Inc. offers a wide variety of compliance services to help your bank satisfy these compliance requirements. If we can help you “catch up” or improve your response to any of the regulations, we stand ready to assist. Please contact Karen Clower, Compliance Operations Manager, at kclower@younginc.com or 330.422.3444 and she will be happy to discuss our services with you.