As your bank grows either organically or through a merger/acquisition, it’s important to make sure the internal operations, overall organizational structure and “governance” considerations grow with it. Banking organizations that have historically operated in the $100-$200 million asset size face new considerations when they cross the $250-$300 million benchmark. Operations activities that historically may have been more informal in nature should be reconsidered. For instance, management needs to be sure accounting, risk and product decisions are adequately documented within the institution. Additional loan and deposit compliance resources will be needed (which means additional expenses need to be budgeted). On the staffing side, the chief lending and chief credit officer positions are often split once a bank reaches the $250-$300 million size. The bank and holding company’s organizational chart should be reviewed to determine whether any new management is needed, in particular whether a chief operations officer or similar position is needed. Internal audit is generally still outsourced. It’s important also to make sure your compensation plans are competitive as your institution grows. At the board level, make sure you include organizational risk and strategic planning in your board’s agenda and discussions.
Once your bank has $500 million in assets as of the first day of its fiscal year (based on its most recent 12/31 call report), additional accounting and internal control federal regulatory requirements come into play, including requirements for annual independent audits, additional requirements that apply to the board’s audit committee, and annual report by management on compliance with S&S laws and ICFR. In addition to other requirements/criteria, audited financial statements must include HUD-mandated testing and report from the audit firm. The federal regulations also include specific requirements that the audit firm must meet. From an internal perspective, the board’s audit committee must be comprised of outside directors, a majority of which are independent of management. The audit committee must meet at least quarterly. Management has requirements regarding internal controls and reporting once a banking organization reaches this $500 million threshold. Clearly, more formal procedures and reporting becomes necessary at this point in bank’s life cycle. A board of directors should (1) maintain a board approved set of written criterial for determining whether a director serving on the audit committee is an outside director and is independent of management and (2) consider the “independence” issue” not only from the standpoint of the individual director, but also from the position (standpoint) of the persons or organizations with which the director has an affiliations.
These are just a few of the issues that banking organizations and their management need to consider as they cross key asset thresholds. We advise many bank holding company and bank boards and CEOs on how to prepare for growth and what to do once they reach the next asset level, whether it be $250 million, $500 million, $1 billion or more.
Jenny McCain is co-chair of Maynard Cooper’s Banking Group. With more than 17 years of experience, Jenny is recognized by The Best Lawyers in America for Banking Law and by Chambers USA: America’s Leading Lawyers for Business for Bank Regulatory expertise.