Community Bank CFO Outlook 2019: What are your peers forecasting?

When Brett Mills began his career as a community bank chief financial officer 20 years ago, his role was to report information to the board. That all changed during the financial crisis, when his Florida community bank began struggling.

“I felt like I had a responsibility to lead and take a more active role,” recalls Mills, now executive vice president and CFO at $1.1 billion-asset First American Bank in Artesia, N.M. “Since then, I’ve just done that normally.”

Mills is not alone, according to Independent Banker’s Community Bank CFO Outlook survey, which asked CFOs about their evolving roles in the wake of high-profile accounting standards, like the current expected credit losses (CECL) model and an increasing rate environment. Over half of CFO respondents (53 percent) say they have become much more engaged with the board throughout their tenure as CFO, and a quarter report moderate change. A third of respondents have been in their position at their community bank for fewer than five years.

As accounting and capital reporting standards have become more complex, Louise Bonvechio, senior vice president and CFO at $720 million-asset Community National Bank in Derby, Vt., finds herself providing the bank’s board and management with more information to support its capital plan.

My role is to be sure that the whole team is aware of these new requirements and always aware of how any strategic decisions and initiatives will impact capital,” says Bonvechio, who has been with the bank for 25 years, including 10 as CFO.

Nick Thom, CFO at $350 million-asset First Northern Bank of Wyoming in Buffalo, Wyo., also finds himself the secretary of an eager board. Thom has been with the bank for 11 years, initially co-managing the wealth management and trust department. He was promoted to CFO in January 2018.

“I think it’s tough for [the board] at some level,” he says. “There’s only so much they can educate themselves on without relying on management to make the right decisions.”

Haynes Standard Jr., CFO at $149 million-asset First State Bank in Wrens, Ga., agrees that his board is keenly interested in financials, budgets and performance. The biggest shift Standard has noticed is a receptiveness to a more strategic direction.

“We want less ‘looking at what we were doing last month or quarter,’ and more, ‘How do we translate this and move to the next level?’”

—Haynes Standard Jr., First State Bank

“We want less ‘looking at what we were doing last month or quarter,’ and more, ‘How do we translate this and move to the next level?’” he says.

At Bank of Bird-in-Hand in Lancaster County, Pa., the first de novo bank formed after the financial crisis, Jennifer Halligan, CFO and vice president, is also finding that her role has grown more strategic. It has been moving away from policymaking and has become more forward-looking, especially as board members who are new to the industry have gotten up to speed.

“Regulators were intense when we started, because we were the first [de novo] bank and the FDIC wanted to make sure [we] got it right. It was more dotting i’s and crossing t’s,” Halligan recalls of the bank’s founding in 2013. “Now it’s more strategic: where we’re going, what we’re doing, how big we want to be and where rates are going.”

The CFO and the C-suite

The C-suite response to increasingly complex accounting and capital standards has varied from bank to bank, according to CFO respondents, with a third saying senior management is much more inquisitive, 29 percent reporting they are slightly more inquisitive and 34 percent reporting no change.

Standard says that his 20 years of community bank CFO experience, combined with the small size of First State Bank—the management team consists of him, the CEO and the chief lender—means he has a lot of independence.

“My CEO leaves me alone for the most part and trusts me to make decisions,” he says of his role of the past eight years. “The board and CEO both depend on me to understand and translate regulatory speak into common sense, everyday language that they can understand and know exactly how it impacts the bank.”

Mills believes financials have grown more transparent with the introduction of Basel III, CECL and S.2155. “Those have changed the landscape,” he says. “You have to interact, plan and discuss the impacts both positive and negative. It’s the new norm.”

One frustration that Thom shares with management is the “busywork” that the new rules create. “The time needed to prepare the board and forecasting feels like a lot more time and money spent for really no material benefit to the bank in terms of the way we operate, our risk profile or our safety and soundness,” he says.

Third-party support

The increase in workload and complex calculations has led about half of community bank CFO respondents to increase their reliance on outside advisors for financial reporting. A third report a small increase, while 20 percent report using many more third parties or using them much more frequently.

Standard depends on the accounting and audit firm that’s been with the bank since before he joined to keep him updated on upcoming changes. He also has an automated tool for interest-rate modeling and forecasting, plus reports from his core.

“We’re a small bank, and I’m not a CPA, so I don’t claim to have all accounting expertise,” he says, adding that he also looks to peers and conferences for advice.

Mills describes it as an “all-hands-on-deck situation,” where the community bank seeks out resources on changes from vendors, regulators, training and other sources.

“We’re not an early adopter [of CECL], so we’re still evaluating,” he says. “Part of the pressure is how do you maintain momentum of increased lending and efficiency.”

Bonvechio says Community National Bank hasn’t brought on new consultants, relying on its longtime asset-liability management consultant to ensure risks align. “It might mean we spend a little more time with tax advisors before year-end to be sure of all the new changes in tax code and maybe even more time with external auditors discussing accounting rules and changes we’ll be subject to as the year unfolds,” she adds.

The exception is CECL, she adds. “We have, in the past, been able to do the allowance process and calculation using our own internal spreadsheets. It was complex and complicated, but it worked, and we understood it and could defend it and communicate to outside auditors and regulators,” says Bonvechio, who now uses more sophisticated software and external consultants.

Quentin Leighty, CFO at First National Bank of Las Animas, Colo., is among the 41 percent of community bank CFO respondents who haven’t changed their use of automated accounting solutions. The $362 million-asset S corporation holds large amounts of capital, and its leadership team isn’t expecting CECL to have a large impact. “We are concerned about the CECL changes, but the reality is we track data that has to be input, and we got assurances from our regulators that we won’t need a third-party vendor to help us with that,” Leighty says. “We’ll know more when it’s effective.”

Standard is still grasping the degree CECL will change his role. “CECL will change considerably what we do and how we do it [in terms of] accounting for credit losses and coming up with an adequate AAA deal,” he says. “Who knows how it will end up working out when we get to the end of it?”

“I’m seeing a lot of CFOs really get engaged in overall balance sheet strategies, funding strategies and using noncore products to manage the balance sheet.”

—Quentin Leighty, First National Bank

Going forward, Leighty expects to see the CFO role grow more sophisticated to help manage the balance sheet, including derivative usage to balance the bank’s risk level and interest-rate risk. “You’ll see more of a focus on managing risk and margin in different scenarios and maybe less on the day-to-day accounting side,” he says. “There will always be that need, but I’m seeing a lot of CFOs really get engaged in overall balance sheet strategies, funding strategies and using noncore products to manage the balance sheet.”

Bonvechio knows there will always be new accounting rules, but for now she thinks her bank’s growth, and shifting lines of business from residential to commercial lending, will have the biggest impact on her role.

“It goes back to managing and monitoring capital and the risk, and how the risk profile can change with different activities,” she says.

Bonvechio says CFOs have become more responsible and involved in the oversight of IT, determining how to spend resources on systems, licenses, software and security, instead of building branches and buying equipment.

“As we grow, we have to think about how big we want to be and what does that mean,” she says. “It wasn’t that long ago that we were a $400 million[-asset] bank.”

Thom predicts more reliance on forecasting as CFOs try to anticipate future challenges.

“There’s increased complexity in figuring out how to fund growth, maintain capital ratios and keeping net interest margin in line,” he says. “It takes more creativity than in the past.”

---