What 2022 Could Hold for Bank M&A

Pent-up deal demand will define 2022, continuing this year’s momentum as pandemic-related credit concerns recede. Stinson LLP Partner Adam Maier believes banks can expect to see a high volume of deals in the space but anticipate approval slowdowns from regulatory scrutiny. He also shares his top advice for directors as their banks prepare for growth next year. Topics include:

  • Deal Demand
  • Regulatory Considerations
  • Advice for Growth

The Unbankey Bank: Coastal Financial’s Evolution

Coastal Financial Corp., a $2 billion community banking company in Everett, Washington, was a typical community bank seven years ago. It wasn’t looking to launch a banking-as-a-service (BaaS) division, where the bank would lend out its charter, payment rails and other bank exclusive products and services to third parties.

But that is exactly what the bank did.

When asked if he knew anything about BaaS prior to 2015 — the launch year of Coastal’s BaaS program — CEO Eric Sprink confessed, “Nope — we stumbled into it.”

In 2015, Sprink met Arkadi Kuhlmann, former CEO of ING Direct USA and ING Direct Canada, who was looking for a bank partner to offer banking services on the back end for his financial technology company, Zenbanx. The fintech offered deposit accounts, international currencies and money transfers.

This was the first time Sprink had heard anything about BaaS. He was interested, the board was interested, the executive team of Coastal was interested; so, the bank started an almost 15-month process of engaging investment bankers and consultants, speaking with regulators and preparing to enter into this new line of business.

But then, Coastal lost the bid to do business with Zenbanx to the personal finance giant SoFi Technologies, which later bought the fintech. Six months later, SoFi announced it was shutting down all Zenbanx accounts.

Instead of opting for resignation, Sprink — with the blessing of his board — continued to chase down new technology leads and partners. In the words of one of Sprink’s board members: “‘We’ve got to find out more about this … start running.’”

And Sprink hasn’t stopped running since. Along the way, Coastal recruited multiple new board members — one about every 18 months, and four in total — who have helped build Coastal’s BaaS strategy from the ground up. Sprink explains the process as being, “evolutionary, not revolutionary … We’ve intentionally looked really hard for expertise that we’re lacking in the evolution of our BaaS group.

That expertise, in part, is coming from its newest members: Stephan Klee; venture capitalist veteran and current CFO of Portage Ventures; Sadhana Akella-Mishra, chief risk officer at alternative core provider Finxact; Rilla Delorier, a former innovation executive at Umpqua Bank and PNC Bank; and Pamela Unger, a former tax manager at PwC, who brings understanding of direct venture capital accounting and oversight.

Coastal is dedicated to partnering with fintechs that are not only unwavering in their mission, but that are compatible with Coastal’s core values: stay flexible, embrace great thinking and be “unbankey,” as Sprink says. In what he describes as their “emotional gating criteria,” the bank sits down — or Zooms in, post-March 2020 — with these fintechs. They want to better understand the business, review their performance and investors, and, most importantly, find out what they want to accomplish. The key is to find partners that will reach and embolden specific communities through financial products and services tailored to their needs.

“We try real hard upfront to make sure we’re picking the ones that best fit us and that have the most likelihood of success,’’ he says. “With limited resources, you really have to stick to your gating criteria and believe in what you’re trying to accomplish.”

The whole process, from initial discussion to commercial launching, takes upwards of one year to 18 months. As of July, Coastal was working with 24 fintechs, half of them actively offering banking products and services through Coastal.

It takes a lot of effort to get to that stage. Out of the more than 1,100 fintechs vetted, only about 2% became fintech partners.

And in regard to the 12 active fintech partners, Coastal just recently crested the $1 million in revenue mark. Coastal’s BaaS revenue for the quarter ending June of 2021 was $1.4 million, a 50.2% increase from the prior quarter. Included in Coastal’s overall BaaS revenue, the bank reported $110,000 in interchange income for the quarter ending in June, up from $35,000 in the prior quarter. The bank isn’t tracking profitability of the division yet, but plans to break it out next year for analysts and investors.

In a 2020 survey, venture capitalist firm Andreessen Horowitz found that out of those surveyed, half of the BaaS banks were seeing above-industry average rates on their return on assets and equity, calculated from 2017 to 2019. The firm says that these returns are two to three times the average industry rate.

When Bank Director magazine launched a study to determine the top 10 fastest growing U.S. banks in 2020, it found that two of the banks listed are BaaS providers: NBKC Bank, with $1.2 billion in assets, placed at the top of the list, while $4.7 billion Celtic Bank ranked fifth.

A BaaS division could lead a bank to new revenue and deposit sources, growth and access to new customer segments, but it does not have the sole capability to turn a bank profitable. It takes good timing, patience and a healthy bank with curious leaders — a combination that Coastal seems to flourish on.

The bank’s second quarter 2021 investor presentation also reports that 73% of Coastal’s fintech partners are headed by a diverse CEO, those who identify as a minority or female. Eighty-eight percent have a diverse co-founder. Partners include Greenwood, Cheese, Fair, Aspiration and Ellevest, some of which reach underserved communities or offer mission-based banking practices.

“At the end of the day, we’re still a community bank, and we’re trying to give that [community banking] experience to others [who] haven’t had it yet,” Sprink says. “And we’re using partners to deliver it.”

Why a Solid Risk Management Framework Helps Manage Change

Who owns risk management at your bank?

If your bank limits that function to the teams that report to the chief risk officer, it’s fumbling on two fronts: It’s failing to drive accountability across every corner of the enterprise, and it’s conceding its edge in a marketplace that’s never been more competitive.

Recognizing that every employee owns a piece of this responsibility make risk management an equal offensive and defensive pose for your organization. This empowers your employees to move nimbly, strategically and decisively when the bank encounters change, whether it’s an external regulatory pressure or an internal opportunity to launch a new product or service. In either case, your team navigates through change by building on best operational practices, which, in the end, work to your advantage.

Getting the bank into that position doesn’t happen overnight; the vision starts with the actions of your senior leaders. They set the tone and establish expectations, but everyone plays a hands-on role. When management prioritizes an environment where people can work collaboratively and have transparency into related roles, they foster consistency across your change management process that minimizes risk.

The need for a risk-aware culture aligns precisely with the signals coming out of Washington, D.C., that the stakes are getting higher. The Consumer Financial Protection Bureau hinted early at increased regulatory scrutiny, advising that it would tighten the regulatory standards it had relaxed to allow banks to quickly respond to customers’ financial hardship in 2020.

In response to the competitive and regulatory environment, your bank’s risk management framework should incorporate four key elements:

  • Start with setting the ground rules for how the bank will govern its risk. Define its risk strategy, the role the board and management will play and the committees that compose that governance structure — and don’t forget to detail their decision-making authority, approval and escalation process across those bodies. This upfront work also should introduce robust systems for ongoing monitoring and risk reporting, establish standard parameters on how the bank identifies issues and create a basic roadmap to remediate issues when they come along.
  • Operating Model. Distinguish the roles and responsibilities for every associate, with a key focus on how they manage risk generated by the core activities in that business. By taking the time to ensure all individuals, in every line of defense, understand their expected contributions, your bank will be ahead of the game because your people can act quicker and efficiently when a change needs to happen.
  • Standard Framework, Definitions and Taxonomies. In basic terms, everyone across the enterprise needs to speak the same language and assign risk ratings the same way. Calibrating these elements at the onset builds confidence that your bank gives thoughtful attention to categorize risks into the right buckets. Standardization should include assessment scales and definitions of different risks and risk events, leading to easier risk aggregation and risk reporting that enables a holistic view of risk across the enterprise.
  • Risk Appetite. Nothing is more important than establishing how much risk your organization is willing to take on in its daily business. Missing the mark can impact your customers, bottom line and reputation. Optimally, bank leaders will reestablish this risk appetite annually, but black swan events such as the pandemic should prompt more timely reviews.

Too often, banks reinvent the wheel every time a change or demand comes along. As the industry eyes increasing regulatory pressure in the year ahead, driving and promoting a robust risk management culture is no longer a “nice to have” within your organization; it’s a “need to have.”

When you reset the role and ownership of risk management as a strategic pillar in your bank’s future growth and direction you minimize your bank’s risk and actually propel your company forward.

Banks looking to check out best practices and a strategic framework for creating their enterprise risk framework should check out my latest whitepaper, Turning a Solid Risk Framework Into a Competitive Advantage.

2020’s Growth All-Stars

Low interest rates pressured net interest margins in 2020, but they also produced outsized growth for banks with a strong focus on mortgage lending.

“From a nominal — that is, not inflation-adjusted perspective — [2020] was the biggest year in the history of the [mortgage] industry, and it was driven heavily by the fact that mortgage rates fell to 2.5%” for customers with good credit history, says Douglas Duncan, senior vice president and chief economist at Fannie Mae. Single-family mortgage originations totaled $4.54 trillion, he says. Almost two-thirds were mortgage refinancing loans; the remaining loans were used for purchases. His tally represents an estimate — the U.S. government doesn’t calculate total mortgage loan volume.

But Duncan’s estimation is reflected in the countless press releases I’ve read from banks boasting record mortgage volume — and revenues — over the past few months. And mortgages are a major factor that fueled 2020 growth for the fastest-growing banks.

Using data from S&P Global Market Intelligence, Bank Director analyzed year-over-year growth in pre-provision net revenue (PPNR) at public and private banks above $1 billion in assets to identify the banks that have grown most quickly during the pandemic. We also included return on average assets, calculated as a three-year average for 2018, 2019 and 2020, to reward consistent profitability in addition to growth. The analysis ranked both factors, and the numeric ranks were then averaged to create a final score. The banks with the highest growth and profitability had the lowest final scores, meaning they ranked among the best in the country.

Among the best was eighth-ranked $2.4 billion Leader Bank. President Jay Tuli credits low interest rates with driving outsized growth at the Arlington, Massachusetts-based bank. Its sizable mortgage operation helped it to take advantage of demand in its market, roughly doubling mortgage volume in 2020 compared to the previous year, says Tuli.

With rates coming down during Covid, there was a big surge in mortgage demand for refinances,” explains Tuli. Most of those mortgage loans were sold on the secondary market. “That produced a substantial increase in profitability.”

Mortgage lending also significantly lifted revenues at Kansas City, Missouri-based NBKC Bank, according to its chief financial officer, Eric Garretson.

The $1.2 billion bank topped our ranking, and it’s one of the two banks in this analysis that have become specialists of sorts in banking-as-a-service (BaaS). The other is Celtic Bank Corp., which is also a Small Business Administration lender that funded more than 99,000 Paycheck Protection Program loans.

NBKC’s BaaS program grew in 2020, says Garretson, though “this was dwarfed by the increase in revenue from mortgage lending.” Right now, NBKC focuses on deposit accounts, allowing partner fintechs to offer these accounts under their own brand, issue debit cards and deliver similar banking services. Lending products are being considered but aren’t currently offered, says Garretson.

As the financial technology space continues to grow, the opportunities should increase for banks seeking to partner with fintech companies, says Alex Johnson, director of fintech research at Cornerstone Advisors. Banks like NBKC and Celtic Bank Corp. have developed the expertise and skills needed to partner with these companies. They also have a technology infrastructure that’s fintech friendly, he explains, allowing for easy integration via standard, defined application programming interfaces (APIs) and a microservices architecture that’s more modular and decentralized. Put simply — a good BaaS bank will have the same tech capabilities as its fintech client.

“There’s a very clear model for how to do this, and there’s growing demand,” says Johnson. “One thing that tends to characterize banks that do well in the banking-as-a-service space are the ones that build a specialization in a particular area.” These banks have a track record for building these products, along with the requisite processes and contracts.

“When a company comes to them, it’s as easy [a process] as it could possibly be,” says Johnson. “The more of that work they do, the more that ripples back through the fintech ecosystem. So, when new fintech companies are founded, [and venture capitalists] are advising them on where to go — they tend to point to the banking-as-a-service partners that will work well.”

Top 10 Fastest-Growing Banks

Bank Name/Headquarters Total Assets (millions) ROAA
3-year avg.
PPNR growth YoY Score
NBKC Bank
Kansas City, MO
$1,207.5 7.93% 67.52% 14.67
Plains Commerce Bank
Hoven, SD
$1,129.9 3.97% 86.75% 15.33
The Federal Savings Bank
Chicago, IL
$1,076.2 7.66% 60.37% 19.67
Northpointe Bank
Grand Rapids, MI
$3,685.5 2.58% 73.24% 25.00
Celtic Bank Corp.
Salt Lake City, UT
$4,704.8 4.22% 55.87% 28.00
Union Savings Bank
Cincinnati, OH
$3,586.3 2.75% 56.76% 29.67
North American Savings Bank, F.S.B.
Kansas City, MO
$2,470.9 2.71% 58.57% 30.67
Leader Bank, N.A. $2,419.6 2.46% 61.63% 32.67
Waterstone Financial
Wauwatosa, WI
$2,198.0 2.41% 59.23% 38.00
BNC National Bank
Glendale, AZ
$1,225.7 2.13% 71.44% 39.33

Source: S&P Global Market Intelligence. Total assets reflect first quarter 2021 data. Average three-year return on average assets reflects year-end data for 2018, 2019 and 2020 for the largest reporting entity. Year-over-year pre-provision net revenue (PPNR) growth reflects year-end data for 2019 and 2020. Bank Director’s analysis of the fastest-growing banks ranked PPNR growth and average ROAA at banks above $1 billion in assets; scoring reflects an average of these ranks.

Marketing Campaigns Go High Tech

For years, community banks had to sit on the sidelines while the biggest banks rolled out sophisticated marketing and revenue-generating programs using artificial intelligence.

That’s no longer the case. There are now plenty of financial technology companies offering turnkey platforms tailored for community banks who can’t afford to hire a team of data analysts or software programmers.

“It’s amazing how far the industry has come in just five years in terms of products, regulatory structure and what banking means to customers,” says Kevin Tweddle, senior executive vice president for the Independent Community Bankers of America. Banks and regulators have gotten quite comfortable doing business with fintechs, choosing from a grocery cart full of options, he says.

One of the best examples of this is Huntsville, Alabama-based DeepTarget, which topped the operations category in Bank Director’s 2021 Best of FinXTech Awards. The category rewards solutions that boost efficiencies and growth.

The finalists and winners recognized in the annual awards are put through their paces in a rigorous process that examines the results generated by the growing technology provider space. For more on the methodology, click here.

DeepTarget’s 3D StoryTeller product delivers customized marketing content using 3D graphics that can be produced by a small bank or credit union without an in-house graphic design staff. Marketing messages resemble the video-rich stories on Instagram, Facebook and Snapchat, allowing the smallest financial institutions to compete with the biggest companies’ marketing campaigns.

The Ohio Valley Bank Co., the $1 billion bank unit of Ohio Valley Banc Corp. in Gallipolis, Ohio, has been using DeepTarget’s 3D StoryTeller software since October 2020, says Bryna Butler, senior vice president of corporate communications.

The bank used 3D StoryTeller to market an online portal where people could shop for cars and then apply for an auto loan through Ohio Valley Bank. From January to September of last year, that car-buying website generated just four loans. But after Ohio Valley Bank used DeepTarget’s 3D StoryTeller, the site saw a 1,289% increase in traffic. Using 3D StoryTeller translated into loans, too. Ohio Valley Bank generated 72 loans through the Auto Loan Center from October to December of 2020. Butler believes the response would have been even higher if the bank hadn’t been undercut by competitors with lower rates.

3D StoryTeller is a recent addition to DeepTarget’s line up; Ohio Valley Bank has been working with the company for about a decade. DeepTarget uses performance analytics among other options to recommend specific products and services that it believes will cater to each customer’s interests, similar to the way Facebook targets ads based on its knowledge of its users. “It’s not just scheduling ads,” Butler says. DeepTarget reports the return on investment for each campaign to the bank every month, including how many clicks translated into new account openings.

When the pandemic hit in March 2020 and the bank put its marketing plans on hold, the graphics program easily adjusted to feature messaging on how to use the bank’s digital banking or drive-thru customer service.

Although DeepTarget integrates with several cores, Butler says the software is also core-agnostic, in the sense that she can pull a CSV file on her customers and send that securely to DeepTarget.

Ohio Valley pays a small monthly fee for DeepTarget, but Butler says the software pays for itself every year. Other Best of FinXTech Awards finalists in the operations category include the marketing platform Fintel Connect, which tracks results and connects ad campaigns to social media influencers, and Derivative Path, a cloud-based solution that helps community banks manage derivative programs and foreign exchange transactions.

Deal Integration Can Transform Finance, Risk and Regulatory Reporting

A number of banks announced mergers and acquisitions in 2020, capitalizing on growth opportunities against a forbidding backdrop of chronically low interest rates and anemic economic growth during the Covid-19 pandemic.

The deals ranged from more moderately sized with a few headline-grabbing mega-mergers —a trend that expected to continue through 2021.

The appeal of M&A for regional and superregional institutions in the United States is that the right transaction could create big benefits from economies of scale, and enhance the proforma company’s ability to gain business. While the number of deals announced in this environment are modest, the stakes involved in contemplating and executing them certainly are not. Nor is the work that banks will face after a combination. Once the transaction has been completed, the hard work begins.

A Closer Look From Regulators
One potential outcome is added scrutiny from the authorities; a new merged entity, with more assets and a broader range of activities, could have more complex risk calculations and reporting obligations to deal with.

Overall, regulators have sharpened their focus on banks during and after the merger process by performing additional audits, more closely scrutinizing key figures and ensuring that the M&A plan is being adhered to. Even if there are no significant changes to a firm’s profile with regulators, or if any needed changes in risk and reporting obligations are manageable, the formidable task of combining the operations of two organizations remains. A single, seamless whole must be assembled from two sets of activities, two work forces with their own culture and two sets of technological assets.

Merging the Parts, Not Just the Wholes
None of these issues is distinct from the others. Consider the technology: The proforma company will have to contend with two data systems — at least. Each company’s data management architecture has staff that makes it run using its own modus operandi developed
over years.

And that is the best-case scenario. Joining so many moving parts is no small feat, but it provides no small opportunity. Deal integration forces the constituent institutions to reassess legacy systems; when handled correctly, it can assemble a comprehensive, fully integrated whole from existing and new tech to meet the combined entity’s compliance and commercial needs.

Creating the ideal unified finance, risk and reporting system starts with an honest evaluation of the multiple systems of the merging partners. Executives should take particular care to assess whether the equipment and processes of the merged entity are better than the acquirer’s, or have certain features that should be incorporated.

Management also should consider the possibility that both sets of legacy systems are not up to present or future challenges. It could be that the corporate combination provides an opportunity to start over, or nearly so, and build something more suitable from the ground up. Another factor they should consider is whether the asset size of the new unified business warrants an independent verification process to supplement the risk and regulatory reporting program.

Understanding What You Have and What You Need
To get the evaluation process under way for the operational merger, a bank should list and assess its critical systems — not just for their functionality, but with respect to licensing or other contractual obligations with suppliers to determine the costs of breaking agreements.

Managers at the combined entity should look for redundancies in the partners’ systems that can be eliminated. A single organization can have a complicated back-end systems architecture, with intricate workarounds and many manual processes. Bringing together multiple organizations of similar complexity can leave the combined entity with expensive and inflexible infrastructure. A subledger and controlling functions can simplify this for finance, risk and regulatory reporting functions. They can consolidate multiple charts of accounts and general ledgers, relieving pressure on the general ledgers. Organizations in some cases can choose to migrate general ledgers to a cloud environment while retaining detailed data in a fat subledger.

Whatever choices executives make, a finance, risk and reporting system should have the latest technology, preferably based in the cloud to ensure it will be adaptable, flexible and scalable. Systems integration is critical to creating a unified financial institution that operates with optimal productivity in its regulatory compliance, reporting efforts and general business.
Integrating systems helps to assure standardization of processes and the accuracy, consistency,
agility and overall ease of use that result from it.

Eliminate Customer Friction to Unlock Your Bank’s Growth

Why don’t your target customers want to join your bank? Because they’re not impressed.

Banks often sabotage their own attempts at success through their siloed, disjointed, out-of-touch and unimpressive approaches to doing business that leave small-to-medium businesses, private wealth clients, upwardly mobile millennials and even commercial customers underwhelmed by their service delivery.

Eliminating customer friction must be your guiding policy
For 10 years, the rallying cry of the C-Suite has been “invest in technology to stay relevant.” The next 10 years must be defined by a singular, focused, and undeviating devotion to eliminating the friction of doing business with your institution.

Fixing customer friction will be challenging and expensive, but it will also offer the best return for your shareholders. Your bank must organize teams around this mission. Executives need to evaluate resource and budget requests against a simple criterion: How much friction will this reduce, compared to the cost of funding it? Every budget request should be accompanied by a detailed user story, a list of friction points, and a proposed solution that describes the customer experience. Every touchpoint is an opportunity to reinforce your brand as customer-friendly or customer-hostile. Your bank should move quickly through these three steps:

  1. Get aligned. Your bank needs support from your board, your C-suite and even your investors to pivot to this focus. Once you have the buy-in and mission statements crafted, it’s time to designate the priority projects.
  2. “Shovel-ready” projects come first. Rescore projects that were previously denied funding or resources because they were too difficult to execute or didn’t cross a financial hurdle on a simple 2×2 matrix that evaluates improvement in customer experience and reduced friction vs. cost and complexity to implement. The projects in the top-right corner should be your initial list of funded initiatives.
  3. Deliver quick wins and results that measurably drive customer engagement. This will define success for the next 10 years. Re-engineer how you extend customer offers and execute pricing for standard and relationship clients. Your investment in tech will pay off if you accelerate this function.

For a fast return on investment, examine how your bank prices on base versus relationship status and rewards customer behaviors. Segmenting customers into single-service households, small to medium-size businesses, commercial, or mass-market and tying rewards or pricing adjustments to their categories can mean the difference between retaining or losing target customers. One-size-fits-all pricing, or even pricing by geography, will leave customers feeling like they do today: you don’t understand them or price according to their life stage or needs.

Aim for high-frequency iterations so you can test and learn everything before you scale it. Imagine being able to execute 100 or more micro-campaigns and evergreen trigger-based offers annually, with multivariant testing. Drill down to specific customer personas, identify specific trigger events, and act on intelligence that demonstrates to your customers that your bank understands them.

Get in the habit of defining a user story, designing a process and executing an offer or pricing schema in a sprint. I was astounded how quickly banks moved on preparing their infrastructure to administer Paycheck Protection Program loans. Imagine being able to consistently move at that speed — without the associated late nights and headaches.

Lastly, installing an agile middleware layer will unshackle your bank from the months-long cycles required to code and test customer offers and fulfillment. High-speed, cloud-based offer management that crosses business lines and delivers omni-channel offer redemption will be a game changer for your institution.

Installing a high-speed offer and pricing engine may seem like science fiction for your bank, but it’s not. It will require investments of time and money, coordinated efforts and lots of caffeine. But the results will allow your financial institution to prove success, build a model and inspire your teams to get serious about bulldozing customer friction.

The financial rewards of executing better offers, engaging more customers and delivering relevant, optimized pricing will give your bank the financial resources to remain independent while your competitors shop for merger partners.

Level 5 Banking

Over the past six months, nCino has partnered with the team at Bank Director on a unique and immersive study of banking. It was originally intended to peer into the future of the industry, but the more we looked ahead, the more we realized that the future of banking is not a revolution, but an evolution. 

Banking is undergoing a vast and vital transformation. The distribution channels of today may soon be obsolete, and technology and innovation are moving ever faster. But this doesn’t mean that the traditional tenets of prudent and profitable banking are outdated. If anything, we found that technology accentuates their importance.

Leadership. Leadership is the most important tenet in banking, but what is leadership? Interviews with dozens of bankers across the country suggest that one keystone character trait is more important than any other: an insatiable curiosity and indomitable will to never stop learning. Best-selling business author Jim Collins refers to this in his book “Good to Great: Why Some Companies Make the Leap and Others Don’t” as Level 5 leadership.

One industry leader who displays this trait is Brian Moynihan, chairman and CEO of Bank of America Corp. “Brian has a deep knowledge because he wants to learn about different things, not just about banking,” says Dean Athanasia, president of consumer and small business at Bank of America. “He looks across every single industry. He’s looking at Amazon, Walmart, the brokerage firms. He’s looking at all these companies and breaking them down.”

Growth. The second tenet we examined is growth. Mergers and acquisitions have been the principal vehicle for growth in the banking industry since the mid-1980s. But as the consolidation cycle has seasoned and digital distribution channels offer alternative ways to acquire new customers and enter new markets organically, we must accept that there are many avenues to growth. 

We’ve seen this firsthand at nCino, as institutions of all sizes successfully leverage our technology in the pursuit of growth and efficiency. But the day has not yet arrived that technology alone can help a bank grow. This is why the majority of banks view it as a way to supplement, not replace, their existing growth strategies.

Risk management. Another tenet we examined is risk management, a core pillar of prudent and profitable banking. Robust risk management is necessary for banks to avoid insolvency, but an equally important byproduct is consistent performance. The banks that have created the most value through the years haven’t made the most money in good times; their real strength has been avoiding losses in tough times.

Technology can help by improving credit decisions and making it easier to proactively pinpoint credit problems. But it must be paired with a culture that balances risk management and revenue generation.

“There are always going to be cycles in banking, and we think the down cycles give us an opportunity to propel ourselves forward,” says Joe Turner, CEO of Great Southern Bancorp, a Springfield, Missouri-based bank that ranks near the top of the industry in terms of total shareholder return over the past 40 years.

Culture. Culture and communication go hand-in-hand, and those financial institutions that are most successful are the ones that empower their employees with information, technology and autonomy. We learned this lesson the hard way during the financial crisis, when the banks that got into the most trouble were the ones that stifled the flow of information about unsavory business practices and questionable credit quality.

Since then, we’ve also seen a clear connection between a bank’s culture and its performance. “We’ve actually done a correlation analysis between employee engagement and client satisfaction scores in different departments,” says Kevin Riley, CEO of Billings, Montana-based First Interstate BancSystem. “It’s amazing the correlation between engaged employees and happy clients.”

Capital allocation. In an industry as competitive as banking, there aren’t many ways to produce extraordinary results. Running a prudent and efficient operation is table stakes. True differentiation comes from capital allocation — distributing an organization’s resources in a way that catalyzes operating earnings. The best capital allocators don’t view it as a mechanical process. They see it instead as a mindset that informs every decision they make, including how many employees they hire, how much capital they return or which third-party technology they choose to implement, among others.

Ultimately, navigating a bank through such a dynamic time is no easy feat. Leaders must embrace change and technology. That isn’t an option. But this doesn’t mean that the timeless tenets of banking should be discarded. The institutions that thrive in the future will be those that blend the best of the old with the new.

Five Reasons to Consider Banking Cannabis

Like nearly every industry, the banking sector is facing major economic disruption caused by the coronavirus pandemic.

Operational strategies designed to capitalize on a booming economy have been rendered obsolete. With the Federal Open Markets Committee slashing interest rates to near zero, financial institutions have needed to redirect their focus from growth to protecting existing customers, defending or increasing earnings and minimizing losses.

While this will likely be the status quo for the time being, bank executives and their boards have a responsibility to plan ahead. What will financial markets look like after absorbing this shock? And, when rates begin to rise again — as they will, eventually — how will you position your financial institution to take advantage of future growth?

The booming legal cannabis industry is one sector banks have been eyeballing as a source for low-cost deposits and non-interest income. While ongoing conflict between state and federal law has kept many financial institutions on the sidelines, others have made serving this industry part of their growth strategy. According to new market research, the U.S. legal cannabis market will be worth $34 billion by 2025. While we don’t claim that sales will be immune to the financial shock caused by the pandemic, they have remained somewhat steady — due in large part to being deemed essential in most states with legal medical cannabis programs. With much of this revenue unbanked, it’s worth taking a closer look at how this industry can be part of your bank’s long-term strategy. Here are five reasons why.

  1. Cannabis banking can provide reliable non-interest income. As net interest margins compress, financial institutions should look to non-interest income business lines to support overall profitability. Cannabis companies are in dire need of quality banking solutions and are willing to pay upwards of 10 times the amount of traditional business service charges. Assessing substantially higher base account charges, often without the benefit of an earnings credit to offset those charges, means there are untapped cash management fee opportunities. Together, these fees can fully offset the operational cost of providing a cannabis banking program.
  2. New compliance technologies can reduce costs and support remote banking. Many banks serving cannabis customers are using valuable human capital to manage their compliance. However, new technologies make it possible to automate these processes, significantly reducing the labor and expense required to conduct the systematic due diligence this industry requires. New cannabis banking technologies can also enable contactless payments, and handle client applications, account underwriting and risk assessment — all via remote, online processes.
  3. Longer-term, cannabis banking can provide a source of low-cost deposits. The pressure to grow and attract low-cost deposits may wane momentarily but will continue to be a driver of bank profitability long-term. Increasing those deposits today will protect future profitability as the economy improves.
  4. Comprehensive federal legalization is on the back burner — for now. While your bank may want to wait for federal legalization before providing financial services to this industry, there’s a significant first-mover advantage for institutions that elect to serve this industry today. The ability to build new customer relationships, earn enhanced fee income and gain access to new sources of low-cost deposits early on could be a game-changer when legalization eventually occurs.
  5. You don’t need to be a pioneer. Having spent most of my career leading retail operations at a community bank, I know financial institutions don’t want to be the first to take on something new. Although it is still a nascent industry, there are financial institutions that have served cannabis businesses for several years and are passing compliance exams. Banks entering the industry now won’t have to write the playbook from scratch.

The coronavirus pandemic requires banks to make many difficult decisions, both around managing the financial impact and the operational changes needed to protect the health of customers and employees. While adapting operating procedures to the current environment, banks should also begin planning for a future recovery and identifying new potential sources of growth. Cannabis banking can provide a lucrative new revenue stream and the opportunity for financial institutions to grow deposits with minimal competition — at least for now.

The Biggest Priorities for Banks in Normal Times

Banks are caught in the midst of the COVID-19 pandemic sweeping across the United States.

As they care for hurting customers in a dynamic and rapidly evolving environment, they cannot forget the fundamentals needed to steer any successful bank: maintaining discipline in a competitive lending market, attracting and retaining high-quality talent and improving their digital distribution channels.

Uncovering bankers’ biggest long-term priorities was one of the purposes of a roundtable conversation between executives and officers from a half dozen banks with between $10 billion and $30 billion in assets. The roundtable was sponsored by Deloitte LLP and took place at Bank Director’s annual Acquire or Be Acquired conference at the end of January, before the brunt of the new coronavirus pandemic took hold.

Kevin Riley, CEO of First Interstate BancSystem, noted that customers throughout the $14.6 billion bank’s western footprint were generally optimistic prior to the disruption caused by the coronavirus outbreak. Washington, Oregon and Idaho at the time were doing best. With trade tensions and fear of an inverted yield curve easing, and with interest rates reversing course, businesses entered 2020 with more confidence than they entered 2019.

The growth efforts reflect a broader trend. “In our 2020 M&A Trends survey, corporate respondents cited ‘efficiency and effectiveness in change management’ and ‘aligning cultures’ as the top concerns for new acquisitions,” says Liz Fennessey, M&A principal at Deloitte Consulting.

A major benefit that flows from an acquisition is talent. “More and more, we’re seeing M&A used as a lever to access talent, which presents a new set of cultural challenges,” Fennessey continues. “In the very early stages of the deal, the acquirer should consider the aspects core to the culture that will help drive long-term retention in order to preserve deal value.”

One benefit of the benign credit environment that banks enjoyed at the end of last year is that it enabled them to focus on core issues like talent and culture. Tacoma, Washington-based Columbia Banking System has been particularly aggressive in this regard, said CEO Clint Stein.

The $14.1 billion bank added three new people to its executive committee this year, with a heavy emphasis on technology. The first is the bank’s chief digital and technology officer, who focuses on innovation, information security and digital expansion. The second is the bank’s chief marketing and experience officer, who oversees marketing efforts and leads both a new employee experience team and a new client experience team. The third is the director of retail banking and digital integration, whose responsibilities include oversight of retail branches and digital services.

Riley at First Interstate has employed similar tactics, realigning the bank’s executive team at the beginning of 2020 to add a chief strategy officer. The position includes leading the digital and product teams, data and analytics, as well as overseeing marketing, communications and the client contact center.

The key challenge when it comes to growth, particularly through M&A, is making sure that it improves, as opposed to impairs, the combined institution’s culture. “It is important to be deliberate and thoughtful when aligning cultures,” says Matt Hutton, a partner at Deloitte. “It matters as soon as the deal is announced. Don’t miss the opportunity to build culture momentum by reinforcing the behaviors you expect before the deal is complete.”

Related to the focus on growth and talent is an increasingly sharp focus on environmental, social and governance issues. For decades, corporations were operated primarily for the benefit of their shareholders — a doctrine known as shareholder primacy. But this emphasis has begun to change and may accelerate alongside the unfolding health crisis. Over the past few years, large institutional investors have started promoting a more inclusive approach known as stakeholder capitalism, requiring companies to optimize returns across all their stakeholders, not just the owners of their stock.

The banks at the roundtable have embraced this call to action. First National Bank of Omaha, in Omaha, Nebraska, publishes an annual community impact report, detailing metrics that capture the positive impact it has in the communities it serves. Columbia promotes the link between corporate social responsibility and performance. And First Interstate, in addition to issuing an annual environmental, social and governance report, has taken multiple steps in recent years to improve employee compensation and engagement.

Despite the diversity of business lines and geographies of different banks, these regional lenders shared multiple common priorities and fundamental focuses going into this year. The coronavirus crisis has certainly caused banks to change course, but there will be a time in the not-too-distant future when they and others are able to return to these core focuses.