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FMS Research: Community Mindset: Bank and Credit Union Leadership Viewpoints

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Published by fmsdesign, 2017-07-20 14:40:13

FMS Research: Community Mindset: Bank and Credit Union Leadership Viewpoints

FMS Research: Community Mindset: Bank and Credit Union Leadership Viewpoints

COMMUNITY MINDSET:
Bank and Credit Union Leadership Viewpoints
2017


EXECUTIVE SUMMARY
Earlier this year, FMS surveyed 400 senior executives from community banks and credit unions about their greatest challenges, leading strategic priorities and general perceptions on the state of their industry. For more on the methodology of the survey, see page 14.
THE COMMUNITY MINDSET
Feeling Good
Despite a number of concerns, community bank and credit union leaders are remarkably upbeat about the state of their industry, with a full 70% of respondents reporting either very or somewhat optimistic outlooks, compared to just 15% who express any degree of pessimism
Familiar Challenges
Among a host of challenges facing their institutions – from credit risk and a
tough interest rate environment to sta ng concerns and cost management
– our survey participants singled out competition from other banks and credit unions and the ongoing regulatory burden as their most pressing issues
Path to Growth
Technological innovation, new products and services and increased commercial lending all gure prominently into community institutions’ priorities for growing their business, while far fewer plan to focus on mergers and aquisitions or branch expansion to achieve those goals
Give the People What They Want
Technological innovation in community institutions is likely to take the form of
enhanced online and mobile offerings, which respondents cited as both the most popular among their customers and the most likely for upgrade opportunities
Seeking Security
Even as they dive further into new technology, however, community institutions will be paying close attention to the potential for cyberattacks, with many executives ranking information security as a top priority in the areas of both risk management and technological advancement
Beasts of Burden
Despite recent proposals to lighten their regulatory loads, community banks and credit unions still feel burdened by what many see as an outsized burden – and its attendant costs
Bracing for Impact
While many executives are probably already tired of hearing about the impending Current Expected Credit Loss (CECL) model, they certainly know what’s at stake – a change in
the way they do business and a considerable impact on their operations
2
Financial Managers Society / Community Mindset: Bank and Credit Leadership Viewpoints 2017


TABLE OF CONTENTS
The State of the Industry
The Regulatory Environment
The Coming Storm: CECL
The Technology Landscape
The Branch Network
Looking to the Future: Succession Planning and M&A
Methodology
Page 4 Page 6 Page 7 Page 8 Page 10
Page 12 Page 14
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THE STATE OF THE INDUSTRY
Overall, community institution leaders are fairly upbeat about the state of their industry, with 70% of respondents across both banks and credit unions feeling either very or somewhat optimistic in the current environment (Figure 1). Meanwhile, just 15% of survey participants expressed any degree of pessimism, although the outlook was slightly less rosy among institutions in the $500 million to $1 billion asset range, where those negative feelings crept up in 22% of respondents.
This optimism comes through despite a number of serious challenges facing community institutions as they navigate the current economic and competitive environment. Among a list of 11 such challenges, survey respondents cited their regulatory
burden and competition from other banks and credit unions as the most signi cant concerns (Figure 2). On the ip side, in response perhaps to an improving economy,
attracting deposits and generating non-interest income did not rate as highly as major challenges.
FIGURE 1: FEELINGS ABOUT THE CURRENT STATE OF THE INDUSTRY
40
35
5
30 25 20 15 10
5 0
4
Very optimistic
Somewhat optimistic
3
Neutral
2
1
Somewhat Very
pessimistic
pessimistic
FIGURE 2: CHALLENGES FACING COMMUNITY INSTITUTIONS
Respondents were asked to indicate how challenging they felt each of eleven issues were to their bank or credit union – the graph represents the percentage who rated the priority in question as either “extremely challenging” or “somewhat challenging.”
Regulatory burden Competition from other banks and credit unions Attracting new/younger customers Attracting and retaining staff
Technology Interest rate environment Cost management Competition from non-bank entities Credit risk Attracting deposits Non-interest income
62 58
54 51
51
51 50
48
48 47
43
4
Financial Managers Society / Community Mindset: Bank and Credit Leadership Viewpoints 2017


Beasts of Burden?
While responses across all asset ranges re ected the challenge of the regulatory burden to roughly the same degree, banks seem to be feeling the pressure more acutely than credit unions, with almost 66% of bank executives viewing the regulatory issue as either extremely or somewhat challenging, compared to just 51% of their credit union counterparts.
FIGURE 3: FACTORS IMPACTING GROWTH
Respondents were asked to indicate the importance of 10 factors to the growth of their business. This graph represents the percentage who rated the priority in question
as either “very important” or “somewhat important.”
73 70
68 68 68
67 66
60 54
47
Technological innovation Growing the commercial loan portfolio Adding new products / services Attracting and retaining talent Cost containment Growing the consumer loan portfolio Getting more from the investment portfolio Adding / expanding wealth management services Pursuing M&A Adding branches
0 10 20 30 40 50 60 70 80
Despite efforts by regulators in recent years to adjust regulatory demands and paperwork requirements to be
more re ective of the scope of community institutions’ actual operations, the leaders of these institutions apparently still
believe there’s more work to be done, with 62% of all respondents considering their regulatory burden to be an either extremely or very
challenging aspect of their business.
Meanwhile, even as the incursion of potential new ntech rivals garners a lot of industry press, community institution leaders remain much more concerned about
the competitive threat posed by the banks and credit unions down the block, with 58% of respondents deeming the presence of such rivals an extremely or very challenging
situation. In terms of asset size, smaller institutions in the $200 million to $500 million range were the most likely to view this competitive pressure as a more extreme challenge.
Despite these challenges, one reason for community bank and credit union leaders’ overall optimism is the growth potential they see for their businesses. Where will that growth come from? Among the 10 options we presented, technological innovation (73%), growth in the commercial loan portfolio (70%) and the addition of new products or services (69%) were all cited by respondents as either very or somewhat important to their institutional growth prospects, while the appetite for mergers or acquisitions (54%) and additional branches (47%) was comparatively muted (Figure 3).
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TOP PRIORITY
FIGURE 4: RISK MANAGEMENT PRIORITIES
SECOND PRIORITY
Regulatory compliance 34%
ERM/establish Information or improve 16% security/fraud
Improve credit underwriting
21%
ERM/establish or improve 16%
prevention
31%
Improve credit underwriting 16%
Information security/fraud prevention 35%
Regulatory compliance 32%
More Money, More Problems?
While 14% of all respondents characterize their regulatory burden as “overwhelming,” that number ticks up to 19% for institutions in the $1 billion to $2 billion asset range.
THE REGULATORY ENVIRONMENT
Regulatory concerns continue to weigh heavily on the minds of community
institution leaders. Not only did a majority of respondents regard regulatory burden to be one
of the greatest challenges facing their institutions (see Figure 2 on page 4), but regulatory compliance was also ranked rst or second from a slate of ve risk
management priorities by nearly 66% of survey participants (Figure 4).
While 53% of respondents seem to be getting by with what they feel to
be a “reasonable or manageable” regulatory burden, others aren’t quite as
sanguine, with 34% characterizing their regulatory load as “a little too heavy”
and 14% taking a pass on the sugarcoating altogether to opt for “overwhelming.” Trying to pinpoint the biggest regulatory headache plaguing institutions yielded a wide range of responses, with compliance costs (14%) and changing laws/regulations (14%) leading the pack.
6
Financial Managers Society / Community Mindset: Bank and Credit Leadership Viewpoints 2017


THE COMING STORM: CECL
Regardless of their size or situation, every community institution will have to confront the changes wrought by the FASB’s impending Current Expected Credit Loss
(CECL) standard, and the executives in our survey are certainly aware of the impact the new standard is going to have on their operations (Figure 5).
Given the 64% of respondents who expect either major or signi cant changes to their operations from CECL – including the 35% of credit unions who expect major changes, compared to just 18% for banks – preparing for the move to the new standard is undoubtedly a key concern for community institutions. The good news is that 93% of survey participants report at least some movement in readying themselves, with 22% noting that preparations are underway and ahead of schedule, 46% considering themselves right on track, and 25% believing they’re either behind or slightly behind schedule.
What are they concerned about as they take the rst steps toward this shift? Perhaps not surprisingly, the highest anxiety among executives is concentrated on the aspect of CECL that represents the most signi cant
change from their current loss calculation methods – forecasting expected losses – with 57% of survey participants expressing concern about nding the right variables for correct implementation (Figure 6).
FIGURE 5: EXPECTED IMPACT OF CECL ON OPERATIONS
50 40 30
22 20
10 0
42
Major
Significant
29
Minor
7
Little to None
FIGURE 6: ASPECTS OF CECL ABOUT WHICH RESPONDENTS ARE VERY OR SOMEWHAT CONCERNED
Finding the right variables to help forecast expected losses
Loan impairment upon implementation Data - having enough and having it correct Profit-and-loss volatility upon implementation Modeling adjustment
57
55
55
55 54
51
0 10 20 30 40 50 60
Crunch Time
While 93% of all respondents report having some degree of CECL preparation underway in their institutions, 7% have yet to get started.
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THE TECHNOLOGY LANDSCAPE
While regulatory burden stood out as the biggest challenge to the community institutions in our survey,
it is perhaps not surprising that technology wasn’t far behind. As more of their customers migrate more aspects of their lives to online platforms and mobile devices, banks and credit unions are scrambling to make sure they’re in position to be able to continue to serve them. This is undoubtedly why so many of the leaders of the institutions in our survey (73%) see technological innovation as their top growth priority.
At present, most feel they’re doing a good job of providing the technological bells and whistles that their customers want and need, with 31% saying their customers are very satis ed with their institution’s technological offerings and another 38% saying customers are somewhat satis ed. These estimates
are based largely on customers’ use of features such as online banking (rated by 41% of respondents as their most popular technology offering), mobile banking (23%) and online bill pay (17%). The executives themselves, meanwhile, feel they’re making excellent use of technology within their institutions, with 76% saying they’re satis ed with their payment technology, 74% with their digital banking, 73% with their cybersecurity efforts and 68% with their data analytics.
Even with the percentages suggesting elevated satisfaction levels for many aspects of their technology offerings, many respondents are still planning to make additions or improvements over the coming year, with half of those surveyed saying they plan to add or improve their mobile and online banking services (Figure 7). Mobile and online bill pay also made the
list, with 44% and 38% of respondents, respectively, saying they plan to add or improve these services. In other areas, 42% of survey participants said they were interested in adding or re ning digital account opening processes, and 36%
said the same of remote deposit capture. In a world increasingly
moving online, these leaders clearly see the value of investing time and resources into making their institutions available, secure and highly functional wherever their customers choose to meet them.
60
51 50
FIGURE 7: PLANS TO ADD OR IMPROVE TECHNOLOGY
50
44
40 30 20 10
0
38
36
42
Mobile banking
Online banking
Mobile bill pay
Digital account opening
Online Remote bill deposit pay capture
8
Financial Managers Society / Community Mindset: Bank and Credit Leadership Viewpoints 2017


Of course, the customer experience isn’t the only way that technology can aid a community institution. Also of interest to these
leaders is the possibility of cost management via technology, with 65% of respondents tabbing improved e ciency through technology as their
best opportunity for cutting costs – in stark contrast to non-technology projects such as cutting branch expenses or renegotiating vendor contracts, for
example, which stirred only 18% and 17% of respondents, respectively.
When it comes to their IT priorities, it’s clear that here-and-now issues such as improving e ciency (77%) and mitigating fraud and risk (77%) rate highly among most
community institutions, while they consider a much talked-about concern like ntech more of a buzzword than a reality in the near term (Figure 8).
IMPORTANCE OF TECHNOLOGY PRIORITIES
Improve fraud/risk management
Improve efficiency
Get more value from existing technology and/or vendor relationships
Data management Add new systems/capabilities Infastructure improvements/core upgrades Replace existing systems Pursue fintech partnerships
77
77
72 70
69 65
63 49
0 10 20 30 40 50 60 70 80
In a world where not just banking, but much of business and personal life, is increasingly handled through technology, it stands to reason that community banks and credit unions are trying to improve their standing. Even if they’re mostly satis ed with their current technology pro le, the constantly changing nature of the beast means that the next challenge, opportunity or threat is always just around the corner.
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THE BRANCH NETWORK
Is the branch dead? Not yet, according to the executives in our survey, 47% of whom said that adding branches was a very or somewhat important factor for institutional growth. Overall, however, branches were low on the priority list, with respondents much more likely to
favor technological innovation (73%) or a bump in their commercial loan portfolio (70%) on the path to growth (see Figure 3 on page 5).
Nevertheless, the branch remains a signi cant piece of the retail delivery puzzle for most community institutions, and
one which most survey respondents feel they’re handling pretty well. Almost two-thirds (65%) expressed satisfaction with their
branch delivery, although this came in lower than other performance
areas, including payment technology (76% satisfaction) and digital banking (74%). For those not particularly satis ed with their branches, more than half (56%) considered it important that they improve branch delivery to the point that they would be very satis ed with it. Here
again, however, when placed in the context
of other factors such as cybersecurity and
payment technology, branch delivery still
registered lower on the priority scale.
Almost half of survey respondents (46%)
expressed satisfaction with the current size
and capability of their branch network and
had no plans to change it, while 36% saw
an opportunity for expansion and were
looking to add branches and 18% were
looking to consolidate or close branches
because their branch network had grown
too large and too costly (Figure 9).
Believing in Bricks and Mortar
Credit unions and smaller institutions were more likely to consider adding branches very important to the growth of their institution than were larger institutions and community banks.
FIGURE 9: OPINION OF CURRENT BRANCH NETWORK
See opportunity for expansion - looking to add branches
21%
Too big and/or costly - looking to consolidate or close branches
18%
Satisfied with current size and capability - hold steady
46%
10
Financial Managers Society / Community Mindset: Bank and Credit Leadership Viewpoints 2017


It stands to reason, of course, that decisions regarding branch delivery be dictated by how customers are (or are not) interacting with them. When asked how their customers viewed the branch experience at their institutions, 72% of respondents said they believed their customers were satis ed. Presumed satisfaction was more prevalent among smaller institutions, with 40% of those under $1 billion in assets believing their customers to be very satis ed, compared to only 34% of those above the $1 billion mark.
When it comes to pinpointing why their customers feel satis ed or dissatis ed, however, the waters get decidedly murkier (Figure 10). Of those executives who felt their customers were satis ed with the
FIGURE 10: CUSTOMER BRANCH EXPERIENCE
When asked how their customers viewed the branch experience, survey respondents tried to
pinpoint the reasons for those opinions, but with limited success FIGURE 10: CUSTOM
Feedback/surveys
Customer service Our service is good Customer impressions/satisfaction
Staff 8 Wait times/location/hours 6 Technology/updates 6
Don't know
20
14 Fee14dback/surveys
Customer service
Our service is good
Customer impressions/satisfaction
Staff
W1a6it times/location/hours
VERY/SOM
VERY/SOMEWHAT SATISFIED
When asked how their customers viewed pinpoint the reasons for tho
VERY/SOMEWHAT DISSATISFIED
Don't know
be the c
16
experience seemed even more unsure as to why this might
y
didn’t know
or failing to answer. Of those who
surveys.
Wait Times/location/hours 5
took a shot, 23% place the blame
Feedback/surveys 5
on staff and customer service, 5%
on wait times, hours and locations,
Customer Service 10
and just 5% on actual feedback or
Staff (not enough, not well-trained) 13
Don't Know
0 5 10 15 20
11
0 5 10 15 20
Technology/updates
0
5
10
1
6 6
Meanwhile, survey respondents
ase, with
35% sa
branch experience, only 20% cited
customer feedback or surveys as
support for that belief. From there,
ER BRANCH EXPERIENCE
it becomes more of a guessing
the branch experience, survey respondents tried to
se opginaiomnse, b,uwt withhlim1i4ted%succietsisng customer
service, 8% staff, 6% wait times,
EWHAT SATISFIED
hours, and locations, and a full 16%
owning up to the fact that they
simply don’t know what’s behind
11
8
who reported that their customers
are dissatis ed with the branch
14
14
their customers’ feelings.
y
5
2
ing the
0
20
Wait Times/location/hours
Feedback/surveys
Customer Service
35
Staff (not enough, not well-trained) 25 30 35
Don't Know
5 5
VERY/SOMEWHAT DISSATISFIED
10
13
35
0 5 10 15 20 25 30 35
The Value of Customer Feedback
Those institutions with satis ed customers in their branches were roughly four times more likely to cite their customers’ own feedback and surveys than those with unsatis ed customers. On the other hand, those with unsatis ed customers were more than twice as likely to say they didn’t know or couldn’t answer the question. It seems clear, then, that taking steps to get input directly from customers can help with guring out how they feel, why they feel that way and how to counter their potential dissatisfaction.
The most glaring fact seems to be that many community institutions simply don’t have a clear idea as to why their customers feel the way they feel about the branch experience. While 23% of those who think their customers are dissatis ed point to staff and customer service problems, a full 35% don’t know or can’t answer. Even among those with satis ed customers, 16% don’t know or can’t answer the question.
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LOOKING TO THE FUTURE: SUCCESSION PLANNING AND M&A
SUCCESSION PLANNING
Community institutions are often susceptible to turmoil from retirement or unexpected turnover among their
upper management and board positions, which is why a
key piece of their strategic thinking has to involve planning
for this eventuality.
The executives in our survey seem to understand the importance of this type of planning, since more than
half of respondents (57%) say they have a strong plan in place for succession, while another
third are working toward a plan (Figure 11). The largest institutions, those with $2 to
$5 billion in assets, are far and away the most likely to have a strong
succession plan in place (64%), while the smallest institutions
in the survey are more likely to be in process or have no
plan in place than the average.
FIGURE 11: STATE OF SUCCESSION PLANNING
In the process of formatting a plan
33%
Strong plan in place 57%
No plan
10%
12
Financial Managers Society / Community Mindset: Bank and Credit Leadership Viewpoints 2017


MERGERS AND ACQUISITIONS
Despite an uptick in M&A across the industry in recent years, pursuing either side of such deals was rated by our survey participants as one of the least important among the 10 factors for growing their businesses. While 22% of all respondents see pursuing M&A as a very important factor for the growth of their institution and only 6.5% consider it very unimportant, the largest percentage (31%) nd it only “somewhat important.”
In terms of M&A planning, 41% of respondents said they are not currently pursuing M&A, but the majority have prospects for a deal or see something on the horizon (Figure 12). Three in 10 say they are poised as a prospective buyer, two in 10 say they are considering selling and one in 10 say they are considering an M&A move in the next three to ve years.
50
41 40
30 20 10
0 Not pursuing or fielding
any M&A opportunities at this time
Prospective buyer
20
Prospective seller
10
Considering a move within the
next 3 - 5 years
FIGURE 12: STATE OF M&A PLANNING
30
Succession Plan B?
The smallest institutions in the survey, those with $200 to $500 million in
assets, were most likely to see the possibility of a merger or acquisition as very important, which may very well be related to their corresponding lack of a succession plan. After all, even a reluctant merger or sale may be a better plan than no plan at all.
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METHODOLOGY
FMS commissioned Woelfel Research, Inc. to survey 300
senior executives from community-based banks and 100 from community-based credit unions in late March and early April 2017. Among the 400 total respondents were CEOs (16%), VPs of nance (15%) and accounting (8%), compliance o cers (11%) and CFOs (7%).
20
15
10
5
0
16
15
FIGURE 13: TITLES OF SURVEY PARTICIPANTS
11
8
77
6666
Participants came from institutions with asset sizes ranging from $200 million to $499 million (25%), $500 million to $999 million (27%), $1 billion to $1.99 billion (23%) and $2 billion to $4.99 billion (25%).
FIGURE 14: ASSET SIZE OF SURVEY PARTICIPANTS
$500 million - $999 million 27%
$200 million - $499 million 25%
$1 billion - $1.99 billion 23%
$2 billion - $4.99 billion 25%
14
Financial Managers Society / Community Mindset: Bank and Credit Leadership Viewpoints 2017
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ABOUT FMS
Founded in 1948, FMS came to be when a group of Chicago controllers formed the Society of Savings and Loan Controllers, a 501(c)6 not-for-pro t association. The Society became an a liate of the United States League of Savings Institutions a few years later and was o cially renamed the Financial Managers Society in 1982.
In 1990, after serving savings and loan nancial o cers exclusively for 42 years, FMS disa liated from the United States League and began to serve nancial personnel not just from savings and loans, but also from community banks, thrifts and credit unions.
Today, with a strong emphasis on rst-class education and community- building, FMS thrives as a professional membership organization with close to 1,600 professional members from community banks, thrifts, credit unions and vendor partners from across the country.
Learn more at FMSinc.org.
©2017
All rights reserved. No part of this report may be reprinted or reproduced in any form or used for any purpose other than educational without the express written consent of FMS.
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