ERM + STRATEGIC PLANNING. February 2016 IBAT

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1 ERM + STRATEGIC PLANNING February 2016 IBAT

2 RISK CATEGORIES OCC defines eight categories + three Credit Risk Interest Rate Risk Liquidity Risk Operational Risk Price Risk Compliance Risk Strategic Risk Reputation Risk Concentration Correlation Historical Trending 2

3 PICK YOUR FLAVOR 3

4 OPERATIONAL RISK IS HIGH (SEMIANNUAL RISK PERSPECTIVE, SPRING 2015) Business models are under increasing pressure as banks: launch new products increase reliance on technology and automated controls reduce staff, outsource critical activities re-engineer business processes Banks are not always adapting risk management and control processes to their changing business strategies 4

5 Opportunities Challenges 5

6 PRUDENT RISK MANAGEMENT The agencies examination and industry outreach activities have revealed an easing of CRE underwriting standards, including less-restrictive loan covenants, extended maturities, longer interest only payment periods, and limited guarantor requirements. The agencies also have observed certain risk management practices at some institutions that cause concern, including a greater number of underwriting policy exceptions and insufficient monitoring of market conditions to assess the risks associated with these concentrations. Joint Agency Statement on Prudent Risk Management for CRE Lending December 18, 2015 Financial Institution Letter FIL

7 FINANCIAL INSTITUTIONS WITH CONCENTRATIONS Historical evidence demonstrates that financial institutions with weak risk management and high CRE credit concentrations are exposed to a greater risk of loss and failure. These actions are consistent with supervisory expectations: Loan policies, underwriting standards, credit risk management practices, and concentration limits are approved by the board Lending strategies, plans to increase lending in a market or type, limits for credit and concentrations, are reviewed to be appropriate in light of changing market conditions Strategies ensure capital adequacy and allowance for loan losses support the bank s lending strategy and are consistent with the inherent risk in the CRE portfolio Perform market analyses (Changing economic conditions) Assess ongoing ability of borrowers and their projects to service all debt as loans convert from interest only to amortizing payments or during periods of rising interest rates Joint Agency Statement on Prudent Risk Management for CRE Lending December 18, 2015 Financial Institution Letter FIL

8 COMMERCIAL LENDING CONCENTRATIONS 73% 8

9 INVESTORS AREN'T THE ONLY ONES RUNNING FOR SAFETY Businesses are indicating an unwillingness to take on risk as loan demand declined for the first time in about four years. Demand for commercial and industrial loans has plunged in 2016, with declines happening across business sizes. Large- and medium-sized businesses had an 11.1 percent decline, while demand from small businesses fell 12.7 percent. Jeff Cox February 2, 2016 Banks report drop in demand for loans - CNBC.com 9

10 IN SHORT, BUSINESS INVESTMENT IS UNLIKELY Banks report weakness in demand for loans from businesses primarily because they are scaling back their investment plans. With energy, mining, manufacturing and agriculture sectors all hurting, we hadn't expected much from business investment this year, but the drop off in loan demand is worse than we expected. Paul Ashworth, chief U.S. economist at Capital Economics Jeff Cox February 2, 2016 Banks report drop in demand for loans - CNBC.com 10

11 ON THE POSITIVE SIDE Banks reported that demand for commercial real estate loans had increased in January and that lending standards for households had eased. But they also expect lending standards to tighten both for commercial real estate and commercial and industrial loans. Jeff Cox February 2, 2016 Banks report drop in demand for loans - CNBC.com 11

12 2015 Mid-Cycle Status Report Supervisory focus for the second half of 2015 and beyond centers on: Strategic Planning and Execution: Adequacy of strategic, capital and succession planning processes in light of assumed risks Corporate Governance: Reinforcing the importance of sound corporate governance Operation Risk: Focus on all phases of risk management, including planning, due diligence internal controls and ongoing monitoring 12

13 BANK DIRECTOR GROWTH STRATEGY SURVEY 13

14 Regulatory Focus (Semiannual Risk Perspective, Spring 2015) Risk management strategies Strategic, cybersecurity, compliance, underwriting and IRR remain top supervisory concerns Strategic objectives in relation to potential exposures Weak underwriting standards in indirect auto, asset based lending, CRE, C&I coupled with liberal repayment terms Banks continue to reevaluate their business models and risk appetites and some take on additional risk by expanding into new, less familiar, or even higher risk products/markets without adequate due diligence 14

15 BANK DIRECTOR GROWTH STRATEGY SURVEY 15

16 Regulatory Focus (Semiannual Risk Perspective, Spring 2015) What is the depth and breadth of potential exposures? In order to deal with competitive pressures and lower expenses, banks are leveraging technology such as cloud computing and mobile banking, which can increase exposure to operational risk Capability and resources of management Management succession planning, attracting appropriate expertise, and retaining key experienced personnel are growing issues especially in credit, BSA/AML, compliance, ERM and audit Strategic planning is a challenge given the current operating environment Risk appetites have not been determined and approved 16

17 WHAT TO START WITH Why would MBSs concern regulators? What is the strategy of a concentration in Jumbos? What would be a strategy for improving NPLs? How is outside risk influencing your strategy? Do you have sufficient BSA/AML expertise? 17

18 SECURITIES PORTFOLIO 18

19 HELOC PERFORMANCE 19

20 NPLS 20

21 CONCENTRATIONS IN CDS 21

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23 LOCAL & REGIONAL ECONOMICS/DEMOGRAPHICS What is the organizations level of risk of exceeding local, regional and national economic & demographic trends and level of competition? 23

24 Standalone ERM Pitfalls Regulatory tail wagging the dog ERM is about management, not compliance Compliance is required but not sufficient in planning Just integrates risks Doesn t break down organizational silos Identify interdependencies in planning Boils the ocean Doesn t focus on what is most important Support strategic decisions for your board, shareholders and regulators in planning 24

25 STAGES OF THE MARRIAGE Stage 1: Foundation Setting. Review policies. Verify that limits and guidelines fit your strategies. Stage 2: Identify and Establish Appetite. Aggregate multiple assessments into one for a comprehensive picture of risks related to strategy. Stage 3: Risk & Performance Measurement and Reporting. Include both Key Risk Indicators (KRIs) and Key Performance Indicators (KPIs) that relate to the strategic plan and are being tracked against policy limits and forecasts. Stage 4: Risk/Strategy Management. ERM must impact decisions that reinforce a riskadjusted strategic plan. 25

26 COMBINE RISK & STRATEGY FIRST How would you rate your current strategic planning process? Are you using your budget as your business plan? How often do you reforecast? How are you considering risks associated with your plan and forecast? 26

27 START WITH THEIR FORMAT 27

28 Banks continue to reevaluate their business models and risk appetites and some take on additional risk by expanding into new, less familiar, or even higher risk products/markets without adequate due diligence KPMG Community Bank Survey 2015 Semiannual Risk Perspective, Spring

29 Are you including risk /compliance folks in the strategic planning process? Have you established risk appetites that reach across business units? Do you document risks as a result of strategy and share that with the board? Who is tracking risks and what do they do with the information? 29

30 ERM & STRATEGY IS ABOUT STOPPING THE SUBCULTURE The threat is the subculture that exists within the bank. Those who are leading and supporting an agenda that is counterproductive to the bank s stated culture are leading the subculture. They may appear to agree with the strategic vision, but they have a better way of achieving it. A community bank s competitive advantage is its relationship based culture. If your ROA is below 1.0; if your non-interest bearing deposits aren t growing; if you re not keeping score of cross-sells; if you re not conducting telephone shops; if you don t have a deposit and acquisition strategy; then you don t have a relationship based culture. It s possible to have one without them, and it is quite possible that your bank is dominated by a subculture. Is Your Bank s Subculture Taking Over? SCMG The Texas Independent Banker January/February

31 SHIFTING YOUR BANK FROM MINIMIZING RISK TO BUILDING VALUE The approach of strategic planning should not be some sort of academic exercise to accomplish for the regulators. Rather, top-performing financial institutions in the country utilize planning to: 1. Define success over a specific time horizon 2. Delineate alternative paths to achieve these goals 3. Determine trigger points along the way 4. Examine the execution risks and conduct stress tests 5. Focus the bank on executing the stated goal the top performing banks start with a realistic goal in three to five years and then figure out how to accomplish the task. Strategic Planning in 2016 Robert Fehn FinPro BankNews September

32 1. Mimics risk categories identified by your regulators 2. Easily included into your strategic plan 3. Offers expertise that compliments the software 4. Provides a centralized repository for data collection, scoring, reporting, analyzing and storing in a real time environment 5. Facilitates work flow and risk assessment for management and monitoring 6. Tracks and includes Key Risk Indicators (KRIs) 7. Platform will sync information with Board Portal 32

33 Q&A 33

34 CONTACT ME (888) Ext Thank You! 34