Rural Bank Leaders Out on the Frontiers of Compliance

By Evan Sparks

It wasn’t too long ago that Ken Clayton, president of Western Bank in Artesia, N.M., was his own compliance officer.

“It’s difficult to get compliance-trained people,” he says of his small town of less than 12,000 in the southeastern corner of New Mexico. “As the president, I was the loan compliance officer,” he says. “The cashier was the operations compliance officer. That worked forever until the FDIC decided forever wasn’t going to work anymore.”

Despite high regulatory ratings, Clayton accepted the examiners’ viewpoint and hired a trained compliance officer from out of town. “But what we’ve run into is when we got that person to town, the bigger institutions with more resources hire that person away,” he explains. “We had that person for like nine months.”

Frustrated by his $195 million bank’s inability to keep up with demand for trained compliance talent, Clayton decided to outsource it. He has a compliance committee to oversee the vendor, which also comes in to train staff and to conduct quarterly audits. “Our compliance is completely outsourced at twice the price of what our compliance officer was,” he groans.

Bankers pride themselves on a dedication to honoring the industry’s regulations. “It’s our responsibility to keep everybody safe and the information about everybody safe,” says Dennis McIntosh, president and CEO of Ozarks Federal, a $222 million thrift in Farmington, Mo. “We’re willing to be the responsible ones. We are going to do it right.”

But for community banks, proving to regulators that they’re “doing it right” has become an increasingly expensive and challenging proposition. And in rural areas—already hard hit by an exodus of talent, fragile economies and aging populations—small banks are especially hard pressed by today’s compliance requirements.

Homegrown talent

“We’re literally 200 miles from anywhere,” says Clayton of Artesia. “We’re 200 miles from Albuquerque, from Lubbock, from El Paso.” As a result, he has to rely on homegrown talent—and, occasionally, native sons and daughters moving home. The small pool makes it difficult to find specialized compliance staff—a common challenge for rural bank leaders.

McIntosh knows he’s “not going to run an ad and get a compliance officer” in rural upstate Missouri. Instead, he has succession plans for every skilled position in the bank, and he looks out for people on his staff who can work independently and have a mind for legal issues—people who might be able to fill those roles with a little time and training.

Donna Petrocco sees this as a positive for her bank. “I think the best ones are homegrown,” she says, noting that at Valley Bank and Trust in Brighton, Colo., she has a compliance officer, BSA officer and internal auditor who started as tellers or branch operations officers years before. “They understand your bank,” she says. “You promote them and train them the way you want things to be done.”

Jeff Mozena, president and CEO of Premier Bank, a $284 million institution in Dubuque, Iowa, agrees. “We brought our person up internally,” he says. “They came to us with no knowledge and we just invested in it. We’re very fortunate we have a top-notch extremely bright employee who gets it and works really well with our regulators. We have not had any issues at all, none at all.”

Training down and up

With the wave of ongoing changes in compliance, bankers prioritize training for staff. “From the overall employee perspective, most of the training that’s going on is in the compliance area,” says Mozena. He primarily offers computer-based training—alternating every couple years between offerings from ABA and another vendor—supplemented with periodic face-to-face instruction. “We have a [compliance] training program for each employee of the bank that they have to go through during the course of the year.”

McIntosh, whose bank is solely focused on mortgage lending, has compliance training embedded in his bank’s loan origination system. “As you’re putting a loan online, if you’ve got a question or there is a little alert, you can literally stop and see a video in the middle,” he says. “Our loan processors and closers are really appreciating the compliance function with our new loan origination system.”

In addition to ensuring employees are trained, part of the CEO’s unique role in compliance is ensuring board members are up to speed on compliance issues and adequately trained for their specific duties. “We typically give them an update at every meeting on something compliance-related,” says John Klebba, chairman and president of $337 million Legends Bank in Linn, Mo. “It’s rare for us to have a board meeting where there’s not something compliance-related that goes on.”

Legal eyes

As compliance concerns have ballooned in recent years with the implementation of the Dodd-Frank Act, rural bank CEOs are finding it valuable to have in-house counsel to complement the compliance staff. McIntosh is an attorney by training in addition to serving as president and CEO of the bank, and he says he often brings his training to bear.

So does Klebba, who describes himself as a “reformed and recovering attorney” who is “heavily involved on the compliance side.” He notes that compliance staff can sometimes “over-worry” about a problem but that his legal experience helps reassure employees on “what is not a problem.”

Meanwhile, Petrocco and Clayton have full-time attorneys on staff. “We were always hiring an attorney for legal advice, for foreclosure, for repo,” says Petrocco. “I think we’ve saved thousands and thousands of dollars by having an in-house general counsel. Instead of having a compliance officer review every single thing, often our attorney will look at it just to make sure it is compliant because he knows the regs.”

The appraiser drought

One issue unique to rural banks seeking to stay compliant is the increasingly dire shortage of qualified rural appraisers. Since 2007, the appraiser workforce has withered by more than 20 percent, and the Appraisal Institute estimates an additional 25 to 30 percent drop over the next 10 years—with the most pronounced effects in rural areas. (See “Surviving the Appraiser Drought” in the March/April 2017 issue of the ABA Banking Journal.)

“There are appraisers in St. Louis an hour and 15 minutes away, but they don’t know a single one of these rural roads,” says McIntosh. “If they can get there, they’re not going to know the neighborhood. They’re not going to know whether or not the comp is a good one.”

One challenge is the regulatory pressure for independence. “We were doing our own appraisals” before the housing crisis, McIntosh reflects. “We had certified appraisers with our organization that were also producers, and [examiners] said you can’t do that anymore. They are more interested in independence than they are in competence.”

Another is sheer numbers. “You can’t use the same one more than a certain number of times,” explains Petrocco. “You’ve got to rotate it through”—even if there aren’t enough qualified appraisers to spread the business around to. And with a high bar to become a qualified appraiser, few are entering the sector. “I don’t think we’ve got a certified appraiser on our list of appraisers who’s less than 70 years old right now,” says McIntosh.

CEO: compliance executive officer?

One thing CEOs agree on is that compliance will continue to remain central to their jobs. Even if they aren’t serving as their banks’ compliance officers directly, as Ken Clayton did, it’s at the forefront of their minds. “In everything I do, I’m always thinking about it,” says Petrocco. “Now my first thought is, ‘I wonder how the examiner is going to look at this.’”

Clayton agrees. “More than a major time commitment, it affects your thinking,” he says. “Compliance is part of your everyday decision-making when you go through your day.”

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About Evan Sparks

Evan Sparks
Evan Sparks is editor-in-chief of the ABA Banking Journal and vice president for editorial services at the American Bankers Association.