Expert Panel: What Mistakes Do Banks Commonly Make?

Bank Director’s Western Peer Exchange October 24-25 in San Francisco is an inaugural event to get bank leaders west of the Mississippi to engage with each other on the issues that matter most to them, hopefully solving problems at their banks and making connections that can help them well into the future. As Bank Director gets ready for the peer exchange, we asked the experts who plan to attend what advice they could offer on mistakes they see banks make.

If you could correct one mistake you see banks commonly make, what would it be?

Polsky_Barbara.pngDenial. It’s one of the biggest mistakes banks commonly make. Leading up to the recent financial crisis, many banks were in denial about their commercial real estate concentration risks, and then during the financial crisis many banks continued to be in denial about the ever-decreasing value of their other-real-estate-owned (OREO) and real estate loan portfolios. It is true that the lessons from the financial crisis have made banks cautious. But caution is different from denial. Many banks remain in denial about weaknesses in their Bank Secrecy Act policies (a hot issue for their bank regulators) or about the need to bolster noninterest income (a hot issue for their successful competitors) or about their president’s excessive compensation (a hot issue for their activist shareholders). The devil isn’t in the details; the devil is in the denial.

—Barbara S. Polsky, Manatt, Phelps & Phillips, LLP

Hay_Laura.pngConversations about compensation often begin with the question, “What are other banks doing?” rather than, “Given our specific strategy and goals, how can we best structure our programs to motivate the right behaviors and drive performance?” Our firm encourages clients to look to their compensation strategy first. High-performing banks are often characterized by clear, straightforward compensation programs based on a strong compensation philosophy that drives business results. Knowing what other banks are doing through competitive data then helps to generate ideas, establish pay levels and provides a reference point for ensuring your pay designs are within the bounds of market practices.

—Laura Hay, Pearl Meyer & Partners

Nachand_Gabe.pngA common mistake among community banks is assuming the implementation of an enterprise risk management (ERM) process is an expensive proposition that lacks the benefits to warrant the cost. Certainly there are a number of expensive software solutions that provide the sticker shock to warrant this concern; but, the reality is most community banks are embarking on the ERM implementation path without using purchased software. We estimate that 80 percent of what is needed for an ERM program already exists at your institution. So banks are supplementing existing processes and procedures with a risk committee comprised of members across the organization, considering all potential risks—not just those in traditional risk assessments, and developing reporting for the board that is easily understood, timely and responsive to the bank’s significant and emerging risks.

—B. Gabe Nachand, Moss Adams LLP

Hovde_Steve.pngBankers are conservative by nature, and the credit crisis served as a stark reminder why they should be. Still, many banks—particularly smaller, community banks—are reluctant to take advantage of strategic opportunities that could significantly enhance shareholder value. FDIC-assisted transactions have been one of the most sure-fire ways to boost size, income, and franchise value during the downturn, yet we generally see the same large, serial acquirers taking advantage of these deals. In addition, there is no better time to be an acquirer than right now, when valuations are near all-time lows. Undoubtedly, larger banks command significant valuation premiums today, so growing the balance sheet and broadening a bank’s footprint through strategic acquisitions or effecting a strategic merger should be discussed seriously between management and the board. Too many healthy banks are content to sit on the sidelines without taking advantage of this unique period in banking.

—Steven D. Hovde, Hovde Group, LLC