Fifth Third’s Transformation

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A few years ago, walls of black granite lined the entrance to Fifth Third Bancorp’s headquarters in downtown Cincinnati. Today, the entrance is an open atrium lined with artwork, a café and a small stage for the public to enjoy performances. Pithy reminders for employees dot the walls and elevator: “Be the bank people most value & trust,” and “Strengthen communities.”

As if to imply that the dark days at Fifth Third are behind it, a wall of windows lets light stream in. Fifth Third not only went through a physical renovation, but a financial one as well. The $205 billion bank’s performance was in the bottom half of peers eight and nine years ago. It’s now in the top quartile. It’s rebuilt its balance sheet and its reputation after the financial crisis, when its stock plummeted to about $1 per share and its ability to survive as an independent entity was in question.

Today’s Fifth Third has accomplished a vast financial comeback as well as a digital transformation executed in part by former CEO Greg Carmichael and Tim Spence, who in July became the youngest CEO among the 20 largest commercial banks in the country.

“That was the major task of the last five, six years: Return the bank to a place where it had the right to flex its muscle a little bit and go achieve great outcomes,” says Fifth Third’s Chief Strategy Officer Ben Hoffman. “Now the question for Tim is, ‘What do you do with that?’”

As if to emphasize the changes, Spence decided our interview would not take place in a conference room. He moved us to the open-office innovation studio that shares the same floor as the executive suite inside Fifth Third’s headquarters tower on Fountain Square. “Those of us who are here today get to operate on a platform that’s going to allow us to think about growth,” Spence says in hushed tones, so as not to disturb the employees working on computers around us. “How do we grow the business organically?”

To understand what happened at Fifth Third, you have to go back in time. Although the bank traces its roots back to The Bank of the Ohio Valley in 1858, it really began growing considerably in the 1980s. Its formidable former CEO, George Schaefer Jr., a West Point graduate and Vietnam War veteran, ran the bank starting in the 1990s until 2007. He created a hard-driving sales culture and had a reputation for frugality.

One reporter described his office furniture as not so much antique as shopworn. He was religious about making sure every employee wore the iconic 5/3 pin on their lapels. One former employee told me the bank was so conservative that women weren’t allowed to wear pantsuits. But it was also one of the top performing banks in the country.

Boosted by a high stock price multiple, Schaefer went on a buying spree that enlarged the bank’s footprint. In the 1990s alone, Fifth Third bought 21 other banks. By 1999, the bank had 384 banking centers in Florida, Ohio, Indiana and Kentucky, according to the company.

“Back in the 1990s, Cincinnati had two of the most highly regarded banks in the country,” says R. Scott Siefers, managing director and equity analyst at Piper Sandler & Co. “It was Fifth Third and Star Bank, which is now part of U.S. Bancorp in Minneapolis … they both had high multiples. Fifth Third might trade at 20 or 25 times earnings and would buy these companies at say, 10 or 12 times earnings. The math just worked fabulously because of the disparity. These deals were so accretive to earnings.”

But some of the deals didn’t work out so well, and investors became more cautious on the company, Siefers says. The financial crisis of 2007-08 came along, and Fifth Third was hit hard. Although the bank didn’t get into subprime lending, management was caught off guard by the sheer loss of value in the real estate industry and the collapse of the mortgage market.

Also, what regulators and the public demanded of banks changed dramatically, remembers Kevin Kabat, who was CEO from 2007 to 2015. Becoming CEO in 2007 was less than ideal. Kabat recalls that he had one good quarter before the crisis hit.

“It was stressful, to say the least,” he says. “We were probably the second most picked-on company after [National City Corp.], which went out of business.”

Congress passed the largest financial law in decades, the Dodd-Frank Act, in 2010.

“[The crisis] broadened in a much bigger way the definition of success,” Kabat says. “In [earlier] days, there was only one thing that mattered; it was earnings per share, period. There was not a lot of conversation about much else … I think what really changed from that perspective was the definition of success. The regulators had a stronger opinion about success. Your customers had a strong opinion of success. Your politicians and community leaders had a much different perspective of what success meant. It created a three-dimensional viewpoint of success, where we were pretty one-dimensional before that.”

Kabat recapitalized the business, with then-Chief Operating Officer Carmichael, and focused on changing the culture and de-risking the balance sheet. “When I joined the company, it was clear that the sales orientation, the sales focus was the No. 1 focus,” Kabat says. “We changed it from a sales focus to a customer focus. It’s not just what the next product is; it’s how the customer feels. How do they judge us? What’s their loyalty? And we began to measure all those things.”

There’s at least one entity that doesn’t believe Fifth Third totally changed: the Consumer Financial Protection Bureau. As of press time, the bureau continues to litigate its 2020 lawsuit against Fifth Third that accuses the bank of imposing sales goals on employees that resulted in unauthorized account openings for several years following the financial crisis, similar to practices at Wells Fargo & Co. that gained attention in 2016. The CFPB accuses Fifth Third of failing to take adequate steps to detect and stop the practices, or remediate harmed consumers.

Fifth Third countered in public statements that those accounts involved less than $30,000 in improper charges that were waived or reimbursed years ago. The company currently does not have sales quotas or product-specific targets for retail employees, nor does it reward them for opening unauthorized accounts. “Starting in 2011 and 2012 and 2013, the measures we took since that point in time ensured we had a culture that put the customer at the center,” Spence says, adding that the company doesn’t comment on pending litigation.

It wasn’t just Fifth Third’s sales culture that was under the microscope. When Greg Carmichael arrived in 2015, the bank was in better shape, but it was trading at book value. Profitability was stoked by ownership of a payments business called Vantiv, but lots of investors discounted that value. Carmichael asked investors what they liked about Fifth Third and what they thought its issues or challenges were. Then, he and his management team studied banks that performed well through economic cycles, looking for their similarities. “Listen, it wasn’t rocket science,” says the matter-of-fact Carmichael, who is now executive chairman of the board. “You need a balance sheet that’s going to perform well when the credit cycle turns. You need a balance sheet that’s going to throw off strong returns, so you need to make sure you’re banking the right clients, and you have the full relationship. You need your fee businesses to be a larger portion of your business to offset low-rate environments.”

The management team committed to becoming a bank that would perform well through various interest rate environments and through the inevitable downturns. Carmichael and his team began to build larger fee income businesses, such as mortgages, capital markets and private banking. He committed the bank to quantifiable financial goals, such as return on tangible common equity and return on assets. “We communicated that strategy with financial targets, and we told our investors to hold us accountable, told our board to hold us accountable. And we also asked our employees to hold us accountable, hold themselves accountable for executing to this strategy. That was critical,” he says.

Still, investors weren’t always pleased. After Fifth Third announced the acquisition in 2018 of one of the larger banks in Chicago, MB Financial, for 2.8 times tangible book value, the stock price fell and didn’t recover fully until the end of 2019. “What they didn’t like is we paid a lot for it,” Carmichael says, “We proved them wrong … I would do that deal in a heartbeat at the same price again, and I wouldn’t bat an eye.”

The other thing Carmichael did was start building the bank’s portfolio of high-quality commercial and industrial loans in Texas and California, even in regions that didn’t have Fifth Third retail branches, says Christopher Marinac, director of research for Janney Montgomery Scott, who follows the company. The management team has been focused particularly on expanding the bank and its branches into growth markets in the Southeast.

The focus has paid off so far. Fifth Third placed No. 5 among the 33 commercial banks above $50 billion in assets in Bank Director’s RankingBanking study last year, based on return on average assets, return on average equity, capital adequacy, asset quality and one-year total shareholder return in 2021. For calendar year 2020, it was building reserves for the pandemic and ranked No. 21 on a similar Bank Director ranking called the Bank Performance Scorecard. For calendar year 2019, it ranked sixth.

After Carmichael transformed the bank, he handed the reins to Spence last summer. But before that, he had executed a two-year succession plan that involved rotating Spence through different roles to see if he could lead major businesses for the bank, bringing him to investor meetings and signifying to the world that Spence was his likely successor. “So, when I actually made the announcement [that] I was stepping down in a handful of months, there was no surprise who the person was, there was no issue with confidence that Tim couldn’t step right in, because he’s been part of [the] strategy,” Carmichael says. The choice was unusual. Instead of picking someone as a potential successor who had 20 or 30 years of service in banking, Carmichael picked someone he had hired from the consulting firm Oliver Wyman as his chief strategy officer in 2015, when Spence was still in his 30s. “He was much younger than I thought he was,” Carmichael says. “But he is well beyond his years in both maturity and leadership, and knowledge base of the banking sector. So, I never thought of Tim as a young man. I always thought of him as a seasoned leader.”

Spence was an unusual pick for another reason. He had a background in the tech sector. Spence learned how to code at the same time he learned how to write, in the first grade, although he never worked as a programmer.

The son of a financial advisor and a flight attendant who divorced, he wasn’t sure what he wanted to do. He grew up in Portland, Oregon, and got a bachelor’s degree in economics and English literature from Colgate University, a private school in New York. While in school, he asked his dad to send him a copy of an Oregon business journal and wrote letters to the paper’s list of the 50 fastest growing tech companies, offering to work for free if there was a possibility of long-term employment. He started out at a small startup as a finance intern, working his way up in corporate development and management before moving to a bigger tech company. But after years at tech firms, he reached a point where he would “sit and listen to our customers, and hear them describe big opportunities and challenges. We were this little component solution. I wanted to have the opportunity to help work on the big things, not just the pieces.”

He got a job at Oliver Wyman and worked there for about a decade, becoming a senior partner of its financial services practice and doing work for its client Fifth Third before Carmichael offered him a job. Given the costs of hiring a consulting firm, Carmichael joked at the time that the hire was a money-saving measure. “He’s very thoughtful in his approach,” Carmichael says. “He [is] very detail oriented when he gets into a subject matter, and he can go very deep, which I was really, really impressed with. And then his listening skills, he listens and that’s also not a trait many consultants have.”

Carmichael says that when he decided to develop Spence as the potential next CEO, he was looking for someone who really understood technology’s impact on financial services. “He really had appreciation for the technology space and a passion for leveraging technology for the success of our business,” Carmichael says. “And I just thought that was also an extremely important attribute and skill set to have, when you think about the future of a bank CEO.”

Spence has a round, boyish face, but he’s tall enough to be a basketball player. Moving through the open offices, employees stopped what they were doing to watch him walk past. “Tim’s mind is all over the place, and I don’t mean in a sloppy, disorganized way,” says Steve D’Amico, who worked for Spence as chief innovation officer for a year and a half, starting in 2016. “He’s a very diverse thinker, bringing lots of unusual ideas to bear.”

Ben Hoffman, Fifth Third’s chief strategy officer, says that Spence has the ability to identify what matters and what doesn’t. “My belief is that Tim’s superpower is focus,” Hoffman says. He’s not a micromanager, but he’s deeply interested in the details. “There have been multiple times where he’s asked me a question about footnote seven on page 87, in the appendix of a presentation.”

One of the details Spence is intensely interested in is the particulars of digital transformation. Spence wants to learn from the best examples of technology and customer service across all industries, not necessarily in banking. “If we need engineers, what does the best employer for an engineer look like?” Hoffman says. “We spend a lot more time thinking about JPMorgan [Chase & Co.] and Goldman Sachs [Group] and LendingClub [Corp.], and the credit funds, candidly, then we do about the traditional regional bank peers.” A few years ago, the bank designed a new consumer deposit account. The walls were filled with sticky notes as staffers wrote down the best brands for customer experiences, among them, Delta Air Lines, Hertz, Domino’s Pizza and Zappos.com.

Then, they came up with ideas about what the app should do, Hoffman says.

Chief Digital Officer Melissa Stevens was deeply involved in launching the bank’s Momentum Banking consumer deposit account product in 2021, all of it built in-house. Notably, it’s not called a checking account. It has an automatic savings tool and free access to wages up to two days in advance with direct deposit, even for gig workers. The account also gives customers additional time to make a deposit to avoid overdrafts and the ability to get an advance of funds against future pay. It has no minimum deposit opening amount, and it costs $0 per month.

Although none of those features are hugely unique in the world of fintechs, what is unique is Fifth Third’s approach to fintech partnerships. Fifth Third is a superregional bank with a tech budget of more than $700 million last year, growing at a compound annual rate of 10%. “They’re not going to have the technology budget of a Chase or a Bank of America [Corp.],” says Alex Johnson, creator of the Fintech Takes newsletter. “And they can’t keep up with those banks if they insist on building everything themselves. But if they can focus their own development resources just on the things that they can’t get by partnering or buying, they can have a much more efficient technology budget where they get more per dollar out of their tech budget because it’s more focused on the highest priorities.” That’s not easy to do, because it’s hard to tell a chief technology officer not to build what that person wants to build, Johnson adds. “I think Fifth Third, for the most part, has managed to sidestep that problem from of an internal politics perspective and just be really aligned from the top down on what their strategy is,” he says.

Fifth Third works with fintech partners for years before it decides, in some cases, to buy them. Hoffman’s team is responsible for venture capital funding and partnerships with fintechs. The bank was an early investor in 2018, for example, in Provide, a digital lending platform for medical practices, according to a 2022 article by Bonnie McGeer for Bank Director’s FinXTech.com division. The bank announced a deal to buy Provide in 2021 and purchased another fintech that finances solar panels in 2022. “I think the other competency you have to have if you’re going to do this well is you have to be really good at partnering and acquiring technology,” Johnson says. “Some of the best technology out there is coming from fintech companies, and most banks have no idea how to work with fintech companies.”

Spence’s job is to get the company’s managers and employees to think differently, and he sees working with fintechs as part of that strategy. “The single best way to do that,’’ he says, was to partner with and invest in fintechs who could help the bank’s employees grow. “One of the big mental model changes that has to still trickle into our industry is this idea of product life cycle management … [Instead of] build it and launch it and leave it, we have to move much more into a software-oriented mindset, where you develop a product and then every six to 12 months, you make it better.”

Spence acknowledges that he’s in an enviable position compared to his predecessors. He was handed a banking franchise in good shape and now needs to sustain it. “What Greg did was remarkable,” Spence says. “We need to continue the focus on profitability and operational excellence and resilience through cycles. We need to maintain those disciplines. We need to grow organically and take advantage of opportunities, particularly in terms of technology that allows us to inhabit a different position in people’s lives.”

Despite the focus on innovation, analysts such as Siefers get the impression that Spence is equally focused on careful, strategic thinking when it comes to the bank’s balance sheet. He doesn’t get the impression that Fifth Third is interested in big gambles, and the bank seems well positioned even heading into a potential downturn.

“Kevin [Kabat] and then Greg Carmichael, they’ve been in reputation rebuild mode for the better part of the last decade,” Siefers says. “And they’ve done so quite successfully, particularly during Greg’s tenure. And ideally, that continuity will continue with Tim.”

Marinac also thinks the bank is well positioned given rising rates. “I think their ability to reset loan yields is better than other banks,” he says. “The industry is craving new ideas, new approaches, whether it’s taking out costs or building these new lending channels, or kind of rethinking the business. That’s where Tim comes in … 85% of banks follow and 15% lead. I think Fifth Third is demonstrating that they’re a leader.”

This article has been updated to reflect that Tim Spence was a senior partner in the financial services practice at Oliver Wyman.

The following feature appeared in the first quarter 2023 edition of Bank Director magazine. It and other stories are available to magazine subscribers and members of Bank Director’s Bank Services Membership Program. Learn more about subscribing here.

Redefining Primary Relationships

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Ask 100 bankers to define what it means to be the primary financial institution for a consumer, and you’ll likely get 100 different answers. Ask 100 consultants to bankers what being the primary FI entails, and you’ll probably get 100 more answers.

Ask 100 consumers how they define which FI is their primary one, and you’re apt to get just a few answers. The most frequent answers will be: where my paycheck is deposited, or what I use to pay my bills.

At StrategyCorps, we talk to a lot of bankers about being the primary FI for a customer or member. We call this primacy. We talk about what they’re doing to lockdown primary relationships to keep from losing them, and what’s being done with non-primary customers to win them over and make them financially productive.

With few exceptions, most community and regional banks do not have a quantitative measurement or definition of primacy. It’s still very much rooted in a banker’s intuition or past experience, rather than a data-driven approach to determine precisely which customers are primary and which aren’t.

The Math
In our 20-plus years studying and analyzing retail checking relationships, products and pricing strategies, we have developed a database of well over 1 billion data performance points from hundreds of financial institutions.

We have found through this analytical approach a metric that holds true with nearly every FI we analyze, regardless of size or operating area location. Here it is: If the banking activity of a customer on a householded basis isn’t generating annually at least $350 in revenue, that household doesn’t consider your organization their primary FI.

Like clockwork, we find that when household revenue is less than $350, the banking relationship effectively nosedives. This typically is the case for 35% of all consumer checking accounts.

More specifically, we find this 35% of total checking account relationships represent slightly less than 2.1% of total relationship dollars and generate only 3.7% of revenue.

Address the Gap
Those customers are not engaged in a mutually beneficial relationship with their FI. They aren’t doing enough banking activities to generate enough revenue to cover the cost to manage and maintain their relationship. Many of those customers are primarily engaged at another FI and need a more compelling reason to bank with your FI than is currently being provided.

A major advantage of knowing specifically who does not consider your bank a primary FI is that you can develop product, pricing, communication and business development campaigns to move them closer to generating at least $350 in revenue. If you don’t, those 35% of relationships will continue to drag down financial performance. And this financial drag can be sizeable — conservatively speaking about $204 a year per relationship.

Do the math: If you have 20,000 checking relationships, 7,000 will be non-primary with a deficit of $204 per relationship. This equates to an annual loss of $1.43 million.

Build Profitability
Another major advantage of knowing precisely the amount of primary relationships at your institution is that knowledge provides great insight for a game plan to lock the relationship down even further with enhanced product offers, preferred pricing, elevated levels of customer service or, in some cases, a thank you. Doing one or more of those things diminishes the chances they’ll consider an offer from a competitor.

In today’s ultra-competitive marketplace, smart bankers realize a data-based definition of primacy in their retail checking base is necessary to make timely decisions. Banks that do so can better protect and grow primary relationships, and fix and grow the non-primary ones. By doing both, they optimize the performance and growth of their retail checking base and don’t leave the financial performance of their checking accounts to guesswork.

Is Crypto the Future of Money?

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Regardless of their involvement in the financial services industry, anyone paying attention to the news lately will know that cryptocurrencies are making headlines.

As the worldwide economy becomes less predictable, regulatory agencies are wondering whether cryptocurrencies could be used to transfer money if other assets become subject to international sanctions, likening crypto to gold. According to an early March article from CNN Business, the price of gold has spiked and could surpass its all-time high before long, while bitcoin is trading 4% higher.

Crypto has also been in the news because of an executive order recently issued by President Joe Biden. The order requires the Department of the Treasury, the Department of Commerce and other agencies to look into and report on the “future of money,” specifically relating to cryptocurrencies.

As part of that order, those agencies need to outline the benefits and risks of creating a central bank digital currency (CBDC), informally known as the digital dollar. The digital dollar can be thought of as the Federal Reserve’s answer to crypto. It would act like cryptocurrency, with one big difference: It would be issued and regulated by the Fed.

How would this work? One idea involves government-issued digital wallets to store digital dollars. While the U.S. is not likely to take imminent action on creating a CBDC — Congress would need to approve it — it would not be a big leap to sell this concept to the American public. The Federal Reserve reports that cash use accounted for just 19% of transactions in 2021. Digital payments, meanwhile, are up. According to McKinsey’s 2021 Digital Payments Consumer Survey, 82% of Americans used digital payments last year, which includes paying for purchases from a digital wallet like Apple Pay. Using digital dollars, in a similar kind of digital wallet, wouldn’t be all that different. The future state of digital currency and the current state of online payments, credit cards, buy now, pay later purchases and more are, in effect, exchanging bills and notes for 1s and 0s.

What this means for financial institutions is a need to focus on education and information, and an ear toward new regulations.

Educating account holders will be vital. Pew Research reports that 86% of Americans are familiar with cryptocurrencies, while 16% say they have invested. The reason more people haven’t invested? They don’t fully understand it. This is a huge growth opportunity for banks to partner with account holders as a trusted voice of information, within the confines of current regulations.

  • Use account holder transaction data to spot trends in cryptocurrency purchases within their ecosystem and inform them on how to communicate and educate account holders.
  • Task an employee to become the in-house cryptocurrency expert, in the ins and outs of crypto’s current and future state.
  • Develop a section on the website with information for account holders.
  • Create an email campaign that shows account holders a history of investment product adoption with links back to the bank’s website for resources about the latest news on cryptocurrencies. Even if the institution doesn’t facilitate sales, it is important to set the institution up as a trusted resource for industry data.

Crypto fraud is rampant because the majority of people still aren’t quite sure how crypto works. That’s why it’s so important for financial institutions to be the source of truth for their account holders.

Further, fintech is already in the crypto arena. Ally Bank, Revolut, Chime and others are working with their account holders to help facilitate crypto transactions. And even established institutions like U.S. Bank are offering cryptocurrency custody services.

Data will be an important key. Pew Research reveals that 43% of men ages 18 to 29 have invested in, traded or used a cryptocurrency. But what does that mean for your specific account holders? Look closely at spending data with a focus on crypto transactions; it’s an extremely useful metric to use for planning for future service offerings.

The role that traditional financial institutions will play in the cryptocurrency market is, admittedly, ill-defined right now. Many personal bankers and financial advisors feel hamstrung by fiduciary responsibilities and won’t even discuss it. But U.S. banking regulators are working to clarify matters, and exploring CBDC, in 2022.

Is cryptocurrency the future of money? Will a digital dollar overtake it? It’s too early to tell. But all signs point to the wisdom of banks developing a crypto and CBDC strategy now.

Evaluating Your CEO’s Performance

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If a core responsibility of a bank board of directors is to hire a competent CEO to run the organization, shouldn’t it also review that individual’s performance?

In Bank Director’s 2021 Governance Best Practices Survey, 79% of responding board members said their CEOs’ performance was reviewed annually. However, 15% said their CEOs were not reviewed regularly, and 7% said the performance of their CEOs had been assessed in the past but not every year.

The practice is even less prevalent at banks with $500 million in assets or less, where just 56% of the survey respondents said their CEOs were reviewed annually. Twenty-eight percent said they have not performed a CEO performance evaluation on a regular basis, while 16% said their boards have evaluated their CEO in the past but not every year.

Gary R. Bronstein, a partner at the law firm Kilpatrick Townsend, regularly counsels bank boards on a variety of issues including corporate governance. “It doesn’t surprise me, but it’s a problem because it should be 100%,” he says of the survey results. “One of the most important responsibilities of a board is having a qualified CEO. In fact, there may not be anything more important, but it’s certainly near the top of the list. So, without any type of evaluation of the CEO, how do you gauge how your CEO is doing?”

A CEO’s effectiveness can also change over time, and an annual performance evaluation is a tool that boards can use to make sure their CEO is keeping pace with the growth of the organization. “There are right leaders for right times, [and] there are right leaders for certain sizes,” says Alan Kaplan, CEO of the executive search and board advisory firm Kaplan Partners. “There are situations that sometimes call for a need to change a leader. So, how is the board to know if it has the right leader if it doesn’t do any kind of formal evaluation of that leader?”

One obvious gauge of a CEO’s effectiveness is the bank’s financial performance, and it’s a common practice for boards to provide their CEOs with an incentive compensation agreement that includes such common metrics as return on assets, return on equity and the growth of the bank’s earnings per share, tangible book value and balance sheet.

Bank Director’s 2021 Compensation Survey contains data on the metrics and information used by bank boards to examine CEO performance.

But just because a CEO hits all the targets in their incentive plan, and the board is satisfied with the bank’s financial performance, doesn’t mean that no further evaluation is necessary. Delivering a satisfactory outcome for the bank’s shareholders may be the CEO’s primary responsibility, but it’s certainly not the only one.

A comprehensive CEO evaluation should include qualitative as well as quantitative measurements. “There are a lot of different hats that a CEO wears,” says Bronstein. “It probably starts with strategy. Has the CEO developed a clear vision for the bank that has been communicated both internally and externally? Other qualitative factors that Bronstein identifies include leadership — “Is the CEO leading the team, or is the CEO more passive and being led by others?” — as well as their relationship with important outside constituencies like the institution’s regulators, and investors and analysts if the bank is publicly held.

Additional qualitative elements in a comprehensive CEO assessment, according to Kaplan, could include such things as “development of a new team, hiring new people, opening up a new office [or starting] a new line of business.” An especially high priority, according to Kaplan, is management succession. If the current CEO is nearing retirement, is there a succession process in place? Does the CEO support and actively participate in that? If this is a priority for the board, then including it in the CEO’s evaluation can emphasize its importance. “Grappling with succession in the C-suite and [for] the CEO when you have a group of senior people who are largely toward the end of their career should be a real high priority,” Kaplan says.

Ideally, a CEO evaluation should involve the entire board but be actively managed by a small group of directors. The process is often overseen by the board’s compensation committee since the outcome of the assessment will be a critical factor in determining the CEO’s compensation, although the board’s governance committee could also be assigned that task. Other expected participants include the board’s independent chair or, if the CEO is also chair, the lead director.

“I think it should be a tight group to share that feedback [with the CEO], but all the directors should provide input,” says Kaplan. Once that has been summarized, the chair of the compensation or governance committee, along with the board chair or lead director, would typically share the feedback with the CEO. “I think the board should be aware of what that feedback is, and it should be discussed in executive session by the full board without the CEO present,” Kaplan says. “But the delivery of that feedback should go to a small group, because no one wants a 10-on-one or 12-on-one feedback conversation.”

Another valuable element in a comprehensive assessment process is a CEO self-assessment. “I think it’s a good idea for the CEO to do a self-evaluation before the evaluation is done by a committee or the board,” says Bronstein. “I think that can provide very valuable input. If there is a discrepancy between what the board determines and what the self-evaluation determines, there ought to be a discussion about that.”

CEO self-assessments are probably done more frequently at larger banks, and a good example is Huntington Bancshares, a $174 billion regional bank headquartered in Columbus, Ohio. In a white paper that explored the results of Bank Director’s 2021 Governance Best Practices Survey in depth, David L. Porteous — the Huntington board’s lead director — described how Chairman and CEO Stephen Steinour prepares a self-evaluation for the board that examines how he performed against the bank’s strategic objectives for the year. “It’s one of the most detailed self-assessments I’ve ever seen, pages long, where he goes through and evaluates his goals, he evaluates the bank and how we did,” Porteous said.

Porteous also solicits feedback on Steinour’s performance from each board member, followed by an executive session of the board’s independent directors to consolidate its feedback. This is then shared with Steinour by Porteous and the chair of the board’s compensation committee.

Bronstein allows that not every CEO is willing to perform such a detailed self-assessment. “If the CEO is confident about his or her position with the board and with the company, they should feel comfortable to be open about themselves,” he says.

Stacking the Deck: Secrets of High-Performing Banks

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Many financial institution executives spend considerable time thinking about strategies to improve overall profitability and create sustainable growth.

The focus on best practices is generally aimed at strategies to cut expenses: using technology, looking at staffing levels and increasing productivity, among others. Although this advice is sound, is that actually what high-performing banks do? To answer this question, we analyzed data for 81 institutions that have been in the top five for return on equity for five consecutive years to peers. These institutions averaged an efficiency ratio of 52.04%.

As the data illustrates, high-performing institutions don’t attempt to save their way to prosperity. They underperform in noninterest expense to assets by 24% and overperform in noninterest income to assets by 325%. So how does your bank stack the deck in its favor?

The key to better results is aligning marketing and execution. High-performing banks invest in growth to create a sustainable advantage that produces superior results. After 35-plus years, here’s what we know:

Get product right. People hate fees. Compressed margins and decreased profitability can lead executives to discuss increasing monthly service fees or minimum balance requirements. Below is recent research on the criteria consumers use when selecting a primary financial institution. Compressed bank earnings have little impact on what consumers want from their banking partner. Your retail and business product considerations must remain compelling if you want the greatest opportunity to grow core customers.

Remove process barriers. Banks must be attuned to compliance-related items; however, over-compliance creates barriers. Look at your customer identification program (CIP), as well as your retail and business account opening policies: Do they create barriers to growth? Is it easy for a consumer to open a retail or business account at your bank? Do you have restrictive scoring metrics that are actually costing you revenue opportunities?

Market to grow. Increase your bank’s spending on strategic marketing.

  • Proactive: According to Novantas, 65% of consumers only consider two options when they decide to change their primary financial institutions. That means that 65% of your current customers already know where they would bank if they didn’t bank with you. Your institution must be top-of-mind before consumers and businesses decide that they want to switch. Your marketing must create the opportunity for them to pick you.
  • Targeted: Your bank needs to use data and analytics to help understand where to market before any campaigns. Your marketing resources should be allocated to target consumers and businesses that haven’t chosen your bank yet — but could and should.
  • ROI Focused: Executives must define what and how the bank will measure success before the marketing campaign, not after. Make sure your marketing investment is working to create tangible, measurable results.

Invest in team training. Too often, banks treat training as an event rather than a way of life. Employees who do not understand your products and services won’t be able to recognize opportunities with customers or discuss the benefits, rather than features. It is crucial your institution commits to regular training initiatives regarding products and services. Once everyone has been trained, begin the process again: knowledge leaks unless it is reinforced regularly.

The actions of high-performing banks tell the story. Banks that invest in growth reap the greatest rewards. While it may not be intuitive, bank executives must ensure they have all of the right strategies to capitalize on growth opportunities that present themselves in any environment.

Honing Your Strategic Vision

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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.

  • Weaving Digital Into Your Bank’s Strategy
  • Being Efficient Without Being “Cheap”
  • Today’s Uncertain Credit Environment
  • Considerations for Bank Boards

Strategic Insights From Leading Bankers: Bank OZK

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RankingBanking will be examined further as part of Bank Director’s Inspired By Acquire or Be Acquired virtual platform, which will include a panel discussion with Gleason and Mark Tryniski, CEO of Community Bank System. Click here to access the agenda.

Is Bank OZK misunderstood?

The $26.9 billion bank may be based in Little Rock, Arkansas — with offices primarily in the southeastern United States — but Chairman and CEO George Gleason II will quickly, but politely, correct you if you refer to Bank OZK as a community bank.

“We consider our bank a truly national bank and presence,” Gleason says, adding that in 2019, he spent 153 days outside of the bank’s headquarters traveling across the United States and internationally. “Sometimes people [comment] that we do a lot of loans outside of our area,” he adds. “I consider it absurd, because the United States is our market, and we do loans all over the United States. It’s a very balanced, diversified portfolio by product type and geography.”

Bank OZK’s unique business model positioned it to top Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP. To delve further into the bank’s performance, Bank Director Vice President of Research Emily McCormick interviewed Gleason about his views on factors impacting long-term performance, including how OZK positions itself to take advantage of opportunities in the marketplace. The interview was conducted on Oct. 26, 2020, and has been edited for brevity, clarity and flow.

EM: First off, tell me how you approach long-term performance for Bank OZK and balance that with short-term expectations.

GG: I’ve been doing this job over 41 years now, and I hope to continue to do it a number of years more. When you’ve been in a job a long time, and you expect to be in it a long time in the future, thinking about long-term performance is much easier than if you’re new to a job, and you’re in it for a very short period of time. With that said, we all live in a world where our stock price moves day to day based on short-term results, and many investors seem to be overly focused on short-term results. So, it takes a lot of discipline and a willingness to be viewed as not doing the best you can do in the short run to achieve the long-term results.

But we have always focused preeminent attention on achieving longer-term objectives, and that has paid off for us tremendously well. Probably the best example of that is our unwavering commitment to asset quality, credit quality. There have been a number of times in my 41-year career where our growth for a few quarters or even a few years has been disappointing, relative to what people thought we were capable of doing, because we held to our credit standards and our discipline, and let competitors take share from us when we thought some of those competitors were being too aggressive. That has always paid off for us in the long run, every single time.

EM: Out of the last crisis, Bank OZK participated in several FDIC deals. We’re in another, very different crisis. Are you applying some lessons that you learned through the last crisis, or through your experience in banking, to what we’re going through now?

GG: I’ve been through a lot of downturns, and the causes are always different. It may be excesses in real estate; it may be excesses in subprime mortgage finance. It may be a bust in the oil and gas industry [or] the savings and loan crisis. [N]ow you’ve got the Covid-19 pandemic-induced recession. Causes vary, but all economic downturns result in people being out of work and suffering economically, and businesses struggling and suffering, and businesses closing. Every economic downturn creates challenges for people that are in the credit business, as we are, but it also creates a lot of opportunities.

The key to being able to capitalize on the opportunities is No. 1, being appropriately disciplined in the good times so that you are not so consumed with problems in the bad times that you can’t think opportunistically. No. 2, you’ve got to have adequate capital, adequate liquidity and adequate management resources. If you have those ingredients and combination … you’re able to spend much more time in a downturn focused on capitalizing on opportunities, as opposed to mitigating your risk. That’s been an important part of our story for several decades now, is we have almost universally been able to find great opportunities in those downturns. … [W]e’re already finding some ways to benefit in this downturn. So, the causes are different, but the result is always the same: [Y]ou’ve got challenges, you’ve got opportunities and you’ve got to be ready to capitalize on those opportunities.

EM: What opportunities are you seeing now, George?

GG: Obviously in the very early days, there was some tremendous dislocation in the bond market. We had a couple of good weeks where we were able to buy things at really advantageous prices. The Fed was so aggressive in their efforts to fix the plumbing of the monetary system that they took those opportunities away literally in a matter of weeks.

We’ve seen a lot of competitors pull back from the [commercial real estate] space; that’s given us an opportunity to both gain market share and improve pricing. We have seen customers evolve [in] how they deal with our branches; it’s given us an opportunity to create some efficiencies [and] advance our rollout of some future technology, all of which have helped us accelerate our movement toward a more consumer-friendly, technology-oriented way of dealing with our customers.

And frankly, Emily, we’re so early in seeing all of the economic impacts from this recession. Some of the impacts, I think, have been pushed out several quarters by the aggressive monetary and fiscal policy actions out of Washington. I think that really good, attractive opportunities will appear in 2021 and 2022. I think we’re just getting started on seeing opportunities begin to emerge.

EM: OZK maintains high capital levels. Why do you view that as important, and how are you strategically thinking through capital?

GG: We’re operating from a position of having excess capital, and that is probably a great and appropriate thing in this environment. [We’re] certainly in an environment where you’d rather have too much capital than too little today and … I believe there are a lot of opportunities that will emerge over the next four to eight quarters where we’ll be able to put that capital to work in a very profitable manner for our shareholders. So, we feel very good about the fact that today we have one of the highest capital ratios of all of the top 100 banks.

EM: Bank OZK has seen some high-level departures in the past few years; most recently, your chief credit officer. I think sometimes that gives people pause, and I wanted to give you the opportunity to address that.

GG: The reality of that is we are very dependent upon human capital and intellect in running our business. … I have always put an emphasis on hiring, training and developing really smart people who have intense work ethics, and who love to win and want to be part of a winning team. We have an abundance of talent in our company, and we’re constantly training, grooming and improving that talent.

When you hire and develop that quantity and quality of well-trained, well-developed staff, hard-charging people who want to win and want to succeed and want to push, some of those people are going to go on and pursue other opportunities, and that is great. And because we have such an abundance of talent, we’re in a position where we can say, “Congratulations, we’re happy for you. Thank you for everything you have done for us,” and I can turn around and say, “Next man up; let’s go.” That really is our culture. So yes, we plan for people to leave. We have plans in place on how we’re going to replace people if they are not available for one reason or another, and we’ve got the depth of talent that it lets us move on without missing a beat.

EM: One more question: Bank OZK has a record of strong performance, which is why it’s included in this year’s RankingBanking study. That said, I sometimes hear whispers of doubt about what you guys are doing, perhaps due to your unique model. I’m curious about how you respond to those doubts from the financial and investment communities.

GG: We feel under-appreciated ourselves sometimes. [W]e have built an extraordinary bank with an extraordinary team of people and a great business model; maybe one of the absolute best business models in the banking industry. I think it will prove to be very durable and very profitable over a long period of time.

Because our model is so heavily involved in commercial real estate, and commercial real estate is something that is sometimes in fashion and sometimes out of fashion, I think we experience that sense of being out of step sometimes. But we do commercial real estate day-in, day-out, every day, up-cycle, down-cycle, and we do it in a way that allows us to be successful no matter which direction the CRE cycle is trending at any point in time.

I believe as this pandemic-induced recession plays out, our business model is going to prove its mettle and equip itself very well. I think that sense [of], “Wow, do we really want to own a CRE bank at this stage in the cycle?” will go away, because people will realize we’re a bank committed to consistent, high asset quality, and we’ve underwritten and will continue to underwrite our portfolios in a way that facilitates that. I think we’ll finally get the credit that my team deserves for the excellent work they’ve done.

I’m told a lot of times by investors, “You’re a great bank. We want to own you. Maybe in a couple of quarters will be the right time to buy a CRE bank.” I think that reflects a less than full understanding of the power of our franchise.

A Dangerous Force in Banking

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culture-8-23-19.pngThe more you learn about banking, the more you realize that just a few qualities separate top-performing bankers from the rest.

One of the most important of these qualities, I believe, is the ability of bankers to combat what famed investor Warren Buffett calls the “institutional imperative.”

Buffett, the chairman and CEO of Berkshire Hathaway, wrote about this in his 1990 shareholder letter:

“The banking business is no favorite of ours. When assets are twenty times equity — a common ratio in this industry — mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the ‘institutional imperative:’ the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.”

At the time, Buffett was referring to a credit-fueled bubble in the commercial real estate market. The bubble was in the process of popping; commercial real estate prices would decline 27% between 1989 and 1994.

The subprime mortgage and leveraged lending markets in the lead-up to the financial crisis offer more recent examples. No bank wanted to lose market share in either business line, even if doing so was prudent. This was the impetus for Citigroup CEO Chuck Prince III’s oft-repeated quote about having to dance until the music stops.

“When the music stops, in terms of liquidity, things will be complicated,” Prince told the Financial Times in 2007. “But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Here’s the problem: A bank that loses market share is vulnerable to criticism by analysts and commentators.

In 2006, for instance, JPMorgan Chase & Co. began offloading sub-prime mortgages and pulling back from the market for collateralized debt obligations. “Analysts responded by giving JPMorgan Chase what one insider calls ‘a world of [expletive] for our fixed-income revenues,’” writes Duff McDonald in “Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase.”

“One of the toughest jobs of the CEO is to look at all the stupid stuff other people are doing and to not do them,” a long-time former colleague of JPMorgan’s Chairman and CEO Jamie Dimon told McDonald.

You would think that analysts and commentators would, at some point, realize that it’s ill-advised to pressure bankers into prioritizing short-term results over long-term solvency, but there’s no evidence of that.

Darren King, the chief financial officer of M&T Bank Corp., noted at a conference in late 2018 that, “The narrative around the industry is that M&T has forgotten how to lend.”

M&T Bank has been one of the top-performing banks in the country since the early 1980s. King was referring to analysts and commentators’ reaction to the fact that M&T’s loan growth over the past two years has lagged the broader industry.

But as King went on to explain: “Generally what you find is when economic times are strong, we’re growing but generally not as fast as the industry. And in times of more economic stress, we tend to grow faster.”

So, how does a bank combat the institutional imperative?

The simple answer is that banks need to cultivate a culture that insulates decision-makers from external pressures to chase short-term performance. This culture is a product of temperament and training, as well as institutional knowledge about the frequency and consequences of past credit cycles.

This culture should be buttressed by structural support, too. Skin in the game among executives is a good example; a supportive board focused on the long term is another. A low efficiency ratio also enables a bank to focus on making better long-term decisions while still generating satisfactory returns.

In short, while the institutional imperative may be one of the most dangerous forces in banking, there are ways to defeat it.

How One Top-Performing Bank Explains Its Remarkable Success

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strategy-10-5-18.pngThe closer you look at U.S. Bancorp’s performance over the past decade, the more you’re left wondering how the nation’s fifth biggest commercial bank by assets has achieved its remarkable success.

Here are some highlights:

  • It was the most profitable bank on the KBW Bank Index for seven consecutive years after the financial crisis.
  • It emerged from the crisis with the highest debt rating among major banks.
  • Its employee engagement scores are consistently at the top of the industry.
  • It has been named one of the most ethical companies in the world for four consecutive years by the Ethisphere Institute.

How has the $461 billion bank based in Minneapolis, Minnesota, accomplished all this?

If you ask Kate Quinn, the bank’s vice chairman and chief administrative officer, the answer lies in its culture.

“There’s a reason that sayings like ‘culture eats strategy for lunch’ are stitched into pillows,” says Quinn.

Quinn doesn’t talk about U.S. Bancorp’s culture from a distance; since joining the bank in 2013 to oversee its rebranding campaign, she has led the charge on articulating and capturing the bank’s culture in a series of value and purpose statements.

“When I was starting to do the work of building the brand, I looked into the history of the company, its genealogy, to figure out our core attributes—the attributes our customers and employees associate with us,” says Quinn. “What I found was this unique thing about us. Any company can say ‘we bring our minds to our customers,’ but there aren’t many companies that can credibly say ‘we bring our hearts to our customers,’ and we can say that. It is real.”

Given that executives at all companies will tell you the same thing, the challenge is to differentiate between companies that pay lip service to these ideals and those that genuinely embrace them.

“The real insight you get about a banker is how they bank,” Warren Buffett has said in the past. “Their speeches don’t make any difference. It’s what they do and what they don’t do [that defines their greatness].”

One way to gauge what a bank does and doesn’t do is to look at its financial performance over an extended period of time. It’s an imperfect proxy, admittedly, but a revealing one nonetheless, as businesses built on unethical or immoral foundations simply aren’t sustainable. At one point or another, the chickens always come home to roost—just ask Wells Fargo & Co.

This is why U.S. Bancorp’s performance, since its current leadership took control of Cincinnati-based Star Banc in 1993, is so significant. It didn’t commit mishaps that caused it to fall prey to a larger competitor in the consolidation cycle of the 1990s. A decade later, it sidestepped the accounting scandals surrounding Enron, WorldCom, Tyco and others that tarnished the images of so many bigger banks. And it steered clear of the worst excesses in the mortgage and securities markets in the lead-up to the financial crisis.

Anyone who knows U.S. Bancorp’s former chairman and CEO Richard Davis will tell you that he embodied principled leadership, adopting an approach that wasn’t only ethical and rational, but also one that embraced balance. He never sent emails to his employees at night, for instance, because he didn’t want to interfere with their home lives. He was also known to call his employees’ parents on their birthdays.

When it came to bottling U.S. Bancorp’s culture, then, one of Quinn’s objectives was to capture Davis’ approach.

“As I was getting my head around what do we do and what are we trying to do, I realized that it isn’t about the products and services,” says Quinn. “When you think about what a bank does—and this came from Richard—it’s really about powering human potential. I told him that I wanted to build his DNA into the company—the culture, the purpose, the core values. That is the part of Richard that has become the fabric of this company.”

But Davis’ influence is just one element of U.S. Bancorp’s broader culture. Other elements come from Davis’ predecessor and successor.

His predecessor, Jerry Grundhofer, was a tactical operator with few equals. He was the dean of efficiency, one of the valedictorians of banking throughout the 1990s.

“Jerry brought a set of values and capabilities to the company that was needed—scrappiness, cut to the chase, financial discipline,” says Quinn. “When Richard came in, he didn’t change that piece of it, he built on top of what Jerry did by adding the human dimension. Jerry had always put the shareholders first. Richard came in and put the employees at the top.”

The same is true of Davis’ successor, the bank’s current chairman and CEO, Andy Cecere, who adds another element into the mix. Cecere’s reputation is that of a practical innovator who’s pushing the bank to focus on change, innovation and technology. His favorite presentation slides, for example, compare the Old Western TV series Bonanza to the Jetsons.

Again, things like this are easy to dismiss as vacuous corporate-speak. But one lesson you learn after spending enough time with top-performing bank CEOs is that just because something sounds trite doesn’t mean it isn’t true.

Quinn understands that. It’s why she’s writing these cultural attributes into U.S. Bancorp’s DNA with revamped value and purpose statements. Facile notions of efficiency and operating leverage may excite analysts on quarterly conference calls, but the true source of U.S. Bancorp’s competitive advantage lies in its commitment to doing what’s right.

What Your Bank Needs to Know About Data

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board-9-12-18.pngBanks executives and directors of all sizes are or should be continually discussing and crafting strategic initiatives for the future of the institution. Today’s competitive ecosystem that’s rooted in continually evolving technological developments and uses of data has made it essential for bank leaders to continually adapt.

From the top of the company to the most basic product and talent level, banks are building strategies to maintain competitive positions using these different kinds of data assets. But with any new or developing strategy, there is a potential for added cost and risk that could negatively affect the bank.

efficiency-7-18-18-tb.pngThinking Beyond The Efficiency Ratio
The ratio of operating expenses to operating revenue has long been a metric by which banks track performance. But there’s much more to accurately and effectively evaluating the performance of your bank and improving efficiency, and management should be exploring further to truly assess opportunities to improve.

agenda-9-12-18-tb.pngWhy Data Should Be On Your Board’s Agenda
More and more executives have come to realize that data management needs to be a priority and not a back-office function for a select group within the organization. Almost everything in the company can be tracked or monitored with data, and it can lead to long term efficiencies.

strategy-9-12-18-tb.pngFive Steps to a Data-Driven Competitive Strategy
There’s no mistaking that leveraging the right data the right way should be a key component of any bank’s strategic planning. Assessing and evaluating your bank’s practices with data can enable you to deliver improvements and advantages for both the bank and its customers.

survey-9-12-18-tb.png2018 Branch Benchmarking Survey
As traffic in branches continues to decrease and as possible changes to the Community Reinvestment Act are discussed by regulators, bankers are continually trying to craft optimal branch strategies. In Crowe’s latest research, we review data from 457 branches around the country to find trends in branch operations and performance.

consumer-9-12-18-tb.pngFive Ways to Measure Success in Consumer Channels
Amazon is able to not only monitor consumer preferences, but deliver aligned products to deepen and extend the relationship with those consumers. If retailers like Amazon can achieve that with its data, banks should be able to deliver a similar experience for consumers as well. Banks must take an objective look at performance across their consumer channels to prepare to compete.