Taking Control and Mitigating Risk With a Collateral Management System

For many banks, managing the manifold economic and internal risks has been a stressful and very manual process.

Truly gaining a comprehensive overview of all the collaterals associated with a bank’s lending business is often the top desire we hear from clients, followed by in-depth reporting and collateral management workflow capabilities. Historically, collateral management in wealth management lending has often been a siloed process with each department managing it individually. And the need for additional resources in credit and risk departments has been a growing trend. In our research, the processes in which banks are managing their collaterals vary but often involve collecting data from a variety of sources, tracking in spreadsheets manually, and pulling rudimentary reports from the core banking system that only gives basic aggregated information at best.

Banks need a way to monitor and manage collateral for all their lending products, not just securities-based lending. An enterprise collateral management solution allows credit and risk professionals to:

• Gain an accurate and up-to-date overview of collaterals across different asset and loan types in real-time for marketable securities, if desired.
• Set up multiple credit policies.
• Perform portfolio concentration analysis for more in-depth insights on potential risks.
• Pull pre-defined and custom reports quickly and efficiently.
• Automate collateral release support.
• Assess borrower’s risk across the entire relationship through data visualizations and modules.
• Conduct in-depth “what-if” stress testing for marketable securities to proactively mitigate any potential risks.

Make Decisions and Act With Efficiency
Many organizations are siloed and visibility across groups is an organization struggle. The lack of visibility across teams can cause operation and client-facing staff to struggle with making timely and informed decisions. A digital, streamlined enterprise collateral management solution can create efficiencies for cross-team collaboration. Your bank’s team should look for solutions with features like tools, reports and workflows that enable them to make informed decisions and act with efficiency, including:

• Automatic calculation of collateral release.
• Portfolio concentration analysis to provide more in-depth insights on potential risk.
• Rule-based and streamlined workflows to support collateral call management in scale with efficiency and at a reduced cost.

The standards for bank risk management and customer service today are at some of their highest levels today; management teams are looking for immediate answers to their questions in this uncertain environment. It is essential that banks have a technological solution that equips their team to have the answers at their fingertips to provide the service clients expect and deserve. Now more than ever, financial institutions need a collateral management solution that provides speed, transparency, efficiency and a streamlined digital workflow to support the new hybrid working environment.

How Banks Can Speed Up Month-End Close

In accounting, time is of the essence.

Faster financial reporting means executives have more immediate insight into their business, allowing them to act quicker. Unfortunately for many businesses, an understaffed or overburdened back-office accounting team means the month-end close can drag on for days or weeks. Here are four effective strategies that help banks save time on month-end activities.

1. Staying Organized is the First Step to Making Sure Your Close Stays on Track
Think of your files as a library does. While you don’t necessarily need to have a Dewey Decimal System in place, try to keep some semblance of order. Group documentation and reconciliations in a way that makes sense for your team. It’s important every person who touches the close knows where to find any information they might need and puts it back in its place when they’re done.

Having a system of organization is also helpful for auditors. Digitizing your files can help enormously with staying organized: It’s much easier to search a cloud than physical documents, with the added benefit of needing less storage space.

2. Standardization is a Surefire Way to Close Faster
Some accounting teams don’t follow a close checklist every month; these situations make it more likely to accidentally miss a step. It’s much easier to finance and accounting teams to complete a close when they have a checklist with clearly defined steps, duties and the order in which they must be done.

Balance sheet reconciliations and any additional analysis also benefits from standardization. Allowing each member of the team to compile these files using their own specific processes can yield too much variety, leading to potential confusion down the line and the need to redo work. Implementing standard forms eliminates any guesswork in how your team should approach reconciliations and places accountability where it should be.

3. Keep Communication Clear and Timely
Timely and clear communication is essential when it comes to the smooth running of any process; the month-end close is no exception. With the back-and-forth nature between the reviewer and preparer, it’s paramount that teams can keep track of the status of each task. Notes can get lost if you’re still using binders and spreadsheets. Digitizing can alleviate some of this. It’s crucial that teams understand management’s expectations, and management needs to be aware of the team’s bandwidth. Open communication about any holdups allows the team to accomplish a more seamless month-end close.

4. Automate Areas That Can be Automated
The No. 1 way banks can save time during month-end by automating the areas that can be automated. Repetitive tasks should be done by a computer so high-value work, like analysis, can be done by employees. While the cost of such automation can be an initial barrier, research shows automation software pays for itself in a matter of months. Businesses that invest in technology to increase the efficiency of the month-end close create the conditions for a happier team that enjoys more challenging and fulfilling work.

Though month-end close with a lack of resources can be a daunting process, there are ways banks can to improve efficiency in the activities and keep everything on a shorter timeline. Think of this list of tips as a jumping off point for streamlining your institution’s close. Each business has unique needs; the best way to improve your close is by evaluating any weaknesses and creating a road map to fix them. Next time the close comes around, take note of any speed bumps. There are many different solutions out there: all it takes is a bit of research and a willingness to try something new.

Growth Milestone Comes With Crucial FDICIA Requirements

Mergers or strong internal growth can quickly send a small financial institution’s assets soaring past the $1 billion mark. But that milestone comes with additional requirements from the Federal Deposit Insurance Corp. that, if not tackled early, can become arduous and time-consuming.

When a bank reaches that benchmark, as measured at the start of its fiscal year, the FDIC requires an annual report that must include:

  • Audited comparative annual financial statements.
  • The independent public accountant’s report on the audited financial statements.
  • A management report that contains:
    • A statement of certain management responsibilities.
    • An assessment of the institution’s compliance with laws pertaining to insider loans and dividend restrictions during the year.
    • An assessment on the effectiveness of the institution’s internal control structure over financial reporting, as of the end of the fiscal year.
    • The independent public accountant’s attestation report concerning the effectiveness of the institution’s internal control structure over financial reporting.

Management Assessment of Internal Controls
Complying with Internal Controls over Financial Reporting (ICFR) requirements can be exhaustive, but a few early steps can help:

  • Identify key business processes around financial reporting/systems in scope.
  • Conduct business process walk-throughs of the key business processes.
  • For each in-scope business process/system, identify related IT general control (ITGC) elements.
  • Create a risk control matrix (RCM) with the key controls and identity gaps in controls.

To assess internal controls and procedures for financial reporting, start with control criteria as a baseline. The Committee of Sponsoring Organizations (COSO) of the Treadway Commission provides criteria with a fairly broad outline of internal control components that banks should evaluate at the entity level and activity or process level.

Implementation Phases, Schedule and Events
A FDICIA implementation approach generally includes a four-phase program designed with the understanding that a bank’s external auditors will be required to attest to and report on management’s internal control assessment.

Phase One: Business Risk Assessment and COSO Evaluation
Perform a high-level business risk assessment COSO evaluation of the bank. This evaluation is a top-down approach that allows the bank to effectively identify and address the five major components of COSO. This review includes describing policies and procedures in place, as well as identifying areas of weakness and actions needed to ensure that the bank’s policies and procedures are operating with effective controls.

Phase One action steps are:

  • Educate senior management and audit committee/board of directors on reporting requirements.
  • Establish a task force internally, evaluate resources and communicate.
  • Identify and delegate action steps, including timeline.
  • Identify criteria to be used (COSO).
  • Determine which processes and controls are significant.
  • Determine which locations or business units should be included.
  • Coordinate with external auditor when applicable.
  • Consider adoption of a technology tool to provide data collection, analysis and graphical reporting.

Phase Two: Documenting the Bank’s Control Environment
Once management approves the COSO evaluation and has identified the high-risk business lines and support functions of the bank, it should document the internal control environment and perform a detailed process review of high-risk areas. The primary goals of this phase are intended to identify and document which controls are significant, evaluate their design effectiveness and determine what enhancements, if any, they must make.

Phase Three: Testing and Reporting of the Control Environment
The bank’s internal auditor validates the key internal controls by performing an assessment of the operating effectiveness to determine if they are functioning as designed, intended and expected.  The internal auditor should help management determine which control deficiencies, if any, constitute a significant deficiency or material control weakness. Management and the internal auditor should consult with the external auditor to determine if they have performed any of the tests and if their testing can be leveraged for FDICIA reporting purposes.

Phase Four: Ongoing Monitoring
A primary component of an effective system of internal control is an ongoing monitoring process. The ongoing evaluation process of the system of internal controls will occasionally require modification as the business adjusts. Certain systems may require control enhancements to respond to new products or emerging risks. In other areas, the evaluation may point out redundant controls or other procedures that are no longer necessary. It’s useful to discuss the evaluation process and ongoing monitoring when making such improvement determinations.

How Banks Can Benefit From Adopting Automation for Month-End Close

The finance industry is no exception when it comes to the general shift toward automation in daily life.

Automation is a powerful tool that eliminates repetitive manual processes, whether it’s to improving the bottom line by increasing productivity and output or offering better service to bank customers. One area of the business that bank executives and boards should absolutely take full advantage of automation is back-office accounting. Here are some of the top benefits banks can gain from automating the month-end close process.

Perhaps the most immediate benefit of automation for banks is the amount of time they can expect to save. Many bank accounting and finance teams are not closing on a timeline they or their CFOs are satisfied with. The month-end close is not something that can be skipped, which means allocating the time it takes for a full close can encroach into other projects or duties. Executives who have worked as accountants know that if the month-end close is not done on time, stressful days turn into late nights in the office. Automating areas of the close, such as balance sheet reconcilements, can free up time for more high value work such as analysis.

It is not uncommon for bank accounting teams to run lean. Cracks in the month-end close can lead to an overburdened workload, burnout and mistakes. When accountants work under stressful conditions, exhaustion that results in an error can be common. Even one mistake on a spreadsheet can create a material cost for the bank; it’s amazing how the tiniest miscalculation can multiply exponentially. One way to reduce human error is to automate processes with a program that can complete recurrent work using algorithms.

An additional pain banks must consider is compliance: external auditors, regulators and more. Things can start to go downhill if the finance team doesn’t properly generate a paper trail. That’s assuming they have, in fact, properly completed the close and balance sheet reconcilements. When a bank takes shortcuts or makes errors in their accounting, it can result in heavy fines or in extreme cases, even sanctions. In this context, automating the month-end close assumes the ethos of ‘An ounce of prevention is worth a pound of the cure.’ Digitizing the month-end close and supporting documents makes it easier to locate important data points and lessens the potential for discrepancies in the first place.

Lastly, accounting automation can help minimize a bank’s fraud risk. Fraud can go undetected for a long time when banks don’t perform due diligence during the month-end close. Reconciling accounts every month will make it easier to spot any red flags.

Companies that take advantage of available, advanced technology available have more chances to keep up with the ever-shifting business landscape. Bank accounting teams can benefit hugely by automating month-end close.

Getting the Most out of the Profitability Process

The banking industry is increasingly using profitability measurements and analysis tools, including branch, product, officer and customer levels of profitability analysis.

But a profitability initiative can be a considerable undertaking for an organization from both process and cultural perspectives. One way that institutions can define, design, implement and manage all aspects of a profitability initiative is with a profitability steering committee and charter — yet less than 20% of financial institutions choose to leverage a profitability steering committee, according to the 2020 Profitability Survey from the Financial Managers Society. Over the past 30 years, we have found that implementing a profitability process inherently presents several challenges for institutions, including:

  • Organizational shock, due to a change in focus, culture and potentially compensation.
  • Profitability measurement that can be as much art as it is science.
  • A lack of the right tools, rules and data needed.
  • A lack of knowledge to best measure profitability.
  • A lack of understanding regarding the interpretation and use of results.
  • An overall lack of buy-in from people across the organization.

The best approach for banks to address and overcoming these challenges is to start with the end in mind. The graphic below depicts what this looks like from a profitability initiative perspective. Executives should start from the top left and let each step influence the decisions and needs of the subsequent step. Unfortunately, many organizations start at the bottom right and work their way up to the left. This is analogous to driving without a destination in mind, or directions for where you want to go.

The best way for banks to work through the above process, and all the related nuances and decisions, to ensure the successful implementation of a profitability initiative is by creating and leveraging a profitability steering committee and related charter. There are three primary components of a profitability steering committee and charter. The first task for the committee is to define the overall purpose and scope of the profitability initiative. This includes:

  • Defining the goals of the steering committee.
  • Outlining the governance of the initiative.
  • Defining how the profitability results will be used.

The committee’s next step is to define the structure of the profitability process, including:

  • The employees or roles that will receive profitability results, based on the decisions to be made, the results they will identify, any needed metrics and reports and any examples of reports.
  • The tool selection process, including determining whether an existing tool exists or if the bank needs a new tool, documenting system/tool requirements, creating the procurement process details and ownership of the tool.
  • Deciding and documenting governance concerns that relate to profitability rules, including identifying the primary owner of the rules, the types of rules needed (net interest margin, costs, fees, provision or capital), the process for proposing and approving rules, any participants in the process and any education, if needed.
  • Identifying the data needs and related processes for the initiative, such as the types of data needed, the sources and process for providing that data, ownership of the data process and the priority and timelines for each data type.

The committee’s final step focuses on the communication and training needs for the profitability initiative, including defining:

  • A training plan for stakeholders.
  • A communication plan that includes how executive will support for the initiative, a summary of the goals, decisions that need to be made, and any expectations and timelines, as well as details of the process, as needed.
  • An escalation process for handling questions, issues or disputes, and the role that committee members are expected to play in the escalation process.
  • The help and support, such as personnel and documents. that will be available.

Additional Best Practices
When creating a profitability steering committee and related charter, we have found it helpful to consider the following items as appropriate:

  • If profitability results will be included as part of individual or team incentive compensation, be sure to work through the necessary details, such as process flows, additional reporting, required integration points and data flows, dispute management, additional education and training, among others.
  • Consider aligning any metrics, approaches and reporting structures if the budgeting and planning process forecasts profitability.
  • Document plans for assessing the profitability initiative over time.
  • Finally, keep it suitably simple. Expect to be asked to explain the initiative’s approaches, details and results; the bank can always increase the precision and/or complexity over time.

Building a Better Nominating/Governance Committee

Boards could be missing out on valuable opportunities to better leverage their nominating/governance committees. 

There’s broad agreement on the responsibilities that many nominating/governance committees are tasked with, according to the directors and CEOs responding to Bank Director’s 2022 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP. Half of the survey participants serve on this committee. But the results also suggest there are areas that these committees may be overlooking. 

As chair of the governance committee at $2.8 billion First Fidelity Bancorp in Oklahoma City, Samuel Combs III views the committee’s overarching duty as being responsible for the board’s broader framework and committee infrastructure. He says, “We try to determine if we are balanced in what we’re covering and in our allocation of resources, board members’ time [and] assignments to certain committees.” 

First Fidelity’s governance committee typically meets three to four weeks ahead of the board meeting to develop the agenda, often working closely with the CEO to do so, Combs says. Devoting this advanced time to craft the agenda means that the board can devote sufficient time later to discussing important strategic issues. 

The survey’s respondents report that their boards’ nominating/governance committees are generally responsible for identifying and evaluating possible board candidates (92%), recommending directors for nomination (89%), and developing qualifications and criteria for board membership (81%). 

Far fewer respondents say their governance committee is responsible for making recommendations to improve the board (57%) or reviewing the CEO’s performance (40%). 

While the suggestion is unlikely to come from the chief executive, a bank’s CEO could benefit from regular reviews by the nominating/governance committee, says Jim McAlpin, a partner at Bryan Cave and leader of the firm’s banking practice group. Reviewing the CEO’s performance gives the board a chance to talk about what’s working and what could be improved, separate from compensation discussions. 

“The only review he or she [typically] gets is whether the compensation remains the same,” says McAlpin, who also serves as chair of the nominating/governance committee at a $300 million bank located in the Northeast. “Beyond compensation, there’s very rarely feedback to the CEO.” 

Almost half (47%) of the survey respondents say their board goes through regular evaluations. Among those, 60% say the nominating/governance committee chair or the committee as a whole leads that process. That tracks with the roughly half (53%) who name reviewing directors’ performance as a responsibility of the nominating/governance committee. 

First Fidelity’s board alternates board evaluations with peer evaluations every other year, but Combs stresses a holistic approach to those. “Not only do you evaluate, but you spend time reviewing it with the group,” he says. “And then with each independent board member, if necessary. And we usually give them the option of having that conversation with myself and the CEO, post-evaluation.” 

McAlpin suggests another exercise that nominating/governance committees could consider: Make it a regular practice — say every 2 or 3 years — to locate and review every committee’s charter. It can be useful to regularly review each committee’s scope of responsibilities and also provides an opportunity to update those responsibilities when needed. 

“Does it list all of the things the committee does or should be doing? And secondly, does it list things that the committee is not doing?” McAlpin says. “It’s a fairly basic thing, but important in corporate hygiene.”

Forty-five percent task the governance/nominating committee with determining whether the board should add new committees. In the case of First Fidelity, the governance committee discussed how to handle oversight of cybersecurity issues and whether it would benefit from a designated cybersecurity committee. The governance committee ultimately assigned that responsibility largely to its audit committee, with some support from its technology committee. 

Nominating/governance committees should also stay apprised of emerging issues and trends, like intensifying competition for talent and increased focus on environmental, social and governance issues. Those may ultimately help governance committees better assess the skills and expertise needed on the board, which about three-quarters of respondents identify as a key duty of the governance committee. 

“It’s good for nominating and governance committees to be forward thinking, to be thinking about the composition of the board, to be thinking about the skill sets of the board, the diversity of the board,” says McAlpin. 

Many boards may assign primary responsibility for talent-related issues to their compensation committee, but Combs argues that it should also concern the governance committee, especially in the tough, post-Covid recruiting landscape. “Talent acquisition, talent retention, talent management should have always been at this level, in my opinion,” Combs says. “These emerging trends should lead you to how you position yourself with your board talent, as well as your staffing talent.” 

A Proactive Approach to Risk Adjusted Performance Management

Banks need to assess their lending practices to get a clear view of how the financial climate, and emerging economic uncertainty, will impact their corporate clients and the growth and performance of their business.

To do that, they need to fully understand their exposure to interest-rate and liquidity risk, and proactively manage their balance sheets to maintain growth and enhance profitability. They need to analyze their lending practices, identifying sources of funding and qualifying loan targets to ensure proper loan management. All of this necessarily entails a re-evaluation of their internal systems’ ability to respond to changes that can impact balance-sheet risk and returns. And many banks have concluded that legacy point solutions are not up to demands from the risk and finance departments to model numerous business and risk scenarios.

For these banks, the solution is an overhaul: combining the modeling capabilities of asset and liability management systems with the governance and reach of planning systems and the analytical power of advanced business intelligence tools.

As part of this approach, banks no longer limit asset liability management to regulatory compliance. They are moving beyond compliance, toward creating business value though flexible scenario modeling for a holistic view of the risk factors impacting the future performance of the business.

To benefit from this kind of proactive approach to risk-adjusted profitability management, banks need to implement several key capabilities. These include methodologies and processes for interest-rate management and balance-sheet optimization for fast and efficient advanced scenario modeling. Banks also the analytical power to rapidly evaluate the results and options available to them. Finally, banks need to act on this analysis. This requires them to put in place the information tooling needed to enable frontline staff to execute the selected options, as well as processes and metrics that allow management to assess the impact of any given measure.

As they move toward a holistic risk-adjusted performance management platform, bankers should ask themselves the following questions:

  • What factors are impacting earnings and liquidity within the changing environment?
  • Is the bank incorporating input from market-facing staff related to growth, spreads and potential losses?
  • Is the bank taking a credit hit? If so, how much?
  • Is the bank managing based on its current balance-sheet composition, without considering future events? Is it counting on cash flows that might disappear?
  • Are the bank’s system capable of handling different interest-rate scenarios, including high volatility and negative rates? Can the bank measure the impact of these scenarios on liquidity and earnings?
  • Is the bank’s current asset liability management solution supporting decisions that will maximize stakeholder value?

Any solution should combine three key attributes. First is that it should include an asset/liability management system capable of quickly computing multiple scenarios from the bottom up. Second, the solution needs to include business analytical tools to compare and contrast the rapid reaction plans for prioritization and execution. And finally, it needs a risk-adjusted performance management (RAPM) tool to measure and manage the results.

Attempting to build a solution in-house with this breadth of capabilities can itself be a risky business. Banks often cobble together a fragmented solution, since legacy point systems are typically focused on addressing just one aspect or requirement. This approach lacks a comprehensive or holistic view of the bank’s true risk position. Indeed, manual processes based on spreadsheets of general ledger data may provide a current view of the business, but fail to model for unforeseen risks or changing behaviors. The result can be a disconnect between the bank’s view of the risks it faces and the true factors impacting the bank’s performance going forward.

On top of that, dealing with multiple systems and suppliers introduces its own risk into the situation, including miscommunication, lack of clarity over ownership of key functions and poor interoperability that can potentially disrupt work flows. The bank may need to maintain multiple project teams with various specializations and vendor points of contacts for multiple individual suppliers, introducing complexity and expense.

That’s why banks increasingly are turning toward a more integrated approach combining risk, compliance and analytics to meet the challenge of risk-adjusted performance management. Adopting a consolidated platform can give banks the consistency and agility to gain a true view of their risk situation. The result is a realistic, holistic view of the bank’s business trajectory, accessible and managed through a single point of contact, ensuring consistency of approach and operational efficiency.

Banking’s Netflix Problem

On April 19, Netflix reported its first loss in subscribers — 200,000 in the first quarter, with 2 million projected for the second — resulting in a steep decline in its stock price, as well as layoffs and budget cuts. Why the drop? Although the company blames consumers sharing passwords with each other, the legacy streamer also faces increased competition such as HBO Max and Disney Plus. That also creates more choice for the 85% of U.S. households that use a streaming service, according to the U.K. brand consulting firm Kantar. The average household subscribes to 4.7 of them.

Our financial lives are just as complicated — and there’s a lot more at stake when it comes to managing our money. A 2021 survey conducted by Plaid found that 88% of Americans use digital services to help manage their money, representing a 30-point increase from 2020. Americans use a lot of financial apps, and the majority want their bank to connect to these providers. Baby boomers use an average of 2.6 of these apps, which include digital banking and lending, payments, investments, budgeting and financial management. Gen Z consumers average 4.6 financial apps.

“Banks can be material to simplifying the complexity that’s causing everybody to struggle and not have clarity on their financial picture,” said Lee Wetherington, senior director of corporate strategy at the core provider Jack Henry & Associates. He described this fractured competitive landscape as “financial fragmentation,” which formed the focus of his presentation at Experience FinXTech, a tech-focused event that took place May 5 and 6 in Austin, Texas. Successful banks will figure out how to make their app the central hub for their customers, he said in an interview conducted in advance of the conference. “This is where I see the opportunity for community financial institutions to lever open banking rails to bring [those relationships] back home.”

During the event, Wetherington revealed results from a new Jack Henry survey finding that more than 90% of community financial institutions plan to embed fintech — integrating innovative, third-party products and services into banks’ own product offerings and processes — over the next two years.

Put simply, open banking acknowledges today’s fractured banking ecosystem and leverages application programming interfaces (APIs) that allow different applications or systems to exchange data.

Chad Davison, director of client solutions consulting at Fiserv, creates “balance sheet leakage” reports to inform his strategic discussions with bank executives. “We’ve been trying to understand from an organization perspective where the dollars are leaving the bank,” said Davison in a pre-conference interview. Some of these dollars are going to other financial providers outside the bank, including cryptocurrency exchanges like Coinbase Global and investment platforms like Robinhood Markets. This awareness of where customer dollars are going could provide insights on the products and services the bank could offer to keep those deposits in the organization. “[Banks] have to partner and integrate with someone to keep those dollars in house,” said Davison, in advance of a panel discussion focused on technology investment at the Experience FinXTech event.

Increasingly, core providers — which banks rely on to fuel their technological capabilities — are working to provide more choice for their bank clients. Fiserv launched a developer studio in late 2021 to let developers from fintechs and financial institutions access multiple APIs from a single location, said Davison, and recently launched an app market where financial institutions can access solutions. “We want to allow the simple, easy connectivity that our clients are looking for,” he said. “We’re excited about the next evolution of open banking.”

Jack Henry has also responded to its clients’ demand for an open banking ecosystem. Around 850 fintechs and third parties use APIs to integrate with Jack Henry, said Wetherington, who doesn’t view these providers as competitive threats. “It’s a flywheel,” he said. “Competitors actually add value to our ecosystem, and they add value for all the other players in the ecosystem.” That gives banks the choice to partner and integrate with the fintechs that will deliver value to the bank and its customers.

As fractured as the financial landscape may be today for consumers, bank leaders may feel similarly overwhelmed by the number of technologies available for their bank to adopt. In response, bank leaders should rethink their strategy and business opportunities, and then identify “the different fintech partners to help them drive strategy around that,” said Benjamin Wallace, CEO at Summit Technology Group. Wallace joined Davison on the panel at Experience FinXTech and was interviewed before the conference.

The Federal Reserve published a resource guide for partnering with fintech providers in September 2021, and found three broad areas of technology adoption: operational technology to improve back-end processes and infrastructure; customer-oriented partnerships to enhance interactions and experiences with the bank; and front-end fintech partnerships where the provider interacts directly with the customer — otherwise known as banking as a service (BaaS) relationships.

Banks will need to rely on their competitive strengths, honing niches in key areas, Wallace believes. That could be anything from building a BaaS franchise or a niche lending vertical like equipment finance. “Community-oriented banks that do everything for everyone, it’s really difficult to do” because of the competition coming from a handful of large institutions. “Picking a couple of verticals that you can be uniquely good at, and orient[ing] a strategy and then a tech plan and then a team around it — I think that’s always going to be a winning recipe.”

Evaluating Your CEO’s Performance

If a core responsibility of a bank board of directors is to hire a competent CEO to run the organization, shouldn’t it also review that individual’s performance?

In Bank Director’s 2021 Governance Best Practices Survey, 79% of responding board members said their CEOs’ performance was reviewed annually. However, 15% said their CEOs were not reviewed regularly, and 7% said the performance of their CEOs had been assessed in the past but not every year.

The practice is even less prevalent at banks with $500 million in assets or less, where just 56% of the survey respondents said their CEOs were reviewed annually. Twenty-eight percent said they have not performed a CEO performance evaluation on a regular basis, while 16% said their boards have evaluated their CEO in the past but not every year.

Gary R. Bronstein, a partner at the law firm Kilpatrick Townsend, regularly counsels bank boards on a variety of issues including corporate governance. “It doesn’t surprise me, but it’s a problem because it should be 100%,” he says of the survey results. “One of the most important responsibilities of a board is having a qualified CEO. In fact, there may not be anything more important, but it’s certainly near the top of the list. So, without any type of evaluation of the CEO, how do you gauge how your CEO is doing?”

A CEO’s effectiveness can also change over time, and an annual performance evaluation is a tool that boards can use to make sure their CEO is keeping pace with the growth of the organization. “There are right leaders for right times, [and] there are right leaders for certain sizes,” says Alan Kaplan, CEO of the executive search and board advisory firm Kaplan Partners. “There are situations that sometimes call for a need to change a leader. So, how is the board to know if it has the right leader if it doesn’t do any kind of formal evaluation of that leader?”

One obvious gauge of a CEO’s effectiveness is the bank’s financial performance, and it’s a common practice for boards to provide their CEOs with an incentive compensation agreement that includes such common metrics as return on assets, return on equity and the growth of the bank’s earnings per share, tangible book value and balance sheet.

Bank Director’s 2021 Compensation Survey contains data on the metrics and information used by bank boards to examine CEO performance.

But just because a CEO hits all the targets in their incentive plan, and the board is satisfied with the bank’s financial performance, doesn’t mean that no further evaluation is necessary. Delivering a satisfactory outcome for the bank’s shareholders may be the CEO’s primary responsibility, but it’s certainly not the only one.

A comprehensive CEO evaluation should include qualitative as well as quantitative measurements. “There are a lot of different hats that a CEO wears,” says Bronstein. “It probably starts with strategy. Has the CEO developed a clear vision for the bank that has been communicated both internally and externally? Other qualitative factors that Bronstein identifies include leadership — “Is the CEO leading the team, or is the CEO more passive and being led by others?” — as well as their relationship with important outside constituencies like the institution’s regulators, and investors and analysts if the bank is publicly held.

Additional qualitative elements in a comprehensive CEO assessment, according to Kaplan, could include such things as “development of a new team, hiring new people, opening up a new office [or starting] a new line of business.” An especially high priority, according to Kaplan, is management succession. If the current CEO is nearing retirement, is there a succession process in place? Does the CEO support and actively participate in that? If this is a priority for the board, then including it in the CEO’s evaluation can emphasize its importance. “Grappling with succession in the C-suite and [for] the CEO when you have a group of senior people who are largely toward the end of their career should be a real high priority,” Kaplan says.

Ideally, a CEO evaluation should involve the entire board but be actively managed by a small group of directors. The process is often overseen by the board’s compensation committee since the outcome of the assessment will be a critical factor in determining the CEO’s compensation, although the board’s governance committee could also be assigned that task. Other expected participants include the board’s independent chair or, if the CEO is also chair, the lead director.

“I think it should be a tight group to share that feedback [with the CEO], but all the directors should provide input,” says Kaplan. Once that has been summarized, the chair of the compensation or governance committee, along with the board chair or lead director, would typically share the feedback with the CEO. “I think the board should be aware of what that feedback is, and it should be discussed in executive session by the full board without the CEO present,” Kaplan says. “But the delivery of that feedback should go to a small group, because no one wants a 10-on-one or 12-on-one feedback conversation.”

Another valuable element in a comprehensive assessment process is a CEO self-assessment. “I think it’s a good idea for the CEO to do a self-evaluation before the evaluation is done by a committee or the board,” says Bronstein. “I think that can provide very valuable input. If there is a discrepancy between what the board determines and what the self-evaluation determines, there ought to be a discussion about that.”

CEO self-assessments are probably done more frequently at larger banks, and a good example is Huntington Bancshares, a $174 billion regional bank headquartered in Columbus, Ohio. In a white paper that explored the results of Bank Director’s 2021 Governance Best Practices Survey in depth, David L. Porteous — the Huntington board’s lead director — described how Chairman and CEO Stephen Steinour prepares a self-evaluation for the board that examines how he performed against the bank’s strategic objectives for the year. “It’s one of the most detailed self-assessments I’ve ever seen, pages long, where he goes through and evaluates his goals, he evaluates the bank and how we did,” Porteous said.

Porteous also solicits feedback on Steinour’s performance from each board member, followed by an executive session of the board’s independent directors to consolidate its feedback. This is then shared with Steinour by Porteous and the chair of the board’s compensation committee.

Bronstein allows that not every CEO is willing to perform such a detailed self-assessment. “If the CEO is confident about his or her position with the board and with the company, they should feel comfortable to be open about themselves,” he says.

Governance Best Practices: Taking the Lead

Due to ongoing changes in the banking industry — from demographic shifts to the drive to digital — it’s never been more important for bank boards to get proactive about strategy. James McAlpin Jr., a partner at Bryan Cave Leighton Paisner and global leader of the firm’s banking practice group, shares his point of view on three key themes explored in the 2021 Governance Best Practices Survey.

  • Taking the Lead on Strategic Discussions
  • Making Meetings More Productive
  • The Three C’s Every Director Should Possess