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Top concerns of chief financial and risk officers at community banks

FINANCIAL INSTITUTIONS INSIGHTS  | 

This article is based on a presentation given during the 2017 Executive Management Road Tour, sponsored by RSM US LLP and PCBB, which addressed the latest critical issues facing community banks. The following offers highlights from that presentation with Steve Brown, president and CEO of PCBB.

Keeping them up at night

Surveys of almost 200 chief financial officers (CFOs) and risk management officers at community banks across the country ranging from $100 million in assets and up shared their top challenges in the industry. Here are some highlights of their concerns and what is keeping them up at night based on two surveys by PCBB: The 2017 State of the Union for Community Bank CFOs and 2017 State of the Union for Community Bank Risk Management Officers surveys.

Leveraging technology

Nearly two-thirds of community bank CFOs rank new technology at the top of their list of concerns. The U.S. government has determined that money laundering and cybersecurity are national security threats to the country, so bank regulatory scrutiny in these areas has ramped up significantly. CFOs also said learning how to leverage technology to serve customers, support new products and services, and aid in operations is taking up an increasing portion of their day.

The changing role of the CFO

Nearly half of CFOs say their roles have grown significantly in the past five years, which may explain why one in five say they do not have adequate staffing and budget for their primary financial responsibilities or to engage in strategic initiatives. About 39 percent even indicated they spend less than half their time on financial matters. Very few CFOs say their roles have stayed the same.

What has shifted the role of the community bank CFO? Technology-related projects are taking up more of the CFO’s time, and this requires getting up to speed on areas outside their scope of expertise. This means education, training costs, and hiring more staff—big budgeting issues.

CFOs need more time to devote to their roles as part of the management team, but the role has shifted and that affects their priorities. Only about one-third of CFOs spend more than 75 percent of their time on financial matters. They may need to offload some responsibilities in order to get more time to spend in other areas, such as loan pricing, loan portfolio risk or loan loss reserves, where their knowledge is increasingly needed to enhance results and manage risks.

Regulatory compliance

Just over half of CFOs at community banks say their organization is “somewhat prepared” for the new current expected credit loss (CECL) standard; and no one claims to be “very prepared.” While adoption is not effective until 2021 for many entities, the time for institutions to prepare for implementation is now. Extraordinary in its complexity, the standard has raised uncertainty regarding its applicability, particularly for financial institutions.

The survey shows responsibility for preparing a bank for CECL compliance falls primarily to the CFO. But like the Bank Secrecy Act and the implementation of its anti-money laundering rules, implementing CECL requires a dedicated team effort involving finance, compliance, lending and risk officers—and that means ensuring that enough resources are available.

Succession planning

Nearly two-thirds of community bank CFOs feel their responsibilities are manageable, yet one-third report their stress has risen to high or very high levels compared to just one year earlier. CFOs are taking on more responsibility and this is likely driving some of the anxiety.

Yet in their efforts to share the responsibilities, nearly two-thirds of CFOs are finding it difficult (or even very difficult) to find qualified candidates to take on some tasks or to replace the CFO when he or she retires.

The survey also found that community banks hoping to leverage the skills and experience of executives from larger banks may not be able to offer attractive enough packages and some have geographic limitations that appear to reduce opportunity. Banks in smaller markets in particular are having difficulty attracting talent, especially in information technology, cybersecurity and compliance.

Risk mitigation

For risk management officers, cybersecurity is the No. 1 concern, with credit and compliance placing a distant second and third. While lending and compliance are receiving increased attention from the media and regulatory entities, cybersecurity is an immediate and broad-based threat.

Like CFOs, nearly half of risk management officers view technology as the bank’s biggest area of risk. Perhaps surprisingly, employees—who other studies shows are typically the top source for processing mistakes, fraud, breaches and other issues of concern—were flagged as a risk by only 18 percent of risk management officers. Regulators and customers follow as other risk concerns.

The strategic focus for 2018

This list is by no means comprehensive. About one-third of community bank CFOs are concerned about managing costs; this is expected to be an area of major strategic focus in the coming months. Filling open positions and getting access to capital are among other major concerns. CFOs also will be engaged in introducing new products and services in their banks’ efforts to drive revenue.

Many banks are focusing on increasing capital and moving into new markets, driven by local pension issues or political gridlock to look beyond their state borders. This could mean the competitive landscape will shift as new banks appear on the border.

But 60 percent of the bankers said the number of their branches will stay the same, while just under one-third will increase their total branches. Even as customers move towards non-branch, digital channels, it seems counterintuitive that only 13 percent of CFOs expect to decrease the number of branches.

But CFOs say that acquiring new customers—and upselling existing customers—will be their top areas of strategic focus through 2018. To that end, in an effort to attract customers to their branches, many banks are modernizing branches into sleek, high-tech locations that offer amenities from coffee bars to yoga along with their services and blend the digital within the brick-and-mortar space.1

In the end, it is about remaining competitive and profitable.

 

1 M. Ghosh, “10 ways for banks to achieve greater profit and customer satisfaction” (Jan. 9, 2014) Data Science Central.