Today s Conversations for a Better Tomorrow: 5 Key Areas the Board and Directors Should Be Discussing

Transcription

1 Today s Conversations for a Better Tomorrow: 5 Key Areas the Board and Directors Should Be Discussing Chris Loyd, CPA, CISA, CGMA Shareholder June 5, 2017

2 This material was used by Elliott Davis Decosimo during an oral presentation; it is not a complete record of the discussion. This presentation is for informational purposes and does not contain or convey specific advice. It should not be used or relied upon in regard to any particular situation or circumstances without first consulting the appropriate advisor. No part of the presentation may be circulated, quoted, or reproduced for distribution without prior written approval from Elliott Davis Decosimo. 2

3 Today s Speaker Professional Overview Chris has more than 15 years of public accounting experience and works exclusively with financial institutions. He provides external and internal audits, Sarbanes-Oxley control audits, Loan Review and IT audits to community banks ranging from $50 million in assets to multibillion dollar financial institutions. Prior to joining Elliott Davis Decosimo, Chris worked with various industries and service areas including financial institutions, healthcare, manufacturing and distribution and benefit plans. Chris Loyd, CPA, CISA, CGMA Shareholder Nashville, TN 3

4 Agenda Planning for the future, what should Boards be discussing? Capital: - Do we have the necessary capital for growth and in light of new accounting and regulatory standards? Regulations: - How do you keep up and manage costs? Succession: - Do we have our next tier of leadership? Technology: - Are we prepared for the cybersecurity challenges & the new generation? Independence: - Can we remain independent in light of the above and other challenges? 4

5 1.) Capital Planning for the future: - New BASEL III Capital Requirements - Impact of new accounting standards Current Expected Credit Losses (CECL) Lease Standard - Organic Growth 5

6 1.) Capital BASEL III Phase in Arrangements (All dates are as of January 1) Capital Phase Minimum common equity capital ratio 3.5% 4.0% 4.5% 4.5% Capital conservation buffer 0.625% 1.25% 1.875% 2.5% Minimum common equity plus capital conservation buffer 3.5% 4.0% 4.5% 5.125% 5.75% 6.375% 7.0% Phase-in of deductions from CET1* 20% 40% 60% 80% 100% 100% Minimum Tier 1 capital 4.5% 5.5% 6.0% 6.0% Minimum total capital 8.0% Minimum total capital plus 8.0% conservation buffer 8.0% 8.625% 9.25% 9.875% 10.5% *Including amounts exceeding the limit for deferred tax assets (DTAs), mortgage servicing rights (MSRs) and financials. Source: Bank for International Settlements 6

7 1.) Capital New Accounting Standards - Current Expected Credit Loss Model (CECL) Final standard issued in June 2016 When is it applicable (calendar year)? SEC filers January 1, 2020 Non-SEC filing public business entities January 1, 2021 Non-public and non-profits January 1, 2022 Early adoption is allowable January 1,

8 1.) Capital Impact of CECL - Begin evaluating in Reminder: On date of adoption: Initial adjustment to beginning Retained Earnings (as Cumulative Adjustment) - Various view points on amount of impact - Current ALLL impact on capital Deduction from Tier 1 (limit to 1.25% of RWA); no guidance from regulators if this will change 8

9 1.) Capital New Accounting Standards - Leases Issued by the FASB in February 2016 Under the old guidance (currently used in practice): Operating leases and capital leases Operating leases not included on the balance sheet and lease expense is charged to operating expense. Capital lease recognized as both an asset and a liability. Interest expense and depreciation are both recognized over the term of the lease. 9

10 1.) Capital Leases Under the new guidance: - Type A (finance lease) and Type B (operating lease) Type A most existing capital leases Type B most existing operating leases - Balance Sheet (MAJOR IMPACT) all leases 12 months or greater, including renewals will result in recognition of an asset and a liability on the balance sheet - Income Statement (minor impact) Type A costs presented as lease expense and recognized on a straight-line basis Type B will recognize amortization of right of use asset separately from interest 10

11 1.) Capital Leases Effective dates (calendar year) - Public and public business entities Private Early adoption is permitted 11

12 1.) Capital In Summary, Management and Board should: - Evaluate the Known impact (BASEL III, Leases) - Plan now for the Unknowns CECL Growth 12

13 2.) Regulations How do you keep up and manage costs? Community banks attempt to keep up - Dodd Frank (22,000 pages) - Bank Secrecy Act - Other Impediment to Growth? Managing the costs - Overhead - Qualified staff 13

14 2.) Regulations Impediment to Growth - M & A BSA/AML issues - M&T & Hudson City 3 year delay - Bancorp South 2 mergers CRA Fair Lending CRE concentration 14

15 2.) Regulations Costs (for highest rated banks) - Commercial banks $1 billion to $10 billion (average compliance costs 2.9% of noninterest expenses*) - Commercial banks $500 million to $1 billion (average compliance costs 4.5% of noninterest expenses*) - Commercial banks $100 million to $500 million (average compliance costs 5.5% of noninterest expenses*) - Commercial banks less than $100 million (average compliance costs 6.8% of noninterest expense*) - 60 percent of compliance costs personnel expense* *The Regional Economist/July

16 2.) Regulations Costs/Qualified Staff - Size of bank - Passing to the consumer - Qualified staff - Training Staff Potential Relief? - Financial CHOICE Act for small banks some relief on Dodd Frank and BASEL III if they meet 10% leverage ratio 16

17 2.) Regulations In Summary, Management and Board should: - Evaluate staffing and qualifications of staff - Consider the costs of staff and outside third parties to meet regulatory requirements 17

18 3.) Succession Do we have our next tier of leadership? Focus of Examiners Evaluate as part of Annual Strategic Planning Plan for next five years Managing overhead 18

19 3.) Succession Evaluation should include: - Board - Senior Management, including Key Lenders - High Risk Areas (IT, Audit, Loan Review) 19

20 3.) Succession Challenges - Double Costs during transition - Qualified candidates (few training programs any longer) - Rural markets 20

21 3.) Succession In summary, Management and Board should: - Assess retirements over next 6-8 years - Evaluate unplanned/unexpected departures - Develop training plans 21

22 4.) Technology Are we prepared for Cybersecurity challenges and millennials? Issues - Cybersecurity - IT Staffing - Preparing for Millennials 22

23 4.) Technology Cybersecurity & data breaches - Hacking - Malware - Physical attacks - Social engineering - Privilege abuse IT Staffing 23

24 4.) Technology Millennials - Fastest growing segment for banks - Online banking products (mobile check deposit, peer to peer payment, fingerprint recognition) - Generation will inherit unprecedented wealth 24

25 4.) Technology In Summary, Management and Board Should: - Ensure the Bank has competent, qualified leader of IT team - Evaluate whether the IT team/management have assessed overall IT/cybersecurity risks - Plan now to attract millennials through the necessary technological methods 25

26 5.) Independence Do we want to remain an Independent Bank? If so, how do we deal with: - Capital requirements - Regulatory burdens increasing - Succession issues - Technology challenges 26

27 5.) Independence Strategic Planning Assess the Board s intentions What does the Board & Management really want to do? Have candid, open discussion in strategic planning The sky is NOT falling! Size/scale matters but, MANY factors affect earnings 27

28 5.) Independence Strategic Planning In evaluating consider: -Location(s) of markets and branches -Competition -Ability to price products/services -Customer loyalty 28

29 5.) Independence Consider Two Examples - Bank of South Carolina Corporation -Charleston, South Carolina -4 branches -Total assets $430 million -30 years old -Public 29

30 5.) Independence Consider Two Examples - Bank of Clarendon -Manning, South Carolina -5 branches -Total assets $265 million -85 years old -Private 30

31 5.) Independence Bank of South Carolina (in thousands) 12/31/ /31/ /31/ /31/2016 Total assets $340,773 $367,138 $399,165 $414,322 Net income $4,247 $4,586 $5,079 $5,424 ALLL/Loans ROAA ROAE Tier 1 Risk Based Ratio Risk Based Capital Ratio Note: All information above obtained from SNL 31

32 5.) Independence Bank of Clarendon (in thousands) 12/31/ /31/ /31/ /31/2016 Total assets $217,863 $222,495 $245,470 $262,015 Net income $2,087 $2,158 $2,245 $2,358 ALLL/Loans ROAA ROAE Tier 1 Risk Based Ratio Risk Based Capital Ratio Note: All information above obtained from SNL 32

33 5.) Independence Why are these banks successful? Bank of Clarendon - Locations - Competition - Customer loyalty Bank of South Carolina - Customer loyalty - Locations - Culture 33

34 5.) Independence Being Profitable - If not at level desired: - Focus on improvements first - Net interest margin - Noninterest income - Noninterest expenses (efficiency ratio) - Evaluate products/services - Tax planning/strategies 34

35 5.) Independence Once Desired Level of Profitability Obtained Evaluate being Private vs. Public - Do you have capital to grow? - If plans for growth, does your stock provide necessary value? - Is there sufficient liquidity in stock to absorb periodic requests by other shareholders to sell? 35

36 5.) Independence Staying Private Enhancing Shareholder Value - Cash dividends - Share repurchases - Stock splits/dividends - Incentive Comp/Equity-Based Plans - ESOP/KSOP 36

37 5.) Independence Staying Independent In conclusion: - Achieve desired level of profitability - Have a PLAN which shareholders understand - Stick to your plan! - Keep the regulators updated on your plan 37

38 In Conclusion Take Aways - Capital remains king - Regulations increasing but can be managed - Succession banking remains a highly respected profession and talent does exist - Technology a factor that may set you apart - Remaining Independent is a valid option and can be very rewarding for shareholders 38

39 Chris Loyd Phone: Website: Elliott Davis Decosimo ranks among the top 30 CPA firms in the U.S. With nine offices across four states, the firm provides clients across a wide range of industries with smart, customized solutions. Elliott Davis Decosimo is an independent firm associated with Moore Stephens International Limited, one of the world's largest CPA firm associations with resources in every major market around the globe. For more information, please visit elliottdavis.com. 39