Current Banking Issues in California A DFI Perspective

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Current Banking Issues in CaliforniaA DFI
Perspective

• By
• Daphne T. Porter
• Assistant Deputy Commissioner
• Department of Financial Institutions

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The Department has four office locations

• Total number of employees 219
• Total number of examiners in all divisions and
  offices 130
• Number of Bank Examiners 92

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Licensee Services
The Department currently grants licenses to
conduct financial services business in California
under nine different sets of statutes bank and
trust, savings associations, credit union,
industrial loan, foreign banks, business and
industrial loan, transmitters of money abroad,
payment instruments, and travelers checks.
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De Novo Banking Activity
New State Chartered Banks opened in California
between 2003 and 2006
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New Banks2005-2006
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Banks
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De Novo Banks Opened in Past Four Years
11 banks opened for business in 2004, but two
of them have merged with other banks since then.
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Percentage of Banks Chartered in Past Four Years
As of 4/30/07, there were 206 state-chartered
banks in California. 75 of them have opened just
in the past four years (over 1/3 of our current
bank licensees).
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New Bank Opening Activity
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New Bank Opening Activity
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De Novo Bank Activity

• As of 4/30/07, ten (10) new commercial banks were
  in the process of organizing, and six (6) new
  bank applications were pending.
• It appears that the peak activity in de novo bank
  formation is likely behind us. However, we are
  still getting inquiries. We are still having
  pre-filing meetings, and receiving applications,
  but not at the level that it reached in the past
  two years.

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Factors that DFI is required to investigate and
consider pursuant to the California Financial
Code

• Public convenience and advantage will be promoted
  by the establishment of the proposed bank.
• The proposed bank will have a reasonable promise
  of successful operation.
• The proposed capital structure is adequate.
• The proposed officers and directors have
  sufficient banking experience, ability and
  standing.
• The character, reputation, and financial standing
  of the organizers and incorporators, and their
  motives in organizing the proposed bank, must
  also be considered.

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New Bank Application Process

• Initial inquiry/meeting
• Pre-file meeting
• Application Review Process
• Each step, we try to be proactive in providing
  feedback, discussing concerns, asking questions,
  and seeking clarification.

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Issues and Concerns in de novo banks

• Qualifications and abilities of management and
  the Board
• Difficulty locating and recruiting qualified
  management.
• New and inexperienced executive management teams.
  Sometimes executive officers may not have had
  prior experience in their respective positions.

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Issues and Concerns in de novo banks

• Qualifications and abilities of management and
  the Board
• Mentor program has been used on occasion to
  compensate for an inexperienced executive
  officer.
• New and inexperienced Board
• Lack of breadth and diversity in Directorates
• High turnover rate at the senior management level
• Some dysfunctional Boards of Directors

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Issues and Concerns in de novo banks

• Difficulty implementing the banks business plan
• Lack of success in originating loans and raising
  core deposits
• Lack of prudent diversification in the loan
  portfolio
• Deposit and loan pricing and market competition
• Have been some recent examples of difficulty in
  raising minimum initial capital

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Issues and Concerns in de novo banks

• Pressure to rapidly deploy the banks capital in
  order to achieve profitability and a return for
  shareholders.
• Asset growth (quantity vs. quality)
• Unacceptably high level of adversely classified
  assets due to underwriting and credit
  administration weaknesses
• Increasing competition, particularly in certain
  geographic and target markets
• Inadequate risk assessment and internal controls
• Poor funds management practices
• High pre-opening expenses
• Processes for insider loans and insider
  transactions

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Lessons Learned in de novo activity

• Re-emphasized the importance of a strong
  management team
• Importance of a qualified CEO
• Importance of a qualified CFO
• Proper internal controls must be established
• Importance of qualified lending personnel
• Credit Administration
• Business Development
• Re-emphasized the importance of a qualified
  directorate
• Importance of proper Board oversight
• Importance of a Board with prior banking
  experience
• Importance of a Board with diverse breadth of
  experience
• When we approved applications where we had some
  concerns, the concerns more often than not have
  turned out to have been well founded.

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DFIs Supervisory Goals

• Maintain a conservative approach to the issue of
  approving new charters
• Insist that the board and management team of new
  banks are sufficiently qualified for their
  proposed positions
• Maintain open communication with the applicants
  and consultants
• Identify and address concerns and issues at the
  earliest possible stage
• Provide appropriate feedback and guidance
• Provide a genuine service to the public and to
  our licensees by promoting the integrity and
  stability of Californias financial services
  system through the appropriate regulation and
  supervision of state chartered financial
  institutions

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The Department Policy on Chartering New Banks
We recognize the fact that the current
prosperity and expansion of business has been
accompanied by a substantial increase in
applications for the establishment of new
banks The proper administration of this phase
of supervising requires the highest type of
judgment, discretion and administrative
teamwork. Accompanying the rise in the
national economy, the number of newly chartered
and opened banks has continued to rise in the
United States as a whole.
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The Department Policy on Chartering New Banks
In arriving at a decision as to whether or not
the charter should be issued, we must give
careful consideration to the many factors we are
required to investigate by the provisions of the
Banking Law. We are particularly concerned
that public convenience and advantage will be
promoted and that the community in which the
bank will operate shall afford reasonable
promise of successful operation. The proposed
capital structure must be adequate, and the
proposed officers and directors must have
sufficient banking experience, ability and
standing, to afford reasonable promise of
successful operation. we must also consider
the character, reputation, and financial standing
of the organizers and their motives in
organizing the proposed bank. It is only after
full and complete analysis is madethat we take
final action either in the negative or
affirmative on any application.
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The Department Policy on Chartering New Banks
The policy of this department concerning the
chartering of new banks will continue to be
conservative. We believe in competition in the
banking business and stand ready to establish a
new bank where there is room for another
institution, but our conclusion and policy is
that overbanking in any community makes for
unsoundness in banking operations, particularly
in the making of bad loans which later develop
into losses that imperil the safety of the
bank By following a conservative policy in
the establishment of new banks , by insisting
that the founders of new banks shall be of
highest integrity and sound financial standing
and ability, the Banking Department will render
a genuine service to the public, the importance
of which will be recognized in the years that
follow.
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The Department Policy on Chartering New Banks
Excerpts from a speech given by William A.
Burkett Superintendent of Banks to a conference
of the State Banking Department January 16, 1956
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QUESTIONS
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(No Transcript)