The 2024 ABA Conference for Community Bankers: Key Takeaways

In February I, along with an expert team of Wolf professionals, attended the ABA Conference for Community Bankers to obtain insights on the state of the economy, the state of the banking industry, and the health of community banks. I typically select breakout sessions likely to challenge conventional thinking or offer a view into the future. This year’s event, my 3rd, didn’t disappoint. Below are observations, tips, tricks, and trends from a series of sessions. Browse through and/or skip through; hopefully, you may find inspiration.

Facing Our Futures – Looking to 2030 & Beyond: Nikolas Badminton

The world economy is led by the nation with the largest economy, the US. But many predict that by 2030, that will be China. How would the U.S. be affected if China makes a Central Bank Digital Currency (CBDC) available? Without a U.S. CBDC on offer, the answer is not good.

Conflicts in the world center around access to water, access to energy, and access to food. The likely migration of 1 billion people (the current 2023 year-end global population is 8.045 billion) will continue to affect not only the economies of nations but also the political stability of many.

Climate change is no longer widely disputed here in the U.S., although the source may remain a topic of discussion for a long time. The coasts are getting wetter, and the south is getting hotter. Populations will shift with unpredictable impacts on water, farming, food, and political forces.

If we look back at technologies that changed the arc of human evolution – telegraph, radio, TV, internet – AI has the potential to deliver a significant impact in the shortest period in history. Language translation, driverless transportation, and AI-assisted medical procedures are within reach today. There will be a shift in required talent, but not necessarily a shift in the number of overall jobs. And because we are human, new issues of bias, ethics, and discrimination will likely remain.

The impact on community banking appears easy to understand. Fintech relationships help keep the community in community banking. Growing deposits, defining micro-economies, and anticipating the economic needs of community members are currently outside the reach of large banks. Seize the day.

The Promise & Perils of AI and Machine Learning (ML) in Cybersecurity: Steve Sanders

Information security defense strategies always trail bad actors who are on the offense. And bad actors are already using generative AI for phishing, network penetration, and ransomware. Does AI offer the ability to bolster security defensive tactics?

The basic principle is that generative AI draws conclusions based on known data. We should soon have AI tools that monitor network traffic by user, within a team, and for the whole organization and globally, bringing that information back to an individual organization to fortify defenses. Capabilities that will help us stay safe include monitoring individual CPU usage enterprise-wide, and identifying unusual activity based on time of day and types of operating system services used; auto-patching each device for BIOS, firmware, operating system, and application level updates; and automatically quarantining CPUs, individual users, and network segments. It sounds great if we can do this – it also sounds like George Orwell’s 1984. Don’t shoot the messenger.

A View from the Fed: Federal Reserve Gov. Miki Bowman

The banking industry and every individual bank is devoting more resources to risk and compliance. Part of that is a product of the times we live in; other efforts are a result of regulatory requirements adjusted for today’s environment and expectations of future economic events and activities.

Regulations intended for the largest banks have a trickle-down effect over time. This is understood. So, what is a community bank? The guidance exceptions state banks with less than $10 billion in assets qualify for the label. Usually, there is one operating company under a holding company. A bank approaching $10 billion is asked to increase its risk management practices before it gets to $10 billion. Regulation should be structured to be fair based on the risks and size of the bank, not necessarily just the $10 billion or $50 billion thresholds. “Too Big to Fail” is harder to set the regulatory approach for, or the right size. If you are not too big to fail, then higher risk management must be put in place so you don’t fail. Here are recommendations that could be implemented.

• Focus on the prioritization of risks for community banks. Certain core risks include core processor oversight, IT succession planning, interest rate risk, credit risk, and liquidity risk. All can have a significant impact on capital.
• Non-core risks, such as emerging risks, must be related to what is important to your business model and must be documented and agreed upon internally. This is the opposite of a one-size-fits-all approach.
• Banks should not have to divine what the exam expectations are until after a supervisory comment has been levied. There is a need for increased transparency as to what is a safe and sound practice, not an interpreted model – which in many cases we have now.
• Third-party risk management guidance has gaps that have not been defined leaving banks wondering what they should do.

There are rivers of risk to the economy that remain ambiguous at this time. Geopolitical risks related to Israel, Ukraine, and impacts on food and energy. It is too soon to project how these may play out to justify lowering the fed funds rate below the 5.25%-5.50% rate.

Commercial real estate loan renewals are different among institutions and regionally, and should not exasperate the current risks to these portfolios. It does not seem to pose a big risk to the economy, although there will be a significant effort to restructure the debt as it matures and renews.

Go Inside the Mindset of the World’s Greatest Leaders: Colin Coggins & Garrett Brown

How do you move people to support your ideas? Similarly, when you hear someone is in sales what are most peoples’ initial responses? Sales shark. Used car sales. Living on commission. Pushy. But at the same time who are some of the greatest salespeople in recent history? Martin Luther King Jr. Steve Jobs. There is a huge difference between the answers to the first question and the second.

Research shows that the greatest leaders are the greatest salespeople. They are selling big ideas. They can land a message. And if the initial message doesn’t land they can self-correct in real time.

Great leaders allow themselves to be vulnerable. This means not knowing everything. They get behind an idea or an initiative they like the most and tell people about it. That is something everyone can do, whether you have a big role and responsibility, or something smaller and more narrowly defined. These leaders also have a high level of self-awareness.

Before you have a meeting with someone for the first time, spend 3 minutes beforehand discovering something about them that you will love. You may be surprised to find that there is something in their life that resonates with you, or a shared experience between you. It’s not sales, but rather the ability to form a relationship.

Move Your Board From Tactile to Strategic: Jeff Marsico

What are some of the characteristics of an effective board versus an ineffective board? One criterion is that the decision process routinely asks the question, “Does this decision benefit most of our stakeholders?” Stakeholders likely include customers, employees, vendors, and the community. Regulators have a simple response: Is the risk to the bank considered first and foremost? There are some practical methods to evaluate an effective board and that is to review their agendas over time. These should include:

• Approve their successor
• Approve their risk appetite
• Monitor the bank’s operations and controls
• Engage with the community
• Manage the board itself

Ineffective boards can be observed to have more than one person exhibiting negative qualities:

• Micromanagers
• Negative impact
• Neutral to no impact
• Monitoring and checklist

An effective board must be a strategic asset that will lead to performance enhancement. The qualities of the board as measured through each member should include:

• Understanding fiduciary responsibility
• Having a risk lens for each decision
• Effective board member onboarding
• A meeting agenda that is structured to foster discussion on critical items. A structure may resemble:
  • Strategy review, training, industry updates
  • Moving consent agenda items all into one section for efficient review including:
• Approving previous minutes
• Operational and financial results
  • C-executives individually reporting to present their work
  • Executive session

Board composition continues to receive considerable discussion. Research over decades supports the idea that diversity ensures a higher-performing board. And there is an equal body of research that indicates it can have a negative impact or no impact at all. What diversity does is reduce the risk of groupthink. Board limits have value as board members who have known each other for 12 years or more leads to groupthink. Expertise not usually considered during board member selection includes marketing and HR, two skills that could add significant value. A good practice is to give the chair of the nominating committee a budget for board education. The goal is to prepare the board for completing their responsibilities in a fast-changing world.

Choosing a Core Provider Other Than the Big Three: Clay Adams, Jennifer Jones & Kristiane Koontz

The key principle of this discussion is that the bank must control its destiny by taking technological agency over the data in the relationship. Unfortunately, the standard Big Three contracts contain provisions that prevent this, or at least make it very expensive. Access to your data when and wherever you want it, integration with both front-office and back-office applications and data analysis, and the ability to move quickly are hurdles too high to support fast and flexible contemporary business practices.

For many community banks, other core banking system providers provide advantages:

• Better customer service especially for organizations with a small number of employees
• Ability to take some load off of the back office
• Responsive for inquiries and fast customer service
• Speed of implementing new products.

A reasonable approach should include the following process steps:

• A best practice is to start the core process selection 3 years before it’s needed.
• List out the pain points. Ask if the current provider can fix them all and if not, profile the request against the list of ABA core providers that have signed up for the Principles for Strong Bank-Core Provider Relationship.
• Establish a bank core committee.
• It may not be unusual to start with a list of 25+ as listed by ABA; qualify a top 8, site visit 3; and perform legal contract due diligence on a final 2.
• 18 months out, share information with the board on the ongoing project.

If a bank pulls data into a data warehouse or data lake you can control the pace of the conversion. Banks can do this one system at a time as the core provider simply becomes another software application. The data warehouse becomes the “system of truth” for the customer master file and other software system transaction data.

Focus on the public exposure systems first. There tend to be fewer moving parts here.

Anticipate a shift to more knowledge worker base as new systems should automate manual processes into a data warehouse. And if you don’t or can’t hire a full-time technologist for the project and the team post-implementation, look to third parties for project expertise and subsequently a virtual CIO.