Apparently, bank directors are a very worried bunch. Nearly 20 members of Bank Director’s membership program responded to the question posed in last month’s newsletter: “What worries you most about the future?” We’ve compiled a word cloud that shows which words came up most often in bank directors’ responses, followed by direct quotes.
If the composition of a bank board of directors hasn’t changed over a period of several years, is it a sign of stability—or stagnation?
The banking industry has gone through a period of dramatic change since the financial crisis, and a board that was up to the challenge of providing effective oversight in 2007 might not be today. Consider how much has changed in recent years:
The regulatory environment has become much more rigorous, not only with more rules and regulations than ever before, but with a higher level of supervision by the bank regulatory agencies. Boards in particular are under greater scrutiny today.
Much greater emphasis is now being placed on risk management. Primary regulators encourage (or require) banks of all sizes to adopt new approaches like enterprise risk management and stress testing, and to form board-level risk committees.
The emergence of potential nonbank competitors like Google, Apple, Facebook and the Lending Club, many of whom are more technologically savvy and quicker to bring new products to market than traditional banks, may threaten to erode the industry’s market share.
The exploding popularity of all things mobile is forcing banks to reassess their reliance on bank branches as their primary distribution system.
If the membership of your board is the same today as it was seven years ago, you should consider doing an assessment to determine whether its collective skill set and knowledge match up with the bank’s challenges. Most directors are generalists who bring their good judgment and experience to the board table, and while these are invaluable assets, it can be very helpful to have experts in specific areas of need.
One institution that has done an impressive job of refitting its board is Huntington Bankshares Inc. in Columbus, Ohio. The bank was one of many casualties of the financial crisis and in 2008 found itself with some pretty significant credit issues, a balance sheet that needed to be strengthened with more capital and a chief executive officer who had reached retirement age. Chairman and CEO Stephen Steinour was hired in January 2009 to lead the bank’s turnaround, and in early 2010 Steinour and the board did a thorough assessment of the board’s strengths and weaknesses.
“In conjunction with Steve, we developed a list of the qualities that Huntington needed on its board as we moved into the future,” says David Porteous, the bank’s lead director. “We had this incredibly talented board but over time we had [become] overweighted in some talents and in other areas [we were] underweighted.” Porteous says that exercise was “absolutely essential” because it identified the kinds of directors that Huntington would need going forward.
That process resulted in some of the bank’s directors stepping down while five new directors have joined the board since 2010. Peter Kight, managing partner of the private equity firm Comvest Partners and founder of technology pioneer CheckFree Corp., which was sold to Fiserv Inc. in 2007, brings a deep knowledge of financial technology to the Huntington board and chairs its technology committee. Steven Elliott, a former senior vice chairman at Bank of New York Mellon Corp., has a background in banking and risk management and chairs the bank’s risk oversight committee. Richard Neu, board chairman at MCG Capital Corp. and a former bank treasurer, chairs the audit committee. Retired KPMG partner and director Eddie Munson, who has an extensive accounting background, also serves on the audit committee. And Ann Crane, president and CEO of Crane Group Co., a family-owned company in Columbus, brings her experience with private businesses.
“We’ve been able to add a number of directors to complement what is really a strong core of directors,” says Steinour. “It allowed us to bolster the areas that we identified in 2010. And we continue to work on that as we think through director retirements and the incremental areas of opportunity for us to enhance the breadth of skills and knowledge on the board.”
The banking industry’s top ranks have long been considered an “old boys’ club,” if not forbidden to women, at least unwelcoming. Even today, only one of America’s 25 largest banks has a woman in the CEO slot: Beth Mooney, chairman and CEO of KeyCorp.
That’s why I was surprised to discover more than one-third of the 46 banks that trade on our OTCQX marketplace have a woman in a senior leadership role. In fact, two OTCQX banks have a female CEO and CFO and one bank has a female chairwoman.
But the gender diversity doesn’t stop there. Of the 15 OTCQX banks surveyed, several reported a high number of women in senior leadership roles. In one bank, up to 80 percent of the senior leadership was female. The two banks with a female CEO and CFO also reported a high concentration of women on their boards.
Click image for complete list
Is there a correlation between being a transparent, shareholder-friendly OTCQX community bank and having more female officers and board members? Who knows, but I thought I’d ask female OTCQX bank executives about their thoughts on gender diversity in banking, what unique traits women bring to the banking profession and their advice to young female bankers who seek to ascend the ladders at their companies. Here are their thoughts:
Do you think gender diversity is important on community bank boards and management? Why or why not? “… gender diversity is just as important as professional, educational, and ethnic diversity on a bank board and in management.” —Janet Silveria, president and CEO of Community Bank of Santa Maria (OTCQX: CYSM), a $211-million asset community bank serving Santa Maria, Orcutt and Lompoc, California.
“Yes, as is overall diversity including education, experience, ethnicity, etc. I think having a female on the board changes the communication and dynamics of a board of mostly men in a positive way.” —Tamara Gurney, president and CEO of Mission Valley Bancorp (OTCQX: MVLY), holding company for Mission Valley Bank in Sun Valley, California, with $260 million in assets.
What unique trait or perspective do you think women bring to bank boards and the C-suite? “… women tend to be more practical and analytical. They tend to work better as a team, and see things more globally.” —Silveria.
“… women are very efficient and good at multi-tasking. In addition, many women are very good at decision making and a caring approach to staff development and team building.” —Colleen Brown, senior vice president, treasurer and CFO at Standard Financial Corp. (OTCQX: STND), parent company of Standard Bank, a Pennsylvania chartered savings bank serving Allegheny, Westmoreland and Bedford Counties in Pennsylvania and Allegany County in Maryland.
What advice would you give a woman looking to attain a leadership position in banking? “Be yourself; don’t flaunt feminism, but you don’t need to act like a man. Embrace your feminine perspective and all the positive attributes that come with being a woman. Be assertive; stand up for your convictions, but always be respectful and kind.” —Silveria
“Use the strengths of being a woman, finding balance between the more nurturing, caring side and the drive typically associated with masculinity. You need to show strength, conviction, confidence and assertiveness, but the caring and compassion are critical as well. Believe in yourself and be yourself; don’t try to act like a man.” —Gurney
When asked if they actively recruit or mentor young women at their companies, most survey respondents said that they take a measured approach, preferring to hire the “best person for the job” rather than hire based on gender.
As to a pay disparity between male and female bankers, most of the women agreed it still exists, but at least one sees a silver lining: “I have seen a slight improvement,” says Gurney.
The past year saw the banking industry recover significantly from the fallout of bad loans and poor asset quality. While profitability improved, the impact of new banking regulations began to take effect, including provisions that cut debit fee income for banks above $10 billion in assets. So what is in store for 2013? Bank Director asked industry experts to answer the question: What will be the biggest change in banking in 2013? Here are their responses:
Steven D. Hovde, President & CEO, Hovde Financial Inc., speaks at Bank Director’s 2012 Bank Executive and Board Compensation event in Chicago on the state of the banking industry over the next 12 months.
Bank executives are often in the unique position to get a first-hand view of their local economies, and if the most recent Bank Director and Grant Thornton LLP Bank Executive Survey is any indicator, they do not like what they see. Only 28 percent of respondents expect an improvement in the local economy in the next six months compared to 44 percent at this time last year, and around twice as many respondents this year expect their local economy to get worse—13 percent compared to 6 percent last year. The same trend holds true for the national economy with only 13 percent of respondents expecting an improvement compared to 39 percent last year.
The annual survey was emailed in June and July to CEOs, CFOs, and audit committee members from U.S. banks with more than $250 million in assets. More than 170 bank executives completed the survey, which polled respondents on both the current state and future direction of the banking industry.
With the two year anniversary of the Dodd-Frank Act recently passed, the survey reveals that a slight majority of U.S. bank executives feel they are currently equipped to handle the increased compliance demands brought on by the historic legislation. Still, regulatory compliance burden is the number one concern among survey respondents for the second year in a row—94 percent this year compared to 91 percent last year. Dorsey Baskin, a partner at Grant Thornton LLP, says that the 54 percent of respondents reporting they are equipped to handle the legislation to date are likely more concerned with the myriad of rules yet to be written.
Fortunately, bank executives as a whole appear to be preparing for whatever is to come. Sixty-eight percent of respondents have strengthened their loan review procedures in the past 24 months, 59 percent have adopted an enterprise risk management structure, and 21 percent have hired a chief risk officer. A full 78 percent of respondents are conducting stress testing on an ongoing basis, with 8 percent more expected to start this year. Additionally, 33 percent of respondents are planning to hire additional staff and 21 percent are planning to hire an advisory firm to meet increased compliance demands. Only five percent of respondents have not begun planning for increased compliance demands.
In what might be attributed to hiring additional staff for compliance, 90 percent of executives expect the number of people they employ at their bank to increase or remain the same in the next six months compared to 85 percent last year.
The increasingly pessimistic outlook on the economy might explain another chief concern of respondents this year, organic loan demand. Over 90 percent of respondents expect to find growth in organic loan origination in the future, but 67 percent list organic loan demand as a concern for their institution. Baskin says that even though bankers are currently seeing a demand for loans, they are rightly concerned with how long it will last and how far the economy will grow. “A point might be made that contrary to all of the political discussions of loan growth and lending by the banking industry, the bankers don’t feel like they have enough loan growth opportunity,” says Baskin. “The bankers who are accused of not making loans are sitting here worried about not having loans to make, and that’s how they hope to grow.”
While bank executives cannot be certain where the economy is headed, they do seem to agree on their presidential pick. When we asked respondents who they are supporting in the upcoming election, they chose Mitt Romney over Barack Obama by a wide margin—79 percent to 8 percent, with 13 percent undecided.
FDIC contractor says more bank failures on the way
Michael Sher has a first-hand view on the nation’s bank failures. He is managing director of RSM McGladrey, which has various contracts with the Federal Deposit Insurance Corp., including assisting the FDIC in shutting down banks, and assisting them with managing and selling the assets. He discusses where FDIC-assisted deals go from here, and what mistakes bankers make when buying failed banks.
What do you do for the FDIC? To date, we and our strategic partner The Corvus Group, Inc. have assisted the FDIC in shutting down 59 failed financial institutions. Additionally, we are a contractor to the FDIC providing due diligence services to assist them in disposing of the assets that have been retained from the failed financial institutions. The first large deal was a $1.7 billion structured sale involving substantially non-performing acquisition and development loans. With a structured sale, the FDIC enters into a partnership with the buyer of the assets and typically, the FDIC retains a 60 percent ownership interest. The other transaction that we were involved with was a securitization backed by approximately $394 million of performing commercial and multi-family mortgages from 13 failed banks.
Do you think the FDIC will do more securitized asset sales in the future? As we move ahead, I think that the FDIC will focus more on securitizations. The cost of due diligence for buyers on a structured sale is substantial and the size of the loans pools historically have exceeded a billion dollars in unpaid principal balance. It is apparent that the interest in such large transactions has waned. The pricing received from the securitization sales is potentially higher than the other methods that the FDIC uses in disposing of assets from failed financial institutions. In addition, with a securitization, the FDIC does not retain an ownership interest that requires on-going monitoring. With structured sales, there is speculation that the size of the transactions will get smaller to encourage more participation.
Where do you think we’re headed in terms of bank closures? I don’t believe it’s over. If you look at the number of banks on the watch list, it’s roughly 10 percent of the banks in the country. How can this crisis be over when we have not seen an overall increase in real estate values? That being said, in my opinion, the number of banks going into receivership will decrease as I think that the FDIC will encourage banks to merge prior to a failure. A benefit to this is that the directors and officers may avoid being investigated by the FDIC subsequent to failure, and may avoid possible legal ramifications.
What’s really the demand for banks in hard-hit areas such as Georgia and Florida and Illinois? This is no different than the savings and loan crisis in the late ’80s and early ’90s. A lot of individuals and organizations made plenty of money buying distressed assets when others thought it was ludicrous to do so. I think that those who are not taking advantage of the distressed times now will be kicking themselves in the coming years because they missed the opportunity. Yes, you have to be cautious about what you buy, but those who get involved have the potential to make a lot of money.
How does the FDIC view the community banks who want to buy these failed banks, versus the big institutional investors? In my opinion, the FDIC views this banking crisis as the banking industry’s problem and is looking to the healthy banks to resolve it. Most of the institutional investors don’t have the experience or the know-how that the FDIC is looking for. I think the FDIC is somewhat reluctant to get these money players involved. The key is to have the right team in place to manage and dispose of the assets.
What sort of mistakes do buyers make in buying failed banks? I think one of the biggest mistakes made is buyers not having a full understanding of their rights and obligations under the loss share agreements that they have entered into with the FDIC. The acquiring banks have a short time-frame to truly understand what they have acquired and their reporting responsibilities under the loss share agreement. This results in the acquirers not fully understanding how to manage and/or dispose of the assets that they acquired.
For the third time this week, I found myself on the FDIC’s website to start my day. A glutton for regulatory punishment? More a curiosity to see the agency’s latest report card. On the bright side, it shows that the banking industry checked in with an $87.5 billion profit in 2010 (up from a net loss of $10.6 billion a year earlier). Less rosy, four points worth noting as a follow up to my post on Monday about FDIC-assisted transactions:
Last year, the number of failed banks reached 157, an 18-year high.
The number of institutions on the FDIC’s “Problem List” rose from 860 to 884.
Total assets of “problem” institutions increased to $390 billion from $379 billion in the prior quarter, but are below the $403 billion reported at year-end 2009.
While the problem banks has grown for the fifth year in the row, it expects the number of failures to be fewer than last year.
Additionally, the report shows that lending remains weak: total loans and leases fell again during the fourth quarter. Not surprisingly, the agency’s chairwoman, Sheila Bair went on record with her expectation that “industry to take the next step, and begin to build their loan portfolios. The long-term health of both the industry and our economy will depend on a responsible expansion of bank lending.” While not a surprising position, some might be reminded that the banking industry remains under considerable pressure from financial regulations that impact lending activity.