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.”
CFO forecasting
We asked CFOs what they expect for financial reporting over the next 10 years as it relates to discussion of and disclosures on lending activities. Here’s what they said:
“I think there will be more transparency. I think [we’ll see] continued expansion of disclosure requirements as related to loan reporting and footnotes.”
—Brett Mills, First American Bank
“There’s more and more reliance on forecasting, which can be a double-edged sword. Forecasts are only as good as the person making them.”
—Nick Thom, First Northern Bank of Wyoming
“I expect the accounting industry to push for us to take the level of past-dues and then drill down on that group to see how risky the assets really are based on potential for default calculations as well as loss-upon default calculations.
This would give a more granular look at the past dues. I do hope I’m wrong as there are way too many factors that would potentially distort the output.”
—Quentin Leighty, First National Bank
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.
Communication with staff
One outcome of the impending CECL standard is an increase in communication between the finance hub and key business lines, such as lending officers and risk managers, according to 71 percent of CFO respondents to our survey.
First Northern Bank of Wyoming put together a work group to find a CECL solution with representatives from loan processing, underwriting and operations. “We were educating different departments on why we have to do this and get the consistency to ensure the data went into the core warehouse,” says CFO Nick Thom, adding that the bank had been collecting data, but most wasn’t in the core system.
Quentin Leighty, CFO of First National Bank, has an advantage when talking to lenders about pricing and why the bank operates the way it does: He is also a lender. “I had a board member asking, ‘Why won’t you offer a 25-year, fixed-rate loan at a low rate?’ I talked about cash flow, amortization, different market and how it affects the value of loans if we get into a liquidity crunch,” he says.
Bank of Bird-in-Hand is among the 29 percent of banks that haven’t seen a change. “Communication was pretty good to begin with,” says Jennifer Halligan, CFO and vice president. “We don’t have any losses or any loans past due, so in some ways, some of this stuff is not going to have a big effect on us.”
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.”
Taking deposits
The increasing challenge of gathering deposits is one area where the vast majority of CFOs agree. Nearly 73 percent report the stronger economy has made deposit-taking more difficult, even in communities that tend to lag behind in economic trends. About two-thirds (68 percent) believe higher rates will lead to new risks that will require the CFO’s expertise.
The increase in rates and competition for deposits has led leadership at First American Bank to train staff on appropriate deposit recommendations after years of low interest in deposits over the past eight to 10 years.
“We have staff so new that they had never even seen a rate cycle,” says Brett Mills, the bank’s executive vice president and CFO. First American Bank is an exception, with southeast New Mexico’s successful oil industry keeping the bank flush with deposits.
Funding mix
An expanding array of funding options have substantially increased the complexity of the CFO job, say a third of respondents, including Louise Bonvechio, senior vice president and CFO at Community National Bank. While committed to core deposits, her community bank has found itself relying more on brokered deposits and other wholesale funding sources. “It’s more than just borrowing overnight from FHLB at end of day or a ladder of some FHLB advances,” Bonvechio says.
Jennifer Halligan, CFO and vice president at Bank of Bird-in-Hand, finds herself thinking about how to position the balance sheet if rates go down, including buying investments. “We don’t want to buy at the bottom of the market, but we might be at the top now,” she says. “Maybe the next few years will be the right time.”
First National Bank used to rely heavily on wholesale funding and CDs to fund its balance sheet, peaking at $33 million in FHLB advances in 2008. Now it relies on core deposit funding, having just come off of its highest-ever year of deposit growth. CFO Quentin Leighty attributes much of this to community bank consolidation. His bank has also been strategic with its gains.
“It would have been easy to grow the balance sheet by paying up on all deposit products. We have worked hard to find clients that need ‘utility’ accounts where the rate isn’t the primary driver, but more the relationship,” he says of First National Bank’s conservative approach to capital.
