The financial institutions examined in Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP, demonstrate the fundamentals of successful, long-term performance. What can we learn from these top performers — and how should bank leaders navigate today’s challenging environment? Crowe Partner Kara Baldwin explores these issues, based on the lessons learned in the RankingBanking study, and shares her own expertise. To view the complete results of the 2021 RankingBanking study, click HERE.
When it comes to emergency succession planning, banks prepare
for the worst and hope for the best.
The coronavirus crisis has reminded us of the importance of emergency succession planning at banks, as well as related disclosure considerations. Boards must create emergency succession plans in the event a key executive become incapacitated. Some institutions may need to activate these plans during the pandemic and may wish they had spent more time detailing them in calmer, more predictable times.
“When you think of disasters, a lot of people think of
natural disasters and don’t really think about pandemics. That’s where that
succession planning comes in: Not that we wouldn’t have this for a natural
disaster, but the chances of somebody dying is pretty small,” says Laura Hay, a
managing director at executive compensation firm Pearl Meyer. “Here, there’s a
much higher likelihood of, at least temporarily, needing some additional
The coronavirus pandemic may last for months, if not over a
year, in the United States. There were about 800,000 confirmed cases and about 40,000
deaths as of April 22, according to economic data firm YCharts; 4.16 million
tests have been administered. Some groups are at higher risk for a severe
illness from Covid-19 than others, according to the Center for Disease Control
and Prevention, including adults over than 65 and individuals who have
underlying medical conditions.
Executives and directors at many banks are particularly vulnerable, based off this. Seventy-two percent of CEOs at institutions participating in Bank Director’s 2019 Compensation Survey were 55 or older; 2% were older than 74. Board members were in the same demographic, with a median director age of 64.
At least one financial
firm has disclosed a death of an executive due to Covid-19: Jefferies Group CFO
Peg Broadbent died of complications related to the coronavirus in late March,
according to Jefferies Financial Group.
Spirit of Texas Bancshares Chairman and CEO Dean Bass took medical leave after contracting the coronavirus, according to an April 7 regulatory filing from the Conroe, Texas-based bank. The board appointed Chief Lending Officer David McGuire to serve as interim CEO and director Steven Morris to serve as acting chairman in his absence. Bass resumed his duties at the $2.4 billion bank on April 13, according to a subsequent filing.
Emergency succession plans differ from long-term succession plans in key ways, Hay says. It is prudent for boards to inform the individual who will be appointed interim or successor in an emergency to prepare them for the role, while directors may want to keep their thoughts on long-term succession plans under wraps. More than one-third of respondents to Bank Director’s 2019 Compensation Survey had not designated or identified successors for the CEO.
to get more detail in their plans, and they should not just focus on the CEO,” Hay
says. “You need to identify and communicate who that person is, and probably
allow them to talk about how a succession would work, with a certain level of
In times like these, banks may want to extend contingency planning to the board as well. This will not be a theoretical exercise for some companies, Hay says; a director at one of her clients recently died from Covid-19. Other directors may be available to step in, though banks should have conversations about appointing an acting committee head who could fill the potential vacancy.
Another major consideration for banks during the pandemic will be the decision to disclose a diagnosis or illness of an executive. Securities rules gives “substantial discretion” to boards weighing the material nature of such disclosures, according to a January article by Fenwick & West attorneys. A disclosure is only necessary when there is “‘a present duty to disclose’ and the information is considered ‘material,’” they wrote.
The wide range of Covid-19 symptoms and outcomes means the
disclosures will probably be on a “case by case” basis, factoring in the
materiality of the individual or affected operations, says John Spidi, a partner in the corporate practice
group at Jones Walker.
cases where it is not completely clear disclosure is required under SEC
regulations, it’s probably a good idea to make the disclosure if the individual
involved has a material impact on the company or its results of operations,” he
Boards may even opt to not disclose if the executive can continue performing their key duties, which seems to be what Morgan Stanley did after Chairman and CEO James Gorman tested positive for Covid-19 in mid-March. Gorman led regular calls with the bank’s operating committee and board of directors in self-isolation. He shared the news in early April via a video message to employees, saying that he did not experience severe symptoms and has fully recovered, Reuters reported.
Hopefully very few banks will need to activate their emergency succession plans, but Hay says creating detailed strategies protects shareholders and keeps operations stable during an otherwise chaotic time.
“If you don’t have a plan, or your plan is super high level where you have to think about how you’re actually going to deploy it, you’re behind the eight ball,” she says.
Success in executing a bank’s growth strategy
— from acquiring another institution to even selling the bank — begins with the
discussions that should take place in the boardroom. But few — just 31%,
according to Bank Director’s 2020 Bank M&A Survey —
discuss these issues at least quarterly as a regular part of the board’s agenda.
Boards have a fiduciary duty to act in the best decisions of shareholders, and these discussions are vital to the bank’s overall strategy and future. Even if management drives the process, directors must deliberate these issues, whether it’s the prospective purchase or another entity of selling the bank.
The survey affirms the factors driving M&A activity today: deposits, increased profitability and growth, and the pursuit of scale. There are common barriers, as well; price in particular has long been a sticking point for buyers and sellers.
M&A plays an important role in most banks’
strategies. One-quarter intend to be active acquirers, and 60% prefer to focus
on organic growth while remaining open to making an acquisition.
However, roughly 4% of banks are acquired
annually — a figure that doesn’t line up with the 44% of survey respondents who
believe their bank will acquire another institution this year.
Conversations in the boardroom, and the
strategy set by the board, will ultimately lead to success in a competitive
“Having strong, frequent communications with the board is very much part of our M&A process, and I can’t emphasize how important it is,” says Alberto Paracchini, CEO at Chicago-based Byline Bancorp. The $5.4 billion asset bank has closed three deals in the past five years. “With proper communication, good transparency and frequent communication as to where the transaction stands, the board is and can be not only a great advisor but a good check on management.”
The board at Nashville, Tennessee-based FB
Financial Corp. discusses M&A as part of its annual strategic planning
meeting. Typically, an outside advisor talks to the board at that time about
the industry and provides an outlook on M&A. Also, they’ll “talk about our
bank and how we fit into that from their perspective,” including potential
opportunities the advisor sees for the organization, says Christopher Holmes,
CEO of the $6.1 billion asset bank. Progress on the strategy is discussed in
every board meeting; that includes M&A.
So, what should directors discuss? Overall,
survey respondents say their board focuses on markets where they’d like to grow
(69%), deal pricing (60%), the size of deals their bank can afford (57%) and/or
specific targets (54%).
“It starts with defining what your acquisition
strategy is,” says Rick Childs, a partner at Crowe LLP. Identifying attractive
markets and the size of the target the bank is comfortable integrating is a
good place to start.
At $6.1 billion asset Midland States Bancorp,
strategic discussions around M&A center around defining the attributes the
board seeks in a deal. Annually, directors at the Effingham, Illinois-based
bank discuss “what do we like in M&A — deposits and wealth management and
market share,” says CEO Jeffrey Ludwig. “[We] continue to define what those
types of items are, what the marketplace looks like, where’s pricing today.”
Given the more than 400 charters in Illinois,
the board sees ample opportunity to acquire, and the board evaluates potential
deals regularly. The framework provided by the board ensures management focuses
on opportunities that meet the bank’s overall strategy.
The board at $13.7 billion asset Glacier Bancorp, based in Kalispell, Montana, is “very involved in M&A,” says CEO Randall Chesler. Management shares with the board which potential targets they’re having conversations with and how these could fuel the bank’s strategy. “We start to show them financial modeling early on [so] that they can start to understand what a transaction might look like,” he says. “They’re really engaged early on, through the process and afterwards.” Once a transaction goes through, the board keeps tabs on the status of the conversion and integration.
Having M&A experience on the board can aid
these discussions. Overall, 78% of respondents say their board includes at
least one director with an M&A background.
These directors can help explain M&A to
other board members and challenge management when necessary, says Childs. “They
can be a really valuable member of the team and add their experience to the
overall process to make sure that it isn’t all groupthink; that there’s
somebody that can challenge the process, and make sure [they’re] asking the
right questions and keeping everybody focused on what the impact is.”
A number of banks don’t plan to acquire via acquisition. How often should these boards discuss M&A? More than half of survey respondents who say their bank is unlikely to acquire reveal that their board discusses M&A infrequently; another 20% only discuss M&A annually.
Jamie Cox, the board chair at $265 million
asset Alamosa State Bank, based in Alamosa, Colorado, says her bank strongly
prefers organic growth. Still, the board discusses M&A quarterly at a
minimum. “We would be remiss if we ignored it completely, because opportunity
is always out there, but you’ve got to be looking for it,” she says. “Whether
it’s your key strategy or a secondary strategy, it’s always got to be on the
In charter-rich Wisconsin, Mike Daniels believes
too many community bank boards aren’t adequately weighing whether now’s the
time to sell. “I don’t want to be as bold as to say that they’re not doing
their fiduciary responsibility to their shareholders, but are they really
looking at what their strategic options are?” says Daniels, executive vice
president at $3.1 billion asset Nicolet Bancshares and CEO of its subsidiary,
Nicolet National Bank.
Green Bay, Wisconsin-based Nicolet has an
investment banker on staff who can model the financial results for potential
acquisition targets. “We’re having M&A dialogue on a regular basis at the
board level because we can do this modeling — here’s who we’re talking to,
here’s what we’re talking about, here’s what it would mean,” says Daniels.
The board sets the direction for what the bank should evaluate as a potential target. How success is measured should derive from those initial discussions in the boardroom.
“We’re real disciplined on that tangible book
value earnback and making sure there’s enough earnings accretion,” says Ludwig.
A deal isn’t worth the effort if earnings per share accretion is less than 2%
in his view. Any cost saves or revenue synergies are factored into the bank’s
earnback estimate. “We’re fairly conservative on the expense saves and diligent
about getting at least what we’ve disclosed we could get, and we don’t put any
revenue synergies in our model.”
Bank Director’s 2020 Bank M&A Survey, sponsored by Crowe, surveyed more than 200 independent directors, CEOs and senior executives to examine acquisition and growth trends. The survey was conducted in August and September 2019. Bank Director’s 2020 RankingBanking study, also sponsored by Crowe, examines the best M&A deals completed between Jan. 1, 2017, and Jun. 30, 2018, detailing what made those deals successful. Additional context around some of these top dealmakers can be found in the article “What Top Acquirers Know.” The Online Training Series also includes a unit on M&A Basics.
Business conditions, financial markets
and competitive landscapes are always changing. But perhaps there is no arena
of business undergoing a more significant transformation at the moment than corporate
Whether driven by activists investors, regulators, institutional shareholders, governance gadflies or best practices, corporate governance is in the crosshairs for many organizations today. And in the banking sector — where some in Washington have placed a bullseye on the industry’s back — an enhanced focus on governance is the order of the day.
Bank boards today would be well served
to pay close attention to three important aspects of governance: board composition,
size and director age and tenure. When left to their own devices, too often
inertia will set in, causing boards to ignore needed enhancements to corporate
governance and boardroom performance. Even in the private company and mutual
space, there is room for improvement and incorporation of best practices if a
bank wants to continue to remain strong and independent.
Some governance advocates adopt a
certain viewpoint that downplays an institution’s history. “If you were
building the board for your bank today at its current size, how many of the
existing directors would you select for the board?” the viewpoint goes. This
obviously ignores historical contributions and the context that took the bank
to its current state. However, as the
old saying goes: “What got you here often won’t get you there.”
For many institutions — particularly those that have grown significantly through acquisition — the size of the board has become unwieldy. Oftentimes, executives doled out seats to get a deal done; in some extreme cases, boards now have 16, 18, 20 — or more — directors.
While this allows for ample staffing
of committees, pragmatically there may be too many voices to hear before the
board can make decisions. At the same time, banks with only six or seven directors may not be able to adequately staff
board committees, and perhaps operate as a “committee of the whole” in some
cases. Often times, this low number of directors
implies a high level of insularity.
Research from sources including both Bank Director and the National Association of Corporate Directors suggests that the average board size is between 10 and 11 directors, including the CEO. Furthermore, the CEO is now typically the sole inside director, unless the CEO transition plan is underway and a president has been named as heir apparent to the CEO role (similar to KeyCorp’s September 2019 succession announcement). Too many or too few directors can impede a board’s effectiveness, and 75% of public boards have between nine and 12 directors.
Board composition, of course, speaks to the diversity seated around the board table. Whether you accept the prevailing sentiment or not, there is ample evidence that boards with more diverse perspectives perform better. In order to garner more diverse viewpoints, the board needs to be less homogenous (read: “not full of largely middle-aged white men”) and more representative of the communities served and employee demographics of today and tomorrow. And let’s not forget about age diversity, which helps to bring the perspectives of younger generations (read: “vital future customers and employees”) into the boardroom. One real world example: How would you feel if your bank lost a sizable municipal deposit relationship because a local ordinance required a diverse board in order to do business with an institution? It can happen.
Lastly, many boards are aging. The average public director today is 63 — roughly two years older than a decade ago. And as directors age and begin to see the potential end of their board service, a number of community bank boards have responded by raised their mandatory retirement age and prolonging the inevitable. Yet with rising tenure and aging boards, how can an institution bring on next-level board talent to ensure continued strong performance and good governance, without becoming unnecessarily large? Boards need to stay strong and hold to their longstanding age and tenure policies, or establish a tenure or retirement limit, in order to allow for a healthy refresh for the demands ahead.
High-performing companies typically have high-performing boards. It is rare to see an institution with strong performance accompanied by a weak or poorly governed board. Boards that take the time to thoughtfully optimize their size, composition and refreshment practices will likely improve the bank’s performance — and the odds of continued independence.
Joining a bank board can be a bewildering experience for some new directors. There’s a lot to learn, including new, confusing abbreviations and financial metrics specific to the banking industry. But with the right approach, bank boards and nominating/governance committees can make the experience easier.
Onboarding new directors and more quickly acclimating them to the world of depository institutions is essential to ensuring banks have a functioning board that is prepared to navigate an increasingly changing and complex environment. It can also reduce potential liability for the bank by ensuring its members are educated and knowledgeable, and that no one personality or viewpoint dominates the boardroom.
Banking differs from other industries because of its business model, funding base, regulatory oversights and jargon. Directors without existing knowledge of the industry may need one to two years before becoming fully contributing members who can understand the most important issues facing the bank, as well as the common parlance.
Proactive boards leverage the chairperson to create an onboarding process that is comprehensive without being overwhelming, and tailor it to suit their institution’s particular needs, as well as the skill sets of newly recruited board members. The chair can work with members of the nominating/governance committee and executives like the chief financial officer to create a specific onboarding program and identify what pertinent information will best serve their new colleague.
Bank Director has compiled the following checklist to help strengthen your bank’s onboarding program.
1. Help new directors understand their role on the board. New directors often come in with a background in business or accounting, skills that are useful in a bank boardroom. But business success in one industry may not readily translate to banking, given the unique aspects of its business model, regulations and even vocabulary associated with financial institutions. New directors can access insights on “The Role of the Board” through Bank Director’s Online Training Series.
Banks are uniquely regulated and insured. Directors should be able to appreciate the role they serve in their oversight of the bank, as well as the role regulators have in keeping the bank safe and sound, and ensuring prudent access to credit.
2. Provide an overview of the banking industry. Directors often aren’t bankers and will need to be acquainted with the business of banking broadly.
With this overview will come the distinctive terms and acronyms that a new director may hear tossed around a boardroom. Boards should either create or provide a glossary with definitions and acronyms of terms, including the principal regulators and common financial metrics.
Click HERE to access Bank Director’s Banking Terms Glossary.
3. Provide an overview of your bank’s business model and strategy. Directors will need to understand the bank’s products, including how it funds itself, what sort of loans it makes and to whom, as well as other services the bank provides for a fee. They will also need to learn about the bank’s credit culture, capital regime and its approach to risk management, including loan loss reserving.
4. Create a reading list. There are a number of internal and external resources that new board members can access as they become acclimated to the ins and outs of bank governance. Internally, they should have access to recent examination reports, call reports, and quarterly and annual filings, if they exist. They should also access external resources, like Bank Director’s Online Training Series, the Federal Reserve Bank of Kansas City’s 2016 publication, “Basics for Bank Directors,” and “The Director’s Book,” published by the Officer of the Comptroller of the Currency.
Additionally, they should keep up-to-date with the industry through bank-specific publications, such as Bank Director’s newsletter and magazine.
5. Schedule one-on-one meetings with the management team. A new board member will need to understand who they are working with and the important roles those individuals play in running a successful bank. Their onboarding should include meetings with the management team, especially the CFO for a discussion about the financial metrics, risk measurement and health of the bank. It may also be prudent to schedule a meeting with other executives who oversee risk management at the bank.
6. Schedule one-on-one meetings with members of the board and key consultants. New directors should sit down with the heads of board committees to understand the various oversight functions the board fulfills. The bank may also want to reach out to the firms it works with, including its accounting, law and consulting firms, to chat about their roles and relationship with the company.
7. Emphasize continuing education. Boards should convey to new members that they expect continued education and growth in the role. One way to achieve this is through conference attendance, which can provide intensive and specialized education, as well as a community of directors from banks in other geographic areas that new members can learn from. Direct new board members to events hosted by your state banking association, if available, or sign them up for annual conferences like Bank Director’s Bank Board Training Forum.
Look for conferences that offer information calibrated to a director’s understanding, starting with basic or introductory instruction suited for new directors. The conferences should also facilitate discussion among directors, so that they can learn from each other. As a director grows in the role, the board can seek out more specialized training.
Successful onboarding should help new directors acclimate to the world of banking and become a productive member of the board. Boards should expect their directors to become comfortable enough that they go beyond thoughtful listening and ask intelligent questions that reinforce the bank’s strategy and its risk management.
Developing a positive relationship with regulators is important for any bank. How can banks foster this?
There’s no one better to answer this question than a former regulator.
Charles Yi served as general counsel of the Federal Deposit Insurance Corp. from 2015 to 2019, where he focused on policy initiatives and legislation, as well as the implementation of related rulemaking. He also served on the FDIC’s fintech steering committee.
In this interview, Yi talks about today’s deregulatory environment and shares his advice for banks looking to improve this critical relationship. He also explains the importance of a strong compliance culture and what boards should know about key technology-related risks.
BD: You worked at the FDIC during a time of significant change, given a new administration and the passage of regulatory relief for the industry. In your view, what do bank boards need to know about the changes underway in today’s regulatory environment? CY: While it is true that we are in a deregulatory environment in the short term, bank boards should focus on prudent risk management, and safe and sound banking practices for the long term. Good fundamentals are good fundamentals, whether the environment is deregulatory or otherwise.
BD: What hasn’t changed? CY: What has not changed is the cyclical nature of both the economy and the regulatory environment. Just as housing prices will not always go up, [a] deregulatory environment will not last forever.
BD: From your perspective, what issues are top of mind for bank examiners today? CY: It seems likely that we are at, or near, the peak of the current economic cycle. The banking industry as a whole has been setting new records recently in terms of profitability, as reported by the FDIC in its quarterly banking profiles. If I [were] a bank examiner, I would be thinking through and examining for how the next phase of the economic cycle would impact a bank’s operations going forward.
BD: Do you have any advice for boards that seek to improve their bank’s relationship with their examiners? CY: [The] same thing I would say to an examiner, which is to put yourself in the shoes of the other person. Try to understand that person’s incentives, pressures—both internal and external—and objectives. Always be cordial, and keep discussions civil, even if there is disagreement.
BD: What are some of the biggest mistakes you see banks make when it comes to their relationship with their examiner? CY: Even if there is disagreement with an examiner, it should never become personal. The examiner is simply there to do a job, which is to review a bank’s policies and practices with the goal of promoting safety and soundness as well as consumer protection. If you disagree with an examiner, simply make your case in a cordial manner, and document the disagreement if it cannot be resolved.
BD: In your presentation at the Bank Audit & Risk Committees Conference, you talked about the importance of projecting a culture of compliance. How should boards ensure their bank is building this type of culture? CY: Culture of compliance must be a focus of the board and the management, and that focus has to be communicated to the employees throughout the organization. The incentive structure also has to be aligned with this type of culture.
Strong compliance culture starts at the top. The board has to set the tone for the management, and the management has to be the example for all employees to follow. Everyone in the organization has to understand and buy into the principle that we do not sacrifice long-term fundamentals for short-term gain—which in some cases could end up being [a] long-term loss.
BD: You served on the FDIC’s fintech steering committee, which—in a broad sense—examined technology trends and risks, and evaluated the potential impact to the banking system. Banks are working more frequently with technology partners to enhance their products, services and capabilities. What’s important for boards to know about the opportunities and risks here? CY: Fintech is the next frontier for banking, and banks are rightly focused on incorporating technology into their mix of products and services. One thing to keep in mind as banks increasingly partner with technology service providers is that the regulators will hold the bank responsible for what the technology service provider does or fails to do with regard to banking functions that have been outsourced.
BD: On a final note: In your view, what are the top risks facing the industry today? CY: I mentioned already the risks facing the industry as we contemplate the downhill side of the current economic cycle. One other issue that I know the regulators are and have been spending quite a lot of time thinking about is cybersecurity. What is often said is that a cyber event is not a question of if, but when. We can devote volumes of literature [to] talking about this issue, but suffice for now to say that it is and will continue to be a focus of the regulators.
Arnold & Porter was a sponsor of Bank Director’s Bank Audit & Risk Committees Conference.
Bank directors face a myriad of expectations from regulators to ensure that their institutions are safe and sound. But there’s one thing directors do that regulators don’t actually ask them to do.
“There’s no requirement or even suggestion, that I’m aware of, from any regulators that says, ‘Hey, we want the board involved at the loan-approval level,’” says Patrick Hanchey, a partner at the law firm Alston & Bird. The one exception is Regulation O, which requires boards to review and approve insider loans.
Instead, the board is tasked with implementing policies and procedures for the bank, and hiring a management team to execute on that strategy, Hanchey explains.
“If all that’s done, then you’re making good loans, and there’s no issue.”
Yet, 77 percent of executives and directors say their board or a board-level loan committee plays a role in approving credits, according to Bank Director’s 2019 Risk Survey.
Boards at smaller banks are more likely to approve loans than their larger peers. This is despite the spate of loan-related lawsuits filed by the Federal Deposit Insurance Corp. against directors in the wake of the recent financial crisis.
The board at Mayfield, Kentucky-based First Kentucky Bank approves five to seven loans a month, says Ann Hale Mills, who serves on the board. These are either large loans or loans extended to businesses or individuals who already have a large line of credit at the bank, which is the $442 million asset subsidiary of Exchange Bancshares.
Yet, the fact that directors often lack formal credit expertise leads some to question whether they should be directly involved in the process.
“Inserting themselves into that decision-making process is putting [directors] in a place that they’re not necessarily trained to be in,” says James Stevens, a partner at the law firm Troutman Sanders.
What’s more, focusing on loan approvals may take directors’ eyes off the big picture, says David Ruffin, a director at the accounting firm Dixon Hughes Goodman LLP.
“It, primarily, deflects them from the more important role of understanding and overseeing the macro performance of the credit portfolio,” he says. “[Regulators would] much rather have directors focused on the macro performance of the credit portfolio, and understanding the risk tolerances and risk appetite.”
Ruffin believes that boards should focus instead on getting the right information about the bank’s loan portfolio, including trend analyses around loan concentrations.
“That’s where a good board member should be highly sensitized and, frankly, treat that as their priority—not individual loan approvals,” says Ruffin.
It all boils down to effective risk management.
“That’s one of [the board’s] main jobs, in my mind. Is the institution taking the right risk, and is the institution taking enough risk, and then how is that risk allocated across capital lines?” says Chris Nichols, the chief strategy officer at Winter Haven, Florida-based CenterState Bank Corp. CenterState has $12.6 billion in assets, which includes a national correspondent banking division. “That’s exactly where the board should be: [Defining] ‘this is the risk we want to take’ and looking at the process to make sure they’re taking the right risk.”
Directors can still contribute their expertise without taking on the liability of approving individual loans, adds Stevens.
“[Directors] have information to contribute to loan decisions, and there’s nothing that says that they can’t attend officer loan committee meetings or share what they know about borrowers or credits that are being considered,” he says.
But Mills disagrees, as do many community bank directors. She believes the board has a vital role to play in approving loans.
First Kentucky Bank’s board examines quantitative metrics—including credit history, repayment terms and the loan-to-value ratio—and qualitative factors, such as the customer’s relationship with the bank and how changes in the local economy could impact repayment.
“We are very well informed with data, local economic insight and competitive dynamics when we approve a loan,” she says.
And community bank directors and executives are looking at the bigger picture for their community, beyond the bank’s credit portfolio.
“We are more likely to accept risk for loans we see in the best interest of the overall community … an external effect that is hard to quantify using only traditional credit metrics,” she says.
Regardless of how a particular bank approaches this process, however, the one thing most people can agree on is that the value of such bespoke expertise diminishes as a bank grows and expands into far-flung markets.
“You could argue that in a very small bank, that the directors are often seasoned business men and women who understand how to run a business, and do have an intuitive credit sense about them, and they do add value,” says Ruffin. “Where it loses its efficacy, in my opinion, is where you start adding markets that they have no understanding of or awareness of the key personalities—that’s where it starts breaking apart.”
Managing risk and satisfying examiners can be difficult for any bank. It’s particularly hard for community banks that want to manage their limited resources wisely.
One bank that balances these challenges well is Bryn Mawr Bank Corp., a $4.6 billion asset based in Bryn Mawr, Pennsylvania, on the outskirts of Philadelphia.
Bank Director Vice President of Research Emily McCormick recently interviewed Chief Risk Officer Patrick Killeen about the bank’s approach to risk for a feature story in our second quarter 2019 issue. That story, titled “Banks Regain Sovereignty Over Risk Practices,” dives into the results of Bank Director’s 2019 Risk Survey. (You can read that story here.)
In the transcript of the interview—available exclusively to members of our Bank Services program—Killeen goes into detail about how his bank approaches stress testing, cybersecurity and credit risk, and explains how the executive team and board have strengthened the organization for future growth.
The top risks facing his community bank
Hiring the right talent to balance risk and growth
Balancing board and management responsibilities in lending
Conducting stress tests as a community bank
Managing cyber risk
Responding to Bank Secrecy Act and anti-money laundering guidance
The interview has been edited for brevity, clarity and flow.
Download transcript for the full exclusive interview
For someone who has covered the banking industry as long as I have (hint: I wrote my first banking story in 1986), these are among the best days to be a banker—or director of a bank—that I can remember. Profitability is high, as is capitalization, and the industry is gliding on the updraft of a strong economy and lower taxes.
The current health of the industry was apparent from what we did not talk about at Bank Director’s Bank Board Training Forum, which took place on May 9-10 in Nashville. There were no sessions about deteriorating loan quality, or the best way to structure a loan workout program, or the need to raise capital. Indeed, our managing editor, Kiah Lau Haslett, wrote a story that published Friday on this website warning against the perils of complacency.
When your biggest challenge is guarding against complacency, you’ve definitely found yourself in tall cotton.
It’s worth drilling down a little bit into the industry’s strong fundamentals. In addition to the continuation of a strong U.S. economy, which will be a record expansion if it continues much longer, banks have also benefited—more than any other industry—from last year’s steep cut in corporate tax rates, as well as a modest rollback of regulations in the Dodd-Frank Act.
Joseph Fenech, managing principal and head of research at the investment banking firm Hovde Group, explained during a presentation that thanks to the tax cut, both return on average assets and return on average tangible common equity jumped to levels last seen prior to the Great Recession. And not only has deregulation had a measurably positive impact on the industry’s profitability, according to Fenech, it has also brought new investors into the sector.
“It’s really driving change in how investors think about banks,” he says.
The only bad news Fenech offered was his assessment that bank M&A pricing has peaked. From 2008 to 2016, stocks of the most active acquirers traded at a premium to book value while many distressed targets traded at a discount, which translated to favorable “deal math” for buyers, according to Fenech. Deal pricing began to edge up from 2016 to 2018 as more acquirers came into the market. Many transactions had to be priced at a premium to book value, which began to make the deal math less favorable for the buyer.
Generally, the higher the deal premium, the longer it takes for it to be accretive. Since the beginning of this year, says Fenech, many investors have become wary of deals with high premiums unless they are clearly accretive to earnings in a reasonable period of time. Undisciplined acquirers that overpay for deals will see their stocks shunned by many investors.
This new dynamic in bank M&A also impacts sellers, who now may receive a lower premium for their franchise.
“I think the peak pricing in bank M&A was last year,” says Fenech.
An important theme during the entire conference was the increased attention that board diversity is getting throughout the industry. Bank Director President Mika Moser moderated a general session panel discussion on board diversity, but the topic popped up in various breakout sessions as well. This is not always a comfortable discussion for bank boards since—let’s face it—most bank boards are comprised overwhelming of older white males.
For many proponents, the push for greater board diversity is not simply to accomplish a progressive social policy. Diverse groups usually offer a diversity of thought—and that makes good business sense. Academic research shows that diverse groups or teams make better business decisions than more homogenious groups, where the members are more inclined to affirm each other’s biases and perspectives than challenge them. Larry Fink, the chairman and CEO of Blackrock—the world’s largest asset manager—believes that diverse boards are less likely to succumb to groupthink or miss emerging threats to a company’s business model, and are better able to identify opportunities that promote long-term growth.
The banking industry still has a lot of work to do in terms of embracing diversity in the boardroom and among the senior management team, but I get the sense that directors are more sensitive—and more open to making substantive changes—than just a few years ago.
The Bank Board Training Forum is, at its core, a corporate governance conference. While we cover a variety of issues, it’s always through the perspective of the outside director. James McAlpin, Jr., a partner and leader of the financial services client services group at the law firm Bryan Cave, gave an insightful presentation on corporate governance. But sometimes the simplest truth can be the most galvanizing.
“The responsibilities of directors can be boiled down to one simple goal—the creation of sustainable long-term value for shareholders,” he says. There are many decisions that bank boards must make over the course of a year, but all of them must be made through that prism.
Bank directors have a golden opportunity to position their banks for future growth and prepare them for change—if they can resist the lull of complacency, according to speakers at the opening day of Bank Director’s 2019 Bank Board Training Forum on May 9.
The current economic environment remains benign, as regulators have paused interest rate increases and credit quality remains pristine, says Joseph Fenech, managing principal and head of research at Hovde Group. Further, he argues that banks today are better equipped to withstand a future economic downturn.
But speakers throughout the day say the risk is that board members may feel lulled by their banks’ current performance and miss their chance to position these institutions for future growth.
“We’re going through the good years in banking. I would argue your biggest competitor is complacency,” says Don MacDonald, chief marketing officer at MX Technologies. He adds that bank boards needs to be asking hard questions about the future despite today’s positive operating environment.
Banks are grappling with the rapid pace of change and technology, shifting customer demographics and skills gaps at the executive and board levels. Speakers during the conference provided a variety of ways that directors can address these concerns with an eye toward future growth.
One way is to redefine how community banks think about their products and their markets, according to Ron Shevlin, director of research at Cornerstone Advisors. Shevlin says many community banks face competition from firms outside of their geographic marketplace. In response, some community banks are moving away from a geographic community and toward affinity, or common bond, groups. These firms have identified products or loans they excel at and have expanded their reach to those affinity customers. He also advises banks to examine how their products stack up to competing products. He uses the example of checking accounts, pointing out that large banks and financial technology firms sometimes offer rewards or personal financial management advice for these accounts.
“Everyone talks about customer experience, but fixing the customer experience of an obsolete product is a complete waste of money,” he says.
Another challenge for boards is the makeup of the board itself. Directors need to have a skill set that is relevant to the challenges and opportunities a bank faces. Today, directors are concerned about how the bank will respond to technology, increase the diversity of their boards and remain relevant to the next generation of bank customers, says J. Scott Petty, managing partner of financial services at Chartwell Partners, an executive search firm.
He challenges directors to consider the skills and experiences they will need in a few years, as well as how confident they are that they have the right board and leadership to run the bank.
“Change doesn’t happen overnight. It has to be planned for,” he says. “Board composition should reflect the goals of the financial institution.”
Banks can resist complacency with their culture, according to Robert Hill, Jr., CEO of South State Corp. Hill says there is never a point in time when “you’ve got it made and your bank is cruising.” Various headwinds come and go, but the overarching theme behind the bank’s challenges is that pace of change, need for customer engagement and competition are all increasing.
In response, Hill says the bank is very selective about who they hire, and looks for passion, values and engagement as well as specific skills. South State prioritizes soundness, profitability and growth—in that order—and wraps its cultural fabric around and throughout the company. A large part of that is accomplished through leadership, and the accountability that goes with it.
“If the culture is not strong and foundation is not strong, it will be much harder for a company to evolve,” he says.