New Rules Benefit Small Bank Holding Companies


holding-companies-12-25-15.pngConfirming an important regulatory concession Congress previously granted to community banks, the Federal Reserve Board recently amended its regulation and related Policy Statement governing “small bank holding companies” (SBHCs) to include companies up to $1 billion in total assets, up from $500 million. The Policy Statement now applies to about 90 percent of all U.S. bank holding companies.

Significance of the Change
This is good news for community banks because the regulation was designed to cut smaller banks and bank owners some slack when it comes to using internal leverage as a source of capital funding. Effectively, Congress has given community banks an “ownership” advantage to help balance against the marketplace advantages enjoyed by larger banks.

Key Benefit of SBHCs
The regulation basically exempts qualifying SBHCs (but not their bank subsidiaries) from the higher consolidated capital generally required for larger banks. Stated differently, the SBHC is deconsolidated from its bank subsidiary, such that only the subsidiary bank is subject to minimum capital ratios. This enables SBHCs to offset the investment inefficiency of maintaining excess capital at the bank level by incurring debt at the holding company level.

Investment Advantage
For shareholders, the principal advantage of the SBHC structure is that it allows the shareholder’s investment to be internally leveraged with holding company debt, which simultaneously reduces the amount of common equity required from shareholders to support the bank’s capital while increasing the shareholders’ return on the capital invested. Moreover, the cost to the issuer of debt capital is typically about half that of equity capital, partly because interest on the debt would be tax deductible whereas dividends on preferred stock would not. In addition, leverage provides a non-dilutive source of bank-level capital to support growth, as compared to common stock. Accordingly, taking advantage of the opportunities afforded to SBHCs can have a material and lasting impact on shareholder value.

Operational Flexibility
An even more important attribute is operational flexibility, because management can readily tap holding company debt to meet common strategic challenges and opportunities, such as:

  • Providing growth capital for a bank subsidiary,
  • Buying another bank or branch, and
  • Repurchasing stock to support shareholder liquidity.

These situations often demand more rapid and decisive action than might be possible if funding must wait for a successful equity stock offering, especially one undertaken in a small community. In fact, having ready access to capital funding through holding company debt could be the key resource that enables some community banks to preserve their independence. The 1,500 community banks without a bank holding company should consider this advantage as well.

Benefit for Subchapter S Banks
The SBHC advantage will be especially helpful for growing Subchapter S banks because it enables these banks to raise capital without affecting the constraints on numbers and types of shareholders permitted for S corporations.

Regulatory Leverage Limits and Conditions
Holding companies are not required normally to obtain regulatory approval to incur debt up to 100 percent of the holding company’s net equity (typically 50 percent of bank equity). The Policy Statement sets out various conditions and requirements that become applicable when debt exceeds that level or when the company has previously been instructed not to incur debt.

In practice, most SBHCs needing capital for any reasonable purpose (except perhaps to cover loan losses) will be eligible under the rule to borrow more money than their directors would have imagined possible or considered desirable. The limiting factor is more likely to be the marketplace’s appetite for the holding company’s debt rather than regulation. 

Sources of Funding
The best resource for senior debt financing will often be an up-stream correspondent or bankers’ bank. These lenders normally expect borrowers to amortize principal over 5 to 10 years, maintain acceptable ratios throughout the financing period and pledge the bank stock owned by the holding company as collateral for the loan. Because of the latter requirement, these loans are often referred to as “bank stock” loans.

Longer term, less restrictive and unsecured or subordinated debt financing could also be sought from major shareholders or other local investors as well as from institutional investors. These instruments tend to provide more flexibility in terms (fixed vs. floating) and can be structured to include conversion features. Moreover, bank holding companies have the ability to issue subordinated debt without the onerous covenants and events of default typically inherent in senior debt instruments.

The Takeaway
Well-managed community banks of tomorrow will wish to use every tool possible to deliver value for shareholders. The SBHC could prove to be the most important tool in the box for many smaller banks.

Community Banks Collaborate on C&I Lending


lending-12-23-15.pngThe traditional community banking model, while still viable, is being challenged because of economic, competitive, technological and regulatory forces—many of which are beyond the control of any individual community bank. The largest banks have used their massive size, product set, and more recently, technology, to make dramatic gains in market share at the expense of community banks. I believe that progressive community banks should be considering new ways of doing business, especially in regards to their lending strategies.

Community banks do many things far better than their larger competitors, while enjoying a degree of trust and resiliency that the megabanks may never achieve. But those big banks boast something the community banks, standing alone, cannot match: the scale to operate the lending platforms which are now necessary in most lines of business—including commercial & industrial (C&I) lending. Many American businesses now require loan amounts of $50 million or more, a loan size that typically defines the low end of the “middle market.” Those loans required by middle market borrowers, companies providing goods and services serving a wide range of industries, far exceed the individual lending capacity of the typical community bank. The teams required to source, screen, underwrite and manage these larger loans are typically out of reach for a community bank.

To date, those megabank advantages have clearly outweighed the strengths of community banking in C&I lending. Without the ability to deliver many of the commercial loans that middle market businesses require, community banks are stuck in a quandary in which they often have to turn away customers with successful, growing businesses. The numbers are clear: In 1990, community banks with under $10 billion in assets accounted for over one-third of C&I loans held on the balance sheets of banks. By the end of 2014, community banks’ share of the C&I market has dropped to just over 15 percent of the market. The continuation of this trend will likely limit the profitability and growth of community banks as well as their ability to positively affect their communities in other lines of business. Equally important, it also subjects those banks to less diversified loan portfolios and the risk associated with loan concentrations, particularly in commercial real estate.

While each community bank may individually struggle to match the scale of the mega-banks, it is important to keep in mind that the biggest banks are saddled with their own challenges such as bureaucracy, legacy systems, resistance to change, customer fatigue and burdensome regulatory oversight.

Community banks, but for their individual lack of scale, ought to be well positioned to capitalize on these opportunities and to outcompete the megabanks. The innovation required for community banks to break this logjam—to free them to focus on their strengths—is here, and its essence is this: community banks no longer need to stand alone.

They can prosper by working together, particularly in gaining access to middle market lending. Community banks do have the scale enjoyed by the biggest banks, they just don’t have it on their own. Together, community banks hold $2.3 trillion in assets—13 percent of the assets held by US banks, and just shy of the assets of JPMorgan Chase & Co., the largest US bank. The question is how to leverage that scale while preserving the individuality, proximity to the customer and legendary service that contribute to their unique value.

Community banks should consider joining together in alliances or cooperatives in order to gain access to C&I loans, including diversified sectors such as manufacturing, healthcare, technology, and business services. In addition to using such partnerships to successfully source these loans on a national basis, other benefits such as diversification (size, geography, and industry type), access to larger customers, and combined expertise in underwriting and loan management can be achieved. One such cooperative, BancAlliance, consists of over 200 community bank members and has sourced over $2 billion in such loans.

Through partnerships such as these, community banks can succeed in delivering loans to job-creating middle market businesses throughout our country at a reasonable cost to each community bank, while adding to their net interest margin and diversifying their balance sheet.

A New Delaware M&A Case Is a Warning to Investment Bankers: Take Care That You Don’t Mislead the Board


investment-bankers-12-21-15.pngMerger and acquisition activity appears to be accelerating among community banks large and small. Despite the nearly ubiquitous shareholder lawsuit that follows a merger announcement from a publicly traded target company, the corporate law relating to the obligations of a board of directors in a merger transaction is well developed and favorable. There is a high bar for board culpability in an M&A transaction, and an even higher bar for board liability. However, recent Delaware court cases have highlighted potential liability for investment bankers that is not shared by directors. This is quite an alarming development, which is of obvious concern to investment bankers, but also should impact boards of directors as they consider deals.

Under Delaware law, which is followed by most states, the primary obligations of the board in a merger transaction relate to good faith, a component of the duty of loyalty, and making an informed decision, duty of care. Fortunately, most companies have a charter provision eliminating director personal liability for monetary damages for breaches of the duty of care, which is not allowed for breaches of the duty of loyalty. And, according to the Delaware Supreme Court in the Lyondell case, director personal liability for “bad faith” requires a knowing violation of fiduciary duties. For example, in a sale transaction, shareholders aren’t supposed to act on a goal other than maximizing value, or in a non-sale merger, act for reasons unrelated to the best interests of the stockholders generally.

Another important hallmark of Delaware M&A case law is the extreme reluctance of judges to enjoin a stockholder vote on a merger transaction when there is no competing offer. And once a transaction closes, and the challenged target company directors were independent and disinterested, and did not act with the intent to violate their duties, judges typically dismiss the lawsuits against directors.

However, in a recent case, which involved the sale of a company called Rural/Metro Corporation, the Delaware Supreme Court ruled that third parties, such as investment bankers, can be liable for damages if their actions caused a board to breach its duty of care, even if directors are not liable for the breach. Moreover, simple negligence by the board, rather than gross negligence, can serve as the basis for third party liability.

In Rural/Metro, the investment bankers were found to have had numerous conflicts of interest, most of which were not discussed with the board. They sought to participate in the buyer’s financing of the acquisition and they sought to leverage their involvement with the seller, Rural/Metro, to obtain a financing role in another merger transaction. They were also found to have manipulated the fairness analysis to serve their conflicted interest in having a particular party win the bid for Rural/Metro. The court held the behavior of the investment bankers caused the board to be uninformed as to the value of the company and caused misleading disclosure. They were held liable to stockholders for $76 million in damages.

The Delaware Supreme Court stated that a board needs to be active and reasonably informed in its oversight of a sale process and must identify and respond to actual or potential conflicts of interest as to its advisers. Importantly, the Delaware Supreme Court rejected the lower court’s characterization of the role and obligations of an investment banker as a quasi fiduciary “gate keeper,” and stated that the obligations of an investment banker are primarily contractual in nature. It further held that liability of an investment banker will not be based on its failure to take steps to prevent a director breach but on its intentional actions causing a breach.

The case is a warning for both boards and investment bankers: Take care when there is a conflict of interest. Investment bankers should avoid conflicts where possible, disclose all conflicts to the board and the board and the investment bankers need to work diligently to address conflicts adequately. In order to do their job well, board members must make sure their advisors are telling them what they need to know.

How to Get the Most out of Your Annual Reviews


annual-review-12-14-15.pngThere has never been a more challenging time to be a bank director. The combination of today’s hugely competitive banking market, increased regulatory burden and rapid technological developments have raised the bar for director oversight and performance. In response, an increasing number of community banks have begun to assess the performance of directors on an annual basis.

Evaluation of board performance is done in many ways, and ranges from an assessment by the board of its performance as a whole to peer-to-peer evaluation of individual directors. Public company boards are increasingly being encouraged by institutional investors and proxy advisory firms to conduct meaningful assessments of individual director performance. The pace of turnover and change on most bank boards is slow, and more often the result of mandatory retirement age limits than focus by the board on individual director performance. This may be untenable, however, as the pace of external change affecting financial institutions often greatly exceeds the pace of changes on the bank’s board.

While some institutions prefer a more ad hoc approach to assessing the strengths and weaknesses of the board and its directors, we suggest that a more formal approach, perhaps in advance of your board’s annual strategic planning sessions, can be a powerful tool. These assessments can improve communication between management and the board, identify new skills that may not be possessed by the current directors, and encourage engagement by all directors. If used correctly, these assessments often provide valuable information that can focus the board’s strategic plan and help shape future conversations on board and management succession.

So what are the key considerations in designing an effective board evaluation process? Let’s look at some points of emphasis:

  • Think big picture. Ask the board as a whole to consider the skill sets needed for the board to be effective in today’s environment. For example, does the board have a director with a solid understanding of technology and its impact on the financial services industry? Are there any board members with compliance experience in a regulated industry? Does the board have depth in any areas such as financial literacy, in order to provide successors to committee chairs when needed? Do you have any directors who graduated from high school after 1985?
  • Develop a matrix. Determine the gaps in your board’s needs by first writing down all of the skill sets required for an effective board, and then chart which of those needs are filled by current directors. Then discuss which of the missing attributes are most important to fill first. In particular, consider whether demographic changes in your market will make recruiting a diverse and/or female candidate a priority.
  • Determine the best approach to assessment. Engaging in an exercise of skills assessment will often focus a board on which gaps must be filled. It can also focus a board on the need to assess individual board member performance. Many boards are not prepared to launch into a full peer evaluation process, and a self-assessment approach can be a good initial step. Prepare a self-assessment form that touches upon the aspects of being an effective director, such as engagement, preparedness, level of contribution and knowledge of the bank’s business and industry. Then, have each director complete the self-assessment, with a follow-up meeting scheduled with the chair of the governance committee and lead independent director for a conversation about board performance. These conversations are often the most impactful part of the assessment process.

In addition to assessing the human capital needs of the board, several other topics should be raised in most board assessments.

  • Communication between management and the board: As demands on the board change, providing directors with the same board packets and agenda as ten years ago may not make sense. Soliciting thoughts on how the content and presentation of board materials could be more helpful and whether the board’s agenda should change is a good exercise for any institution.
  • Buy, sell or hold? While strategic matters are best addressed through group discussion, gauging directors’ views on the strategic direction of the institution can also help shape the tenor of the board’s future discussions. Understanding individual directors’ justifications for a potential sale as part of the assessment process may allow for solutions short of a sale of the bank.

Board assessments are a key component of a healthy board environment, as they can provide management and the board with insight into the true feelings of the board of directors on a variety of issues. Careful evaluation of which assessments to utilize and the timing in doing so can allow a board to better adapt to a rapidly changing marketplace.

Are Community Banks an Endangered Species?


ROAA-11-11-15.pngIf there was an endangered species list for U.S. corporations, a lot of community banks would probably be on it. The financial crisis and Great Recession are now distant memories, and the U.S. economy has enjoyed six years of steady, if unspectacular, growth, but many small banks are struggling and will probably have to get larger if they hope to survive, according to Steve Hovde, president and CEO of the Chicago-based Hovde Group, who spoke Tuesday at Bank Director’s 2015 Bank Executive and Board Compensation Conference in Chicago.

The banking industry itself seems to be doing well based on a variety of measures—profitability is still high, credit quality is much improved and tangible capital ratios are stronger than ever. But the news isn’t quite as good for banks under $1 billion in assets. Citing data from the Federal Deposit Insurance Corp. and SNL Financial, Hovde pointed out that the average quarterly return on average assets (ROAA) through the second quarter of 2015 was 1.12 percent for banks over $1 billion in assets versus 0.70 percent for banks with less than $1 billion in assets. The larger banks also had higher levels of noninterest income—1.16 percent versus 0.70 percent—and lower efficiency ratios, at 63.9 percent compared to 73.1 percent for banks under $1 billion. “The bigger banks are simply more efficient,” Hovde said.

Of course, the operating performance of some of the country’s largest banks isn’t all that impressive either, Hovde was quick to point out. In fact, the most profitable banks would seem to be in the $5 billion to $10 billion asset range, where they are large enough to have some economies of scale—particularly in the area of regulatory compliance—but aren’t so large that their size actually makes them harder to manage from a performance perspective. For example, banks in the $5 billion to $10 billion range had the industry’s highest ROAA in each of the last five quarters through the second quarter of 2015. “This seems to be the sweet spot for the industry,” he said.

Hovde expects consolidation in the industry, which has seen the number of banks fall from approximately 15,000 in 1990 to less than 6,500 today. Strikingly, banks under $1 billion in assets account for just 8.3 percent of the industry’s total assets despite accounting for 89 percent of all institutions. This sharp decline in the number of banks, combined with the significant increase in market share for banks over $1 billion, has been accentuated by the dearth of new bank formations since the financial crisis. “If we don’t get de novos going again, the trend line will continue and the numbers will keep getting smaller,” he said.

Hovde’s recommended solution for the challenges that small banks face today were to either grow through acquisition and thereby gain the kinds of efficiency improvements that could improve their profitability, or lobby the U.S. Congress and federal banking regulators to establish a two-tiered regulatory system that reduces the compliance burden for the smaller banks. Otherwise, concluded Hovde, “Community banks under $1 billion will become almost extinct.”

Competing for Consumer Loans Through Collaboration


If the economy’s backbone is small business, then small business’ backbone is community banking. Unfortunately, both economic and policy developments have dealt community banks a sustained blow from which they can only recover together. The challenge is for community banks to leverage the scale they lack as individual institutions but jointly possess.

The indications of stress are stark. It was just a generation ago that community banks accounted for nearly 80 percent of consumer loans. The number today is less than 10 percent. The largest banks are simply driving community banks out of the lending business.

The irony is that some of the difficulty community banks face actually results from policies intended to help them. Regulations that were supposed to limit the largest banks instead created impossible compliance burdens for small ones. The lifting of limits on interstate banking gave the big players a further leg up. But the biggest challenge has come from the shift of many types of lending away from relationship-based, customized lending (at which local banks excel) towards process-based, standardized lending (which requires scale to afford the systems, people, models, marketing and processes that are required).

This evolution from handshakes in a local bank to anonymous clicks in online applications required massive investments in technological platforms that community banks were unable to make. Yet despite the pressures, community banks retain advantages with which no large bank can compete: the trust and genuine loyalty of local customers, a personal understanding of their needs and the willingness and ability to customize their offering to the specific needs of customers when appropriate.

But if they are to survive, personal service alone will not be enough. If these banks lose the ability to offer the broad array of products and services that have become process-intensive (consumer lending, small business lending, wealth management, etc.), they will lose their connection to their customers who are forced to look elsewhere. Community banks must combine what they are uniquely good at with the scale necessary to go toe-to-toe with the largest banks. The good news is that these banks, collectively, already have that scale. Taken together, community banks command $2.3 trillion in assets—14 percent of the economy and more than enough to compete with any of the largest banks.

“Together” is key. The imperative for community banks is to find ways to take advantage of their combined scale while retaining the local focus and service for which they are legendary.

One such model is BancAlliance—a collaboration, as the name suggests, of more than 200 community banks with more than $300 billion in assets in 40 states. That $300 billion would be enough to rank these institutions together as one of the 10 largest banks in the country. The network is managed by Alliance Partners.

Among other benefits, partnerships like BancAlliance can help community banks seize the opportunities in the financial markets that new technologies enable. New players like Lending Club are using high-end online platforms to provide first-in-class customer experiences that are taking ever larger swaths of the consumer lending business away from the largest mega banks.

The platforms are so sophisticated, though, that no single community bank has the resources to figure out how to forge a partnership with them. By partnering through collaborations like BancAlliance with lenders like Lending Club, community banks can combine their knowledge of their customers with the new lenders’ unmatched customer experience platforms. BancAlliance, for example, is allowing its members to achieve those benefits through a partnership under which the Lending Club platform is offered through community banks.

BancAlliance is a promising model for collaboration, but only one. Regulators are recognizing and encouraging the value of these efforts, even as tiered requirements and limits on consolidation are also improving the policy environment. The key to these collaborative efforts now is that community banks realize the value of their combined scale.

Community banks still have the best advantages in a business that ultimately distills to relationships and trust. But the detriments of smaller individual size have begun to erode those assets and, absent action, could threaten the sustainability of the community banking model. By joining forces—collaborating with each other and partnering with institutions that can give them access to the advantages of technology and reach—community banks can convert a serious problem into a compelling opportunity. And history tells us that when they are able to compete on a level playing field, community banks prevail.

The Battle Is Back On for Checking Customers


As I was driving to a meeting the other week listening to the radio, I heard back-to-back commercials from two different banks about checking accounts. The first was a super-regional bank promoting that they would pay me $250 to move my checking account to them. The second, one of the mega banks (a top five bank in asset size) promoted a similar message but upped the incentive to $300 to switch.

When I got home later that day, I found a direct mail offer from another mega bank upping the incentive to $500.

CHASE500_card2.jpg

I looked closer at the conditions of these incentives and found a similar nuanced strategic objective. These banks (and a few others I found online making similar offers) are clearly not returning to the days of “open a free account, get a free gift.” They aren’t looking for just consumers willing to switch their account to a free account with no commitment other than the minimum balance to open requirement (usually less than $50).

Rather, they are looking for those willing to switch their relationships that require a certain level of funding and banking activity (direct deposit, mobile banking activation, etc.) to earn part or all of the cash incentive. And these banks aren’t offering a totally free checking account.

Recognizing this as the objective, I perused a major online marketing research company to look for competitive responses from community financial institutions and found hardly any similar monetary offers. Those that were similar were mainly promoted just on their respective websites.

So what do these large banks know about these types of offers that community financial institutions don’t know (or deem important enough) to mount a credible competitive response? Reading and listening to presentations made to stock analysts by big bank management reveal that they know they can simply out market smaller community financial institutions, which don’t have or want to devote the financial resources for incentives at these levels.

They also know these smaller institutions’ customers, namely millennials, have grown disenchanted with inferior mobile banking products, and are looking for superior mobile products that the larger banks typically have. They are capitalizing on a growing attitude taking place in the market regarding consumers who switch accounts — 65 percent of switchers say mobile banking was extremely important or important to their switching decision, according to a survey by Alix Partners.

So by out-marketing and out-innovating retail products, larger banks know the battle is on to attract profitable or quick to be profitable customers, traditional ones right down to millennials who never set foot in a branch, by offering an attractive “earned” incentive to move and providing better mobile products along with a wider variety of other retail products and services.

Now community bankers reading this may be thinking, “That’s not happening at my bank.” Well, you better double-check. Last year, 78 percent of account switchers nationally were picked off by the 10 largest U.S. banks (and 82 percent of younger switchers) at the expense of community banks. Community banks lost 5 percent of switcher market share and credit unions lost 6 percent, according to Alix Partners.

And once these larger banks get these relationships, they aren’t losing them. Take a look at JPMorgan Chase & Co. Chase Bank has driven down its attrition rate from over 14 percent in 2011 to just 9 percent in 2014 (an industry benchmark attrition rate is 18 percent). Also from 2010 to 2014, it has increased its cross-sell ratio by nearly 10 percent and average checking account balances have doubled.

With this kind of financial performance (not only by Chase but nearly all the top 10 largest banks), a negligible competitive marketing response from community institutions and a tentativeness to prioritize enhancing mobile checking related products, their cash offers from $250 to $500 to get consumers to switch accounts is a small price to pay.

Combining this with well-financed and marketing savvy fintech competitors also joining the battle to get customers to switch, the competitive heat will only get hotter as they attack the retail checking market share held by community institutions slow to respond or unwilling to do so.

So community banks and credit unions, what’s your next move?

Heightened Standards for Directors: What You Need to Know


directors-10-15-15.pngOn September 2, 2014, the OCC issued guidelines establishing heightened standards for certain institutions with $50 billion in total assets and for “highly complex” institutions, noting that it does not intend to apply the guidelines to community banks. However, the guidelines distill the OCC’s characterization of directors’ responsibilities that apply regardless of asset size. In this regard, the guidelines should be required reading for directors of every bank.

With regard to the role of directors, the OCC did not adopt a higher standard of director liability than the law generally provides (depending upon state of incorporation or chartering). This approach is very different from that espoused by the Federal Reserve Board’s Governor Tarullo in his controversial speech last year. Governor Daniel Tarullo exhorted legislatures to change the standards governing director conduct to impose a duty to meet regulatory and supervisory objectives (not just a duty to their institution and shareholders). The OCC notably bypassed the opportunity to try to extend director obligations beyond statute. Thus, the guidelines need to be read in conjunction with the existing legal framework.

The OCC reformulated what are in many cases age-old principles of director conduct. The guidelines are beneficial to directors in a variety of ways. Notably, the OCC sought to reclarify the divide between director and managerial responsibilities. To understand the significance of such line drawing, directors need to be aware of the regulatory approach to conflating the roles of directors and management since the downturn. Specifically, administrative actions, matters requiring attention and supervisory correspondence, have discussed the directors’ obligations to become further involved in their institutions’ activities in a quasi-managerial tone.

The OCC’s guidelines, however, note that they do not impose managerial responsibilities on boards or suggest the boards must guarantee any particular result. Instead, the OCC notes that the board’s duty is the traditional one of strategy and oversight.

However, there are increasing expectations for directors, particularly in terms of oversight of risk management. First, the OCC expects institutions to establish strategic plans that set forth a risk appetite. The board then must hold management accountable for adhering to the framework established. The guidelines clarify that the board provides active oversight by relying on risk assessments prepared by the departments of risk management and internal audit. Thus, although the board’s active oversight is in reliance on risk assessments, the board still must evaluate whether the risk appetite is being exceeded.

This expectation for oversight of risk tolerance have been seeping down the landscape and has become common practice for banking organizations of over $1 billion. I have seen institutions of $600 million and $700 million in total assets adding chief risk officers and risk committees. Risk assessments have proliferated like kudzu. Whether the guidelines are only expectations generally for the systemic important financial institutions (SIFIs) or not, these principles are becoming mainstream ideas for community banks as well. For SIFIs, the scope and pervasiveness of the risk management and mitigation framework are yet to be fleshed out.

The OCC expects boards to provide a credible challenge to management. Specifically, boards, in reliance on information from independent risk management and internal audit, should question, challenge and, when necessary, oppose decisions to expand the bank’s risk profile beyond its risk appetite.

The guidelines note that boards are not prohibited from engaging third-party experts to assist them. Thus, the OCC keeps open the well-worn ability of directors to rely on others for guidance (although the fiduciary decision-making remains exclusively the province of the board).

Otherwise, the OCC trots out existing basic minimum standards for corporate governance. Specifically, the guidelines provide that boards should conduct annual self-assessments. The guidelines also note that the OCC will review director training to see if it touches on all appropriate areas. Moreover, the guidelines note that directors must dedicate time and energy to reviewing and understanding the key issues affecting their bank. Those expectations are hardly new.

In short, the guidelines represent a mixed bag for bank directors. The OCC’s adherence to the separation between board and managerial responsibilities and directors’ ability to rely on third-party experts is reassuring. The OCC’s discussion of risk management and engaged directors challenging managerial direction are not threatening in themselves. Director concerns lie in the notion that examiners will expect an increasingly elaborate edifice of risk tolerance and assessment. For community banks, the question is how much of this edifice will they need. Thus, it is not the principles that are controversial, but the way in which such principles will be measured that causes concern for director liability.

The Big Banks’ Latest Trends in Mobile Banking


mobile-banking-9-10-15.pngBig banks have been committed to working out their mobile strategies over the past two years and are now unveiling the dramatic results they’ve achieved. According to AlixPartners, big banks controlled 67 percent of the primary banking relationships by the second quarter of 2014, while credit unions had 14 percent. Mid-size banks controlled 11 percent, community banks 4 percent and all others at 4 percent. Plus, 78 percent of people who switched accounts went to a big bank, while only 8 percent went to a credit union and the remaining 14 percent to a community bank, mid-size bank or other. It’s an even bigger gap with young people—82 percent of these switchers went to a big bank, while only 7 percent switched to a credit union, and 11 percent to a community bank, mid-size bank or other. The study also shows that in 2014, 65 percent of the people who switched accounts said that mobile played a role in their decision to switch.

Chase Bank, for example, is one of the biggest retail banks in the country and has seen massive gains in retention and customer engagement, along with a steady loss in attrition and branch expense. Over a four-year period, the number of products and services per household has gone up, and attrition rates have fallen to an astonishing 9 percent this year. According to Chase, mobile app users have increased by 20 percent in the past year, mobile QuickDeposit by 25 percent, mobile QuickPay by 80 percent and mobile bill pay by 30 percent.

Not only are these great things for retention, but they are also business strategies that are saving the bank money. Today at Chase, 10 percent of all deposits are made via mobile. Over a seven-year period, teller transactions have been cut in half, driving a tremendous cost reduction. Since 2010, Chase has cut out over $3 billion in costs.

For the past two years, Chase, as well as other top big banks, including Bank of America, Citi, Wells Fargo and U.S. Bank, have been offering the top five mobile services—mobile banking, mobile bill pay, mobile deposits, ATM/branch locator and P2P payments. The list is growing, as three new services have recently become a standard for all of these banks—Apple Pay, pre-login balances and mobile-friendly websites.

Apple Pay
By January of 2015, 300 financial institutions had been approved for Apple Pay, and in April, that number jumped to 2,500. Today there are about 375 active financial institutions using Apple Pay, 250 of which are credit unions.

Mobile payments have a slow usage growth though—only 0.5 percent of people in 2014 with near-field communication (NFC) equipped phones were doing mobile payments regularly, meaning they did at least one mobile transaction per month. According to Deloitte, that number is forecasted to jump to 5 percent by the end of 2015.

Pre-login Balances
All five of the top big banks now offer the ability to check your balance without logging into mobile banking, and it’s a feature that is proving to be one more way to drive engagement and remove a barrier to mobile usage. Customers using Citi’s Snapshot, for example, sign in to mobile banking three times as often as those who don’t.

Mobile-Friendly Websites
Google announced in May of this year that there are now more Google searches on mobile than there are on desktop computers, a trend that greatly influences how people are making decisions to buy products.

In about six out of 10 cases, when people are shopping for bank products, they’re doing online comparisons, meaning banks now have to anticipate the growing percentage of website traffic coming from mobile. Currently, about 15% of banks’ website traffic is coming from mobile, which will only continue to grow.

Not only did Google announce the state of mobile search, but also starting in April, they’ve put a requirement in place that if your website is not mobile friendly, they’ll move the placement down on Google’s search results.

Of the top 10 banks, every single one has a mobile friendly website. Four out of the top 10 credit unions have passed the mobile friendly test.

As customers are flocking to digital services, the big banks are growing stronger. Credit unions and community banks can stay competitive, though, by continuously training their team to have a mobile mission and being disciplined enough to innovate constantly.

Is Your Board Suitably Engaged?


board-effectiveness-9-2-15.pngI was in a board meeting the other day for one of my community bank clients. The president of the bank, let’s call him Hank, had just finished giving a presentation to the directors about a new product that the bank was considering rolling out. When the president finished giving his presentation, the chairman leaned back in his chair, locked his hands behind his head and declared: “Well, that was a very nice presentation Hank. Frankly, if it is good enough for Hank, it is good enough for me.”

Suffice it to say that this vignette does not depict a highly functioning board of directors. Sadly, however, it is not uncommon to hear similar conversations in boardrooms across the country, particularly in smaller community banks. It is this type of deferential attitude that can result in regulatory fallout for directors and the institutions they serve. Most lawsuits brought by the Federal Deposit Insurance Corp. in the wake of a bank failure are brought on the basis of the board being “asleep at the switch.” This article will provide a couple of helpful tips that you should consider implementing to make sure that your board remains suitably engaged to oversee the bank’s management and create maximum value for the institution’s shareholders.

  • Your board should reflect the make-up of the bank’s customer base and the communities it serves. A diverse group of directors representing the predominant industry groups in your bank’s markets will ensure that your board has the appropriate expertise and understanding of the unique issues facing the bank and its customers. This will help you ask the right questions and accurately evaluate the risks presented by customers and other issues the bank faces.
  • Choose a strong, but thoughtful chairman. Oftentimes, a board can be dominated by the individual running the meetings and decisions of the board largely reflect the thinking of the chairman. While it is important to select a chairman who is not afraid to make decisions, that person should also be open and thoughtful to differing opinions and should not discourage robust discussion of the issues. To this end, it is often a good idea to bifurcate the role of chairman from the CEO of the institution. An independent chairman can maintain an objective perspective and not develop tunnel vision, which can often result from being “too close” to the issues.
  • Maintain board visibility during regulatory examinations. One thing that bank examiners like to see is that the board’s engagement extends beyond the boardroom itself.  It is a good idea to have representatives from the board of directors stop in to see the examiners once or twice during the examination process. It can be as casual as simply checking in to make sure everything is going alright, or to answer any questions that have arisen during the exam that have not yet been adequately addressed by bank personnel. Examiners are often impressed when board members take an active interest in the examination process and engage with the examiners other than during the meeting to present the results of the exam.
  • Don’t let your meetings get hijacked by one issue. It is very easy for one issue to dominate a board meeting, particularly an issue that a number of the directors are passionate about. It is critical to maintain a manageable agenda and to have appropriate leadership to be able to stay on task during meetings. Otherwise, one of two things can happen: (i) other equally important issues can be given short shrift and hasty decisions can be made, or (ii) meetings can drag on for hours and directors can become more interested in their other obligations than in the business at hand. If it appears that a more robust discussion on an issue is warranted than the allotted time would permit, the chairman should table the issue for the next meeting (or a special meeting if time is of the essence), in order to make sure that appropriate consideration is given to all agenda items.

The items covered in this article only scratch the surface of how to keep your board suitably engaged. The important take-away, however, is that a failure to adequately run the board could result in significant harm to the institution and personal liability for the directors. The board of directors of an insured financial institution is the gatekeeper of the institution and should actively and meaningfully participate in overseeing and directing the operations of the institution.