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Published by fmsdesign, 2018-01-02 16:07:32

FMS forward: Janaury/February Issue 2018

A PUBLICATION OF THE FINANCIAL MANAGERS SOCIETY
18 STORIES FOR THE NEW YEAR
THE ECONOMIC OUTLOOK FOR 2018
WHAT’S UP FOR M&A AFTER NYE?
JANUARY/FEBRUARY 2018 | FMSinc.org


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Contents JANUARY/FEBRUARY 2018 | VOL. 2, ISSUE 1
18 FOR ‘18
Eighteen stories on what’s facing the industry in 2018.
CREDIT UNION CONNECTION: PUMP THE BRAKES
Can credit unions go too far with auto loans?
DIGITAL BANKING:
THE OTHER SIDE OF THE DIGITAL REVOLUTION
Take notes on how to stay ahead of the digital curve.
BRANCH STRATEGIES: THE BRANCH OF 2018
The branch isn’t dying, but it’s rapidly changing.
INTERNAL AUDIT: IN THE STARS
Two internal audit leaders take a look into their crystal balls.
RISK MANAGEMENT: COSO’S UPDATED ERM FRAMEWORK
Risk, and the ways we address it, are transforming in 2018.
REGULATORY CHANGES: THE NEXT ACT FOR HMDA
As reporting shifts, make sure your institution is up-to-date.
THE FMS FORUM 2018: PARTY IN ORLANDO
This celebration will be one for the history books.
FMS CHAPTERS: CHAPTER AND VERSE
Dallas-Fort Worth debuts as the first new FMS chapter in 20 years
FMS EDUCATION: THE CLASS OF 2018
Mark your calendar with new educational opportunities with FMS.
FMS forward | JANUARY/FEBRUARY 2018 | 3
forward, a publication of the Financial Managers Society 1 North LaSalle Street Suite 3100
Chicago, IL 60602-4003
FMSinc.org | 800-ASK-4FMS
FMS EDITORIAL STAFF
DANIELLE HOLLAND
President and CEO
MARK LOEHRKE
Editor and Director, Publications and Research
CHERETTA CLERKLEY
Consultant, Branding Marketing
HILARY COLLINS
Assistant, Publications and Research
LYNDSEY WARNER CAULKINS
Layout and Design
2017-2018
FMS EXECUTIVE LEADERSHIP
DARRELL E. BLOCKER, CPA
Chairman
STEVEN M. FUSCO, CMA, CFM
Vice Chairman
JOHN WESTWOOD
Immediate Past Chairman
Copyright© 2018
Financial Managers Society, Inc. All rights reserved.
6 MEMBER SPOTLIGHT 8 Ami Myrland of McFarland State
Bank shares her perspective.
8 HAPPY ANNIVERSARY: 28 YOUR SOCIETY AT 70
Memorable milestones and a few
vintage snapshots from our first
70 years. 30
10 THE ECONOMY: THE BIG PICTURE
Three economists take a look at the environment for the coming year.
12 FMS QUICK POLL: DÉJÀ VU 32 FMS members share the challenges
facing their institutions in 2018.
14 PROFITABILITY:
MARGINAL IMPROVEMENTS 34
The quest for income is top of mind for community institutions.
16 DEPOSIT STRATEGIES:
WHEN CDS GO MIA 35
In a rising rate environment, will CDs survive?
18 DEMOGRAPHICS:
THE NEXT GENERATION 36
Learn how community institutions can help welcome Gen Z to the adult world.
22 M&A: THE MERGER MARKET 37 Learn from the experts what to
expect in the M&A arena.
24 FINANCIAL EDUCATION:
A LONG-TERM INVESTMENT 38
Serving the community is part of the program at these institutions.
26 EXECUTIVE COMPENSATION: PAYDAY Q&A 38
Properly calibrating compensation for executives is crucial to competitiveness.
6


FROM THE CEO
FMS celebrates our 70th Anniversary this year. As a professional membership organization, we enable our 1,600 members from community banks, thrifts, credit unions,
and affiliate partners, from across the country to provide you with a variety of specialized education, information and networking opportunities.
As we honor our historic past and look ahead to the future, we can’t help but to reflect on our journey. It all began with a group of Chicago controllers forming the Society of Savings and Loan Controllers. Over time, FMS evolved to serve financial personnel not just from savings and loans, but also from community banks, thrifts
and credit unions. Today, with a strong emphasis on first-class education and building community, FMS thrives as a professional membership organization working to ensure that our valued members have the resources and tools you need
to succeed and to equip you with the
knowledge to address the challenges our industry faces.
FMS members have exclusive access to peer-driven educational seminars and complimentary webinars on a variety of today’s most important topics; targeted industry- specific publications, regulatory updates, and white papers; and a nationwide network of industry thought- leaders and peers.
Our valued members make this organization strong and one we’re all proud to be a part of. Year after year, we strive to deliver the programs, industry insights, and connections you need to succeed in the financial industry. And in this coming year, our 70th Anniversary, you’ll see even more exciting ways we’re engaging, supporting, and serving you better. Thank you for your ongoing support of FMS!§
DANIELLE HOLLAND
President and Chief Executive Officer Financial Managers Society
BY DANIELLE HOLLAND
ANNIVERSARY
4 | FMS forward | JANUARY/FEBRUARY 2018
8
4
9
1
2
0
1
8


EDITOR’S
LETTER
Making resolutions is as much a part of ushering in a New Year as breaking said resolutions a month later. But while most resolutions traditionally tend to focus on physical improvement (regular gym members prefer to stay away for the first couple of weeks in January for a reason), the dawn of a New Year is a great time to think as much about the bottom line as one’s waistline.
That’s why this issue of forward is dedicated to shining a spotlight on 18 things that FMS members will be – or should be – keeping an eye on as 2018 unfolds.
From profitability measurement to deposit strategies to digital banking, we’re looking at the topics that are likely to come up in your ALCO and board meetings this year. We’ve also called on a number of industry experts to look ahead and discuss the trends they see in the coming twelve months for everything from the economy and executive compensation to M&A and internal audit. Some of these topics are also reflected
in the 100+ responses we received from members when we asked for their greatest challenges heading into 2018 in a recent
FMS Quick Poll, the results of which are summarized and illustrated in “Déjà Vu” on page 12.
Of course, not every potential big story for 2018 is covered in these pages, nor is every topic included here given a fully in-depth examination – this is merely a starting point for what promises to be another exciting and challenging year for our industry. We’ll cover many of these stories – and many others – in greater detail in the months to come, so stay tuned.
Finally, 2018 is also a big year here at
FMS, as your Society marks its 70th year
of providing first-class education and networking opportunities to finance and accounting professionals. We kick off the celebration in this issue with a timeline spread on pages 8 and 9, and you can expect to find similar look-back features in future issues of forward this year as we raid the archives and toast seven decades of FMS memories. We look forward to sharing them with you.
As always, thanks for reading.§
BY MARK LOEHRKE
FMS forward | JANUARY/FEBRUARY 2018 | 5


FMS MEMBER SPOTLIGHT
Bio in Brief
Ami Myrland
Title: CFO
Institution: McFarland State Bank –
McFarland, Wis.
Asset Size: $470 million
Years in current position: 1 (became acting CFO January 2017, promoted to CFO July 2017)
Years as an FMS member: 4 (national), 2 (Wisconsin chapter)
What is the single biggest challenge facing your institution right now?
Like many community banks, we’re currently faced with the challenge of compressing margin and increased expenses. We have a strong desire to stay relevant, and in order to do that we must differentiate ourselves from the competition. We believe superior customer service and staying current with technology in the banking environment
are keys to success. However, balancing costs of new technology and maintaining adequate returns for our shareholders can be challenging.
This past year, we have challenged
ourselves to move the bank to the next level.
6 | FMS forward | JANUARY/FEBRUARY 2018


Where do you expect to be focusing most of your attention in the next two to three years?
Over the course of the next few years,
we will be working on some fairly large projects, including a new network, a
new branch, expanded business lines
and new IT platforms that will help drive efficiencies. My job will be to focus on the successful planning and budgeting of these projects, as well as balancing them with the financial and risk management goals of the institution.
What do you like best about working in a community institution? First and foremost, I love the people. I have the greatest group of coworkers that are committed to the communities we live in and serve. We are like family. We know each other’s family member’s names,
we cook for each other when there are sicknesses or tragedies and we step in to help whenever someone needs it.
I also love the opportunities to be involved in a variety of projects and tasks. Over
the last six years with the bank, I’ve had the opportunity to be involved in projects that touch every area of the institution. These experiences have helped me to build relationships and gain better insight into the cross-functionality of our departments and platforms.
What advice would you offer to someone entering the banking profession, particularly at the community institution level?
Be all in! Learn as much as you can, ask questions every time you don’t understand something and volunteer for anything that comes up. The more engaged and involved you are, the more opportunities will be presented to you.
What is the best (or worst) professional advice you’ve ever received?
When I was in college and applying for
The more engaged and involved you are, the more opportunities will be presented to you.
internships with public accounting firms, I was given the advice to work for a company that clearly aligned with my individual core values. During one of my interviews, the partner asked me to list my own values
and then followed with the values of the firm, many of which overlapped. This conversation about values stood out more than anything about the travel, benefits or work-specific conversations that we had, and ultimately became a decision point for me when it came time to choose where to work. I’ve continued to use these standards in my career when I’ve made decisions to move between companies and when I’ve hired personnel.
What have been some of the key mileposts on your leadership journey to this point?
Some of the most memorable milestones for me came before I moved into a management role. When I worked at Wipfli as a staff accountant, I was nominated to be the local spokesperson for a newly created internal recognition program. I had the opportunity to work with everyone in the office – from staff to partners – to roll out the new initiative and help others be accountable in their response to it. This experience gave me the confidence to have discussions outside of my comfort zone and set me up for larger projects that would come later in my career.
Later down the line in September of 2011, during my transition into my senior accounting role at McFarland State Bank, they had just completed an acquisition
and things were still settling down. The accounting department at the time was extremely small, and procedures for reconciling general ledger accounts and completing the usual accounting duties were spread throughout multiple departments. Over the course of the next two years,
I worked to build up the accounting department, centralize the accounting/ finance functions and formalize many of the policies and procedures. I built relationships in ways I hadn’t had the opportunity to do so before and gained new perspectives on challenges that arose, all of which prepared me for my current role as CFO.
What do you like best about being an FMS member?
FMS provides a platform for networking, education and opportunities within a group that naturally belongs together. Among the various members, there is a clear connection to financial services and community banking, and a variety of perspectives that help expand my thinking as I look at the issues facing our institution.
Where do you see the banking industry in 5-10 years? How do you see it changing/developing?
I see banking undergoing some of its biggest transformations in the next five to ten years. With the introduction of AI, ‘big data’ and fintech, banking is going to be forced to keep up with rapid change or differentiate in another way. So while I don’t have a clear vision of what that will all look like, I do feel like we’ll be looking back and asking how we managed to keep up!§
FMS forward | JANUARY/FEBRUARY 2018 | 7


#1
YOUR SOCIETY AT70
1948. Truman was in the White House, the Cleveland Indians were World Champions and a small group of controllers in Chicago came together to form a not-for- profit professional association that would eventually become the Financial Managers Society.
Seventy years later, the Indians still may not have that follow-up trophy, but FMS is stronger than ever. With an emphasis on first- class education and community, your Society is thriving as
a professional membership organization with nearly
1,600 finance and accounting professionals from banks, credit unions and affiliate partners from across the country.
As we look forward to commemorating this milestone anniversary throughout 2018, we look back on 70 years of FMS. §
HAPPY ANNIVERSARY
8 | FMS forward | JANUARY/FEBRUARY 2018
TIMELINE
70 YEARS OF FMS
1948
Society of Savings and Loan Controllers established
1949
First annual meeting held
1957
Society affiliated with U.S. League of Savings Institutions
1972
Name changed to Financial Managers Society for Savings Institutions


While he jokes that some of his colleagues at Springs Valley Bank & Trust think he’s been around as long as FMS itself, it hasn’t been quite a full seventy years for DARRELL BLOCKER. However,
the current FMS Chairman has indeed been an FMS member for more than two decades, a span over which he’s been able to observe how the association has evolved to meet the education and networking demands of a rapidly changing industry.
“I learned early on in my career that finding additional education was going to be a lifelong
journey, and that FMS was a great way to stay abreast of the changes were constantly coming from FASB and the regulators,” Blocker says. “The roles have changed for FMS and the financial professionals that it serves over these seventy years. But I believe recent strategic moves, such as our merger with AMIfs, will allow FMS to continue to be a leader in financial institution education. I know that with the efforts of our dedicated staff, board, councils, chapters, members and affiliate members, the future will be bright for years to come.”
1982
Name changed to Financial Managers Society for Financial Institutions
1993
Chapter charter agreement enacted
2004
Financial Managers School established
2016
Danielle Holland appointed President and CEO
1988
Dick Yingst appointed President and CEO
1996
Focus on professional education expanded to include a wide array of workshops, webinars and a major annual conference
2014
FMS Connect online community launched
2017
The Association
for Management Information in Financial Services (AMIfs) joins the FMS community
FMS forward | JANUARY/FEBRUARY 2018 | 9


#2
THE BIG
PICTURE
THE ECONOMY
ECONOMIC OUTLOOK 2018
CRAIG DISMUKE, Chief Economist Vining Sparks
JOHN WALKER, Chief Economist Ambassador Financial Group
BRIAN WESBURY, Chief Economist First Trust Advisors, LP
THE BIGGEST ECONOMIC STORY HEADING INTO 2018
CRAIG DISMUKE: The potential for a major overhaul of the U.S. tax code is certainly the most important economic story. There is already a fair amount of optimism built into the markets and economic activity presuming some kind of reform will happen. The market expectations are evidenced by the
rise of stock prices when tax reform appears likely to occur and the drop in stocks when Washington appears mired in peripheral issues. As for economic activity, the torrid climb of stocks since the election has grown wealth, improved consumer confidence, led to more consumption activity, driven business confidence higher and resulted in a pick- up in business investment in equipment and software already.
If tax reform does not materialize,
the markets will adjust with assets
pricing in less optimism, thereby driving down consumer wealth, optimism and consumption. Business confidence will also likely pull back along with the recent uptick in investment. On the other hand, if tax reform does occur, the size and details of the package will determine what direction we go from there. A larger-than-expected package would likely boost risk assets
10 | FMS forward | JANUARY/FEBRUARY 2018


even higher and yield even better economic growth. So we see this as an upside risk to our 2018 outlook.
As such, tax reform is key to determining what happens with U.S. economic activity, how many times the Fed can hike and how the markets trade.
JOHN WALKER: The lack of inflation in the economic environment is the major storyline heading into 2018, although wage inflation might be starting to perk up.
Tied to the inflation uncertainty as well is the question surrounding the next Fed chief. Will there be a meaningful shift in monetary policy with longer-lasting implications?
BRIAN WESBURY: Tax cuts. While no one knows what will happen, I think it’s a
OTHER MAJOR DEVELOPMENTS TO KEEP AN EYE ON IN THE YEAR AHEAD
DISMUKE: Some of the factors to watch
in 2018 include elevated geopolitical risks and stubbornly low global inflation, which
is likely to slow down central banks and their recent reduction in accommodation. On the positive side, synchronization of global growth has been a welcome development and is likely to continue next year.
As far as the interest rate environment is concerned, FOMC composition is likely to change next year with the appointment of
a new Chair and three vacant governors’ seats to fill. Moreover, the voting members are already going to tilt more hawkish based on the regular rotation. One concern we have is the prospect of the Fed hiking too
‘tight’ until the federal funds rates is north of 3%, and that will take approximately
two years. Therefore, with the economic recovery already eight years old, the odds of surpassing the record 10-year-long recovery of the 1990s is within reach. In fact, I think this recovery will go down in the books as the longest on record.
Using traditional measures, the stock market is at most slightly overvalued. However, earnings continue to grow as new technology relentlessly drives down costs and boosts productivity. At this point, there are no major bubbles in the economy. As a result, risks to long-term investors remain minimal.
THE STORY LIKELY TO HAVE THE GREATEST IMPACT ON COMMUNITY INSTITUTIONS
DISMUKE: The changing composition of the FOMC is likely to be the event that has the biggest impact on community financial institutions, as a potentially more hawkish FOMC would likely lead to a flattening yield curve. Additionally, the appointment of (Randal) Quarles to the supervisory role will be an important factor for financial institutions.
WALKER: A slowdown in housing and mortgage lending might negatively impact banks, while increased levels of capex and higher long-term rates will help.
WESBURY: Financial deregulation is a
huge story and it really has yet to unfold. Dodd-Frank placed excessive burdens on small banks and credit unions because the cost of complying with those regulations is disproportionate – the bigger banks spend a smaller share of total revenue on compliance.
I expect smaller financial institutions to benefit tremendously as banking regulations are reviewed and reformed. At the same time, as interest rates go up, earnings potential will move higher as well. Add to this the fact that the credit cycle shows
few signs of excess and I see great years ahead for both community banks and credit unions – especially as jobs, wage growth and corporate profits all improve.§
The potential for a major overhaul of the U.S. tax code is certainly the most important economic story.
Craig Dismuke, Chief Economist, Vining Sparks
slam dunk that corporate tax rates will be cut, which will boost after-tax corporate profits, make the U.S. a more attractive place to deploy capital and lift equity values. The net effect of this will be to help boost economic growth from its plow- horse 2% pace of the past eight years. With unemployment low already, wages will rise. In other words, with a better set of fiscal policies, the U.S. economy is set to accelerate.
Also part of those better fiscal policies is a huge reversal in the direction of federal regulation. Over 800 regulations have been reversed, ended or delayed, and
the number of new pages in the Federal Register (a measure of regulatory burden) has plummeted. The new budget passed by Congress also has federal spending growing more slowly than overall GDP growth. In other words, the public sector has stopped growing faster than the private sector.
aggressively, causing stock prices to correct and leading to a consumer slowdown.
WALKER: Two economic data points
that could have an impact on banking are developments in the housing market, which looks to have hit a plateau in the late months of 2017, and the slowly building momentum in capex over the past four months.
Another macroeconomic element that will
be getting underway in late 2017 is the Fed’s balance sheet unwind. This will obviously not happen overnight, so it’s likely to create some uncertainty for 2018 and beyond.
WESBURY: Another huge story is a new Federal Reserve Board Chair. Because the Fed is a committee, any major changes will take time. However, monetary policy will continue to be normalized – the Fed’s balance sheet will shrink and interest rates will rise. However, all this will happen slowly. I do not believe Fed policy will get
FMS forward | JANUARY/FEBRUARY 2018 | 11


#3
FMS QUICK POLL
“Regulators continue to focus on pushing the views of larger institution risk management strictures down to smaller community institutions without concerns for cost burdens.”
VP – $3.5 billion credit union
“Larger banks are moving into the community banking arena.”
EVP & CFO – $436 million bank
“Banks and credit unions are operating from a position of strength. We’re all chasing the same solid clients, but we are also increasingly chasing the same human talent. Recruiting and retaining talent is tougher these days.”
SVP & CFO – $302 million bank
12 | FMS forward | JANUARY/FEBRUARY 2018
DÉJÀ VU


3%
5%
12%
2018
12%
The ongoing quest for higher margins and additional income
Increased competition from either traditional or non-bank entities
Interest rate risk and uncertainty
The cost and pace of technological advances
Cybersecurity issues
Regulatory demands
Attracting new/younger customers Succession planning
Other answers
Fed now on a somewhat more predictable rate path, one area that saw a fairly dramatic shift from 2017 to 2018 was interest rate risk and uncertainty, which saw its standing as a top challenge drop from 14% in last year’s poll to just 2% this year.
As with last year’s iteration of this survey, not every big potential challenge was included among the eight options provided in the Quick Poll question. Some of the write-in candidates for the 12% of respondents who selected “other” were deposit growth, liquidity concerns and CECL preparation.
For the short answer portion of this Quick Poll,
FMS asked respondents to briefly explain why they opted for the choice they did, and these comments yielded some terrific – and terrifically insightful – observations, which you can read in the surrounding quotes. Bonus points to the EVP and CFO of a
$414 million bank who chose not to participate in the actual Quick Poll, but instead sent his vote for the top challenge facing his institution in a direct response to the survey email:
“Cybersecurity! That is why I did not click on the link below!” §
41%
BIGGEST CHALLENGE HEADING INTO
It seems that the more things change, the more they stay the same for FMS members. Despite the rapidly changing dynamics of the banking industry, the major challenges facing community banks and credit unions at the dawn of 2018 are remarkably similar to the top concerns they were confronting last year at this time.
Respondents in our recent Quick Poll once again tabbed the quest for higher margins and additional income as their biggest challenge heading into 2018, with a percentage hewing closely to the number tallied in last year’s poll – 41% in the current survey versus 47% twelve months ago. This suggests that community institutions find the income squeeze
to be a persistent and ongoing puzzle, an opinion that is backed by net interest margins that remain virtually static from quarter to quarter.
Outside of the overwhelming majority for that top pick, the 108 respondents in this year’s poll – 85 from banks and 23 from credit unions – also saw challenges in the areas of increased competition from traditional and non-bank entities (13%), compliance and regulatory demands (12%) and cybersecurity (6%), all mostly in line once again with last year’s results. However, with the
13%
2%
6% 6%
FMS forward | JANUARY/FEBRUARY 2018 | 13


#4
MARGINAL IMPROVEMENTS
PROFITABILITY
Reading through the various topics
that comprise this issue of things
for community institutions to be
aware of heading into 2018, it’s both remarkable and not at all surprising how many of them can be tied back
in one way or another to the concept
of profitability. The quest for income stands as the dominant challenge facing FMS members heading into the year according to the results of a recent Quick Poll. Deposit strategies will be made with profitability firmly in mind. Digital banking, branch and lending decisions all stand to benefit from good, solid profitability data.
Yet despite the many foundational ways in which it touches the business, not every institution has firm grasp on how best to measure and analyze its profitability.
“We’ve conducted surveys with regard to this, and 83% of institutions feel they are not doing enough in terms of profitability measurement,” says Ken Levey, a vice president in
the Financial Institutions division of Kaufman Hall. “We’ve been in such
a tight margin environment over the past ten years and institutions are fighting for every basis point. So we need to understand for example, which customers, products and departments are bringing the most value to the organization and how we can improve low performers to become, if possible, more profitable.”
Levey says that there are several key elements that make up a good profitability system, one of the most important of which is the ability to understand all the components of profitability, including
net interest margin allocation (through
“We find that less than 12% of institutions have such a committee, and those that do are typically more successful in their deployment and usage of profitability analysis,” Levey explains. “Without management
Without management developing and communicating the importance of profitability analysis, it is very difficult to be successful in its implementation.
Ken Levey, Vice President – Financial Institutions, Kaufman Hall
C M Y CM MY CY CMY K
Funds Transfer Pricing), allocations on non-interest items and the allocation of loan loss.
“Measuring these in a consistent framework with metrics that are easy to reconcile and understand will ensure that the entire team will understand and be able to act on the analysis,” he says.
To this last point, Levey notes that any profitability system, however well constructed, is only as good as the extent to which it is utilized throughout the organization. He recommends that every institution establish a cross-functional profitability steering committee that
can help determine the goals, metrics and strategy that will guide the use of profitability data and ensure that it’s being used in the right ways.
developing and communicating the importance of profitability analysis, it is very difficult to be successful
in its implementation. A profitability steering committee that is comprised of representatives from across the institution not only helps ensure that all factors are considered as the institution develops the framework of the profitability process, it also helps achieve buy-in once the results are rolled out.”
Given the importance of such data to so many different areas, it’s probably fair to say that building a better profitability system – or fine-tuning the one already in place – is a worthwhile 2018 resolution for every community institution to consider. The key is to not put it off any longer.§
14 | FMS forward | JANUARY/FEBRUARY 2018


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#5
DEPOSIT STRATEGIES
WHEN
CDS GO MIA
WITH CONSUMER AND COMMERCIAL LENDING BOTH AS STRONG AS THEY’VE BEEN IN RECENT MEMORY, ONE WOULD EXPECT NOTHING BUT SMILES AT COMMUNITY INSTITUTIONS.
However, while loan portfolios have indeed been growing mightily, there’s suddenly
an issue festering on the other side of the balance sheet. The certificates of deposit that have long been relied upon to fund all of that lending activity just aren’t selling like they used to – they’re either getting very expensive very quickly, or they’re simply not finding takers at all.
From demographic shifts to the rising-rate environment, there are a variety of reasons
why consumers are finding other places
to stash their cash, leaving community institutions to make difficult decisions about how hard they want to work (and how much they want to pay) to ensure that CDs remain a reliable piece of their deposit strategy, or whether that effort would be better spent in pursuit of whatever will eventually replace that CD money.
OLD MONEY
Do CDs even have a place in the lexicon
– let alone the portfolios – of younger consumers?
“The traditional perception of a CD customer is an older person,” says Laura Stanley, a senior vice president at The CorePoint. “There is no risk of loss of money, as long as it is deposited for the duration of the contract term and there is, traditionally, little payout and no potential to receive any higher return than the rate of return originally agreed upon. Because of
16 | FMS forward | JANUARY/FEBRUARY 2018


this low risk, old-fashioned CDs are often an option for people who are past their income-producing years who need steady and reliable investments.”
The problem for community institutions is that as those older customers get older, they may not be interested in locking up their money for even five years. In addition, as they slowly begin to represent a smaller and smaller slice of the customer base, the next generation taking their place doesn’t have the same love for – or in some cases, even the general awareness of – CDs.
“Today’s younger depositors are used to much more fluidity with their money,” says Dave Koch, the president and CEO of Farin Financial Risk Management. “They can find access in and out of relatively high-rate accounts that doesn’t require them to do nearly the amount of work that a CD does.”
The question for institutions, then, is whether they should simply accept the slow demise of CDs as their target market fades away, or redouble their efforts to convince young depositors that the same things that the last generation loved about CDs are still worth talking about today.
“How do we teach them about CDs?” Koch asks. “Some credit unions have done a good job with an ACH direct-deposit into
a CD program, teaching people to save over time, and those programs have good value in terms of how institutions serve their communities. But is it going to be as many dollars as we’ve seen from that older demographic? Probably not, because they just don’t save as much.”
RATE DEBATE
Even more so than demographic shifts, however, the CD market in recent years has been roiled by the rising interest rate environment. After all, banks and credit unions weren’t the only ones who saw opportunity in those long-awaited hikes from the Fed.
“In general, with the uncertain future around interest rates right now, getting people to go out into the CD space for the kind of yield that’s being offered is tough,”
Koch explains. “It’s really hard to convince somebody to lock up liquidity given the differentials between rates, so institutions are going to have to raise costs on the CDs to get the enticement high enough, and I’m not sure they can afford that right now.”
As consumers look around and see higher- rate alternatives for their money, even the traditional CD fail-safe for institutions – the early withdrawal penalty – is suddenly proving to be a less and less effective deterrent to rate-hoppers.
“If an institution has poor penalties on their CDs, they need to be careful,” Koch says. “Consumers have gotten a lot smarter about that, and they might be able to take the
only commoditizes what an institution
has to offer. Moving away from the ‘rate- game’ approach into a more value-added, depositor-centric, need-based process will ultimately drive success for an organization – developing a strong brand image
through a better depositor experience, and employee engagement.”
Koch says that while there are some definite asset-liability management discussions to be had, the question of how to handle CDs going forward ultimately revolves around the institution setting a long-term asset strategy and deciding how it plans to get there.
“The bigger strategic question is what the depository focus is going to be in the
It’s really hard to convince somebody to lock up liquidity given the differentials between rates, so institutions are going to have to raise costs on the CDs to get the enticement high enough, and I’m not sure they can afford that right now.
Dave Koch
President and CEO, Farin Financial Risk Management
institution for a bit of a ride. They’ll take a five-year CD at a great rate and then when rates go up a little, they’ll just take the hit on the penalty and go invest somewhere else at the higher rate.”
NEXT STEPS
So what is a community institution to do when its customer base for a bedrock product is thinning and those customers that remain interested in the product
are getting too expensive to keep? It’s a difficult situation, but one thing Stanley says the institution absolutely shouldn’t do is panic and overpay in order to keep that CD flame burning.
“The biggest mistake we see is when a community institution puts all its focus into the promotions its competitors are running and tries to price match,” she explains. “Matching is a losing game that
next five to ten years, because you need
to start getting into some institutional discussions on developing new depositors,” he says. “Historically, financial institutions have assumed that they can go out and
get money by raising rates or offering products, and for the most part that’s worked. But maybe now we need to spend a little more time and effort building
a funding strategy – not a regulatory contingency plan, but rather a look at each sector of those deposits to see what we rely heavily on and what we’re going to
do if those deposits go away. I think the CD portfolio needs to be there as a way to move some of the uncertain non-maturity money into a bit more certainty Рeven if it costs us a little bit more Рbut we have to be careful not to overpay. And we have to put a little strategic thought to the question of how we manage each of these deposit segments.Ӥ
FMS forward | JANUARY/FEBRUARY 2018 | 17


#6
DEMOGRAPHICS
THE NEXT
GENERATION
Millennials may still be the hot topic as they dominate the marketplace both as employees and consumers, but as the oldest members
of Generation Z (born from 1996 onward) begin to turn 22 this year and, thus, start graduating college and starting careers, it’s worth noting that lumping all of these “young folks” together might not paint an accurate picture. In reality, members of Gen Z are in many ways very different from the Millennials that came before them.
GUIDE TO THE GENERATIONS
Based on extensive research into generational traits, the Center for Generational Kinetics defines generations by the following birth years:
GEN Z born 1996 to present MILLENNIALS born 1977 to 1995
GEN X born 1965 to 1976
BABY BOOMERS born 1946 to 1964 TRADITIONALISTS born 1945 and earlier
18 | FMS forward | JANUARY/FEBRUARY 2018


FMS forward | JANUARY/FEBRUARY 2018 | 19
“Over the next two or three years, Gen Z is going to be the fastest growing generation in the workforce, and then they’re going to be the fastest growing generation of customers and clients, so this is a critical time to understand them and begin to adapt”, says Jason Dorsey, the president and co-founder of the Center for Generational Kinetics.
More conservative and realistic than Millennials, and young but already serious about saving, Gen Z doesn’t remember
a time before cell phones or high-speed internet. With habits and preferences shaped by witnessing the bad luck of previous generations and growing up immersed in technology, these are potential customers that financial institutions would be wise to get to know.
LEARNING FROM OTHERS’ MISFORTUNES
One of the defining traits of the members of Gen Z is their desire to escape the
Members of Gen Z don’t want to fall into the same traps that Millennials did, whether it’s accumulating college debt for degrees that won’t help their careers, or having to live with their parents when they’re 30. And these ideas are reinforced by their Gen X parents, who saw their Boomer parents lose jobs, retirements and pension plans.
“The Boomers were the last generation that really held on to the idea that they were going to work for the same company forever and retire and get a pension and benefits,” says Dorsey. “Gen X didn’t believe that – they think you need to be self-reliant so you’re not counting on a third party for your financial security and your future, and they really tried to impart that on their Gen Z children.”
The result: a young generation of cautious savers who know what can happen in a bad economy. Dorsey’s research shows that members of Gen Z differ from Millennials
kind of national health care,” says Dorsey. “They’re expecting benefits when they’re 22 years old, while Millennials weren’t thinking about that at that age. They were just trying to survive their college debt.”
These differences could lead to tension between Gen Z and Millennials in the work force over the next few years. Dorsey’s research suggests that while Millennials expected to be catered to and to move up through the ranks quickly, Gen Z will be more willing to work hard and start at the bottom.
However, Gen Z and Millennials also have some common ground when it comes to their job expectations, including regular feedback and access to training and talent development. But Gen Z’s primary focus is first and foremost stability, and that will likely be the leading guide in any job hunt.
GENERATION DIGITALIZATION
Of course, what Generation Z shares with Millennials is a penchant for technology. Even more than Millennials, Gen Z grew up with the world in their pocket in the form of a phone.
“This is a generation that has always had everything immediately available to them through their mobile device – everything they could possibly want or need,” says Dorsey.
In other words, Gen Z can’t remember a time when entertainment, communication and basic tasks weren’t all funneled through
a smart phone. Whether they’re banking, dating, watching television or doing school work, their phone is not a secondary option – it’s the first. Like Millennials, while Gen
Z doesn’t necessarily see a bank or credit union branch as a place to get cash or make deposits, they do see it as a place to have more serious conversations about financial goals. So while branches will continue to serve a purpose, Gen Z customers will likely see them as only a secondary option.
“Branches serve a purpose, in that they show that a financial institution is tangible,” says Dorsey. “And for complicated matters, Gen
Z is going to want to show up and talk to somebody. So there’s still absolutely a role for branches, and there will be for a long time.”
The biggest difference between Gen Z and other generations is that they grew up seeing and hearing about the Great Recession without actually going through it.
Jason Dorsey, President and Co-Founder, The Center for Generational Kinetics
pitfalls that bedeviled Millennials before them. Growing up in that shadow, Gen
Z watched Millennials struggle through
the Great Recession and graduate with hulking anchors of college debt while also entering the job market at an inopportune time. At the same time, their Gen X parents repeatedly warned Gen Z not to end up like the Millennials before them.
“Sometimes we forget that the employment rate right out of college can have a huge impact on a person’s career,” Dorsey points out. “The Millennials came at a really terrible time, and Gen Z saw all of that and were repeatedly warned about it by their Gen X parents. The biggest difference between Gen Z and other generations is that they grew up seeing and hearing about the Great Recession without actually going through it.”
by spending much more conservatively, avoiding name brands, seeking out discounts and saving much more aggressively.
“In a study we found the percentage of Gen Z saving money was roughly the same as Millennials, who are ten years older,” says Dorsey. “That’s a big shift.”
WORKER Z’S
Business owners can also expect to see differences between Gen Z and Millennials as employees. While Millennials had unrealistic expectations for promotions and weren’t thinking of benefits when they first started working, Gen Z expects to work harder and longer to get ahead, but they also expect a 401K match and decent healthcare.
“Remember, Gen Z has always had some


APPEALING TO GEN Z CUSTOMERS
Getting Generation Z into community banks and credit unions is a unique challenge. Given their penchant for technology, presenting a strong showing in mobile banking is obviously essential.
“Take a look at your website traffic and determine what percentage of it is mobile versus desktop or laptop computer,” Dorsey says. “Most financial institutions are shocked to find that the majority of the people visiting their site are doing so on a phone, and their sites aren’t really set up for that.”
Community institutions should make sure their websites – which look different on the small screen of a phone versus the large screen of a desktop or laptop – are easy to navigate on mobile devices for both prospective and existing customers. Also, having an app isn’t good enough – it has to be a mobile app that looks sleek and performs well. Dorsey also stresses the importance of explaining accounts and services in a fun and accessible way.
While all these things might be keys to charming Gen Z, there is one big turn-off: hidden fees. For a cautious and thrifty generation that doesn’t want to make the same mistakes as its predecessors, every penny counts, and a surprise fee is a deal breaker.
“They’re more sensitive to pricing and they’ve also come to believe that there are unlimited banking options,” says Dorsey. “As far as community banks and credit unions, they like things that are locally owned and they like the sense of connection, but they want to know that the institution is stable.”
APPEALING TO GEN Z EMPLOYEES
The same principles that will get Gen Z in the door as customers will get them in the door as employees. Again, they are looking for an easy online process, benefits that will save them money and a strong, stable company. If it’s not easy to apply for jobs at your institution using a mobile device, for example, Dorsey warns that you’re likely to miss out on some of the best applicants. Places that require printed resumes
that will decrease the amount of money coming out of their pockets.”
Perhaps most importantly, Gen Z is a generation seeking stability. They want to work for a strong organization, and they are looking for stability and good planning from day one.
“They want to know you’re prepared for them when they show up to work, which means really thinking through what the first day and orientation looks like,” says Dorsey. “They want to know that you actually have a plan to help them be a great employee.”
INVESTING IN THE FUTURE
As Gen Z enters the adult world in increasing numbers, Millennials are entering a new stage as well: moving into their 30s, getting married, buying homes and having kids.
“We predict that Millennials will move more toward traditional investments, and we’re starting to see that,” says Dorsey. “When
you have a child, you Y
start to think about CM
your own retirement MY C M
“Gen Z particularly likes gamification, where you set goals, budget and reach milestones,” he notes.
While Millennials
weren’t interested
in traditional
investments in the
way previous generations were – often because they simply didn’t have the income to invest – Gen Z shows signs of going in
a different direction. Since they’re already better at saving than Millennials were at this stage, financial institutions may find that Gen Z customers are interested in financial advising services that can help them convert their savings into more money in the long term.
“However, they might be more conservative in their investing,” Dorsey says. “What this means is that to generate the return they need, they might need to be steered away from investment profiles that are suited for someone who’s 55 or 60 versus someone who’s 22.”
As far as community banks and credit unions, [Gen Z likes] things that are locally owned and they like the sense of connection, but they want to know that the institution is stable.
and mortality. In
our last study, we found that Gen Z is intentionally trying to graduate with less college debt, which gives them the ability to save, invest, buy a
home and so forth. So there is a pretty big switch.”
Whether Gen Z will follow the Millennials’ lead and delay major life events until
their 30s, or veer back into a trajectory more aligned with previous generations remains to be seen. What’s certain is that community institutions have a lot to gain by trying to better understand Gen Z so that they can be there to help them achieve the secure future they so desire – and thus help ensure their own future in the process.§
CY CMY K
Jason Dorsey, President and Co-Founder, The Center for Generational Kinetics
and other antiquated ways of applying will likely repel young talent.
“You want to make it easy for quality people to apply to your jobs,” says Dorsey. “It sounds obvious, but you wouldn’t believe how many financial institutions make it very difficult to apply for a job then wonder why they can’t get the employees.”
Gen Z might have more realistic expectations for their careers than Millennials did, but they have high standards for the benefits that their employer offers.
“They realize that any benefit they get will offset a cost, so they’re expecting employers to match their 401K,” says Dorsey. “Anything
20 | FMS forward | JANUARY/FEBRUARY 2018


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# 7
M&A
THE MERGER MARKET
Pricing doesn’t solve culture issues – if the target doesn’t feel like a fit, a great currency will not fix that mismatch of cultures.
Rick Childs, Partner, Crowe Horwath LLP
It’s certainly not inaccurate to characterize the M&A market for community institutions in 2017 as active, provided one takes
into consideration not only the deals
that actually got done, but the serious discussions of possibilities that took place in offices and board rooms as well. While most institutions try to maintain a standing game plan for how to proceed with either side of
a potential transaction, many of those plans likely received a serious airing over the past twelve months – whether or not they ever got to the point of real action.
So even though it wasn’t a record-setting year for deals, pricing and other factors led to an environment that was nevertheless thick with the intrigue of potential. What was fueling these considerations, and what does it mean for 2018? FMS checked in with Rick Childs of Crowe Horwath LLP and Robert Kafafian of The Kafafian Group to get their takes on where the M&A market stands and where it might be headed.
FMS: What are some of the factors driving M&A activity in the current environment?
that the current
prices being realized
by institutions of all
sizes have led to a
decision threshold
for many boards
and shareholders
of banks, because
they likely view the
environment as the perfect storm of pricing and enthusiasm in the marketplace. Many community institutions have management and board succession issues, as well as potential shareholder liquidity events looming; for these institutions, the impact of pricing strength is a welcome potential solution to those issues.
Early in 2017, I believe there was optimism among many community institutions that regulatory relief would be enacted, and that such relief would increase the feasibility
for many to continue to thrive and remain independent. As some of that optimism has eroded, it may be spurring more institutions to seek an acquisition partner.
ROBERT KAFAFIAN: Since 2008, for the most part, large banks have been out of the M&A business – particularly when it comes
RICK CHILDS: First and foremost, I believe
22 | FMS forward | JANUARY/FEBRUARY 2018
to buying other banks. They’ve been mostly sitting on the sidelines. In other words, since the Great Recession, a lot of the M&A discussions and transactions have been primarily among the community institutions.
Many institutions are realizing that they may not have the scale they need, they may not have the performance they want, they may not have the management succession in place to extend themselves into the future
– there are a lot of factors that are causing them to review their strategic alternatives. In light of all of this, there have been a
lot more discussions between community institutions regarding mergers of equals – even if many of those haven’t led to actual transactions, often for social reasons.
The one that’s particularly interesting here is the succession issue, because even though


a lot of institutions probably don’t want to admit it, that may in fact be what’s pushing them into M&A discussions. The smaller the institution, the more difficult it is to have a stable of successor employees lined up to move into management positions.
FMS: Where do things stand in terms of pricing?
CHILDS: The pricing for most sizes of sellers is up significantly from the same period in 2016. The median overall price/ tangible book value for all announced deals through September 30, 2017, compared to the first nine months of 2016, increased approximately 28% year over year. This has resulted in an overall median price/tangible book value of almost 165%.
KAFAFIAN: Pricing has clearly moved up, but there’s also a pretty wide gap between some of the top deals and some of the lower-end transactions. After the recession, we saw pricing get down around, and often below, book value. Now there have been a few transactions recently that have been closer to, and above two times book value, so multiples are clearly rising. But there are still some institutions that have issues, so not every bank can expect to get full price, and there’s still a wide gap.
There are a lot of institutions that think that the rising tide is raising all boats, but the reality is that it may not be raising them as equally as it has in the past.
FMS: What are some of the emerging factors or trends for an institution considering either side of an M&A transaction to be aware of?
CHILDS: Much of the pricing increase realized in 2017 has been the result of the increase
in the performance of publicly traded bank stocks. This provides sellers with better results on the day of closing, but also provides some risks in terms of price protection from a decline in the received currency, post acquisition. As
a result, sellers need to perform due diligence on buyers – including the factors that are contributing to stock performance and the sustainability of those factors. In the letter
of intent and definitive agreement, sellers should consider whether price protection in the form of a collar should be considered to provide an opportunity to protect shareholders from a price decline at the buyer. Additionally, sellers should consider the volume of daily trading to gauge the ease of being able to diversify shareholders’ holdings without unduly affecting the market price.
While strong stock price for the buyer can make an expensive transaction easier to achieve, buyers shouldn’t lose sight
of pricing fundamentals when doing a transaction. Pricing also doesn’t solve culture issues – if the target doesn’t feel like a fit, a great currency will not fix that mismatch of cultures.
Because of CECL’s pending implementation, I also think buyers should pay close attention to the quality of the data they would be taking on at the selling institution, as it
customers in the Baby Boomer and Generation X age groups. The institutions that come through this transition successfully are likely to be the ones that will emerge from the pack, and become the next group of consolidators.
FMS: What are the prospects for M&A heading into 2018?
CHILDS: I believe that 2018 will be similar to 2017 – that is, a steady flow of transactions in most regions and for most institutions. The stock prices of buyers clearly was the story in 2017, and the tone of 2018 rides upon the realization of the drivers of stock price increases.
If the stock market retracts, as some have suggested, it is likely that bank stocks will follow and that could have a slight chilling effect on transaction pricing and deal volume. If tax reform does not materially impact overall corporate tax rates, then
There are a lot of institutions that think that the rising tide (of pricing) is raising all boats, but the reality is that it may not be raising them as equally as it has in the past.
Robert Kafafian,
President and CEO, The Kafafian Group
some of the optimism built into bank
stocks will also likely evaporate. If net interest margins don’t expand as much as anticipated from the rate increases at the Federal Reserve, there again there could be a bit of a pullback on stock prices.
KAFAFIAN: Within the next two years, some of the larger banks may get back into the M&A game, and there may also be more action in the $25 billion to $50 billion asset group, as well. So the risk factor for the smaller institutions is that if they wait it out, they may wind up not finding enough candidates to attract desired price levels.
Throw this idea in with some of the other factors we’ve discussed, and add in the potential economic landscape of the next recession, and you have a very interesting time for community institutions to navigate. §
FMS forward | JANUARY/FEBRUARY 2018 | 23
may add hidden costs to the transaction that impede the buyer’s ability to efficiently implement CECL at the acquired institution.
KAFAFIAN: The two biggest factors that we’ve been seeing for successful community institutions in the long term are the ability to adapt to changing technology and the ability to manage human capital – how they develop their employee base in order to stay relevant, successful and independent.
In the next 15 years, the industry is likely to be flipped on its head as Millennials start
to accumulate wealth, become CEOs, start companies and have growing families. The way that they’ve learned how to bank is materially different than older generations. So the industry needs to be transitioning towards that in terms of the technology and human capital, while not abandoning its current core


A LONG-TERM INVESTMENT
As consumer debt reaches all-time highs, studies reveal that consumer financial knowledge is running low. A recent study from U.S. Bank found that many high school seniors and college students don’t understand credit, and many think that paying off a delinquent loan means it will remove it from their credit report.
While many of these young consumers
will find a way to learn the ropes as they get older, many will still take a lack of financial literacy into larger and higher- stakes transactions such as investing and buying a home. Will they turn to their local community institution for the expertise and advice they need?
THE ABCS OF FINANCE
The hope at Anderson Brothers Bank is that they will. The $600 million institution in South Carolina saw more than 300 middle school and high school students complete its online Le Tour de Finance financial literacy program in its first year.
“There was a story from one of the first years of our program,” says Susan Grant, the marketing director at Anderson Brothers. “One of the kids said his cousin had gone off to college and got a credit card application in the mail. Spring break was coming up, so he filled it out, sent it off and was approved for a huge line of credit. Being a kid, he took his girlfriend with him on a cruise and put the whole trip on his credit card. He ran up about $5,000 and when they got back, she dumped him. And now he has to pay it back.”
Despite the unfortunate romantic outcome, Grant sees a positive in this sad tale of financial waywardness, in that it gets the
kids to start communicating and thinking about money in a way they probably haven’t before—and possibly avoiding disastrous mistakes.
“The goal was to empower children with knowledge about saving that would better prepare them to achieve their future financial goals,” says Kayla Carpenter, Happy State’s chief of staff. “Many adults weren’t given an opportunity to learn these valuable financial lessons, and we felt that if we could begin teaching that at an early age maybe it would change the future for the adults of tomorrow.”
In addition to opening their free Kids’ Bank savings account – where they can deposit as little as a penny – students can also submit an application to be a teller. They are interviewed, hired and get to spend a day at the bank.
“One of the fun things we’ve seen is that some of the Kids’ Bank tellers come back and become actual tellers while they’re in high school or college,” Carpenter says. “They have their first interview as a fifth grader then get to help others with their financial needs as an adult. It’s really rewarding to see.”
IT’S NEVER TOO LATE
These banks are also reaching the adults Carpenter speaks of who weren’t given an opportunity to learn financial literacy in school. Anderson Brothers offers customer resources on its website, and promotes continuing education to their employees on every level. They also offer the Checking Navigator, a quick and easy online program that teaches banking basics.
“The Checking Navigator is older, but it continues to be used,” Grant explains. “It’s a good source of basic knowledge for people who don’t want to be judged. Financial education is an ongoing process. The world changes, and we’re trying to stay on top of what’s coming down the pipeline.”
Where do undergraduate college and high school students stand on the subject of financial literacy?
According to the 2017 U.S. Bank Student Financial Literacy Study:
55%
do not know that their credit score is not impacted by how much money is in their bank account
51%
are interested in learning more about saving money
30%
would go to a bank branch or financial advisor with financial questions if their parents don’t have the answers
24 | FMS forward | JANUARY/FEBRUARY 2018
Many of the same goals are in play at $3-billion Happy State Bank in Texas, where they start even younger with their Kids’ Bank program. Now in its third decade and over thirty elementary schools, the program teaches students the value of money by offering free savings accounts, and encourages them to see banks as trusted partners.


Happy State regularly works with local schools and nonprofits teaching financial literacy classes, and has a community webpage where anyone can submit a request for a class. For example, a recent request came from a local nonprofit group asking if Happy State offered any programs on how to buy a home.
“We’re going to be doing four different classes for people who want to learn about home ownership and how to save for a down payment,” Carpenter says. “We can tailor-make a program to fit the specific needs of the audience.”
GIVING BACK TO THE COMMUNITY
While these banks hope that the children and young people they reach go on to become lifelong customers, gaining accounts is not the primary focus of these programs.
“The program is all about the financial literacy piece and teaching the students that banks are their trusted financial partner,” says Carpenter. “We have always been focused on being a strong community partner, and one of our key partnerships is investing in the future of our communities through this program.”
While Happy State does not focus on the numbers, Kim Fulgham, Happy State’s community impact officer, is quick to add that they have over 1,200 active accounts from the Kids’ Bank program.
“Around 80% of our Kids’ Bank savers go on to be Happy State Bank savers and continue saving for college and building their financial future,” Fulgham says.
While many of the people who benefit from these financial literacy programs come
from disadvantaged communities – 74%
of the Kids’ Bank schools are considered economically disadvantaged by the Texas Education Agency – they’re not the only ones who need the help.
“We want to be a good partner to everyone in the community,” Carpenter says. “We see
so they can take the knowledge and use it in their lives.”
Cari Roach, Happy State’s senior vice president of marketing, feels that it’s more than a purpose – it’s a duty.
“It’s just the right thing to do,” Roach says. “This is our area of expertise and we should be using it to help the entire
#8
FINANCIAL LITERACY
FMS forward | JANUARY/FEBRUARY 2018 | 25
college graduates who are doctors or lawyers or teachers who don’t know the basics of banking. They just haven’t been exposed to credit reports, budgets and other basics.”
BUILDING A BETTER CUSTOMER
Anderson Brothers takes a similar stance. While the hope is that its financial education program brings in new customers, the bank doesn’t track the numbers. Instead, the focus is on educating their customers and the young people in their community and putting themselves in a better position to serve as trusted advisors.
“These programs give us more information on what people are asking outside of the bank and what their needs are,” says Grant. “Our main purpose is the betterment of everyone in the community
community. From the basic fundamentals of banking to the most complicated aspect, we have all the resources to educate
them and help them meet their personal aspirations and goals.”
Ultimately, though, educating young people, community members and banking customers opens opportunities for healthier personal finances and helps them avoid decisions that could cause long-term, detrimental consequences. Fewer college students with thousands in high-APR cruise debt is a good thing for everybody.
“We all ultimately benefit from this, because it helps people avoid getting in trouble with credit cards and other debt they can’t pay,” says Grant. “We’re doing something that’s good for everybody.”§
Many adults weren’t given an opportunity to learn these valuable financial lessons, and we felt that if we could begin teaching that at an early age maybe it would change the future for the adults of tomorrow.
Kayla Carpenter, Chief of Staff, Happy State Bank


PAYDAY Q&A
#9
EXECUTIVE COMPENSATION
26 | FMS forward | JANUARY/FEBRUARY 2018
WHEN IT COMES TO THE SHIFTING COMPETITIVE LANDSCAPE IN 2018, COMMUNITY BANKS AND CREDIT UNIONS ARE FACING INTENSE BATTLES FOR NOT ONLY THEIR CUSTOMERS, BUT THEIR INTERNAL TALENT AS WELL.
Indeed, Scott Richardson, the president and CEO of IZALE Financial Group, says that as the compensation market has continued to stabilize and return to pre-recession levels in recent years, the competition for top executives has likewise hit an upswing. In a recent conversation with FMS, Richardson talked about where things currently stand, what the regulators are paying attention to and what community institutions should be thinking about when it comes to their compensation considerations heading into 2018.
FMS: What was the biggest story or development in executive compensation for banks and credit unions in 2017?
SCOTT RICHARDSON: For banks, at the senior executive level, we’ve seen raises return and base compensation has been increasing a little bit more than it had been in prior years. There’s probably some catch-up in play there, but there’s also some competitive pressure at work. If I’m another bank that competes with you and I want to be in your market, there are two ways for me to do it – I can buy you or I can buy your people, and it’s a whole lot cheaper to buy your people. So there’s increased competition for certain positions out there.
In the credit union space, split-dollar loan arrangements for certain executives have been incredibly popular, and will remain so as long as we have a low interest-rate environment. These are valuable benefits, but because they’re harder to get out of than to get into, they’re typically reserved for just a handful of executives. Precisely because split-dollar loans have been so popular, we’re seeing regulators paying more attention and asking more questions and having more criticisms about their numbers and their design.
FMS: That raises a good point – how much has recent regulatory input or chatter affected the compensation conversation?
RICHARDSON: There’s a different conversation and a little bit more impact for public filers, but for many community institutions the regulators continue to be mindful of incentive compensation being paid out too soon before the ink has dried – that is, if you’re basing compensation on certain production or results that turn out not to be true or not sticky enough, then some of that compensation should remain at risk. Those rules on incentive compensation have been around for a number of years, but now that the regulatory focus on credit risk and some other things have sort of stabilized, they’re starting to look at some of these issues again and starting to pay attention to the incentives institutions have in place.


FMS forward | JANUARY/FEBRUARY 2018 | 27
Is there enough diversity so that people can’t play with the system
to juice up their compensation? In other words, institutions shouldn’t just be using a single compensation metric – they should have enough different measures that can frankly work in opposition to one another at times. For instance, ROE v. ROA – you can do things at the end of the year to really juice ROE, but it might harm your ROA and vice-versa. You want to take a balanced approach to these metrics, and at the same time have some of it at risk. It’s one thing to say ‘you did a great job – here’s an incentive,’ and pay it all out versus paying some of it out now and holding some back for a couple of years just to make sure that performance held true.
If I’m another bank that competes with you and I want to be in your market, there are two ways for me todoit–IcanbuyyouorIcanbuy your people, and it’s a whole lot cheaper to buy your people.
On the credit union side, there’s a known wave of graying executives – much more so than in banks – so there’s a huge concern among regulators about succession planning. I’ve seen forecasts that 60%- 65% of current CEOs in credit unions will be at retirement age within the next five years. So that puts some pressure on these boards to find and groom and prepare a successor. Frankly, I think this is what’s driving a lot of merger activity for credit unions. If you’re a $20 million credit union, it’s tough to attract and pay for a good executive who may be in his or her 40s to take over the organization for the next 10-20 years, so sometimes it’s easier to just merge away.
By the same token, there are a number of organizations that are looking at the compensation that has been paid to some of the current executives and it’s probably been under-market for the last several years, so now there’s a tendency to try to play catch-up. As a result, regulators in some states are questioning those arrangements because they think it’s nothing more than a windfall to leave and retire early, so institutions have to be mindful of that kind of scrutiny.
FMS: What trends do you see for executive compensation and incentives in community institutions heading into 2018?
RICHARDSON: There will likely be a continuation of how things have been going, but we’ll probably see some new forms of compensation gain popularity or come into play as well. It’s a generational thing as much as anything else. What works for a 55- or 60-year-old executive who is five or ten years from retirement may be wholly unappealing to
a 35- or 40-year-old up-and-coming executive. So cash compensation is one element that’s fairly easy to deal with, but what are some of the other elements of compensation that we can introduce?
It could be deferred compensation or equity grants or phantom stock. It could be looking to do a better job of risk management; that is, making sure the institution protects the income of its key folks through adequate life and disability insurance. Increasingly, the conversation is also coming back around to potential long-term care as an executive benefit. And that’s due in large part to the industry coming back. When the recession hit, many long-term care providers either pulled in their reins or just left the business. Now they’re coming back to the market, so those products can again be used very creatively in the executive benefit world.
FMS: What advice would you offer community institutions as they consider their compensation and incentive policies moving forward?
RICHARDSON: Base compensation gets more attention because it’s now – it fuels our lifestyle today, whether you’re the CEO or the receptionist – so institutions need to make sure what they’re doing there is appropriate. But what they shouldn’t do is take a single survey from any one trade group or association and use it as a sole source of benchmarking salaries. Because even the best-run surveys have flaws or limitations, and those could be problematic if that’s your only data point. Rather, institutions should try to find a partner who has access to three, four or five surveys that can be averaged to provide a clearer picture of what should be going on. This doesn’t have to be done every year since surveys don’t generally change that much from year to year, but you should be doing it at least every two to three years.
There’s a balancing act of art and science, and it’s good to remember to not let the science scare you and to embrace the art.
It’s also important to understand that beyond cash compensation you have quite a bit of flexibility, and rather than letting it paralyze you from doing something, embrace it and try to figure out how you can put something in place that can attract, reward and retain good people regardless of their generation – but does so in a way that’s still mindful of the obligation to shareholders or members in running a profitable organization. There’s a balancing act of art and science, and it’s good to remember to not let the science scare you and to embrace the art. §


#10
CREDIT UNION CONNECTION
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PUMP THE
BRAKES
Credit unions kicked auto lending up a notch in 2017. In the second quarter of last year, the NCUA reported that new auto loans had risen 16.3% from the year before – a continuation of what had been a long- term acceleration over the preceding several quarters.
However, while the numbers may look good overall, there are a number of warning signs that this growth may not be sustainable at this rate, and that perhaps credit unions should grab the wheel and correct course before the road ahead gets treacherous.


THE CHECK ENGINE LIGHT IS ON
Some of the warning lights are already flashing, according to Charley McQueen, the president of McQueen Financial Advisors, and many credit unions aren’t heeding to the signs.
“The growth of auto lending at credit unions is not sustainable,” McQueen believes. “One of the things people don’t pay enough attention to in the credit union industry is return on equity.”
While return on equity (ROE) governs growth in the long run, there are signs that credit unions are growing above their long-term ROE levels. McQueen says his clients report losing an average of $12,000 a loan, up from $3,000 several years ago.
“What we’re seeing is that a lot of the lending is financing in some substantial negative equity positions at the time of acquisition,” McQueen says. “I think the losses are up because of that negative equity being put in and people not looking at risk appropriately. Not many people are looking at real loss rates correctly.”
Other warning signs include the majority of loan growth coming from indirect car loans, and lengthy loan terms wherein the car’s depreciation outpaces the amortization term. In November, the Consumer Financial Protection Bureau reported that 42% of new auto loans now carry a term of six years or longer, a steep rise from just 26% in 2009. Having recognized the growing dangers, some lenders are already taking a step back from indirect lending.
“We’re already seeing the negative effects selectively around the country,” says McQueen. “There are new people coming in and seeing the growth that others have had and they’re hopping in, but they’re coming in really late and, if anything, they’re probably the ones driving up the categories.”
THE IMPACT
McQueen sees two main negative effects
for credit unions down the line. One is the substantial losses for those who haven’t been vigilant about ROE. The second, however, could hit even those credit unions that are handling the loss component correctly – the troubles to come when volume dries up in an area they’ve grown to rely upon.
“If you have 50% of your lending in car loans and car loans slow substantially, all of a sudden your loans are paying off really quickly and you have nothing to replace them,” McQueen explains. “That could leave you with an earnings issue on a going-forward basis because that asset class has become such a big component of your business.”
TIME FOR A TUNE-UP
Credit unions can steer away from heavy damage by moving away from lending
to those whom McQueen refers to as “transactional members” – that is, members who are only with the credit union because it has the lowest-yielding loan or because the car dealership steered them that way.
“Credit unions should be focused on core lending to their members,” says McQueen. “Lending to transactional members does nothing for the long-term position of your institution.”
But McQueen thinks the major failing of credit unions is that they’re not doing the
AROUND THE BEND
So what should credit unions be looking for in 2018? While McQueen believes they should steer away from indirect auto loans, direct car lending can be a great place to focus their energies – even though he predicts that market to be “hand-to-hand combat.”
“A typical consumer needs loans for two things – cars and homes,” McQueen says. “Focusing on the core things that your members need is going to keep you successful in the long run.”
Like direct car lending, McQueen thinks home lending will be a good place for credit unions to be in 2018, though he cautions it will likely be slow going, with values up and affordability low. On the other hand, he sees red flags for commercial lenders who may be shifting toward more retail lending.
“Commercial lending is a great area, but I worry about some of the lower-tier strip malls having to compete with Amazon and online shopping,” he explains. “Financing a retail strip mall isn’t a
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The growth of auto lending at credit unions is not sustainable. We’re already seeing the negative effects selectively across the country.
Charley McQueen, President, McQueen Financial Advisors
math on indirect auto lending, and they’re likely to be driven out of the game by either regulatory pressure or losses, plain and simple. The math on an indirect car loan should include four crucial figures: the yield, the dealer reserve, the reasonable loss estimation and a reasonable prepayment speed, or how long the loan will stick around. This last item is the one McQueen believes many institutions are overlooking, to their detriment.
“We had a credit union having some troubles come to us and we helped them do the math on their indirect auto lending portfolio,” McQueen says. “The average yield – the true yield they were receiving on their indirect car loans – was 60 basis points, which is less than half the yield on cash. People aren’t even thinking about that.”
risk that others are willing to take. I think that’s going to cause some problems in a few years.”
REFOCUSING ON MEMBERS
While the problems facing the auto lending market are real, McQueen says the solution
is relatively straightforward – if not exactly sexy. Credit unions simply have to move away from risky lending practices, refocus on their members’ needs and do the math on their portfolios to see if they’re really working toward the long-term health of the organization.
“Long-term success is going to be a function of direct lending to your membership – not using your membership’s money to lend to people you don’t know,” McQueen says. “It’s not fun, it’s hard and it’s slow growth, but we cannot survive at 13% or 16% growth. It’s absolutely unsustainable.”§


Christina Churchill can throw out some impressive – and, in some cases, frightening - statistics concerning the digitization of the banking industry. To wit:
• 70% of consumers haven’t been to a bank branch in the past two weeks
• 71% of consumers don’t mind their bank being transactional rather than relationship-driven
• 27% of consumers would consider a branchless digital bank
“Convenience is really what’s driving the totality of digital movement,” says Churchill, a principal at RSM US LLP. “If you look at the studies and the data, it’s all about ease of use.”
This is the other side of a digital divide – if a consumer is going to a bank to deposit a check or taking out cash from an ATM to pay a friend back, he or she may already be considered the odd one out. Even older customers have become increasingly comfortable with mobile deposits, while P2P use has skyrocketed, with Venmo users transmitting $8 billion in the second quarter of 2017 alone – twice as much as the year before.
TRENDS IN TRANSFORMATION
How do community institutions fit into this revolution in its current state? Churchill believes the trend that will continue to dominate
digital banking in the coming year will be data analytics, illustrating her point with the jarring story of a community institution that had no idea that 85% of its customer base was over 65 years old until they started pulling and analyzing the data.
“That’s a huge deal,” she says. “And if they didn’t know, they couldn’t have done anything to protect themselves.”
As data analytics grows into a more and more powerful way to attract and keep customers, Churchill says institutions should be using data to take an in-depth look at account attrition and where they’re losing customers. For example, one of the common stories Churchill hears is that kids come in to close their accounts when they go away to college. If the institution is bleeding accounts every August because college students can’t use mobile banking to deposit a check or access their account information easily, at what point does it become necessary to invest in digital banking?
“Customers are looking for ease of use, so if you have the services and you haven’t screwed up, they’re typically not going to change accounts,” Churchill says. “So long as you’re meeting their needs you’re okay, but the relationship has changed dramatically and customers aren’t loyal to banks anymore.”
A PEOPLE PROBLEM
If one problem is losing customer loyalty in the digital age, another is finding the right people to lead your institution’s digital crusade.§
#11
THE OTHER SIDE OF THE DIGITAL REVOLUTION
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DIGITAL BANKING


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IT and cybersecurity experts are high in demand in a job market where unemployment is already low. While community institutions should be prepared to invest in staffing their digital efforts with quality people, the question remains as to how many of those top candidates will pick a bank over, say, Google? Or a community credit union over a big bank? Churchill has seen institutions that are willing to put the time and money into digital transformation but are still struggling to find the right team.
“It’s probably the first time in my lifetime that that’s happened,” she says. “Bank IT specialists have a lot of places after them right now. It’s a small pool, and it’s narrowed further by your core application.”
THE RIGHT FIT
Even if you’ve gotten the digital ball rolling and hired a solid tech team, it can still feel daunting to start a digital campaign when you look around at the scope of what other (often larger) institutions are already offering.
“Some of the big banks have really good commercials,” Churchill says. “They have a bride and groom doing remote deposit capture, and a mom doing bill pay, and we feel like we need to have those things too.”
The good news for community institutions is that in most cases they don’t necessarily have to offer what everyone else is offering. After all, another powerful use of data analytics is to identify the particular products and services your customers want and need so you can avoid squandering resources on something they’re not really interested in.
Convenience is really what’s driving the totality of digital movement.
If you look at the studies and the data, it’s all about ease of use.
Christina Churchill, Principal, RSM US LLP
“I know some places that don’t do mobile transfer because they find they don’t really have anyone using it,” Churchill says. “Or conversely, an institution might look at its call center data and find it has huge numbers of customers calling in for their balance every day, so it makes sense to set up a system where they can text for their balance. It’s about taking whatever makes sense for you and determining how that’s going to work best.”
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JEFF MORRIS HAS A VISION FOR THE BRANCH OF THE FUTURE. BUT WHILE TECHNOLOGY IS CERTAINLY A PART OF IT, IT’S NOT ALL ABOUT THE BELLS AND WHISTLES.
#12
BRANCH STRATEGIES
THE BRANCH OF 2018
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“When you walk into the branch of the future, it’s going to look more like a personal financial planning office,” says Morris,
the managing director of ProBank Austin. “You can sit down in a private office with a personal banker one-on-one and talk about your needs.”
That means the traditional teller line with multiple stations will disappear, replaced by technology – ATMs or ITMs (interactive teller machines) – often positioned to
be accessible 24/7. But it also means a different type of employee.
“You need someone who can speak to the client about their financial options and decisions,” Morris says. “You need someone who can deal with something more than how much money they want out of their checking account today.”
As a growing segment of the population demonstrates a preference for handling transactions from a phone or laptop, the teller line may eventually become a relic of the past. But there are many ways a community institution can align its branch network with what customers need right now to prepare for a prosperous future.
RECALIBRATING THE BRANCH NETWORK
As transactions move away from brick-and- mortar branches in favor of the internet,
it’s important that community institutions approach their branch network thoughtfully. Morris recommends that at least every three years, institutions focus their strategic planning process on an in-depth look at
the healthy and dying limbs of their branch networks.
“You’re basically weighing the fixed cost savings that would result from closing a branch against the profitability of the core deposits that’ll be lost,” he explains. “That’s the tipping point.”
The public relations issues associated with closing a branch aren’t what they used to be, meaning institutions don’t necessarily have to fear the optics of shuttering the occasional branch. As ATM networks grow and digital becomes increasingly dominant, customers
tend to understand and accept the reality that they may have to travel a little further to access a brick-and-mortar branch – provided reliable and convenient digital services are still available to them.
Assessing the branch network at least every three years is essential because change is happening ever more rapidly in a digital world, and wider gaps between
“The community bank gets bypassed in a Google search, and the only way you’ll find it is if you know somebody,” says Morris.
This puts community institutions in a tough position, since they can’t simply rely on word of mouth or the branch-as-billboard strategy to pull in Millennial borrowers. New to the home market, Millennials aren’t necessarily yet turning to each other for advice, and if
those reviews could mean missing important opportunities to redirect branch costs into digital channels, to open a branch in a more strategic location or to alter an existing branch.
“The branch is not going away,” Morris says. “It’s still important, but a lot of community institutions have a smattering of branches within their network that if they could convince themselves to do something different with them, they would be better off financially.”
THE CHANGING LANDSCAPE OF LENDING
That something different may indeed be serving as a meeting place where customers can have serious, in-depth conversations about their financial needs with experts who care – conversations that have traditionally centered on mortgages and other loans. But is lending as likely to get customers in the door as it used to?
While community institutions may offer attractive and competitive mortgage rates, for example, many borrowers are moving toward online lenders – despite some having higher rates and fees. Millennials in particular are attracted to the convenience of online applications, often leading them to favor online upstarts over local options that could potentially save them money.
an institution is relying on them driving past
a branch for the hundredth time and finally popping in to see what rates are like, it’s likely to be a long wait. While these problems may be new, however, the solutions are time-honored.
“The main point is what it’s always been for community institutions – stressing the local commitment, the superior service, the in-depth knowledge of the local market and better rates without all the fees,” Morris says.
RETHINKING GROWTH
In the 2017 FMS research study “Community Mindset: Bank and Credit Union Leadership Viewpoints,” 47% of respondents noted that adding branches was an important factor
for growth. While that may still seem like a healthy percentage, Morris was quick to flip the figures to put things in perspective.
“If you had done the study ten years ago, that number would have been 90%,” he says. “I would look at that as 53% of respondents don’t think that adding branches is important. That 47% is only going to go down.”
The truth, then, may be that the “branch of the future” simply means many institutions will find that they’re able to grow without opening as many branches, and will instead focus on ensuring that the branches that remain are as vibrant, active and profitable as possible.§
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The branch is not going away, but a lot of community institutions have a smattering of branches within their network that if they could convince themselves to do something different with them, they would be better off financially.
Jeff Morris, Managing Director, ProBank Austin


#13
IN THE STARS
THE OUTLOOK FOR INTERNAL AUDIT
As community institutions look to the
New Year, two members of the FMS Risk Management/Internal Audit Council – Scott Baranowski, director of internal
audit services at Wolf & Company PC, and Michael Beverley, controller and internal audit manager at Arbor Bank – take a look into their crystal balls to predict what lies in store for internal auditors in 2018.
THE REGULATION FIXATION
It doesn’t take a fortune teller to know that regulatory scrutiny will be a primary concern for internal audit in the coming year. With so many changes coming down the pipeline – from HMDA to BSA to CECL – auditors will be essential to keeping things running smoothly in community institutions.
“In 2018, regulatory expectations are front and center in everyone’s mind – from the board room to the C-suite to the audit function,” says Baranowski. “And as regulations and requirements change, you can’t just dust off your audit program from ten years ago.”
Internal auditors will be feeling pressure from regulators to educate their institution’s audit committee about these changes as well.
“There’s an expectation that audit committee members will have a general understanding of the risk that CECL, cybersecurity and the bank’s succession planning present to the organization,”
is being touted as the auditor of the future, with speculation that machines will one day perform many audit functions. In light of these developments, Beverley says accountants and auditors need to hone the
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INTERNAL AUDIT
Any new product or service that comes into the banking space is a potential impact to internal audit, so it’s a matter of trying to get a seat at the table when people are creating these new products and services.
Scott Baranowski, Director of Internal Audit Services, Wolf & Company, PC
Beverley adds. “Internal audit will need
to develop a formal open dialogue setting where the audit committee is provided an opportunity to assess the effectiveness of risk management.”
THE DIGITALIZATION IMPLICATIONS
Technology is shaking up the internal audit function in much the same way it’s making itself felt industry-wide, with data analytics and artificial intelligence standing out as major potential disruptors. AI in particular
necessary skills to provide intangible value to their organization, especially in the area of data analytics.
“As internal auditors push to provide more value, a focus will be placed on providing the ‘right’ data, and being able to explain data in a way that’s easily understood by key stakeholders,” he says.
Baranowski further predicts a focus on sound infrastructure in the wake of


2017’s horrific hurricanes and disastrous cyber breaches. Small community institutions in particular will rely on their audit teams to ensure disaster recovery plans and business continuity plans are strong. After all, one of the time-honored ways community institutions have remained competitive is by being accessible and customer-oriented, but when a major disruption cuts customers off from their accounts for an extended period of time – whether it’s a hacker or a natural disaster – it can be the kind of deal- breaker that sends them packing.
“In the wake of Hurricane Harvey, banks were literally shipping money in armored cars to keep Houston
running,” Baranowski says. “It might not be something as catastrophic as Harvey, but if your institution gets spoofed by a bad actor and customers don’t have access to their money, that’s bad for business.”
THE INNOVATION CONVERSATION
As regulators push for auditors to have “meaningful conversations” with the audit committee, auditors themselves should be opening lines of communication with the innovative leaders at their institutions.
“Any new product or service that comes into the banking space is a potential impact to internal audit so it’s a matter of trying to get a seat at the table when people are creating these new products and services,” Baranowski says. “The control environment needs to be considered along the way and not just as an afterthought.”
For internal auditors, the most significant challenge in automation and other innovations will be having a chance to contribute to the process. When auditors can develop the right audit procedures and analyze new products from a control standpoint, they can address risks before they impact business.
“It’s a chicken-and-egg situation,” Baranowski explains. “Something needs to exist so I can audit it, but I want to help create it. It’s good to get the advice during the process so we’re not finding the problem after a million transactions have already gone wrong.”
THE EDUCATION PRIORITIZATION
In 2018, internal audit will continue to evolve, and every auditor should prioritize ongoing education to be able to continue making meaningful contributions to his or her institution. In a rapidly changing world, being a lifelong learner is what will propel internal audit into the future.
“I expect to see staffing trending in a positive direction as we continue to form innovative ways to display our value,” Beverley says. “I believe training will provide us with the ability to stay abreast of the changes and emerging issues.”§
#14
COSO’S UPDATED ERM FRAMEWORK
For the first time since 2004, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) has updated
its Enterprise Risk Management (ERM) Integrated Framework. The changes reflect the growing importance of performance and strategy in ERM, and the ways that risk has transformed at the dawn of 2018.
“The complexity of risk has changed, new risks have emerged and both boards and executives have enhanced their awareness and oversight of enterprise risk management while asking for improved risk reporting,” noted COSO chairman Robert Hirth, Jr., in a press release announcing the update. “Our overall goal is to continue to encourage a risk-conscious culture.”
The changes – which prioritize the discussion of strategy and clarify the connection between performance and ERM while explicitly connecting ERM to decision-making – were made after COSO observed that several recent high-profile organizational failures were borne of pursuing a strategy that was inconsistent with the overall vision and values of the organization. The updated framework gives institutions tools to evaluate how strategy and risk interact, so they won’t be unpleasantly surprised by the long-term and large-scale implications of strategic decisions; after all, a strategy can be flawlessly executed and still do harm to an organization if it doesn’t align with its values.
The revised framework also helps institutions more closely analyze the relationship between performance and risk, especially in regard to how performance can impact the level of risk an institution can wisely assume. Attention to this relationship commonly only focuses on what will happen if performance is worse than expected, but COSO is now stressing the importance of also taking into account the risks that come with surpassing goals.
Looking ahead, COSO is focusing on several trends that may affect the future of risk management, including adapting to the increasing importance and ubiquity of data and effectively utilizing artificial intelligence and other forms of automation.
“There is no doubt that organizations will continue to face a future full of volatility, complexity and ambiguity,” Hirth explained. “Enterprise risk management will be an important part of how an organization manages and prospers through these times.”§
RISK MANAGEMENT
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#15
THE NEXT ACT FOR HMDA
REGULATORY CHANGES
As community institutions prepare for 2018, the CFPB’s Home Mortgage Disclosure Act (HMDA) may not be high on the list of pressing concerns. After all, HMDA has been in the news for quite some time – the most recent major item was the final rule amending Regulation C in 2015 – and most institutions probably feel like
they have a pretty good handle on the basics. However, like other regulatory initiatives, HMDA is in fact a many-splendored thing, and most of what institutions have already internalized is really just one part of what they need to know.
THE CHANGES
What’s new with HMDA in 2018? Some of the key changes involve the platform used for HMDA reporting, which institutions must access as of January 1 with a Legal Entity Identifier (or LEI, available at gmeiutility.org), which is a number intended to replace the menagerie of respondent IDs previously used for HMDA reporting. Once they gain access to the HMDA platform, institutions will also notice
that the number of reportable fields on the platform has increased dramatically – from 26 to 110 – to encompass disaggregated data for ethnicity, race, sex and more for all applicants seeking credit that is HMDA reportable.
While this last point likely will cause regulatory burdens to rise as fast as blood pressures in many community institutions, there’s some welcome burden-reducing news in 2018 as well. HMDA has added a uniform loan-volume threshold for depository institutions effective January 1, replacing a temporary level set in 2017. Now in addition to the existing asset size, location, loan activity and federally-related tests to determine reporting qualification, an institution must meet the new loan volume threshold as well.
“A creditor must have originated at least 25 closed-end mortgage loans in each of the preceding two calendar years,” explains William Deligiannis, a senior manager at Plante Moran. “The creditor
must collect, report and disclose the new HMDA data on all such transactions beginning in 2018. Likewise, if a creditor originated 500 open-end lines of credit in each of the two preceding calendar years,
it will be responsible for HMDA data on those types of transactions as of 2018. However, beginning in 2020, the number of open-end lines of credit that are originated in the previous two calendar years reverts back to 100 – HMDA data will be required for these types of loans beginning on January 1, 2020.”
THE IMPACT
While the new loan volume threshold will certainly have an impact on some institutions, Deligiannis believes it’s the new data format that will represent the biggest HMDA adjustment in the community institution space.
“The new data format and additional fields will be of concern to for community institutions that are currently using a manual process for HMDA compliance,” he says. “These institutions should consider adopting an automated system to reduce the risk that HMDA data will fall through the cracks. Having an automated system and selecting a sample of loans to test for HMDA compliance is a better use of limited compliance resources.”
Another area of concern will be the tracking of open-end loans, particularly for those institutions that have traditionally elected not to report home equity lines of credit.
“Under the new rule, open-end lines of credit also include commercial lines of credit secured by dwellings, including apartment buildings, 1-4 family rental units, etc.,” Deligiannis explains. “This will require the community institution to keep trace of these commercial lines and home equity lines to determine if it meets the threshold.”
Deligiannis says that in order to properly account for the new HMDA provisions, compliance processes will need to be updated and staff will need to be trained to identify which loan applications are covered by the final HMDA rule and ensure that all data is collected. This will be best accomplished through a comprehensive training plan that includes system updates, new processes and reporting standards.§
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#16
THE FMS FORUM 2018
Take that fresh unmarked 2018 planner and draw a big red circle around June 10-12. That’s when you’ll want to make plans to be in Orlando for three big days of networking, learning and fun at The FMS Forum!
THE SITE
The Hyatt Regency Grand Cypress is a luxury resort offering a spa, a half-acre pool with 12 waterfalls, on-site dining and a Jack Nicklaus- designed golf course, as well as shuttle service to local theme parks. After a full day of educational sessions and meeting with your peers from across the country, you can get a drink, book a massage or go for a swim – without ever leaving the grounds.
THE PARTY
Speaking of golf, you can tee off for a round with your fellow financial leaders on Sunday, June 11, with a continental breakfast beforehand and a buffet luncheon and award session after. For those who prefer their optional activity a little more wild, we’ll also be sending a group to the untamed plains of Africa for a behind-the- scenes tour of Disney’s Animal Kingdom.
Of course, throughout the Forum we’ll be celebrating 70 years
of FMS, including a ‘70s themed party that will attempt to bring disco kicking and screaming into 2018. You’ve been warned – come prepared to boogie.
THE AGENDA
This year’s Forum will feature a full program of timely and insightful educational sessions from top-rated industry professionals, as well keynotes from two dynamic speakers - customer-focused strategy expert Chip Bell at the opening general session and award-winning author and Everest mountaineer Paul Deegran to close out the event.
So pack your business cards – and your bell bottoms – and make plans to join us in Orlando for the event of the year. Can you dig it?§
PARTY IN ORLANDO
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#17
NEW YEAR,
NEW CHAPTER
Two decades since FMS last launched a new local chapter, we’ll mark our 70th anniversary in 2018 by welcoming the members of the brand new Dallas-Fort Worth Chapter to the FMS community.
This is fitting, of course, since chapter organizations formed the original foundation for today’s FMS. In 1948, a controller by the name of William Giraldin arranged for a group of his local peers to meet and share ideas, thus founding the first chapter and, shortly thereafter, FMS. Nearly seven decades later, our local chapter network remains an active and excellent way to get to know fellow FMS members and become involved with the organization.
The new FMS Dallas-Fort Worth Chapter will host its inaugural kickoff meeting in early January 2018 (date was to be determined as this issue’s print deadline), with subsequent meetings to follow throughout the spring. To help launch the chapter, the FMS board of directors recently appointed directors-at-large John Carrozza, executive vice president and CFO of Phoenixville Federal Bank
and Trust in Phoenixville, Pennsylvania, and Robert Segal, chief investment officer and CEO of Bedford, Massachusetts-based Atlantic Capital Strategies to head up our new FMS Chapter Working Group. As former FMS chapter presidents, their expertise will be critical to the successful launch of the first FMS chapter of the 21st century.
“My experience with the FMS Philadelphia Chapter over the years has helped shape my career in a way that I will forever be grateful for,” Carrozza says. “FMS is a fantastic organization made up
of passionate professionals doing great things in the financial institutions industry. I’m honored to help expand that passion
for our industry to new members and chapters in Texas and, eventually, across the country.”
If you reside in the Dallas-Fort Worth area, or in any of the other areas serviced by our eight existing FMS chapters, and would
like information on how you can become involved, contact FMS at [email protected] Better yet, if you’re looking to start an FMS chapter in your community, contact Autumn Wolfer, FMS Director, Member Relations and Professional Development at [email protected] FMSinc.org. §
CHAPTER AND VERSE
38 | FMS forward | JANUARY/FEBRUARY 2018
#18
THE CLASS OF 2018
Financial professionals know that one of the keys to success – for both their careers and their institutions – is to never stop growing. From new regulations to new technology to new workplace trends, being a leader in the industry means being educated and informed at all times in order to stay ahead of the curve.
Sharing that commitment to professional development, FMS is proud to offer a growing library of on-demand webinars. Learn about ALM assumptions, effective leadership, data analytics, vendor pricing, risk appetite and more from top industry experts and thought leaders on your own schedule and at your own pace, with 24/7 access that can transform your office or living room into a classroom whenever it’s convenient for you.
Just like our live sessions, all of our on-demand webinars are complimentary to FMS members, so visit the Education tab on our website today to stay informed and ahead of the curve!
FMS EDUCATION
C M Y CM MY CY CMY K
ON THE HORIZON
ALM FOR THE BOARD OF DIRECTORS
January 23
ONLINE
5300 CALL REPORT FOR CREDIT UNIONS
March 5
ORLANDO, FL
CALL REPORT BOOT CAMP FOR BANKS AND THRIFTS
March 5
ORLANDO, FL
FMS-AMIFS 2018 ANNUAL CONFERENCE
April 18
TEMPE, AZ
THE 2018 FMS FORUM
June 10-12
ORLANDO, FL
FMS-AMIFS INSTITUTE
July 15-20
SAINT LOUIS, MO
*limited space
We’re always adding new programming, so be sure to check FMSinc.org for the latest seminars, webinars and chapter events.§


THE
FORUM
ANNIVERSARY
JUNE 10 - 12, 2018
The Forum is the only event of its kind dedicated exclusively to nancial professionals from community
banks, thrifts and credit unions.
Join us for our 70th Anniversary Celebration from past to present. You won’t want to miss The 2018
FMS Forum. There’s something for everyone!
Orlando, FL
CHIP BELL
PAUL DEEGAN
INTRODUCING
GENERAL SESSION
SPEAKERS CHIP BELL & PAUL DEEGAN
LEARN. CONNECT. COLLABORATE.
REGISTER TODAY AT FMSinc.org/TheForum18
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Financial Managers Society
1 North LaSalle Street, Suite 3100 Chicago, IL 60602
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FMS Industry Insights
Your trusted source for information on leading trends and research that connect
insights with solutions
on the most prevalent issues facing our industry. Stay ahead of the curve!
Visit FMSinc.org/IndustryInsights to learn more.


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