Twelve Steps for Successful Acquisitions


acquisition-11-21-18.pngOftentimes bankers and research analysts espouse the track records of acquisitive banks by focusing on the outcomes of transactions, not the work that went into getting them announced. As you and your board consider growing your bank franchise via purchases of, or mergers with, other banks, consider these steps as a guideline to better outcomes:

  1. Prepare your management team
    Does your team have any track record in courting, negotiating, closing and integrating a merger? If not, perhaps adding to your team is warranted.
  2. Prepare your board
    Understand what your financial goals and stress-points are, create a subcommittee to work with management on strategy, get educated about merger contracts and fiduciary obligations.
  3. Prepare your largest shareholders
    In many privately held banks there are large shareholders, families or individuals, who would have their ownership diluted if stock were used as currency to pay for another bank. It is important to get their support on your strategy as the value of their holdings will be impacted (hopefully positively) by your actions.
  4. Prepare your employees 
    While you cannot be specific about your targets until you need to broaden the “circle of trust,” let key employees know that their organization wants to grow via purchases. They will deal with the day-to-day reality of integration, get them excited that your organization is one they want to be with long-term.
  5. Prepare your counsel
    Just as some bankers focus on commercial or consumer loans, some law firms focus on regulatory matters, loan documents or corporate finance. Does your current counsel have demonstrated experience in merger processes? In addition, your counsel should help to educate your Board about the steps required to complete a transaction.
  6. Prepare the Street
    We have seen in recent months several large bank acquisitions announced where the market was unpleasantly surprised; a bank they viewed as a seller suddenly became a buyer. Some of these companies have since underperformed the broader bank market by 5 to 10 percent. If it has been several years between acquisitions, prep the market beforehand that you might resume the strategy. BB&T recently laid parameters for going back on the acquisition trail. And while their stock was down some on the news, it has since more than recovered.
  7. Prepare your IT providers 
    Most customers are lost when you close your transaction by the small annoyances that come with a systems conversion. Understand if your current core systems have additional capacity or begin to get systems in place that can grow as you grow.
  8. Prepare your regulator(s)
    Whether it is the state, the FDIC, OCC or the Fed, they generally do not like surprises. Get some soft guidance from them on their expectations for capital levels and growth rates. Before you formally announce any merger, with your counsel, give the regulators a courtesy heads-up.
  9. Prepare your rating agency
    If you are a rated bank, think about your debt holders as well as equity holders, especially if you need access to acquisition financing. Share with them the broad plan of growth and your tolerances for goodwill and other negative capital events.
  10. Prepare your financing sources
    Do you have a line-of-credit in place at the holding company that could be drawn to finance the cash portion of acquisition consideration? Have you demonstrated that you can fund in the senior or subordinated debt markets, perhaps by pre-funding capital? Are there large shareholders willing to commit more equity to your strategy?
  11. Prepare your targets
    If the Street does not know, and your shareholders do not know, and your bankers and lawyers do not know, then the targets you might have in mind also will not know you are a buyer. Courting another CEO is a time-consuming process, but completely necessary and should be started 12-18 months before you are in the position to pull the trigger. Your goal is to be on their “A” list of calls, and have the chance to compete, either exclusively or in a controlled auction process.
  12. Prepare to walk away 
    After you have done all this work, it is easy to get “deal fever” when that first process comes along. Sometimes you need to recognize it is a trial run for the real thing and be prepared to pack your bags and go home. The best deal most companies have ever done is the one they didn’t do.

A Roadmap for Productive Board Discussions


bank-board-10-11-18.pngYou can’t drive a car to a new destination without a roadmap, and a board can’t conduct a productive meeting—and ultimately, effectively oversee the organization—without a well-thought agenda that keeps meetings focused on discussing what’s important, and helping the board stay proactive on the potential opportunities and threats facing their bank. What’s placed on that agenda, and when it’s discussed, differs a bit from bank to bank. But there are several issues that should be on every agenda, and some that should be addressed regularly, albeit less frequently.

At every meeting
Bank board agendas don’t differ from a standard corporate agenda in many respects. There should be a call to order, review and approval of minutes from the previous meeting, and a review of reports.

For a bank, every meeting should include a review of financial reports, with the chief financial officer on hand to address questions and discuss items in detail. Directors will also want to review loan reports, at which point the board will typically hear from the senior loan officer. Reports from the committee chairs should also be heard at every board meeting.

New business will include updates on strategic initiatives, including milestones and progress. Actions taken by the bank to address regulatory concerns should also be addressed, though how frequently this item appears on the agenda will depend on how much hot water the bank is in with its examiners. Trends impacting the growth and financial performance of the bank should also be discussed.

Old business should also be addressed in the agenda, and it’s an area often overlooked by banks, according to Bob Brown, a managing director at Kaplan Partners and board member at $84 million asset County Savings Bank in Essington, Pennsylvania. He previously spent 40 years at PwC. If management was instructed to take a certain action, or the board decided it would circle back to an issue, those matters shouldn’t be dropped.

Regular items to address
Risk, cybersecurity and technology are top concerns for bank boards, but directors are split on how often these topics need to be discussed by the full board. Twenty-six percent of respondents to Bank Director’s 2018 Risk Survey said their board discusses cybersecurity at every meeting, compared to 37 percent who do so quarterly. Half of the respondents to the 2018 Technology Survey said their board discusses technology at every meeting, compared to 37 percent who cover the topic quarterly.

The board should discuss management and incentive compensation semiannually, advises Brown. And don’t forget the auditors: Internal auditors should address the board semiannually, and external auditors annually.

Board education should be woven into the agenda at least quarterly, and should cover a variety of topics relevant to directors’ level of expertise as well as any ongoing regulatory, economic or competitive concerns. Regularly bringing in outside experts can also stimulate productive dialogue among board members.

Every year, the board should review board and committee charters, as well as key policies and loan loss reserves. The makeup of the board should also be assessed annually, using a board matrix or evaluation, or both. A board matrix is a grid that lists all the directors on one axis, and the skill sets and attributes needed on the board on the other. This check-the-box-style exercise can be an easy way to identify gaps where additional expertise is needed.

Strategic planning should occur annually and will drive the agenda by setting the priorities that the board will want to follow up on throughout the year. “That then drives what senior management does,” says Jim McAlpin, a partner and leader of the financial services client service group at the law firm Bryan Cave Leighton Paisner. Does the bank need to renew its contract with its core vendor, or seek another solution? Does it make sense to build a new branch? These decisions should be fueled by the strategic plan. “It’s good to take stock, set direction and plan, and then over the course of the next year refer back to that plan and refer back to the priorities when engaging with the CEO,” he says.

McAlpin recommends that strategic planning take place off site if possible, with the board spending a half day or day talking about the bank’s strategic direction.

The board chairman—or the lead director, if the chairman is not independent—often develops the agenda, with input from the chief executive. Committee chairmen should also weigh in to ensure those areas are addressed. Individual directors should feel welcome to contribute to the agenda, and there should be room to speak up during meetings. “A good agenda should include a line item in which the chair asks if there are any additional matters the directors think should be addressed,” says McAlpin.

An annual discussion that sets the agenda for the year—tied to the strategic planning session—can help boards better drive what’s on the agenda, says Brown. The governance and nominating committee can then take that conversation and finetune the scope of the board’s agenda for the year, with input from the board before it’s finalized.

Getting the right input
It’s important to hear from other members of the management team and ask questions directly of the heads of the respective areas of the organization, rather than relying on one source—the CEO—for that information. Ideally, the board should hear from the CFO at every board meeting to address financial matters. The heads of legal, compliance, human resources and information technology should also be available to address their areas of expertise, when needed. McAlpin recommends asking open-ended questions to gain their perspectives and address any of the board’s concerns. “If I were a board member, I’d rather [their answers] be unfiltered,” rather than through the CEO, he says.

Brown also recommends that the board hear from business line leaders at least annually, to better understand these important areas of the business.

Aside from better understanding the bank, it’s important for the board to understand the depth of the management team. “Perhaps the most important role a board has is selecting and evaluating the CEO,” says Brown. “Succession planning is a key responsibility, and understanding the management team’s depth, strengths and weaknesses of management team members, and having the chance to see them in action … is really important.”

Independent directors should also make time to discuss issues without management present, in an executive session, advises Brown.

Facilitating effective discussions
The board agenda will structure the discussion, but it’s on the board to ensure those discussions are fruitful. First and foremost, materials should be provided in advance, so directors have time to prepare.

Remote participation has become more common as technological solutions like web conferencing make this option easier and can be a good way to attract younger candidates with diverse backgrounds, who may still be building their careers, to the board, says Dottie Schindlinger, vice president at Diligent. But make sure discussions are secure. Don’t reuse the same conference call number and passcode every time—this can easily be accessed by a disgruntled ex-employee, for example, who then gains access to sensitive conversations. And directors shouldn’t use their personal emails to discuss board matters. Web portals, such as that offered by Diligent, can help boards store and access information, and communicate safely.

Remote attendance can have its disadvantages, and there are always directors who tend to dominate a discussion. An effective facilitator—usually the chairman or lead director—will overcome these hurdles and ensure everyone’s voice is heard. Pointed, open-ended questions can help engage introverted board members. Making sure one director speaks at a time cuts out crosstalk and helps remote directors understand what’s discussed.

McAlpin emphasizes that it’s important to have an actual discussion—not just directors passively listening to what the CEO has to say, or other members of management, or the committee chairs. And this underscores the need to assemble a strong board. “Some of the most effective CEOs, I’ve found, are those who purposefully build a strong board—a board consisting of board members with a range of strong experience, good insight and a willingness to share feedback and make suggestions,” he says.

Three Strategic Considerations for Bank Boards About Fintech Charters


strategy-10-4-18.pngStrategic planning is one of the most important roles of a financial institution’s board of directors. Since the 2008 financial crisis, financial institution boards have dealt with the emergence of fintechs as a primary consideration in developing their strategic plans. A few large financial institutions have opted to build fintech capabilities, but the majority of financial institutions have determined that the best strategy is either to invest in or partner with a fintech firm through an outsourcing process.

On July 31, 2018, the Office of the Comptroller of the Currency announced it would begin accepting applications filed by fintech firms for “special purpose” federal bank charters. While not unexpected given the conversations around this topic in recent years, the announcement garnered immediate and passionate responses from the interested constituents. Whichever strategy has been adopted and implemented in their firm, financial institution boards should consider the impact a “special purpose national bank charter” may have on their relationship with a fintech firm, or how newly chartered fintechs may change their strategic plan.

First: Re-evaluate Your Strategy
Financial institution boards should first consider if their strategy should change based on an assumption that fintech firms would become chartered special purpose banks. Applying the standard SWOT (strengths, weaknesses, opportunities, threats) approach to their strategic planning, the board might determine that what once was a strength for a financial institution (direct access to customers, ability to accept deposits) could become a threat as chartered fintechs obtain bank powers, while weaknesses (stricter regulatory oversight and related infrastructure expense) become strengths or opportunities. This shift in the playing field for fintech and financial firms should become a basis for deciding if the build, invest or partner strategy is still the best fit for the financial institution.

Second: Evaluate Your Options
Whether the board determines that their current strategy is appropriate or needs to be reconsidered, their decision will be influenced by the ability to and cost of change. The board should review the existing relationships that are in place and determine the feasibility of changing strategy. While building may be the best answer, the cost of building fintech expertise may not be a valid strategic option, given the expertise required and the size of investment. Likewise, finding a new vendor or outsourcing partner may be relatively easy, but exiting a current contract may be difficult or costly if there isn’t a valid contractual reason for termination.

Third: Focus on Execution
In their review of options the board should have been exposed to any shortcomings or important factors in executing the adopted strategy. Once the strategic approach has been decided, the basis of that decision must be taken into account in the execution. The possibility of a fintech firm obtaining a bank charter should be the cornerstone of execution. Directors should ask themselves whether getting a bank charter should be a basis for terminating a financial institution’s relationship with a fintech firm. If so, the terms should be clearly stated including financial outcomes and operational details. For example, any fintech investments or contracts should make it clear the financial institution will maintain the customer relationships and the related data. In addition, the arrangement should have appropriate non-solicitation and non-competition clauses to protect the financial institution in the event the fintech becomes a competitor. If the fintech firm can terminate the relationship, the financial institution should ensure there is an adequate conversion process that will allow it to pursue a different strategy or to migrate to a new strategic partner with minimal interruption to its customers.

It is not expected that fintech firms will rush to obtain charters or that charters will be granted to fintech firms in the near future. Significant barriers still remain for fintech firms to obtain charters. The application, review and examination process for obtaining a new (or de novo) charter is arduous and time consuming. In addition, newly chartered special purpose banks would need to build extensive regulatory infrastructure and would be subject to additional oversight and supervision during their early existence. Nevertheless, the OCC’s announcement will provide fintech firms with additional strategic options and a foothold for bringing further disruption to the financial services industry. Financial institution boards should be prepared to strategically respond to that challenge.

Five Qualities It Takes to be an Effective Director


governance-7-20-18.pngI’ve always thought that corporate governance looks deceptively easy. While some are more hands-on than others, a bank’s board of directors does not (and should not) play a direct operating role. It is there to advise and oversee the company’s senior management team, but not run the company. I also believe that governance is critically important, and the board and its individual directors can have a material impact—either positively or negatively—on the fortunes of their companies. The attributes of an effective director are an interesting combination of knowledge, personality and social skills. Not everyone is good at it. Intelligence and experience are the minimum characteristics for any director, but they alone won’t guarantee success. While this is not an all-inclusive list, here are five attributes that I think define what it means to be an effective director.

Be independently minded. There are legal definitions that the major stock exchanges and regulators use when they refer to independence, mostly centering around conflicts of interest, but I’m referring to something different. Is a director willing to exercise their own judgment, with the courage to follow through on their convictions, even if that brings them into conflict with other board members? It can be uncomfortable to be the only director who objects to a particular course of action, or who raises a sensitive issue others are afraid to address. Effective directors are willing to engage in a level of constructive conflict when they believe there is an important principle at stake.

Actively engage in the business of the board. How thoroughly does a director prepare for every board or committee meeting? Do they ask questions? Do they participate in meetings or simply observe? Is their head in the game? Most of the really good directors I know find banking to be intellectually stimulating and believe banks are important. And they enjoy the opportunity to work with a group of smart and successful people who all want the same thing, which is to build a great bank.

Understand banks and banking. The mechanics of corporate governance are pretty straightforward, and a smart person can pick them up quickly enough. But banking is a complex business, in part because it is so heavily regulated, but also because the economics are different than most other industries. Most outside directors do not come from the banking industry, but to be effective and fulfill their fiduciary duties, a director must know enough about the business of banking to have a meaningful dialogue with management. This requires a commitment to learning and continuing education that lasts for as long as a director serves on the board. It’s also important that a director have an intimate understanding of their own bank, its strategies, its major risks and the things that drive its economic value.

Pay attention to the world around you. The business of banking is changing, and banks need to adapt. Much of this change is driven by the growth of a digital economy and evolving preferences in how consumers want to transact with their merchants and service providers, including their banks. Customer demographics is a factor in this shift. Most bank directors today are baby boomers, while the fastest growing customer segment is the millennial generation, and they want to bank differently. The digital economy isn’t the only external development that directors need to pay attention to. For example, the recent tariffs imposed by President Donald Trump’s administration on imported steel could have a negative impact on small and medium-sized manufacturers that rely on cheap steel from Mexico. How changes in the larger economy affect a bank’s corporate and business customers should always be a top concern for the board.

Know when it’s time to leave the board. Everyone has a freshness date that reflects their own unique combination of physical and mental capabilities, and life circumstances. While some boards have a mandatory retirement age policy, the argument against them is they can force a highly competent director to leave simply because they age out. Unfortunately, some directors remain on the board too long, just as some professional athletes play beyond their prime. If the board doesn’t have a mandatory retirement age, every director should have enough respect for the importance of corporate governance to acknowledge and step out gracefully if they feel they can no longer meet the demands of board service. Those who do will gain the lasting respect of their colleagues, because that’s a message no one else on the board wants to deliver—that it’s time to go.

Health Check of Governing Documents


governane-3-23-18.pngLike laws and regulations applicable to financial institutions, corporate governance best practices are not static concepts. Instead, they are constantly evolving based on changes in the law, the regulatory framework and investor relations, among other matters. When was the last time the governing documents of your financial institution were reviewed and updated? The governing documents of many financial institutions were prepared decades ago, and have not evolved to reflect or comply with current laws, regulations, and corporate governance best practices. In fact, in the course of advising financial institutions, we have come across numerous governing documents that were prepared prior to the Great Depression. Although such documents may still be legally effective, operating under them may subject your financial institution and its board of directors to certain legal, regulatory and business risks associated with antiquated governance practices. As such, reviewing and, if necessary, updating your financial institution’s corporate governance documents is not just a matter of good corporate governance but also an exercise in risk mitigation.

Certain common—yet often alarming—issues may arise from the use of outdated governing documents. These include:

  • Indemnification provisions may be inconsistent with and unenforceable under applicable law. Likewise, most governing documents also contain provisions providing for the advancement of expenses to directors and officers in connection with legal actions relating to their service to the financial institution. In addition to legal compliance concerns, these provisions should be carefully drafted to ensure that the financial institution is not required to advance expenses to such officer or director with respect to a lawsuit between such person and the financial institution.
  • Voting procedures may be inconsistent with applicable law and/or best practices. These practices may also be inconsistently defined and conflict with relevant governing documents of a single financial institution.
  • Procedures to prevent or discourage shareholder activism or a hostile takeover of your financial institution could be inadequate.
  • Rights of first refusal or equity purchase rights contained in different, but operative, agreements among shareholders and the financial institution could be inconsistent.
  • Provisions limiting the liability of directors and officers of your financial institution may be inconsistent with and unenforceable under applicable law, or such provisions inadvertently may be more restrictive than permitted under applicable law.
  • Non-competition and non-solicitation provisions contained in various agreements applicable to the same director or executive officer could compete with one another.
  • Shareholder agreements for financial institutions could be structured in a fashion such that the Federal Reserve deems the agreements themselves to qualify as a bank holding company under the Bank Holding Company Act of 1956. For instance, based on guidance previously issued by the Federal Reserve, this unexpected outcome could occur if your financial institution’s shareholder agreement contains a buy-sell provision and is perpetual in term. These are common terms of shareholder agreements designed to protect a financial institution’s Subchapter S election, so bank holding companies that are Subchapter S corporations are being required by the Federal Reserve to amend their shareholder agreements to limit the terms to 25 years. Without such an amendment, the Federal Reserve takes the position that a Subchapter S shareholder agreement, in and of itself, can be deemed a bank holding company.

The board of directors and management team can protect the financial institution from these risks by following a few simple steps to update its governing documents.

  • Locate your governing documents. These could include the financial institution’s articles or certificate of incorporation, bylaws, committee charters, shareholder agreements, buy-sell agreements, corporate governance guidelines or policies, intercompany agreements, and tax sharing agreements.
  • Review and analyze the financial institution’s governing documents to identify any risks or areas for improvement, or areas that could be updated to reflect current laws and to incorporate current best practices.
  • Revise the financial institution’s governing documents to mitigate identified risks, address legal deficiencies and reflect current best practices.
  • Develop a procedure for monitoring changes in applicable laws and best practices that affect the institution, and implement an ongoing process for addressing any such changes in a timely manner.
  • Finally, designate a committee of the board of directors (e.g. the governance committee) or a member of the management team to manage the monitoring procedure established for this purpose.

Although simple, following these steps will help to prevent or mitigate many of the legal, regulatory and business risks that may arise as a result of operating under outdated governing documents and, more importantly, strengthen your financial institution’s corporate governance practices in a manner that better positions the board of directors and management to effectively oversee your financial institution and protect against unwanted shareholder activism.

Creating Liquidity: Alternatives To Selling The Bank



Executives and boards of private banks have to think outside the box if they want to create a path to liquidity for shareholders that doesn’t require selling the bank. In this video, Eric Corrigan of Commerce Street Capital outlines three liquidity alternatives to consider, and shares why a proactive approach can help a bank control its own destiny.

  • Challenges in Creating Liquidity
  • Three Liquidity Alternatives
  • Benefits and Drawbacks to Each Solution
  • Questions Boards Should Be Asking

Nine Vendor Risk Management Tips for the Board


risk-management-7-19-17.png2017 is already proving to be a very difficult year for bank boards. While being on a board can be a rewarding experience, increasing regulatory pressures certainly don’t make the position and its corresponding responsibilities any easier.

One particular area of intense focus by the regulators is third-party risk management. Ultimately, the regulators have stated that it is your responsibility to ensure that you have a third-party risk program in place that addresses your vendors and the level of risk they pose.

Aside from potential enforcement actions and fines from the regulators, an inadequate third-party risk program can leave your institution ill-prepared or vulnerable to a host of issues. Worsening vendor financial performance could be an indicator of woes to come, such as poor customer service, bugs and issues with its system. Banks that auto-renew vendor contracts could miss a chance to re-negotiate old contracts.

Poor due diligence could mean partnering with a vendor that is damaging to your institution’s reputation. For example, if you don’t understand where customer complaints are coming from and why, regulators could question your ability to properly oversee and monitor your vendor’s performance and manage the corresponding impact on your customers.

While there will always be unforeseen issues you cannot avoid, having an effective third-party risk policy and program in place can ensure your full compliance with the guidance and help steer you to partnerships that will benefit your institution.

And, even when those unforeseen issues do occur, and they will, you’re better prepared to react in an effective and organized manner. To help, here are nine tips to keep you on the right path.

Nine Vendor Risk Management Tips for the Board

1. Read and understand the guidance from your primary regulator as it pertains to third-party risk management. There are key expectations clearly identified in the guidance and they should give you ample fodder for asking your institution’s senior management team pertinent questions.

2. Set expectations and tone from the top. Make sure that from senior management all the way to the front-line customer service representatives, everyone understands his or her responsibilities when it comes to compliance with the rules, as well as how your organization wants to handle vendor-risk management.

3. Have your vendor risk management program thoroughly reviewed for any possible deficiencies and focus on areas that are often overlooked, such as fourth-party risk management or reviewing third parties’ procedures for complaint management.

4. Automate your third-party risk program. Most institutions have already taken the steps away from Excel and other spreadsheet programs in favor of ones that help to manage a complicated network of vendors and regulatory expectations.

5. Involve your internal audit department, compliance team and counsel in evaluating the effectiveness of the vendor management program.

6. Strongly consider making vendor management directly accountable to the board or the most senior risk committee at your institution. Firmly establish its independence from the various lines of business and ensure the needs of vendor management do not fall on deaf ears. Ensure that any issues raised, whether in the course of normal business or during examinations, are promptly and thoroughly addressed.

7. Invite the head of your vendor management program to report regularly at board meetings. A standard set of reports is adequate, but make sure that any concerns or significant issues are clearly called out and reflected in the minutes of the meetings.

8. Ensure those involved in vendor management have adequate resources, such as staffing and a high enough budget, as well as ample training and experience to do the job well. Seek outside independent expertise or outsource tasks where needed, particularly for highly technical items such as business continuity plan reviews for SSAE 18 analysis, attestation standards issued by the American Institute of CPAs.

9. Ask pertinent questions and drill down when anything seems amiss. Use industry news, new regulations and enforcement actions as opportunities to view your own vendor management program through that lens and see if there are areas of concern that should be addressed.

The world of vendor management isn’t easy and your job as a director is incredibly complex and overwhelming at times. Fortunately, done well, vendor risk management can also be a significant strategic advantage, allowing you to do business with well-managed companies in a compliant and cost-efficient manner.

Resources
Venminder Library
CFPB guidance 2016-02
FDIC FIL 44 2008
OCC Bulletin 2013 29
OCC Bulletin 2017 21
FFIEC Appendix J

Bank Boards Need to be Younger, More Diverse and More Visionary


diversity.png

I was chairing a conference recently at which a Gartner Group consultant talked about the firm’s annual bank survey. Gartner found that of the senior bankers it surveyed, 76 percent don’t believe that digitalization will affect their business model.

I can tell you that 76 percent of those survey respondents were wrong. Of course digitalization is affecting the business model, and if you don’t think it is then you need to read my blogs about platformification; back office overhaul through the cloud and machine learning; the impact of shared databases through blockchain; the rapid cycle change of microservices organizations; and the rise of innovation economies in Africa and growth economies like China’s.

In fact, I would be amazed if any banker who reads my blog could honestly say that digitalization doesn’t change their business model. After all, the business model of traditional banks was built for face-to-face interactions backed up by paper documentation; the business model of digital banks is for device-to-device interactions backed up by data. The two are completely different.

It doesn’t worry me that bankers think their banks business models don’t need to change—after all, banks are run by bankers and it’s their problem if they believe otherwise—but it does worry me that people in charge of systemically important institutions that are so important to so many aspects of our lives could be so ignorant. I think it reflects the lack of insight into how digital transformation is impacting the world, and also the lack of balance in bank boardrooms.

This was evidenced by a recent Accenture analysisof the boardrooms of the 100 biggest banks in the world, which shows that:

  • Only 6 percent of board members have professional technology backgrounds.
  • Just 3 percent of these banks have CEOs with professional technology backgrounds.
  • Forty-three percent of the banks analyzed don’t have any board members with professional technology backgrounds.
  • Thirty percent of these banks have only one board member with a professional technology background.
  • In North American banks, 12 percent of board members have professional technology experience, compared with 5 percent in both European and Asian banks.
  • Though boards of banks in the United States and the United Kingdom have higher percentages of directors with professional technology experience than others, the numbers are still low—at 16 percent in the U.S. and 14 percent in the U.K.

Banks are led by bankers even though banks are actually fintech companies—even if they don’t yet realize that. That is the fatal flaw here, as fintech firms are led by a combination of technologists and bankers. Most fintech firms I meet have a healthy balance of young, bright technology experts and seasoned financial people.

That is why it’s interesting to see that the biggest banks are gradually reconstructing their boardrooms for more balance, or sothis year’s trendspredicted. When I think of a bank boardroom, I picture a lot ofold menin suits (andthe numbersprove this). When I think of a fintech firm’s boardroom, I see something that is young, diverse and visionary. It does have some old hands on board, but it’s balanced. So what I really expect in the next decade is to see a bank boardroom become just a little bit more awesome. Still a bit grey, but also a little younger, more diverse and a healthy mix and balance of financial acumen and technology vision. Please.

Five Common Sense Board Oversight Techniques


oversight-4-3-17.pngIt seems that all of the banking industry is abuzz about the prospects of potential legislative changes and financial regulatory reform. It is anticipated that Representative Jeb Hensarling will propose Financial Choice Act 2.0, bringing broad and sweeping changes to banking laws and a great number of regulatory changes. While most of the industry supports these changes, it is unclear if any of them will ultimately become law. With uncertainty about whether change in regulatory oversight will be made, we suggest that banks take a look at the functioning of their constant regulator: the board.

Most bank board members would recoil at the notion that they are regulators. They correctly view their role as enhancing shareholder value, which includes setting the strategy for the bank. In some cases, it is a dynamic strategy. However, the oversight function of the board requires that board members serve as the bank’s primary line of regulatory oversight. The board needs to ensure that the bank not only has reasonable programs in place designed to promote compliance with laws and regulations, but also that the bank is appropriately implementing the strategic plan adopted by the board. With that in mind, we believe bank boards can improve their oversight function by adopting some of the key proposals under discussion for regulatory reform.

  1. Adopt a limited number of key principles: A board’s primary guidance to management—the strategic plan—should set forth high level requirements for the direction of the bank. Developing a detailed operational plan at the board level, or attempting to co-manage the bank along with officers, is frequently counterproductive and causes management to spend too much of its time complying with the board’s requirements rather than building value in the business.
  2. Tailor oversight to the size and complexity of the institution: It is critical that the board’s oversight function evolve as the business model and the growth of the bank does. While we sometimes see boards impose requirements on management that are overly complex and burdensome, it is more common that boards fail to evolve their oversight as the bank grows and becomes more complex. This issue is particularly prevalent among fast-growing, acquisitive banks. Boards sometimes take the same approach to compliance and regulatory oversight as they did when the bank operated in a single community with a small number of conventional products.
  3. Eliminate concentrations of power: Just as many bankers find the unchecked power and single director structure of the Consumer Financial Protection Bureau objectionable, concentrating too much power in one or two directors can also be destructive for a bank. Among the bank failures we saw, a disproportionate number relied on the oversight and guidance of a single dominant director. A properly functioning board should foster discussion and debate among directors with diverse business backgrounds, risk tolerances, and points of view. Moreover, directors should feel accountable to each other and to shareholders.
  4. Eliminate useless reporting: Just as bankers seek to streamline regulatory reporting, board reports should be streamlined as well. When was the last time your board had a discussion about the usefulness of the various reports received at each board meeting? There is a terrible opportunity cost to having some of the best minds in the bank prepare reports that do not provide actionable information or, even worse, are ignored by board members. Boards should periodically discuss which reports are no longer helpful, and also, which types of additional reports might be beneficial as the business model of the bank evolves.
  5. Provide timely feedback: One of the less publicized provisions of the Financial Choice Act is a requirement for timely delivery of regulatory exams. Boards should adopt this policy as well with regard to key board actions and feedback to senior management. A concern raised in a board or committee meeting without timely resolution by the board can leave management in limbo, afraid to make any decision that might ultimately be deemed by the board to be a bad one. If the board’s oversight function raises a concern, boards should work to resolve the concern and take any necessary action as quickly as possible in order to allow management to move forward.

In a deregulatory environment, it may seem strange that attorneys would suggest that boards likewise streamline their oversight function. However, it is our belief that reducing regulation is not nearly as important as improving the effectiveness and efficiency of regulation. By focusing the board’s oversight function on monitoring the key risks of the bank in an efficient manner, board members will create more time to focus on developing effective strategy, and for their management teams to focus on building value for the bank. Thoughtful board oversight is as important as regulatory relief for the industry, if not more so.

M&A Alert for Banks: Preparing to Be a Buyer


strategy-1-27-17.pngBefore a board and management of a bank pursue an acquisition, they should realistically assess their bank, the characteristics of the board and the shareholders, and the alternatives available.

The board and senior management should develop a strategic plan for the bank. The Federal Deposit Insurance Corporation has cited an increasing number of banks for lack of strategic planning in matters requiring board attention. The Office of the Comptroller of the Currency also has focused on strategic planning in the last few years. 

All board members must share a commitment to the strategic plan. Divisiveness in the boardroom often jeopardizes a bank’s ability to achieve its objectives.

The board has a fiduciary duty to make fully informed business decisions as to what is in the best interests of the hypothetical shareholder who is not seeking current liquidity. Management must assume the responsibility of educating the board (or bringing in consultants to do so) regarding the bank’s strengths and weaknesses, its inherent value, and the market(s) for targets. The board and senior management should meet regularly to discuss the bank’s strategic direction.

Debate in the planning process is healthy, but once the board agrees on a course of action, the board and management should speak with a united voice.

The board and management should communicate the bank’s strategic direction to shareholders. If key shareholders disagree with the direction, the board and management should arrange for such shareholders to be bought out or be comfortable that the bank need not do so. It is difficult to achieve strategic objectives if the board and key shareholders are working at cross purposes.

Evaluate Alternatives
The prospective buyer has a number of alternatives for enhancing shareholder value or multiple paths to be pursued at the same time. The board should evaluate such alternatives to identify the most attractive transaction.

Evaluate Your Prospects for Success
In embarking on bank M&A in the current environment, sellers will demand assurances that buyers can close. Here are some of the factors purchasers should consider:

  • Community Reinvestment Act and compliance ratings: Purchasers need to understand the “hot button” issues driving regulatory reviews and stay up to date. Yesterday’s focus on asset quality, anti-money laundering and Bank Secrecy Act compliance and third-party relationships have been joined by redlining, incentive compensation, concentration risk and cybersecurity, among others.
  • Capital levels: Determine whether the bank’s capital is sufficient to support an acquisition. If not, where will your bank obtain the needed funding?
  • Management: Does the purchasing bank have sufficient senior management capacity to staff the acquired bank or will target management be needed to implement the acquisition?
  • Systems and facilities: The purchasing bank’s board should evaluate whether the bank has compliance management systems and an enterprise risk management program that can scale for the acquisition.

Coming up with a good strategic plan while considering the bank’s alternatives is important for the board to discuss before embarking on an acquisition.

Negotiating the Transaction
There still may be a problem: What if there are very few targets that the bank has identified as “fits,” and none of them are in the market to sell?

Increasingly would-be buyers are willing to consider offering stock as part or all of the merger consideration. There are several drivers of this newfound willingness. First, buyers must meet increasingly challenging capital requirements. The exchange ratio in the merger may offer more attractive pricing to the buyer than issuing common equity to the market. Second, sellers have become more willing to accept private or illiquid stock as merger consideration. This may be a function of sellers’ understanding that economies of scale offer potential for greater returns on investment while enabling sellers to refrain from taking their “chips off the table” as would be the case in a cash sale. The recent run up in the stock market indexes has not yet translated into a general increase in M&A pricing. Third, a transaction that provides for a significant stock component allows for more one-on-one negotiations. Lastly, a strategic combination allows for mutuality of negotiation.

Just offering the selling shareholders stock may not be enough to convince a reluctant seller to consider a transaction. Would-be community bank buyers must recognize that there are social issues in any transaction (even when the merger consideration is cash). Accordingly, the buyer must evaluate in advance the roles of senior management of the seller, retention arrangements to proffer, severance to provide as well as bigger picture social issues such as board representation, combined institution name and headquarters.

A focus on the social issues and a willingness to put stock on the table may allow community bank buyers to continue to compete for acquisitions despite the rebounding stock market. Other competitors may be able to offer nominally more attractive pricing, but such an offer may not have better intrinsic value.