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© 2017 – FinPro, Inc. 0158 Route 206 North Gladstone, NJ 07934 P: (908) 234-9398 [email protected] www.finpro.us

New Jersey BankersDo not get complacent – Change is coming!

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© 2017 – FinPro, Inc. 1

In a world full of change, Directors and Senior Officers, need to focus on these key things.

1. Change: Stay abreast of change2. Regulatory: Assess risk and manage accordingly3. Economics: Plan under multiple environments, define trigger points!4. Demographics: Know how demographic shifts will change your market5. Technology: Stay current with technology, avoid oligarchy traps6. Customers: Market to customer segments7. Employees: Select and retain top talent8. Corporate Governance: Improve corporate governance9. Planning: Identify Trigger Points and Incorporate into Strategic Plan

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© 2017 – FinPro, Inc.

Change: Stay abreast of change. Change is impacting every industry, not just banking.

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Then Now To Come

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Traditional brick and mortar branches will follow the path of blockbuster video stores . . .

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Human Delivery

Digital Delivery

Call Center Delivery

Mini Branch Delivery

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Can this Administration, Senate and House get ANYTHING DONE? Are they CAUSING change or STIFLING change?

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Then Now To Come

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2015 2016 2017

Regulation: Assess risk and manage accordingly. Based on recent exam report findings, regulators are focusing more on risk management, strategic, and information technology (IT) risks.

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Capital

Asset Quality

Management

Earnings

LiquidityLegal &Regulatory

ReputationITValuation

CorpGovernance

BSA

Strategic

RiskManagement

Compliance

Operational

Sensitivity

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Beware of Pending Regulatory issues and change.

Key concepts Credible challenge Presumptive knowledge Documentation Reality

Pending changes Curry – term expires 4/2017 Gruenberg – term expires 11/2017 Cordray – term expires 7/2018 FRB – 2 Openings + Tarullo and Lacker resignations

Agencies will follow their leaders – look for regulatory easing!

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What regulatory issues should keep us up at night?

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Wholesale Funding Brokered, Listing, Borrowing, Internet Volatile?? Core??

Concentrations MHC Structure – Do we need affiliate agreements? Bank Holding Company Thresholds BASEL and Capital Consumer Advocacy – CFPB UDAAP, Disparate Impact and other subjective governance Accounting Issue: CECL Dodd Frank

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Economics: What economic issues should keep us up at night?

Rising Rates Fed Funds 10 Year

Tax Rates and Policy Corporate Individual Loss of Deductions? “S” vs “C”?

Repatriation of foreign $ Scenarios

Trump Successful Continued Schizophrenia Recession

Impact on banking services Mortgage banking and refinance market Commercial Real Estate Tax Structure

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Historical Yield Curve

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

3 Month 6 Month 1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 20 YearMarch‐16 June‐16 September‐16 December‐16 February‐17

Trump Success

What might the rate scenarios look like?

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Continued SchizophreniaGridlock Recession

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Demographics: What demographic trends should keep us up at night?

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Aging Boomers will utilize accumulated wealth so will see a decline in AUM New Millennials are not motivated like Boomers If immigration levels decline, where does entry level workforce come from? How much will rural areas decline? What will happen to McMansions? Will we need as many offices as flex time skyrockets? What will happen to malls? Strip centers?

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Technological: What technological advancements should keep us up at night?

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Regulators are giving mixed signals on FinTech OCC wants to issue FinTech charters, but they CAN NOT give FDIC Insurance. NY now suing OCC over FinTech charters, other States to follow! FDIC will apply the same standards and assessment criteria to FinTech applications as it

does to any other denovo. As such, it appears that Banks will preserve their Competitive advantages of:

FDIC Insurance Leverage

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© 2017 – FinPro, Inc. 12

We are already seeing this shift in the Fintech arena as many start up companies are listening to the needs of the customer and have already launched products that have been disruptive to the financial services industry . . .

Disruptive Lenders Peer to Peer Payments Deposit Alternatives

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What should we do?

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Eliminate concentrated power of Oligarchs Shorten duration of contracts Eliminate of minimize prepayment penalties – know State law

Give customers what they want Digital banking Clean and easy use

Focus on new technology

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Customers: Transaction volumes are falling. Todays customer wants relationships . . .

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People do not come to branches anymore

They want information and advice

And will be your best salesperson, or your worst!

Find the Spheres of Influence for each

segment you want to serve.

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© 2017 – FinPro, Inc. 15

Market to specific Customer Segments . . .

Understand your

customer

Break down silos

Improve customer

experience

Process Improvement

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We must rethink our current product, transactional and functional centric approach, where we don’t listen to our customers but rather provide them what we think they want . . .

Products / Services Delivery Channels Customers

• Deposit Products

• Loan products

• Retail banking services

• Commercial banking services

• Other financial services

• Branch

• ATM

• Internet

• Mobil

• Remote Capture

• In person

? ?

?

??

??

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© 2017 – FinPro, Inc. 17

To a customer centric approach where are products are delivered to customers based on their needs . . .

Products / Services Delivery Channels Customers

• Deposit Products

• Loan products

• Retail banking services

• Commercial banking services

• Other financial services

• Branch

• ATM

• Internet

• Mobil

• Remote Capture

• In person

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How To Attract Top Talent: Competitive Compensation and Benefits:

Provide a strong base salary, bonus and other benefits to top hiring prospects

Working Environment: Provide indication on structure of promotion

and upward mobility Provide options for lateral mobility if another

department fits their interest and or skill sets better

Culture: Display positive culture attributes of the

Company to top prospects Make them feel welcome on all levels

during process

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How to Retain Top Talent: Competitive Compensation and Benefits:

Continually stay competitive on compensation

Review salaries and benefits at least annually and have market compensation studies done to verify outside competitiveness

Working Environment: Consistently track and monitor

accomplishments of employees for timely promotion within the organization (goal based)

Constantly ask for and provide feedback on improvement areas before larger issues arise

Culture: Be inclusive and make them feel as an

integral part of the team Praise accomplishments Encourage questions and collaboration

Employees: Select and retain top management. Good people are hard to find, great people are even harder to keep!

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Key attributes to look for in talent.

Intellectual curiosity Motivated Willing to take on additional responsibility and roles Hard working Quick learner Efficient and accurate Takes accountability for work Willing to take the lead, but also willing to take the backseat when needed Forward looking individual Ability to adapt Communication Passion

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Can we find Millennials with many of these attributes?

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How do we retain great people, we motivate them by showing them we are invested in them . . .

4. Strong Technician 2. Strong Performer 1. Outstanding

7. Adequate Performer 5. Solid Performer 3. Future Star

9. Poor Performer 8. Under Performer 6. Raw Talent

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Per

form

ance

Leadership, Sales, and Client Relationship Competencies

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Corporate Governance: Improve Corporate Governance.

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Central Hub

Vendor Management

Talent Management

LONOS33 More Modules

to Come . . .

Sample Policies

Valuation

Shareholder Services

Compensation Surveys

Document RepositoryProcess ManagementMeetings Management

Due DiligencePermissions & Security

Some Coming Modules:• Loan Participation Network• Liquidity• ALLL• ALCO Assumption Review• ERM• Insurance Management• Customer Segmentation• Delivery Channel Profitability• CDI and MTM Model• Market Ranking Analysis

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Board and Senior Officer Training is paramount.

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Must be aligned to bank’s risk assessment Train of high risk elements first Training should include mitigation efforts

Must be comprehensive and repetitive Use Global webinar package Use regulatory training materials and events Utilize experts where appropriate

Should use bank specific data ALCO Risk All Compliance

Best if spread into manageable segments Must be documented – “If it is not in writing, it did not happen”

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What are some of the high risk elements that require enhanced training?

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The Trump “Bump” and economy Liquidity

Core vs wholesale funding Betas and Decays Deposit Loyalty

Capital Based on internal risk assessments Where and how to get it

Consumer Compliance (unfortunately!)

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© 2017 – FinPro, Inc. 24

Good Corporate Governance includes:

Identify potential strategic opportunities for the institution Exercise

Credible challenge Presumptive Knowledge Document Reality Individual Judgment – not all board votes should be unanimous

Take steps to identify, measure, monitor and control risks Serve as a spokesperson in representing the Company and its positions Evaluate the Bank’s performance Set expectations and communicate them completely Promote open and honest discussion Attend all meetings well prepared for discussion Disclose any potential conflicts of interest

Always ask: How would the outside world perceive this?

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Planning: Identify Trigger Points and Incorporate into Strategic Plan . . .

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1. Remain Independent

Grow into infrastructure- Limited

branching- Lead with

Loans

Increase Cash dividends and repurchases

2. Sale

Organic Growth Only

Bank

Organic Growth and

Acquire

Trigger:Takeout Price>$20 per share

Trigger:Takeout Price<$20 per share

Trigger:Good fitting targets available & TBVS Dilution<10% & Workback<5 years & EPS accretion>0%

Trigger:No good fitting targets available and or TBVS Dilution>10% and or Workback>5 years and or EPS accretion<0%

Trigger:Abundance of attainable deposits and loans available in market (market feasibility analysis) for continued growth

Trigger:Less abundance of attainable deposits and loans available in market or undervalued stock price or shareholder need for liquidity

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© 2017 – FinPro, Inc. 26

Good Planning requires multiple scenarios with numerous variable stress testing.

ROAE

Definition

Significance

Historical Projections

This ratio is a second measure of overall profitability. It is the primary measure for banks and public thrifts, and measures the return being generated for each $1 of equity.

Net income as a percentage of average total equity.

9.90

10.95

10.45 9.04

9.01

10.33

9.71

9.74

10.67

11.47 10.54

6.32

10.92

11.02

11.41

11.04

5.74

7.63

8.92

6.61

7.47

7.32

7.46

7.89

7.47 7.48

8.87 8.758.29 8.45

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

Moderate Low High Moderate HighPeer Group 1 Median Peer Group 2 Median Bank Base Case 20% ProvisionFed Forecast Robust Economic Growth Market Recession 10% Loan and Deposit Growth 90% Loans and 120% DepositsNIE +5% -$1 Mil Expenses Combination Trigger Point

Trump Platform Execution

Flat Environment

Market Recession

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“Traditional” Model

Historical Perspective

Asset Growth

Transactions

Products

Advertising

Brick and Mortar

SILO’ s

Single Scenario Plans

Regulatory Constraints

Departmental Risk Assessments

Board Confusion

Job Training

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FinPro 2020 Model

Forward Looking

Value Creation

Relationships

Customers

Targeted Marketing

Targeted Delivery

Integrated Organizations

Multiple Stress Tested Scenarios

Market Opportunities

Integrated ERM

Effective Corporate Governance

Talent Management

In Conclusion: The “traditional” community banking model is dead! Those organizations with strong leadership will recognize the new paradigm and enact change accordingly . . .

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© 2017 – FinPro, Inc. 28

We must change from the traditional model to ensure future success . . .

Changing Demographics

Changing Technology

Continued Regulatory /

Compliance Burden

Unstable Economic Rate

Environment

New Under Regulated Non‐

bank Competition

Under Educated and

Under Trained Staff

Single Analysis Engine

Individual Variable and

Total Scenario Stress

Testing

Corporate Governance

Board Training

Customer Segmentation

Talent Management

New Delivery Channels

Risk Management

Regulatory Expertise

Improve Delivery

• Human Branches

• Digital Branches

• Brick & Mortar

Focus on customers (not

products)

Relationship – not

transactions

Talent Management

• Few employees

• More expensive

• Better Educated

Creating the right brand in a

highly commoditized world

The Face of Community Banking is Changing . . .

Each Bank will Need the Following Tools . . .

So, To Create Value . . .

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For more information, please contact

Donald MussoPresident, FinPro, Inc.

908‐234‐[email protected]

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new jersey bankers · management new deliverychannels risk management regulatory expertise improve...

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