An Easy Way to Lose Sight of Critical Risks

CHICAGO — Let me ask you a question:

How does the executive team at your biggest competitor think about their future? Are they fixated on asset growth or loan quality? Gathering low-cost deposits? Improving their technology to accelerate the digital delivery of new products? Finding and training new talent?

The answers don’t need to be immediate or precise. But we tend to fixate on the issues in front of us and ignore what’s happening right outside our door, even if the latter issues are just as important.

Yet, any leader worth their weight in stock certificates will say that taking the time to dig into and learn about other businesses, even those in unrelated industries, is time well spent.

Indeed, smart executives and experienced outside directors prize efficiency, prudence and smart capital allocation in their bank’s dealings. But here’s the thing: Your biggest—and most formidable—competitors strive for the same objectives.

So when we talk about trending topics at today and tomorrow’s Bank Audit and Risk Committees Conference in Chicago, we do so with an eye not just to the internal challenges faced by your institution but on the external pressures as well.

As my team at Bank Director prepares to host 317 women and men from banks across the country this morning, let me state the obvious: Risk is no stranger to a bank’s officers or directors. Indeed, the core business of banking revolves around risk management—interest rate risk, credit risk, operational risk. To take things a step further:

Given this, few would dispute the importance of the audit committee to appraise a bank’s business practices, or of the risk committee to identify potential hazards that could imperil an institution. Banks must stay vigilant, even as they struggle to respond to the demands of the digital revolution and heightened customer expectations.

I can’t overstate the importance of audit and risk committees keeping pace with the disruptive technological transformation of the industry. That transformation is creating an emergent banking model, according to Frank Rotman, a founding partner of venture capital firm QED Investors. This new model focuses banks on increasing engagement, collecting data and offering precisely targeted solutions to their customers.

If that’s the case—given the current state of innovation, digital transformation and the re-imagination of business processes—is it any wonder that boards are struggling to focus on risk management and the bank’s internal control environment?

When was the last time the audit committee at your bank revisited the list of items that appeared on the meeting agenda or evaluated how the committee spends its time? From my vantage point, now might be an ideal time for audit committees to sharpen the focus of their institutions on the cultures they prize, the ethics they value and the processes they need to ensure compliance.

And for risk committee members, national economic uncertainty—given the political rhetoric from Washington and trade tensions with U.S. global economic partners, especially China—has to be on your radar. Many economists expect an economic recession by June 2020. Is your bank prepared for that?

Bank leadership teams must monitor technological advances, cybersecurity concerns and an ever-evolving set of customer and investor expectations. But other issues can’t be ignored either.

So as I prepare to take the stage to kick off this year’s Bank Audit and Risk Committees Conference, I encourage everyone to remember that minds are like parachutes. In the immortal words of musician Frank Zappa: “It doesn’t work if it is not open.”

3 Trends (and 3 Issues) Every Bank’s Board Needs To Consider

Quickly:

  • The challenges faced by financial institutions today are as numerous as they are nuanced. Be it data security, emerging technology, fraud, crisis management and/or the effectiveness of internal controls, I opened the 12th annual Bank Audit & Risk Committees Conference by laying out a number of key governance, risk and compliance issues and trends.

CHICAGO — While a sophomore at Washington & Lee University, a professor loudly (and unexpectedly) chastised a close friend of mine for stating the obvious. With a wry laugh, he thanked my classmate “for crashing through an open door.” Snark aside, his criticism became a rallying cry for me to pause and dive deeper into apparently simple questions or issues.

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I shared this anecdote with some 400 attendees earlier today; indeed, I teed up Bank Director’s annual program by reminding everyone from the main stage that:

  1. We’re late in the economic cycle;
  2. Rates are rising; and
  3. Pressure on lending spreads remains intense.

Given the composition of this year’s audience, I acknowledged the obvious nature of these three points. I did so, however, in order to surface three trends we felt all here should have on their radar.  I followed that up with three emerging issues to make note of.

TREND #1:
Big banks continue to roll-out exceptional customer-facing technology.

Wells Fargo has been kicked around a lot in the press this year, but to see how big banks continue to pile up retail banking wins, take a look at Greenhouse by Wells Fargo, their app designed to attract younger customers to banking.

TREND #2:
Traditional core IT providers — Fiserv, Jack Henry & FIS — are under fire.

As traditional players move towards digital businesses, new players continue to emerge to help traditional banks become more nimble, flexible and competitive.  Here, FinXact and Nymbus provide two good examples of legitimate challengers to legacy cores.

TREND #3:
Amazon lurks as the game changer.

Community banker’s fear Amazon’s potential entry into this market; according to Promontory Interfinancial Network’s recent business outlook, it is their greatest threat.

In addition to these trends, I surfaced three immediate issues that banks must tackle

ISSUE #1:
Big banks attract new deposits at a much faster pace than banks with less than $1 billion assets.

If small banks can’t easily and efficiently attract deposits, they basically have no future. ‘Nuf said.

ISSUE #2: 
Bank boards need to know if they want to buy, sell or grow independently.

In a recent newsletter, Tom Brown of Second Curve Capital opined that “if you have less than $5 billion in assets, an efficiency ratio north of 65%, deposit costs above 60 basis points, and earn a return on equity in the single digits, this really is time to give some thought to selling.”  As I shared on LinkedIn yesterday, the 3 biggest bank M&A deals of the year took place in May: Fifth Third Bancorp’s $4.6 billion purchase of MB Financial, Cadence Bancorp’s $1.3 billion acquisition of State Bank Financial and Independent Bank Group’s $1 billion agreement to buy Guaranty Bancorp. 
 I don’t see the pace of consolidation slowing any time soon — and know that banks need to ask if they want (and can) be buyers or sellers.

ISSUE #3:
The risk of data breaches across industries continues to increase.

Be it risk management, internal control or third-party security considerations, every aspect of an institution is susceptible to a data breach — and managing these threats and identifying appropriate solutions takes a village that includes the most senior leaders of an organization.

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Just as banks need to develop their audit and risk capabilities, skills and talents, so too do officers and directors have both an opportunity and the responsibility to stay abreast of various trends and topics.  Bank Director’s event continues tomorrow with some fascinating presentations. To see what’s been shared already, take a look at Twitter, where I’m tweeting using @aldominick and #BDAudit18.

3 Disruptive Forces Confronting Banks – and How Zelle Might Help

By Al Dominick, CEO of DirectorCorps (parent co. to Bank Director & FinXTech) | @aldominick

“The volume and pace of what’s emerging is amazing. I’ve never seen it before in our industry.”

These words, spoken about technology driving an unprecedented pace of change across our financial landscape, came from Greg Carmichael, today’s keynote speaker at Bank Director’s annual Bank Audit & Risk Committees Conference.  Greg serves as president and CEO of Fifth Third Bancorp, a diversified financial services company headquartered in Cincinnati, Ohio.  The company has $142 billion in assets, approximately 18,000 employees, operates 1,191 retail-banking centers in 10 states and has a commercial and consumer lending presence throughout the U.S.

Fifth Third Bancorp’s four main businesses are commercial banking, branch banking, consumer lending and wealth and asset management.  Given this focus, Greg’s remarks addressed how, where and why technology continues to impact the way banks like his operate.  Thinking about his perspective on the digitization of the customer experience, I teed up his presentation with my observations on three risks facing bank leadership today.

Risk #1: Earlier this year, the online lending firm SoFi announced that it had acquired Zenbanx, a startup offering banking, debit, payments and money transfer services to users online and through its mobile app.  As TechCrunch shared, “the combination of the two will allow SoFi to move deeper into the financial lives of its customers. While today it focuses on student-loan refinancing, mortgages and personal loans, integrating Zenbanx will allow it to provide an alternative to the traditional checking and deposit services most of SoFi’s customers today get from banks like Bank of America, Citi or Chase.”  Given that many banks are just beginning their digital transformation, combinations like this create new competition for traditional banks to address.  Cause for further concern?  It came to light that SoFi just applied for an industrial loan bank charter in Utah under the name SoFi Bank.

Risk #2: With so much talk of the need for legacy institutions to pair up fintech companies, I made note of a recent MoneyConf event in Madrid, Spain.  There, BBVA chairman Francisco González said that banks need to shed their past and image as ‘incumbents’ and transform into new digital technology companies if they are to prosper in a banking environment dominated by technologically astute competitors. Transforming the bank “is not just a matter of platforms. The big challenge is changing an incumbent into a new digital company.”  Clearly, transforming one’s underlying business model is not for the faint of heart, and the leadership acumen required is quite substantial.

Risk #3: Finally, when it comes to digital companies doing it right, take a look at TheStreet’s recent post about how “Amazon Has Secretly Become a Giant Bank.”  I had no idea that its Amazon Lending service surpassed $3 billion in loans to small businesses since it was launched in 2011.  Indeed, “the eCommerce giant has loaned over $1 billion to small businesses in the past twelve months… Hiking up the sales for third party merchants is a plus for Amazon, as the company gets a piece of the transaction.” What I found particularly note-worthy is the fact that over 20,000 small businesses have received a loan from Amazon and more than 50% of the businesses Amazon loans to end up taking a second loan.

A Potential Solution

Jack Milligan, our Editor-in-Chief, recently wrote, “disruptive forces confronting banks today are systemic and in some cases accelerating.” In his words, the greatest risk facing bank leadership today is “the epochal change occurring in retail distribution as consumers and businesses embrace digital commerce in ever increasing numbers, while aggressive financial technology companies muscle into the financial services market to meet that demand.”

Against this backdrop, Fifth Third Bank just announced it will be one of more than 30 major financial institutions to roll out Zelle, a new peer-to-peer (P2P) payments service operated by Early Warning.  As Greg shared during his remarks, this will initially be offered through the banks’ mobile banking apps, and positions the bank to better compete with PayPal’s Venmo.

This is big news.  Indeed, Business Insider noted in today’s morning payments brief that the growing crowd of providers will fight over a mobile P2P market set to increase ninefold over the next five years, reaching $336 billion by 2021.  In addition to working directly with financial institutions, let me also note that Early Warning has established strategic partnerships with some of the leading payment processors –– think FIS, Fiserv, and Jack Henry.  These relationships will allow millions more to experience Zelle through community banks and credit unions.

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Here in Chicago, we have 298 bank officers and directors with us today and tomorrow — and our Bank Audit and Risk Committees Conference itself totals 366 in attendance.  In terms of bank representation, we are proud to host audit committee members, audit committee chairs, CEOs, presidents, risk committee members, risk committee chairs, corporate secretaries, internal auditors, CFOs, CROs and other senior manager who works closely with the audit and/or risk committee.  Curious to see what’s being shared socially? I encourage you to follow @bankdirector and @fin_x_tech and check out #BDAudit17.

Don’t Be Crowdsourced Out Of Business

This is the fifth and final piece in my series on emerging threats to banks from non-financial companies — one that shines a light on the pooling of money from many different people to make an idea happen. Click on any of these titles to read my previous posts: For Banks, the Sky IS FallingPayPal is Eating Your Bank’s LunchThe Bank of Facebook and Is WalMart the Next Big Bank.

Next week kicks off Shark Week on the Discovery channel… maybe you’ve been inspired by the endless commercials hyping this programming during Deadliest Catch?  Perhaps so inspired that you’ve come up with a brilliant new idea that just needs some money to get it off the ground!  As a creative type (you watch Shark Week after all), you can’t be bothered with your community bank’s draconian business loan process.  No, you want to start right away and are going all in with a crowdsourcing platform (there are some 700 or so) to rally the capital you need to get your project off the ground.  After all, your “financial backers” on such a platform will not profit financially — unlike those greedy banks that certainly will — while your great idea will flourish thanks to this oh-so-captivated audience that gave you their money with nothing expected in return.

Against this backdrop, banks have no chance, right?

Hyperbole aside, it may be easy to underestimate the impact of crowdfunding on financial institutions, dismissing these “purpose-driven marketplaces” as nothing more than online outposts where wacky ideas attract even wackier investors.  While banks possess inherent competitive advantages in today’s digital world (e.g. large customer bases, vast amounts of customer and transaction data along with the capabilities to enable payments, security, and financing), keep in mind a proverb that “the shark who has eaten cannot swim with the shark that is hungry.”  To this end, let me repurpose the thoughts of  LinkedIn’s co-founder Reid Hoffman, who opines:

“Crowdfunding relies on the wisdom of crowds to identify, fund and unleash entrepreneurial innovation far more efficiently than the credit rules of banks can.”

Having looked at the competitive stances taken by Wal-Mart, Facebook and PayPal in previous posts, let me shift my focus to two of the more well-known crowd funding marketplaces that are “democratizing access to capital, fueling entrepreneurship and innovation, and profoundly changing the face of philanthropy at unprecedented scale and impact.”  Rather than deep dive their business models, let me share, in their words, why people gravitate to their respective sites.

Indiegogo
Founded in 2008 and headquartered in San Francisco, this site was one of the first to offer crowd funding.

Indiegogo is no longer unique; indeed, numerous crowdfunding sites make billions of dollars of capital accessible to upstarts and entrepreneurs alike.  However, it is one of the most established in the space.  As they share “people usually contribute to campaigns for four different reasons: people, passion, participation, and perks. Often, people contribute to support other people—maybe contributing to the campaign of a friend or another inspiring individual. Others contribute because they’re passionate about a mission, such as women’s health or elementary education. Others are motivated by a desire to participate in something big, like building a new community center in their hometown. And often, people contribute to receive perks, the cool things or experiences they get in return for their contributions.”

Kickstarter
A global crowdfunding platform with a stated mission to help bring creative projects to life.

As the company explains, “Mozart, Beethoven, Whitman, Twain, and other artists funded works in similar ways — not just with help from large patrons, but by soliciting money from smaller patrons, often called subscribers. In return for their support, these subscribers might have received an early copy or special edition of the work. Kickstarter is an extension of this model, turbocharged by the web.”

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The reason I wrote today’s piece — and the previous four — is simple.  I am convinced that many community banks have real opportunities to expand what banking means to its individual and business customers by offering services that go beyond their traditional business model.  While many bankers recognize the threats presented by Bank of America to their long-term survival, I am concerned that non-bank competition poses an even greater threat.  Essentially, I think more bank CEOs and boards need to take their conversations beyond just cutting branches and full-time employees and consider how they make the bank more efficient by reinventing how they do things.

Whether you agree or disagree, I’d be interested in your thoughts. Feel free to leave a comment below by clicking on the white plus sign (within the grey circle at the bottom of this page) and I invite you to follow me on Twitter (@aldominick) where you can publicly or privately share your thoughts with me.

Guest Post: Variety is the Spice of Life

As promised, a special guest author for this Friday’s column: Bank Director magazine’s Managing Editor, Naomi Snyder.  Having shared my key takeaways from our annual Bank Audit & Risk Committees conference on Wednesday and Thursday, I invited Naomi to share her post-conference thoughts on my blog.  So this morning’s title is as much about truth in advertising as it is an invitation to learn what my friend and colleague deemed timely and relevant.

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At Al’s request, I’m going to step in and give a quick recap of Bank Director’s Audit and Risk Committees Conference in Chicago this week.  As you can tell from this picture, nearly 300 people attended our conference at The Palmer House hotel and they got a lot of frightening news about risks for their financial institutions, including cyber risk, interest rate risk, compliance and reputation risk in the age of social media.  I’m going to address three of those points today.

Interest Rate Risk

Many banks are extending credit at a fixed rate of interest for longer terms in an effort to compete and generate much-needed returns. This will be a problem for some of them when interest rates rise and low cost deposits start fleeing for higher rates elsewhere. You could assume the liability/asset equation will equal out, but will it? Steve Hovde, the president and CEO of the investment bank Hovde Group in Chicago, is worried about a bubble forming, saying he has seen credit unions offer 10- or 15-year fixed rate loans at 3.25 percent interest. “I’m seeing borrowers get better deals with good credit quality than they have ever gotten in history,” he says.

Reputation Risk

In an age of social media, anyone can and does tweet or post on Facebook any complaint against your bank. Cyber attacks, such as the one that befell Target Corp., can be devastating and cost the CEO his or her job. Rhonda Barnat, managing director of The Abernathy MacGregor Group Inc., says it’s important not to cater to TV news, such as telling a reporter that your employee’s laptop was stolen at a McDonald’s with sensitive customer information, prompting a visit by the camera crew to the McDonald’s. Not disclosing how many customer records were stolen could keep you off the front page. Focus on the people who matter most: your customers and investors and possibly, your regulators. They want to know how you are going to fix the problem that impacts them.

Compliance Risk

Regulators are increasingly breathing down the necks of bank directors, wanting evidence the board is actively engaged and challenging management. The official minutes need to reflect this demand, without necessarily going overboard with 25 pages of detailed discussion, for example. Local regulators are increasingly deferring questions to Washington, D.C., where they can get stuck in limbo. When regulators do give guidance, it is often only verbal and can cross the line into making business decisions for the bank, says Robert Fleetwood, a partner at Barack Ferrazzano in Chicago. In such an environment, it’s important to have good relations with your regulators and to keep them informed.

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About Naomi: Prior to joining our team, she spent 13 years as a business reporter for newspapers in South Carolina, Texas and Tennessee. Most recently, she was a reporter for The Tennessean, Nashville’s daily newspaper. She also was a correspondent for USA Today. Naomi has a bachelor’s degree from the University of Michigan and a master’s degree in Journalism from the University of Illinois.  To follow her wit and wisdom on Twitter, follow @naomisnyder.

The Bank Audit & Risk Committees Conference – Day Two Wrap Up

With all of the information provided at this year’s Bank Audit & Risk Committees conference(#BDAudit14 via @bankdirector), I think it is fair to write that some attendees might be heading home thinking “man, that was like taking a refreshing drink from a firehose.”  As I reflect on my time in Chicago this week, it strikes me that many of the rules and requirements being placed on the biggest banks will inevitably trickle down to smaller community banks.  Likewise, the risks and challenges being faced by the biggest of the big will also plague the smallest of the small.  Below, I share two key takeaways from yesterday’s presentations along with a short video recap that reminds bankers that competition comes in many shapes and sizes.

The Crown Fountain in Millennium Park
The Crown Fountain in Millennium Park

Trust, But Verify

To open her “New Audit Committee Playbook” breakout session, Crowe Horwath’s Jennifer Burke reinforced lessons from previous sessions that a bank’s audit committee is the first line of defense for the board of directors and shareholders.  Whether providing oversight to management’s design and implementation with respect to internal controls to consideration of fraud risks to the bank, she made clear the importance of an engaged and educated director.  Let me share three “typical pitfalls” she identified for audit committee members to steer clear of:

  1. Not addressing complex accounting issues;
  2. Lack of open lines of communication to functional managers; and
  3. Failure to respond to warning event.

To these points, let me echo her closing remarks: it is imperative that a board member understand his/her responsibility and get help from outside resources (e.g. attorneys, accountants, consultants, etc.) whenever needed.

Learn From High-profile Corporate Scandals

Many business leaders are increasingly aware of the need to create company-specific anti-fraud measures to address internal corporate fraud and misconduct.  For this reason, our final session looked at opening an investigation from the board’s point-of-view.  Arnold & Porter’s Brian McCormally kicked things off with a reminder that the high-profile cyber hacks of Neiman Marcus and Target aren’t the only high-profile corporate scandals that bankers can learn from.  The former head of enforcement at the OCC warned that regulators today increasingly expect bank directors to actively investigate operational risk management issues.  KPMG’s Director of Fraud Risk Management, Ken Jones, echoed his point.  Ken noted the challenge for bank executives and board members is “developing a comprehensive effort to (a) understand the US compliance and enforcement mandates — and how this criteria applies to them; (b) identify the types of fraud that impact the organization; (c) understand various control frameworks and the nature of controls; (d) integrate risk assessments, codes of conduct, and whistleblower mechanisms into corporate objectives; and (e) create a comprehensive anti-fraud program that manages and integrates prevention, detection, and response efforts.”

A One-Minute Video Recap

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To comment on this piece, click on the green circle with the white plus (+) sign on the bottom right. If you are on twitter, I’m @aldominick.  P.S. — check back tomorrow for a special guest post on AboutThatRatio.com.

The Bank Audit & Risk Committees Conference – Day One Wrap Up

Fundamentally, risk oversight is a responsibility of the board.  One big takeaway from yesterday’s Bank Audit and Risk Committees conference (#BDAudit14 via @bankdirector): the regulatory framework has changed considerably over the past 12 to 18 months — with less focus being placed on things like asset quality and more on operational risks and new product offerings.  To this end, I get the sense officers and directors cannot always wait for the Federal Reserve or other agencies to release guidance to get a sense of the potential impact on their institution.

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Frank Gehry’s Chicago masterpiece

Trending Topics

Overall, the issues I took note of were, in no particular order: (a) when it comes to formulating a risk appetite, no one size fits all; (b) a bank’s CEO and/or Chairman should establish a formal, ongoing training program for independent directors that provides training on complex products, services, lines of business and risks that have a significant impact on the institution; (c) bank examiners are increasingly asking more probing questions regarding new products and services & third-party vendor risk; (d) the DOJ’s “Operation Chokepoint” use of the banking system to identify fraud and criminal activity in certain areas perceived as high risk was mentioned in three different general sessions; and (e) cyber security is the hot topic.

A Two and a Half Minute Recap

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To comment on this piece, click on the green circle with the white plus (+) sign on the bottom right. More from the Palmer House in Chicago, IL later today on twitter (@aldominick) and again tomorrow on this site.

Three Thoughts on Banks and Risk

I’m heading out to Chicago and Bank Director’s annual Bank Audit & Risk Committees Conference.  The agenda — focused on accounting, risk and regulatory issues — aligns with the information needs of a Chairman of the Board, Audit and/or Risk Committee Chair and Members, Internal Auditors, Chief Financial Officers and Chief Risk Officers.  Before I welcome some 300 attendees (representing over 150 financial institutions from 39 states) to the Palmer House, I thought to share three things that would keep me up at night if I traded roles with our attendees.

The Bean

(1) The Risk of New Competition

For bank executives and board members, competition takes many forms.  Not only are banks burdened with regulation, capital requirements and stress testing, they now have the added pressure of competition from non-financial institutions.  Companies such as Paypal, as well as traditional consumer brands such as Walmart, are aggressively chipping away at the bank’s customer base and threatening many financial institutions’ core business — a fact made clear by Jamie Dimon, the CEO of JPMorgan Chase, at a shareholder meeting this February.

“You’d be an idiot not to think that the Googles and Apples  .  .  .  they all want to eat our lunch.  I mean, every single one of them.  And they’re going to try.”

To this end, I find myself agreeing with Accenture’s Steve Culp, Accenture’s senior managing director of Finance & Risk Services, when he writes “banks need to keep developing their risk capabilities, skills and talents, and align these skills with their agenda around future growth. If they don’t align their growth agenda with their risk capabilities—building a safe path toward growth opportunities—they will miss out on those growth opportunities.”  While I plan on diving much deeper into this topic following the conference, I definitely welcome feedback on the issue below.

(2) The Risk to A Reputation

While the Dodd-Frank Act requires publicly traded banks with more than $10 billion in assets to establish separate risk committees of the board, and banks over $50 billion to additionally hire chief risk officers, I’m seeing smaller banks proactively following suit.  Such additions, however, does not absolve directors and senior managers of financial institutions from preparing for the worst… which is easier said then done.   In some ways, a bank’s reputation is a hard-to-quantify risk.  Anyone can post negative comments online about an institution’s products, services or staff, but one only needs to look at Target’s financial performance post-cyber hack to realize that revenue and reputation goes hand-in-hand.

(3) The Risk of Cyber Criminals

Speaking of Target, earlier this year, Bank Director and FIS collaborated on a risk survey to pinpoint struggles and concerns within the boardrooms of financial institutions.  As we found, tying risk management to a strategic plan and measuring its impact on the organization proves difficult for many institutions, although those that have tried to measure their risk management program’s impact report a positive effect on financial performance.  What jumps out at me in the results of this research are the concerns over cyber and operational security.  Clearly, the number of “bad actors” who want to penetrate the bank’s defenses has increased exponentially, their tools have become remarkably sophisticated, and they learn quickly.  I read an interesting piece by an attorney at Dechert (sorry, registration required) that shows the analytical framework for cyber security is very similar to what most directors have focused on in their successful business careers: people, process and technology.  But theory is one thing, putting into practice a plan to protect your assets, entirely different.

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To comment on today’s column, please click on the green circle with the white plus sign on the bottom right. If you are on twitter, I’m @aldominick. Aloha Friday!

FI Tip Sheet: Strong Board, Strong Bank

As the banking industry continues to regain its health, efficiency and productivity are key elements in positioning a bank to grow.  Still, the reality remains there is an overcapacity in the US banking industry and the consolidation trend that brought the number of bank charters from over 14,000 to under 7,000 over the last 25 years will continue.  So let me sum in up in word letters: OTSS… only the strong survive.  Today’s post builds on this idea and offers a few takeaways from day one of the Bank Board Training Forum.

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Don’t Cry For Me

Yes, a more demanding regulatory and business environment has placed a substantial burden on bank directors and their boards. However, nearly every conversation/presentation focused on what’s possible — and not what’s broken.  Here are a few characteristics of successful “growth” banks:

  • They have a history of executing accretive transactions that are supported in the market both post-announcement and in terms of performance over time.
  • They tend to under promise and over deliver

While mergers and acquisitions is the principal growth strategy for many of these institutions, don’t sleep on building organically.  Indeed, many of the banks in attendance look at M&A as a complement to their growth plans.

An appetite for technology
We welcomed 117 bank officers and directors to the Hermitage in Nashville yesterday (and I’ll be getting up on stage in a few minutes to do so again this morning).  We went old school and put pen + paper in front of these men and women and asked a few true/false technology-specific questions.  47% have responded so far and here’s what I’m finding:

  • T/F: Our executive team has two people with strong technology understanding/experience…  43 responded true and only 12, false.
  • T/F: I would describe my bank as innovative… 40 responded true and 15 false
  • T/F: Mobile banking is an important part of our strategy… 46 responded true and 8, false

Growing Through Innovation
I heard one bank is consolidating some 200 different software packages, while another introduced concierge banking.  Interestingly, 11 bankers wrote on the survey above that the most innovative “thing” they are doing right now involves mobile banking.

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I’ll try to post more later today, as several of the afternoon conversations tied growth into risk and audit concerns, two topics I’ve covered earlier this week.  Aloha Friday!

Joining a Bank’s Risk Committee?

Risk committees, chief risk officers, risk appetite programs, stress tests and enterprise risk management programs were not a major part of most board’s focus six years ago — but they are now.  As a risk committee typically coordinates risk oversight with the audit and other committees, today’s post builds on yesterday’s piece, Joining a Bank’s Audit Committee.  Please understand, there are so many risks that can undermine a bank today that this column simply tees up the where a committee member might focus his/her time.

article-0-137DDACE000005DC-975_634x525

Most bankers understand the concept of financial risk.  For those directors joining a risk committee?  Let’s just say they really need to understand the risks of running an operation that relies on numerous internal processes, systems and people to be successful.   Indeed, a committee member must focus on the full range of complex and often interrelated risks, including:

  • Strategic
  • Credit
  • IT
  • Market
  • Operational
  • Compliance
  • Liquidity
  • Legal
  • Reputation

Yes, risk oversight is a fundamental responsibility of the entire board; however, I hear that individual risk committee members should develop a broad view of issues across their organization to both see and know how they relate to one another.  My two cents: (a) its imperative to define your own bank’s risk appetite before communicating risk management plans throughout the bank (b) if you have one, work with your chief risk officer to determine what forward-facing metrics you want consistent focus on in order to identify and react to emerging threats.

If you’re interested…

Here are three resources that can help you go deeper into this topic:

Tomorrow’s focus: a check-in from the Bank Board Training Forum at the Hermitage hotel in Nashville, TN.

Joining a Bank’s Audit Committee?

At most financial institutions, the audit committee is the most important board committee. Indeed, just about everything of significance that happens within an institution ends up passing through the audit committee in some form or fashion.  To build off of yesterday’s post (Building a Higher Performance Bank Board), let me take a quick look at this essential committee.

bank-vault-door-3d-gualtiero-boffi

While a typical audit committee meeting involves matters like a summary of internal audits, regulatory reports and economy/operational/product/market/personnel changes, I thought to share four characteristics of “high performing audit committees” based on numerous conversations with audit committee chairs, members and executives with accounting firms:

  1. Independence from management is critical;
  2. Financial expertise is key;
  3. Access to external experts (e.g. authorized to engage counsel independently) is essential; and
  4. Industry knowledge separates the good from the great.

As my friend and colleague Jack Milligan likes to say, members of a bank’s audit committee are typically the smartest people on the board.  When you look at some of the technical accounting and financial reporting issues they have to deal with, you would at least have to agree that they carry a pretty heavy load — particularly when the audit committee is also responsible for risk governance, which is still the case on most community bank boards.

If you’re interested…

Here are three resources that can help you go deeper into this topic today:

Tomorrow’s focus: joining a bank’s Risk Committee.

Quality never goes out of style

Wait... there was something going on other than the Stanley Cup finals this week?
Wait… there was something going on other than the Stanley Cup finals this week?

Today’s title, inspired by my uncle who founded and continues to run Computech, a very successful technology firm here in the D.C. area, is both simple and profound.  I believe the three points shared below reflect the same spirit of craftsmanship and professionalism he built his firm on.  Working smarter, building better, doing it right the first time… themes I picked up this week and thought to share below.  And yes, #LetsGoBruins!

(1) One of the work questions most frequently asked of me at conference cocktail parties and in social settings concerns the future of banks. So the fact that the St. Louis Fed published a study that examines banks that thrived during the recent financial crisis proved irresistible.  After all, “those who cannot remember the past are condemned to repeat it.”  I’ve alluded to this research in a previous post; for me, it is interesting to note that some of the most profitable banks, in the short-term, are not necessarily the best banks.  Instead, the so-called “best banks,” in my opinion, get creative in offering new products. They watch closely what is working for other banks in and out of their own market. They watch what products and services are being brought to market by vendors to our industry.  This survey, in a broad sense, backs this up.

(2) In the St. Louis Fed’s survey, the authors conclude that there is a strong future for well-run community banks.  In their estimation, banks that prosper will be the ones with strong commitments to maintaining risk control standards in all economic environment.  This aligns neatly with most discussions about a board’s role and responsibilities. Indeed, one of the critical functions of any bank’s board of directors is the regular assessment of their activities and those of the bank’s management in terms of driving value. As C.K. Lee from Commerce Street Capital explains, this may be defined as value for shareholders, value for the community and the perception of strength among the bank’s customers and regulators. Over the last few months on BankDirector.com, he’s explored the concept of tangible book value (TBV) and its relationship with bank valuation. He also looked at internal steps, such as promoting efficiency and growing loans, which boards could take to drive more revenue to the bottom line and drive bank value.  The “final installment” of his series is up — and if you are interested in two additional factors that drive value in both earnings production and market perception, a good read.

(3) Over the last few weeks, I have shared my take on a few issues near and dear to audit committee members.  These committee members have direct responsibility to oversee the integrity of a company’s financial statements and to hire, compensate and oversee the bank’s external auditor.  So on the heels of Deloitte’s trouble with New York’s Department of Financial Services comes this week’s final point.  In case you missed it, the state’s regulator cracked down on Deloitte’s financial-consulting business, essentially banning them from consulting with state-regulated banks for the next year.  Big enough news that the American Banker opined “it will send waves through its bank customers, competitors and federal regulators.  Banks will have to scrutinize their relationships with consultants, brace for the possibility of a wave of regulation of consulting practices and have backup plans in case a key advisor ever receives a punishment like the one New York state dealt Deloitte.”  As many begin to re-examine the relationships they have with outside vendors, here is a helpful evaluation assessment tool offered by the Center for Audit Quality, a nonpartisan, nonprofit group based here in Washington, D.C.  While specific to an audit committees needs, the sample questions highlight some of the more important areas for consideration.  As with CK Lee’s articles on building value, this form is worth a look if you’re considering the strength of your vendor relationships.

Aloha Friday!