Can the Industry Handle the Truth on Credit Quality?

Maybe Jack Nicholson was right: “You can’t handle the truth!”

The actor’s famous line from the 1992 movie “A Few Good Men” echoes our concern on bank credit quality in fall 2019 and heading into early 2020.

Investors have been blessed with record lows in credit quality: The median ratio of nonperforming assets (NPA) is nearly 1%, accounting for nonperforming loans and foreclosed properties, a figure that modestly improved in the first half of 2019. Most credit indicators are rosy, with limited issues across both private and public financial institutions.

However, we are fairly certain this good news will not last and expect some normalization to occur. How should investors react when the pristine credit data reverts to a higher and more-normalized level?

The median NPA ratio between 2004 and 2019 peaked at 3.5% in 2011 and hit a record low of 60 basis points in 2004, according to credit data from the Federal Deposit Insurance Corp. on more than 1,500 institutions with more than $500 million in assets. It declined to near 1% in mid-2019. Median NPAs were 2.9% of loans over this 15-year timeframe. The reversion to the mean implies over 2.5 times worse credit quality than currently exists. Will investors be able to accept a headline that credit problems have increased 250%, even if it’s simply a return to normal NPA levels?

Common sense tells us that investors are already discounting this potential future outcome via lower stock prices and valuation multiples for banks. This is one of many reasons that public bank stocks have struggled since late August 2018 and frequently underperform their benchmarks.

It is impressive what banks have accomplished. Bank capital levels are 9.5%, 200 basis points higher than 2007 levels. Concentrations in construction and commercial real estate are vastly different, and few banks have more than 100% of total capital in any one loan category. Greater balance within loan portfolios is the standard today, often a mix of some commercial and industrial loans, modest consumer exposure, and lower CRE and construction loans.

Median C&I problem loans at banks that have at least 10% of total loans in the commercial category — more than 60% of all FDIC charters — showed similar trends to total NPAs. The median C&I problem loan levels peaked at 4% in late 2009 and again in 2010; it had retreated to 1.5%, as of fall 2019. The longer-term mean is greater due to the “hockey stick” growth of commercial nonaccrual loans during the crisis years spanning 2008 to 2011, as well as the sharp decline in C&I problem loans in 2014. Over time, we feel C&I NPAs will revert upward, to a new normal between 2% to 2.25%.

Public banks provide a plethora of risk-grade ratings on their portfolios in quarterly and annual filings, following strong encouragement from the Securities and Exchange Commission to provide better credit disclosures. The nine-point credit scale consists of “pass” (levels 1 to 4), “special mention/watch” (5), “substandard” (6), “nonperforming” (7), “doubtful” (8) and “loss” (9, the worst rating).

They define a financial institution’s criticized assets, which are loans not rated “pass,” indicating “special mention/watch” or worse, as well as classified assets, which are rated “substandard” or worse. The classified assets show the same pattern as total NPAs and C&I problem loans: low levels with very few signs of deterioration.

The median substandard/classified loan ratio at over 300 public banks was 1.14% through August 2019. That compared to 1.6% in fall 2016 and 3.4% in early 2013. We prefer looking at substandard credit data as a way to get a deeper cut at banks’ credit risk — and it too flashes positive signals at present.

The challenge we envision is that investors, bankers and reporters have been spoiled by good credit news. Reversions to the mean are a mathematical truth in statistics. We ultimately expect today’s good credit data to revert back to higher, but normalized, levels of NPAs and classified loans. A doubling of problem credit ratios would actually just be returning to the historical mean. Can investors accept that 2019’s credit quality is unsustainably low?

We believe higher credit problems will eventually emerge from an extremely low base. The key is handling the truth: An increase in NPAs and classified loans is healthy, and not a signal of pending danger and doom.

As the saying goes: “Keep Calm and Carry On.”

Best Practices for Onboarding New Directors


governance-9-12-19.pngJoining a bank board can be a bewildering experience for some new directors. There’s a lot to learn, including new, confusing abbreviations and financial metrics specific to the banking industry. But with the right approach, bank boards and nominating/governance committees can make the experience easier.

Onboarding new directors and more quickly acclimating them to the world of depository institutions is essential to ensuring banks have a functioning board that is prepared to navigate an increasingly changing and complex environment. It can also reduce potential liability for the bank by ensuring its members are educated and knowledgeable, and that no one personality or viewpoint dominates the boardroom.

Banking differs from other industries because of its business model, funding base, regulatory oversights and jargon. Directors without existing knowledge of the industry may need one to two years before becoming fully contributing members who can understand the most important issues facing the bank, as well as the common parlance.

Proactive boards leverage the chairperson to create an onboarding process that is comprehensive without being overwhelming, and tailor it to suit their institution’s particular needs, as well as the skill sets of newly recruited board members. The chair can work with members of the nominating/governance committee and executives like the chief financial officer to create a specific onboarding program and identify what pertinent information will best serve their new colleague.

Bank Director has compiled the following checklist to help strengthen your bank’s onboarding program.

1. Help new directors understand their role on the board.
New directors often come in with a background in business or accounting, skills that are useful in a bank boardroom. But business success in one industry may not readily translate to banking, given the unique aspects of its business model, regulations and even vocabulary associated with financial institutions. New directors can access insights on “The Role of the Board” through Bank Director’s Online Training Series.

Banks are uniquely regulated and insured. Directors should be able to appreciate the role they serve in their oversight of the bank, as well as the role regulators have in keeping the bank safe and sound, and ensuring prudent access to credit.

2. Provide an overview of the banking industry.
Directors often aren’t bankers and will need to be acquainted with the business of banking broadly.

With this overview will come the distinctive terms and acronyms that a new director may hear tossed around a boardroom. Boards should either create or provide a glossary with definitions and acronyms of terms, including the principal regulators and common financial metrics.

Click HERE to access Bank Director’s Banking Terms Glossary.

3. Provide an overview of your bank’s business model and strategy.
Directors will need to understand the bank’s products, including how it funds itself, what sort of loans it makes and to whom, as well as other services the bank provides for a fee. They will also need to learn about the bank’s credit culture, capital regime and its approach to risk management, including loan loss reserving.

4. Create a reading list.
There are a number of internal and external resources that new board members can access as they become acclimated to the ins and outs of bank governance. Internally, they should have access to recent examination reports, call reports, and quarterly and annual filings, if they exist. They should also access external resources, like Bank Director’s Online Training Series, the Federal Reserve Bank of Kansas City’s 2016 publication, “Basics for Bank Directors,” and “The Director’s Book,” published by the Officer of the Comptroller of the Currency.

Additionally, they should keep up-to-date with the industry through bank-specific publications, such as Bank Director’s newsletter and magazine.

5. Schedule one-on-one meetings with the management team.
A new board member will need to understand who they are working with and the important roles those individuals play in running a successful bank. Their onboarding should include meetings with the management team, especially the CFO for a discussion about the financial metrics, risk measurement and health of the bank. It may also be prudent to schedule a meeting with other executives who oversee risk management at the bank.

6. Schedule one-on-one meetings with members of the board and key consultants.
New directors should sit down with the heads of board committees to understand the various oversight functions the board fulfills. The bank may also want to reach out to the firms it works with, including its accounting, law and consulting firms, to chat about their roles and relationship with the company.

7. Emphasize continuing education.
Boards should convey to new members that they expect continued education and growth in the role. One way to achieve this is through conference attendance, which can provide intensive and specialized education, as well as a community of directors from banks in other geographic areas that new members can learn from. Direct new board members to events hosted by your state banking association, if available, or sign them up for annual conferences like Bank Director’s Bank Board Training Forum.

Look for conferences that offer information calibrated to a director’s understanding, starting with basic or introductory instruction suited for new directors. The conferences should also facilitate discussion among directors, so that they can learn from each other. As a director grows in the role, the board can seek out more specialized training.

Successful onboarding should help new directors acclimate to the world of banking and become a productive member of the board. Boards should expect their directors to become comfortable enough that they go beyond thoughtful listening and ask intelligent questions that reinforce the bank’s strategy and its risk management.

Three Things You Missed at Experience FinXTech


technology-9-11-19.pngThe rapid and ongoing digital evolution of banking has made partnerships between banks and fintech companies more important than ever. But cultivating fruitful, not frustrating, relationships is a central challenge faced by companies on both sides of the relationship.

The 2019 Experience FinXTech event, hosted by Bank Director and its FinXTech division this week at the JW Marriott in Chicago, was designed to help address this challenge and award solutions that work for today’s banks. Over the course of two days, I observed three key emerging trends.

Deposit displacement
The competition for deposits has been a central, ongoing theme for the banking industry, and it was a hot topic of conversation at this year’s Experience FinXTech event.

In a presentation on Monday, Ron Shevlin, director of research at Cornerstone Advisors, talked about a phenomenon he calls “deposit displacement.” Consumers keep billions of dollars in health savings accounts. They also keep billions of dollars in balances on Starbucks gift cards and within Venmo accounts. These aren’t technically considered deposits, but they do act as an alternative to them.

Shevlin’s point is that the competition for funding in the banking industry doesn’t come exclusively from traditional financial institutions — and particularly, the biggest institutions with multibillion-dollar technology budgets. It also comes from the cumulative impact of these products offered by nondepository institutions.

Interestingly, not all banks struggle with funding. One banker from a smaller, rural community bank talked about how his institution has more funding than it knows what to do with. Another institution in a similar situation is offloading them using Promontory Interfinancial Network’s reciprocal deposit platform.

Capital allocation versus expenses
A lot of things that seem academic and inconsequential can have major implications for the short- and long-term prospects of financial institutions. One example is whether banks perceive investments in new technologies to be simply expenses with no residual long-term benefit, or whether they view these investments as capital allocation.

Fairly or unfairly, there’s a sense among technology providers that many banks see investments in digital banking enhancements merely as expenses. This mindset matters in a highly commoditized industry like banking, in which one of the primary sources of competitive advantage is to be a low-cost producer.

The industry’s justifiable focus on the efficiency ratio — the percent of a bank’s net revenue that’s spent on noninterest expenses — reflects this. A bank that views investments in new technologies as an expense, which may have a detrimental impact on efficiency, will be less inclined to stay atop of the digital wave washing over the industry.

But banks that adopt a more-philosophical approach to technology investments, and see them as an exercise in capital allocation, seem less inclined to fall into this trap. Their focus is on the long-term return on investment, not the short-term impact on efficiency.

Of course, in the real world, things are never this simple. Banks that approach this decision in a way that keeps the short-term implications on efficiency in mind, with an eye on the long-term implications of remaining competitive in an increasingly digitized world, are likely to be the ones that perform best over the long run.

Cultural impacts
One of the most challenging aspects of banking’s ongoing digital transformation also happens to be its least tangible: tailoring bank cultures to incorporate new ways of doing old things. At the event, conversations about cultural evolution proceeded along multiple lines.

In the first case, banks are almost uniformly focused on recruiting members of younger generations who are, by habit, more digitally inclined.

On the flipside, banks have to make hard decisions about the friction that stems from existing employees who have worked for them for years, sometimes decades, and are proving to be resistant to change. For instance, several bankers talked about implementing new technologies, like Salesforce.com’s customer relationship management solutions, yet their employees continue to use spreadsheets and word-processing documents to track customer engagements.

But there’s a legitimate question about how far this should go, and some banks take it to the logical extreme. They talk about transitioning their cultures from traditional banking cultures to something more akin to the culture of a technology company. Other banks are adopting a more-tempered approach, thinking about technology as less of an end in itself, and rather as a means to an end — the end being the enhanced delivery of traditional banking products.

Banks, Fintechs Share This Three-Letter Word


technology-9-6-19.png“Try.”

This one humble word reflects the mindset I encounter in nearly every high-performing executive today. And it might just be the theme at next week’s Experience FinXTech Conference at the JW Marriott Chicago.

Simple as it first appears, breaking away from the known and attempting to explore what’s possible requires leadership, conviction and a commitment to try something new.

While other fintech-oriented conferences highlight “funding paths” or “successful exits,” we built this event for bank leaders seeking growth and efficiencies through the application of financial technologies. Over two days, we’ll look closely at the implications of technology on the banking business, and explore how and where traditional brick-and-mortar institutions can generate top-line growth and bottom-line profits through new business relationships.

A word of encouragement to those joining us from community banks: Don’t let your asset size limit your aspirations.

Yes, technology companies continue to impact consumer expectations and challenge existing business models. And yes, this is changing the basis of competition in the industry. But it’s your mindset, not the size of your bank’s balance sheet, that will dictate its future. That’s why Experience FinXTech brings banking peers together from across the country to share how they pursue collaboration and creativity.

There’s something for all of us to learn.

For those attending from the technology sector, I urge you to tell us stories that demonstrate your resiliency, curiosity and resourcefulness. I continually hear that banks prize anecdotes that reflect a tenacity of purpose — a trait that many technology companies joining us can rightfully claim.

Ahead of Experience FinXTech, I’m inspired and intrigued by three companies making waves in the financial space:

  • Aspiration, which offers socially responsible banking and investment products and services, and has attracted 1.5 million customers as of June 2019.
  • Chime, which advertises itself as one of the fastest-growing bank accounts in America.
  • N26, a German direct bank that promises to provide real-time payments information and early access to paychecks to woo new U.S. consumers.

Executives should think about what these companies hope to accomplish, how they are building their presence and how it could impact community banks across the country.

At the conference, we’ll talk about companies like these, as well as the technology firms that have gained traction with banks. We look at the choices and challenges facing small and mid-size banks as they apply to payments, lending, data and analytics, security and digital banking. We’ll explore changing the basis of competition when it comes to earnings, efficiency and engagement.

Given that many community banks specialize in particular verticals or business lines to remain competitive, we’ll also talk about how they can cultivate a culture that prizes creativity and authenticity. We’ll look at tools and strategies to help them grow. Throughout the program, we’ll encourage conversations about inspiration and transformation.

The underlying theme is to encourage attendees to try something new in order to build something great.

For those joining us at the JW Marriott Chicago, you’re in for a treat. Can’t make it? Don’t despair: We intend to share updates from the conference via BankDirector.com and over social media platforms, including Twitter and LinkedIn, where we’ll be using the hashtag #FinXTech19.

A Dangerous Force in Banking


culture-8-23-19.pngThe more you learn about banking, the more you realize that just a few qualities separate top-performing bankers from the rest.

One of the most important of these qualities, I believe, is the ability of bankers to combat what famed investor Warren Buffett calls the “institutional imperative.”

Buffett, the chairman and CEO of Berkshire Hathaway, wrote about this in his 1990 shareholder letter:

“The banking business is no favorite of ours. When assets are twenty times equity — a common ratio in this industry — mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the ‘institutional imperative:’ the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.”

At the time, Buffett was referring to a credit-fueled bubble in the commercial real estate market. The bubble was in the process of popping; commercial real estate prices would decline 27% between 1989 and 1994.

The subprime mortgage and leveraged lending markets in the lead-up to the financial crisis offer more recent examples. No bank wanted to lose market share in either business line, even if doing so was prudent. This was the impetus for Citigroup CEO Chuck Prince III’s oft-repeated quote about having to dance until the music stops.

“When the music stops, in terms of liquidity, things will be complicated,” Prince told the Financial Times in 2007. “But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Here’s the problem: A bank that loses market share is vulnerable to criticism by analysts and commentators.

In 2006, for instance, JPMorgan Chase & Co. began offloading sub-prime mortgages and pulling back from the market for collateralized debt obligations. “Analysts responded by giving JPMorgan Chase what one insider calls ‘a world of [expletive] for our fixed-income revenues,’” writes Duff McDonald in “Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase.”

“One of the toughest jobs of the CEO is to look at all the stupid stuff other people are doing and to not do them,” a long-time former colleague of JPMorgan’s Chairman and CEO Jamie Dimon told McDonald.

You would think that analysts and commentators would, at some point, realize that it’s ill-advised to pressure bankers into prioritizing short-term results over long-term solvency, but there’s no evidence of that.

Darren King, the chief financial officer of M&T Bank Corp., noted at a conference in late 2018 that, “The narrative around the industry is that M&T has forgotten how to lend.”

M&T Bank has been one of the top-performing banks in the country since the early 1980s. King was referring to analysts and commentators’ reaction to the fact that M&T’s loan growth over the past two years has lagged the broader industry.

But as King went on to explain: “Generally what you find is when economic times are strong, we’re growing but generally not as fast as the industry. And in times of more economic stress, we tend to grow faster.”

So, how does a bank combat the institutional imperative?

The simple answer is that banks need to cultivate a culture that insulates decision-makers from external pressures to chase short-term performance. This culture is a product of temperament and training, as well as institutional knowledge about the frequency and consequences of past credit cycles.

This culture should be buttressed by structural support, too. Skin in the game among executives is a good example; a supportive board focused on the long term is another. A low efficiency ratio also enables a bank to focus on making better long-term decisions while still generating satisfactory returns.

In short, while the institutional imperative may be one of the most dangerous forces in banking, there are ways to defeat it.

The Powerful Force Driving Bank Consolidation


margins-8-16-19.pngA decades-old trend that has helped drive consolidation in the banking industry can be summarized in a single chart.

In 1995, the industry’s net interest margin, or NIM, was 4.25%, according to the Federal Reserve Bank of St. Louis. (NIM reflects the difference between a bank’s cost of funds and what it earns on its assets, primarily loans.) Twenty years later, the margin dropped to a historic low of 2.98%, before gradually recovering to 3.30% last year.

NIM-chart.png

The vast majority of banks in this county are spread lenders, making most of their money off the difference between what they pay for deposits and what they charge for loans. When this spread narrows, as it has since the mid-1990s, it pinches their profitability.

The decision by the Federal Reserve’s Federal Open Market Committee to reduce the target range for the federal funds rate by 25 basis points in August will likely exacerbate this by reducing the rates that banks can charge on loans.

“For most banks, net interest income [accounts for] the majority of their revenue,” says Allen Tischler, senior vice president at Moody’s Investor Service. “A reduction in [it] obviously undermines their ability to generate incremental earnings.”

There have been two recessions since the mid-1990s: a brief one in 2001 and the Great Recession in 2007 to 2009. The Federal Reserve cut interest rates in both instances. (Over time, lower rates depress margins, although banks may initially benefit if their deposit costs drop faster that their loan pricing.)

Inflation has also remained low since the mid-1990s — particularly since 2012, when it never rose above 2.4%. This is why the Fed has been able to keep rates so low.

Other factors contributing to the sustained decline in NIMs include intermittent periods of intense competition and rate cutting between banks, as well as the emergence of fintech lenders. Changes over time in a bank’s the mix of loans and securities, and among different loan categories, can impact NIMs, too.

The Dodd-Frank Act has exacerbated the downward trend in NIMs by requiring large banks to carry a higher share of low-yielding liquid assets on their balance sheets, which depresses their margins. This is why large banks have contributed disproportionally to the industry’s declining average margin – though, these institutions can more easily offset the compression because upwards of half their net revenue comes from fees.

Community banks haven’t experienced as much compression because they allocate a larger portion of their balance sheets to loans and do most of their lending in less-competitive markets. But smaller institutions are also less equipped to combat the compression, since fees make up only 11% of the net operating revenue at banks with less than $1 billion in assets, according to the Office of the Comptroller of the Currency.

The industry’s profitability has nevertheless held up, in part, because of improvements to operating efficiency, particularly at large banks. The corporate tax cut that went into effect in 2018 plays into this as well.

“If you recall how banking was done in 1995 versus today … there’s just [greater] efficiency across the board, when you think about what computer technology in particular has done in all service industries, not just banking,” says Norm Williams, deputy comptroller for economic and policy analysis at the OCC.

The Fed’s latest rate cut, combined with concerns about additional cuts if the escalating trade war with China weakens the U.S. economy, raises the specter that the industry’s margin could nosedive yet again.

Tischler at Moody’s believes that sustained margin pressure has been a factor in the industry’s consolidation since the mid-1990s. “That downward trend does undermine its profitability, and is part of the reason why the industry has consolidated as much as it has,” he says.

If the industry’s margin takes another plunge, it could drive further consolidation. “The industry has been consolidating for decades … and there’s no reason why that won’t continue,” says Tischler. “This just adds to the pressure.”

There were 11,971 U.S. banks and thrifts in 1995. Today there are 5,362. Given the direction of NIMs, it seems like we may still have too many.

What’s Trending at Acquire or Be Acquired 2019

Smart Leadership – Today’s challenges and opportunities point to one important solution: strong boards and executive teams.
Predicting The Future – Interest is growing around mergers of equals, commercial deposits and shifting team dynamics.
Board-Level Concerns – Three characteristics define the issues facing bank directors.
Spotlight on Diversity – Diverse backgrounds fuel stronger performance.
Digging into Strategic Issues – The end of the government shutdown could yield more IPOs.

A Top-Performing Bank Explains Why It Sponsors Three NFL Teams


Best-Performing Stadium Sponsorships

Sponsoring a local sports team is an effective way to resonate with a community.

It’s something M&T Bank Corp. takes so seriously that it sponsors three NFL teams: the Buffalo Bills, in the bank’s hometown of Buffalo, New York; the New York Jets, who play out of Metlife Stadium in East Rutherford, New Jersey, and the Baltimore Ravens.

Since 2003, the $121.6 billion asset bank has held naming rights for the Ravens’ home field, M&T Bank Stadium in Baltimore, Maryland. It’s a relationship the bank extended in 2014, for a cool $60 million, keeping M&T’s logo on the stadium until 2027.

“We are embedded in the communities where we live and work, [and] we understand that those teams are important to their communities, including our employees, customers and prospects,” says Betsey Locke, senior vice president of brand, advertising and sponsorships at M&T.

Back in 2003, M&T was relatively unknown in the Baltimore market, she says. Holding the naming rights for the Ravens’ stadium “gave us immediate credibility. We’re now perceived as a hometown bank.”

Placing a bank’s logo on a local stadium and aligning the brand with a well-loved team can make an impact; that’s what drives even efficiency-conscious companies like M&T to spend millions on these sponsorships. It’s a unique relationship that Bank Director sought to understand by looking at the recent records of major sports teams.

In addition to win/loss records, the ranking accounts for the popularity of the sport, based on survey data from Gallup.

“Football remains the biggest and most popular sport,” says Locke. “The NFL draws the largest, strongest partnership ROI and the greatest fan affinity.”

Sponsoring sports teams is a tactic embraced by banks nationwide. There are more than 250 minor league baseball teams in the U.S., for example, and naming-rights sponsorships with these teams include big regional banks like Cincinnati-based Fifth Third Bancorp (the $168.8 billion asset company sponsors the Toledo Mud Hens) as well as smaller banks like $9.6 billion asset NBT Bancorp, in Norwich, New York, which sponsors the Syracuse Mets.

College teams offer another popular option. Through its Centennial Bank brand, Home Bancshares, based in Conway, Arkansas, has naming rights on the stadium that’s home to Arkansas State University’s Red Wolves football team – John Allison, the chairman of the $15.3 billion asset company, is an alumnus of the school.

M&T gets hundreds of sponsorship requests from sports teams to arts and cultural activities, says Locke. Her team uses a scorecard to conduct an initial review and determine whether a request meets the minimum requirements for M&T to seriously consider it. They look at things like alignment with the bank’s target audience, whether the opportunity will effectively promote M&T’s brand and differentiate the company in the marketplace, and if the bank will be able to promote its products and services to new audiences. Requests that pass this initial review are then handed off to a committee that meets quarterly to decide which requests to ultimately pursue.

Sponsoring the Ravens is a good fit, says Locke, because M&T doesn’t just cut a check. “We do community efforts together,” she says. For example, 150 employees from both organizations worked together to rehab a Boys & Girls Club of America in Baltimore earlier this year. Showing that both organizations are “deeply embedded in the community” is an important piece of the partnership, says Locke.

For the Ravens and other partners, M&T tracks the return on its investment through a number of key metrics, including impressions and engagement on traditional and social media. The bank also offers branded checking accounts for fans of the Ravens, Jets and Bills. These affinity accounts are promoted alongside the sponsorship, and M&T tracks their growth as part of the checking portfolio.

Fans’ love of the game goes beyond the numbers. A team’s record doesn’t account for its history, and teams that perform well one year can break fans’ hearts the next.

Locke says M&T is with fans through the good times and the bad. “Fans are deeply engaged and support [their] teams year-round,” she says. And football promotes values that M&T wants to align itself with. “[It’s] about teamwork, love for the sport, love for the community,” she says.

Best-Performing Stadium Sponsorships

Rank Sponsoring Bank Team League Win/Loss Record Score*
#1 M&T Bank Corp. Baltimore Ravens NFL 62.5% 1.2
#2 Wells Fargo & Co. Philadelphia 76ers NBA 62.2% 1.8
#3 TD Bank Boston Celtics NBA 59.8% 2.8
#4 U.S. Bancorp Minnesota Vikings NFL 53.1% 5.0
#5 Barclays New York Islanders NHL 58.5% 5.6
#5 Capital One Financial Corp. Washington Capitals NHL 58.5% 5.6
#7 PNC Financial Services Group Carolina Hurricanes NHL 56.1% 6.4
#8 SunTrust Banks Atlanta Braves MLB 55.6% 7.2
#9 Citizens Financial Group Philadelphia Phillies MLB 49.4% 7.8
#10 Bank of America Corp. Carolina Panthers NFL 43.8% 8.6

Source: Source: Gallup, NFL, MLB, NHL, MLS
*The score is based on the popularity of the sport as well as the win/loss records for each team. Where the bank sponsors an arena that hosts two sports teams, the best-performing team appears in the ranking.

An Easy Way to Lose Sight of Critical Risks


audit-6-7-19.pngLet 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.

Regular readers of Bank Director know that 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 this year’s Bank Audit and Risk Committees Conference, hosted by Bank Director in Chicago from June 10-12, we do so with an eye not just to the internal challenges faced by your institution but on the external pressures as well.

As we prepare to host 317 women and men from banks across the country, 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.

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.

At our upcoming event in Chicago, the 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.”

An Easy Way to Learn More About Banking


governance-5-24-18.pngEvery year when Richard Davis was the chief executive officer of U.S. Bancorp, he would travel to see Warren Buffett in Omaha, Nebraska.

“The meetings were always on the same day and always lasted exactly an hour and 15 minutes,” Davis once told me. “That wasn’t the plan. It just happened that way.”

Even though the meetings went over an hour, however, there were never people in the waiting room annoyed that the conversation went long. The tranquility was refreshing to Davis, who was accustomed to days packed with back-to-back meetings.

Buffett guards his time. He spends 80 percent of his day reading and thinking, he has said.

A student at Columbia University once asked Buffett, the chairman and CEO of Berkshire Hathaway, how to become a great investor. “Read 500 pages like this every day,” Buffett said, holding up a stack of papers. “That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

The same is true of banking, I believe.

But where should one start? What are the most important things to read if one wants to learn more about banking?

As someone who has been immersed in banking literature for nearly a decade, I recommend starting with the annual shareholder letters written by a trio of top-performing bankers.

The best known is Jamie Dimon’s annual letter written to the shareholders of JPMorgan Chase & Co.

“Jamie Dimon writes the best annual letter in corporate America,” Buffett said on CNBC in early 2012. “He thinks well. He writes extremely well. And he works a lot on the report—he’s told me that.”

In his letter this year, Dimon talks about JPMorgan’s banking philosophy. He talks about leadership. He talks about the things JPMorgan doesn’t worry about: “While we worry extensively about all of the risks we bear, we essentially do not worry about things like fluctuating markets and short-term economic reports. We simply manage through them.”

And Dimon comments extensively on an array of critical issues facing not just the banking industry, but the broader economy and society: “[I]t is clear that partisan politics is stopping collaborative policy from being implemented, particularly at the federal level. This is not some special economic malaise we are in. This is about our society. We are unwilling to compromise. We are unwilling or unable to create good policy based on deep analytics. And our government is unable to reorganize and keep pace in the new world.”

A second CEO who writes an especially insightful letter is William Demchak at Pittsburgh-based PNC Financial Services Group.

In his latest letter, Demchak delves into PNC’s retail growth strategy, outlining the bank’s expansion into new markets using a combination of physical locations, aggressive marketing and digital delivery channels.

Demchak also discusses the changes underway in banking: “It’s an amazing time in the industry—exciting, if you’ve been preparing for it, and probably terrifying if you haven’t. . . . [I]n some ways, it feels like we’re running through the woods with 5,400 other players and one big bear: retail customers and deposit consolidation. Some will be lost in the chaos; others will fall victim to bad decisions and the realization that they waited too long to start moving toward the future.”

Last but not least is the letter written by Rene Jones at M&T Bank Corp, a regional lender with $120 billion in assets based in Buffalo, New York. Of all the annual messages written by bank CEOs this year, Jones’ does the most to advance the industry’s narrative.

It’s crafted around two arguments, the first of which concerns the growing share of retail deposits held by the nation’s biggest banks. This trend isn’t simply a function of scale and technology, Jones argues. It’s also driven by demographic patterns.

“Historically, deposit growth itself is highly correlated to increased employment, income and population,” Jones writes. “The banks with the most scale have benefited from their outsized presence in the largest U.S. markets, which unlike past recoveries, have experienced a disproportionate share of the nation’s economic growth.”

Jones’ second argument concerns the need to refine the existing regulatory framework: “Regulation, like monetary policy, is a tool whose purpose is simultaneously to promote the economy while protecting those who operate within it. It is a difficult balance—especially so after significant events such as the financial crisis. The practice of implementing and adjusting regulation is both necessary and healthy, because its impacts are felt by communities large and small.”

Jones’ message will resonate with bankers, as M&T has long been an unofficial spokesman for the industry on regulatory matters, giving voice to their frustration with the sharp swing in the regulatory pendulum over the past decade.

In short, all these letters are worth the modest amount of time they take to read. They are three of the leading voices in banking today. There’s a reason someone like Warren Buffett reads what they write.