Regulators are close to tightening standards for links between community banks and the firms they hire
The Record
When Oak Ridge-based Lakeland Bank needed heating and air conditioning services, it tapped a company run by Mark J. Fredericks, who is on the bank’s board of directors.
For a portion of its legal work, Wayne-based Valley National Bank turned to the lawyer Graham O. Jones, a board member, who received $310,681 last year for debt collection work and bank-customer loan closings.
And when ConnectOne Bancorp, based in Englewood Cliffs, went public last year, it benefited from the advertising and marketing expertise of the public relations firm MWW, which was paid $525,800 for its services. Michael Kempner, founder and chief executive of East Rutherford-based MWW, is a co-founder and board member of the bank.
These so-called related-party transactions, which have been reviewed by regulators, illustrate how board membership, especially in small banks, often is accompanied by business relationships.
Bankers say these deals are often good for the bank and its shareholders. Directors who provide professional services or who rent real estate to the banks they serve sometimes charge less than they would charge another customer or tenant. And they are often large shareholders, with a vested interest in the bank’s success.
But the deals also raise real or perceived issues of insiders using their positions to help themselves. The deals must be disclosed to regulators — ranging from the Securities and Exchange Commission and the Federal Deposit Insurance Corp. on the federal level to the state Department of Banking and Insurance — who are on the lookout for conflicts of interest, fraud and lax corporate governance that could put shareholders’ investments or depositors’ funds at risk. The regulators want assurance that fees paid to a company owned in whole or part by a board member are in line with what the bank would pay a company with which it has no insider relationship. In other words, no sweetheart deals.
And these transactions will get even closer scrutiny under new standards proposed by the Public Company Accounting Oversight Board, an industry watchdog, that are scheduled to take effect a week from today, subject to approval of the SEC.
"The regulators take a very close look at this," said Bert Ely, a banking consultant in Alexandria, Va. "This is often a factor in bank problems and failures because insiders take too much money out of the bank," he said.
"The agencies are very consumer-oriented right now, and they are taking a very jaundiced view of these transactions," said Donald J. Musso, president and chief executive of FinPro, a consulting firm in Somerset County.
Industry experts say the scrutiny has intensified since the financial collapse and regulatory reforms, which have made banker-regulator relations more contentious.
The SEC requires publicly traded companies to disclose related-party transactions that exceed $120,000 in a given year. Related parties are defined as directors and executive officers and their immediate family members, including in-laws and stepchildren. They also include shareholders who own 5 percent or more of a company and their family members. Privately held banks must disclose insider deals to regulatory examiners, who are trained to treat them as potential signs of abuse or fraud.
Ely points to the case of Vernon Hill, former chairman of Cherry Hill-based Commerce Bancorp, who was investigated over millions of dollars in bank payments made each year to companies that Hill family members controlled, including one owned by his wife that provided design work and furnishings for bank branches. The investigation led to his ouster in 2008, around the same time Commerce agreed to be bought by TD Bank.
More locally, Mariner’s Bank, based in Edgewater, was ordered by state and federal regulators in early 2012 to tighten its controls on loans to insiders and other insider relationships that were not described in detail publicly. The privately held bank continues to operate under increased oversight.
Thomas Shara, chief executive of Lakeland Bancorp, parent of Lakeland Bank, noted that in addition to the Fredericks heating oil deal, in which Fredericks was the winning bidder, Lakeland leases a branch in Little Falls from Fletcher Holdings, which received $153,031 in rent last year from the bank. Board member Stephen R. Tilton Sr. is the chairman and chief executive of Fletcher Holdings.
"Steve Tilton and Mark Fredericks are two of our largest individual shareholders, and they have a vested interest on both sides, and they are going to do what’s right for the bank," Shara said. "As long as the transactions are arm’s length and fully disclosed, I don’t think there is anything wrong with them."
Shara was the only banker who agreed to be interviewed for this article. Others did not respond, declined to comment or responded with general statements.
MWW’s Kempner, who is also deputy national finance chairman for the Democratic National Committee and a major fundraiser for President Obama, said in an emailed response to The Record’s questions about the public relations work his firm does for ConnectOne that "MWW is proud of the work that it has done on behalf of ConnectOne — the marketing and communications program has been a material part of the bank’s success." The bank raised about $48 million in a February initial public offering by selling more than 1.8 million shares that have increased in value by more than a third.
The New York Stock Exchange and Nasdaq require that a majority of a company’s board members be "independent" overseers. Nasdaq, on which ConnectOne trades, says directors cannot be considered independent if they engage in related-party transactions greater than either $200,000 or 5 percent of the annual sales of the director’s company.
ConnectOne said in a regulatory filing that the board had determined the fees the bank pays to Kempner’s firm do not affect Kempner’s status as an independent director, in part because the sum is a small portion, less than 1 percent, of MWW’s total revenue.
At an investor conference in Manhattan in the summer, ConnectOne Chairman and CEO Frank Sorrentino III also declined to discuss the related-party transactions.
"It’s all been disclosed to our regulators," he said. "It has been vetted by our regulatory agencies, our auditors, by everyone. So we have complete transparency about what we do and what we will do in the future," he said.
Valley National Bancorp, one of the largest New Jersey-based commercial banks with one of the largest boards, also has disclosed a number of related-party transactions.
The lender said in a 2013 filing with regulators that it paid $90,000 in 2012 consulting fees to MG Advisors, owned by Michael Guilfoile, spouse of a director, Mary Guilfoile.
Valley also disclosed that the son-in-law of longtime Chairman and CEO Gerald Lipkin has received more than $650,000 in bank-owned life insurance commissions since 2001 because he introduced a broker to the bank who sold the policies. Over the life of the policies the son-in-law, Robert Keith Sauertig, a financial adviser at Park Avenue Securities, will receive nearly $1 million in commissions, the bank said in a filing with regulators.
Sauertig noted in a phone interview that the bank has disclosed the relationship in its filings with the SEC every year since 2001. "The bank does not pay me, the third party insurance broker pays me," he said.
The company said in the filing that the commission arrangement is typical for the life insurance industry, and that Lipkin was not involved in the negotiations.
Publicly traded banks and other public companies may soon face tougher audits of these types of related party transactions.
If the SEC approves the new standards, independent auditors will have to evaluate more closely how well such deals are disclosed and accounted for in financial reports of all public companies. The new standards would require auditors to go to greater lengths to understand financial relationships with insiders that might increase risk of financial reporting misstatements. This includes performing additional inquiries to verify that such transactions are conducted at arm’s length. The new standards would be effective for audits of fiscal years beginning on or after Dec. 15.
Industry experts say smaller companies, including many publicly traded community banks, tend to have greater numbers of related-party transactions and are likely to be among the companies most affected by stronger audits — which could result in the unwinding of some long-standing business relationships.
So-called emerging-growth companies, including ConnectOne Bancorp, which are allowed to raise capital under relaxed regulatory requirements, may be exempt from the new standards. The 2012 Jumpstart Our Business Startups Act says that any rules adopted by the Public Company Accounting Oversight Board after April 5, 2012, do not apply to the audits of emerging-growth companies, unless the SEC "determines that the application of such additional requirements is necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition and capital formation." The oversight board is reviewing public comments on the matter.
Herb Snyder, chairman of the accounting, finance and information systems department at North Dakota State University in Fargo, who has written on the subject, said audits may become more expensive for companies that have a lot of related-party transactions, but "the costs are consistent with the need to deal with the increased risk of [financial] misstatements."
Musso, the Somerset County consultant, said that in light of increased government scrutiny, a growing number of community bankers, fearing costly enforcement actions, are avoiding any deals likely to draw criticism from consumer advocates or attention from regulators.
"People are using an abundance of caution," he said. "They are afraid of being in a conflicted position."
For a portion of its legal work, Wayne-based Valley National Bank turned to the lawyer Graham O. Jones, a board member, who received $310,681 last year for debt collection work and bank-customer loan closings.
And when ConnectOne Bancorp, based in Englewood Cliffs, went public last year, it benefited from the advertising and marketing expertise of the public relations firm MWW, which was paid $525,800 for its services. Michael Kempner, founder and chief executive of East Rutherford-based MWW, is a co-founder and board member of the bank.
These so-called related-party transactions, which have been reviewed by regulators, illustrate how board membership, especially in small banks, often is accompanied by business relationships.
Bankers say these deals are often good for the bank and its shareholders. Directors who provide professional services or who rent real estate to the banks they serve sometimes charge less than they would charge another customer or tenant. And they are often large shareholders, with a vested interest in the bank’s success.
But the deals also raise real or perceived issues of insiders using their positions to help themselves. The deals must be disclosed to regulators — ranging from the Securities and Exchange Commission and the Federal Deposit Insurance Corp. on the federal level to the state Department of Banking and Insurance — who are on the lookout for conflicts of interest, fraud and lax corporate governance that could put shareholders’ investments or depositors’ funds at risk. The regulators want assurance that fees paid to a company owned in whole or part by a board member are in line with what the bank would pay a company with which it has no insider relationship. In other words, no sweetheart deals.
And these transactions will get even closer scrutiny under new standards proposed by the Public Company Accounting Oversight Board, an industry watchdog, that are scheduled to take effect a week from today, subject to approval of the SEC.
"The regulators take a very close look at this," said Bert Ely, a banking consultant in Alexandria, Va. "This is often a factor in bank problems and failures because insiders take too much money out of the bank," he said.
"The agencies are very consumer-oriented right now, and they are taking a very jaundiced view of these transactions," said Donald J. Musso, president and chief executive of FinPro, a consulting firm in Somerset County.
Industry experts say the scrutiny has intensified since the financial collapse and regulatory reforms, which have made banker-regulator relations more contentious.
The SEC requires publicly traded companies to disclose related-party transactions that exceed $120,000 in a given year. Related parties are defined as directors and executive officers and their immediate family members, including in-laws and stepchildren. They also include shareholders who own 5 percent or more of a company and their family members. Privately held banks must disclose insider deals to regulatory examiners, who are trained to treat them as potential signs of abuse or fraud.
Ely points to the case of Vernon Hill, former chairman of Cherry Hill-based Commerce Bancorp, who was investigated over millions of dollars in bank payments made each year to companies that Hill family members controlled, including one owned by his wife that provided design work and furnishings for bank branches. The investigation led to his ouster in 2008, around the same time Commerce agreed to be bought by TD Bank.
More locally, Mariner’s Bank, based in Edgewater, was ordered by state and federal regulators in early 2012 to tighten its controls on loans to insiders and other insider relationships that were not described in detail publicly. The privately held bank continues to operate under increased oversight.
Thomas Shara, chief executive of Lakeland Bancorp, parent of Lakeland Bank, noted that in addition to the Fredericks heating oil deal, in which Fredericks was the winning bidder, Lakeland leases a branch in Little Falls from Fletcher Holdings, which received $153,031 in rent last year from the bank. Board member Stephen R. Tilton Sr. is the chairman and chief executive of Fletcher Holdings.
"Steve Tilton and Mark Fredericks are two of our largest individual shareholders, and they have a vested interest on both sides, and they are going to do what’s right for the bank," Shara said. "As long as the transactions are arm’s length and fully disclosed, I don’t think there is anything wrong with them."
Shara was the only banker who agreed to be interviewed for this article. Others did not respond, declined to comment or responded with general statements.
MWW’s Kempner, who is also deputy national finance chairman for the Democratic National Committee and a major fundraiser for President Obama, said in an emailed response to The Record’s questions about the public relations work his firm does for ConnectOne that "MWW is proud of the work that it has done on behalf of ConnectOne — the marketing and communications program has been a material part of the bank’s success." The bank raised about $48 million in a February initial public offering by selling more than 1.8 million shares that have increased in value by more than a third.
The New York Stock Exchange and Nasdaq require that a majority of a company’s board members be "independent" overseers. Nasdaq, on which ConnectOne trades, says directors cannot be considered independent if they engage in related-party transactions greater than either $200,000 or 5 percent of the annual sales of the director’s company.
ConnectOne said in a regulatory filing that the board had determined the fees the bank pays to Kempner’s firm do not affect Kempner’s status as an independent director, in part because the sum is a small portion, less than 1 percent, of MWW’s total revenue.
At an investor conference in Manhattan in the summer, ConnectOne Chairman and CEO Frank Sorrentino III also declined to discuss the related-party transactions.
"It’s all been disclosed to our regulators," he said. "It has been vetted by our regulatory agencies, our auditors, by everyone. So we have complete transparency about what we do and what we will do in the future," he said.
Valley National Bancorp, one of the largest New Jersey-based commercial banks with one of the largest boards, also has disclosed a number of related-party transactions.
The lender said in a 2013 filing with regulators that it paid $90,000 in 2012 consulting fees to MG Advisors, owned by Michael Guilfoile, spouse of a director, Mary Guilfoile.
Valley also disclosed that the son-in-law of longtime Chairman and CEO Gerald Lipkin has received more than $650,000 in bank-owned life insurance commissions since 2001 because he introduced a broker to the bank who sold the policies. Over the life of the policies the son-in-law, Robert Keith Sauertig, a financial adviser at Park Avenue Securities, will receive nearly $1 million in commissions, the bank said in a filing with regulators.
Sauertig noted in a phone interview that the bank has disclosed the relationship in its filings with the SEC every year since 2001. "The bank does not pay me, the third party insurance broker pays me," he said.
The company said in the filing that the commission arrangement is typical for the life insurance industry, and that Lipkin was not involved in the negotiations.
Publicly traded banks and other public companies may soon face tougher audits of these types of related party transactions.
If the SEC approves the new standards, independent auditors will have to evaluate more closely how well such deals are disclosed and accounted for in financial reports of all public companies. The new standards would require auditors to go to greater lengths to understand financial relationships with insiders that might increase risk of financial reporting misstatements. This includes performing additional inquiries to verify that such transactions are conducted at arm’s length. The new standards would be effective for audits of fiscal years beginning on or after Dec. 15.
Industry experts say smaller companies, including many publicly traded community banks, tend to have greater numbers of related-party transactions and are likely to be among the companies most affected by stronger audits — which could result in the unwinding of some long-standing business relationships.
So-called emerging-growth companies, including ConnectOne Bancorp, which are allowed to raise capital under relaxed regulatory requirements, may be exempt from the new standards. The 2012 Jumpstart Our Business Startups Act says that any rules adopted by the Public Company Accounting Oversight Board after April 5, 2012, do not apply to the audits of emerging-growth companies, unless the SEC "determines that the application of such additional requirements is necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition and capital formation." The oversight board is reviewing public comments on the matter.
Herb Snyder, chairman of the accounting, finance and information systems department at North Dakota State University in Fargo, who has written on the subject, said audits may become more expensive for companies that have a lot of related-party transactions, but "the costs are consistent with the need to deal with the increased risk of [financial] misstatements."
Musso, the Somerset County consultant, said that in light of increased government scrutiny, a growing number of community bankers, fearing costly enforcement actions, are avoiding any deals likely to draw criticism from consumer advocates or attention from regulators.
"People are using an abundance of caution," he said. "They are afraid of being in a conflicted position."
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