Hail to the Chiefs

Does creating snappy job titles lead to a better performing or more “in touch” bank? Possibly. But we are skeptical and at this point, it is too early to ascribe empirical evidence to say “yes’ or “no.”

The proliferation of titles such as “Head of Digital Banking,” “Head of Consumer Insights and Innovation,” “Cannabis Risk Officer” and so on have signaled priorities, but have they accomplished anything? In practice, it seems some new titles are not well aligned with the new skills needed to drive strategy or promote innovation. In some — or many — instances, it might be counterproductive if a bank is parsing responsibilities even further, muddying the waters on who is responsible for executing what.

We often see this in employee development. Many first-line supervisors, and even executive management, are under the false belief that the Chief People Officer, another name for the head of human resources, is primarily responsible for employee development. As a result, we see little execution that results in well-developed employees who can move the bank forward.

A common weakness uncovered in the bank strategy sessions or process improvement engagements that our firm undertakes is bank silos. Do titles lead to more silos or to more collaboration? Your chief innovation officer is not responsible for creating an end-to-end paperless mortgage experience that can go from application to close in less than three weeks. Your head of mortgage lending is — and that is based on knowing what customers demand.

Prior to advances in technology, the industry was awash in data. With these advances, there is even more of it. This is what drives banks to enlist data scientists, a functional position we highly support — although it is perhaps an exaggerated title. In a recent banking podcast, Kim Snyder, CEO and founder of data visualization firm KlariVis, spoke eloquently about data governance and integrity. How do we pull meaningful data out of our systems if we lack discipline in what we put in them?

How to use the data, how to make sure the data is well aligned across the organization and determining  who is responsible is the conundrum all banks face. Commercial lenders might belly ache about being held accountable for a client’s total relationship, which may affect compensation or how employees or how a bank markets their services. But this makes the lender keenly interested in viewing the total relationship across loans and deposits, wealth and other third-party systems that impacts many organizational silos.

Why would banks want to create even more silos with these newfangled chiefs? Convincing executive management teams that they are responsible for the entire bank, not solely their functional positions, has been a struggle. Would we exacerbate that struggle by creating positions that tell the head of commercial lending they are no longer responsible for their employees’ development or the department’s diversity since the bank now has a chief diversity officer? When many are responsible, nobody is accountable.

When executing a mission in the military, the senior officer of the operation issues something called a “Commander’s Intent.” This communicates to each unit what the commander deems success, such as “It is the Commander’s Intent that this mission degrades the enemy’s surface to air missile capability by 75%.” Each unit commander plays a role in executing the Commander’s Intent, with appropriate coordination. Could banking use such cultural discipline to achieve executives or the boards’ intent, without developing creative job titles or dispersing responsibilities to chief this or chief that?

We at The Kafafian Group think so. Keep your organization simple. Define roles and accountabilities. Issue your Commander’s Intent for missions that you currently use chiefs to define. Coordinate accountabilities and focus on execution and organizational learning. Success will be evident; one day, your bank will be called a “Top Performer” or an “Innovator” — a title that any executive management team can get behind.

Why Community Banks Should Use Derivatives to Manage Rate Risk

As bank management teams turn the page to 2022, a few themes stand out: Their institutions are still flush with excess liquidity, loan demand is returning and the rush of large M&A is at a fever pitch.

But the keen observer will note another common theme: hedging. Three superregional banks highlighted their hedging activity in recent earnings calls.

  • Birmingham, Alabama-based Regions Financial Corp. repositioned its hedging book by unwinding $5 billion of receive-fixed swaps and replacing them with shorter-term receive fixed swaps. Doing so allowed the $156 billion bank to lock in gains from their long-term swaps.
  • Columbus, Ohio-based Huntington Bancshares increased its noninterest income in a scenario where rates increase 100 basis point from 2.9% to 4%. The $174 billion bank terminated certain hedges and added $6 billion of forward starting pay fixed swaps.
  • Providence, Rhode Island-based Citizens Financial Group executed $12 billion of receive fixed swaps in 2021, including $1.25 billion since June 30, 2021. The $187 billion bank’s goal is to moderate their asset sensitivity and bring forward income.

These banks use derivatives as a competitive asset and liability management tool to optimize client requests, investment decisions and funding choices, rather than be driven by their associated interest rate risk profile.

Why do banks use derivatives to hedge their balance sheet?

  • Efficiency. Derivatives are efficient from both a timing and capital perspective. In a late 2021 earnings call outlining their hedging strategy, Citizens Financial’s CFO John Woods said, “We think it’s a bit more efficient to do that (manage interest rate risk) off-balance sheet with swaps.”
  • Flexibility. It’s more flexible than changing loan and deposit availability and pricing.
  • Cost. It’s often less expensive when compared to cash products.

Why are some banks hesitant to use swaps?

  • Perception of riskiness. It’s easy for a bank that hasn’t used derivatives to fall into the fallacy that swaps are a bet on rates. In a sense, though, all the bank’s balance sheet is a bet on rates. When layered into the bank’s asset-liability committee conversations and tool kit, swaps are simply another tool to manage rate risk, not add to it.
  • Accounting concerns. Community banks frequently cite accounting concerns about derivatives. But recent changes from the Financial Accounting Standards Board have flipped this script:  Hedge accounting is no longer a foe, but a friend, to community banks.
  • Fear of the unknown. Derivatives can bring an added layer of complexity, but this is often overdone. It’s important to partner with an external service provider for education, as well as the upfront and ongoing heavy lifting. The bank can continue to focus on what it does best: thrilling customers and returning value to shareholders.
  • Competing priorities. Competing priorities are a reality, and if something is working, why bother with it? But growth comes from driving change, especially into areas where the bank can make small incremental adjustments before driving significant overhauls. Banks can transact swaps that are as small as $1 million or less.

For banks that have steered clear of swaps — believing they are too risky or not worth the effort — an education session that identifies the actual risks while providing solutions to manage and minimize those risks can help separate facts from fears and make the best decision for their institution. The reality is community banks can leverage the same strategies that these superregional banks use to enhance yieldincrease lending capacity and manage excess liquidity.

New Synergies in Risk Management for 2022

The past two years have created massive, life changing challenges for just about everyone on the planet — and bank managers and board members are certainly no exception. While the public has been dealing with the Covid-19 nightmare, remote work challenges, child and elder care woes, and concerns about family physical and mental health, bank leadership has had to deal with increased internal risks (operational, cyber, staffing) and external ones (rapid market changes, stressed industries, and a lack of traditional financial measurements, since many businesses did not produce audited financial statements during much of 2020).

As we enter 2022, no one knows for certain how, or if, all of those daunting issues will be resolved. In recent statements, the banking regulatory agencies are suggesting cautious optimism in 2022, though they are wary of complacency and loosening credit underwriting standards. One of the key forces that drive innovation and change in the world is a crisis, and if nothing else, 2020 and 2021 have seen rapid change and massive innovation, including in banking. With this backdrop, let’s look at some of the related developments and some new trends in credit risk management that will likely take place in 2022.

One significant industry change preceded Covid, and that was another acronym that started with a “C,” which was CECL. The story behind the current expected credit losses accounting standard is long and tedious — but a by-product of that rule for most bankers was a newfound understanding of the value of their portfolio’s credit data and how that data ties directly to reserves, risk and profitability. Thanks to CECL’s requirement for vast amounts of historical data, including credit attributes like collateral types, delinquency, payments and segmentation, many banks invested a lot of time and resource gathering, inventorying and cleaning up their credit data for CECL compliance. A result of this activity was that like never before more banks have more information about their loan portfolios, borrowers and their historical and current behavior.

During the time that CECL implementations started, Covid hit and bank managers were challenged with remote work requirements along with addressing PPP and other fast-moving emergency credit programs — creating a need for innovation and automation. Many areas of the bank were suddenly faced with new processes, operations and technology tools that were unplanned. A result of this accelerated change was that areas like commercial lending, credit and loan review were forced to adopt new innovative ways to work. While some of these areas may return to “the old normal,” many will retain most, if not all, of the new improved processes and tools that were needed to survive the challenges of the Covid crisis.

Those two developments, along with a growing understanding of the importance of credit concentration management, are driving new opportunities and synergies in credit risk management in 2022. The concept of credit concentration management is not a new one in banking. Even before the Great Recession of 2007-2009, the agencies made it clear that concentrations could be “bank killers,” with subprime lending and investor-owned commercial real estate (CRE) clear priorities. But now, the combination of more readily available, relevant credit concentration data and new tools and automation have made it significantly easier for banks of all sizes to proactively manage their concentrations.

A very obvious but valuable case study on the importance of concentration management is going on right now at the start of 2022 within the retail, office and the hospitality industry segments. Suddenly understanding exposure to these industries and property type segments is a high priority. Unlike the past, this time banks are much better positioned with improved data, tools and a more automated approach. The next use case to look at in 2022 is portfolio concentrations based on exposure to acute environmental threats like forest fires, hurricanes and flooding. That will likely be an early first step as more banks incorporate the environmental, social and governance framework into their risk management programs.

Another often neglected, proactive credit risk management process that has gotten a lot more attention during the past two years is portfolio stress testing, or “shocking segments of the portfolio.” This practice was used widely in banking during the end of the Great Recession to effectively monitor CRE risk, but by 2015, most smaller banks performed only annual tests, most of which were not looked at as having much, if any, strategic value. Part of the issue was that the banks simply weren’t collecting enough credit data to perform meaningful testing, and there was a sense that money for stress testing tools could be better spent elsewhere.

Now with additional risk management tools and better data, stressing concentrations simply makes sense and is achievable for most banks. New stress testing programs for concentrations like restaurants and business hotels are the norm, while more comprehensive, and strategic programs are starting to be put in place in banks of all sizes.

As we look back at the years of the Covid crisis, it is only natural to think of the disruption, challenges and uncertainty that banks faced, some of which are still being faced today. But thanks to the forces that drove the challenges in 2020 and 2021, bankers rapidly embraced automation and performed proactive credit data management leveraging innovative practices. Banks need to seize those opportunities and continue to enhance their risk management processes, not letting those benefits pass them by. A 2022 with this more synergistic approach to credit risk management may make the future a little bit brighter for bank management.

Digital Deniers Need Not Apply

There are few bankers who understand the process of digital transformation better than Mike Butler.

Beginning in 2014, Butler oversaw the evolution of Boston-based Radius Bancorp from a federally chartered, brick-and-mortar thrift to one of the most tech-forward banks in the country. Radius closed all its branches except for one (federal thrifts are required to have at least one branch) and adopted a digital-only consumer banking platform.

The digital reinvention was so successful that in February 2020, LendingClub Corp. announced a deal to buy Radius to augment that marketplace lender’s push into digital banking. Now Butler is off on another digital adventure, this time as president and CEO of New York-based Grasshopper Bancorp, a five-year-old de novo bank focused on the small business market. Like Radius, Grasshopper operates a digital-only platform.

Butler will moderate a panel discussion at Bank Director’s upcoming Acquire or Be Acquired Conference focusing on the importance of integrating bank strategy with technology investments. The conference runs Jan. 30-Feb. 1, 2022, at the JW Marriott Desert Ridge Resort and Spa in Phoenix.

Butler says that successful transformation begins with the bank’s executive management team and board of directors, where discussions about technology need to be an integral part of strategic planning. And most importantly, management and the board need to see digital transformation as crucial to the bank’s future success. Butler says there are still plenty of “digital deniers” among bankers who believe they can be successful without strengthening their institution’s digital capabilities.

“Have you embraced the kinds of changes that are taking place inside the industry?” Butler says. “And do you have a very strong cultural commitment to be a part of that change? When you do that, you start to look to technology as the enabling driver to get you to that place.”

Management teams that are just starting out on a path to digital transformation can easily find themselves overwhelmed by the sheer number of potential projects. “The most important thing to do is to prioritize and recognize that you cannot do this all at once,” Butler says. “It would be a mess if you tried. Pick two to three things that you think are critically important.”

A third element of a successful transformation process is finding the right person to lead the project. “You’ve got to have the right talent to do it,” Butler says. “That leader better be somebody who has been pushing it rather than you push it on them as CEO. You can’t say, ‘Joe, you’ve been running branches for 30 years, do you believe in digital? Eh, kind of. Okay, I want you to put in a digital platform.’ That’s not going to work.”

Butler goes so far as to say that only true believers should run those fintech projects. “You cannot do this without people that have the passion and the belief to get to the other side, because you will hit a lot of roadblocks and you’ve got to be able to bust through those roadblocks,” he says. “And if you don’t believe, if you don’t have the passion, there’s a lot of reasons to stop and go a different way.”

Butler might not seem the most likely person to be a digital change agent. He spent 13 years at Radius and pursued a branch banking strategy in the early years. Prior to joining Radius, Butler was president of KeyCorp’s national consumer finance business. He did not come from the fintech sector. He has a traditional banking background. And yet as Butler is quick to point out, Radius didn’t reinvent banking, it reinvented the customer experience.

The fact that Butler lacked a technology background didn’t deter him from pursuing a transformational strategy at Radius. He was smart enough to see the changes taking place throughout the industry, so he understood the business case, and he was also smart enough to surround himself with highly committed people who did understand the technology.

In building out its digital consumer banking platform, Radius worked with a number of third-party fintech vendors. “I wasn’t making technology decisions about whose technology was better, but I surely was making decisions about the companies that we were partnering with and what type of people we were willing to work with,” Butler says. “I met every single CEO of every company that we did business with, and that was a big part of our decision as to why we would partner with them.”

At Grasshopper, Butler says he prefers the challenge of building a new digital bank from scratch rather than converting a traditional bank like Radius to a digital environment. Sure, there are all the pain points of a startup, including raising capital. But the advantages go beyond starting with a clean piece of paper from a design perspective. “It’s really hard to transform a culture into something new inside of an organization,” Butler says. “So, I’d say the upside is that you get to start from scratch and hire the right people who have the right mindset.”

Choosing BOLI as a Long-Term Asset

The keys to a bank’s success include its understanding of risk management, its approach to long-term planning and the lifelong relationships it develops with customers. 

A vital consideration for bank management teams when selecting financial products and services is a like-minded alignment and shared approach to planning for risks that span decades, not quarters. As bankers diligently work with borrowers and customers, these turbulent times reaffirm a bank’s decision to acquire a valuable long-term asset: bank-owned life insurance, or BOLI.


Many bank executives and directors view BOLI as an asset that remains on their balance sheet for decades. It’s a sizable asset for many banks. While the average BOLI contract at MassMutual is around $3 million, we work with many clients with larger policies. 

And because it’s a long-term decision, selecting a competitively priced product from a financially strong carrier helps ensure asset quality. This can provide bank boards with the assurance that their BOLI product is stable and that their carrier has the financial strength necessary to pay a market-competitive crediting rate at a time when banks need it most.

Demonstrated Commitment

Stability in the BOLI business is a strength; banks need their insurance carriers’ commitment to the BOLI market to be unwavering. During volatile economic times, the long-term commitment and stability of your BOLI provider can be a key asset for your bank.

As bank management evaluates which companies to work with, some of the considerations should include:

Longevity: How long has the insurer been continuously active in this space and across market cycles?

Service commitment: What types of servicing protocols are in place for existing clients, and how are advisor relationships supported?

Values: Does the insurer share similar values as the bank, and how does it demonstrate those values through community involvement and investment?

Investment Philosophy Underpins Stability

Boards have an obligation to govern and supervise their BOLI holdings, as well as the insurers with which they do business. Selecting a BOLI carrier is a vote of confidence in that firm’s long-term portfolio management and risk management philosophy.  It is incumbent that boards focus on their BOLI insurer’s approach to underwriting and its underlying long-term investment philosophy.

We believe the mutual company structure naturally gives MassMutual a long-term perspective when it comes to planning and investing, as we focus on economic value and not short-term stock prices.

The uncertainty caused by the coronavirus pandemic provides insight into how an insurer’s investment strategy performs in a volatile market. When it comes to due diligence on BOLI carriers, credit ratings are a great place to start. But directors should also look at the insurer’s capital levels, liquidity and financial cushion. 

To meet long-term commitments, insurers must follow an appropriate asset-liability matching program, while achieving attractive portfolio returns to back customer obligations. An insurer’s general investment account should be well diversified and managed with a long-term view that withstands short-term fluctuations in asset values.  Even in the most volatile market conditions, your bank’s BOLI provider should be positioned to meet the needs of those who rely on them. 

In view of today’s economic uncertainty, we understand BOLI may not be top of mind for directors and banks.  However, it’s important to understand the differences and nuances when it comes to BOLI management and investment. 

Evaluating and aligning with companies that share a similar approach to risk management, long-term commitment and sound investment philosophy have proven to pay dividends over the long term. While post-pandemic planning may be hard to conceptualize, banks operate and run for the long term, and should consider relationships with companies that feel the same.

Insurance products issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001. 

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Window of Opportunity for Sub Debt

Bankers who have not done so recently may want to revisit their subordinated debt playbooks so they can successfully navigate an emerging window of opportunity.

Market activity is up significantly due to interest rate trends, regulatory developments and other factors. Bank management teams who are prepared to act quickly can capitalize on the opportunity.

Sub debt is a long-term debt obligation with a maturity typically ranging from 10 to 15 years, a fixed (or fixed-to-floating) interest rate and the ability for the issuer to redeem the notes under certain circumstances. It has become a staple of bank capital planning, because it can qualify as Tier 2 capital if properly structured. Most banks can even use it to generate Tier 1 capital at the bank level, a strategy even more banks can employ following the 2018 changes to the Federal Reserve’s Small Bank Holding Company Policy Statement.

However, executives must be mindful of certain limitations of sub debt. In particular, its treatment as Tier 2 capital is phased out by 20% per year, beginning five years before maturity. Additionally, the interest rate typically flips from a fixed rate to a floating rate during the last five years, which is often higher than the fixed rate. Accordingly, banks that issued sub debt in 2014 and 2015 — when they were preparing for Basel III capital rules and, in some cases, repaying comparatively expensive Troubled Asset Relief Program funding — may now have the opportunity to refinance that sub debt.

New Issuances
Banks considering a new sub debt offering need to consider several matters in planning the transaction. These include many familiar decision points, such as selecting a placement agent or underwriter, deciding whether to seek a credit rating, consulting with regulators and determining the proposed offering terms, including offering size, maturity, interest rate structure, use of proceeds and other matters. In addition, banks will need to be mindful of federal securities laws that govern the offering.

There are also new issues for management teams to consider, like selecting a benchmark rate for the floating rate component. Historically, sub debt floating rates have been calculated based on the London Interbank Offered Rate, or LIBOR. Given LIBOR’s likely disappearance after 2021, issuers will need to evaluate whether to preserve the flexibility to select an alternate benchmark rate at the beginning of the floating rate period or to preemptively commit to an alternate benchmark.

Directors will want to make sure they have a clear understanding of how the offering complies with the company’s long-term capital plan and review the pro forma effects of the offering on capital ratios. From a fiduciary perspective, they also need to understand how the sub debt fits into the capital structure and how the organization will use the proceeds.

Given the significant planning needed ahead of a sub debt issuance, banks should begin the process at least two to three months before they need the capital.

Redeeming Existing Sub Debt
The mechanics of redeeming existing sub debt are relatively straightforward, and are governed by the terms of the notes and any applicable indenture. The terms can limit the dates on which a redemption can be completed, require some notice period to holders and dictate that partial redemptions be allocated pro rata among noteholders.

But before taking any steps, it is critical that issuers consult with their regulators and be mindful of related issues, including compliance with the Federal Reserve’s SR letter 09-4, which prescribes certain actions and considerations in connection with return of capital transactions. Depending on an institution’s size and other characteristics, it may need to obtain prior regulatory approval. Directors will need to understand the effects of the redemption on the organization’s capital structure and pro forma capital ratios.

Public Company Considerations
Banks with publicly listed holding companies will also want to evaluate whether to conduct a public offering through their shelf registration statement. This generally requires an indenture, clearinghouse eligibility, prospectus supplements, a free writing prospectus, limitations on credit rating disclosure and other actions. However, it can improve execution by making it easier for purchasers to resell their notes. Public companies also need to comply with their Exchange Act reporting obligations.

While there are several other issues to be considered in connection with any sub debt issuance or redemption transaction, management teams and boards of directors who have a basic understanding of the considerations outlined above will be well positioned to develop and maintain a strong capital foundation to execute their strategic growth initiatives.