Getting Faster, Simpler, Cheaper and More Secure

In June 2020, Coastal Financial Corp. began onboarding financial technology clients to ramp up its banking as a service (BaaS) business.

The $1.8 billion community banking company in Everett, Washington, would lend its bank charter, compliance program and payment rails to nonbanks for a fee. Nine out of 10 of those clients are unregulated by any financial regulator; one out of 10 might be a regulated entity such as a broker-dealer. This arrangement means the bank must monitor its nonbank customers for compliance with anti-money laundering, foreign sanctions and Bank Secrecy Act (BSA) laws.

Andrew Stines, the chief risk officer of Coastal Financial, and his staff of BSA experts keep track of a fluctuating amount of flagged transactions per month, about 3,000 to 4,000, on everything from ACH and loan payments to debit and credit card transactions. It’s a lot. From the bank regulators’ point of view, “I’m the one who really owns that risk,” Stines says.

The company previously had manually pulled flagged transactions for further investigation  with Excel spreadsheets. But that didn’t work anymore, given the workload. So Coastal turned to Hummingbird, the winner of Bank Director’s 2021 Best of FinXTech Award for compliance & risk.

Hummingbird automatically pulls flagged transactions from the bank’s core, Neocova, and automates compliance reporting. It sends suspicious activity reports (SARs) to regulators after Coastal Financial conducts investigations. Hummingbird also creates an auditable trail of each case.

The bank is not alone in trying to ramp up its fraud and compliance monitoring and reporting using new software. Financial institutions are under increasing pressure to update their fraud technologies with machine learning, robotic process automation and other tools to combat increasingly sophisticated criminals and higher use of digital services, according to a February 2021 report from the research firm Celent.

Celent Head of Risk Neil Katkov projects that North American financial institutions — which are the greatest targets for global fraud — will spend $3.1 billion on fraud technology in 2021, or 16.1% more than the year before. Spending on fraud operations will amount to another $4.55 billion, he wrote.

The marketplace for fraud and compliance software has become crowded, which benefits banks, says Kevin Tweddle, the senior executive vice president for community bank solutions at the Independent Community Bankers of America.

“People ask me what’s a fintech,” he says. “It makes [banking] faster, simpler, cheaper and more secure.” An especially active group right now are cybersecurity companies, all vying to monitor threats for financial institutions and to help with compliance and reporting requirements.

Finalists in the compliance and risk category for the Best of FinXTech Awards included IT compliance company Adlumin, which uses machine learning to detect threats, malfunctions and operations failures in real time, and the cybersecurity provider DefenseStorm, which is a cybersecurity compliance platform built for banks and credit unions. For more on how Bank Director chose winners, click here.

But Hummingbird was clearly a stand-out for Coastal Financial. The software program was cost competitive, although Stines declines to name the price. Using the software clearly pays for itself, he says. But he admits the company might not need Hummingbird if not for its BaaS business, which adds to the company’s reporting requirements. Stines estimates he’d have to hire four to five additional full-time employees without it.

The drawback is that Hummingbird’s software doesn’t include every tool the banking company needs. But there’s a roadmap to adding functionality, and Hummingbird sticks to its promised dates, Stines says. The real selling factor was the user interface and the fact that Hummingbird seems eager to make changes as needed, and understands Coastal Financial’s technology clients. “They are more forward-thinking and more in tune with digital and fintech services than traditional players in the space,” he says.

This may just be the beginning. For Tweddle, banks and credit unions are enjoying an early to middle development period for fintech. “There’s a lot more interesting things to come,” he says.

In a Challenging Earnings Climate, There Is No Room for Lazy Capital

The persistently challenging earnings environment stemming from a stubbornly flat yield curve requires bank management teams examine all avenues for maximizing earnings through active capital management.

The challenge to grow earnings per share has been a major driver behind more broadly based capital management plans and playbooks as part of larger strategic planning. Management teams have a number of levers available to manage capital. The key as to when and which lever to pull are a function of the strategic plan.

A strong plan predicated on staying disciplined also needs to retain enough nimbleness to address the unforeseen and inevitable curveballs. Effective capital management is, in large part, an exercise in identifying and understanding future risks today. Capital and strategy are tightly linked: A bank’s strategic plan is highly dependent on its capital levels and its ability to generate and manage it. In our work with clients, we discuss and model a range of capital management techniques to help them understand the costs and benefits of each strategy, the potential impact on earnings per share and capital and, ultimately, the potential impact on value creation for shareholders.

Bank acquisitions. M&A continues to offer banks the most significant strategic and financial use of capital. As internal growth slows, external growth via acquisitions has the ability to leverage capital and significantly improve the pro forma company’s earnings stream. While materially improved earnings per share should help drive stock valuation, it is important to note that the market’s reaction to transactions over the last several years has been much more focused on the pro forma impact to capital, as represented by the reported dilution to tangible book value per share and the estimate of recapturing that dilution over time, alternatively known as the “earnback period”.

Share repurchases. Share repurchases are an effective and tax-efficient way to return excess capital to shareholders, compared to cash dividends. Repurchases generally lift the value of a stock through the reduction in shares outstanding, which should increase earnings per share and the stock price. They’re generally favored by institutional owners, and can make tremendous sense for broadly held and liquid stocks. They can also be very effective capital management tools for more thinly traded community banks with growing capital levels, limited growth prospects and attractive stock valuations.

Cash dividends. Returning capital to shareholders in the form of cash dividends is generally viewed very positively both by the industry and by investors. Banks historically have been known as cash dividend paying entities, and the ability and willingness to pay them is often perceived as a mark of a healthy and stable company. Cash dividends are often viewed as more attractive to individual shareholders, where quarterly income can be a more meaningful objective in managing their returns.

Business line investment. Community banking at its core is a spread dependent business. The ability to diversify the revenue stream through development or acquisition of a fee generating business can be an effective and worthwhile use of capital. Common areas of investment include mortgage banking, wealth management, investment products and services, insurance and the lift out of lending teams. A recent development for some is investing in technology as an offensive play rather than a defensive measure.

Capital Markets Access. Effective capital management plans also consider the ability to access the capital markets. In the community banking space, accessing capital is not always a foregone conclusion.  Community banks need to remain alert to market conditions and investor appetite. Over the past couple of years, the most common forms of capital available have been preferred equity and subordinated debt. It’s our view that for banks of a certain size and market cap, it’s a prudent capital management strategy to file a shelf registration, or Form S-3. The optionality provided by having a shelf registration far outweighs the concern that the shelf itself suggests a shareholder dilutive activity is on the horizon.

There are a couple of guidelines that managements should bear in mind as they develop their capital management plans. First, the plan needs to be realistic and achievable; there is limited value in building a plan around an outcome that is unrealistic. Second, don’t look a gift horse in the mouth. If there is credible information from trusted sources indicating that capital is available, get it.

It’s important to note that these capital management activities can be utilized individually or in combination. An acquisition may necessitate the need to access the capital markets. Or given the relative inexpensiveness of sub debt, raising some for the purpose of a share repurchase could make sense. A strong capital management plan can position a company to manage through the good times and maybe, more importantly, the challenging times.

Brace Yourself For An Unstoppable Tech Wave

technology-12-10-18.pngBanks across the country are wrestling with the challenge of transforming current banking systems—the foundations of which were conceptualized in the Middle Ages—into systems designed to serve the needs of the digital age.

This marks a critical moment for banks. Some industry data suggests we’re in a golden age of banking, including a growing economy, increased loan demand, technological efficiency and higher levels of profitability. However, these factors could only be masking more important developments that signify even more change.

Much of the world is already living with both feet firmly planted in the digital age. Author Brett King, who is the CEO of the mobile banking startup Moven, notes between 2010 and 2030, an estimated 2.5 to 3 billion people worldwide will come into the financial services space. Of those billions of people, King says some 95 percent will have never visited a bank branch.

International Banking Systems
There are hundreds of examples around the world of what the digital age of financial services looks like. Kenya’s mobile money service, M-Pesa, counts nearly 100 percent of adults in Kenya as customers and also transmits nearly 50 percent of the country’s gross domestic product.

China-based Ant Financial Services Group has been valued at $150 billion, a market cap higher than Goldman Sachs. Ant Financial has the world’s largest money market fund, processes trillions of dollars in payments each year and can profitably make small- and medium-sized enterprise (SME) loans as little as $50 in a matter of minutes.

Examining international banking systems helps provide directional insight into various successful financial systems and institutions developed to serve the digital age—without the hindrance of legacy regulatory and organization systems.

Evolution of Client Expectations
It’s no longer good enough for banks to have a digital strategy that only aims to keep pace with their peers. Banks must have a forward-thinking strategy for the digital age, as their customers have become used to accessing world-class, technology-enabled services from their financial services providers.

A recent BKD survey of the employees of an advanced, progressive community bank found that more than 70 percent of the bank’s own employees had two or more credit cards beyond the cards offered by the bank, and more than 80 percent of the bank’s employees had a banking relationship outside of their employer. Even employees who think highly of their bank have relationships with other financial institutions, exposing them to the best services the financial services industry has to offer. As customer expectations climb exponentially, banks are challenged with keeping up.

Banks may find comfort knowing some people prefer digital interaction with a financial services company for routine, immaterial transactions, but prefer the one-on-one experience of sitting with a banker and receiving guidance for major financial decisions.

There likely will always be a place for high-touch client service in community banking. However, we’re entering an age where people are comfortable visiting a doctor by video, and IBM’s Watson outperforms doctors in some areas of health care diagnostics. If people are comfortable trusting their health to someone over the phone, and artificial intelligence is becoming better than humans at providing health care services, a disruption and transformation of the banking industry in the U.S. can’t be far behind.

Moving Forward
As technology across all industries advances rapidly and relentlessly, the inhabitants of a digital age will expect nothing less from their financial services provider. With intense transformation facing the banking industry, consider asking these important questions of your institution:

  • Are we ready to be ambient? Can we completely surround our customers on all sides, no matter where they go or which device they use?
  • Are we ready to provide end-to-end mobile account opening, with no paper forms or signatures?
  • Are we deploying machine learning and artificial intelligence?
  • Are we preparing to authenticate accounts and payments with facial recognition technology? 

Even answering these questions affirmatively isn’t enough.

Some prognosticators say it’s too late for banks. While that’s simply not true, banks do have to move more aggressively and rethink their approach to the market. Neither consumers nor regulators are going to materially slow technology’s rapid advancement within the financial services industry. There’s no turning back the clock on the digital age.

2018 L. William Seidman CEO Panel

Former FDIC chairman and Bank Director’s publisher, the late L. William Seidman, advocated for a strong and healthy U.S. banking market. In this panel discussion led by Bank Director CEO Al Dominick, three CEOs—Greg Carmichael of Fifth Third Bancorp, Gilles Gade of Cross River Bank and Greg Steffens of Southern Missouri Bancorp—share their views on the opportunities and threats facing banks today.

Highlights from this video:

  • Reaching Today’s Consumer
  • Front and Back-Office Technologies That Matter
  • Competitive Threats Facing the Industry
  • The Future of Community Banking


Bank Director’s Story: How the Board of Congressional Bank Evaluated Itself

5-21-14-Bankers-Story.pngPeople always tell you of the unintended consequences of intentional actions. When the board of Congressional Bank, a $450-million asset institution in Bethesda, Maryland, decided to conduct its first board self-assessment last year, we had no idea what it would produce. We composed and conducted the self-review without outside help. It brought immeasurable returns.

The board of directors of Congressional Bank has been in place for 10 years. We have most of the founding members still sitting at the table, and about one third of our 15 members have joined in the last five years. The bank had come through the recession with a strong balance sheet, yet we knew that the near–term horizon of the community banking industry will bring great uncertainty and change. We decided to take the opportunity to reflect on how we could better support management in this next stage for Congressional Bank.

The board development committee launched a self-assessment process involving individual interviews with each of our board members. We were eager to know the strengths and weaknesses of the board as perceived by each board member, with interviews scheduled at a time when we were not rushed to accomplish any other bank business. The results of the reviews would be presented to the full board, although names of those commenting would be kept private.

Immediately, a valuable part of this process became evident. Members of the board development committee wanted to interview members they didn’t know well. As one member of the committee said, “I don’t ever interact with so-and-so. He is not on any committees with me, our paths don’t cross in the community and I feel I just don’t know him. This will be a great opportunity to learn more about him.” Another committee member said, “I would like to interview the women of the board. I am very interested in gaining what may be unique perspectives.” A third member of the committee made his request, “I am most interested in whether newer members of the board feel they are listened to and believe their opinions are respected as well as more-tenured members.” Members chose their interviewees based on their interests and the relationships they wanted to grow.

We built the board self-assessment around some traditional questions related to our board member roles, committee work and meeting agendas, such as:

  • Are we staying at the strategic level as good board members should, or is there room for improvement here?
  • Do we have the right board members for the future? If not, what areas of expertise, and characteristics/qualities do we need to add to the board with our next nomination of a new member?
  • We have not reviewed our own compensation for many years. Is our current compensation matched well with our purpose as a board, or does it need to be adjusted?

The board self-assessment also included some questions often used in other industries to uncover strengths and areas for improvement, such as,

  • What should we keep doing?
  • What should we start doing or do more of?
  • What we should stop doing or do less of?

These last three questions provided much more thoughtful responses, more enthusiastic ideas and more individual reflection than the other, more traditional questions. Several board members reviewed their own contributions to the board and declared their interest in additional or different committee assignments. Members expressed eagerness for even more knowledge and training about our bank, our industry and related regulatory matters.

Interviewees expressed their desire to ensure we were always aligned and focused in our time and energy with management on the matters that were of the highest priority for the bank’s success.

So was it worth it? We tweaked our board agendas, are reviewing our board compensation and have added more banking knowledge/training opportunities for our board members. Yes, I would say it was worth it.

But the full value of this self-assessment was generated in the unique process we used. The individual board member interviews, conducted by colleagues who serve on the board development committee, generated the real return. We conducted hours of one-on-one interviews exploring what each individual thought was important for the full board going forward, and the power of their own individual contributions for the best future of the bank. We grew more meaningful relationships and deepened our appreciation for each other. Yes again—I would say it was well worth it.

2014 Bank M&A Survey: Community Bank Trends

Last November, Bank Director published the 2014 Bank M&A Survey, which found that 76 percent of bank senior executives and directors expect to see more deals in the year ahead, and much of that activity will take place among community banks. With that in mind, Bank Director further explored these results among banks with less than $5 billion in assets to examine how community banks plan to approach acquisitions in 2014.

Over 230 officers and directors of banks across the U.S. responded to the survey, which was conducted by email in the fall of 2013. Of these, 202 represented banks with less than $5 billion in assets. The 2014 Bank M&A Survey was sponsored by Crowe Horwath LLP.

Planned M&A in 2014 by Asset Size


The Growing Serial Acquirers: Banks with Assets of $1 Billion to $5 Billion

Many banks with between $1 billion and $5 billion in assets are gaining reputations as serial acquirers. These banks have a little wiggle room before they hit the $10-billion asset threshold when they will be subject to new regulations, and many find that growing through acquisitions is a quicker route to expanding market share than organic growth. Rick Childs, a director at Crowe Horwath, says that the average size of the seller—at roughly $200 million in assets—fits right into the size of acquisition that these banks are willing to make. “They’re looking to build themselves a better footprint and franchise, and so they’re being active acquirers, and there’s really not a lot of competition [for deals from larger institutions] like there would have been maybe 10 years ago” says Childs. “It’s just fortunate that the size of the seller fits the size that they are probably the most comfortable in acquiring.”

As many of these banks are seasoned acquirers, it’s not surprising that 96 percent of board members have M&A experience, either within the banking industry or within their own business, compared to 81 percent in the industry overall. And M&A is a key part of the strategic direction of these institutions: More than half of respondents from banks between $1 billion and $5 billion in assets report that deal-making is a regular part of their board’s agenda, while banks with less than $1 billion in assets are more likely to only discuss deals as opportunities arise or as part of the institution’s annual strategic planning process.

Banks with assets between $1 billion and $5 billion did more transactions in 2013 than banks overall, according to the survey.

  • More than half report the purchase of a healthy bank in the previous 12 months, versus 24 percent overall.
  • One-quarter participated in a FDIC-assisted deal, while just 8 percent of total participants participated in a FDIC transaction last year.
  • Thirty-four percent of respondents report their bank purchased one or more branches last year, compared to 23 percent overall.
  • Twenty-seven percent purchased at least one non-depository line of business, like an investment management business or an insurance brokerage, compared to 11 percent of total participants.

Looking ahead to 2014, participants indicate that their institutions will likely keep up this pace, with almost 70 percent of banks of this size planning a healthy bank acquisition.

Still Independent: $500-Million to $1-Billion Asset Banks

Respondents from banks with between $500 million and $1 billion in assets reveal a commitment to independence. Forty-six percent of participants from these banks indicate plans to buy a bank in 2014, but few plan to sell.

Childs says banks need three qualities to become an acquirer:

  • Adequate capital and earnings for regulatory approval of the deal
  • Infrastructure in place to both acquire and grow the institution
  • Available sellers in the bank’s target market

Banks closing in on $1 billion in assets may have adequate capital and the appropriate infrastructure in place, but might have a hard time finding the right target geographically close enough to make sense. “If you’re in a state where there are very few sellers, and you look at your surrounding states and it’s not much better, you may never be able to execute a strategy for growth because you just don’t have a significant number of available sellers,” says Childs.

When asked about plans to sell a bank, branch, loan portfolio or non-depository line of business, 94 percent of respondents from banks between $500 million and $1 billion in assets reveal that they don’t plan to sell anything, compared to 80 percent overall. Just 3 percent plan to sell their bank, and 56 percent cite the fact that the management and board wish to remain independent as a barrier to a potential sale. Childs adds that many of these banks hold a strong position in their markets, supporting their choice to stay independent and build a strategy for growth. “There’s still the possibility for them to build a franchise and build a lot of value for their organization.”

Ripe for the Acquisition: Less Than $500-Million Asset Banks

Looking ahead to 2014, 10 percent of respondents from banks with less than $500 million in assets plan to sell their institution—double the 5 percent of respondents overall.

Why sell? Respondents from these banks are more likely to cite the high cost of regulation, at 39 percent compared to 25 percent of overall respondents.

While regulations currently place a strain on bank management and boards, Childs believes this burden will level off as the environment settles and technology allows smaller banks to be more effective and efficient. “While I agree that right now it feels really oppressive at times…I don’t think that would be a reason that I would want to sell. I’d want to sell for a variety of other reasons,” says Childs, citing as examples liquidity and diversification of investments, succession concerns and the need for scale to manage costs.

Limited growth opportunities are pushing small bank respondents to want to sell, at 32 percent of respondents from banks below $500 million in assets, compared to 23 percent overall. Twenty-nine percent of officers and directors of the smallest banks say that they’d sell because banking just isn’t enjoyable anymore, compared to 18 percent overall. 

“Management and directors are telling us that banking’s not fun anymore,” says Childs.

Pricing Barriers by Asset Size


Those willing to sell still face barriers. The smallest banks, at 56 percent, are more likely to think pricing remains too low than banks overall, at 42 percent. In contrast, 63 percent of all respondents say that potential targets have unrealistic expectations for a high price. Meanwhile, 40 percent of potential buyers overall cite concerns about the asset quality of potential targets as a barrier to making a deal, and 10 percent of respondents from banks with less than $500 million in assets say that their bank’s asset quality is subpar, compared to just 5 percent overall.

Childs says that while asset quality has improved, “it’s still historically too high, in terms of the level of non-performing assets to total assets.” The economic recovery remains sluggish in some parts of the country. All this ties to the price, and boards waiting for a significant increase in pricing may be disappointed. Some small institutions “may still be longing for the glory days of two-times book value, which I don’t think are going to come back. We may see some really positive pricing here in the next several years, but it’s never going to get back to the heyday that it was,” says Childs.