Consumer Compliance Risk Profile

Consumer Compliance Risk Profile

Bailey Brothers State Bank

April 30, 20xy

INSTITUTIONAL OVERVIEW

Organizational Structure

Bailey Brothers State Bank (“Bailey Bros”) is located in Celina, Ohio and is a wholly owned subsidiary of RKO Bancorp in Bedford, Ohio. As of March 31, 20xy, RKO had assets of $3.9 billion and Bailey Bros had assets of $666.7 million, representing approximately 17.1% of the holding company’s assets. Bailey Bros. operates several branch offices in the western part of Ohio and the eastern part of Indiana.

In January 20xx, Bailey Brothers closed one branch in Ft. Wayne MSA, located in Indiana. As a result, the bank has one branch remaining in the MSA. In addition, in September 20xx, Bailey Bros. closed one branch in Mercer County, located in the State of Ohio. As a result, there are six branches remaining in this county. Further, since the previous mergers and various branch closings, RKO recently re-evaluated Bailey Bros’ assessment area and changed it to better reflect the bank’s overall market. The Board of Directors approved the changes to the assessment areas on October 27, 20xx. The new assessment area maps are forthcoming to the Reserve Bank.

Although the bank addressed the safety and soundness concerns relative to asset quality, earnings, and BSA violations the merger of four affiliate banks into Bailey Bros. is still on hold. However, in discussions with the Compliance Officer on December 2, 20xx, the bank hopes to merge two of the four banks into Bailey Bros sometime during the third or fourth quarter 20xy now that the Safety and Soundness concerns have been rectified.

The four affiliate banks pending the merger are as follows:

1.  State Bank, N. Manchester, Indiana – FDIC

2.  The Savings Bank, Clyde, Ohio – FDIC

3.  The Federal Saving Bank, Marion, Indiana – OTS

4.  Customer First State Bank, Hartford City, Indiana – FDIC.

Preliminary discussions regarding the Safety and Soundness examination indicate that the Written Agreement will be lifted. According to S&S “draft” report, the bank’s overall condition has improved and is considered satisfactory.

Geographic Areas and Market

The bank operates 19 branches within its footprint; 13 with ATMs and 13 with drive-thru windows. The bank also operates one loan production office in Greenville, Ohio.

The bank’s assessment area consists of four separate assessment areas. Two assessment areas are located in western Ohio, and two assessment areas are located in eastern Indiana. The assessment areas to date are located in the following counties:

·  Ohio Non-MSA includes Darke, Defiance, Mercer, Paulding, Van Wert, and Williams Counties

·  Lima MSA 30620 includes portions of Allen and Auglaize Counties

·  Indiana Non-MSA includes Jay and Randolph Counties; and

·  Ft. Wayne MSA 23060 includes only portions of Allen County.

Business Strategies

As of March 31, 20xy, the bank’s loan portfolio consisted of the following:

·  Real Estate Loans 70.44%

- 1-4 Family Residential 39.21% (of total loan mix)

- Multi family (5 or more) 00.16% (of total loan mix)

- Non-farm Non-Residential 17.18% (of total loan mix)

- Construction, land development & other 02.09% (of total loan mix)

·  Agricultural Loans 12.24 %

- Finance agriculture production & other 1.9% (of total loan mix)

- Secured by farmland 10.3% (of total loan mix)

·  Commercial & Industrial Loans 9.53%

·  Individual Loans 17.63%

Internet Web Site

Bailey Bros continues to operate its website (www.baileybros.com). The site is fully functional, including a home banking view, account balance information, account history, transfer between authorized accounts, and deposit and employment applications. The bank is planning on offering on-line business banking in the future. Advertising includes CD, Savings, credit card and checking advertisements. Credit cards is the only type of loan product that is advertised on the bank's website.

A web-site review was conducted in July 20xx and numerous violations were noted. Shortly after this review, an email regarding the violations was sent to the Compliance Officer. In discussions held with her on December 2nd, all violations on the website have been corrected.

Consumer Compliance Supervisory Issues or Concerns

Consumer Compliance Examinations

Most Recent Compliance Examination Date and Rating: July 22xw

The bank’s compliance program during the most recent compliance examination was considered to be marginally satisfactory. Senior management and board oversight of the compliance program was considered to be satisfactory.

The most significant violation noted during the July 22xw examination involved flood. During the examination, three types of flood exceptions were identified:

·  Inadequate amount of flood insurance

·  Failure of the bank to force-place flood insurance

·  Timing of flood determinations

A file search was conducted and the results were referred to the BOG for determinations of civil money penalties. Bailey Bros. paid $5,500 CMPs on June 12, 20xx.

The overall compliance program continues to function effectively and is able to identify, measure, monitor, and control the compliance risk to the institution. The bank has continued to monitor the previous exam violations by reviewing loans that require flood insurance to ensure adequate coverage. In addition, the compliance officer has requested a listing of all the bank loans serviced by Northcentral Financial Services to ensure adequate flood insurance coverage on these loans as well. Further, the bank has continued its fair lending reviews. Currently, the compliance officer conducts fair lending reviews semi-annually.

Further internal controls and audit were considered satisfactory. During the previous examination, the risk management department conducted monthly compliance reviews on loans closed in the prior month. These reviews appeared to be effective because the controls in place were able to identify problems, which allowed the bank to implement appropriate actions.

Prior Compliance Examination Date and Rating: July 20xu - 2

CRA Examinations

Most Recent CRA Examination Date and Rating: July 20xw “Satisfactory”

The bank’s lending was considered “high satisfactory.” Investments are considered to be “low satisfactory. Services were considered to be “low satisfactory.” Overall rating for CRA was “Satisfactory”. No violations were found in the substantive portions of anti-discrimination laws and regulations.

There were advisory comments regarding the bank’s public file. Bailey Bros. needed to include the list of services and fees offered by all branches as well as being aware of including information that may be of a confidential nature.

Prior CRA Examination Date and Rating: July 20xu “Satisfactory”

The bank’s lending was considered “high satisfactory.” Investments were considered adequate. Services are considered to be “low satisfactory.” Overall rating for CRA was “Satisfactory”. No violations were found in the substantive portions of anti-discrimination laws and regulations.

Supervisory Actions

Due to the recent BSA findings at the April 20xw Safety and Soundness examination, the bank entered into a Written Agreement with the FRB Cleveland. A Safety and Soundness examination was conducted in October 20xx to assess the recent findings and orders of the Written Agreement, although the final S&S report has not been issued, the draft report states that the bank’s overall condition has improved and is considered satisfactory. The exit meeting for this examination is scheduled for December 4, 20xx and at that time management will be informed that the Written Agreement will be lifted.

Updates to the supervisory actions can be found below in the supervisor/enforcement action section of this report.

Other Supervisory Issues or Concerns

Other Examination Types / Examination Date / Rating / Agency /

Significant Findings

Commercial
Commercial
Composite Risk Assessment / 05/12/20xx
10/20/20xx
06/30/20xx / 232322/3
not available at this time (but overall rating will be “2”) / ODFI
FRB / See exam report for further information.
Most recent exam report not finalized
Credit risk is high with a stable and decreasing. Credit risk remains high, but acceptable risk management practices contribute to a decreasing trend. Due to the large amount of classified loans in the profile, proper risk identification remains crucial.
· 
Liquidity risk is moderate and increasing. This is due to the an increased reliance on noncore funding
Operational risk is moderate and stable. Due to the overall substantial compliance with the BSA has been achieved. Day-to-day policies and procedures are adequate to ensure that Currency Transaction Reports and Suspicious Activity Reports are filed in accordance with the BSA. Management has made significant progress in addressing previous examination concerns regarding internal audit. Primary improvements include adherence to the annual audit plan, increased oversight by the audit committee, and improved reporting methods.
Market risk is moderate and stable. The magnitude of fixed-rate mortgage backed securities, fixed-rate mortgage loans, callable securities, and off-balance sheet activities increased the market risk profile.
Legal risk is moderate and stable. The high level of problem loans increases the risk of litigation, as issues are resolved. In addition, fiduciary concerns involving broker selection, proxy voting and mutual fund servicing fees create potential conflicts of interest and customer litigation.
Bank Holding Company / N/A
Information Systems / 04/15/20xw / “Satisfactory.” / FRB
Trust
Trust / 05/05/20xx
04/15/20xw / 21112/2
Composite Rating “2” / The fiduciary risk at this institution is moderate. Weak management oversight and risk management practices allow for the possibility of unnecessary risk to occur which could be better controlled/eliminated if processes were in place for more timely identification and communication. Forturnately, the institution's first line of defense against potential risk is a qualified and knowledgeable staff who are very familiar with respective account circumstances and requirements as well as governing rules and regulation. While these individuals are in place certain risk are mitigated, but if they leave, management will lose this mitigant. While there are no significant concerns at present, management needs to do a better job understanding and monitoring the actions of the front line administrators and portfolio managers. If these steps are taken, this would be considered a low risk institution.
Transfer Agent / N/A
Municipal Securities Dealer / N/A

Supervisory / Enforcement Actions

Commercial: April 20xw Written Agreement

Due to the recent BSA findings at the April 20xw Safety and Soundness examination, the bank entered into a Written Agreement with the FRB Cleveland. According to the most recent S&S examination from October 20, 20xx, the bank’s overall condition has improved and is considered satisfactory. As a result, the Written Agreement will be lifted.

Consumer Complaint Activity

No complaints since previous examination.

Litigation

No pending litigation.

CONSUMER COMPLIANCE RISK MANAGEMENT PROGRAM

Board of Directors and Senior Management Oversight

Senior Management and Board of Director oversight are considered satisfactory. Management is committed to establishing an effective compliance program. Bailey Bros continues to be headed by President Bailey. The following continue to be the reporting responsibilities to the Board of Directors:

q  The Risk Management Committee’s responsibility is to report directly to the Board of Directors. On a monthly basis articles and any changes to compliance regulations are gathered and packaged for the quarterly packet to the board.

q  On a quarterly basis, compliance reviews conducted by the Compliance Officer are submitted to the Risk Management Committee. According to RKO Financial Bancorp, it’s the responsibility of the Risk Management Committee to report on compliance issues that they feel are necessary to forward to the board. According to the president, they are trying to educate the Board on compliance issues every quarter.

q  In January 20xx, the CRA Officer was hired by RKO to oversee CRA of the corporation and Bailey Bros.

Consumer Compliance Program Structure

The previous compliance examination considered Bailey Bros’ compliance program as marginally satisfactory. This perception will remain until the next compliance examination scheduled for third quarter 20xy.

However, during the December 2nd surveillance discussion, the Compliance Officer discussed management plans for a new compliance schedule for 20xy. The Compliance Officer mentioned that Corporate Compliance Officer is in the process of developing a “Regulatory Review Schedule” for all the affiliates under the holding company. This will incorporate a review of all regulations throughout the year, ensuring that reviews will be conducted on all state members under the holding company. The reviews will be conducted at the respective offices and sent to the Compliance Officer for review, who will then forward them on to Corporate Compliance Officer. Then a report will be generated for senior management and an executive summary report will be submitted to the Board of Directors.

Since the schedule was not finalized during this surveillance period, a review of the schedule and reports will be conducted during the next surveillance period or during the upcoming examination in May 20xy.

The Compliance Officer is continuing to conduct fair lending reviews twice a year. Reports are still forwarded to Corporate Compliance Officer for review and then submitted to the Board of Directors.

Policies and Procedures

Polices and procedures were reviewed during the previous examination. According to the report of examination, compliance policies and procedures are reviewed annually and are approved by the Board of Directors.

Any updated policies and procedures will be reviewed as they are submitted to the Reserve Bank and during the compliance examination scheduled during the second quarter 20xy.

Compliance Audits / Internal Controls

The bank’s internal controls and audit functions are considered satisfactory. Currently, the Compliance Officer, conducts reviews on a quarterly basis, which covers various compliance areas: deposit operations, Regulation CC, NOW accounts, ETS. In addition, she is responsible in overseeing the bank’s website.

During the first quarter of 20xx, the Compliance Officer began quarterly reviews of fair lending using the Interagency Procedures. The Corporate Compliance Officer oversees the fair lending reviews conducted by the Compliance Officer. The reviews conducted are very thorough and submitted to upon completion. The reviews include an extensive review of deposit operations and lending.

As mentioned, all audits/reviews are submitted to Corporate Compliance Officer and are summarized and given to the Risk Management Committee. On a quarterly basis, the Risk Management Committee gives an executive summary report to the Board of Directors of the compliance audits/reviews conducted.

All files in the bank’s system continue to be reviewed for flood. All commercial, retail and HELOC loans have been reviewed to ensure all documentation is in the file and checks for adequate insurance was reviewed. The bank has developed written procedures; implemented quarterly reviews of all files and audit conducts random sampling for flood issues. Additionally, the bank has contacted Northcentral Financial Services (the corporate service provider) and requested a listing of all files in flood zones to ensure adequate flood insurance coverage exist on these loans. Follow-up of this review will be conducted during the next quarter’s surveillance.