How do you plan in an environment where the future is so uncertain?
If this was a bad joke, the answer might be “very carefully.” The real answer is more like “very nimbly.”
The Covid-19 pandemic has presented the banking industry with an almost-unprecedented set of challenges, including a deep recession and the necessity to manage a distributed work force. The variable that no one can predict is the pandemic.
Most economist agree that the U.S. economy won’t fully recover until the pandemic has been brought to heel — and that probably won’t occur until an effective vaccine has been widely distributed. Many banks are also reluctant to repatriate their remote employees in large numbers until it’s safe to do so.
Strategic planning in such a confused situation has to be different than at other times. In a webcast discussion for Bank Director’s AOBA Summer Series — a run-up to the 2021 Acquire or Be Acquired conference in January — Stephen Steinour, chairman and CEO at Huntington Bancshares in Columbus, Ohio, talked about the challenges of strategic planning today.
In an audio recording of that conversation with Editor-at-Large Jack Milligan, Steinour detailed some of the steps that Huntington has been taking through the pandemic, including processing tens of thousands of Paycheck Protection Program loans for its business customers and adapting to a virtual work arrangement for most of its employees.
Steinour also describes a new approach that Huntington’s senior management teams and board of directors is adopting toward strategic planning. Traditionally the bank has planned on a three to five-year cycle, but today’s uncertain environment requires a shorter time horizon.
“I think we’re going more into a continuous planning mode rather than a cyclical mode,” he says. “It requires us to be more nimble.”
“Culture should be viewed as an asset, similar to an organization’s human, physical, intellectual, technological, and other assets. … Oversight of corporate culture should be among the top governance imperatives for every board, regardless of its size or sector.” — National Association of Corporate Directors’ Blue Ribbon Commission
A strong, clear culture that aligns performance to shared goals is the hallmark of a thriving and sustainable organization. Such a culture boosts performance and long-term value creation. It’s a non-replicable competitive advantage.
Culture is a substantial asset. Like all other assets — loans, cash, investments or fixed assets — banks should have a proper valuation of their culture asset and know what their return on that asset is. It is incumbent on them to proactively identify strategic cultural risks and opportunities to optimize asset performance.
The chief executive officer is responsible for shaping and managing the bank’s culture, but the board ensures that they do so effectively. The ultimate responsibility for a thriving and sustainable culture sits squarely with the bank’s board.
A board should never be surprised by culture-related issues — yet these often only reach the boardroom when there are problems. Recent scandals have brought culture to the forefront for companies, and many boards and executive teams want to know exactly how — or, alarmingly, what — their culture is doing.
An Incomplete View of Culture It can be difficult for bank boards to assess a seemingly “soft” issue like culture. They typically rely on disparate and indirect metrics such as employee engagement surveys and comments, hiring, promotion and turnover data, net promoter scores, and leaderships’ opinions to form some notion of cultural health. Many banks have done some form of “culture work” as well. In Gallup’s experience, these efforts tend to be episodic and narrowly focused on a desired aspirational state, such as being “agile,” “innovative,” “customer-centric” or “inclusive.”
The results are drastically — and worryingly — incomplete. Directors are becoming increasingly aware that their efforts to assess their culture asset lack a meaningful perspective on the risks, performance or asset value of the culture overall.
Culture Asset Management Gallup’s experience is that most organizations struggle to define their culture — much less understand and harness effective levers for shaping it. Most banks and boards manage culture by default rather than by design.
We regularly observe high levels of angst and frustration from board members and executives who know there should be predictive signals, but don’t know where or what to look for.
Bank boards need an objective and reliable approach to managing culture risk and maximizing the return on their greatest — and riskiest — asset to effectively govern and guide corporate strategy.
In partnership with bank executives and boards, and leveraging tens of millions of data points, Gallup has developed a solution called Culture Asset Management to help boards measure and strengthen their cultures. We’ve found the 10 most influential factors of a healthy culture that are predictive of positive business outcomes:
Ethics and compliance
Diversity and inclusion
Mission and purpose
These 10 dimensions serve as a framework for determining the real value of culture as an asset and for diagnosing the performance and risk factors in managing that asset.
Bank boards are ultimately responsible for the culture of the organization; they must elevate the way they manage culture to fulfill their duty to steward and guide the long-term sustainability of the organization. Culture is a bank’s most valuable and riskiest asset, and should be treated as such. Yet, boards lack reliable, valid and comprehensive tools to understand the risks and strategic opportunities of their culture, which often leads to surprises.
Bank boards should never be surprised. They need a predictive, clear and holistic view of their bank’s culture to understand what the actual value of the culture asset is — just like every other critical asset.
Clearly, things in the marketplace are very uncertain at the moment.
But one thing is certain to continue when things stabilize: The megabanks’ domination of the banking industry when it comes to consumer deposit market share and growth.
If you think Bank of America Corp., JPMorgan Chase & Co., Citigroup, Wells Fargo & Co. and Goldman Sachs Group are sitting back, basking in a victory that comes at the expense of regional and community financial institutions, think again. The lack of a credible response to stop them means there’s nothing preventing them from continuing to execute their strategies.
Here are examples of the mindset at a couple of megabanks about their view of, and plans for, increasing their consumer marketplace dominance.
Bank of America Chairman and CEO Brian Moynihan declared in mid-January that he believed the bank could double its consumer market share in the United States. He also believes the bank could double its retail business without opening more branches.
“If we do a good job for the customers and clients and we’re fair in our pricing, I think that’s good because … the scale that we have enables us to do more for customers,” Moynihan said.
He also mentioned that doubling the retail business could happen without opening any more branches. His plans for the next couple of years include opening 500 financial centers and modernizing 2,500 centers with technology upgrades by 2021, creating fully automated branches with ATMs and video conferencing facilities so customers can communicate with off-site bankers, adding 2,700 more ATMs, and increasing the use of AI-powered chatbot Erica to improve digital offerings and cross-sell products like mortgages, auto loans and credit cards.
Doubling the bank’s business may not be the actual end goal at all. Moynihan sees a massive market opportunity. Not only does Bank of America have the scale, but regional and community banks are not responding to consumers’ deposit needs urgently or effectively. Encroaching on their market share doesn’t seem to be a herculean undertaking.
Moynihan doesn’t expect to see a challenge from “traditional large competitors or even regional banks,” but existing and new online bank competitors. “The struggle that BofA will have in increasing market share will not come from traditional large competitors or even regional banks, but more likely from new online banking companies,” he said.
Let’s find out what one of those online banks is working on today.
Marcus by Goldman Sachs “We aspire to be the leading digital consumer bank,” stated Eric Lane, global co-head of Goldman’s consumer and investment management division. “We’re starting with loans, we added savings and cards, and we’re working to build out the balance of the digital products suite, including wealth and checking. We’re trying to deliver a retail bank branch through your mobile phone.”
From 2016 to 2019, Marcus has grown customers from 200,000 to 5 million, deposit balances from $12 billion to $60 billion, and loan and card balances from $200 million to $7 billion. That has culminated in revenues growing from $2 million to about $860 million, according to the bank’s investor day presentation.
Despite Lane’s desire to deliver a retail branch through phones, Marcus’ growth to-date has been without a mobile app — which was finally released in January. Adding mobile to the digital delivery platform supports the bank’s commitment to the retail consumer and is a crucial foundation for their growth plans. Goldman Sachs plans to more than double consumer deposits, to at least $125 billion over the next five years, and to grow loans and credit card balances fourfold, to over $20 billion during the same period.
Leveraging its perceived advantage over traditional banks, Marcus also just announced plans to offer retail consumer checking accounts in 2021. It will also provide zero-fee wealth management services accessed through the mobile app by the end of 2020 and is reportedly in talks to offer small business loans to Amazon.com’s e-commerce platform business users.
This is just the mindset of two of the megabanks. Bankers should study the plans of others, like Chase and Citi, to learn about their aggressive plans to materially grow consumer market share. They all plan to compete for customers of regional and community banks more than ever while defending their existing relationships and turf.
Regional and community bankers need to pay close attention to the mindset of these megabanks and shift from denying their negative impact on consumers to devising realistic plans to compete against them.
Has your executive team been approached by leaders of
another bank interested in an acquisition? It likely means your bank is doing
something right. But, now what?
Many CEOs’ visceral response to being asked to consider a
deal is to say, “Thanks, but no thanks” and continue running the bank. While this
may be the correct response, this overture is a chance for leadership to objectively
revisit the bank’s strategic alternatives to determine the best option for its shareholders
and other stakeholders.
Stay the Course Boards must objectively identify where their bank is in its life cycle — be it turn-around, growth or stability — and what will be needed to successfully compete at the next stage. Ultimately, they must determine if the bank can drive more long-term shareholder value staying independent than it could with a partner. They must also weigh the risk of remaining independent against the potential reward.
Directors should prepare five-year projections, ideally
with the help of a financial advisor, that assume the bank continues to operate
independently. They should forecast growth and profitability that reasonably
reflect current marketplace dynamics and company strategy, and are generally
consistent with past performance. Consider opportunities to lower funding costs,
consolidate or sell unprofitable branches, add lines of business, or achieve
economies of scale through acquisitions or organic growth. However, be
cognizant of market headwinds: low interest rate environment, slower projected
loan growth, increasing cost of technology and cybersecurity, regulatory burden,
competition, demographic trends, upcoming presidential election and so on. The
board should also consider organizational issues such as succession planning —
a major issue for many community banks. How do these factors impact the future
performance of your institution? Will your bank be able to meet shareholder
Merge with Peer Peer mergers have been a hot topic of late. The bank space has seen several high-profile transactions: the merger between BB&T Corp. and SunTrust Banks to form Truist Financial Corp.; Memphis, Tennessee-based First Horizon National Corp. and Lafayette, Louisiana-based IBERIABANK Corp.; Columbia, South Carolina-based South State Corp. and Winter Haven, Florida-based CenterState Bank Corp.; and McKinney, Texas-based Independent Bank Group and Dallas-based Texas Capital Bancshares.
The opportunity to double assets while achieving
economies of scale can drive significant shareholder value. But these
transactions can be tough to nail down because both parties must be willing to compromise
on key negotiation topics. Which side selects the chairman? The CEO? How will the
board be split? Where will the company be headquartered? What will be the name
of the future bank?
Peer mergers can be risky propositions for banks, as
cultures don’t always match and integration can take several years. However,
the transaction can be a windfall for shareholders in the long run.
Sell A decision to sell almost always generates the greatest immediate value for shareholders. Boards must ascertain if now is the right time, or if the bank can do better on its own.
Whether or not selling creates the highest long-term value
for shareholders depends on several factors. One factor is the consideration
mix, if any, between stock and cash. Cash gives shareholders the flexibility to
invest and diversify the net proceeds as they see fit, but capital gains will
be taxed immediately. Stock consideration is generally a tax-free exchange,
when structured correctly, but it is paramount to select the right partner. Look
for a bank with a strong management team and board, a proven track record of
building shareholder value and a plan to continue to do so. That partner may
not offer you the highest price today, but will most likely deliver a better
return to shareholders in the long run, compared to other potential acquirers. Furthermore,
a partner that is likely to sell in the near-term could provide a double-dip —
a potential homerun for your shareholders.
It is crucial to consider what impact a sale would have on other stakeholders, like employees and the community. Prepare your bank to sell, well in advance of any conversations with potential acquirers. Avoid signing new IT contracts with material termination costs; it is an opportune time to sell when core processing contracts are nearing expiration. In addition, review existing employment agreements and consider establishing a severance plan to protect employees ahead of time.
Being approached by a potential acquirer gives your bank an opportunity to objectively reflect on its strategy and potentially adjust it. Even if your bank hasn’t been contacted by a potential acquirer, the board should still review the bank’s strategic alternatives annually, at a minimum, and determine the best path forward.
about the importance of culture all the time, and a few have created a specific
executive-level position to oversee it.
Chief culture officer is an unusual title, even in an industry that promotes culture as essential to performance and customer service. The title was included in a 2016 Bank Director piece by Susan O’Donnell, a partner with Meridian Compensation Partners, as an emerging new title, citing the fact that personnel remain a critical asset for banks.
“As more millennials enter the workforce, traditional banking environments may need to change,” she wrote. “Talent development, succession planning and even culture will be differentiators and expand the traditional role of human resources.”
recent unscientific internet search of banks with chief culture officers
yielded less than a dozen executives who carry the title, concentrated mostly at
One bank with a chief culture officer is Adams Community Bank, which has $618 million in assets and is based in Adams, Massachusetts. Head of Retail Amy Giroux was awarded the title because of her work in shifting the retail branches and staff from transaction-based to relationship-oriented banking, which began in 2005. Before the shift, each branch tended to operate as its own bank, with the manager overseeing the workplace environment and culture. That contributed to stagnation in financial performance and growth.
“We decided that we wanted to grow but to do that, we really needed to invest in our workplace culture,” she says. “When you think of a bank’s assets and liabilities, which represents net worth and capital, cultural capital becomes equally important.”
bank’s reinvention was led by senior leadership and leveraged a training
program from transformation consultancy The Emmerich Group to retrain and
reorient employees. The program incorporated Adams’ vision and core values, as
well as accountability through measurable metrics. Branch staff moved away from
acting as “order-takers” for customers and are now trained to build and foster
worked for us,” says CEO Charles O’Brien. “We’re the go-to community bank for
our customers, and they rave about how different we are. We’ve grown
significantly over the last five years.”
As CCO, Giroux
works closely with the bank’s human relations team on fulfilling the bank’s strategic
initiatives, aligning operations with its vision and goals, creating a
framework of visibility and deliverability for goals and holding employees
accountable for performance. She reports to O’Brien, but says her efforts are
supported by the whole executive team.
“A lot of times, people think that culture is invisible. They’ll sometimes say, ‘Well, how do I do these things on top of my job?’” she says. “Culture isn’t something you’re doing on top of your job. It’s how you do your job.”
North Dakota-based Bell Bank, the chief culture position is held by Julie
Peterson Klein and is nestled within the human resources group, where about 20
employees are split between HR and culture. She says she has a “people first,
workload second” orientation and has focused on culture within HR throughout
her career; like Giroux, the title came as recognition for work she was already
her job is really about empowering employees at the State Bankshares’ unit to
see themselves as chief culture officers. Bell’s culture team supports
employees by engaging the $5.7 billion bank’s 200 leaders in engagement and
training, and works with HR to handle onboarding, transfers, promotion and
exits. The group also leads events celebrating employees or giving back to the
community, using storytelling as a way to keep the bank’s culture in front of
“We focus on creating culture first, and we hire for that on the HR side,” she says.
Culture is important for any organization, but Giroux sees special significance for banks because of the large role they play in customers’ financial wellness. Focusing on culture has helped demonstrate Adams’ commitment of giving customers “extraordinary service.”
“Prior to having the collaboration and the infrastructure for culture, everybody kind of did their own thing,” Giroux says. “This really solidifies the vision and the mission. And it really is, I believe, the glue that holds us together.”
The country’s most advanced bank is run by the industry’s smartest CEO.
Co-founder Richard Fairbank is a relentless strategist who has guided Capital One Financial Corp. on an amazing, 25-year journey that began as a novel approach to designing and marketing credit cards.
Today, Capital One—the 8th largest U.S. commercial bank with $373.2 billion in assets—has transformed itself into a highly advanced fintech company with national aspirations.
The driving force behind this protean evolution has been the 68-year-old Fairbank, an intensely private man who rarely gives interviews to the press. One investor who has known him for years—Tom Brown, CEO of the hedge fund Second Curve Capital—says that Fairbank “has become reclusive, even with me.”
Brown has invested in Capital One on and off over the years, including now. He has tremendous respect for Fairbank’s acumen and considers him to be “by far, the best strategic thinker in financial services.”
I interviewed Fairbank once, in 2006, for Bank Director magazine. It was clear even then that he approaches strategy like Sun Tzu approaches war. “A strategy must begin by identifying where the market is going,” Fairbank said. “What’s the endgame and how is the company going to win?”
Fairbank said most companies are too timid in their strategic planning, and think that “it’s a bold move to change 10 percent from where they are.” Instead, he said companies should focus on how their markets are changing, how fast they’re changing, and when that transformation will be complete.
The goal is to anticipate disruptive change, rather than chase it.
“It creates a much greater sense of urgency and allows the company to make bold moves from a position of strength,” he said.
This aggressive approach to strategy can be seen throughout the company’s history, beginning in 1988 when Fairbank and a former colleague, Nigel Morris, convinced Richmond, Virginia-based Signet Financial Corp. to start a credit card division using a new, data-driven methodology. The unit grew so big so fast that it dwarfed Signet itself and was spun off in 1994 as Capital One.
The company’s evolution since then has been driven by a series of strategic acquisitions, beginning in 2005 when it bought Hibernia Corp., a regional bank headquartered in New Orleans. Back then, Capital One relied on Wall Street for its funding, and Fairbank worried that a major economic event could abruptly turn off the spigot. He sought the safety of insured deposits, which led not only to the Hibernia deal but additional regional bank acquisitions in 2006 and 2008.
Brown says those strategic moves probably insured the company’s survival when the capital markets froze up during the financial crisis. “If they hadn’t bought those banks, there are some people like myself who don’t think Capital One would be around today,” he says.
As Capital One’s credit card business continued to grow, Fairbank wanted to apply its successful data-driven strategy to other consumer loan products that were beginning to consolidate nationally. Over the last 20 years, it has become one of the largest auto lenders in the country. It has also developed a significant commercial lending business with specialties like multifamily real estate and health care.
Capital One is in the midst of another transformation, to a national digital consumer bank. The company acquired the digital banking platform ING Direct in 2011 for $9 billion and rebranded it Capital One 360. Office locations have fallen from 1,000 in 2010 to around 500, according to Sandler O’Neill, as the company refocuses its consumer banking strategy on digital.
When Fairbank assembled his regional banking franchise in the early 2000s, the U.S. deposit market was highly fragmented. In recent years, the deposit market has begun to consolidate and Capital One is well positioned to take advantage of that with its digital platform.
Today, technology is the big driver behind Capital One’s transformation. The company has moved much of its data and software development to the cloud and rebuilt its core technology platform. Indeed, it could be described as a technology company that offers financial services, including insured deposit products.
“We’ve seen enormous change in our culture and our society, but the change that took place at Capital One’s first 25 years will pale in comparison to the quarter-century that’s about to unfold,” Fairbank wrote in his 2018 shareholders letter. “And we are well positioned to thrive as technology changes everything.”
At Capital One, driving change is Fairbank’s primary job.
One of the most important metrics in banking is the efficiency ratio, which is generally viewed as a measurement of how carefully a bank spends money. Following this definition to its logical conclusion, the more parsimonious the bank, the lower its efficiency ratio should be.
But this common understanding fails to capture the true nature of what the efficiency ratio actually measures. It is in reality a fraction that expresses the interrelationship between the two most dynamic forces within any business organization: the growth of revenue and expenses.
Looked at this way, the efficiency ratio is actually a measurement of effective spending—how much revenue does every dollar of spending produce. And embedded within the efficiency ratio is a simple but extraordinarily important concept that is the key to high profitability—positive operating leverage.
But first, let’s look at how the efficiency ratio works. It’s an easy calculation. The numerator, which is the top half of the fraction, is expenses. And the denominator, which sits below it, is revenue. A bank that reports $50 of expenses and $100 of revenue in a quarter has an efficiency ratio of 50 percent, which is the benchmark for most banks (although most fall short).
However, not all 50 percent efficiency ratios are created equal.
Consider two examples. Bank Cheapskate reports $40 of expenses and $100 of revenue in its most recent quarter, for an efficiency ratio of 40 percent. Coming in 10 percentage points under the benchmark rate of 50 percent, Bank Cheapskate performs admirably.
Bank Topline reports $50 in expenses and $125 in revenue in its most recent quarter. This performance also results in an efficiency ratio of 40 percent, equivalent to Bank Cheapskate’s ratio. Again, an impressive performance.
While the two ratios are the same, it is unlikely that most institutional investors will value them equally. The important distinction is how they got there.
The argument in favor of Bank Cheapskate’s approach is simple and compelling. Being a low-cost producer is a tremendous competitive advantage in an industry like banking, which has seen a long-term decline in its net interest margin. It allows to a bank to keep deposits costs low in a tight funding market, or back away from an underpriced and poorly structured credit in a competitive loan market. It gives the bank’s management team optionality.
The case for Bank Topline’s approach is probably more appealing. Investors appreciate the efficiency of a low-cost producer, but I think they would place greater value on the business development skills of a growth bank. In my experience, most investors prefer a growth story over an expense story. Bank Topline spends more money than Bank Cheapskate, but it delivers more of what investors value most—revenue growth.
To be clear, the choice between revenue and expenses isn’t binary—this is where positive operating leverage comes in.
Positive operating leverage occurs when revenue growth exceeds expense growth. Costs increase, but revenue increases at a faster rate. This is the secret to profitability in banking, and the best management teams practice it.
A real-life example is Phoenix-based Western Alliance Bancorp. The bank’s operating efficiency ratio in 2018 was an exemplary 41.9 percent. The management team there places great importance on efficiency, although the bank’s expenses did rise last year. But this increase was more than offset by strong revenue growth, which exceeded expense growth by approximately 250 percent. This is a good example of positive operating leverage and it’s the real story behind the bank’s low efficiency ratio.
The greater the operating leverage, the lower the efficiency ratio because the ratio is relational. It is not solely a cost-driven metric. At Western Alliance and other banks that focus on creating positive operating leverage, it’s not just how much you spend—it’s how many dollars of revenue each dollar of expense creates.
To understand the real significance of a bank’s efficiency ratio, you have to look at the story behind the numbers.
The battle is on among all banks to acquire new customers and their low-cost deposits. The key to winning the battle for low-cost deposits is owning the primary banking relationship and, in particular, the consumer checking account relationship.
The checking account is the central way consumers identify “their bank.” It is the only banking product that consumers use daily to navigate the intersection of their life and their money.
If this navigation is smooth, your bank is in the best position to collect even more deposits, loans and fee income.
Banks that understand this best have been successful at capturing primary banking relationships, which in recent years have been the four biggest U.S. banks. They are the ones investing the most to continue this trend and defend their success.
If you’re a community bank or even a regional one, a recent AT Kearney survey detailed the ways you are being attacked.
The four biggest banks (Bank of America Corp., JPMorgan Chase & Co., Citigroup and Wells Fargo & Co.) have 40 percent of the U.S. consumers’ primary banking relationships. Superregional banks have 19 percent. The remaining 41 percent is split between other institution types, with credit unions at 14 percent, community banks at 12 percent, regional banks at 8 percent and relatively new direct banks like Marcus and Ally already at 5 percent.
The four biggest banks are collectively budgeting more than $30 billion in technology investments, about one-third of which is on digital banking around the checking account.
Digital channels drive 35 percent of primary banking relationship moves, while branches only drive 26 percent. The Big Four banks are capturing 41 percent of consumers that do switch their primary relationship. Superregional banks are capturing 28 percent. This leaves 31 percent for everyone else, and the new digital-only banks have 11 percent of that remainder.
Big Banks Rule The reality is the biggest banks have the upper hand. The resources they are investing in digital platforms to maintain and increase market share can’t be replicated by community or regional banks.
But let’s not confuse the upper hand with the winning hand. Community and regional banks can fight back, because there is a chink in the armor of big banks.
While the digital experience provided by the four biggest banks may be superior, a review of the actual product benefits their consumer checking accounts provide isn’t that impressive. They are as ordinary as the checking accounts at most other banks.
Their checking lineups, terms and conditions are complicated with significant product overlap. They mask this weakness with an allure in the marketing and digital delivery of these ordinary benefits.
When smaller banks discuss growing consumer retail accounts, they talk more about acquisition pricing and marketing strategy, and not enough about first improving and simplifying products and lineups. Many banks start by spending on the promotion of unappealing, undifferentiated checking products at the lowest price in a confusing lineup. This isn’t a winning battle plan.
Smaller banks should first make their lineup simple for consumers to understand. The best practice here is a good, better, best methodology, which we have previously discussed in my article, Use Good/Better/Best for Checking Success.
While doing this, why not offer checking products as good, modern and different as you can afford?
Nontraditional Benefits Work Recent research by Cornerstone Advisors, titled “Reinventing Checking Accounts,” shows how positively consumers respond to switching to checking accounts that include nontraditional benefits like cell phone insurance, roadside assistance and pharmacy/vision discounts alongside traditional benefits.
These nontraditional benefits are central to consumers’ lives away from the bank but can be captured in their checking account.
There’s no debating the importance of acquiring new checking relationships in gathering low-cost deposits. While the biggest banks dominate currently, are investing heavily in technology and paying handsome incentives to attract even more new customers, smaller banks can attack where these big banks are vulnerable.
Don’t fight them toe-to-toe with a complex lineup of look-a-like checking products. That’s a losing battle. Instead, focus on the appeal of a simple lineup and products that competing banks don’t offer. That’s a battle worth fighting, and one that can be won.
Leadership is a central aspect of banking. Not only do bank executives lead their institutions, but directors who sit on bank boards tend to be leading members of their communities.
Indeed, it’s no coincidence that the biggest and tallest buildings in many cities and towns across the country are named after banks.
That’s why leadership was one underlying theme of this year’s Bank Director’s Acquire or Be Acquired Conference held at the JW Marriott in Phoenix, Arizona.
It was the 25th anniversary of the conference, one of the marquee events in the banking industry each year.
The conference opened with a video tracing the major events in banking since 1994—a period of deregulation, consolidation and innovation.
In that time, the population of banks has been cut in half, Great Depression-era regulations have rolled back and the internet and iPhone have made it possible for three-quarters of deposit transactions at some banks to be completed from the comforts of bank customers’ own homes.
It was only fitting then to bookend the conference with some of the greatest leaders in the banking industry throughout this tumultuous time.
The first day concluded with the annual L. William Seidman CEO Panel, featuring Michael “Mick” Blodnick, the chief executive officer of Glacier Bancorp from 1998-2016, and Joe Turner, the CEO of Great Southern Bancorp since 2000.
The banks run by Blodnick and Turner have created more value than nearly all other publicly traded banks in the United States. Glacier ranks first in all-time total shareholder return—dividends plus share price appreciation—while Great Southern ranks fifth on the list.
As Blodnick and Turner explained on stage, there is no one right way to grow. Blodnick did so at Glacier through a series of 30 mergers and acquisitions, building one of the leading branch networks throughout the Rocky Mountain region.
Turner took a different approach at Great Southern. He and his father, who had run the bank from 1974 to 2000, focused instead on organic growth. They built a leading footprint in the Southwest corner of Missouri, and then, in the financial crisis, completed five FDIC-assisted transactions to spread their footprint into cities up the Missouri and Mississippi rivers.
One consequence of this approach was it enabled Great Southern to consistently decrease its outstanding share count by upwards of 40 percent since originally going public, as it never had to issue shares to buy other banks.
Asked what one thing he wanted to share with the audience, Turner talked about the importance of ignoring shortsighted stock analysts. Despite Great Southern’s extraordinary returns through the years, it has rarely if ever been “buy” rated by the analyst community.
Why not? When the economy is great and other banks are growing at a rapid clip, Great Southern tempers its growth to avoid making imprudent loans. Then when times are tough, and a pall is cast over all stocks, Great Southern surges ahead. Blodnick’s advice focused on M&A. For sellers, the goal should never be to get the last nickel, he explained. Rather, the goal should be to establish a partnership that will maximize value over time.
The conference also had a parallel track of sessions, FinXTech, focused on technology.
These sessions were often standing-room only. It was an obvious indication about what the future leaders of banking are focused on now.
Don MacDonald, the chief marketing officer of MX Technologies, took a particularly broad approach to the subject. Although his session ostensibly focused on harnessing data to increase growth and returns, he put the topic into historical perspective.
The question MacDonald was trying to answer was: How do we know if the banking industry has reached a genuine inflection point, after which the rules of the game, so to speak, have changed?
The answer to this question, MacDonald said, can be found in developing a framework for assessing change. That framework should include multiple forces in an industry, such as regulations, customer expectations and technology.
It’s only when multiple major forces experience change at or around the same time that a true strategic inflection point has been reached, explained MacDonald.
Has banking reached such a point?
MacDonald didn’t answer that question, but given the environment banks operate in right now with the growth of digital distribution channels and the ever-evolving regulatory regime, one would be excused for coming to that conclusion.
Given these two tracks—the general sessions focusing on banking and the FinXTech sessions focusing on technology—it was fitting that the final day of the conference was opened by John B. McCoy, the former CEO of Bank One, from 1984-99. McCoy hails from the notoriously innovative McCoy banking dynasty, preceded by his father and grandfather. Bank One was one of the earliest adopters of credit cards, drive-through windows and ATMs, among other things.
Furthermore, it was McCoy’s approach to acquisitions at Bank One, where he completed more than 100 deals, that helped to inform Blodnick’s approach at Glacier. Known as the “uncommon partnership,” the approach focused on buying banks, but allowing them to retain their autonomy.
The decentralized aspect of the uncommon partnership left decision-making at the local level—within the acquired banks. It allowed Bank One and Glacier to have their cake and eat it too—growing through M&A, but leaving the leadership of the individual institutions where it belongs: In their local communities. This resulted in lower customer attrition, the scourge of most deals.
One overarching lesson from Acquire or Be Acquired is that banking is about facilitating the growth of communities, and the best people to spearhead this are the ones with the most on the line—the leaders of those communities.
With unemployment at its lowest point since 1969, the competition for top talent is as fierce as it has been in years.
While many experienced banking professionals know well that the industry offers challenges, rewards and opportunities, many millennials and Gen Z’ers remain reluctant to pursue a career in banking.
The high-performing banks of the future will be those that can translate those benefits to attract, develop, reward and retain top talent. There are two places your bank can start this process.
Banks already provide strong salaries, bonus opportunities, health-care coverage and retirement plans. The challenge the industry now faces is how to make the banking industry more attractive to today’s generation of younger recruits.
What a bank should consider includes flexible work hours, the ability to work remotely and cross-training. If the bank can demonstrate a track record and policy of promoting from within, the job opportunity will be even more attractive to a potential hire. Another recruiting tool we have often used successfully, particularly for younger individuals, is a deferred compensation program designed to help pay down student loans, with vesting provisions that encourage continued employment at the bank.
But once you acquire top talent, how do you develop them as future leaders?
First, an ongoing coaching and mentoring program is critical.
Pat Summitt, the legendary University of Tennessee women’s basketball coach who won more games than any other NCAA Division I women’s coach, recruited talented players.
Once they joined the team, she delivered an individualized plan to improve each player’s weaker areas. She also provided regular feedback and monitoring. This method of coaching and mentoring led to 1,098 career victories and Hall of Fame success as a coach and leader. So, how can Summitt’s approach help your bank?
When developing the bank’s future senior management, the board and the CEO should ensure they agree on both the long-term strategic plan and the necessary skills to execute that plan.
They should then identify the internal candidates best suited to develop and provide them with opportunities for growth. It is important the bank develop a culture of honest assessment of strengths and weaknesses, and provide ongoing mentoring and feedback.
Even with top talent, it is unlikely that Summitt would have achieved the success she did had she provided her players with feedback only once a year.
In addition to an ongoing assessment and coaching program, the bank should discuss a career path for potential leaders, and the company should provide the necessary training and cross training, when feasible, to allow promising employees to learn each facet of the bank’s operations. Thorough training programs can be very attractive in recruitment and are invaluable to the development of a leader.
Once the bank has invested in developing up-and-coming leaders, rewarding them appropriately and incenting them to remain with your bank is critical. No doubt, your competitors will recognize the strong leaders you are developing and actively recruit your talent, requiring your bank to maintain not just competitive salaries, but methods of keeping your compensation programs unique and desirable.
An example is a nonqualified deferred compensation plan that pays in-service distributions at the end of certain periods, such as three- or five-year time frames. This type of plan typically would include performance-based compensation tied to specified goals.
Additional amounts can be credited to the deferred compensation account and distributed at the end of a longer period (such as 10 years), providing even more incentive to stay with the bank.
If the individual terminates before the applicable distribution period(s), undistributed funds can be allocated to hire a talented replacement or credited back to the bank’s income.
We have found these flexible deferred compensation arrangements, when combined with other tools, to be helpful in recruiting, developing and keeping top talent.
An active career development program bolstered with proper financial incentives can help ensure your bank has the right leaders for the future.