What you learn at a puppet show

Hank Williams "walking" the red carpet in Nashville

I wrapped up a fairly intense period of travel with a day trip to NYC on Monday and a subsequent overnight in Nashville on Tuesday & Wednesday. While in the Music City, our Chairman invited me to join him at a puppet festival (yes, you read that right). The show, a musical chronicle of the history of country music, benefitted the Nashville Public Library Foundation and the Country Music Hall of Fame. Laugh if you will, but I will tell you, it was amazingly creative. As I mingled with various benefactors of both institutions, I found myself engaged in conversation with the former managing partner at Bass, Berry & Sims. Having led one of the preeminent law firms in the Southeast, his perspective on how dramatically the legal profession has changed in the last fifteen years struck a nerve. The parallels between his profession and the banking space were immediately apparent. So with Patsy Cline playing in the background, we talked about the future of banking, professional services firms and relationship building in general. As we did, I made a mental note to share three thoughts from this week that underscore how things continue to change in our classically conservative industry.

(1) First Republic’s founder and CEO, Jim Herbert, shared some of his Monday morning with me while I was in NYC. Jim founded the San Francisco-based bank in 1985, sold it to Merrill Lynch in 2007, took it private through a management-led buyout in July 2010 after Merrill was acquired by Bank of America, then took it public again this past December through an IPO. For those in the know, First Republic is one of this country’s great banking stories. Not only is it solely focused on organic growth, it’s also solely focused on private banking. While my conversation with Jim was off-the-record, I left his office convinced its the smarts within, not the size of, a bank that will separate the have’s from the have not’s in the years ahead. Clearly, as new regulations and slim profit margins challenge the banking industry, the skills and backgrounds of the employees who work in banking must change.

(2) Speaking of successful banks that have successfully navigated recent challenges… KeyCorp’s Chief Risk Officer, Bill Hartman, joined us last week for Bank Director’s annual Bank Audit Committee Conference in Chicago. Bill is responsible for the bank’s risk management functions, including credit, market, compliance and operational risk, as well as portfolio management, quantitative analytics and asset recovery activities. While I shared some thoughts about that program last week, I thought to elaborate on how KeyCorp divides the roles and responsibilities of its Audit and Risk Committees. Some still think you “retire” to the board; as he showed, that is definitely not the case – especially not at an institution that counts 2 million customers, 15,000 employees and assets of $89 Bn. In terms of Key’s Audit Committee, members oversee Internal Audit, appoint independent auditors and meet with the Chief Risk Officer, Chief Risk Review Officer, and of course, for financial reporting, the CFO. I thought it was interesting to note their Audit Committee met 14 times in 2012 — twice as often as the institution’s Risk Committee convened. With many smaller banks considering the creation of such a committee, let me share the focus of their Risk Committee. Strategically, it is responsible for:

  • Stress testing policy;
  • Dividend and share repurchases;
  • Modeling risk policy;
  • Asset and liability management; and
  • Setting tolerances, key risk indicators and early warning indicators

For those thinking about introducing a Risk Committee into their bank, take a look at what some of our speakers shared leading up to last week’s Audit Committee conference for inspiration.  For a recap of the event, our editor shares his thoughts in today’s Postcard from the Bank Audit Committee Conference.

(3) Yesterday, I was pleased to learn that ConnectOne’s CEO, Frank Sorrentino, agreed to participate in our annual Bank Executive & Board Compensation Conference in November. In addition to being one of the more active bankers I follow on Twitter, I’ve written about his bank going public in a previous post. Today, it’s a WSJ piece that shows U.S. regulators grilling banks over lending standards and “warning them about mounting risks in business loans” that has me citing the NJ-based bank. This particular article quotes the CEO of the Englewood Cliffs, N.J. bank in terms of lending standards (yes, a subscription is required). He reveals that regulators recently asked what he is doing to ensure he isn’t endangering the bank by making risky loans. His response: “the bank is trying to offset the lower revenue from low-interest-rate commercial loans by cutting expenses.” While I get the need for oversight, I do wonder how far the regulatory pendulum will continue to swing left before sanity/reality sets in at the CFPB, FDIC, OCC, etc. I’ll stop before I say something I regret, but do want to at least encourage a Twitter follow of Frank and his “Banking on Main Street” blog.

Aloha Friday!

Swimming without a bathing suit?

A full house in Chicago
A full house in Chicago

A busy week in Chicago… one highlighted by Bank Director’s annual Bank Audit Committee at the JW Marriott that kicked off on Wednesday morning and wrapped up about a few hours ago. For those that missed the event, today’s title comes from a conversation I had with the CEO of Fifth Third before he took the stage as our keynote speaker. Without going into too much detail, it refers to a line favored by our former publisher (and head of the FDIC) Bill Seidman. At conferences like this one, Bill was fond of saying when times are good, no one sees what is happening under water. But when things get tough and the tide goes out, well, you see who has been swimming without a bathing suit. In that spirit, what follows are three things I heard while hosting 350+ men and women, an audience representing 150 banks from 38 states.

(1) To kick off the conference, we invited the head of Hovde Financial to present on “Navigating Complex Financial, Strategic and Regulatory Challenges.” While we welcomed attendees from institutions as large as SunTrust, Fifth Third and KeyCorp, Steve Hovde’s presentation made clear that while larger banks like these continue to increase in size, many smaller community banks are fighting for survival in today’s regulatory and low-interest rate environment. Case-in-point, mobile banking technology is already in place at larger banks, fewer options are available to smaller banks to replace declining fee revenue (which could offset declines in net interest margins) and increased regulatory burdens favor large banks with economies of scale.

All of this suggests M&A should be hot and heavy. However, Steve pointed out that 2013 has not started out strong from a deal volume standpoint. In fact, only 59 deals were announced through April; annualized, this will result in significantly less deals than in 2012. Naturally, this leads many to think about building through more organic means.  To this end, he suggests that bank boards and management teams focus on questions like:

  • Is adequate organic growth even available today?
  • Are branches in urban markets more important than rural markets?
  • How much expense base would need to be added to fund the growth compared to the revenue generated by new loans?
  • Are we better off deepening penetration of existing markets or expanding physical premises into neighboring markets or both?
  • What steps can we take to enhance web and mobile platforms?

(2) In the spirit of asking questions like these, it strikes me that everyone has something to learn as we come through one of the deepest recessions in history. As businesses and regulatory agencies debate what could have been done differently, everyone is looking for an answer to avoid the next one, or at least, minimize its impact. Clearly, as directors and officers search for ways to manage future risks, they need to understand how to work together without impeding the organizations’ efficiency of operations while preparing for unexpected events.

Accordingly, we opened this morning with a session to explore this unique balance of corporate governance. The session included Bill Knibloe, a Partner at Crowe Horwath, Bill Hartmann, the Chief Risk Officer at KeyCorp and Ray Underwood, the Bank Risk Committee Chairman at Union Savings Bank. Together, they emphasized the need for both management and the board to understand current initiatives, future initiatives and various risks embedded in each to design plans for various oversight roles. For me, “plan to manage, not eliminate” stuck out in their comments.  If you were with us in Chicago, I wonder what was yours?

(3) Think about this: ­­­­­­­­­­­­­­it might be easier and safer today to rob banks with a computer than with a gun. While banks design their internal controls to help mitigate risk, our final session of the day looked at how an audit committee needs to properly address cyber risk as more and more attempt to attack an institution through the web. Here’s a link to a piece authored by our Managing Editor, Naomi Snyder, entitled Five questions to ask about cyber security; short, sweet and to the point. I hope to have more on this topic early next week as it kept the room full (I took the picture above just a few minutes before the close). Until next week…

Aloha Friday!

Standing Out on a Friday

Fenway Park's red seatComing off of last week’s Growth Conference, I found myself planning for next year’s program. As we recognized Customers Bank, State Bank & Trust and Cole Taylor Bank for “winning” our annual Growth rankings, I spent some extra time looking at other banks that performed exceptionally well this past year. So today’s Friday-follow inspired post shares a few thoughts and conversations I’ve had about three very successful banks.

(1) While easy to frame the dynamics of our industry in terms of asset size, competing for business today is more of a “smart vs. not-so-smart” story than a “big vs. small.” During one of my favorite sessions last week — David AND Goliath — Peter Benoist, the president and CEO of St. Louis-based Enterprise Financial Services Corp, reminded his peers that as more banks put their liquidity to work, fierce competition puts pressures on rates and elevates risk. My biggest takeaway from his presentation: we all talk about scale and net interest margins… but it’s clear that you need growth today regardless of who you are. It is growth for the sake of existence.

(2) During the afore mentioned presentation, the participants all agreed that you cannot compete with BofA on price. Consequently, the ability to introduce new products (e.g. increasing deposit platforms) is key for many banks today. So from diversification to differentiation, let me turn my attention to San Francisco-based First Republic. Their story is a fascinating one. While not with us in New Orleans, I heard a lot about them yesterday while I was in NYC visiting with KBW. Subsequently, our editor wrote me with some background: Jim Herbert founded the bank in 1985, sold it to Merrill in 2007 for 360% of book, took it private through a management-led buyout in July 2010 after Merrill was acquired by Bank of America, then took it public again in December through an IPO. First Republic is a great bank: it finished 3rd out of 80+ in the $5-$50 billion category in Bank Director magazine’s 2012 performance rankings. But not only is it solely focused on organic growth, it’s also focused solely on private banking.

(3) Finally, as we move our attention from growth to risk in advance of our annual Bank Audit Committee conference, I started to think about the challenges facing banks of all sizes. Admittedly, I started with Fifth Third as their Vice Chairman & CEO will be joining us in Chicago as our keynote speaker. Yes, I am very interested to hear his perspectives on the future of banking. Quite a few small bank deals have recently been announced, and I have to believe many sales came together thanks to escalating compliance costs and seemingly endless regulation. For larger institutions like Fifth Third, it will be interesting to see what transpires over the next few years and where he thinks the market is moving for banks of all sizes. If you’re interested, take a look at our plans for this year’s event.

Aloha Friday!

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About today’s picture:

I’m a die-hard Boston RedSox fan, and for anyone whose been early to, or stayed late at, Fenway Park, you’ve probably seen one red seat in the right field bleachers (Section 42, Row 37, Seat 21). Did you know it signifies the longest home run ever hit at Fenway, one struck by the great Ted Williams on June 9, 1946? While a nice chance for me to share my love for the RedSox, I thought the visual made a lot of sense when writing about standing out from the crowd… -AD