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Published by fmsdesign, 2018-06-22 18:36:38

FMS forward: July/August Issue 2018

julyaug_digital version




IN THIS ISSUE | The Habits of High-Performing Institutions | The Dangers of Ethical Risk


Proprietary Invictus
Analytical Data

Macroeconomic Data Third-Party Data

(RMBS, CMBS, etc)

Publicly-Available ank Capital
Bank Data Markets Data
(Call Reports, SEC filings, etc)


Loan-Level Data Invictus
Reconnaissance Data

George Dean Callas, Chief Revenue Officer & National Sales Director • [email protected] • (718) 219-0441 • 275 Madison Ave., 14th Floor, New York, NY 10016

Contents JULY/AUGUST 2018 | VOL. 2, ISSUE 4

forward, a publication of the 12
Financial Managers Society
1 North LaSalle Street 28 THE HABITS OF HIGH-
Suite 2225
Chicago, IL 60602-4003 PERFORMING BANKS | 800-ASK-4FMS
Imitation isn’t just a form of flattery
DANIELLE HOLLAND – it’s a great way to help steer your
President and Chief Executive Officer institution in the same direction
Editor and Director, 30 GROWTH FOCUS
Publications and Research Incoming FMS Chairman Steve
Consultant, Brand Marketing Fusco believes the challenges and
HILARY COLLINS opportunities facing the association
Specialist, Publications and Research mirror those of its members
Manager, Sponsorship and Meetings 32 THE HIDDEN RISK
Manager, Membership 28 While it may not get the attention
Layout and Design of interest rate or credit risk, the
negative potential of ethical risk can
2017-2018 be just as much of a threat
STEVEN M. FUSCO, CMA, CFM Features Departments
Vice Chairman
DARRELL E. BLOCKER, CPA MATCHMAKER Todd McCoy of the University of
Immediate Past Chairman Kentucky Federal Credit Union shares
As the M&A market heats up and his insights on the industry
Copyright© 2018
Financial Managers Society, Inc. institutions search for the perfect 8 70TH ANNIVERSARY
All rights reserved. partner, what should leaders be
looking for in a match? Technology has come a long way over

20 THE LIBOR-ATION the course of our 70 years – we take a
Plagued by years of scandal and look back at the changes

risk, LIBOR appears to be on its 34 FORUM FORESIGHT
way out – a move that has many
implications for financial institutions This year’s big event in Orlando was

24 ALARM BELL just the beginning – make plans to
join us in these exciting locations in
Fresh from the stage at the 2018 the coming years
FMS Forum, author and strategist
Chip Bell discusses the customer

FMS forward | JULY/AUGUST 2018 | 5


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.

Summer is coming in hot here in Chicago! We Space is filling up quickly, so if you haven’t
officially kicked off the summer season with registered yet I would encourage you to do so
the 2018 FMS Forum in Orlando, Florida. What at
a great way to celebrate the season with all of
you. It’s great to see how far the Society has Next up, the Financial Managers School on
come in 70 years, but the one constant is the September 9-14, 2018 in Madison, Wisconsin.
dedication of you, our members. I hope you all Designed specifically for bank and credit
enjoyed the Forum and walked away energized union CFOs, controllers, and others managing
and refreshed, with new strategies and the overall finance and accounting at their
knowledge — I know I did. As we all know, institution, the School offers a unique hands-
each season brings unique set of challenges on and group learning environment, that will
and it is our mission at FMS to ensure you are go beyond the basics of ALM theories. This
never alone in dealing with the challenges that one-week, ALM immersion program that will
effect our industry. We are here for you! provide attendees with the latest innovations
in asset/liability management. One of our
This summer we are thrilled to bring our popular events and for those that were able
members the FMS-AMIfs Institute on July to reserve your spot, I look forward to seeing
15-20, 2018 in St. Louis, Missouri. You’ll you in Madison!
discover a place where performance and
profitability management expertise exist As summer ends and we head into the
to help you build confidence in your skills. fall, keep an eye out for new professional
Attendees will learn about funds transfer development opportunities offered both
pricing, and capital and asset liability in person and online so you can choose
management. Additionally, sessions will offer what works best for you. Be sure to check
hands-on learning so that you can implement in regularly at for more
the strategies you learn in your organization. information. §

6 | FMS forward | JULY/AUGUST 2018


BY MARK LOEHRKE – a fact highlighted in our lighthearted what institutions need to be thinking about
look back through the FMS archives for when they consider today’s customers – to
Philosophers and poets from David Bowie this issue’s 70th anniversary spread. ensure that they don’t suddenly become
to Greg Brady have weighed in on its For example, some members may get a yesterday’s customers.
significance. Teenagers both anticipate it chuckle from a 1987 throwback image of
and dread it in equal measure. Companies in a stack of floppy disks (while others may But those aren’t the only places that
every industry have to deal with it. And in a be able to look around their office and change rears its head in this issue. In our
world where very few things are certain, it is glance at a similar stack still occupying a cover story, we examine the landscape
the absolute one thing that most certainly is. shelf or drawer), but everyone will be able surrounding one of the biggest changes an
to understand the power of that image institution will ever encounter – a merger or
Change. as a reminder of just how quickly and acquisition. Elsewhere, we take a look at the
dramatically technology has changed, and coming changes to LIBOR, and profile Steve
Change happens whether you want it or not. continues to change, in this industry. Fusco of SB One Bank (that’s a recent name
And nobody knows its power (for both good change, by the way, from Sussex Bank), who
and bad) quite like financial institutions, But as much as technology itself has takes the reins as FMS Chairman for the
where change refers to much more than the changed and transformed many of the coming year in a changing of the guard.
coins they’d prefer not to count and roll for tasks and practices within institutions,
their customers anymore, or the considerable an even more dramatic tech-driven In other words, without really intending
pile amassing in the communal office swear change has been unfolding on the other to do so, we ended up with something
jar (particularly around exam time). These side of the teller window – or, more of a theme issue centered on change –
days, there is very little of the same-old, accurately these days, the other side of perhaps an inevitable hazard in covering
same-old for banks and credit unions. the computer screen. In many ways, the this industry. Maybe that’s fitting, though,
bank customer or credit union member of as this issue represents the one-year
Technology, of course, has been one of the today is dramatically different than just a anniversary of our changeover from the old
most impactful change agents in financial few short years ago in terms what he or FMS Update newsletter to FMS forward
services over the past several decades she expects and values from a financial magazine. We hope you’ve enjoyed the first
institution. When Chip Bell spoke about year of this exciting new publication, and
this phenomenon in his keynote address we look forward to continuing to cover the
at the recent FMS Forum 2018, attendees issues that matter most to your institution.
likely appreciated his enthusiasm and
his way with a turn of phrase almost as You can rest assured that one thing that
much as they were a little bit spooked by will never change is our appreciation of the
what he had to say about the “customer continued support of the FMS membership.
revolution.” For those who didn’t make it to
Orlando, we caught up with Chip to find out Thanks, as always, for reading. §

FMS forward | JULY/AUGUST 2018 | 7


Bio in Brief

Todd McCoy

Title: CFO
Institution: VP – Finance and Risk
Management Institution: University of
Kentucky FCU – Lexington, Ky.
Asset Size: $761 million
Years in current position: 3
Years as an FMS member: 2

What is the single biggest
challenge facing your institution
right now?
Gathering deposits to continue our growth.
We’ve done really well lending money for
the last couple years, but we need funding
to continue. We can utilize the FHLB and
other sources – and we do, because they
offer a great service for us – but in order
to keep doing what we want to do, we
ultimately need the deposits.

And I’m not sure we can do it just on rate
anymore. We pay better rates than anyone
in our market, but it doesn’t move the
needle that much. National banks generally

You never know what you might be able
to bring in from somewhere outside
that could help move you forward.

8 | FMS forward | JULY/AUGUST 2018

pay less, yet their market share has been I really like my community, so working
increasing while the community institutions in a community financial institution has
have decreased. In a day where we can allowed me to grow in my profession
set up an account online and it’s easier and stay in my community.
than ever to utilize our services, deposit
accounts are still very sticky. When most
of our products are basically commodities,
it’s difficult to differentiate yourself to the
consumer and win the argument for them to
leave and come to you.

How has your role changed over the What do you like best about What roles outside of accounting
past five years? working in a community institution? and finance have you held and
As a member of our management team, I I really like my community, so working in a how have they helped you in your
spend more time in meetings and less time community financial institution has allowed current position?
with day-to-day accounting and finance me to grow in my profession and stay in I worked several thoroughbred horse
or risk work. I went to lunch a while back my community. Lexington is a great place auctions in college. Whenever I’m frustrated
with some former colleagues from my old to live, and I’m a Kentuckian through and with my job or my co-workers, I remember
CPA firm. They were discussing some really through – I love basketball, horse racing, back to those days getting up at 4:00 a.m.
interesting accounting treatment for a bourbon and fried chicken. So I’m fortunate and working in the stalls by 5:30 a.m. – and
factory client they were working with, and to have a great job right in the middle of I’m thankful I’m good with numbers.
I’d just left a meeting about the dress code where I want to stay.
for our new operations center. What do you like best about being
What advice would you offer to an FMS member?
Those days aside, being able to affect someone entering the banking or FMS gets great people to come in and
change for the institution on the days you credit union profession? provide the training, so it’s very worthwhile.
can is very rewarding. We’re constantly I would advise them to look into internal I wish I could fit more of it in. A close
re-assessing what we’ve done and what audit or risk. Regardless of what becomes second is FMS Connect. While I don’t want
we’re going to do, so reading and research of the branch (its death having been greatly anyone to have any problems, it does make
becomes a lot bigger part of the job, too – exaggerated) and/or changes to the sales me feel better knowing I’m not alone on
both about financial institutions, as well as channels, we’ll always need auditors and some of the issues!
other well-run companies or organizations. risk managers. If you can also code and
You never know what you might be able to understand cybersecurity, all the better, Where do you see the banking
bring in from somewhere outside that could since everything will continue to get more industry in 5-10 years? How do you
help move you forward. and more technical. Best of all, you can see it changing/developing?
learn all about the institution from those I would be very surprised if we don’t
Where do you expect to be positions, and set yourself up nicely for a continue to see consolidation, although
focusing most of your attention in long career. maybe at a slower pace as technology helps
the next two to three years? the smaller shops stay relevant.
In a word: efficiency. We offer a great What is the best professional advice
deal to our members and the University of you’ve ever received? Technology will continue to drive
Kentucky community, but we’ll have to keep An old boss once told me ‘most days we’re innovation, but I don’t think we’re within
getting better – and doing more with less overpaid.’ That is, if everything goes well, ten years of the obsolescence of our
– in order to be able to maintain it in the what do they need us for? You earn it on industry. There’s still value in the peace
face of competition from fintech and non- the days when problems come up and tough of mind we offer to the public as financial
bank competitors, as well as other credit decisions have to be made – things that can intermediaries. I don’t think the software
unions and area banks. But I think if we keep really change the course of folks’ lives. I companies will be willing to bite off the
doing what we’re doing and keep giving our think it’s a great perspective and it’s helped regulatory burden we carry. §
members a good deal, it will be through me when the big things have come along.
efficiency – both in terms of customer-
facing offerings for the members and back-
office savings.

FMS forward | MAY/JUNE 2018 | 9


Over the past seven decades of FMS, financial institutions
have developed and/or benefited from a variety of amazing
technological advances, from barcodes to cell phones to
personal computers. And with each new invention, life changed
– both at work and at home.
In honor of our 70th anniversary, we decided to dig through
the treasure trove of archival photos and articles in the
old FMS attic and take a look back at the many wonderful
innovations that have graced our industry over the years.

10 | FMS forward | JULY/AUGUST 2018

As customers keep talking about how they
want more technology, here’s hoping this
isn’t your response in 2018.

Floppy disks were once the pinnacle of
technology. Who could ever imagine storing
so much information in such a small space? The
floppy reigned during the 1980s and 1990s with
the rise of personal computers, standing as the
most effective way to distribute software – as our
savvy FMS members of 1987 well knew.

FMS forward | JULY/AUGUST 2018 | 11

The meaning of AI has certainly
transformed over the years. While
Star Wars still dominates the cultural
consciousness, AI has grown into something
more advanced than the voice recognition
they imagined.

Danger, Will Robinson! Low balance! Low
balance! Robo-advisers sound like a great idea,
but this might have been pushing things.

12 | FMS forward | JULY/AUGUST 2018

File under: same as it ever was. The latest
technology may have changed dramatically in the
last thirty years, but one thing has stayed the same
– it’s still expensive to keep up with the times.

The big chapter happening in
1988 was the unveiling of New
York-New Jersey’s electronic
bulletin board, which was
essentially the 1988 version of
FMS Connect. Wouldn’t you
love to travel back in time to tell
everybody about Facebook?

The more things change, the more they stay
the same. “Computer crime” is still very much a
concern for financial institutions, even if almost
all of the circumstances around it have changed.

FMS forward | JULY/AUGUST 2018 | 13



As institutions search for the perfect
partner, many factors play into
their long-term compatibility. What
should leaders be looking for as they
explore the M&A landscape?

14 | FMS forward | JULY/AUGUST 2018

It’s the heart of wedding season – warm friendly environment with the recent tax THE STATE OF M&A
summer nights spent pledging everlasting reform bill and regulatory rollbacks. While
love, eating cake, and dancing to old the tax bill may free up more capital to fund If the responses in a recent FMS survey
standbys from Frank Sinatra and the Village possible deals, it is the deregulation that are any indication, the M&A market is
People. But long before the celebration could introduce some bigger players to the heating up in 2018. When asked about
comes months of planning the event, making M&A pool. the importance of M&A as a factor for their
the arrangements and perfecting the details. institution’s growth, 12% more of the 400
“The most important change was this bill bank and credit union executives surveyed
The story is largely the same – albeit more that changed what constitutes a systemically deemed it either very or somewhat
analytic than romantic – on the corporate important financial institution,” says Steve important than in 2017. There was a
wedding scene. With prices rising, Jacobs, president of BCC Advisers, speaking corresponding drop in the number of
competitive pressures percolating and of changes to Dodd-Frank that were signed respondents who weren’t pursuing M&A.
technological concerns intensifying, many into law in May. “It raised the threshold at
institutions are surveying the M&A scene which banks are considered ‘too big to fail’ NOT PURSUING OR FIELDING ANY
to decide whether they want to spend the from $50 billion to $250 billion. This will M&A OPPORTUNITIES AT THE TIME
next few years flying solo or if it’s time to certainly encourage banks to make more
find a partner. acquisitions and be more active in the M&A 41%
Much like a good marriage, a good merger 30%
is a symbiotic relationship where both While institutions celebrate this much-
parties bring different and complementary anticipated relief from post-crisis rules, some PROSPECTIVE BUYER
strengths to the table, and ultimately are already seeing salutatory effects from 30%
are more successful together than either the tax reform bill passed late last year.
would be on their own. But much like a 40%
struggling marriage, it takes an unforeseen “Cutting taxes from 35% to 21% is really
issue in just one of the two parties to bring going to help the M&A market,” says Dan PROSPECTIVE SELLER
the whole relationship down. Therefore, Bass, managing director of Performance Trust 20%
institutions need to make a concerted effort Capital Partners. “Because banks are fully 24%
to be sure they’re entering the market with taxed, those savings are going to fall right
a deep understanding of their own strengths to the bottom line. The first quarter earnings CONSIDERING A MOVE WITHIN THE
and weaknesses, a clear idea of how to were very strong, and I expect we’ll see more NEXT 3-5 YEARS
identify the strengths and weaknesses of a of the same. That will really help.”
buyer or seller and a distinct understanding 10%
of their deal-breakers. However, these regulatory shifts have the 7%
potential to either encourage or squash the
BIGGER FISH IN THE SEA? M&A interest of smaller institutions. While 2017 2018
Merger and acquisition activity has saving money on compliance costs and tax Source: Community Mindset: Bank and Credit Union
been relatively strong over the past cuts may allow some smaller institutions to Leadership Viewpoints 2018 – FMS Research
few years, as institutions have keep competing, the advantage it could hand FMS forward | JULY/AUGUST 2018 | 15
consolidated in the wake of to larger banks might cancel that out.
flattening yield curves
and digital pressures. “With the tax law change and deregulation,
However, 2018 small banks will see that either they need
has created a to get a really good price, or they’re going to
uniquely stay independent,” says Scott Martorana,
merger- executive managing director of FinPro. “Small
bank M&A has been really active, and I could
see deregulation cutting either way.”

As digital transformation has become
necessary to success, technological
investments and cybersecurity concerns
have both become major factors in M&A
considerations. The resources required to

keep up with technological innovation may technological solutions, those without the As institutions migrate to onlineplatforms,

force smaller institutions without a strong resources or the know-how to implement a cybersecurity has become a key component

tech profile to decide whether they can suite of digital banking options may find that of M&A negotiations as well, carrying

confront the digital future on their own or if it’s time to sell. Martorana suggests they immense significance in the due diligence

they should look for a solid buyer. pick one of those options and really commit. process. Buyers now do well to thoroughly

evaluate the cybersecurity protocol and

“Again, this can processes of any

cut both ways,” Either look at selling now and strike while the potential acquisitions.
Martorana says.

“A small bank can iron is hot and the merger market is strong, “Cybersecurity has
use technology to or have a five- to seven-year plan for staying become a much
their advantage bigger factor – not

by seeing it as a in business and reinvesting in the company. just for banks but for
way of expanding all organizations,”
Scott Martorana,
their geographic Executive Managing Director – FinPro says Tom Cavanagh,

boundaries. If they’re vice president of BCC

a four-branch bank, Advisers. “It’s a huge

ten years ago they would have been mostly “It doesn’t really make sense for them to risk and potentially a huge cost should

limited to customers within a fifteen-minute hire new people and spend a lot of money there be a breach. So if you acquire a bank

drive of one of those four locations. That’s to implement technology if they’re not with faulty protocols, any past breaches

not the case with the benefit of a strong going to be in business for the next several become yours, and you may not know

digital presence.” years,” he explains. “Either look at selling about past breaches unless your audit

now and strike while the iron is hot and the process is robust.”

Of course, while small institutions willing to merger market is strong, or have a five- to

make the investment can significantly widen seven-year plan for staying in business and There are enough high-profile breaches in

their footprint with online banking and other reinvesting in the company.” recent memory to impress upon buyers and

DIY M&A? The majority of institutions looking to venture down the road of “Some deals can be set by social contact,” he says. “They know the bank,
a potential merger or acquisition will seek out an advisory firm to they have a high regard for them, they have a price in mind and if they can
help guide them through the process. And for most institutions, agree on a price, they’ll sign and turn it over to the professionals.”
the expertise and guidance of experienced advisors is well worth
whatever they pay. However, for some, taking on an M&A transaction However, Joshua Juergensen, a principal at CliftonLarsonAllen,
as a DIY project might just be a possibility. cautions that while there are some scenarios where institutions can
work through the intricacies of an M&A deal on their own, they could be
Howard Hagen has worked out of Iowa and the upper Midwest for missing out on other potential partners or getting slammed by taxes.
years, and he knows the area well. With a host of smaller community
banks – often family-owned and far below the national average asset “With an aging bank ownership base, there are a lot of options
size – Hagen believes this market is ideally suited to doing M&A on out there,” Juergensen says. “They may have options they haven’t
one’s own. considered. And on the sell side, they need to work with the right
advisors because there are significant tax ramifications that take
“These bankers are well connected with each other, and most of the place anytime you sell an institution.”
institutions are not publicly traded,” he says of these small, private
companies. “If you’re not public, you rely on your accounting firm In general, both Juergensen and Hagen agree that some smaller
and your law firm – those two working together can handle the vast institutions in small markets that have solid relationships with the
majority of your needs. There’s enough of that kind of activity that right people and who won’t run into any complex accounting scenarios
both the counsel and the accounting firms are well-versed in the ins are probably in good shape to try M&A on their own – keeping the
and outs of M&A.” commission they’d otherwise pay to advisors and instead shelling out
an hourly rate to their CPA and lawyer.
While Hagen specializes in the rural Midwestern market – the heart
of community banking – he surmises that for many small markets “Some community banks are more like small family businesses than
where community banks are well-connected to their peers, the same corporations,” says Hagen. “That makes a big difference in the way
principles will hold true. they approach M&A.”

16 | FMS forward | JULY/AUGUST 2018

targets alike the importance of a clean bill merger should begin taking steps to mitigate “There are several different considerations
of health when it comes to cybersecurity. those costs as soon as possible. with every institution,” Cavanagh notes.
There doesn’t seem to be any statute “Quality of assets, return on assets,
of limitations on data breaches, with “We have a lot of clients who negotiate efficiency, your market, how dynamic the
companies being called onto the carpet long contracts that have limited termination institution is, your growth prospects, what
after their customers’ data was accessed. costs,” Martorana says. “Even if somebody kind of costs savings can be implemented,
may not think they’re a seller, in the next your products, your employees – these are all
“Certainly we’ve all seen that criminals few years that might change, and your keys to maximizing value if you’re a seller.”
are becoming more creative, and termination costs can be prohibitive.”
everyone’s information seems to be more It’s a good time to sell, with prices rising
readily available,” says Cavanagh. “Some Bass suggests taking a look at all of your steadily and no new regulations to trip up
sellers are even doing their own internal contracts to see when they’re up for the approval process.
audits ahead of seeking a buyer to try to renewal as soon as you begin entertaining
“The overall price-to-tangible-book value
The overall price-to-tangible-book value has has been rising steadily,” Cavanagh says.
been rising steadily. In 2016 it was in the “In 2016 it was in the range of 1.3 to 1.4
range of 1.3 to 1.4 times book value, and times book value, and in 2017 it increased to
in 2017 it increased to 1.6 or higher. Now 1.6 and higher. Now that this legislation has
that this legislation has passed, there isn’t passed, there isn’t any question that it will
any question that it will continue to rise. continue to rise.”

Tom Cavanagh, One of the problems of such a strong
Vice President – BCC Advisers market is that sellers’ expectations can be
unrealistic. Some targets can have a hard
ease some of those concerns and give ideas about selling. If your contracts are time finding a buyer if they set their price
good buyers confidence.” all up for renewal in the coming year, too high, and some buyers can be caught off
it’s a perfect time to sell. Another trick guard by their sellers’ demands.
The concern comes from risk and of the trade is to work with vendors and
reputation concerns, certainly, but your counsel to see if you can modify the “As a buyer you need to know who you can
regulators are also bearing down on it. contracts in any way, as even a few changes buy and at what price, and if you’re a seller
Martorana notes that cybersecurity is can often go a long way in making your you need to know your buyers’ capacity to
one of the top regulatory concerns at the institution more attractive to buyers. pay,” Martorana says. “You may think you’re
moment, and rightfully so: “It’s top of worth so much money, but if there are no
everyone’s mind.” “In early strategic planning efforts, sellers likely buyers in your market who can afford
should go through and reevaluate all of that, you’ll never get that price. Certainly
SPEAK NOW OR FOREVER HOLD their vendor agreements to ensure they there’s also a difference between the ability
YOUR PEACE are current and they’re negotiated in the to pay and the willingness to pay.”
Perhaps the biggest potential deal-breaker best fashion possible,” Jacobs says. “If
between two institutions on their way down possible, you should get assignability Sellers can do a lot to attract solid
the aisle is the status of vendor contracts. clauses in vendor contracts, so it’s easier to prospects with cybersecurity audits,
handle the transition from seller to buyer. contract termination precautions and
“The number one cost in an M&A This generates goodwill leverage and the some of the other due diligence discussed.
transaction is contract terminations,” possibility of a premium for your institution.” Additionally, a solid deposit base is the
Martorana says. “Whether the core kind of sought-after attribute that will
processor or the loan system or any other THE DOWRY make any institution a good candidate to
vendor contract, sellers need to really Of course, price is a huge factor in any M&A fetch top dollar.
manage those costs and keep them down.” deal – often the biggest factor – and the
elements that go into determining what an “I think one of the biggest
Because of the immense cost of termination institution is worth are diverse and can vary shifts in 2018 is the
fees – often 80% of the remaining value of from bank to bank and market to market. focus on
the contract – any institution considering a

FMS forward | JULY/AUGUST 2018 | 17

I’ve had deals where the deposits and funding,” Martorana says. “For communicate what the combined entity is
board tells me culture the past ten years, from the crisis to mid- and then everyone needs to embrace it.”
doesn’t really matter to late-2017, those weren’t really a focus Having a cultural mismatch that results
and they just want the for many institutions because they were in not successfully combining the two
highest price, but when abundant, whereas now deposit competition institutions into a cohesive entity can take
I get them the highest is becoming fierce. Therefore, institutions its toll on both employees and customers,
price and they see it’s not with strong, stable, lower-cost deposit bases with many jumping ship. Changes in
a good cultural fit, we have become more valuable in this market schedules, titles or cultural norms can
end up selling for a little than they were two or three years ago.” alienate employees – and if employees bail,
less to an organization customers may follow suit.
that’s a better match. COMPATIBILITY IS KEY
No matter how important the right price “One of the biggest risks in a cultural clash
Dan Bass, Managing is and how big of a deal-breaker broken is the chance that you’ll lose top producers,
Director – Performance contracts can be, it may be the most but there are a number of options that
Trust Capital Partners subjective element of any deal that ends can help keep key people around,” Jacobs
up being the most important to its success: says. “Stay bonuses and other incentive
18 | FMS forward | JULY/AUGUST 2018 cultural fit. Experts agree that any time programs can keep top performers around
two institutions merge, a strong cultural at least through the transition period. If they
match is one of the most critical elements don’t stay during that crucial period, the
to a satisfactory final product. Yet the customers are negatively impacted.”
importance of a good fit can be something
that leadership doesn’t recognize until they While acquirers should certainly do all they
see a bad fit. can to keep key employees, they should
also take a strong stance against anyone
“I’ve had deals where the board tells me consciously undermining the new combined
culture doesn’t really matter and they just institution.
want the highest price,” Bass says. “But
when I get them the highest price and they “After the deal, you have communicate
see that it’s not a good cultural fit, we end that there’s only going to be one culture
up selling for a little less to an organization going forward,” Martorana says. “It’s not
that’s a better match.” going to be us-versus-them – it’s going to
be we-and-our. Make sure you’re meeting
Even when the parties realize how with the people on the other side of the
important culture is, it can be hard to find a deal as soon as possible to make sure the
good match. After all, there’s no eHarmony culture is communicated, established and
for banks and credit unions. ingrained across the entire new entity. And
if someone isn’t embracing the culture and
“I wish this were easier to pin down, but it’s acting in the best interest of the combined
one of those soft things,” Cavanagh notes. entity, they need to go. That may sound
“You can’t just read a document and do a ruthless, but they can become a cancer to
couple interviews and determine it’s a fit.” the culture of the new entity.”

While doing a couple of interviews certainly THE GUEST LIST & SEATING CHART
won’t cut it, extensive questioning with Much like a bride and groom plan out their
as many employees as possible about invitation list and put all their single friends at
operations, staffing, hours, flexibility, one table at the reception, smart institutions
management style, information flow, will plan out who stays and where they’ll sit
community involvement and more can help early in the process of a deal.
both parties get closer to a match.
“The more recent trend I see is that the
“The reality is that it’s hard to quantify, but next generation of bankers is not as deep
it can be the biggest asset or the biggest of a pool as it was ten or twenty or thirty
detriment to the surviving institution,” years ago,” Martorana says. “A lot of
Martorana says. “There isn’t one right people see M&A as an opportunity to get
answer, but you need to understand and the best talent from both organizations and


Credit union M&A has held steady over the past few years, and At other times, credit unions are pushed into mergers at the
the valuation experts at Wilary Winn LLC expect to see that urging of their regulators, who are noting either year-over-year
trend continue. losses, holes in succession plans, poor management or receding
fields of membership.
“Most credit union mergers have been smaller credit unions
consolidating,” says Doug Winn, president of Minnesota-based “If they’re incurring losses and depleting their capital level
Wilary Winn. “One of the reasons is probably the same as what and their operations are being hindered, regulators might tell
you’re seeing in the community bank sector – folks are having a hard them to look for a buyer,” says Katelin Hartman, a manager at
time earning enough with the flattening of the yield curve and the Wilary Winn. “Or sometimes their membership is largely runoff,
compression of net interest margin.” like when a large employer the credit union serves closes their
location in the area.”
Over the past several years, most of the deals have involved
acquirers subsuming much smaller credit unions, and Winn doesn’t Just as they face different reasons for merging in the first place,
expect to see that change any time soon. And while many of the credit unions often face different challenges after merging as well.
trends are the same for both banks and credit unions, some tend For instance, the cooperative model for a credit union makes it
to be more exacerbated in the credit union space while others are less likely that the merged entity will cut employees, which is why
entirely different. The very nature of credit unions creates its own making sure people get moved into positions where they’ll be most
strengths and weaknesses, since they’re more likely to have a effective becomes so important.
homogenous membership base than banks.
“In credit union deals, you can’t have two CFOs but they’ll offer
“Sometimes credit unions look into mergers because of their you a different job,” Winn notes. “They’re generally softer on the
membership profiles,” Winn explains. “You have credit unions that employee side than the average bank transaction.”
start as a particular employer segment and their members are older
and aren’t taking out loans and are investment-heavy. Conversely, Cultural consensus is just as important to credit unions as it
you could have a credit union where the membership is young and is to banks, and merging institutions should give thought to
doesn’t have much savings and they need loans. So some M&A representation for the seller instead of just imposing a new culture
transactions are meant to balance out these types of things.” on them.

Another consideration unique to credit unions is the fact that “When the institutions are more equal, the credit union being
some mergers are motivated by institutions looking to broaden acquired is more likely to have board representation, but when
their charters. Sometimes growth is made difficult by a restrictive they’re very small sometimes they don’t,” Hartman says.“For
charter, and acquiring a different kind of credit union can open credit unions that are proportionally much smaller than the
those doors. acquirer, we believe it’s important to set up an advisory
committee to make sure that the smaller organization doesn’t
“When you merge, you get the rights to their charter, and you get lose its voice.”
the right to serve their members and their segment,” Winn says.
“Some institutions want to acquire a federal credit union so they By finding a partner with complementary strengths and finding
can have more rights and services, or sometimes an institution ways to bring the culture of the smaller institution into its larger
will want to acquire a state charter so they can serve a larger acquirer, credit unions can create a happy union that gives
geographic region.” everyone cause to celebrate.

FMS forward | JULY/AUGUST 2018 | 19

bring them together. For example, maybe given market or given service that can help you “This deregulation may provide an even
you don’t have a strong CFO, but this target build a more profitable institution.” greater opportunity for community banks to
does, or you don’t have a strong lending thrive as they provide better service to their
group, but this other bank does. When you It can also be an opportunity to revisit your customers,” he explains. “At the same time,
combine, you can take the best of both succession plan. Martorana recalls a deal it is critical that they are large enough to be
entities and move people to the positions for where the CEO of the target became the able to provide the technology expected by
which they’re best suited.” president of the organization, with the plan today’s customer.”
being that in two years when the current CEO
The reality of it is that retires, he will take his seat at the head of Similarly, Bass sees the landscape not as a
because the labor the company. zero-sum game, but as a move up the food
market is so tight, it’s chain for all who can survive.
difficult to find highly “You can use M&A as a way to overcome
skilled folks in lending, your weaknesses and value detractors,” “These regulatory changes should help the
investments and Martorana says. “Finding qualified people M&A market because it will bring more large
other key operational is one of the most important issues in buyers to the equation,” he says. “Larger
departments. You banking today, because banking is a buyers looking at midsize banks between $5-
either have to find people-based business.” $20 billion can increase the prices of those
a key employee at a potential sellers. Those potential sellers,
competitor, or maybe COMPETITIVE LANDSCAPE in turn, can use that richer currency to buy
you look into acquiring Competition – whether from fellow smaller banks.”
someone who has a institutions or fintech startups – has become
stronger presence in an enormous challenge for institutions. HAPPILY EVER AFTER
a given market or a Regulatory relief and technological Entering the M&A market knowing what
given service that can advancement may allow struggling small you’re looking for and what you have to offer
help you build a more institutions to make it on their own for a give you a head start in finding your perfect
profitable institution. few more years, but it won’t be easy. If their partner. Doing your homework will help you
competitors enjoy the same benefits, it may to not only put together a deal that goes off
Steve Jacobs, President end up being a zero-sum game. without a hitch, but to create a partnership
– BCC Advisers that is successful for years after the
“It’s a competitive environment and it’s only honeymoon glow wears off…as long as you
In a market where organizations are having a getting more competitive,” Martorana says. both shall live. §
hard time filling executive and tech positions, “Sellers are getting higher multiples than
employees may be forced to take on roles they’ve gotten in many years. The little guys
outside of their bailiwicks. An acquisition are looking at that and wondering if they
is the perfect time to ensure that the best can compete if some of these regional banks
person for each role is in the right place by become super-regionals.”
right-setting bad matches between skills and
position. On the other hand, Jacobs predicts that if
regionals become super-regionals, they will
likely move upstream in terms of loan and
transaction size to compete with the big
banks. This will allow opportunities
for smaller banks to pick up the
customers who fall below that
increased size limit.

“The reality of it is that because the labor
market is so tight, it’s difficult to find highly
skilled folks in lending, investments and other
key operational departments,” says Jacobs.
“You either have to go find a key employee at
a competitor, or maybe you look into acquiring
someone who has a stronger presence in a

20 | FMS forward | JULY/AUGUST 2018


Faced with retirements and attrition at the top of their org charts,
small banks often view M&A as a default succession plan. In fact,
Dan Bass says it’s the number one reason behind most of the
acquisitions he’s worked on.
“There have been nineteen M&A deals in Texas in the last year, and
I’ve handled five of them,” Bass says. “And every one of them had to
do with succession planning issues. It’s sad in a way.”
Bass says his deals have fallen into two categories – banks
chartered after 2000 that were always planning on selling,
and smaller family-owned banks in rural areas where the next
generation was either unwilling or unable to take over. For the
newer banks, they never planned for succession because they
thought they’d sell before it was an issue. For the family-owned
banks where no one wants to step up and run the bank, it can be
difficult to find a viable outside candidate.
“Even in institutions that aren’t family-owned, they’re looking for a
candidate who’s willing and able to take the reins, or they’re going
to sell because they don’t think they can promote someone or recruit
someone to fill the CEO’s shoes,” says Scott Martorana.
In other words, viewing M&A as a succession plan when other
avenues dry up is a trend that is unlikely to slow down anytime soon.
“You’re going to continue to see this for a number of reasons,” says
Steve Jacobs. “For the most part, these institutions are not profitable
enough to pay to have a strong bench, or they’re in a position where
it’s become very difficult to deal with compliance requirements.”

FMS forward | JULY/AUGUST 2018 | 21


Plagued over the years by scandal and risk, LIBOR appears to be on its way
out. What does that mean for financial institutions?

22 | FMS forward | JULY/AUGUST 2018

Since 1969, the London interbank offered rate – or LIBOR – has served billions of dollars in fines and people went to jail for quoting LIBOR
as a reference rate for how much banks charge to lend to each other, but incorrectly, so in today’s situation where you can’t observe a lot of
now over $300 trillion in financial assets are tied to that rate. A standard trades and the regulators are requiring you to quote LIBOR, there’s a
index by which unsecured loans can be priced, the largest institutions lot of liability there.”
use it and the rate ripples down, affecting the entire industry.
The United Kingdom’s top regulator, the Financial Conduct Authority,
LIBOR was rocked by scandal during the financial crisis and seems announced in July 2017 that it would not continue compelling banks
likely to be phased out by 2021, as the Secured Overnight Funding to submit LIBOR after 2021. Thus it seems likely that after the
Rate (SOFR) promises to deliver a better way to price the mortgages, pressure from regulators is lifted, some banks will be happy to stop
commercial loans, bonds and other products that are currently providing their quotes.
underpinned by LIBOR without the issues that plague it. What will
change for financial institutions between now and 2021? “The bankers who are providing it feel that they’re exposed to undue
risk by providing these estimates,” says Jim Lutter, the senior vice
WHAT’S WRONG WITH LIBOR? president of trading and operations at PMA Financial Network.
“They think they can do this to the best of their ability in good faith,
The major problem with LIBOR was clearly exposed during the 2012 but if something derails somewhere they could pay. They don’t want
scandals – it’s easily manipulated. LIBOR is created by taking rates to be responsible for it anymore.”
submitted by a panel of banks, discarding the highest and lowest
rates and settling on the average of the remaining rates. During the WHAT MAKES SOFR DIFFERENT?
financial crisis, some of the banks on this panel conspired to submit
false rates, which was easy to do since LIBOR was not transaction- Once the UK regulator signaled that LIBOR would be phased out, it
based but rather just an estimate. became clear that a new benchmark was needed to replace it. Here
in the United States, the Alternative Reference Rates Committee
A second critical issue with LIBOR is one of scale. The three-month (ARRC) has been working to find a viable alternative since 2014.
LIBOR rate is widely considered the most important, but while $300 Looking to solve the problems of LIBOR – and worried that it has
trillion in financial assets are tied to LIBOR overall, less than $500 already begun to deteriorate as fewer banks borrow unsecured –
million in LIBOR trading takes place on a daily basis. ARRC launched SOFR on April 3, 2018. The biggest differentiator
with SOFR is that it’s based on actual transaction data from three
“The bankers who are providing [LIBOR] feel that repo market segments, thus solving two of LIBOR’s biggest flaws –
they’re exposed to undue risk by providing these it’s difficult to manipulate and there’s much more trading in it.
estimates. They think they can do this to the
best of their ability in good faith, but if something “In SOFR’s first few days, there was over $800 billion in trading a
derails somewhere they could pay. They don’t day in the repos that make it up,” Coffee says. “Contrast that to the
want to be responsible for it anymore.” $500 million in U.S. dollar LIBOR trading. It’s a massive difference
and a much more robust number.”
Jim Lutter, SVP of Trading and Operations – PMA Financial Network
While SOFR solves many of LIBOR’s problems, the shift to a new
“That $500 million of trading is the basis for pricing $300 trillion of rate comes with its own challenges. SOFR is a secured rate (as its
financial contracts,” says Meredith Coffey, executive vice president name makes clear), while LIBOR is an unsecured rate. Since LIBOR
of research and regulation at the Loan Syndications and Trading includes credit risk while SOFR is risk-free, LIBOR is expected to be
Association (LSTA). “That’s a lot of contracts being priced off of very higher. Institutions will need to determine a credit spread differential
little liquidity. Also, because there’s so little trading, many banks between LIBOR and SOFR in the next four years, which is bound to
aren’t trading LIBOR on a daily basis, but they still have to provide a present plenty of challenges.
LIBOR quotation.”
The overnight element of SOFR is likely to cause issues as well.
This raises the third issue with LIBOR. After punishment was doled There will be a degree of difficulty as financial institutions try to
out to LIBOR manipulators, bankers became leery of providing their calculate compound terms from daily rates.
LIBOR quotations, most of which were still based on their expert
judgment – which was basically their best guess. “LIBOR has a term curve,” says Coffey. “The ARRC plans to develop
term curves for SOFR over the next four years so that we have one-
“There were obviously a lot of allegations of LIBOR manipulation week, one-month, three-month rates, and so on. Right now we don’t
during the financial crisis,” Coffey says. “There were tens of have any of that – just the overnight rate.”


Some institutions that don’t use LIBOR may be wondering what
all the fuss is about. However, the gravitational pull of this

FMS forward | JULY/AUGUST 2018 | 23

“In SOFR’s first few days, there was over $800 WHAT SHOULD YOUR INSTITUTION BE DOING RIGHT NOW?
billion in trading a day in the repos that make it
up. Contrast that to the $500 million in U.S. dollar While 2021 may seem far away, financial institutions should
LIBOR trading. It’s a massive difference and a be taking steps now to get their affairs in order well before the
much more robust number.” LIBOR shift.

Meredith Coffey, EVP of Research and Regulation – Loan “The most important thing for parties to do right now to put themselves
Syndications and Trading Association in the best position is to take a look at their current contracts and
legacy documents to see what fallback language is provided,” says
benchmark rate is strong, and everyone is likely to feel some Tess Virmani, senior vice president and associate general counsel of
effects from its disappearance. LSTA. “They should also see what amendment flexibility they have.”

“It truly impacts everybody,” Lutter says. “It’s going to have Institutions should also be taking an inventory of their LIBOR
ramifications for every asset size. It’s your pension funds, your exposure to understand exactly which of their loans, deposits and
mutual funds, your insurance companies, your Wall Street banks, contracts include LIBOR effects.
your lenders, your equipment leases, commercial papers, student
loans, bank deposits, mortgages, auto loans – it can touch any loan “Once they know where their LIBOR exposure is and what their
or deposit taking place. Any time you’re competing with the big current document language is, they can make an informed decision
banks, whether you call it LIBOR or not, you’re in essence pricing in on how quickly they need to act,” Virmani says. “It’s up to them
competition with institutions that are using LIBOR. By default, you’re to decide if they need to add in more flexibility now, or if they’re
correlating very closely to the LIBOR rates.” comfortable waiting until they know more about SOFR.”

Once (institutions) know where their LIBOR
exposure is and what their current document
language is, they can make an informed decision
on how quickly they need to act. It’s up to them to
decide if they need to add in more flexibility now,
or if they’re comfortable waiting until they know
more about SOFR.

Tess Virmani, SVP and Associate General Counsel – Loan
Syndications and Trading Association

Institutions risk creating a disconnect between themselves and their The benefit of waiting for a while if you can is that more and more
competitors – or even within their own structures – by not keeping information about SOFR is coming out every day. As more becomes
up with the shift. available, it’s likely that the language and response will evolve, and
institutions that can afford to wait a while will get the benefit of
“If you want to stay competitive you have to have market-based learning from those who went before them. To reap those benefits,
pricing,” Lutter continues. “Community banks and credit unions are however, institutions need to tune in to the leaders of the transition.
already responding and changing as rates rise and the LIBOR rates Coffey recommends following ARRC, the committee doing a great
change. They’re going to be pushed into it regardless.” deal of the heavy lifting on shifting to the replacement rate, and
an excellent resource for those interested in learning about SOFR
solutions as they emerge.

In the end, while SOFR attempts to solve the problems that became so
obvious with LIBOR, transitioning to a new rate is very much a process
that the market is only beginning to sort out. But by understanding
the basics, how it affects your institution and what you can do now,
bankers can stay ahead of the curve during this seismic shift. §

24 | FMS forward | JULY/AUGUST 2018

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26 | FMS forward | JULY/AUGUST 2018

THERE’S NOTHING A popular corporate speaker and motivator, Bell recently shared his
QUITE LIKE considerable knowledge and charm with attendees at the 2018 FMS
HEARING CHIP BELL Forum in Orlando. For those fortunate enough to be there, it was a
IN PERSON, WHERE keynote address that likely sent them home with plenty of ideas for
THE MAN’S INHERENT creating a better experience for their bank and credit union customers.
ENTHUSIASM AND For those who couldn’t make it, however, Bell sat down for an exclusive
HOMESPUN WAY WITH interview with FMS to share a few additional thoughts on the changing
AN ANECDOTE CAN customer landscape and what he thinks institutions need to survive it.
SKEPTICAL AUDIENCE FMS: What are some of the key characteristics, trends
TO BELIEVE IN or behaviors that have lead to what you describe as an
THE POWER OF emerging “customer revolution?”
CUSTOMER SERVICE. CHIP BELL: Customers have been changing rapidly, and there are
three things that are driving them to be different. First off, customers
today have a lot more choices, so they tend to look more at the
experience they get from an organization in order to make a purchase
decision. We’ve come so far that these days customers just assume
they’re going to get a quality outcome or product, so if an institution
that delivers a poor outcome is not going to get to stay in business –
that’s a given. Second, customers assume they’re going to get that
product or service at a fair price; if you gouge in the marketplace,
you don’t survive. Finally, as a result of those assumptions regarding
quality and price, the experience has become the differentiator. With
so many choices these days in financial services, customers now see
the experience as the driver of their decisions.

Customers today are a lot smarter than they used to be – they
have so much more information at their fingertips – and a lot of
that information relates to the experience they expect to have.
For example, if someone is planning a vacation, they’ll go online
to research the hotel they’re considering. But they’re not just
checking the price or the pretty pictures – they’re reading the
reviews to find out about the experiences that other people have
had at that property.

But I think the thing that has most changed customers today, and has
really fueled a ‘customer revolution,’ is the fact that they do get great
customer experiences in pockets of their lives, and they tend to use
those experiences to evaluate everyone else. So if your customer has
a great experience with the staff and the service at Disney World
on Friday, they’re already subconsciously subjecting your bank to a
standard of how they expect to be treated when they walk into the
branch on Monday morning. Maybe Disney versus a bank isn’t a fair
comparison, but that’s what’s going on in their mind. Or maybe your
customer calls FedEx for a package pickup and their call is answered
on the first ring and the service is friendly and efficient. What are the
expectations when they now call your branch? It goes down the line
like this – you’re being compared to every other experience they’ve
had, which means that everything is elevated. Research shows that
customer expectations are going up by around 30% every year, and
what’s driving that up is the culmination of the other experiences they
have in their lives.

Another factor in all of this is the fact that customers are much more

FMS forward | JULY/AUGUST 2018 | 27

powerful and influential than they’ve ever your frontline people – whether those are FMS: What specific issues or
been before. This changes the calculus of the your tellers or your phone or online support challenges do you think banks and
marketplace. Jeff Bezos from Amazon says in staff. You have to treat those people like credit unions are facing with regard
the physical world an unhappy customer tells scouts and show them how much you value to their customers, and how can they
six people, but in the cyber world they can tell their input in order to be sure they’re sharing best address them going forward?
six-thousand. So when the consumer has that with you the timeliest and most accurate
kind of reach, they’re far more powerful and information as to how your customers feel BELL: Particularly in financial services,
they can really have a profound impact on your and what they expect from your institution. where there’s obviously a great deal of
institution with just one post or tweet – and A lot of banks fail to properly tap this rich regulation, the systems and processes
they know it. resource for customer information. are all crafted around what the institution
needs, without always taking into account
FMS: What are some of the FMS: What can a company do to what that looks like through the lens of the
traditional customer service and transform its service experience customer. And banks and credit unions tend
engagement methods or practices into one that better reflects the to use regulation as an excuse for setting
that no longer work for companies attitudes and behaviors of today’s things up like this. But smart organizations
in the current environment? demanding customers? try to think differently about how they’re
going to serve the customer.
BELL: Most organizations think that if they BELL: It starts with deciding who you want
deliver good service, they’ll be effective in to be. Do you want to be a customer-centric If you were to ask people to name the best
the marketplace. But that’s changed. Good, organization or not? The first step is to make service-providing companies, how many
polite and friendly service is kind of no big the call to go in that direction because it’s the people would name a bank? How far down
deal these days. What people talk and tweet only way to remain competitive. the list would you have to go? To me, that
about now is whether the service they means there’s great opportunity for a
get is exceptional or unique or out of the From there, you have to secure the financial services company to up its game
ordinary. So the quest for a more innovative involvement of everyone in the organization and stop using the regulation excuse for
not providing a better customer experience.
We’re living in an exciting time right now, There are companies that are exceptions, of
and there’s no industry that’s going to course – there are places that are figuring
experience more of a metamorphosis in it out. But by and large, there’s still a long
terms of what it means to be customer- way to go in this industry. Banks and credit
focused than banks and credit unions. unions just aren’t the type of places people
We’ve redefined what it means to be a taxi really like to be, and in a lot of cases it’s
company with Uber. We’ve redefined what just a matter of how those institutions think
it means to be a hotel company with Airbnb. about how they’re presenting themselves to
And I think financial services may be next. the customer – so much of what they do is
set up for the benefit and convenience of the
experience is something companies have to – particularly those frontline employees – institution instead of the customer.
start considering. in trying to craft the processes and steps
and practices that you need to get to that We’re living in an exciting time right now,
Also, too many organizations don’t keep up customer-centric orientation. How serious is and there’s no industry that’s going to
with customers’ changing expectations. If executive management about moving in this experience more of a metamorphosis in
you ask a bank how it learns what matters direction? There’s no drive-by way to do this. terms of what it means to be customer-
most to its customers, they’ll pull out a It’s a journey that a lot of companies aren’t focused than banks and credit unions.
survey that they give to customers every necessarily willing to undertake because it We’ve redefined what it means to be a taxi
year. The problem is, two weeks after they do takes a lot of time and a lot of commitment. company with Uber. We’ve redefined what
that survey, the results are already outdated But when I see this kind of transformation it means to be a hotel company with Airbnb.
because customers are changing that fast. work, the two most important factors tend to And I think financial services may be next. §
So how do you deal with that? You need to be the real involvement of top management
get real-time and ongoing feedback from and the participation of the frontline people.

28 | FMS forward | JULY/AUGUST 2018


Financial Managers Society would like
to congratulate this year’s winners

FMS Chairman’s Award FMS Chapter of the Year
John Foff Philadelphia

Past President, Accepting: Tom Mennie
Philadelphia Chapter
FMS Chapter Leader of the Year
FMS Member of the Year Amy Wheatley
Rita Bostick NY/NJ

MountainView Financial Solutions, FMS Community
a Situs Company Excellence Award

Accepting: Stephen Feehan

FMS Finance and Accounting Scholarship
Debra Arsenty

Columbia College of Missouri


of High-Performing Institutions

Comparison may be the thief of joy – especially when it comes to a neighbor’s new car or a friend’s vacation
pictures on Facebook – but there’s no shame in comparing your own institution to high-performers in the
industry, because those that are outperforming their peers aren’t leading the pack by chance. In most cases,
there are common principles and actions that have brought high-performing institutions their success.
So instead of logging onto Facebook or staring longingly at your neighbor’s Mercedes (again), it might be more
constructive to find out what a couple of industry observers see as the habits of high-performing institutions.
Because – to lean on the lesson of yet another old saw – imitation just might be not only the highest form of
flattery, but a great way to nudge your institution into that high-performing category as well.

30 | FMS forward | JULY/AUGUST 2018


President - QwickRate Principal, Advisory Services - ALM First

JJ They come in all sizes JJ They have an excellent decision-making framework
Using QwickAnalytics at QwickRate, we define high- Sometimes CFOs are tempted to make important decisions
performing banks as the top 5% in core operating earnings over without sufficient information or data. Successful ones simply
assets, or the top 266 out of 5,322 community banks in the don’t! Successful CFOs use quantitative data and tools to aid
QwickAnalytics Community Bank Index™. Despite having read in the decision-making process and to find the holes in the
their obituary many times in the past few years, 2017 saw that assumptions that are being used. They don’t want to make
nearly 20% of the high-performing institutions were under $50 one good decision, they want to make 100 – failing to use data
million in assets. Additionally, two out of three top-performers would give them a much lower batting average.
were under $500 million. In other words, you don’t have to be
big to succeed. JJ They know pricing matters
High-performers don’t base their assumptions or pricing on
JJ They stick to the basics their competition. If yours are based on what the institution
High-performing institutions don’t need to excel in multiple across the street offers, you’re going to struggle. This kind of
lines of business. Having a strong net interest margin combined pricing can lead an institution to become unprofitable.
with the current low cost of deposits shows that a traditional
business model can push an institution to strong performance. JJ They don’t fall in love with any one sector
High-performing institutions are honest and unbiased in their
JJ They know deposits will matter appraisal of any product. We oftentimes see leaders gravitate
Last year, almost all institutions had low deposit costs. But in towards certain sectors – maybe they’ve had success with
the years ahead, high-performers know that having a strong them in the past or they were previously priced appropriately;
retail mix and base of deposits will be mandatory. Warren Buffet whatever the reason, they just like them and they’re going to
always says that no one knows who’s swimming naked until the continue to do them regardless of what the data suggests in
tide goes out. Right now, the tide is in and everyone has a good terms of their profitability. High-performers won’t continue to
cost of funds and deposits, but we’re about to see that deposits do something just because they’ve always done it – they look
are going to matter a lot more in 2019 than they did in 2017. at the data.

JJ They control what they can control: overhead JJ They are opportunistic
Looking at last year’s data, the strongest correlating metric Institutions that are successful are willing to evaluate new
for institutions with high returns was their efficiency ratio. ideas. This doesn’t mean that they’re going to implement
Regardless of what business model an institution embraces, everything they see, but they’re always willing to look for
focusing on cost management is still the best recipe to be a what the next opportunity will be, and they won’t sit on it
high-performing institution. In our studies, we didn’t see that forever. A lot of under-performers will see new ideas and say
top performers were cutting employees; in fact, they actually they don’t have the bandwidth right now and put it off for six
paid their people better than the rest. This suggests that months. High-performers are able to evaluate and understand
institutions that are efficient across the board are finding good opportunities so they can strike while the iron is hot. They
employees, paying them well and giving them the tools they scoop up basis points as they come up and add them to the
need to be efficient. bottom line. This is where high-performing institutions excel
– they find those little pennies all the time. It’s a part of their
JJ They invest wisely in diversifying their revenue – but daily process.
not just for the sake of more revenue
While not a requirement to being a high-performer, last year JJ They get out of the weeds and look at macro-factor risk
20% of all high-performing banks were also in the top 5% High-performing institutions are always appraising how well
of non-interest income and assets for community banks. In they’re being compensated for each of their big risks – the big
other words, it can help to conduct another line of business four are interest rate risk, credit risk, liquidity risk and options
like mortgages or SBA lending. While those separate lines of risk – and this helps them take a top-down approach to sector
business aren’t for every institution, those that pursued them selection. 95% of performance comes from sector allocation,
successfully often saw top performance. not security or loan selections. §

FMS forward | JULY/AUGUST 2018 | 31



32 | FMS forward | JULY/AUGUST 2018

As he begins his tenure as the new Chairman of the FMS Board more projects and provide more value-added benefits to our
of Directors, Steve Fusco is approaching the opportunity with the members so they can expand their competitive advantage in their
same mindset he has been working under in recent years as the markets. All of these things are interrelated, of course, but it all
senior executive vice president and CFO at $1.4-billion SB One Bank comes back to growing the membership.”
(formerly Sussex Bank) in New Jersey.
Fusco cites recent developments such as new publications,
“Our goal at the bank is to continue to grow and be opportunistic in free webinars, deep discounts for multiple members within an
a market in which banks are consolidating rapidly,” he says. “We’ve institution and proprietary research as examples of how FMS has
seen tremendous growth in our balance sheet and profitability over been working to add new value for members, in addition to its
the past several years and we are extremely excited for the future traditional hallmark of industry-leading educational resources and
of our company. With that, there are challenges and headwinds networking opportunities. He believes that as banks and credit

It’s not about walking away from the traditional things we’ve done
– it’s just a matter of changing how we go about doing them.

ahead of us as an industry as the operating environment experiences unions work to transform their products, services and delivery
significant transformations, such as the impact from rising interest channels to better reflect the changing preferences and behaviors
rates on balance sheets and earnings, deposit wars, the technology of their customers, FMS will likewise continue to keep pace with
revolution, the shift in changing demographics, changing customer the rapid changes in the environment by providing resources to
preferences and the new evolution of risks (i.e., cyber, BSA, help them do so.
compliance, etc.) – all of which will dramatically impact banking
business models. Of course, those same challenges and headwinds “There’s rapid change happening in our operating environments
can present even greater opportunities for those institutions and the industry, and institutions have to adjust to that and their
that can make the strategic shift and take advantage of the new customer’s needs,” he says. “FMS is now moving at the same pace
operating environment.” as the changes that are happening around us, and it’s critical that
we continue to provide great research and training to support our
He sees a similar situation facing FMS, an organization to which he members in making FMS their primary resource as they make those
has been dedicated at both the local chapter (NY/NJ) and national transformational moves into a new way of banking.”
levels for over two decades now. While he feels the association
has made tremendous strides in the past several years in terms of At SB One Bank, Fusco says the focus after several years of
how it communicates and engages with its members as well as the tremendous growth is to stay disciplined in risk management and to
educational and networking value it provides to them, he knows remain true to the bank’s goal of organic growth by delivering great
that sustained membership growth is the key to continuing that customer and employee experiences to keep building for a bigger,
positive momentum. brighter and more profitable future. Here again, he sees the parallel
between his dual roles in the coming year – the common thread that
“The consolidation in our industry really does impact membership, will allow both his bank and FMS to grow and succeed.
but that’s where we have to be more strategic and creative in
finding ways to grow advocacy and engagement in order to keep “The focus on providing value-added products, services and delivery
expanding,” he explains. “Membership participation is what makes channels to our members is what’s going to help us grow and get
FMS such a vibrant and diverse community, which is what helps stronger,” he says. “It’s not about walking away from the traditional
bring in more partners and sponsorships, which is what provides us things we’ve done – it’s just a matter of changing how we go about
with the additional revenue and resources we need to undertake doing them.” §

FMS forward | JULY/AUGUST 2018 | 33


Financial institutions are certainly no says in most cases such risks can be tied MITIGATING ETHICAL RISK
strangers to risk – taking risks being, after directly back to the importance of corporate
all, one of the central concepts upon which governance in the institution. Eileen Iles believes there are a number
their business is built. of steps that can be taken to reduce the
“In a broad sense, corporate governance possibility of ethical risk in institutions, most
But whereas most banks and credit unions is the set of systems and processes an of which revolve around two key areas.
likely tend to focus on several common organization has in place to protect the
areas of concern as they evaluate their risk interests of and add value to its diverse Strengthening Corporate Governance
landscape – namely, interest rates, credit stakeholder groups, including shareholders, •• Set ethical standards
and liquidity – Eileen Iles believes there may employees, customers, members, vendors, •• Define, communicate and enforce
be one type of risk they’re not considering the community and society at large,”
as much as they should be. While it may not she says. “Good corporate governance ethical strategy
be as easily identifiable from a spreadsheet means having directors who can work •• Recognize desired behaviors among
or as directly tied to the bottom line, she effectively – in a group and individually –
says ethical risk can pose as much danger to be responsive, decisive, collaborative, employees
to an institution as the more commonly participative, qualified, accountable and •• Establish and communicate business
considered risks inherent to banking. transparent. This results in a strong tone at
top, ethical decision-making and effective, practices, including corporate
“An institution has ethical risk if there are efficient allocation of resources.” governance policies, business
unethical behaviors or forces that could lead processes and procedures, lines of
to unethical behaviors,” explains Iles, a partner Organizations where these types of communication, codes of conduct,
at Crowe Horwath LLP. “Threats to business characteristics are present and regularly performance goals and measures,
ethics can include undue sales pressure, fear demonstrated tend to enjoy better whistleblower policies and
of being fired for not meeting unrealistic goals reputations among investors, regulators and compensation systems
or perceived unfair compensation.” business partners. In addition, they hold a •• Appoint an ethics officer
competitive advantage when it comes to •• Manage change, which can be
WHILE IT MAY NOT BE AS their ability to attract and retain qualified challenging and at times difficult for
EASILY IDENTIFIABLE FROM A talent, as employees at all levels understand employees to accept
SPREADSHEET OR AS DIRECTLY expectations and work to maintain the •• Encourage and embrace collaboration
TIED TO THE BOTTOM LINE... institution’s clearly-defined ethical standards. •• Educate employees
ETHICAL RISK CAN POSE •• Value and encourage open and honest
AS MUCH DANGER TO AN “Good corporate governance shapes an communication – without retribution
INSTITUTION AS THE MORE institution’s decision-making,” Iles continues.
COMMONLY CONSIDERED RISKS “The board makes decisions of generally Strengthening Corporate Culture
INHERENT TO BANKING. significant nature for an institution, providing •• Take actions to improve
direction on issues or topics of financial,
However, when these types of threats regulatory compliance, resources, operations, employees’ understanding of the
ultimately manifest themselves in instances strategy and reputation. The tone at the top organization’s mission and vision,
of unethical behavior – such as mistreating sets the rigor and tenacity by which other as well as their role in contributing
employees or others, employees lying to decisions are made by management.” to the overall success of the
supervisors/managers, corporate or financial institution
misrepresentation or giving/accepting bribes Given those stakes, it may be time for •• Take actions to improve employee
– they are often treated as isolated incidents institutions to add ethical risk to the list of satisfaction and recognition
or the actions of rogue individuals. But Iles key risks facing their businesses – just like •• Implement processes to assist
interest rate and credit risk – and to take employees in achieving both their
34 | FMS forward | JULY/AUGUST 2018 steps to mitigate that hidden risk. § personal goals and the goals of the
•• Provide examples of actions
exhibiting desired traits
•• Review and update the company’s
mission, vision and strategic
objectives as necessary



By: Adam Mustafa, President and CEO - Invictus Group rate environment. As short-term interest rates increase back to
normal levels and the Federal Reserve’s policy of quantitative easing
The financial regulatory reform bill that recently passed in the Senate unwinds in what we call the “Normalization Period,” they will face new
contains a number of so-called goodies for community banks. But one of challenges that typical bank analytics cannot predict.
those provisions is actually fool’s gold: the “capital simplification” that
calls for a new community bank leverage ratio. Loan growth in most parts of the country has declined, deposits are
quickly becoming a problem (both in terms of cost and volume) and
Senate Bill 2155 calls for bank regulators to develop a community bank there is no low-hanging fruit left to optimize the efficiency ratio through
ratio, based on tangible equity capital, “of not less than 8% and not more organic means.
than 10%.” I­f a bank maintains a capital level above this requirement, it
would be well-capitalized. Community banks would be able to opt into the NEW RATIO THREATENS INDEPENDENCE
new ratio, and ignore other capital requirements based on risk weightings. Banks that choose the community bank leverage ratio may have less
regulatory scrutiny and perhaps lower compliance costs, but that will come
BIG MISTAKE FOR MOST BANKS with a significant price. They may find that they cannot generate sufficient
Regulators will likely choose a ratio of 9% or 10%. (The House bill that ROE for shareholders, and end up having to put themselves up for sale.
must be reconciled with the Senate bill called for a regulatory off-ramp
for banks that met a 10% leverage ratio). And regulators have been Bankers need to take the bull by the horns and calculate what their
pushing more and more community banks toward a 10% minimum for capital requirements should be based upon their bank’s unique risk
roughly 18 months now. profile, risk appetite, business model and geographic dynamics. They then
need to take that analysis to their regulators and fight to make their case.
Community banks that opt into the new ratio will end up with no option
to optimize their capital requirements. This will be problematic for CALCULATING CAPITAL REQUIREMENTS
banks with concentration levels and unique business models that rely The only way a bank can calculate its own capital requirements in
on assets with low risk weightings. a post-2008 world is with a stress test. At the end of the day, the
new definition of capital adequacy is based upon a bank’s ability to
An Invictus study found that 82.3% of community banks can – and should withstand another severe downturn.
– safely operate with leverage ratios of 8% or lower today. Only 4.8% of
banks require a ratio of more than 9%. (Invictus used its BankGenome™ Think of a stress test as the new capital calculator. You will need to
intelligence system to calculate the optimal capital adequacy for all support your methodology and your assumptions, but the regulators will
community banks. The system includes quarterly stress tests on every respect this calculator because they understand the power of stress
bank in the country driven by unique algorithms that leverage loan-level testing. If your calculator shows you only need 8% or even 8.5% capital,
data as a proxy for regional lending trends. The BankGenome™ stress tests it is worth fighting for.
estimate optimal capital requirements for each bank based upon its unique
mix of assets, business models, earnings strength and asset quality profile.) Most community banks are only running stress tests today because
they feel like they must. What they are missing is that stress testing is
It is already difficult enough to generate a sufficient enough return on not about compliance – it’s about capital adequacy.
equity (ROE) for a community bank to justify its existence. Cementing
in stone a 9% or 10% leverage ratio will only make it more difficult – or Those banks that understand this and take this approach will also be
nearly impossible – for many banks. the banks that have earned regulatory permission to operate with
capital requirements that make more sense for their bank, and not the
COMMUNITY BANK ROE very expensive safe harbor of 10%.
Community banks must contend with tough headwinds threatening
ROE as they transition from a post-crisis recovery cycle to a rising-

FMS forward | JULY/AUGUST 2018 | 35



We hope you were able to attend the FMS Forum in Orlando—we’re already busy looking ahead. From the East Coast to the desert and back
again, there are plenty of opportunities for great education in a great location. So pack your bags!

JUNE 23-25, 2019 – BOSTON, MA

You don’t have to be a Harvard grad to know how smart it is to join
your fellow FMS members in Boston for three days of networking
and industry education. Returning to one of our most popular
Forum sites in 2019, we invite you to visit some of this historic
city’s famous colonial sites while learning how to revolutionize
your financial institution.

JUNE 14-16, 2020 – SCOTTSDALE, AZ

We’re back in the desert in 2020, but it’s far from a barren
landscape. Discover ways to help your institution flourish while
enjoying some of the most beautiful vistas in the country.

JUNE 13-15, 2021 – WASHINGTON, DC

Leaders belong in the nation’s capital – and that includes leaders
of financial institutions. Get a history fix at the Smithsonian (or
almost anywhere else in town) while getting a look into the future
of banking with an education slate packed with up-to-the-minute
information from some of the industry’s foremost authorities.

September 9-14 MADISON, WI

We’re always adding new programming, so be sure to check the education calendar at
36 | FMS forward | JULY/AUGUST 2018


with FMS & Join Your


Gain access to even more FMS
education and networking by
becoming a member of your local
chapter and connect with industry

peers in your community.

Plus,chapter members receive
$75 off of their national dues








Financial Managers Society PRSRT STD
1 North LaSalle Street, Suite 2225 US POSTAGE
Chicago, IL 60602



Boston June 23 - 25, 2019

The Westin Boston Waterfront


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