The Certified Community Bank Director Program (CCBD) will be held October 30-November 1, 2014 at the Cox School of Business on the campus of Southern Methodist University. The CCBD designation is a collaboration of and is administered by IBAT and the Southwestern Graduate School of Banking (SWGSB) Foundation. A comprehensive curriculum has been created to address all areas of bank directorship – from duties and responsibilities to the foundations of bank finance.
IBAT also offers a bank director series of webinars for live viewing, digital download or CD-Rom receipt. Upcoming programs include:
By S. Scott MacDonald, Ph.D.
The world is rapidly changing and the best bank boards are always looking down the road in an attempt to continually improve and modernize their institutions to serve their communities better. Below, I have outlined a few of the more pressing strategic questions bank boards should be asking.
Prepare for and Continue to be Mindful of Economic Conditions
The economy continues to struggle to get traction. A total lack of fiscal policy and monetary policy that pegs the return to risk at zero are both hindering a full recovery. This has forced the Federal Reserve into heroic and unprecedented measures. They have increased their balance sheet over fourfold, kept short-term rates at near zero for almost six years, and purchased nearly 80 percent of net new issues of mortgage-backed securities using quantitative easing. We all know interest rates must increase “someday.” The question is when is someday and how much will they increase?
Bank boards should be asking, “Do we truly know the degree of interest-rate risk on our books?” Interest rates could increase sooner and faster than we expect, and the banking industry has been reaching up the yield curve by increasing their holdings of longer-term assets, in particular, mortgage-backed securities. Don’t feel alone; the Fed is the worst offender. In a recent article in the Wall Street Journal, Scott Hein from Texas Tech University argues the Fed would fail its own stress test due to significant interest-rate risk. The Fed is borrowing short-term by paying 25 basis points for bank reserves and investing primarily in longer-term treasuries and mortgage-backed securities, similar to many savings and loans in the 1980s. This massive and unprecedented increase in the Fed’s balance sheet will inevitably lead to much higher levels of inflation and a corresponding increase in interest rates. The Fed is unlikely to be able to unwind this gracefully. Don’t do as the Fed does by reaching for yield with longer-term assets. You don’t have a printing press!
Build and Maintain a Superior Balance Sheet
A high quality balance sheet is critically important today. There are many parts to a strong balance sheet: high capital levels; a diversified, high quality portfolio, which is not overweight longer-term, fixed-rate assets; and strong liquidity built on a solid core deposit base and limited noncore borrowings.
Maintain a strong capital base. A strong capital base takes into consideration the regulatory environment, the strength of the bank’s balance sheet and the board of directors’ risk appetite. Capital is needed to meet regulatory requirements, but, more importantly, to support the strategic direction of the institution. Regulators look to capital as one of the indicators the board and management fully understand the level of risk the bank has assumed and is prepared if everything does not go as planned.
The second purpose of a strong capital position is strategic. The more risk the institution assumes the greater levels of capital needed or are expected by regulators. Those institutions with the greatest growth or acquisitions opportunities in their future need additional capital. Institutions with concentrations in loans, products, geographic areas or other income sources, might warrant additional capital to support these activities as well. Bank boards should ask, “Do we have sufficient capital to support our strategic objectives?”
Finally, having sufficient capital today might not be enough. The last thing you want to do is start looking for capital after you actually need it! Bank boards should also ask, “What would we do if we needed to raise capital?” Develop a contingency capital plan by working from the inside out. Start inside the board room: If the bank had an opportunity or was in need of additional capital, would you be willing to contribute additional capital? If the answer is not as positive as you hope, you must determine what you are not doing correctly to make it attractive to your own board and management? Then look outside the board room. “Where could we raise additional capital if needed?”
Maintain a high quality diversified portfolio. Be mindful of all concentrations, whether they be in loan types, asset maturities, products, geographic areas and even people. One problem we face in diversifying our portfolio is the tools in our tool belt. If we only have one tool, a hammer, all problems look like nails. Diversification out of real-estate loans, for example, often requires retooling. If our loan officers are primarily real-estate lenders, asking them to start making cattle loans might be a stretch! We must either retrain or retool to maximize their productivity. Diversification of loan types, products and geographic areas is also an opportunity to expand our reach into new markets by employing new talent with new skills. Bank boards should ask, “Do we have the right talent in the right places to fulfil our vision for the future?”
Strong liquidity. A solid core deposit base with limited noncore borrowings are the building blocks to strong liquidity. Similar to capital, you don’t want to start looking for liquidity after you need it. Today, our ability to grow is no longer limited to our ability to grow core deposits. Banks have many more funding sources available to fund growth, e.g., noncore borrowings. But those same funding sources represent contingent liquidity sources that once used, are no longer available as liquidity sources. In fact, many of the recent bank failures were due to an over dependence on noncore borrowings. Today’s low interest rates mean brokerage companies’ money market accounts are less attractive and have left many community banks flush with deposits. As interest rates begin to increase, however, returns offered by the brokerage houses will improve and put pressure on banks’ deposit sources and with it, potential liquidity needs. Bank boards should ask, “As interest rates increase and loan demand picks up, will we have sufficient liquidity?”
Build and Maintain a Strong Management Team
Most community banks view their people as their single greatest asset. Community banks are in the relationship banking business rather than the transactional banking business. Community banks develop and nurture their relationships with customers to provide superior financial services. Building and maintaining a strong management team is central to this approach. To be the best, we have to train our staff to be the best. The staff in a community bank often wears many hats and must be able to contribute in many areas. Bank boards should ask, “Do we have a high quality training program that supports our staff in being the best providers of superior financial services?”
But building a strong management team is still not enough. We must retain them and prepare for succession. Community banks have historically suffered from a future talent gap at the top, but it is more severe this time. Some of our best and brightest are the aging baby boomers and there is a smaller and smaller population of qualified folks coming up the ranks. What is the solution? Train and develop it. Find it externally. Buy it. Or sell into it. Training and developing young staff is typically preferred, but this can be years in the making. Opportunistic hires as well as acquisitions of other institutions or teams are more immediate, but more costly and could dilute the bank’s culture. Bank boards should ask, “What is our long-term plan for succession?” Without a viable long-term succession plan, the board should ask the very difficult question, “Will we maximize the value of the bank by exiting the business?”
Prepare for and Continue to be Mindful of New Regulatory and Compliance Requirements
We must continue to change the regulatory environment as we can. However, this new environment is here to stay for a while. We must build a new banking model that not only accepts the new environment, but also can be successful in it. Know when to hold ‘em, know when to fold ‘em, know when to walk away and know when to run! Train your staff extensively. Create a culture that makes regulatory compliance everyone’s job.
Embrace New Technology
The bank’s technology will make the difference between a successful and less successful company. “But this time it is different” is a familiar refrain. During the past half-decade we spent much of our efforts playing defense while technology moved on at a dizzying pace. One only needs to visit a Nordstrom’s or Starbuck’s to see the progress made in America’s payment system. Many retailers no longer use expensive cash registers which require you to go to the counter to check out. They now come to you in the middle of the store with a $600 iPhone. At Starbuck’s you can pay for coffee using your iPhone and a QR code. No money needed. With all this new technology, bank boards should ask, “Do we have all the technology we need, or have we fallen behind?” Employ all the new technology you can and eliminate the perceived “large bank technology advantage.” It’s much less expensive than it used to be. Then hand your customers your business card with your cell phone number on it! Let them know you are their financial consultant, available 24/7!
Re-evaluate and Modernize the Branching Model
Branch banking has been the lifeblood of many institutions over the past two decades. When moving into a new market, the branch was often seen as the only viable means of announcing our arrival. Today, however, the expense and low returns to the brick-and-mortar branch require a re-evaluation of this long-time method of delivering services. Many banks have too many branches, or they are too large, or in the wrong location. Just as we have been slow to adopt new technology we have been slow to adopt new methods of delivering services. Bank boards should be asking, “Is our branching strategy appropriate going forward?” “Are our branches the appropriate size and in the correct locations?”
The role of the brick-and-mortar branch will change dramatically in the next decade. The airlines, for example, have a well-orchestrated push to reduce costs by guiding passengers to “self-serve” using ticketing kiosks. Ditto grocery stores, gas stations, automobile insurance and Internet shopping. Banks have resisted and held fast to expensive structures to provide the most common banking services. Smart ATM machines, like ticketing kiosks, allow for smaller branches and fewer staff. Teach your customers to self-serve with technology. I hated the airline kiosk a few years back, now I often choose it over a ticketing agent! The branch bank is not dead. It just needs to be modernized for the new technology age.
Controlling Noninterest Expense
Controlling costs must be a strategic objective, not a once-a-year exercise. Improving earnings is not just about generating more income, but also about controlling or reducing expenses. Bank boards should ask, “Do we have a strategic cost-control program?” Surprisingly, many don’t. Employees fear the words “cost control.” Yet, staff is often the best resource for controlling overhead. Ask them to involve their entire departments. Create incentives for great ideas. If our people are the best, let them dazzle us with their ability to contribute!
Generating Noninterest Income
Larger banks generate almost twice as much noninterest income to total assets as smaller institutions. This is often due to staff being unfamiliar with the products the bank offers, rather than not charging fees. Bank boards should ask, “Do we have the all the products we need? Is the staff knowledgeable about them? Are they priced correctly?” For community banks, it’s not about fees. Fees are a bad word to customers, yet we are the guiltiest in promoting this. When was the last time you paid a FEE for a nice steak dinner? Hopefully, the price paid was commensurate with its value. It’s not about charging fees. It’s about delivering superior financial solutions at a reasonable price. The real opportunity comes from offering dessert with the steak dinner. That is, do we offer all the products our customers might want or need? Does our staff even know there’s a dessert menu?
Boards spend a good deal of time looking in the rear view mirror, looking over historical financials. But the real questions bank boards should be asking are the strategic ones. The best boards spend their time looking out the front windshield determining where we are going rather than where we have been!
S. Scott MacDonald, Ph.D. is President and CEO, SW Graduate School of Banking Foundation, Director, Assemblies for Bank Directors, and Adjunct Professor, Edwin L. Cox School of Business, Southern Methodist University, email@example.com.
Community bank CEOs, IT personnel and operations staff are called to participate in IBAT’s Annual Technology Survey before Wednesday, September 10.
The survey seeks to identify trends in mobile and online banking adoption by bank customers, as well as current technology priorities of Texas community banks.
“The information provided by IBAT members in this survey plays a critical role in helping IBAT build our education programs at events like TechMecca,” said IBAT President and CEO Chris Williston.
The Financial Services - Information Sharing and Analysis Center (FS-ISAC), a non-profit financial industry owned association, is co-sponsoring a free two-day, table-top exercise called Cyber Attack Against Payment Processes (CAPP). This exercise is designed to help bankers assess their institution’s readiness in the event of a cyber attack. It takes approximately one hour each day and FS-ISAC membership is not required to participate.
In urging bank participation, Texas Banking Commissioner Charles G. Cooper sent an email saying, “Executive members of the Texas Bankers Electronic Crimes Task Force who have participated in previous sessions have said the exercise requires minimal work and has helped prepare their staff to defend against inevitable cyber fraud. The exercise is an excellent way for institutions to help develop their corporate culture of security, which is increasingly being evaluated during examinations due to its importance in today’s banking environment.”
The registration deadline for the first exercise on September 9-10 is September 5. The exercise is repeated on September 16-17 with a registration deadline of September 12. Registration information and additional details are located on the FS-ISAC website.
Also on the cyber security front, last week federal and state bank regulators were provided with IP addresses associated with intrusions against the financial sector. The agencies sent emails to regulated entities recommending that they forward the IP addresses to their IT staff or network service provider(s) and add them to the list of malicious addresses for blocking and network monitoring. If you have not received an email from your regulator with these IP addresses, please contact them directly.
IBAT Endorsed Provider Promontory Interfinancial Network is hosting a complimentary webinar on September 9. Former Vice Chairman of the Federal Reserve Alan Blinder paints a detailed picture of the current economic situation and explores what goes into the Federal Reserve’s monetary policy.
- Overview of current economic conditions and key market data.
- Factors most likely to influence market reactions.
- Evaluation of the timing and degree of a potential Fed rate increase.
In October 2013, federal regulators published a Notice of Proposed Rulemaking to implement the Basel III liquidity coverage ratio (LCR) for banking institutions with more than $50 billion in assets. The rule, which is expected to be final next week, would exclude municipal securities as "qualifying liquid assets" for the purpose of calculating the LCR for large institutions.
"While it is important to note that this rule only applies to very large banks, this rule has the potential to negatively affect municipal market pricing and liquidity in the short term," said Ed Krei, partner with The Baker Group in Oklahoma City. "But we expect the impact to be minimal and short-lived."
The Baker Group, one of IBAT's endorsed service providers, issued an advisory to clients late last week that can be found here.
Community banks in Texas had nearly 30% of their investment portfolio holdings in municipals at the end of 2013, and the percentage of municipal holdings has steadily increased for the past five years.
For more on this issue and other factors affecting the asset/liability management strategy of your bank, plan to attend the Investment and Asset/Liability Management Summit on November 6, in San Antonio.
Speaking to the annual Padgett Stratemann Financial Institutions Forum last week in San Antonio, IBAT President and CEO Chris Williston addressed IBAT and ICBA initiatives for obtaining meaningful regulatory reform in Congress.
"Everything has been teed up" he told the group of 100 CEOs and CFOs gathered at the meeting. "And many of the bills have passed the U.S. House of Representatives."
Williston went on to say that while he was not optimistic that any legislation would pass the Senate and be sent to the President in this Congress before or after the November elections, he believes that community bank regulatory reform will be a priority when the next Congress commences in mid-January.
"This is no time to let up. We have to continue to tell our story and relay real life examples to demonstrate that regulatory overkill is stifling consumer and small business lending availability," he added.
The annual event features industry speakers along with Padgett CPA staff discussing top-of-mind tax and accounting issues of importance to community banks.
If you want to be a part of the strategic planning team in your bank, you'll need to be up-to-date on the latest changes affecting the community banking industry. New CFPB mortgage rules, increased scrutiny of fair lending and IT security are just three of the most pressing issues operations officers must be prepared to help their financial institutions address in the days ahead.
Come to the 34th year of the IBAT Bank Operations Institute Sunday, October 12th - Friday, October 17th on the campus of SMU in Dallas. We encourage you to select someone from your bank to attend this critical operations school.
What is BOI? Bank Operations - Pure and Simple
Participants achieve a comprehensive understanding of community bank operations and how it contributes to the overall success and profitability of the bank. The program is designed by our advisory board, made up of regulators and bankers, and is based on the most current regulations and exam practices. Because the advisory board provides relevant issues, the curriculum is dynamic. Presentation styles include lecture, case studies, simulations and interactive class exercises.
What's the benefit? Operational Efficiencies and Compliance
Your bank benefits from greater operational efficiencies, enhanced regulatory compliance and a greater awareness of income opportunities driven from the operational side of the bank.
The CFPB finalized an IBAT-supported extension to a temporary exception that allows federally insured financial institutions to estimate third-party fees and exchange rates when providing remittance transfer disclosures to account holders when exact amounts cannot be determined. The CFPB said that the extension, which expires on July 21, 2020 and will not be renewed, should allow time to develop ways to provide consumers with exact fees and exchange rates for all remittance disclosures.
"The extension reduces uncertainty regarding our community banks’ ability to comply with disclosure requirements relating to the permissibility of using third-party fees and exchange rate estimates," said IBAT President and CEO Chris Williston, "and should stem the tide of community banks exiting this market."
Last week’s news of a high profile data breach of Tennessee-based Community Health Systems (CHS) has potential implications for Texas community banks and their customers. The company, which owns and operates hospitals in 26 states (including Texas), fell victim to malware which exploited network vulnerability originating from the Heartbleed security flaw. The breach resulted in the loss of critical information on 4.5 million patients including names, birth dates and social security numbers. No medical records or credit card numbers were compromised, according to a company release.
Per the CHS website, it owns or operates 19 hospitals in Texas, including locations in Abilene, Alpine, Big Spring, Brownwood, Cedar Park, College Station, Corsicana, Granbury, Hillsboro, Jourdanton, Laredo, Longview, Lufkin, Mesquite, San Angelo, Tomball, Weatherford and Victoria.
“The case is a warning sign for banks to carefully check all computing devices connected to their networks for vulnerability to Heartbleed and to renew their diligence in monitoring customer accounts for signs of fraud,” wrote Penny Crosman of American Banker. Crosman’s article also includes practical considerations for bankers to take next steps in ensuring that network-connected devices and third-party applications don’t pose a potential risk to bank systems.
We’re a “go” for IBAT Winter Summit XV! The top regulators are in... the attorney panel is back... and we hope to see you in South Lake Tahoe February 8-10, 2015. A unique education value in a relaxed setting at a terrific venue.
Watch for more information and registration information on this popular program.
Last week, the National Retail Federation and other retail groups filed a petition asking the United States Supreme Court to take up the ongoing case regarding the Federal Reserve’s rule implementing the Durbin interchange amendment of the Dodd-Frank Act.
You’ll recall that the Fed’s rule was struck down in a July 2013 ruling, which determined that the agency set the cap on debit card transaction fees too high by taking into consideration factors outside of the statutory guidelines. In March, a D.C. Circuit Court of Appeals overturned that decision, siding with the Fed.
“While fully anticipated, IBAT is disappointed that this ‘attorney annuity’ continues to be litigated,” said Chris Williston, IBAT President and CEO. “The Durbin Amendment is bitter frosting on the poisonous cake that is Dodd-Frank. We are hopeful that reason will prevail if and when the Supreme Court reviews this matter, but would very much prefer for Congress to address and correct this and other damaging sections of Dodd-Frank in an expeditious manner.”
As reported earlier in the month, IBAT President and CEO Chris Williston has put out a call to action to all community bank employees, directors and shareholders to sign an ICBA-initiated petition calling for a simplification of the quarterly call report. Specifically, the petition requests the regulators consider allowing well capitalized community banks to submit the call report short form at the end of March and September. More than 10,000 community bank supporters across the country have stepped up to participate in the petition thus far, but further participation is needed.
“Federal regulators are under the false assumption that the banks’ core processing systems automatically prepare the call report,” Williston said. “They are astounded when they learn that it is taking community bank personnel hundreds of hours to complete the work each year.”
Williston noted that the standard call report for credit unions is only 25 pages long, while the bank call report has swelled to 80 pages, requiring a 600 page set of instructions to complete.
IBAT thanks all those who have already signed the petition. We especially thank H.L. “Buddy” Baker and the board of directors of the First National Bank of Lake Jackson, for their resolution in support of the IBAT and ICBA petition.
Late summer is upon us, the kids are heading back to school, and the baseball pennant races are heating up. There are two sets of protagonists in particular that are headed for a major showdown, and it’s got nothing to do with Milwaukee vs. St. Louis. The clash between the Yellen Doves and the Plosser Hawks in the Central Bank League is shaping up to be a classic confrontation that may make all the other rivalries look tame. The release [last] week of the most recent FOMC minutes shows that oddsmakers can no longer ignore the growing momentum of the surging Hawks as they point to improving economic performance and growing threats of asset bubbles as reasons to dethrone the Doves and Ms. Yellen’s easy-money style. While still outnumbered, the scrappy Hawks seem to be slowly bringing in a few converts off the bench.