A PUBLICATION OF THE FINANCIAL MANAGERS SOCIETY
MARCH/APRIL 2018 | FMSinc.org
THE WAR FOR DEPOSITS
BUILDING YOUR DREAM TEAM AN EXCLUSIVE INTERVIEW WITH IN A TIGHT LABOR MARKET THE NCUA’S RICK METSGER
FINANCIAL MANAGERS SOCIETY
April is Member Appreciation Month! We’ll be celebrating you all month long —
With member spotlights, weekly contests, and more!
Join the conversation on FMS Connect and make sure you’re following along on social media
Contents MARCH/APRIL 2018 | VOL. 2, ISSUE 2
12 THE WAR FOR DEPOSITS
forward, a publication of the Financial Managers Society 1 North LaSalle Street Suite 3100
Chicago, IL 60602-4003
FMSinc.org | 800-ASK-4FMS
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President and CEO
Editor and Director, Publications and Research
Consultant, Branding Marketing
Specialist, Publications and Research
LYNDSEY WARNER CAULKINS
Layout and Design
FMS EXECUTIVE LEADERSHIP
DARRELL E. BLOCKER, CPA
STEVEN M. FUSCO, CMA, CFM
Immediate Past Chairman
Financial Managers Society, Inc. All rights reserved.
As loan growth continues and liquidity concerns arise, competition for deposits threatens to develop into an arms race
16 BUILDING A DREAM TEAM
With unemployment at post-recession lows, how can institutions find—
and keep—promising talent?
22 SUSTAINABLE SUCCESS
Taking up the cause of sustainability offers a way to differentiate an institution from its competitors
26 SPOILER ALERT
The importance of FTP in telling the story of
how your institution makes money
30 NEVER TOO LATE
There’s still time to squeeze in a few 2017 tax planning strategies for 2018
8 MEMBER SPOTLIGHT
Dana Litman of Quantum National Bank
shares his thoughts on the industry
20 CONVERSATION: RICK METSGER
The NCUA board member discusses the state of the credit union in an exclusive interview with FMS
34 ON THE HORIZON
Mark your calendar with the latest and
greatest educational opportunities from FMS
FMS forward | MARCH/APRIL 2018 | 3
Advance preparation: None Instructional Method: Live-Group
Field of Study: Accounting
FMS is registered with the National Association of State Boards of Accountancy as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses. Complaints regarding sponsors may be addressed to: The National Registry of CPE Sponsors, 150 Fourth Avenue, North, Suite 700, Nashville, TN 37219-2417 Web: www.nasba.org. For more information regarding administrative policies such as concerns or refunds, call 800-ASK-4FMS (800-275-4367).
22 HOURS CPE
Accounting 101 & april 24 - 25
are your ready
for 2018? april 26 - 27
to learn more, visit FMSinc.org/DalLasSeminars
FROM THE CEO
BY DANIELLE HOLLAND
FMS celebrates our 70th Anniversary this year. As a professional membership organization, we enable our 1,800 members from banks, thrifts, credit unions, and vendor partners, from across the country to provide you with a variety of specialized education, information and networking opportunities.
We are so excited for what we have in store for 2018 and to welcome AMIfs members to our diverse community. With FMS and AMIfs joining forces you will get access to all FMS exclusive resources in addition to the AMIfs benefits you already receive. FMS will provide you with what we do best: educating financial institutions on the topics most relevant to you. As we celebrate our 70th Anniversary, we have
a lot of new content to help professionals like you stay ahead of the curve. Visit FMSinc.org/content to see what we have store for 2018!
In addition to our content, we will kick
off our conference season in April. I look forward to personally welcoming you April
18-20 in Tempe, AZ for the FMS-AMIfs 2018 Annual Conference on Financial Performance and Risk Management. This
is the premier event for management
and accounting, risk, and profitability professionals. We’ve designed a conference that provides you with access to the latest strategies to give you and your institution a competitive edge.
Our valued members make this organization strong and one we’re all proud to be a part
of. Year after year, we strive to deliver the programs, industry insights, and connections you need to succeed in the financial industry. And in this coming year, our 70th Anniversary, you’ll see even more exciting ways we’re engaging, supporting, and serving you better.§
FMS forward | MARCH/APRIL 2018 | 5
Financial Performance & Risk Management
APRIL 18 - 20, 2018 | TEMPE, AZ | TEMPE MISSION PALMS
Featuring the industry’s leading experts, consultants, and voices
REGISTER TODAY AT FMSinc.ORG/ANNUAL
BY MARK LOEHRKE
How can you tell if you’re an FMS lifer? A good litmus test is if you recognize that odd little logo beneath this letter, which decades ago and for many years served as the official symbol of the Society.
And while this hieroglyphic head-scratcher was surely inspiring plenty of WTFs long before WTF was a thing, we unearthed its fairly interesting backstory for this issue’s 70th anniversary feature on page 10. Without spoiling your stroll down memory lane here, the abridged version of how this historical curiosity came to represent FMS involves a well-intentioned and meticulously researched attempt to demonstrate the
through-line between the highly regarded scribes of ancient Egypt and the finance and accounting professionals of the modern era.
Whether the resulting scribble accomplished that lofty goal may be subject to debate, but the inspiration behind it – the timelessness of the financial industry – is proven time and again. Take our cover feature on the war for deposits, for example (beginning on page 12). Those who have worked in the banking and credit union arena long enough know all too well that the competition for deposits and the challenges associated with managing funding are hardly new developments – as
ALM First’s Robert Perry notes in the story, this industry has always been a “war for deposits” because institutions have always risen or fallen on the flow of deposits. So even though recent loan growth may be the primary driver behind the current deposit dustups, the battle itself is a timeless one in this industry.
Thanks to technology and the resulting ability to better parse massive quantities
of data, profitability analysis, too, is often cast as something of a more “modern” practice, but as our discussion of FTP on page 26 illustrates, the idea of trying to get a better handle on how an institution makes its money is nothing new under the sun. Likewise, Millennials may be the current flavor of the month when it comes to trying to assemble a highly skilled and forward- looking staff, but the hiring considerations at issue in our feature on page 16 didn’t spring up overnight.
So maybe in retrospect that old logo was in fact a pretty apt symbol for FMS after all – if not a terribly attractive or self-explanatory one (which is why the decision to ultimately scrap it was indeed the right one).
As always, thanks for reading.§
FMS forward | MARCH/APRIL 2018 | 7
FMS MEMBER SPOTLIGHT
Bio in Brief
Dana W. Litman
Title: EVP, CFO, CRO
Institution: Quantum National Bank –
Asset Size: $442 million
Years in current position: 11 years Years as an FMS member: 7 years
Longer term, I think all banks will face greater pressure from market disrupters – fintechs, small nimble startups or almost any large organization that is trying to take on pieces of the banking model. We are working on strategic partnerships to help leverage what the disrupters bring to the table with the natural strengths of a community bank.
8 | FMS forward | MARCH/APRIL 2018
What is the single biggest challenge facing your institution right now?
Short memories. We are seeing relaxed underwriting standards from competitors and pricing pressures for both loans and deposits. On the deposit side, we have a local competitor that is trying to fund a national push for loans with local deposits, and it feels eerily like 2005-06.
Longer term, I think all banks will face greater pressure from market disrupters – fintechs, small nimble startups or almost any large organization that is trying to take on pieces of the banking model. We are working on strategic partnerships to help leverage what the disrupters bring to the table with the natural strengths of a community bank.
How has your role changed over the past five years?
My role has developed more towards risk management, with the added title of chief risk officer. Today everything is about risk
– risk/reward, enterprise risk assessment, the risk appetite statement, the key risk indicator (KRI) dashboard, risk assessments, inherent risk and key residual risk, all
of which tie back to the original seven categories of risk that the regulators use to measure the stability of a bank.
Banks need to make sure that their critical decisions and strategic agendas are in
sync with the risk profile of the institution. With my responsibilities in information technology, I am acutely aware of the ever increasing IT risks that have inspired us to expand the seven categories of risk to eight on our KRI dashboard.
Where do you expect to be focusing most of your attention in the next two to three years? Besides asset-liability management, liquidity planning and capital stress testing, I would say how to expand
our franchise value – that is, adding shareholder value by expanding our market penetration and making sure we offer products to drive customer traffic and profitability. We have not always been
the best in driving retail business, but we are taking a serious look at the products, services and styles of banking needed to move the needle on shareholder value.
What do you like best about working in a community institution? The people. When you work in a smaller institution you know everyone in the organization on a first-name basis and
you get to meet and talk to customers. At Quantum, we are very hands-on, and it’s not unusual for any of the C-suite folks to be asked to attend customer meetings. For me personally, I enjoy talking to our customers about their businesses, the local and national markets and how we can help be their ‘Banking Partner for Success.’
What advice would you offer to someone entering the banking profession, particularly at the community institution level?
Learn as much as you can about what is expected of you, about the industry, about your customers and about your company’s strategic plan and goals. Ask questions, volunteer for committees or opportunities within the bank and find out what organizations your bank sponsors. Do not be afraid to move around in the organization if opportunities arise. Most importantly, work hard and do the best job you possibly can.
What is the best (or worst) professional advice you’ve ever received?
The two best pieces of advice I ever received were:
#1 Work hard – my grandfather had the same job for 54 years, and was featured on the front page of our local newspaper when he retired at age 83.
#2 Do the right thing when no one is looking – a simple but powerful statement.
What roles outside of accounting and finance have you held and how have they helped you in your current position?
I was a process owner many years ago when process reengineering was being pushed by large organizations. The idea was to tear down the walls and make end-to-end processes, reduce turnaround times and create better experiences for the customer – the once-and-done philosophy. We led
a team to reengineer 300+ people in three locations across the U.S. who worked in different departments of a larger company.
As a result, I’m always thinking about the end-to-end process within our organization and what we can do to improve the efficiencies and the customer experience.
What do you like best about being an FMS member?
I like the ability to share information with other professional bankers – there’s always someone who has been in your situation who can help. FMS is a great banker resource!
Where do you see the banking industry in 5-10 years? How do you see it changing/developing?
I see continued consolidation. In five years
we could have 20-25% fewer banks, with 50% fewer in ten years. Banks will either
find partners with the market innovators, disrupters and fintechs or they will struggle. Innovative banks will deliver higher shareholder value. You do not need to reinvent the wheel or go way outside your comfort zone, but you do need to find the right partners and be willing to look at opportunities.§
The FMS community wants to get to know you better! If you’d like to share your thoughts and insights in the Member Spotlight, let us know at [email protected]
FMS forward | MARCH/APRIL 2018 | 9
10 | FMS forward | MARCH/APRIL 2018
CELEBRATING 70 YEARS
...or a few thousand
The long and storied history of FMS stretches back 70 years now, but for a long time the association’s logo went back even further – much further, in fact. Up until the 1990s, the FMS logo was made up of hieroglyphic symbols from ancient Egypt, meaning “scribe” or “writer who reckons with numbers.”
“When I became a member in 1976, that was the logo,” says John Foff, relationship manager at FLH Bank Pittsburgh and a 42-year member of FMS. “I think it was retired in the early 90s.”
The hieroglyphic logo reigned for decades. But for those who haven’t been members as long as John has – and even for some of those who have – the question likely persists: what compelled a group of financial professionals to choose a dead language to represent their society?
Finding the answer to that question involves first trying to understand what being a scribe really meant.
History tells us that scribes in ancient Egypt were important and trusted workers whose main duty was to faithfully record the wealth of the kingdom by counting, measuring and writing down how much gold, grain or slaves the Pharaoh had at any given time. Scribes also imposed and collected taxes, according to a 1965 article written for FMS by Gamal Sale, the chief curator of the Cairo Museum.
“To be a scribe was the dream of all those who were ambitious,” wrote Sale in his piece. “It is he who commands the whole country, and everything is under his control.”
So the hieroglyphics of the FMS logo symbolized not only the literal meaning of “scribe”, but also how long the work of the accountants and CFOs of the world had been around. Not only were they historic, but in ancient Egypt they were prestigious and desirable as well – a proud legacy for today’s financial professionals.
“If you look at the character at the end of the logo, you can see the little kneeling guy – that’s the scribe,” Foff explains. “The idea was that the Pharaoh relied on the scribe to accurately record the wealth of the kingdom. Instead of land and warehouses, we now have banks and money, but we’re still the people charged with accurately recording the wealth of the kingdom.”
A NOBLE CALLING
An article in the May 1988 issue of Financial Managers’ Statement – the old version of FMS forward –discussed the meaning of the logo, quoting from an ancient text which seems to be the famous Papyrus Lansing. The Papyrus is a letter from a high-level scribe to a younger apprentice, urging him to devote himself to the job and pointing out the many benefits of their shared calling.
“Apply yourself to this noble profession,” the older scribe writes. “You will find it useful.you will be advanced by your superiors.All occupations are bad except that of the scribe. See for yourself with your own eye. The washer man’s day is going up, going down. All his limbs are weak, from whitening his neighbor’s clothes every day. The maker of pots is smeared with soil, like one whose relations have died.By day [the peasant] cuts his farming tools; by night
he twists rope.The scribe does not suffer like the soldier [who] is awakened at any hour [and] may not rest.”
Instead, being a scribe is a respectable profession. Sure, scribes spent years learning how to write with the palette on papyrus, but once they became proficient, their toil was over: “Furthermore, look, I instruct you to make you sound; to make you hold the palette freely.
To make you become one whom the king trusts; to make you gain entrance to treasury and granary. To make you receive the shipload at the gate of the granary. To make you issue the offerings on feast days. You are dressed in fine clothes; you own horses. Your boat
is on the river; you are supplied with attendants. You stride about inspecting. A mansion is built in your town. You have a powerful office, given you by the king. Male and female slaves are about you. Those who are in the fields grasp your hand, on plots that you have made. Look, I make you into a staff of life! Put the writings in your heart, and you will be protected from all kinds of toil. You will become a worthy official.”
Therefore, as odd of a choice as hieroglyphics might seem for an association of financial professionals on the face of it, the logo actually served to place FMS members on a long and ongoing continuum – the world has needed trustworthy, knowledgeable professionals to help them record and protect their resources for thousands of years, and FMS has been there to support those professionals with education and peer networking.
It was also, if nothing else, a good reminder of how lucky we all are to not be smeared in soil.§
The hieroglyphic logo reigned for over forty years, reminding members that that they could trace the history of the banking and accounting professions back to ancient times.
Originally either “writing” or writer.
Figure of man added to denote “writer”.
“To count” or “to reckon up with numbers”.
FMS forward | MARCH/APRIL 2018 | 11
THE WAR FOR DEPOSITS
WITH RATES ON THE RISE AND LOAN GROWTH ON A STEADY CLIMB, THESE SHOULD BE THE BEST OF TIMES FOR FINANCIAL INSTITUTIONS. BUT AS LIQUIDITY CONCERNS BEGIN TO FESTER, THE HEIGHTENED COMPETITION FOR DEPOSITS THREATENS TO DEVELOP INTO AN ARMS RACE.
“It was the best of times, it was the worst of times...”
While almost anyone who has made it through a high school English class is likely familiar with that immortal opening line from Charles Dickens’ 1859 masterpiece
A Tale of Two Cities, fewer probably know how the passage continues just beyond those ellipses. Specifically, the author
goes on to note that the period in question surrounding the French Revolution was also simultaneously “the age of wisdom” and “the age of foolishness.”
Despite this seemingly contradictory characterization, it is a description that just might ring true among many community institutions in the current deposit and lending environment. For just as the healthier economy and its accompanying uptick in loan growth are combining to help banks and credit unions once again better resemble the prudent, trusted financial stalwarts they were largely believed to be prior to the Great Recession, the resulting ground-level skirmishes for the deposits needed to fund that ongoing loan growth and maintain adequate liquidity have the potential to tip the scales back toward
an age of keeping-up-with-the-Joneses foolishness which, unfortunately, will look all too familiar to those who have been around this block before.
“The banking industry has always been a ‘war for deposits’ because institutions rise and fall on the flow of deposits,” says Robert Perry, a principal in the ALM and Investment Strategy division at ALM First Financial Advisors. “However, today is unique from the standpoint of community institutions, which tend to be smaller in terms of asset size, have higher operating costs relative
to revenue and are more likely to have branches in rural locations compared to their non-community counterparts. In this area
of the marketplace, the war for deposits is the challenge community institutions face
to gain deposit share over non-community
12 | FMS forward | MARCH/APRIL 2018
institutions, which tend to have a greater share of deposits overall, and in particular, have a greater share of valuable metropolitan deposits. That said, rising funding costs are a bit of a sleeping giant for the banking industry as a whole.”
Others may not be ready to declare the current environment a “war” just yet, but they nevertheless can hear the drums beating and smell the gunpowder that may portend a larger-scale conflict to come.
“‘War’ is probably a little more aggressive than I would characterize it right now,” says Tom Hauck, a managing director at ProBank Austin. “There are probably some small battles at this point, but I certainly think that later in the year we could experience some escalation as institutions continue to see loan growth. Particularly for community institutions, there was a
lot of liquidity on balance sheets for the past several years, and amid some pretty strong loan demand in 2017 a lot of that has been eaten up. So as we push forward, assuming loan demand remains reasonably strong, institutions are going to have to start growing deposits or look elsewhere if they can’t.”
Particularly for community institutions,
the rising cost of funds could be a bit of a ticking time bomb, which is why they should be looking at their deposit stability.
Robert Perry, Principal – ALM and Investment Strategy, ALM First Financial Advisors
Indeed, any discussion about a war for deposits starts with the multi-year growth in loan portfolios, and the effect that run-up has had on the liquidity residing on institutions’ balance sheets. During a CFO roundtable session at the 2017 FMS Forum in Las Vegas last summer, the wide-ranging discussion continually circled back to concerns about liquidity – regardless of the asset size or region of the institution in question, these heads of finance clearly saw liquidity as a challenge that touched on virtually every aspect of what they were trying to do.
“For institutions experiencing above- average loan growth, that loan growth is often outpacing deposit growth,” confirms Matt Pieniazek, president of Darling
Consulting Group. “This has contributed over recent years to some very clear reductions in on-balance sheet liquidity levels, resulting in investment portfolios that have been shrinking aggressively as institutions redirect the cash flow to fund the delta between loan and deposit growth.”
But for many institutions it’s not a question of simply building liquidity back up to where it was – it’s about determining where that liquidity level even needs to be these days.
“The biggest challenge is probably the fear of the unknown,” says Christine
Mills, a managing director of analytics
at MountainView Financial Solutions. “Historically, institutions didn’t hold a lot of excess liquidity because there’s a big cost
As loan portfolios grow and the competition for deposits continues to heat up, some institutions may find it useful to explore an alternative source of liquidity they perhaps haven’t considered in quite some time (if ever) – wholesale funding. While for most institutions it remains more of a contingency funding option than a source for everyday liquidity, that may start to change if deposits do indeed dry up.
“In terms of pricing opportunities, institutions have to look at their cash flows and balance sheet structures to determine if they’re better off pushing 1-year or 5-year CDs or maybe going after wholesale funds rather than core deposits,” says Tom Hauck. “That’s the benefit of wholesale funding – you can make a phone call and have quick liquidity, whereas running a CD special is going to take time.”
Particularly if they’re new to wholesale funding or haven’t dipped a toe in the wholesale pool in many years, however, there are a few important things for institutions to keep in mind before taking the plunge.
BE SPECIFIC, BUT NOT TOO RESTRICTIVE
Care should be taken not to make wholesale funding policies unnecessarily restrictive. Have explicit instructions, but provide ALCO with the appropriate flexibility to do its job. Make sure there’s a reason and logic for the term structure of your wholesale funding, and be sure to have a clear linkage to the needs of the balance sheet.
UNDERSTAND WHAT WILL CHANGE IN THE CASE OF A LIQUIDITY EVENT
Many unsecured wholesale funding channels are not going to be available in a crisis, and the institution’s contingency liquidity plan needs to reflect that.
KEEP THE REGULATORS IN MIND
While many regulators have grown more open-minded about the use of wholesale funding in recent years, they definitely want to see a clear plan with institution-specific assumptions (including an understanding of what happens if those assumptions are wrong) and correlation with other risk management functions.
FMS forward | MARCH/APRIL 2018 | 13
associated with that. But that changed after the crisis, so now all of these questions have come up and in many cases there’s really no right or wrong answer. The guidance is clear about holding marketable, unencumbered liquidity, but less so as to how much. And when a lot of institutions look back on their data from before the crisis, they didn’t have
a lot of liquidity issues so there isn’t a clear example from their own history to reference.”
Woven throughout those questions surrounding liquidity is the very fiber at the heart of this war for deposits – just how much is an institution willing to pay to keep its existing depositors and attract new ones? In attempting to balance the desire to grow deposits with the need to manage the pace with which funding costs increase, there are some very important discussions to be had and some crucial decisions to be made.
On the one hand, if you don’t really have
a liquidity challenge, then why pay up for hot money? Institutions with tighter liquidity, on the other hand, have a little bit of
a different dynamic to work through.
Matt Pieniazek, President, Darling Consulting Group
“The yield curve is so flat and the long end of the curve has not moved up, so institutions have not been able to increase loan offering rates to any degree,” Hauck says. “At the same time, however, they’re starting to have to pay up for deposits and that’s putting pressure on margins, and it’s probably going to continue to happen for a while.”
Even if paying up for deposits may seem inevitable, however, few institutions have
shown a willingness to fire the first shot in what promises to become a very expensive battle ahead. Because once those costs start to rise, there are going to be some difficult decisions to make.
“In the past year, market rates have gone up 100 basis points, but if you strip away the large institutions, the typical cost of funds at the average community institution has not gone up much at all – they’ve gotten away with it because of the herd mentality that nobody wanted to be the first out of the gate to raise deposit rates,” Pieniazek explains. “But that balancing
act is going to get a little bit tougher each time the Fed raises rates, and ultimately the business issue is going to come down to an institution’s willingness to accept some deposits leaving – especially
when the higher probability is that those deposits that are most rate-sensitive
are going to be the ones to leave. On
the one hand, if you don’t really have a liquidity challenge, then why pay up for hot money? Institutions with tighter liquidity, on the other hand, have a little bit of a different dynamic to work through. How
do they attract incremental deposits while minimizing the cost of cannibalizing what they already have? It’s a balancing act of growing deposits and managing overall funding costs.”
“The primary risk is paying too much for the deposit – it’s that simple, really,” adds Hauck. “You have to look at the impact to the bottom line. Is the institution raising deposit rates to match competition, or is
it raising rates because it really needs to gather those deposits? Some institutions with excess liquidity may not have to match their competitors, so they can actually let some of those deposits run off.”
FORECASTING WINNERS AND LOSERS
The institutions that figure out how to
best manage that balancing act of growing deposits and managing funding costs will be the ones most likely to come out of this war in a better position than they went into it. But what are the critical considerations they need to be making now, before the fighting gets underway in earnest, in order to emerge victorious?
“Right now, it is important for institutions to review their pricing strategies,” Perry believes. “Particularly for community institutions, the rising cost of funds could be a bit of a ticking time bomb, which is why they should be looking at their deposit stability. For institutions with high costs
of funds already, hot money, for example, tends to undermine depository franchise value since the value to the depositor stems from the rate paid, so lowering the rate could be a viable strategy should the institution have the liquidity to spare. The deposits could turn out to be stickier than modeled and, if not, they may not be worth the cost anyway.”
Regardless of how they approach the deposit questions, however, Hauck says one thing is certain – this is definitely roll-up- the-sleeves time for institutions.
“Since the recession ended, we’ve
seen fairly significant non-maturity deposit growth in a historically low-rate environment,” he says. “Institutions haven’t had to market their deposit products in order to see deposit growth. That trend is going to have to reverse
– they’re going to have to be more aggressive in gathering core deposits, instead of just opening up the doors and having the money roll in.”
Ultimately, however, while deposit
studies, liquidity concerns, marketing plans, and even emerging technologies will all certainly play some role in how an institution chooses to gird itself for the competition for deposits to come, Hauck believes that one of the most effective weapons in this war will be something that community institutions have long valued and long fostered as a key element of their business model.
“The institutions that are gathering deposits are benefiting largely from their relationships, and from having qualified
and capable staff who can aggressively go after existing customers for more deposits,” he says. “Rate is not necessarily going to be the primary driver of deposit generation going forward – it’s going to be those customer relationships.”§
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üA LIQUIDITY TO-DO LIST
Given the fluidity of marketplace conditions and the unique challenges strategies for larger-balance depositors and more mass market- facing each individual institution, there’s no one standard piece oriented customers, always keeping in mind the marginal costs of advice to fully address every liquidity situation. But there are a associated with those pricing strategies.
number of general guidelines most institutions would be wise to
observe as they look to avoid getting caught up in a deposit war and instead solidify their liquidity planning for the remainder of 2018.
üTAKE A DEEP DIVE INTO YOUR DEPOSIT BASE
Where is the rate-sensitive money in your existing base? If the answer is “the same place it was the last time we saw significant movement in rates,” then it might as well be “we have no idea” because the market has changed so dramatically since the last meaningful rate increases. In other words, it’s probably time to take another look.
“From an operational perspective, you have to get your arms around what you already have and have a very specific, delineated game plan for how you’re going to handle your larger and mass market customers,” explains Pieniazek. “Make sure your board is behind that philosophy, then get that story out to everybody in the organization, because the objections aren’t going to come from your ALCO – they’re going to come from your lenders and your call center and your branch employees.”
“If you look at the growth in the industry as we’ve come through this long, protracted, gradual recovery, the growth in balances at those institutions that are still around has been well above average,” says Matt Pieniazek. “The irony is that these institutions don’t have any experience for how the vast majority of the money sitting on their balance sheets today has behaved or will behave in a sustained rising-rate scenario – they don’t have the history. The whole world has changed and there’s a lot of uncertainty, without even getting into the impact of technology and the pent-up demand for higher rates and the ability of customers to get instantaneous information about almost anything. So now is the time to take a deeper dive into that deposit base and try to figure out where that potentially rate-sensitive money is hiding.”
“There’s a fear among regulators that deposits are going to go away and institutions are going to be in a situation they’re not prepared for,” adds Christine Mills. “This is why it’s so important for institutions to really understand their depositors. If your deposits have grown 20% since your last deposit study, you probably don’t have as clear
an understanding of your deposit base as you think you do – the information is not as granular as it needs to be.”
üFORMULATE A VERY SPECIFIC OPERATIONAL PLAN Understanding your deposit base is only step one in a two-step process – that information is only as good as what you plan to do with it. Now it’s time to take that information and develop very specific
From deposit pricing and promotions/marketing plans to funding sources and documentation, a contingency liquidity plan should encompass enough detail to provide the clearest possible idea of how things will play out should a crisis arise. This isn’t just good practice for the regulators, of course – it’s a great way to keep your team informed, up to date and on the same page.
“In many cases, the contingency plans we see just don’t have enough meat to them – the actionable items, who’s in charge, etc.,” Mills says. “Liquidity is extremely dynamic and fluid, so you have to have a system for determining the severity of a potential liquidity event, how you’re going to determine that it’s coming and how you’re going to react to it. The biggest migration since before the financial crisis is that you used to have liquidity policies that were really short. Now you see policies that are forty pages long because you really have to spell out everything you’re going to do in explicit detail. That’s a big challenge in this environment.”
“A good contingency liquidity plan creates a moving picture,” adds Pieniazek. “It shows how a liquidity crisis could materialize or unfold – to what degree that could happen, how quickly that could happen, what about the institution’s business model and customer base could cause that to happen. So you see the preemptive measures that would need to be executed to deal with that. Most plans tend to underestimate what could happen, and overestimate how many friends the institution will have when the unexpected occurs.”
WHEN IT COMES TO CONTINGENCY PLANNING, MIND
FMS forward | MARCH/APRIL 2018 | 15
16 | FMS forward | MARCH/APRIL 2018
BUILDING A DREAM TEAM
WITH THE UNEMPLOYMENT RATE AT ITS LOWEST LEVEL SINCE THE RECESSION, FINANCIAL INSTITUTIONS ARE FEELING THE HIRING CRUNCH.
“Often companies don’t think about what should make great candidates want to work for them – and stick around after they start,” says Alison Green, a management expert who runs the popular Ask a Manager blog. “That means getting back to the basics, like offering competitive salaries and benefits, but it also means having a culture that values transparency, feedback, accountability, positive energy and respect at all levels.”
Salary and benefits loom large in any candidate’s decision-making process, but employers can provide additional value with flexible schedules, great leadership and an environment that allows employees to fully disconnect from work when they’re off the clock. Nevertheless, the bottom line is often a candidate’s top concern – any employer who wants to not only attract but keep the best candidates will want to ensure they are paying well.
“It’s generally worth it to pay for top talent,” says Green. “The difference between having a high performer in the job versus someone who’s just okay can be dramatic.”
Not only can top talent boost profitability and morale, but getting a few good people in the fold can mean much less work for your recruiting team going forward.
“When you hire really great people, the word gets out,” says Perry. “Really great people attract other really great people, because everyone wants to work with them.”
STEP 2: KNOW WHAT YOU OFFER
Many organizations sell themselves short
by not putting enough time and effort into their job postings. A detailed posting will tell potential employees exactly what you have to offer, not just the basics of the position. When good candidates are in such short supply and most of them are already employed, you may need a level of salesmanship to pique interest.
“My advice is to always put your best foot forward,” says Perry. “If you’re in a small town, that’s a benefit to somebody. There’s someone sitting in a big fancy job in New York who’s tired of the commute, and would love the opportunity to maybe go skiing on
AS OF OCTOBER 2017, THE NATIONAL UNEMPLOYMENT RATE WAS 4.1%, THE LOWEST NUMBER SINCE 2000.
SOURCE: BUREAU OF LABOR STATISTICS
AMONG LEADERS OF FINANCIAL INSTITUTIONS, 51% SAID THAT ATTRACTING AND RETAINING TALENT WAS A CHALLENGE.
SOURCE: FMS RESEARCH 2017 EMPLOYERS IN 2018 ARE
PLANNING TO HIRE 4% MORE NEW GRADUATES THAN IN 2017.
SOURCE: NATIONAL ASSOCIATION OF COLLEGES AND EMPLOYERS
61% OF RECRUITING TEAMS EXPECT TO HIRE MORE PEOPLE IN 2018 THAN THEY DID IN 2017.
SOURCE: INDEED EMPLOYER OUTLOOK 2018
Once upon a time, hiring teams could post a job description online and have more than enough qualified applicants beating down their door. These days, they’re often posting to crickets. And the dearth of able and interested talent only intensifies when
trying to fill important executive positions and high-demand IT posts, or when staffing in regions with higher costs of living.
Every institution faces its own unique challenges when it comes to hiring, but while there’s nothing they can do to reverse the effects of a tightening labor market, there are steps they can take to optimize their searches and build an amazing team of qualified, happy employees.
The benefits of hiring the right people can
be enormous for an institution, according to David Perry, a recruiting expert and managing partner of Perry-Martel International.
“Effective hiring is at the core of what builds competitive advantage for all organizations, especially a small or medium-sized bank,” he says. “Companies with great executive talent significantly outperform their competitors on all fronts, so it should come as no surprise
to anybody that the competition for talent is fierce. When you add in globalization, attrition and changing demographics, the scarcity of talent has only increased.”
STEP 1: BUILD YOUR REPUTATION
While many institutions are devoting time and energy to building a strong brand identity meant to attract customers or members, not all are consciously building a name that will catch the attention of high- quality employees. In a candidates’ market, it’s a good idea to invest in building a name people want to work with.
FMS forward | MARCH/APRIL 2018 | 17
the weekends right around the corner who would find your position really interesting if you go out with a really well-crafted pitch.”
There are other things that organizations might not realize could be compelling to candidates, like the opportunity to build a project from the ground up or challenge themselves with a new technology or skill set. Often a great candidate would be willing to move to a smaller company if they can have a more hands-on role, or to a larger company if it means they’ll be able to work with cutting-edge technology.
“If you’re looking into blockchain, for example, that’s going to excite somebody,” says Perry. “If you can explain the technology stack they’re going to be working on, the new skills they’re going to acquire
by coming and working with you, this can attract the right people.”
“My advice is always
to put your best foot forward. There’s someone sitting in a big fancy job in New York... who would find your position really interesting if you go out with a really well-crafted pitch.”
David Perry, Managing Partner, Perry-Martel International
STEP 3: KNOW WHAT YOU NEED
Being honest with candidates is only one side of the equation – the organization also needs to be honest with itself by working to avoid two common pitfalls when filling
a position: not taking the time to examine how the position has changed since the last time it was empty and not taking the time to distinguish between wants and needs. Perry believes not taking the time to really examine the job description is the most common reason for bad hiring decisions.
“The most common pitfall is not spending enough time up front deciphering and agreeing on what you’re looking for,” he explains. “What happens in most organizations is when
they lose, for example, their vice president of IT, they take the job description that was written five years ago and they hand it to HR and ask for one of the same. Then they wind up with someone who fits the bill perfectly, but it’s the bill from five years ago.”
With change now unfolding faster than ever before, job descriptions should be reconsidered every time they’re used. And the higher one goes on the organizational chart, the more detailed the preparation needs to be.
“For any role over director, you really
need to sit down and put together a detailed SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis,” Perry says. “Once you’ve done that analysis of the role, it starts to paint a very clear picture
of not only the skills you need, but the experience you’re looking for and the kind of individual you want to attract.”
It’s also important to remind yourself what the word “need” really means.
“We often hire for things that are nice to have rather than focusing on things we must have,” says Green. “For example, we’ll overvalue a college degree when the work doesn’t require one, or experience with specific software when the right person could pick it up easily, or a preference for extroverted candidates when extroversion has nothing to do with doing the job well. You want to get clear on what you really need for the job.”
STEP 4: TAKE YOUR TIME (BUT NOT TOO LONG)
All of this analysis may lengthen a hiring process that already seems to take too long (analysis last year from Glassdoor put the average U.S. hiring process at 23.8 days),
but taking the time to find the right person
for the job is essential. The cost of hiring the wrong person can be high, with studies finding that employee turnover costs organizations anywhere from thousands of dollars to two times the salary of the employee lost. But Perry also warns against the flip side of desperation – taking too long. Sometimes hiring teams will find a person who fits the position perfectly, but still feel compelled to see more candidates.
“You really don’t have to keep looking if you’ve done the work to make sure you
have a solid understanding of what the
role needs,” he says. “Often people keep looking because they know in their gut that they didn’t do enough research to say with certainty that they’ve found the right person.”
STEP 5: BUILD A SOLID PROCESS
After taking a long, hard look at what the role requires and collecting some solid resumes, how can the institution best ensure that it’s choosing the right candidate once it hits the interview process?
“Make sure you see
the candidates in action. Have them do exercises or simulations that demonstrate what they’d do on the job. This is one of the crucial parts of hiring, and too few employers do it.”
Alison Green, Management Expert, Ask a Manager
“Make sure you see the candidates in action,” says Green. “Have them do exercises or simulations that demonstrate what they’d do on the job. This is one of the crucial parts of hiring, and too few employers do it.”
A good exercise will not only test for the exact skills you’re looking for, but will help separate candidates with style from those with the substance to demonstrate just how they would excel in the position. In fact, Green says, sometimes a candidate who didn’t necessarily nail the interview will really impress in a more hands-on test.
This process should also allow time for you to engage with candidates. In a market where talented employees often already have good jobs, it’s more important than ever to really understand what drives them, while also allowing them to get a feel for your institution’s culture.
“It sounds a little soft, but work is personal and to attract the best, you have to engage
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their heart,” says Perry. “You have to connect them to your cause, because they will want to understand the organization’s business goals, challenges, assumptions and blind spots.”
STEP 6: KEEP THEM AROUND
Given the fact that the best talent is often in high demand, you want to make sure that once you find a great employee, you keep them. The good news is that if you build an organizational reputation that attracts qualified candidates, the basis of that good reputation – competitive pay and benefits and a positive culture – will naturally encourage retention. Of course, a
big part of retention is having high-quality leadership, because shoddy management is often a dealbreaker for otherwise satisfied employees.
“It sounds a little soft, but work is personal. You have to connect [applicants] to your cause, because they will want to understand the organization’s business goals, challenges, assumptions, and
David Perry, Managing Partner, Perry-Martel International
“People might love what they’re doing, but if they’re working under a bad manager, they’re going to want to leave,” says Green. “Good management will set clear expectations, give frequent feedback, help people grow professionally and hold people accountable.”
In today’s job market, examining how welcoming your institution looks to potential candidates, weighing what you really need from new hires and taking the time to demonstrate a solid cultural fit can really pay off. After all, if an organization is only as good as the people behind it, making an investment in better hiring practices is certainly worth a top spot on your to-do list.§
How are the best banks making their organizations great places to work? Two FMS member institutions that made ABA’s list of
best banks to work for in 2017 share their perspectives on hiring challenges and successes.
SVP and Director of Human Resources
Montecito Bank and Trust
Santa Barbara, California Asset size: $1.3 billion Number of employees: 221
What challenges are you facing in regards to hiring?
We have a very limited pool of experienced talent in our market and geographical footprint. The cost of living in Santa Barbara County is 154% above the national average, which makes it very difficult to attract candidates from out of the area and hard to retain associates.
Are certain positions or departments harder to staff than others?
We have had challenges hiring for our
IT, marketing and risk and compliance departments, as we are looking for very specific experience. Hiring for lenders and financial analyst positions is also very challenging.
What challenges are you facing retaining employees?
While our retention is very strong, our top reason for associates leaving the bank is relocating due to the high cost of living, especially many who are just beginning their careers or are at mid-level positions.
What do you do to find and retain good employees and leaders?
We track our positions and candidate sources, and look at historical data to build the best recruitment strategies
for each position. We also offer formal development plans for career paths, create opportunities and time away for community volunteer efforts or board involvement, promote strong internal community, offer competitive salaries and present a full engagement program.
EVP and Chief Financial Officer
Prime Meridian Bank
Tallahassee, Florida Asset size: $350 million Number of employees: 70
What challenges are you facing in regards to hiring?
Our culture is everything to us, so we look for people who fit very specifically into that. We want people with an innovative mindset, and we value complete transparency. It definitely gets harder to keep the culture intact as we grow. It was easier when
we were smaller, but we believe we have a good opportunity to keep building on something special.
Are certain positions or departments harder to staff than others?
Not specifically, but when we hire, we can’t always get the experience we want, so
we look for the right mindset. Sometimes an experienced person will be unwilling
to learn new ways of doing things or have mental silos, but we can look for a person with the right mindset instead of a specific background.
What challenges are you facing retaining employees?
We’ve had some misses – people who didn’t like our culture. Some people want to do their job and be left alone, and that isn’t going to work here. You have to be a part of the team, and you’ve got to understand how what you do affects everybody else.
What do you do to find and retain good employees and leaders?
I think people like working here for more than just the salary, because they feel like they’re a part of something where they can really grow and learn. We are constantly educating. We put a lot of thought into who we hire up front, and it’s been pretty successful.
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State of the (Credit) Union
A Conversation with Rick Metsger
In this exclusive interview with FMS, the former NCUA chairman and current board member talks about the challenges facing the country’s credit unions and how his agency is evolving and transforming itself to better help address them
FMS: What do you see as the most pressing concerns for the credit union industry right now, and how is the NCUA working to help its institutions confront these challenges?
RICK METSGER: Cybersecurity has been a priority for the last
four years. In fact, we’ve been working to shore up our own internal defenses at NCUA, updating our sometimes antiquated assets so we can be a source of strength for the system. We’re also working hand in hand with other regulators and intelligence agencies to identify risks so we can alert the credit union community to those, and we’ve been working with the FFIEC to develop tools for both federal and state regulators and credit unions to use to test their defenses and evaluate their policies.
In addition, I am hoping Congress will give NCUA the same authority other federal financial institutions regulators have to supervise third- party vendors, particularly with respect to cybersecurity. With so many credit unions using – and sharing – vendors that provide these services, it’s important that we are able to know more about them.
But we’re also concerned about competition from unregulated or less-regulated financial intermediaries in the credit union space. We have to prepare for the possibility that new systems and platforms could bring as much disruption to financial services as Uber and
Lyft have brought to the taxi industry. We need to give credit unions the flexibility they need to respond to the realities of the economic marketplace without jeopardizing consumers, and that means we have to ensure there’s a level playing field for the regulated and the unregulated.
For example, there was a lot of concern in the credit union community over the CFPB’s proposed payday lending rule. But when the CFPB issued its final rule, credit unions learned that most of their concerns had in fact been addressed, and that the focus of the final rule was on unregulated or less-regulated payday lenders. So it actually helped credit unions by leveling that playing field. This was a competitive issue for which we had advocated on behalf of credit unions, and we will continue to do so going forward.
FMS: What are some of the key components of the NCUA’s proposed four-year regulatory reform plan, and what are some of the benefits credit unions can expect to see if they’re enacted?
METSGER: The plan is a point-in-time analysis, so things can change as facts and circumstances change. But in the near future, the goal of the plan is to modernize and streamline our loan limits, to eliminate portfolio limits on third-party servicing of indirect vehicle loans, to update the federal credit union bylaws to provide additional
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flexibility to credit unions and to expand field of membership opportunities so that credit unions can serve more Americans as a not-for-profit alternative. We also need to implement a number of previously adopted rules, such as our existing field of membership changes, the new appeals processes and the new rules for stress testing for credit unions with more than $10 billion in assets.
Our medium-term priorities include removing the prescriptive limits on loan participations as we have been moving more and more to
a principles-based examination system, simplifying and combining authority to purchase loans and other assets, and expanding the type of assets available for purchase, raising the non-member deposit limit, making it easier for low-income credit unions to use secondary capital and allowing alternative forms of capital to count for risk-based capital purposes.
These are some of the priorities that we think in the next few years we can certainly make progress on.
FMS: Where do you think the best middle ground lies for a risk-based capital rule that balances opportunity for credit unions and adequate protection for their members?
METSGER: Frankly, I believe our risk-based capital rule already balances the opportunities for credit unions and protection for their members.
I think it’s important to note that our rule completely exempts all credit unions with less than $100 million in assets, which represents more than three-quarters of all credit unions. The comparative rule for banks doesn’t exempt a single bank, even though there are more than 1,800 banks with less than $100 million in assets – they’re all subject to the rule, whereas only 25% of credit unions are. Further, under our rule, the risk weight for current secured consumer loans is only 75%, compared to the 100% risk weight for banks, and our rule doesn’t require the 2.5% capital conservation buffer that banks have to hold on top of their risk-based capital in order to avoid restrictions on their dividends and bonuses. So our rule is actually much more favorable for credit unions than the comparable rules are for the banks.
When the rule was adopted, we estimated that fewer than two- dozen credit unions out of more than 5,000 nationwide would have their capital drop from well-capitalized to adequately-capitalized, and those very few are outliers. If you examine their portfolios, they’re very different from their peer group’s portfolios. So we want outliers to hold capital commensurate with the risk on their balance sheets to minimize the risk of losses to the insurance fund that will ultimately be paid by all of the other well-run credit unions with less risky portfolios.
FMS: The agency recently closed the Temporary Corporate Credit Union Stabilization Fund and, at the time of this conversation, was anticipating potential distributions in 2018. Talk about how this came about and what factors played into the decision.
METSGER: The early merger of the funds was only made possible by faster-than-anticipated recoveries in the value of our legacy assets, and significantly greater-than-anticipated recoveries for the lawsuits that the NCUA filed on behalf of the failed corporates, which is really the lynchpin for all of this. While we won’t know the full cost of recoveries until the last of the legacy assets are sold, we do project there will be recoveries that will allow the insurance fund to pay distributions to credit unions. But it’s important note that this based on projections, and things could change between now and 2021 when the last of the NCUA Guaranteed Notes mature.
It’s also important to note that every dime of special assessments that credit unions paid to resolve the corporate problems was spent during the resolution process, and the only reason that a future distribution may be possible is because of the billions of dollars
in recoveries from the lawsuits we initiated. Early merger of the funds only happened because Chairman McWatters and I, on a non- partisan basis, agreed that while we were not required to merge the funds until 2021 and not required to pay any distributions until 2022, we could do so without jeopardizing the safety and soundness of the insurance fund. We also knew that if we didn’t merge the funds now, there was a high likelihood that credit unions would have to pay share insurance premiums between now and 2021 to bring the insurance fund back up to its normal operating level. So it made sense with everything coming together at the right time to do it this way.
FMS: How do you feel the NCUA’s announced restructuring plan will allow the agency to better serve the credit union community?
METSGER: I think it’s going to right-size the agency and place our human resources where they’re most needed. It also will make a big difference in terms of future costs, since human capital is three- fourths of our budget.
The plan will consolidate all credit union services other than examination into the Office of Credit Union Resources and Expansion (CURE), and continue the overall reduction in staffing that began under the Exam Flexibility Initiative I created in 2016. It will also lower the ratio of examiners to supervisor-examiners by 25% – from 8-to-1 to 10-to-1 – and increase the utilization of specialized examiners for more complex credit unions. It also reduces our leased office space nationwide over the next two years by 80%.
The main area of expansion in this restructuring plan is investment in the infrastructure and systems that we need to do more of
our work offsite to minimize our impact on credit unions, while simultaneously allowing us to monitor their activity more quickly and efficiently. The overarching goal of the plan is to prepare the agency to oversee the credit union system as we think it will exist in ten or twenty years, rather than as it exists today.§
The NCUA maintains a list of cybersecurity resources and a link to the FFIEC’s cybersecurity assessment tool on its website at ncua.org.
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IN AN INDUSTRY MARKED BY INTENSE COMPETITION, A CREDIT UNION HAS FOUND A WAY TO STAND OUT. BY STAYING TRUE TO ITS VALUES AS A SUSTAINABLE, SOCIALLY CONSCIOUS INSTITUTION, SELF-HELP CREDIT UNION IS GREEN AND GROWING.
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What makes a financial institution stand
out from its competitors? From the biggest U.S. banks to small community credit unions, finding a way to truly differentiate your institution – not to mention finding a way to convincingly communicate that to customers and members – is an ongoing challenge.
For Self-Help Credit Union, a $680 million multi-armed institution with locations in California, Florida, Illinois and Wisconsin, that sense of differentiation – and the cause that drives it – is readily apparent. While many institutions may carve
out time and resources for community outreach or charitable work, there is no line between the day-to-day business and the overarching cause at Self-Help – the notion of being a sustainable, socially conscious financial institution is built into the organization’s DNA.
“There wasn’t really a moment when a light bulb went on and we shifted direction,” says Melissa Malkin-Weber, sustainability director at Self-Help. “It was actually a much more organic process.”
Over the past thirty years, Self-Help has grown to encompass a credit union, a community development finance institution, a real estate developer and an advocacy arm. As these arms have been added to the mix, each has bought into the cause—from the residential real estate team adopting an energy efficient program that allowed Self-Help to offer a price guarantee for homebuyers to the lending team financing biofuel businesses.
The defining moment for Self-Help, however, came when those individual efforts were unified. The first step towards a real systemic values change was when an internal volunteer team came together to discuss the different ways they were advancing the same causes. That team quickly realized that if Self-Help was serious about its sustainability efforts, the institution needed more than a few people taking a few hours out of their workweek. It needed someone who could devote all of their time and attention to these important projects.
“They raised funds to hire a full-time person on a two-year test run,” says Malkin-Weber.
“Having a dedicated staff resource makes sustainability much more intentional. It’s not an afterthought, and our environmental impact and ability to increase sustainability on various projects is baked in rather than added later. When it comes as an afterthought, it makes it more difficult and sometimes even impossible to incorporate.”
DAVID BECK, POLICY AND MEDIA DIRECTOR, SELF-HELP CREDIT UNION
Did it work out? Well, she’s still there – eight years later.
A FEARLESS LEADER
The benefits of having a full-time expert were quickly apparent to the credit union.
“Having a dedicated staff resource makes sustainability much more intentional,” says David Beck, policy and media director at Self-Help. “It’s not an afterthought, and our environmental impact and ability to increase sustainability on various projects is baked in rather than added later. When it comes as an afterthought, it makes
it more difficult and sometimes even impossible to incorporate.”
Having a staff member focused on the cause also gave that person the opportunity to build up a degree of expertise – not just
on sustainability and social justice topics, but institutional knowledge – and take
that information from one department
and disperse it to others. Malkin-Weber’s familiarity with both the inner workings of the credit union and sustainability projects means that she can deliver results more quickly than someone who might be looking at that information for the first time.
“Some of that expertise is regularly quantifiable cost savings,” Beck says. “Say we’re working on a real estate project
and we’re considering the upfront cost of additional environmental impact parts of the projects versus the payback and how long
it would take to get that payback. Melissa
is in a position to make that argument more lucidly than if the project manager had to go round up all of that information on his or her own – which would just be one more reason not to do it.”
It also means that Malkin-Weber is constantly seeking out new ways to advance sustainability and other social missions within the organization.
“The way the role is set up is intentionally very entrepreneurial,” she explains. “As sustainability director, my job is to figure out what’s possible and how to get it done with the resources we have. If we don’t have the resources I go out and find new resources, so it’s a very intentional scouting mission. My intention is always to start a project, start a process, start a system and then have it stand on its own two feet after we’ve worked out the kinks. But I’m able to devote the time and effort and bandwidth to get it standing, and that’s really important.”
THE VALUE OF VALUES
Self-Help gravitated to its cause as a natural extension of the institution’s values, but the benefits of a focused sustainability brand soon added up to more than just doing good for its own sake.
“We did the experiment for two years, and we counted every penny,” says Malkin-Weber. “And in those first two years, we had a really strong return on investment. The net present value was around $1.75 million – certainly much bigger than any of our salaries.”
Self-Help is very interested in backing up its mission with data, finding its “green lending,” for example, to be one of the easiest metrics to track. Over the life of the organization, Self-Help has lent more than $350 million to sustainable organizations, businesses and projects.
“We are an organization of financial professionals who really care about
the numbers working, so we’re very sophisticated in terms of trying to make the
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numbers work,” says Malkin-Weber. “We prefer to invest in energy efficiency projects because the ROI tends to be terrific.”
On the investment side, Self-Help has found that there is a real demand among young people for financial institutions with values that align with their own. Many customers, for example, have moved to take their money out of institutions that support controversial projects like pipeline construction, and
are eager to move to institutions that are investing in their community and not investing in fossil fuel extraction. Here again, Self-Help notices particular interest from Millennials, a demographic that many financial institutions have found to be downright elusive.
“We bring in a lot of depositors and investors because of our mission,” says Annie McShiras, an investment associate from the federal arm of the credit union. “We’re very explicit and unapologetic about that mission. We put it front and center, and it brings in people who are mission-aligned and certainly
“We’re very explicit and unapologetic about our mission, and it brings in people who are mission-aligned, and that means a lot of young people, a lot of Millennials...but it runs the gamut. It’s not just younger people.”
ANNIE MCSHIRAS, INVESTMENT ASSOCIATE, SELF-HELP FEDERAL CREDIT UNION
that means a lot of young people, a lot of Millennials, because the idea of making your money work for your values is popular among the younger crowd. That said, it runs the gamut – it’s not just younger people.”
Self-Help finds that its sustainability and social justice focus brings in not only excited members, but passionate employees as well.
“From my perspective, our sustainability focus has been incredibly helpful in recruiting and hiring,” Malkin-Weber says. “Staff is an incredibly important resource to us. Every summer we hire interns and we always get an avalanche of applications from people who
want to get in on a career that matters and reflects their values. I think if you can offer that intangible, it really matters to people.”
THE RISK OF TAKING A STAND
The downside of all this might be obvious. A cause that is so attractive to some is often alienating to many others – a certainty in both the environmental and social justice movements. However, Self-Help believes environmentalists in particular are looking to improve the dialogue around their cause.
“The traditional old-school split between environmentalists and development folks is a tension that environmental advocates want
SUSTAINABILITY AROUND THE WORLD
Sustainability in banking isn’t limited to U.S. institutions like Self-Help Credit Union – it’s a movement that is making waves internationally as well. Rong Zhang, the International Finance Corporation’s senior policy officer in sustainability and the global coordinator for the IFC’s Sustainable Banking Network, says sustainable banking is enjoying big success in emerging markets around the world.
“Right now, we’re in 34 countries representing 85% of banking access in emerging markets,” she says. “At the beginning of 2012, ten countries individually started working on policies and initiatives to support banks in their countries and take on sustainable banking. They were all working with the IFC in their individual countries, so we brought them together to create a knowledge network.”
This network primarily works with regulators and banking associations to set up policies that stimulate action from individual banks. Bringing different countries together allows them to compare notes and build on each other’s successes instead of constantly reinventing the wheel. The Sustainable Banking Network sees its mission as not just activism, but a smart business decision.
“In our view, sustainable banking is essential to future resilience and
competitiveness,” says Zhang. “At its core, the practice combines proactive environmental and social risk management with lending opportunities for green and inclusive sectors. The growing trend of lending to green sectors and projects is not only opening new opportunities, but there’s evidence that green lending is more profitable than conventional lending.”
A success story from the network’s annals: a small and relatively unknown bank in China joined the initiative and identified going green as its primary differentiation strategy in its market. Now, Zhang recounts, it is a top ten Chinese bank.
“They went from not even showing up in the rankings to top ten, all because of their green strategy,” says Zhang. “Their green lending produced both more money and environmental benefits. This is one of the most profitable banks in Asia, not just China. They have the tangible proof of the success of sustainable banking.”
Zhang says this is the perfect time for any bank to take on a sustainability initiative. Enough financial institutions have paved the way that organizations have a clear blueprint for success.
“It doesn’t matter where you are now,” she notes. “It’s about progress and taking the knowledge and examples of others and using them to accelerate action.”
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to get past,” says Malkin-Weber. “It’s no longer a fight between environmentalists who want to put an ecosystem in permanent protection and keep it safe and pristine and people who want to build and generate jobs right now. They want to see new models.”
Self-Help’s commitment to sustainability and opposition to fossil fuel extraction investments does not mean that the institution is interested in demonizing competitors with differing priorities.
“On the one hand, we advocate against abusive practices and call out those who are doing it in the hope that those practices will be reformed,” says Beck. “But on the other hand, we want to work with them and encourage them to do good work.”
The credit union doesn’t strike a harsh tone of condemnation, finding that groups one might assume would be alienated by a green message are friendly to them as well.
“Renewable energy specifically can feel kind of divisive on a national level,” says Beck. “But in North Carolina, where we do a lot of work, the policy environment towards renewable energy is led by conservative legislators who see the value of bringing that kind of investment to rural counties that haven’t seen an expanding tax base
in decades. The thread of conservatives
for clean energy is very strong in North Carolina. Making loans to solar farms would hardly alienate anyone.”
INVESTING IN SUSTAINABILITY
Institutions looking to move toward a sustainability focus may have trouble figuring out exactly where to start. Malkin- Weber has some tips.
“My starter recommendation would be to find an organization in their city or county or region that is advocating for sustainability,” she says. “The thing that I love about these is that you get to meet your peers. You find out what worked for other people, what didn’t work, what your regional resources are – if you have somebody in your Rolodex who’s already done it and can help you, that’s incredibly valuable.”
organization, enter a competition. Green organizations do business competitions for sustainability initiatives often, and many competitions will come with a checklist to kick off your project.
“Management is happy to get that recognition and a plaque and something to put in the company newsletter, and you get the experience,” she adds.
Perhaps most importantly, don’t get distracted by what Malkin-Weber calls “the green bells and whistles.” It can be tempting, for example, to buy products labeled “green” that cost more than the normal stuff and don’t actually contribute meaningfully to your cause.
“It’s a big mistake to overlook an energy program with your HVAC contractor in favor of things like handcrafted organic high-end dish washing soap,” she says. “Instead of talking to a vendor who’s marketing green things, talk to your HVAC person about how to be more environmentally sustainable by reducing your energy spend.”
But avoiding “green-washing” – the mistake of buying into flashy green products that don’t actually add up to meaningful change – doesn’t mean opting out of small, fun projects that increase buy-in among your team.
“We had the great paper smackdown that pitted floors against each other to see who could print the least,” says Malkin-Weber. “We put a bicycle bell next to the printer and anyone who printed had to ring the bicycle bell and embarrass themselves.”
In the end, whether the changes an institution makes are small or major, making sure that they’re true to the organization and its culture is the key to success.
“Every challenge is different, but I think
that getting anything done in sustainability is really similar to pulling off any other organizational change,” Malkin-Weber
says. “You have to identify how this effort is going to help the organization with its other goals. What’s your alignment? If the alignment’s missing, you’ve got a problem."§
Once the institution is part of a local
FMS forward | MARCH/APRIL 2018 | 25
WITHOUT A WELL-DESIGNED FTP FRAMEWORK, THE STORY OF HOW YOUR INSTITUTION MAKES MONEY MAY BE A WORK OF FICTION.
Every financial institution has a story it tells its shareholders, its board members, its employees, its regulators and the general public about how it makes money.
A well-developed and robust story requires an acknowledgment of how risk contributes to earnings, taking into account that in addition to credit risk, interest rate and liquidity risk also contribute to the level and volatility of earnings. This disaggregation of earnings into risk-related components (factor analysis) requires a well-functioning Funds
Transfer Pricing (FTP) process that quantifies the returns to taking and managing interest rate and liquidity risk. According to David Green, an accurate earnings attribution without FTP is simply not possible.
“Even at institutions that use FTP, if the organization doesn’t have someone running it who is dogmatic about accurate attributions, FTP processes will almost certainly be perverted to conform to the preconceived story of how the institution makes money – a story which is almost certainly at odds with the facts,” explains Green, the managing director in the financial services division of Exequor Group. “In effect, a fiction is crafted that makes executive management and shareholders feel good, at least temporarily,
but this fiction will lead to incorrect product pricing decisions and unsatisfactory strategic balance sheet management decisions.”
Green believes FTP is not as widely utilized as it should be throughout the industry for a number of reasons. Some institutions prefer operating under naive assumptions, however dubious, about how they make money, some believe FTP is a practice with which only
the biggest banks can or should concern themselves and some dismiss its importance because regulators have not mandated its use. Nevertheless, Green is steadfast in his conviction that FTP is not optional.
“It is incumbent upon executive management to understand how their institution makes
26 | FMS forward | MARCH/APRIL 2018
money,” he says. “Now that interest rates are moving, interest spread and margin dynamics are in play, and simply forecasting more of what happened in the previous
year will no longer work. A lot of financial institutions believe that FTP is a ‘nice to have’ or something that is only for big banks, but FTP is an essential profitability management tool for institutions of any size or charter
type because all depository institutions have interest rate and liquidity risk.”
Green believes that any financial institution that truly cares about how it makes money should keep the following five points about FTP in mind as it works to first understand and then tell its story.
FTP IS AN ESSENTIAL COMPONENT OF PROFITABILITY MANAGEMENT
Green says that without FTP, the earnings associated with interest rate and liquidity risk are embedded into product or segment
measures, leading to an underappreciation for how interest rate and liquidity risk contribute to earnings and, thus, overstated product and segment profitability. FTP allows an institution to evolve from essentially saying interest rate and liquidity risk have nothing to do with earnings to being able to disaggregate earnings into these important risk factors.
“What FTP provides is a means of extracting the risk-related earnings out of the various products and business segments and moving them into a central business unit – what we call the mismatch center – for which ALCO is responsible,” Green explains. “When
an institution does not use FTP, there is
no attribution of earnings to interest rate and liquidity risk. This means that earnings that should otherwise be attributed to
these risks are misallocated to credit
and operational risk, which in turn makes deposits and loans look more profitable than
they really are. In addition to more accurate product and segment profitability measures, having all of the interest rate and liquidity risk-related earnings in one bucket makes it is easier to manage these risks, and finance will find it easier to hold ALCO responsible for these earnings.”
GETTING EVERYONE ON THE SAME PAGE IS KEY
Green says that in most institutions interest rate risk and liquidity risk are measured by ALM (on behalf of ALCO), while profitability is managed by finance – these two balance sheet management functions are treated
as separate and distinct, with each using different data sets, different models and different behavioral assumptions. As a result, they are almost certainly out of sync with one another and, upon close inspection, tell very different stories about how the institution makes money. For FTP to function effectively, risk and profitability must be understood as one in the same problem.
FMS forward | MARCH/APRIL 2018 | 27
“It is not only a systems challenge – the need to implement a single modeling solution to meet the needs of both risk
and profitability management – but you have to have a very rich understanding
of what drives the behavior of all of the loans and deposits,” Green explains. “This requires not just extensive historical data, but also a robust and continuous dialogue between risk management and the business units. When FTP is not used or is poorly implemented, this dialogue is not productive and is most often evidenced by extreme frustration and continuous tweaking of FTP rules to achieve expected outcomes. But when FTP is well-functioning, the dialogue is enlightening because the role of risk is clear and irrefutable. More importantly, when FTP is well-functioning, product managers are immunized from the earnings volatility associated with interest rate and liquidity risk, which means that granular budgets and forecasts of segment and product performance have a much greater chance of being achieved. When strategies are put into place, the distinct role of credit, operational, interest rate and liquidity risk are clear.”
BE PREPARED FOR A WAKE-UP CALL AROUND THE STORY OF EARNINGS
Green says many of his clients tend to be surprised at the thin margins that are left in lending and deposit-gathering when they do an honest accounting of their interest rate and liquidity risk-related earnings.
“FTP clarifies the perception of earnings throughout the organization, so there is almost always some initial shock value when it is first put into place or is revised from previous constructions,” he says. “But once an institution gets over that shock, and appreciates that the resulting story
is much more accurate, it finds itself in a much stronger position to make important decisions around product pricing, strategic planning, capital management, capital allocation and performance measurement.”
Simply following the market assumes that the competition is good at risk-based pricing. Green is quick to point out that when the U.S. economy is growing at only around 3%, any institution that is growing its balance
sheet at a considerably faster pace must
be stealing business from the competition, often by lending at lower rates and raising deposits at higher rates. Earnings are often further boosted by short-funding the assets, i.e. creating a mismatch. Without FTP, there
is no way to understand the correct price for loans and deposits, nor is there any way to quantify how much the incremental mismatch contributes to the overall increase in earnings.
“If an institution isn’t careful, the short time of increased earnings will be followed by the reality of future earnings volatility and possible margin compression.”
DON’T WAIT AROUND FOR A
With so many regulatory demands requiring their time and attention, many institutions are hesitant to commit the resources to developing and operating a comprehensive FTP framework unless specifically instructed to do so by an examiner. But Green says even if the regulators aren’t demanding FTP
started moving, these organizations are going to be very confused about what’s happening with their P&Ls.”
SUCCESSFUL FTP STARTS AT THE TOP
Green won’t sugarcoat the effort required
to implement a comprehensive and well-functioning FTP framework within
an organization, especially one that is unaccustomed to such granular earnings analysis (e.g., where there is no distinction between volume and value). But he is equally adamant about the risk involved in trying to effectively steer an institution through its myriad earnings management challenges without the insights and clarity that FTP can provide. That’s why he believes the value of FTP needs to be embraced and proselytized from the very top of the organization.
“Earnings management is not a trivial problem to solve – it influences everything that the institution does, including performance management,” he says. “Because effective FTP will almost certainly
A lot of financial institutions believe that FTP
is a ‘nice to have’ or something that is only for big banks, but FTP is an essential profitability management tool for institutions of any size or charter type, because all depository institutions have interest rate and liquidity risk.
David Green, Managing Director – Financial Services Division, Exequor Group
(for now), any institution that desires a more thorough understanding of how it makes
its money should take the plunge – with or without a mandate.
“Because there is no regulatory requirement that institutions (outside of the SIFIs) utilize FTP – much less actually do it correctly – a lot of bankers have unfortunately decided that if the regulators don’t require it, then it must not be necessary,” he notes. “Possibly even worse, many institutions will say they’re doing FTP, but when you lift up the hood and look closely, they’re not doing it well; FTP methodologies are haphazard
or arbitrary. Now that rates have finally
challenge many long-held perceptions at the organization, the push for change must come from the top. This can be a challenge when management doesn’t appreciate
how interest rate and liquidity risk impact both the level and volatility of earnings.
An unfortunate result of post-crisis Fed policy is that most people in an institution simply do not understand how an increase in market interest rates impacts earnings. Despite the challenges, however, the CFO must understand the critical need for FTP and lead the charge. It takes a lot of work to get FTP right, but in the end it will most certainly provide extraordinary clarity around how the institution makes money.”§
28 | FMS forward | MARCH/APRIL 2018
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30 | FMS forward | MARCH/APRIL 2018
When the new tax reform legislation became law on December 22, 2017, financial institutions and other businesses immediately started scrambling to maximize any possible advantage from
the historic reduction in tax rates – and to make the necessary changes by the end of the year. But even several months into 2018, David Thornton of Crowe Horwath says there are several tax planning strategies for 2017 that institutions can implement right up through October of 2018. He notes upfront, however, that whether these strategies will work for a particular institution is dependent on a number of factors.
C-CORP V. S-CORP
The new rate is different for C-corporation banks and S-corporation banks. For C-corporation banks, the rate is reduced from a maximum rate of 35% (34% for taxable income below $10 million) to a flat rate of 21% for taxable years beginning after December 31, 2017. For S-corporation banks, whose tax liability is determined at the individual shareholder level, the maximum individual rate applied
to taxable income under the new law falls from 39.6% to 37%, and shareholders can claim a deduction of 20% of this income in determining their personal tax liabilities.
CALENDAR V. FISCAL
The other major consideration is whether the institution operates
by the calendar year or the fiscal year. Calendar year banks stand to gain maximum benefit from these strategies, while fiscal year filers will face different issues.
“For a calendar year bank that secures an extension of time to file its 2017 federal income tax return, these strategies can be applied as late as October 15, 2018 for C-corporations and September 15, 2018 for S-corporations,” Thornton says. “On the other hand, while fiscal year filers may still have time to adopt tax planning strategies that require action before the 2017 year-end, the impact of adopting the strategies is diminished because of how the tax rate reduction is applied to them.”
For example, assume a September 30th fiscal year taxpayer
wishes to secure a deduction for its accrued bonus in order to take advantage of the federal tax rate reduction. If measures are taken to secure this deduction on or before September 30, 2018, the bonus will be deductible in that fiscal year at the higher federal tax rate. However, the enactment of the rate reduction effective on January 1, 2018 retroactively reduces the taxpayer’s fiscal year 2017 tax rate to 24.53% for all taxable income earned that year (35% x 92/365 + 21% x 273/365). The tax savings may still be worthwhile, but will not generate a savings of 14% – that is, the full effect of the rate reduction from 35% to 21%.
DON’T MISS OUT WITH THESE 2017 TAX PLANNING STRATEGIES FOR 2018
FMS forward | MARCH/APRIL 2018 | 31
THREE 2017 STRATEGIES TO USE IN 2018
Note: In some cases, these strategies require the filing of an IRS
form 3115, Application for Change in Accounting Method, under the automatic consent procedures for filing that form; others simply require the desired treatment to be applied when filing the 2017 tax return.
1. Accelerated Fixed Asset Tax Depreciation
Maximizing the accelerated depreciation applied to fixed assets
is perhaps the most commonly available tax planning strategy
and is easy to apply. The standard tax depreciation schedules applied to personal property and land improvements (as opposed
to buildings and other real property) generally follow a declining balance methodology that significantly accelerates the tax depreciation deduction for these assets. In addition, even before the new law was enacted, a direct 50% write-off in the form of “bonus depreciation” applied to the cost of this property and certain qualified software placed into service during 2017.
However, under the newly enacted tax law, bonus depreciation has been expanded even further to 100% of the cost of qualified property placed into service after September 27, 2017 (unless a written, binding contract was in place to acquire the property on or before that date). Property qualifying for the 100% direct write-off includes all fixed
assets and certain qualified software with a tax depreciation life of 20 years or less. Building components and improvements generally do not qualify, but there is a fairly expansive exception to this rule for many interior buildouts of existing buildings.
Taxpayers may also continue to apply IRC section 179 to qualified fixed assets placed into service during 2017. This provision allows direct expensing of up to $510,000 of qualified property, but is phased out dollar-for-dollar to the extent that the sum of qualified property placed into service during the year exceeds $2,030,000.
Many taxpayers may also benefit from having a formal cost segregation analysis performed on building purchases, current construction projects and construction projects completed in recent years. The goal of these specialized services is to apply
an engineering-based approach to analyzing the cost of building acquisitions, construction and renovation in order to maximize the amount of costs eligible for bonus and accelerated depreciation. For purchases and construction projects completed in prior years, taxpayers are permitted to determine the cumulative effect of the retroactive re-determination of tax depreciation on these assets and deduct this amount in 2017. Please note that this retroactive
application requires the filing of IRS form 3115 under the automatic
consent procedures for filing that form and may have limited application to taxpayers currently under
2. Contributions to Qualified Employee
Tax laws generally permit a deduction in the current year for
contributions to qualified employee benefit plans that are paid on or before
the tax return is originally filed for that year. In order to qualify for 2017, the amount must
be designated as a 2017 contribution, must fall within the 2017 maximum deductible amount for the
plan determined by the plan actuaries and must also fall within all other applicable contribution limitations. This rule does not apply to non-qualified deferred compensation plans, such as those maintained exclusively for executive officers and
The deduction must be claimed on the originally filed 2017 tax return, so taxpayers may wish to extend the
2017 return to extend the payment date (to as late as October 15, 2018 for calendar year C-corporations
and September 15, 2018 for calendar year S-corporations).
3. Current Deduction for Loan Origination Costs and
Qualified Short-Term Prepaid Expenses
Many taxpayers already follow the favorable tax treatment of advance deductions for loan
origination costs and qualified short-term prepaid expenses. However, given the potential
benefit of deducting these amounts in 2017 at 35%
v. 21% in later years, now may be an opportune time to revisit this treatment to ensure it is being applied, or
to make the relatively easy fix if it is not.
Treasury Regulation 1.263(a)-4 provides a variety of guidance
on the correct timing for deducting certain intangible costs, including loan origination costs and certain short-term prepaid expenses. Under these rules, no capitalization is required
for employee compensation and allocations of overhead to taxpayer transactions. In addition, a de minimis rule allows a current deduction for all other allocable transaction costs if the average of such costs per transaction does not exceed $5,000. An exception to the de minimis rule applies for third-party commissions.
By applying these rules to loan origination transactions, most taxpayers would qualify for immediate deduction of their loan origination costs because these costs are comprised primarily
of allocations of employee compensation and overhead, and any other costs likely fall below $5,000 per transaction. Consequently, these costs can be deducted currently, notwithstanding the
fact that they are typically capitalized for book purposes. The
one common exception to current deduction is for third-party commissions paid for loan referrals (those must be capitalized and amortized for tax purposes).
These same Treasury regulations also permit advance deduction for qualified short-term prepaid expenses. To qualify, the prepaid item must have an original life of twelve months or less, must be fully amortized by the close of the following tax year and must meet the economic performance tests found within the Treasury regulations. There are also restrictions on the application of these rules to certain prepaid service and maintenance contracts. Nevertheless, prepaid insurance and prepaid regulatory assessments often present a reliable source of advance deduction under these provisions.
For those taxpayers who are not currently deducting these items (i.e., because they are following the book treatment), a retroactive change to avail the bank of a 2017 deduction for the cumulative effect can be applied. For loan origination costs, the cumulative effect deduction can only be applied to amounts paid or incurred in taxable years ending on or after January 24, 2002. However, most taxpayers would not likely have any amount still on their books from pre-2002 tax years anyway.
Claiming these retroactive deductions in 2017 requires
the filing of IRS form 3115 under the automatic consent procedures for filing that form and may have limited application to taxpayers currently under IRS examination. Here again, the form 3115 must be filed concurrently with the originally filed 2017 tax return, so taxpayers may wish to extend the 2017 return to extend the time for preparing and filing these elections (to as late as October 15, 2018 for calendar year C-corporations and September 15, 2018 for calendar year S-corporations).§
As always, please be sure to review the specific state tax laws and requirements that apply to your institution.
32 | FMS forward | MARCH/APRIL 2018
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