Five Issues Bank Boards Should Consider Now

December 18th, 2017

governance-12-18-17.pngThere are a number of significant issues and emerging trends affecting U.S. companies and the economy, both of which are crucial to the health and vibrancy of the financial institutions sector. In this environment, it is imperative that bank executives and board members think about five key issues in evaluating their strategic plans. These are areas in which changes have already taken place or are on the verge of being implemented.

1. Regulatory changes
Financial institutions face a number of regulatory and accounting changes. First, a new rule under the Home Mortgage Disclosure Act requires 48 new or modified data points, which will allow regulators to determine if unfair lending practices are occurring. The new rules promise to be expensive to implement.

Institutions growing via acquisition should consider how adoption of the CECL model will affect accounting for loans, securities and other affected instruments at the target institution. And the new standard for revenue recognition issued jointly by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) could prove more challenging than many institutions realize.

2. Tax reform
Banks have expanded to new markets to generate loan growth in response to a challenging rate environment. However, many have not considered the state and local tax liabilities for loans originated outside of their physical footprint. To date, certain states have not rigorously enforced compliance, but banks could be on the radar as cash-strapped state and local governments face revenue shortfalls.

If Congress passes a tax reform bill that lowers the corporate tax rate, institutions in a net deferred tax asset position will need to realize the adverse effect that the new rate would have on the value of its assets. The impairment of the value of the deferred tax asset would need to be recognized upon the effective date of the tax change, resulting in a corresponding decrease in regulatory capital. Institutions may consider increasing their deferred tax liabilities as part of their year-end tax planning process to minimize the impact of any rate decrease on the value of the deferred asset. Further, the expected impact should be factored into capital planning. Institutions that have made a subchapter S election should also monitor the outcome of individual tax reform in combination with corporate tax reform to determine if the subchapter S election remains the most tax-efficient model for operations.

3. Data management
Financial technology firms capture the same consumer data that community banks do, but typically are more effective in their ability to leverage and capitalize on it. Large banks are harnessing this data as well, but smaller banks may not have the resources to make the effort profitable. The data may be residing in multiple systems, or it may be inaccurate or outdated. But the ability to efficiently capture and leverage data will fundamentally change how banks go to market and drive profitability. Banks that want to capitalize on the consumer data they already have will need to make a strategic decision to imitate fintech companies or partner with them.

In addition, regulators are increasing reporting requirements for institutions as a way to conduct efficient, ongoing monitoring, which is fundamentally changing the way regulatory exams are conducted. Institutions that can leverage data for risk management purposes will see better regulatory outcomes and improved profitability.

Cybersecurity remains an immediate threat, and regulatory scrutiny in this area has ramped up accordingly. Banks need to have an effective data security plan in place to deal with the threats that come with gathering so much information.

4. Labor and workforce
A lack of qualified workers may constrain growth, service and innovation if not addressed from a strategic perspective. It has become particularly difficult to find qualified and well-trained credit analysts and compliance officers in a tight labor market. Given most community and regional banks’ focus on commercial real estate lending, the projected shortage of qualified appraisers presents a significant challenge. Banks in smaller markets are particularly challenged in attracting and retaining talent, but they can partially or completely outsource many responsibilities, such as those in information technology, asset liability management and regulatory compliance. A thoughtful approach to outsourcing can assist in maintaining core activities while allowing internal resources to focus on strategic activities.

5. Changing consumer preferences
As customers move to digital channels, acquiring new customers—and increasing wallet share of existing customers—should be top areas of strategic focus throughout 2018. Boomers are shifting from accumulating wealth to maintaining and preserving it, and as a group they prefer a mix of in-person and digital interactions. In an effort to retain these customers, many banks are modernizing branches into sleek, welcoming locations with a number of amenities and educating this demographic on the ability to leverage digital channels in a secure manner, while also responding to the digital demands of younger consumers.

Banks need to find the balance between the digital and the personal, and be agile enough to respond to these changing preferences.


John Behringer is a partner with RSM US LLP. He focuses on providing advisory and risk management consulting services to commercial banks, as well as on internal and external audit services, loan review and credit administration risk management services.


Nicholas Hahn is a director with RSM US LLP. He has more than 11 years of public accounting experience working with privately and publicly held commercial and community financial institutions.