One of the feature stories in this issue of Bank Director magazine-“Exit Strategy,”-focuses on the transition from a retiring chief executive officer to his or her successor, one of the biggest events a bank’s board of directors deals with outside of a merger or acquisition.
What type of advice, if any, should a retiring CEO offer on the way out the door?
This is an especially pertinent question now, given that incoming CEOs today are taking over at a delicate time. The economic cycle is well-seasoned. The regulatory environment is evolving. And technology is revolutionizing the way customers interact with banks.
Most CEOs will tell you that their advice to the next generation of leaders is less about tactics and more about overarching strategy.
Phil Green, CEO of Cullen/Frost Bankers, says his advice would be the same as the advice he got from one of his mentors:
“Get people to trust you.”
How do you gain that trust?
“Learn from the organization and then listen,” Green says. “If you’re in a great organization, you’ve got great people. They have great ideas, and through collaboration we’ve done some great things.”
For Rodger Levenson, who’s been CEO of WSFS Financial Corp. since the beginning of this year, it’s not much different.
To him, the key ingredients to success lay in teamwork and supporting members of a team equally, regardless of differences in opinion.
“This might be stating the obvious, but you’re really only as good as the team that you have underneath you,” Levenson says. “If you don’t have a well-functioning, high-performing team, you’re never going to be a successful CEO.”?
The Value of a Story
William Clay Ford Jr., the great-grandson of Henry Ford, took over as CEO at Ford Motor Co. in 2001, a pivotal moment in the company’s 115-year history.
Ford reported a $5.5 billion loss that year thanks to intense competition, slow sales and negative publicity following a wave of fatalities caused by tire blowouts on its Ford Explorer SUV.
The national economy was also just then coming out of a recession, with 9/11 still fresh in everyone’s minds.
But that isn’t what Ford pointed to as the root cause of the automaker’s travails.
“The real cause of our poor performance … was that we lost track of the things that made us great,” Ford wrote in the company’s 2002 annual report, published just weeks after he became CEO.
To right the ship, Ford cut through the noise not with products (though they did expand their vehicle lineup) but with people. Instead of promoting the efficiencies in their new vehicles (sure, they talked about that, too), they shared the stories of the folks in their factories and dealerships to whom their customers were closest.
Put simply: The company told its story.
The stories resonated with consumers, because they were familiar and comfortable. The proof is in the pudding. In 2003, the company reported net income of $495 million. In 2004, that rose to $3.5 billion.
Banks today face some similarities to what Ford faced then. Competition has never been more intense. The economy, from a historical perspective, seems ripe for a downturn. Efforts to innovate have pulled banks in new and unfamiliar directions.
Big banks are spending to increase scale and gather deposits. Community banks are trying to hold on to what they have.
How should banks respond to these challenges? One way is to revisit their stories-to remind customers, employees and shareholders what made their banks great.
A New Reality About Data
The data held by banks is one of their most potent competitive advantages. It’s why Amazon CEO Jeff Bezos is dipping into financial services. It’s also why nefarious cybercriminals try to hack into banks to steal it.
Bank directors understand this, yet the issue has only recently begun to show up more frequently on the agenda of board meetings. At least one bank-Huntington Bancshares-has even set up an ad hoc committee to address the issue more formally.
Many community banks are to the point where they have a decent digital platform they can build on to become more competitive, incorporating technologies like chatbots, artificial intelligence, machine learning and so forth. Some banks are even considering cloud-based platforms to house all the bank’s data in a single environment.
But these efforts can be delayed when the board learns a little more about their data-specifically, what it is and where it’s stored.
When directors dig deeper, they often discover some kind of data mismanagement, says Chris Sifter, a partner at Crowe LLP, who has a specialty practice at the firm focused on data intelligence and information management for banks.
This discovery happens for a few reasons, Sifter says.
Everyone’s favorite regulatory topic-the current expected credit loss (CECL) standard-is an example.
“Every client that we have that has been doing something with CECL, like implementing a platform like Moody’s or Sageworks or something, or doing it themselves, they bump into the fact that not all the data is living in the core,” Sifter says.
Inevitably, some data management is done in Excel or other applications, leading to separate silos of uniquely formatted data. Individuals in an organization will often also collect and store their own selections of data to use in third-party analytics software, like Tableau, and make decisions based on that analysis. They do this even though those decisions are made using just a fraction of potentially available data.
Sifter refers to these as data islands.
“You get that natural occurrence of, ‘I trust my data, not what your data is,’ and they’re making decisions off it,” Sifter says.
One of his clients had a board-level matter that came up when regulators observed that the performance metrics on reports to the bank’s board differed from those in its call reports.
This seems like a basic issue, says Sifter, but it proves three important things.
“It proved the fact that the definition of data wasn’t clear. Timing and availability of data could be a factor, and the fact they couldn’t point at someone and identify that person as a steward of their data,” Sifter says.
It leads to one serious question boards have to ask at a time when the data should be the driving factor in decisions: “Can we trust our data?” says Sifter.
The question is different for more forward-thinking banks, including those that are exploring or implementing cloud-based data platforms and advanced technologies, whether they face the customer or not.
“Can they even trust that the decisions that come out of that platform can really be based on [reliable] data?” says Sifter.
Questions with that potential gravity weren’t as common two years ago, he says. The idea was obscure, ungoverned if you will, and boards generally didn’t consider the specific issue of data governance as seriously.
That’s changing now, and Sifter says he’s in regular conversations about data governance-sometimes whether the bank even has a policy covering it-and how it might shift the bank’s strategy moving forward if they can’t trust the information they would use to make those decisions.
One mistake banks have made is assuming this is something for the bank’s information technology department to handle. In the past that might have been the case, but not today. IT professionals tend to focus on technological infrastructure, like keeping software up to date and implementing policies. More often, data governance is becoming the ultimate responsibility of the chief financial officer.
Some banks have even started to consider, or have already formed, a board-level data-focused committee, which would oversee this specific area of bank operations.
“There’s always this hope that somebody is looking after the data,” Sifter says. “And unless you have established a data management office or data governance committee, or whatever it is, unless you put stewards in place that actually have policies and procedures that they’re following, it doesn’t matter what IT is doing with data.”
A Texas Acquirer Shares His Philosophy
As a general rule, acquirers prefer lower risk, bite-sized acquisitions, but sizeable deals are par for the course for Malcolm Holland, the chief executive of Dallas, Texas-based Veritex Holdings. In one of the most transformative mergers announced in 2018, the now-$8 billion asset Veritex purchased $4.4 billion asset Green Bancorp, out of Houston. In just the past eight years, Holland has acquired seven banks, including two in 2017 that totaled $1.5 billion, and $145 million asset Fidelity Bank back in 2011, when Veritex had just $198 million in assets.
Bank Director interviewed Holland about the Green Bancorp merger in February, and he shared his M&A philosophy and the bank’s “secret sauce” for integration. The interview has been edited for length, brevity, clarity and flow.
BD: Can you break down how the acquisition of Green Bancorp came about?
MH: I bought a bank back in ’17. I closed on the Sovereign Bank, and Sovereign had one branch in Houston, and the rest of them were up there. It’s about a $1 billion bank, and the rest were in Dallas, I had one branch there. Then I closed another deal [Liberty Bank] about three months later, in Fort Worth. I had this, I called it-some people didn’t like it-but I had this outpost down in Houston, and it was one branch, about $150 million dollars. Once we had it the decision was kind of made for me, and Houston is a great market, that we needed to be in Houston as well.
At the time there were four independent banks to buy, and you’re probably familiar with them. I went out and I talked to three of them, I didn’t talk to the fourth one, they ended up selling to Allegiance [Bancshares]. Long story short, I had [letters of intent] on two of them-at the last moment I lost both of them. Here it is a year later, I’ve tried to buy four banks in Houston, the only independent banks to buy, and they’re all gone. I was close, didn’t win them, so now I’m sitting here in early 2018, March, and I thought, “You know what, I’ve lost the four deals, I’ve committed to Houston, but now I’m going to have to do it the old fashioned way.”
I hired a recruiter, and I hired a real estate guy, and I said, “All right, I want to hire these teams, I want to put four to five branches on the ground, I’m going to do it the old fashioned way, we’re going to de novo this. It’s going to take longer, it’s going to be cheaper, but I’m going to go do it, because I want to be in Houston, I’m committed to Houston.”
May rolls around, I get a call from Geoff Greenwade [president of Green], and he goes, “Hey, are you coming down to Houston for Texas Bankers, Manny [Mehos, Green’s CEO] and I would like to talk to you.” I said, “Sure, I’m always up for a conversation.” I hung up the phone and thought, “Huh that’s weird, why would they be calling me. Oh, they want to buy us.” I ran some numbers and prepared for the meeting, got down there, and they said, “Listen, we don’t want to buy you, we want you to buy us for a bunch of reasons. Accounting reasons, for management reasons, for just a bunch of different things, and in that first hour and a half meeting we looked at each other and said, “This deal makes a ton of sense.”
This is May, if you know Green’s history, they had some credit issues and so the biggest issue I had was, “Hey, Manny, Jeff, I have got to solve this credit deal first. I got to understand it explicitly, because I can’t go to the market and buy a bank that has credit issues.” I went and hired an outside firm, we spent a fair amount of money and 20-plus people came in, and we combed over their credit portfolio in a really hard way. By early June we’d done our analysis, I said, “All right, I can get there.” It moved really fast and so by July 24, we announced the acquisition, it was a $1 billion deal at the time-obviously, the market’s moved.
We’ve done seven deals, and this is the best deal we’ve done of all those seven deals from a social aspect. Everybody pulling the same direction, everybody working toward the same target. The openness and collaboration have been unbelievable.
BD: In your history, you’ve done some large deals relative to your size. Talk about your philosophy around M&A and how you approach growth.
MH: Our business is about scale, plain and simple. The size matters, the bigger you get to a certain degree, there becomes a law of diminishing returns. The bigger you get, the more efficient you can become, and you can offer more products, the better distribution you have. You can acquire better people, and so I’ve always been about scale. Now one thing we don’t really get a lot of credit for, is our first seven years of operating, we did 20-plus percent of organic growth every year. We not only acquired businesses and banks, we have a growth engine outside of acquisition.
That’s always been important, because if acquisition business slows down, closes up, and we don’t do any more, we better have an engine that can continue to feed the growth, and we do. Now, we’re not going to grow 20 percent at this point, because the law of large numbers is going to grab us.
The question you asked was, how did you buy banks your size-I have a management team that I put together at the very beginning of this company and I said, “These are folks that can go a long way.” I knew I had some horses in the stable, and it just took time to acquire some of these assets and build this scale to where we could really put their work to solid use. I had the people to do it, we had a great market.
We created a currency that had some value, buying a bank your size or one a little bit smaller or 10 percent of what you are, it really requires the same effort. It’s like you’re going to make a $10 million loan or $1 million loan, you got to do the same amount of work. You get paid better on the 10.
BD: In terms of the integration piece, what are the important pieces of the playbook that should be kept in mind
MH: We call it the secret sauce. It’s not technology. It’s not data conversions. It’s really not products and services. It is taking people from their loan department with our loan department. It’s taking their lenders and integrating them with our lenders. It’s my finance group, so those are the things that we think we do really well and is the secret sauce.
Those intangibles are what make the difference. The question is: How do you take that culture, your culture that’s been so successful, and institute it into their culture, yet picking up some of the things that they do and putting it into yours?
One of the first things we did was that we took their employee handbook and our employee handbook and [compared them]. We talk about silly things like, do you call it vacation or do you call it PTO? I go, “It doesn’t matter,” they go, “Wait a second, let me explain to you why it matters.” Maybe PTO is better than vacation, and so you work through all of those things, but it takes a lot of time and a lot of effort. We have an integration steering committee that’s been meeting every week for the past two months, continues to meet until we get through the integration, and we think the majority of integration will be done by June.
BD: What’s your perspective on M&A in Texas?
MH: It’s fair to say that [Independent Bank Group CEO] David Brooks and I are what I call serial acquirers. It’s been a major part of our growth stories. David and I are very good friends, we see each other once a quarter just to catch up. I think we are fortunate to live in a great state that has great growth with great employment, and so we have opportunities.
It’s one of those things that you need to strike when the iron is hot, and so David has acquired, I’ve acquired, Paul Murphy [CEO] of Cadence [Bancorp.] has done some acquisitions. Allegiance [Bancshares] has done a couple of smaller deals. There’s some stuff going on, I think everyone is after the same thing: scale and market share.
At this point in time my focus is on being a Texas-based institution that stays in the state. It may change, but that’s what our theory is today. Opportunities here are just endless. I’m super focused on getting this deal done and integrated, I’m not focused on future M&A right now-don’t need to be. I need to make sure I get this one done right, and then we’ll see what the markets have for us in a year or so.