Stacking the Deck: Secrets of High-Performing Banks

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Many financial institution executives spend considerable time thinking about strategies to improve overall profitability and create sustainable growth.

The focus on best practices is generally aimed at strategies to cut expenses: using technology, looking at staffing levels and increasing productivity, among others. Although this advice is sound, is that actually what high-performing banks do? To answer this question, we analyzed data for 81 institutions that have been in the top five for return on equity for five consecutive years to peers. These institutions averaged an efficiency ratio of 52.04%.

As the data illustrates, high-performing institutions don’t attempt to save their way to prosperity. They underperform in noninterest expense to assets by 24% and overperform in noninterest income to assets by 325%. So how does your bank stack the deck in its favor?

The key to better results is aligning marketing and execution. High-performing banks invest in growth to create a sustainable advantage that produces superior results. After 35-plus years, here’s what we know:

Get product right. People hate fees. Compressed margins and decreased profitability can lead executives to discuss increasing monthly service fees or minimum balance requirements. Below is recent research on the criteria consumers use when selecting a primary financial institution. Compressed bank earnings have little impact on what consumers want from their banking partner. Your retail and business product considerations must remain compelling if you want the greatest opportunity to grow core customers.

Remove process barriers. Banks must be attuned to compliance-related items; however, over-compliance creates barriers. Look at your customer identification program (CIP), as well as your retail and business account opening policies: Do they create barriers to growth? Is it easy for a consumer to open a retail or business account at your bank? Do you have restrictive scoring metrics that are actually costing you revenue opportunities?

Market to grow. Increase your bank’s spending on strategic marketing.

  • Proactive: According to Novantas, 65% of consumers only consider two options when they decide to change their primary financial institutions. That means that 65% of your current customers already know where they would bank if they didn’t bank with you. Your institution must be top-of-mind before consumers and businesses decide that they want to switch. Your marketing must create the opportunity for them to pick you.
  • Targeted: Your bank needs to use data and analytics to help understand where to market before any campaigns. Your marketing resources should be allocated to target consumers and businesses that haven’t chosen your bank yet — but could and should.
  • ROI Focused: Executives must define what and how the bank will measure success before the marketing campaign, not after. Make sure your marketing investment is working to create tangible, measurable results.

Invest in team training. Too often, banks treat training as an event rather than a way of life. Employees who do not understand your products and services won’t be able to recognize opportunities with customers or discuss the benefits, rather than features. It is crucial your institution commits to regular training initiatives regarding products and services. Once everyone has been trained, begin the process again: knowledge leaks unless it is reinforced regularly.

The actions of high-performing banks tell the story. Banks that invest in growth reap the greatest rewards. While it may not be intuitive, bank executives must ensure they have all of the right strategies to capitalize on growth opportunities that present themselves in any environment.

10 Fraud Prevention Tips to Help Protect Your Institution

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According to a recent study, organizations lose 5% of revenue to fraud each year — a staggering statistic. In an effort to help institutions decrease this percentage, here are 10 fraud prevention tips.

1. Confidential Hotline
This is the single most cost-effective anti-fraud action an institution can take. Tips via hotlines are the No. 1 way that frauds are detected, according to the ACFE 2020 Report to the Nations; most tips come from employees. We encourage banks to set up a confidential hotline operated by a third party and advertise it internally to all of their employees.

2. Fraud Awareness Training
Awareness training for employees can result in shorter duration for prospective fraudulent activities and lower losses. Institution-wide awareness is critical: Turn your employees and managers into fraud detectors and take advantage of all those eyes and ears.

3. Vendor Controls
Vendor fraud is very common because of the large number of payments going out to different companies and entities. Every company has vendors/suppliers, so it’s an easy place to perpetrate fraud. Some items to consider:

    • New vendor selection:
      1. Who can select?
      2. How are they selected?
    • Due diligence on new vendors:
      1. Is the vendor real?
      2. Is their pricing reasonable?
      3. Is the vendor related to an employee?
    • Periodically reassess vendor relationships.
    • Reduce or eliminate conflicts of interest.

4. Implement Good HR Practices
Conducting checks on candidates before they walk in the door can go a long way in preventing fraud. Additionally, having exit interviews can be a very useful tool in finding out about fraud, waste and abuse in your institution. Without the interview, exiting employees may not bother to tell you what they know.

5. Implement Mandatory Vacations
You know those employees who never take a vacation day, and if they do, they check in the whole time? It may not be because they are super dedicated. Many problems are identified during perpetrator vacations, because someone must fill in for them and perform their duties. Implementing mandatory vacations or job rotations can help identify fraudulent activities.

6. Credit Card, Expense Reimbursement Policies
Purchase and credit cards are a very common and convenient tool for committing fraud. Closely monitoring with strong controls in place is essential to reducing the risk of this type of fraud. Start with a clearly defined policy on what is and is not acceptable. Card use for “business purposes” is not good enough.

    • What types for expenses do you really want to be paying?
    • What types of expenses are not acceptable?
    • What documentation is required?

7. Fraud Risk Assessment
Similar to going to the doctor for a checkup, banks should conduct a fraud risk assessment annually or biannually. The bank changes, and with those changes come different risks. A periodic fraud risk assessment can help adapt to those changes, allow executives to understand their institution’s fraud risks and focus their efforts. This assessment should be performed by someone who looks at fraud issues on a regular basis.

8. Segregation of Duties
This can be difficult for small or growing institutions that have controls that have not kept pace with their growth. Segregating duties is not a new concept, but it’s just as critical today as any time in the past.

A few places to focus on:

      • A/P access to signed checks.
      • A/P clerks who can set up vendors.
      • Payroll clerks who can set up new employees.

9. Code of Conduct
These can seem like “soft” controls, but it is critical that an institution has these in place so employees cannot claim “ignorance” that what they were doing was wrong. Policies to consider implementing include:

    • Anti-fraud policy.
    • Conflict of interest policy.
    • Policy related to gifts and gratuities.

10. Create the Right Culture
Culture is a critical component to fraud prevention. If leadership demands and displays integrity and transparency, it typically permeates through an institution.

    • Tone is set at the top: Management must “walk the walk.”
    • Create a positive workplace environment.
    • Establish a culture of honesty and high ethics.
    • Put an emphasis on doing the right thing.

Decades of experience have taught us that even if a bank implements all the tips above, it could still become a fraud victim. Fraudsters are infinitely creative with their schemes; detecting or preventing those schemes is a never-ending task. But when taken together, these top 10 tips can still go a long way in helping your institution mitigate its fraud risk.

This article is for general information purposes only and is not to be considered as legal advice. This information was written by qualified, experienced BKD professionals, but applying this information to your particular situation requires careful consideration of your specific facts and circumstances. Consult your BKD advisor or legal counsel before acting on any matter covered in this update.

What You Don’t Know Can Hurt You

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3-4-15-Jack.pngOn March 5 and March 6, Bank Director will hold its second annual Bank Board Training Forum at the Hermitage Hotel in Nashville. The day-and-a-half event was designed to augment Bank Director’s other conferences, which tend to focus on a specific topic, like mergers and acquisitions, audit, risk or compensation, and appeal to a more targeted audience. Instead, the Training Forum was designed for the entire board, and it covers a wide range of topics that all bank directors need to understand.

We are expecting a standing-room only crowd with about 120 people, which speaks to the pressure that directors feel to keep up with the changes that are occurring throughout the industry. Whether it’s something to do with technology, like the advance of mobile or the impact of social media, the rise of nonbank competitors like Google and Apple, or the growing impact that millennials are having on the U.S. economy, the pace of change seems to have accelerated. Staying on top of it all almost seems like a full-time job.

I’ve always thought that bank directors face a unique challenge because banking is a highly regulated industry and it takes time for a new director to grasp just the major requirements, let alone the entire rule book. (I wonder how many bank CEOs who grew up in the industry know the entire rule book.) Banking is also a complex business (as is finance generally) and a new director whose background is in, say, manufacturing or retail can end up having a pretty steep learning curve. The fact that most bank directors come from outside of the industry only adds to the challenge. 

Ultimately, directors’ effectiveness will depend on how much they know about the business of banking and, specifically, their own bank. How can a board exercise their fiduciary duties to shareholders, or be a valuable resource to management, if its members don’t understand the industry, its issues and how those are changing?  

There are a variety of ways that directors can keep themselves informed. Attending events like the Training Forum, or those offered by other industry organizations, is certainly one approach. I would also strongly suggest that directors read a variety of industry publications on a regular basis. Bank Director magazine is one of them, obviously, but there are others. I think it would be extremely helpful if there was someone on the board, perhaps the lead director or independent director, or even the corporate secretary, who could flag important articles, research reports and webcasts and push that content out to the entire board.

I have come across a number of bank boards that make it a regular practice to have a member of senior management brief the board on a particular topic, say, credit trends throughout the industry, or the latest developments in cybersecurity. I think it’s entirely reasonable for the board to expect management to help keep it informed on important industry trends as well as what’s going on inside the bank. But the management team can’t do it all. Directors themselves have to make a personal commitment to training and education for as long as they serve on the board. Basic intelligence, life experience and sound judgment are important qualities for a director, but they can only take you so far. 

Cultivating the Talent Within

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military-formation.jpgHaving trouble finding quality managers that fit your organization’s culture? Maybe it’s time you make them yourself. Bank of Marin, a $1.4-billion asset community bank headquartered in Novato, California, is doing just that.  By applying a similar training concept to those sometimes employed by much larger institutions, Bank of Marin  is wagering that even for a community bank, the long-term benefits of an early investment in employees will be well worth the initial cost.  Bank of Marin CEO Russell Colombo recently spoke with Bank Director about the program.

Why did you start an employee training program? 

We really looked at both our growth and our total employee base. As we’ve been growing, we felt it was important to start building a culture from the bottom up by training people to learn the organization. That way we knew what we were getting.Whereas, when you hire from the outside, there’s a little bit of risk. You can interview all you want, but you don’t necessarily know what you are getting.

The program also sends a very good message to our employees that there are opportunities here for growth.

Can you give us an overview of how the program works?

It’s a nine month program. Each trainee is assigned a mentor who meets with them regularly either at branch locations or at headquarters depending on where they are assigned. These mentors, usually branch managers, provide the trainees with guidance and assistance. 

After they graduate, the mentor who was assigned to them still remains in contact and works with them as they are taking on their full responsibilities in the branches. They help them make that transition. So, it’s a nine month program with three months of additional mentoring. The trainees become pretty close to their mentors.  They can call them anytime for assistance, direction and guidance even after those last three months.

What are some of the qualities you are looking for from trainees?

There are a few things. For educational background, we are looking for a bachelor’s degree or better. We are looking for [people with] leadership qualities: Those that are not afraid to speak up and are open to learning. We are looking for those that can be outgoing and have a sales aptitude. We also want someone who isn’t afraid to ask for business and who can build client relationships with existing customers.

How have you been gauging the success of the program?

It is early yet since we just completed the first year, but we had our first graduation and each [graduate] got up and gave a speech. They felt good about their own careers because the bank had confidence in them and we were willing to spend money to train them for success within the bank.

I think this [program] creates a strong sense of loyalty. These days you have people coming out of college with degrees in business and accounting who are taking jobs as tellers. We pulled our [trainees] out of these ranks because they clearly have the capability and the capacity to do more.  We are giving them their opportunity.

People see this and they say, “If so-and-so can have that opportunity and succeed, I could too,” and maybe they will raise their hand the next time or be chosen the next time. That has a real positive impact on a culture.

Do any of your area competitors have similar programs?

I haven’t seen any others in the area doing this. This is what the big banks used to do. They all had training programs. When I started in banking, every bank had a significant training program where they hired a number of people and put them through a class. You spent a year or two training and learning about the bank before being placed in a job.

With community banks it’s tougher because it’s a matter of cost. Everybody is looking hard at the efficiency ratios. We are adding people who do not have a function other than learning, but I Iook at it from this perspective—even though there is that initial cost, in the long run this is going to be really efficient for us because we don’t have to go through the retraining when we hire people. We are creating a pipeline of people who can take over, who can really be a succession plan for our branch managers. We don’t want it to be a fire drill and have to go out and look for the right person every time a spot opens up.  You want to be able to say, “OK, this person is ready now to take that roll on.” That’s certainly the best way to do it.

What lessons have you learned from the program?

I think one of the things we learned is we have to do a really good job in training our employees who are managing people on the employment laws and regulations in this state. There are a myriad of regulations they need to know about employment issues that go beyond just basic management skills. We don’t want them to either risk their own careers or the bank because they made mistakes regarding the law. It’s not as simple as it used to be. Believe me. 

What advice would you give to CEOs considering a similar training program?

I would say to any other community bank—if you can afford to do something like this, it is well worth it. It’s a great way to build upon the culture that your particular organization has. This program is creating branch managers who will ultimately be doing things the Bank of Marin way. So, there is not a culture clash between the new hires and existing employees. We don’t have people saying, “Oh, we did it like this at x,y,z bank.” No.This is the way we do it, and I think there is a lot of benefit to that.

I look back on my banking career, and I had the opportunity to go through a [training program]. It was terrific because your job was to learn. You have people that are learning the right way to do it. That’s invaluable. It  will save you money in the long run, and it will build a more positive environment and culture for the bank.

What Have We Wrought? How Can We Atone?

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training.jpgI know, I know, this may not be the time or the venue for industry self-flagellation, but like the twelve-step programs and most religious admonitions, one cannot change or eliminate bad habits or poor behavior without first acknowledging the problem. That one key problem for community banking—both relative to this crisis and the continuation of our business model—is the dearth of classically trained credit talent remaining in our industry.

We know the primary culprit: the big bank fixation on the efficiencies of the hunter-skinner template for credit delivery. Are we not now paying exponentially for those “savings” now? I’ve said for years that I knew of no other industry that has been successful putting people on the street selling a product or service with such limited knowledge or training.  Most devastatingly, adherence to that model has ended the en masse credit training that had been the font of credit talent that ultimately found its way to the community banks. Even without this economic tsunami, our niche of the industry was facing a crisis over how to staff lending functions with people who actually knew credit. These are the people who provide value to both risk management and the borrowing customer—knowledge that is arguably at the heart of community banking’s popularity and viability. Simply put, due to big bank strategies and retirement factors, there’s less credit talent per capita in banking today than ever before.

What can be done? Like the so-called aging infrastructure of America, rebuilding our depleting credit talent pool needs significant investment and high profile support—support at the highest levels of our banks, including boards and CEOs.  Credit training can no longer be seen as just a discretionary non-interest expense item available for the budget balancing axe. Even at Credit Risk Management, L.L.C. (CRM), training revenue has been down about 25 percent since the onset of the crisis in ’08—understandable for the times, but a trend that must be reversed. Credit training, of course, can take many forms: in-bank, trade association-sponsored, and vendor-directed. Each bank needs to devise a strategy that works best for its talent needs.

One initiative that banks should consider is re-invigorating the formal or informal peer group training programs, where costs can be shared and curriculum can be customized. Also, look for schools with graduated levels of complexity in the two primary branches of commercial lending: C&I (commercial & industrial) and CRE (commercial real estate). Community banking in particular needs diversity away from real estate. Focus on schools where the curriculum will be focused totally on credit underwriting and analysis, using case studies, mock presentations, and computer tools—not ancillary issues like loan review or effective officer call programs. And to ensure the cost justification for the bank’s investment in sending students, ensure that the program include at certain stages some testing and certification. 

Even with all the turmoil and economic pain our industry is currently experiencing, I subscribe to the Chinese adage that within every problem lays an opportunity. Our opportunity is to begin now to build the next version of the business model for community banking, and credit training must be a vital part of that re-building strategy. Accordingly, I implore you community banking leaders—executive management and board directors—to first acknowledge this depleted credit talent problem, and then to see some way to budget for training opportunities as not only investments in enhanced risk management, which we obviously need, but as investments, too, in the marketing and survival of our niche in the broader industry.