2024 Bank M&A Survey: On the Hunt for Deposits

Bank leaders’ enthusiasm for M&A appears muted going into 2024, but an appetite for sticky, low cost deposits could motivate some financial institutions to make a deal in the year ahead.

Bank Director’s 2024 Bank M&A Survey, sponsored by Crowe LLP, finds that 35% of bank executives and directors believe they are likely to acquire another institution by the end of 2024, down from 39% in 2023 and 48% in 2022. Eighty-five percent point to an attractive deposit base as a top attribute of an acquisition target in today’s environment, compared with 58% who said as much a year ago. That was followed by a complementary culture (58%), efficiency gains (55%) and locations in growing markets (48%).

Looking over the next five years, more than half (56%) of bank executives and directors say they are open to acquisitions. Almost a quarter plan to be active acquirers.

By and large, respondents do not expect dramatic swings in their bank’s deposit rates over the next 18 months. Forty-five percent expect deposit rates to increase by no more than 50 basis points, and 22% expect them to decline by that amount. If that holds true, that’s positive news for the industry. The Federal Reserve’s Open Market Committee raised the federal funds rate 11 times over the past 18 months, bringing it to a range of 5.25% – 5.50%. “Deposit acquisition [at] reasonable rates will be the key to profitability,” writes the independent director of a private, southwestern bank.

When asked about strategies their bank has employed to generate organic growth in 2022-23, 57% say they’ve added staff in revenue-generating areas. Forty-two percent expanded their product offering within existing business lines, and 38% added new business lines or products. The percentage who have undertaken new digital efforts to attract deposits fell from 50% in last year’s survey to 39% this year.

One respondent points out that digital channels allow customers to move money more quickly, adding, “sticky deposits are not so sticky anymore.”

Organic growth has also been tough to come by lately. Respondents cite economic uncertainty or fear of recession (56%), competition from other financial institutions (55%), and limited or sluggish loan demand (34%) as the top three obstacles to achieving organic growth in the current environment. Nearly a quarter (24%) cite staffing constraints as a growth challenge, a sentiment that was echoed in anonymous comments by survey respondents.

“The inability to attract human capital at all levels of the bank remains our largest concern going forward,” says the CEO of a midwestern bank. “I see this as our biggest obstacle to the survival of community banks going forward.”

Key Findings

Transformational Deals
Forty-one percent of respondents say their bank would be open to a merger of equals, while 34% say it would not be. Nearly a quarter are unsure. Two years ago, almost half (48%) said their bank would be open to such a transaction.

Waning Confidence In Valuations
Respondents cite the pricing expectations of potential targets (71%) as a top barrier to M&A, followed by a lack of suitable targets (59%). Among potential acquirers, 35% would be willing to pay up to 1.5 times tangible book value for the right target. However, just over half of respondents would expect a minimum of 1.75 times book value in a sale. For public banks, 40% feel their bank’s stock is attractive enough to buy an institution that meets its acquisition criteria, a sharp drop from 51% who said as much last year.

Selective Sellers
While a majority (61%) express no preference as to whether a potential acquirer would be a direct competitor, most would rather sell to a regional bank (65%) or community bank (60%) than to a private investor group (18%), multinational bank (12%) or credit union (9%).

Trouble On The Horizon
Forty-three percent anticipate more bank failures over the next 18 months, but among those bank leaders, most do not expect to see more than 10 banks fail. A third of respondents do not anticipate any further bank failures in that time period.

Failed Bank M&A
Three-quarters of bank leaders say they have not discussed the possibility of buying a failed bank, but 17% have discussed it and informed their regulator of their interest.

Sluggish Fintech Investing
A large majority of respondents (79%) say their bank did not invest in or acquire a fintech firm in 2022 or 2023, consistent with last year’s survey results. Of those who did invest in a fintech company, most cite a desire to gain a better understanding of the fintech space.

To view the high-level findings, click here.

Bank Services members can access a deeper exploration of the 2024 Bank M&A Survey. Members can click here to view the complete results, broken out by asset category and other relevant attributes. To find out how your bank can gain access to this exclusive report, contact [email protected].

Bank Director will delve deeper into capital, M&A and technology strategies at its biggest event of the year, the Acquire or Be Acquired Conference, Jan. 28-30, 2024, in Phoenix, Arizona.

Time for Boards to Clean House and Recession-Proof the Bank

Bank boards can prepare for potentially tough economic times by becoming well versed in the balance sheet and cultivating a culture of credible challenge, said speakers throughout the first day of Bank Director’s Bank Board Training Forum, held in Nashville on Sept. 11-12.

In the wake of the spring regional bank failures of Silicon Valley Bank, Signature Bank and First Republic Bank, the industry has revisited whether or not directors can really govern risk. While they have redoubled their efforts on liquidity, they now need to contemplate what might happen to their institution’s balance sheet over the next four quarters and beyond. 

“2023 is a lost year for banks,” said Dan Flaherty, a managing director at the investment bank Janney Montgomery Scott. “If you have to make an investment or strategic decision that can accelerate getting to greener pastures, this is the time to do it.”

Balance sheet management and interest rate risk are urgent areas of focus for many banks. High interest rates have finally appeared in deposit costs. The spring banking crisis accelerated a deposit exodus and ignited greater competition. This is on top of the “huge” unrealized losses that banks are carrying on securities and fixed-rate loans, some of which may resolve themselves during the next two to five years depending on the direction of the federal funds rate, Flaherty said.

Boards should be asking management about the outlook for the underlying cost of funding and asset yield that go into the projected 12-month return on assets, said Brian Leibfried, partner and managing director at the investment bank Performance Trust Capital Partners. He gave the example of a bank that had projected a 70 basis point cost of funds; the actual cost of funds was 1.2%. This skewed metrics like the bank’s net interest margin, earnings and return on assets.

“The balance sheet could produce different returns,” he said. “Can the bank weather those different returns?”

Given that, boards and management teams should have a sense of how fast the assets and deposits on their balance sheet could reprice, and how long it could take unrealized losses to accrete back. Some banks may need to take dramatic action, said Eve Rogers, an audit partner at the public accounting, consulting and technology firm Crowe LLP.

“Now is the time to clean house,” she said. “There’s no reward in being more profitable [this year] versus building profitability for future years.”

Rogers added that banks may want to launch market expansion efforts in order to compete for deposits or grow a customer base. Some banks may decide to consider limited balance sheet restructuring that monetizes their unrealized loss but gives them cash and flexibility to reinvest those funds into higher-yielding opportunities or preservation of capital. Flaherty said he expects the fourth quarter may be peppered with announcements of banks selling loans or securities and booking their loss. 

Forward-looking banks should also think about mitigating losses and making their balance sheet “recession-proof,” said Sydney Menefee, a former regulator at the Office of the Comptroller of the Currency and a partner at Crowe. Bank boards may expect to record losses in a recession, but losses flow through other line items on the balance sheet. Have they explored what might happen to the balance sheet if the economy enters a long period of slow growth? 

The way for boards to get at those answers is by asking questions, said Leslie Schreiner, the director of diversity and inclusion at Federal Home Loan Bank of Atlanta.

“Questions are the tools of the board,” she says. To that end, it will be crucial for directors to press management on the assumptions and processes they used to model returns or come up with strategic decisions going into 2024.

Embracing Strategies and Overcoming Challenges to Unlock Growth

Institutions are seeking a multitude of means to stimulate their growth.

Growth is mission-critical for banks but can be difficult to achieve due to various factors. A successful growth goal and outcome needs a systematic approach toward execution. Banks can achieve growth by driving toward metrics that are broken into components across the institution. But to ensure that growth is not merely a board-level catchphrase, banks need to establish a clear set of strategies and plans that lead to sustainable success.

Three variables drive growth at banks:
• Leadership and strategy.
• People and culture.
• Marketing.

Leadership and Strategy
Leadership and strategy are enormously impactful on any organization’s growth — or lack thereof. Winning banks are headed by executives who map out a clear vision and direction, backed by metrics, for where they want to take their organization. What gets measured gets managed. Accompanying this vision are strategies that banks can use to articulate growth goals and objectives throughout their organization.

Clarity of vision, open and transparent employee communication and simple messaging can all align growth objectives to people’s specific roles in the organization. This can boost understanding of their roles in the larger machinery and morale among employees. Finally, management should emphasize how the institution will monitor progress against realistic metrics, with the highest levels of leadership retaining the ability to adjust course when necessary.

People and Culture
The confluence of people and culture is another major impact on the growth of banks. An institution is only as good as the individual. Banks must create a team of motivated employees who are aligned with the vision and values of their leaders. Clear and transparent communication can foster a culture rooted in innovation, collaboration and customer-centricity directed toward growth.

The third major impact on growth is marketing, both strategic and tactical. Banks that have a firm understanding of their account holders’ current financial needs, their target markets and how to best serve them can effectively leverage marketing to foster growth. In a world of digital touchpoints, staying competitive means providing personalized and quantified marketing campaigns that aim to reach, connect, engage and ultimately spur action that positively impacts the bank’s growth trajectory.

Banks that work to align all three of these elements have a good chance of achieving their growth goals and sustainable success while gaining a competitive advantage and delivering higher value to their customers. Failure to do so can spell trouble for banks, leading to stagnation, decline and potential closures.

Challenges That Stunt Growth
The financial services industry faces several challenges that broadly hinder its ability to grow. In recent years, the industry has contended with a shortage of skilled employees, turnover and overwhelming ongoing demands. Although digital transformation is essential, it can be expensive and result in banking feeling less personal if the digital element is not fully leveraged for customer communications. This, in turn, clashes with a bank’s growth objectives.

Despite digital transformation being one of the top goals in the financial services industry, banks may not fully grasp how to capitalize on their digital assets. Banks need to utilize their abundance of customer data to humanize digital interactions. Using data and AI insights can lead to increased customer engagement within multiple digital channels, which leads to growth. But how do banks do this with the severe shortage of the skills needed to lead and implement digital strategies?

Growth as a Service
Digital engagement and cross-selling are critical for banks, especially in a hypercompetitive landscape with high consumer expectations. Banks need to invest in the right technologies to do this at scale. And those banks focused on growth have a mandate to find and use these solutions effectively.

The benefit of “growth as a service,” otherwise known as GRaaS, is that it does not just stop at technology. Understanding what technology platforms to use is an important part of the puzzle — but it’s still only a part of the puzzle. With GRaaS, bank leaders can get a robust combination of technology and industry experts who can become an extension of your bank, while putting the tech to good use towards your growth goals.

As a holistic approach that enables the growth of loans and deposits, GRaaS can also support banks’ quest to acquire new customers and digital users. The “service” in GRaaS is what is so pivotal. It delivers that soup-to-nuts value: expertise that can conceptualize, define, implement, measure and optimize multiple, concurrent data-driven campaigns to serve a bank’s growth objectives.

Managing Interest Rate Risk With Stronger Governance

Many banks were caught off guard by the rapid pace of interest rate hikes over the past year. Now that the initial shock has hit, bank directors are questioning how to manage interest rate risk better and prepare for disruptions.

While rising rates are part of market cycles, rates rarely increase at their recent velocity. Between March 2022 and June 2023, the federal funds rate rose from 0.25% to 5.25%, a 500-basis point increase in less than 15 months.

A High Velocity Rise Caught Bank Leaders Off Guard
Not since the 1970s have rates increased at this pace in such a short time frame. Even in the cycle preceding the 2008 financial crisis, rates rose from 1% in 2004 to 5.25% in 2006 over 24 months. The latest interest rate hikes are steeper — and come at a time when banks were already awash in cash and liquidity. With excess cash, less loan demand and no place to park their money in recent years, many banks purchased securities, which historically have been a safe bet in such times.

But few boards were prepared for rates to increase so quickly. Since March 2022, continual increases in the federal funds rate have reduced the value of banks’ fixed-rate assets and shortened the maturity of their deposits. Two bank collapses in March 2023 demonstrated how quickly interest rate risk can grow into a liquidity risk and reputation risk.

Bank Directors Can Focus on Strong Governance, Risk Mitigation
Now that they have experienced an unprecedented event, bank directors are questioning what they can do to prepare for future interest rate shocks. But banks don’t necessarily need new risk management strategies. What they should do now is use the risk-mitigating levers available to them and act with strong governance.

Most banks already have asset-liability management committees that meet quarterly to stress test the balance sheet with instantaneous shocks, ramps and nonparallel yield curves. While going through the motions every quarter might appease regulators, it won’t prepare banks for black swan events. Banks need to hold these stress-testing meetings more frequently and make them more than compliance exercises.

In addition, bank directors should review assumptions used in their asset-liability management report packages. Some directors take these assumptions at face value without questioning how they were calculated or if they reflect reality. Yet the output of a model is only as good as the integrity of its underlying conventions or specifications.

Additional Strategies Require a Focus on Execution
Repricing products, changing product mix or employing derivatives can be other effective tools for managing risk. But again, the key is in execution. Some banks fear alienating customers or the community by repricing or changing products that are safer for the bank but might not be preferred by the customer. For example, some institutions prefer to book fixed-rate loans to meet customer demand, even though floating-rate loans might help the bank better manage risk.

While derivatives can add risk if not properly understood and managed, they can be a highly effective tool to manage interest rate risk if used early in the cycle. Once rate changes are underway, a derivative might no longer be helpful or might be cost-prohibitive.

Even as the Federal Reserve contemplates its next move, bank directors can look at the recent past as a learning experience and an opportunity to better prepare for the future.

How Banks Can Implement 3 Types of Automation Solutions

Many banks struggle with digital transformation, often because they lack an effective strategy, clear governance over the transformation process or both.

Common and current inefficiencies include relying on manual reports created in spreadsheets across multiple systems, using email or word processing to capture and document approvals and serve as a system of record and inconsistent procedures across business functions.

A digital-first approach has increasingly become table stakes for financial institutions given consumer adoption. In 2021, 88% of U.S. consumers used a fintech, up from 58% in 2020, according to an annual report from Plaid. Customers expect a frictionless experience from their bank; traditional institutions need to have a plan in place to adapt accordingly.

Banks that don’t already have a digital transformation strategy need to establish one to anchor and govern their process for evaluating, prioritizing and executing digital transformation projects. One area for consideration on that digital journey should be automation, which can help organizations become more efficient and better mitigate a variety of risks. There are three intelligent automation solutions that can help banks reduce costs and improve productivity, among other benefits: robotic process automation, digital process automation and intelligent document processing.

  1. Robotic process automation: In general, RPA is task-based automation focused on accomplishing targeted components of business processes without the need for significant human intervention. RPA is capable of handling high volume, repetitive and manual tasks on behalf of human process owners, filling gaps where systems lack integration capabilities.
  2. Digital process automation: This type of automation focuses on optimizing workflows to orchestrate more collaborative work processes. DPA typically involves highly auditable data flows to improve regulatory compliance, and is scalable in a way that helps the organization adapt to evolving business needs.
  3. Intelligent document processing: IDP automation involves the extraction of semi-structured data from digital documents such as PDFs and image files. This transforms such documents into discrete data elements that can drive decision-making. IDP can enhance the scope of RPA and DPA solutions.

Questions to Ask
On a foundational level, banks need to have a clear, intentional link between technology spending and their overall business strategy if they want to succeed in their digital journey. Leadership teams need to understand issues with current processes to ascertain where streamlining those processes could offer the greatest return on investment. Here are some key questions to consider when evaluating process automation:

  • How does the automation solution reduce friction and improve the customer or user experience?
  • What is the associated market opportunity or efficiency gain enabled by the solution?
  • Is the institution potentially automating a bad process?
  • How does the solution align with what customers want?
  • How will the institution train its teams to ensure adoption?
  • How does the automation solution fit into the organization’s current processes, workflows and culture?
  • How will the bank manage the change and govern post-transformation?

Developing a Framework
Depending on where a bank is in its digital transformation journey, there are a variety of steps the organization will need to take to implement automation solutions. Those banks that are early in their journey can use the following steps to help:

  • Plan: Establish a framework for implementation, including objectives, teams, timelines and a project governance structure.
  • Assess: Understand the current state of functions across the business and identify process gaps where automation can help.
  • Design: Use best practices to establish a “fit for purpose” system design that meets business requirements and is scalable for future growth.
  • Execute: Configure the applications and integrations according to system design; validate, test and resolve any defects identified; migrate the approved configuration to the production environment.
  • Go live: Assess user readiness and deploy the solution.
  • Support: Execute an automation support strategy and establish an external support framework.
  • Monitoring: Establish and track key performance indicators to provide metrics for better visibility into the business.
  • Road map: Evaluate business unit usage and develop a plan for optimization and expansion to realize the company’s digital transformation vision and business goals.

Addressing each of these steps can help banking leadership teams develop a more thoughtful approach to automation solutions and improve their overall digital transformation strategy.

Operational Resilience: An Inside-Out and Outside-In Perspective

Operational resilience is a topic of concern for bank boards. Unfortunately, many operational resilience initiatives focus primarily on upgrading internal systems and processes to respond to potentially disruptive events. This internally focused approach can cause banks to pursue reactive, disconnected and short-term projects that are difficult to sustain and detached from overall strategy.

Recognizing this problem, a growing number of banks are refocusing their operational resilience efforts, approaching potential disruptions from an external, customer-centric perspective that seeks opportunities to create and protect value. Such an approach can enable more proactive and effective operational resilience initiatives for institutions of all sizes.

The phrase “operational resilience” typically refers to a business’s ability to overcome adverse circumstances that might cause financial loss or disrupt operations. Under this definition, topics such as disaster recovery, business continuity, cybersecurity threats, fraud and other conventional risk management issues are central to most banks’ operational resilience efforts.

Yet some of the most potentially disruptive forces banks face stem from other factors, many of which lie outside the scope of conventional risk management programs. Examples include rapidly changing technology, evolving customer expectations and unconventional competitors encroaching on banks’ traditional service models.

In this environment, an often overlooked aspect of operational resilience is relevance — a bank’s ability to remain relevant to its customers’ financial services needs and ultimately become more relevant in the future. Perhaps the conventional definition of operational resilience should be replaced with one that acknowledges the importance of resilience, such as: “The ability of a company to build confidence and trust in its capability to adapt to changing circumstances.”

This shift in understanding could have significant implications for executives. For example:

  • In addition to internal mechanisms and systems that protect the value of the organization, operational resilience must also address external factors that could affect the bank’s value.
  • Rather than focusing solely on the downside risks of changing circumstances, an effective operational resilience approach also should recognize potential upside opportunities, particularly those stemming from customers’ evolving concerns and expectations.
  • In addition to responding to identified risks, operational resilience initiatives should proactively study, anticipate and prepare for potentially disruptive events and trends.
  • To remain resilient and relevant, banks must actively seek customer input and be ready to respond quickly with new service models and products if they align with the bank’s long-term strategy.

Connecting External Forces to Broader Threads
Banks face many pressures including continued digitization, cybersecurity threats, migration from legacy information systems, nontraditional competitors, interest rate volatility and a slowing economy, to name a few. Responding to each disruptor in isolation can create a reactive, internally focused approach that produces disconnected and uncoordinated projects that have little relevance to an institution’s overall strategy.

A more proactive approach to resilience requires leadership to consider potential disruptions within the context of the broader external issues and forces that can influence a bank’s business direction. For example, rather than reacting to a slowdown in a large commercial customer’s business, it is more effective to develop a business strategy that addresses the underlying economic trends that could lead to such a disruption and provides a set of potential offerings that might better enable that customer to navigate specific challenges ahead.

Broadly speaking, most disruptive events can be considered within the context of several general trends, including:

  • Demographic shifts.
  • Regulatory trends.
  • Economic and environmental issues.
  • Competitive issues.
  • Changing technology.
  • Evolving customer needs and expectations.

By developing proactive strategies to address these broader trends, risk managers can provide a foundation for more consistent and coordinated responses to specific events. More importantly, such an approach can help management prioritize trends that are most likely to have a direct impact — either positive or negative.

Question Your Operational Resilience, Strategy Frequently
A more strategic approach to operational resilience begins with strategy itself. In today’s environment, annual strategy sessions are simply inadequate. The most successful organizations conduct quarterly or monthly strategy reviews, fine-tuning priorities to stay ahead of developments.

Risk management and operational resilience questions must figure prominently in these discussions. Management should remain customer focused, seeking to understand how their customer would experience the same risks and potential disruptions.

Management also must recognize that an effective operational resilience effort is a dynamic and iterative process that requires continuing investment in data technology to integrate information and perspectives across the organization. With a new perspective, staying resilient and relevant is possible.

RankingBanking: Fueling Successful Strategies

Bank Director’s recent RankingBanking study, sponsored by Crowe LLP, identified the best public banks in the U.S. While their strategies may vary, these banks share a few common traits that enable their success. These include a consistent strategy and a laser focus on customer experience, says Kara Baldwin, a partner and financial services audit leader at Crowe. Training and organizational efficiency also allow these bankers to retain that customer focus through challenging times. In the year ahead, banks will need to manage through myriad issues, including credit quality, net interest margin management and new regulatory concerns. 

Topics include: 

  • Cultural Consistency 
  • Organizational Efficiencies 
  • Customer Centricity  

Click here to read the complete RankingBanking study.

Do Independent Chairs Reduce CEO Pay?

In an advisory vote earlier this year, shareholders roundly rejected JPMorgan Chase & Co.’s executive compensation package, particularly a whopping  $52.6 million stock option award for CEO and Chair Jamie Dimon. But at the same time, shareholders voted against a proposal to split those roles.

The proxy advisory firms Glass Lewis and Institutional Shareholder Services favor separating the CEO and chair roles. “Executives should report to the board regarding their performance in achieving goals set by the board,” Glass Lewis explains in its 2022 voting guidelines. “This is needlessly complicated when a CEO chairs the board, since a CEO/chair presumably will have a significant influence over the board.”

An analysis of Bank Director’s Compensation Survey data, examining fiscal year 2019 through 2021, finds that CEOs earn less when their board has an independent chair. Most recently, the 2022 Compensation Survey, sponsored by Newcleus Compensation Advisors, found that banks with separate CEO and chair roles reported median total CEO compensation of $563,000, compared to $835,385 where the role was combined. 

The results are striking, but they should be taken with a grain of salt. The information collected from the survey, which is anonymous, doesn’t include factors like bank performance. Respondents skewed toward banks with an independent chair. And data alone can’t sufficiently describe what actually occurs in corporate boardrooms.

“I can’t really say which model works better. Look at Jamie Dimon; that’s worked really well for the shareholders of JPMorgan Chase, whereas I think there have been three or four initiatives to try to split that role,” says Jim McAlpin Jr., a partner at the law firm Bryan Cave Leighton Paisner. McAlpin also serves on the board of Bank Director’s parent company, DirectorCorps. “It was voted down every time by the shareholders.”

CEOs typically negotiate when and whether they’ll eventually be named chair when they join a bank, says McAlpin. “If you have a very impactful, strong CEO who wants to be chair — most boards will not deny him or her that position, because they want [that person] running the bank.” It’s a small price to pay, he adds, for someone who has such a dramatic influence on the bank’s performance. “There is nothing more important to the bank than a CEO who has a clear vision, who can show leadership, form a good team and can execute well,” says McAlpin. 

But it’s important to remember that boards represent the interests of the shareholders. “The most important thing a board has to do is hire and retain a quality CEO. Part of retaining is getting the compensation right,” says McAlpin. “It’s important for the board to control that process.” 

McAlpin favors appointing a lead director when the CEO also has the chair position, to provide input on the agenda and contribute to the compensation process. 

Truist Financial Corp., in response to shareholder pressure around chair independence in 2020, “strengthened” its lead independent director position, according to its 2022 proxy statement. Former Piedmont Natural Gas Co. CEO Thomas Skains has served as lead independent director of the Charlotte, North Carolina-based bank since March 2022. Skains has the authority to convene and set the agenda for executive sessions and other meetings where the chair isn’t present; provide input on the agenda, and approve board materials and schedules; and serve as a liaison between the independent directors and CEO and Chair William Rogers Jr. 

But one individual can’t single-handedly strengthen the board, says Todd Leone, a partner and global head of executive compensation at McLagan. The compensation committee is responsible for the company’s pay programs, including executive compensation, peer benchmarking, reviewing and approving executive compensation levels, recommending director compensation, evaluating the CEO’s performance and determining the CEO’s compensation. With that in mind, Leone says the strength of the compensation committee — and the strength of its committee chair — will influence the independence of these decisions.

Leone also believes that increased diversity in the boardroom over the years has had a positive effect on these deliberations. “A diverse board, in my experience, they’re asking more questions,” he says. “And through that process of asking those questions, various things get unearthed, and the end result generally is stronger pay programs.”

Twelve years of Say-on-Pay — where public company shareholders offer an advisory vote on the top executives’ compensation — has also benefited those decisions, he says. Today, most long-term incentive plans are based on a selection of metrics, such as return on assets, income growth, asset quality and return on equity, according to Bank Director’s 2022 Compensation Survey. And in August, the U.S. Securities and Exchange Commission passed a pay versus performance disclosure rule that goes into effect for public companies in the fiscal year following Dec. 16, 2022.

“There’s a much higher bar for getting these plans approved,” says Leone, “because the compensation committees feel much more responsibility for their role in that process.”

In McAlpin’s experience, the best CEOs have confidence in their own performance and trust the process that occurs in the boardroom. “If they don’t like the results, they’ll give feedback, but they let the process unfold,” he says. “They don’t try to overtly influence the process.”

Heading into 2023, Leone notes the whipsaw effects that have occurred over the past few years, due to the pandemic, strong profitability in the banking sector and looming economic uncertainty. These events have had abnormal effects on compensation data and the lens through which boards may view performance. “We’re in a very volatile time, and we have been on pay since the pandemic,” says Leone. “Boards, [compensation] committees and executive management have to be aware of that.” 

Getting Everyone on Board the Digital Transformation Journey

Digital transformation isn’t a “one and done” scenario but a perpetual program that evolves with the ever-changing terrain of the banking industry. Competition is everywhere; to stay in the game, bank executives need to develop a strategy that is based, in large part, on what everyone else is doing.

According to a What’s Going On In Banking 2022 study by Cornerstone Advisors, credit unions got a digital transformation head start on banks: 16% launched a strategy in 2018 or earlier, versus just 9% of banks that had launched a strategy the same year. But it’s not only credit unions and traditional big banks that community financial institutions need to be watching. Disruptors like Apple and Amazon.com pose a threat as they roll out new innovations. Fintech players like PayPal Holding’s Venmo and Chime are setting the pace for convenient customer payments. And equally menacing are mortgage lenders like Quicken’s Rocket Mortgage and AmeriSave, which approve home loans in a snap.

An essential consideration in a successful digital transformation is having key policy and decision-makers on the same page about the bank’s technology platforms. If it’s in the bank’s best interest to scrap outdated legacy systems that no longer contribute to its long-term business goals, the CEO, board of directors and top executives need to unanimously embrace this position in support of the bank’s strategy.

Digital transformation is forcing a core system decision at many institutions. Bank executives are asking: Should we double down on digital with our existing core vendor or go with a new, digital platform? Increasingly, financial institutions are choosing to go with digital platforms because they believe the core vendors can’t keep up with best-in-class innovation, user experience and integration. Many are now opting for next-generation, digital-first cores to run their digital platform, with an eye towards eventually converting their legacy bank over to these next-gen cores.

Digital transformation touches every aspect of the business, from front line workers to back-end systems, and it’s important to determine how to separate what’s vital from what’s not. Where should banks begin their digital transformation journey? With a coordinated effort and a clear path to achieving measurable short- and long-term goals.

Here are some organization-wide initiatives for banks to consider as they dive into new digital transformation initiatives or enhance their current ones.

1. Set measurable, achievable transformation goals. This can include aspirations like improving customer acquisition and retention by upgrading customer digital touchpoints like the website or mobile app.
2. Prioritize systems that can produce immediate returns. Systems that automate repetitive tasks or flag incomplete applications create cost-efficient and optimal outcomes for institutions.
3. Invest in a discipline to instill a changed mindset. A bank that upgrades a system but doesn’t alter its people’s way of thinking about everything from customer interaction to internal processes will not experience the true transformational benefit of the change.
4. Conduct a thorough evaluation of all sales and service channels. This will enable the bank to determine not only how to impact the maximum number of customers, but also impart the greatest value to them through product assessment and innovation.
5. Get employees on board with “digital” readiness. Form small training groups that build on employees’ specialized knowledge and skills, rather than adopting a one-size-fits-all model. Employees that are well-trained in systems, processes and technology are invaluable assets in your institution’s digital transformation journey.

Banks must foster their unique cultures and hard-earned reputations to remain competitive in this ever-changing financial services landscape. As they build out digital strategies, they must continue fine-tuning the problem-solving skills that will keep them relevant in the face of evolving customers, markets and opportunities. Most importantly, banks must embrace a lasting commitment to an ongoing transformation strategy, across the organization and in all their day-to-day activities. For this long-term initiative, it’s as much about the journey as it is the destination.

How Bank Executives Can Address Signs of Trouble

As 2021’s “roaring” consumer confidence grinds to a halt, banks everywhere are strategizing about how best to deal with the tumultuous days ahead.

Jack Henry’s annual Strategic Priorities Benchmark Study, released in August 2022, surveyed banks and credit unions in the U.S. and found that many financial institutions share the same four concerns and goals:

1. The Economic Outlook
The economic outlook of some big bank executives is shifting. In June 2022, Bernstein Research hosted its 38th Annual Strategic Decisions Conference where some chief executives leading the largest banks in the U.S., including JPMorgan Chase & Co., Wells Fargo & Co. and Morgan Stanley, talked about the current economic situation. Their assessment was not entirely rosy. As reported by The New York Times, JPMorgan Chase Chairman and CEO Jamie Dimon called the looming economic uncertainty a “hurricane.” How devastating that hurricane will be remains a question.

2. Hiring and Retention
The Jack Henry survey also found 60% of financial institution CEOs are concerned about hiring and retention, but there may be some hope. A 2022 national study, conducted by Alkami Technology and The Center for Generational Kinetics, asked over 1,500 US participants about their futures with financial institutions. Forty percent responded they are likely to consider a career at a regional or community bank or credit union, with significant portion of responses within the Generation Z and millennial segments.

3. Waning Customer Loyalty
The imperative behind investing in additional features and services is a concern about waning customer loyalty. For many millennials and Gen Z bank customers, the concept of having a primary financial institution is not in their DNA. The same study from above found that 64% of that cohort is unsure if their current institution will remain their primary institution in the coming year. The main reason is the ease of digital banking at many competing fintechs.

4. Exploding Services and Payment Trends
Disruptors and new competition are entering the financial services space every day. Whether a service, product or other popular trend, a bank’s account holders and wallet share are being threatened. Here are three trends that bank executives should closely monitor.

  • The subscription economy. Recurring monthly subscriptions are great for businesses and convenient for customers: a win-win. Not so much for banks. The issue for banks is: How are your account holders paying for those subscriptions? If it’s with your debit or credit card, that’s an increased source of revenue. But if they’re paying through an ACH or another credit card, that’s a lost opportunity.
  • Cryptocurrency. Your account holders want education and guidance when it comes to digital assets. Initially, banks didn’t have much to do with crypto. Now, 44% of execs at financial institutions nationwide plan to offer cryptocurrency services by the end of 2022; 60% expect their clients to increase their crypto holdings, according to Arizent Research
  • Buy now, pay later (BNPL). Consumers like BNPL because it allows them to pay over time; oftentimes, they don’t have to go through a qualification process. In this economy, consumers may increasingly use it to finance essential purchases, which could signal future financial trouble and risk for the bank.

The Salve for It All: The Application of Data Insights
Banks need a way to attract and retain younger account holders in order to build a future-proof foundation. The key to dealing with these challenges is having a robust data strategy that works around the clock for your institutions. Banks have more data than ever before at their disposal, but data-driven marketing and strategies remains low in banking overall.

That’s a mistake, especially when it comes to data involving how, when and why account holders are turning to other banks, or where banks leave revenue on the table. Using their own first-party data, banks can understand how their account holders are spending their money to drive strategic business decisions that impact share of wallet, loyalty and growth. It’s also a way to identify trouble before it takes hold.

In these uncertain economic times, the proper understanding and application of data is the most powerful tool banks can use to stay ahead of their competition and meet or exceed account holder expectations.