Directors’ College Report of Examination Workshop Remember to bring this Manual to the Workshop! VERSION: APRIL 19, 2017 Examination Workshop Overview We have prepared a sanitized version of an actual examination report. Before the last session, please review this report in its entirety, taking special note of the comments on the following pages: • Examination Conclusions and Comments • Risk Management Assessment During the case study, participants will be divided into groups to analyze and discuss the CAMELS components. At least one examiner will participate in each group discussion. The objective is to identify the major topics/trends related to each CAMELS component(s) that the examiner listed for discussion. Then, the entire class will assign ratings for each component. After the ratings are determined, the participants will discuss corrective actions for the significant issues identified and recommend any enforcement actions, if necessary. Your familiarity with the examination report’s contents will greatly enhance the effectiveness of this exercise. Checklists and question guides for each of the CAMELS components are included to facilitate an orderly review of the report. We recommend either highlighting or making note of the topics deserving corrective action or comment as you review the report. The following documents are included with the examination report: • Purpose of the Presentation • Background Information • Points to Consider • Question Guides • Uniform Bank Performance Report • Definitions for Composite and Component CAMELS Ratings • Workshop Feedback Form Please be sure to bring the examination report and the other documents to the last session. Introduction – Background Page 1 Presentation Purpose This project is intended to enhance the participants’ understanding of the most significant topics that are contained in an examination report. An additional objective is to have the directors appreciate and understand the reasoning behind the topics that were addressed in the January 9, 2014 examination report. There are two major sources that all regulatory agencies utilize to analyze a bank’s condition. The first is an onsite examination report which, since February 1994, is uniformly used by all federal bank regulatory agencies and most state banking departments. The second source is the many offsite monitoring reports, which are produced quarterly from bank records and examination reports. The most commonly used offsite monitoring tool is the Uniform Bank Performance Report, which is generated from data submitted by banks in quarterly Consolidated Reports of Condition and Income (Call Reports). Introduction – Background Page 2 Background Information Valhalla Commerce Bank The Bank was established as a state nonmember institution in 2004. It is wholly- owned by Valhalla Community Bancorp, Inc., a one-bank holding company. Ownership is widely held, with no shareholder owning or controlling 5 percent or more of holding company stock. Stock is held by 388 shareholders. Directors and executive officers own 14.3% of the outstanding shares. Chairman of the Board and President Henry Shackelton is the largest shareholder at 3.83% ownership interest. Valhalla Commerce Bank (VCB) began operations in 2004 pursuing a traditional community bank business plan. It subsequently expanded into three local communities with six offices in Asgard, Odin, and Glasir. The bank and its branches are located in affluent communities in the far western suburbs of the Anytown area. VCB has always been assigned a composite 2 rating. In 2015, bank management embarked on an aggressive growth strategy in real estate construction lending. A significant number of new housing developments were being approved in VCB’s market area. Competition is fierce as the Anytown area is heavily banked with both community institutions and multibillion dollar organizations. During 2015, the bank added $10 million in new land development and real estate construction credits. This represented a 33% increase in this type of lending. At the end of 2015, acquisition, development and construction (ADC) credits totaled 265% of total capital. These credits were funded, in part, with $6.5 million borrowed from the Federal Home Loan Bank. The bank’s loan/deposit ratio far exceeded 100% by the end of 2015. At no time did the board set a limit on commercial real estate (CRE) credits in relation to capital. Demographic and Market Data Demographics The Bank operates six offices in AnyCounty, AnyState, which is located in the Anytown metropolitan area. The Bank’s main office holds 60 percent of the institution’s total deposits. The Bank’s deposits represent 5 percent of the total deposits in AnyCounty. None of the Bank’s six offices are located in or within one mile of a low- or moderate-income (LMI) census tract. Introduction – Background Page 3 There are approximately 180,000 households within AnyCounty. Low-income households account for 13 percent of the total number of households in the market area, while moderate-income households also account for 21 percent.1 Middle-income households comprise the largest group in the metro, accounting for 35 percent of households. Upper-income households account for the remaining 31 percent of households. The median household income in AnyCounty is $68,969, significantly above the national median.2 Economic Overview Weakness in the housing and manufacturing sectors, as well as disruption in capital markets, has negatively affected key employment sectors in AnyState. Nonfarm employment in the state fell 0.1 percent in the third quarter 2014 from a year ago. Employment losses have been broad-based across the state with the largest declines in the leisure and hospitality, government, construction, and financial activities sectors. The Anytown metro area has also experienced economic deterioration; employment in the area declined 1.7 percent in the third quarter 2014 from a year earlier. The AnyState housing market remains under pressure, but some areas are experiencing increasing home sales. Home prices were down .5 percent in AnyState in the second quarter 2015 compared to a year earlier, and down 1 percent from the peak in 2014.3 Management Information Henry Shackelton - Chairman of the Board, President, and Chief Executive Officer. President Shackelton is the original founder. He was an organizer of Baldr Community Bank, AnyCity, AnyState, where he served as its president and CEO from 1995 to 2002. After Baldr Community Bank was purchased, he helped start Valhalla Commerce Bank in 2004. Mr. Shackelton is a graduate of the Valkyrie University Graduate School of Banking. Frank Wild - Senior Vice President. He supervises the loan portfolio. He has over 30 years of banking experience. He previously served as a vice president in loan administration for Cypress Bank, AnyCity, AnyState. SVP Wild replaced former senior lender, Mr. Thomas McLeod, who resigned in November 2014. 1 For the purposes of this analysis, low-income households are households earning $24,999 or less, moderate-income households are households earning between $25,000 and $49,999, middle-income households are households earning between $50,000 and $99,999, and upper-income households are households earning $100,000 or more. 2 Income data are from the U.S. Census Bureau 2014-2015 American Community Survey. 3 House price data are from the Federal Housing Finance Agency All-Transactions Index. Introduction – Background Page 4 Hedy Lamarr - Senior Vice President/Cashier. Ms. Lamarr is the head of bank operations and serves as cashier, BSA officer, IT officer, and securities officer. She was previously employed at Baldr Community Bank, AnyCity, AnyState. Hubert Hudson - Vice President. Joined the bank in 2014 and is a commercial lender. He has 15 years of commercial lending experience. His previous employment includes Bear Stearns, Inc.; Cypress Bank, AnyCity, AnyState; and Merchant Marine Commerce Bank. Frank Hurley – Vice President. Joined the bank in 2011 and is a commercial lender. His prior experience as a lender includes Icelandic Commerce Bank and Regents Savings Bank. Thomas Crean - Vice President. Joined the bank in 2013 and is a commercial lender. He has more than 20 years of banking experience serving as a lender and in bank operations. His previous employment includes Macklin Bank and Cypress Bank. Frank Worsley - Vice President. Joined the bank in 2014 and is head of the mortgage banking operation. He has more than 28 years of retail, commercial, and trust banking experience. His previous employment includes Regents Savings Bank, Idhammar Commerce Bank, and Cypress Bank. The Directorate – 8 Members Nikola Tesla (1)(3)(4)(6)(7) Joined Bank: 2004 Born: 1954 Mr. Tesla is president of Tesla Industries and is a director of AnyCounty Mutual Insurance, both located in AnyCity, AnyState. He also owns and operates Tesla Generators in AnyCity, AnyState. John Vincent (1)(2)(5)(6)(7) Joined Bank: 2004 Born: 1955 Mr. Vincent is a retired engineer. He is former president and sole shareholder of Hull Maintenance, Ltd., AnyCity, AnyState. He previously served as a director at Merchant Bank, AnyCity, AnyState. Alfred Cheetham (2)(4)(6)(7) Joined Bank: 2004 Born: 1961 Mr. Cheetham is a private investor, a partner in Boat Slip Partnership, and a philanthropist. Introduction – Background Page 5 Robert Clark (3)(5)(6)(7) Joined Bank: 2004 Born: 1955 Mr. Clark is president of Biologics, Inc., a genetic testing company. He also owns and operates various commercial properties in AnyCounty. He previously served as a director of Denbury Bank, AnyCity, AnyState. Henry Shackelton (1)(6)(7) Joined Bank: 2004 Born: 1960 Chairman of the Board, President, and Chief Executive Officer. Thomas Orde-Lees (1)(3)(5)(6)(7) Joined Bank: 2004 Born: 1958 Mr. Orde-Lees is a practicing attorney with Westgarth and Harrison, LLC, AnyCity, AnyState. Charles Green (2)(3)(6)(7) Joined Bank: 2004 Born: 1937 Mr. Green is a retired pharmacist. He previously owned Green Drugs. Louis Rickenson (1)(2)(3)(4)(5)(6)(7) Joined Bank: 2004 Born: 1957 Mr. Rickenson is a practicing CPA and partner in Rickenson Ltd., AnyCity, AnyState.