The Missing Piece in Community Bank M&A

The community bank space is consolidating at a blistering pace, but buyers may be overlooking a key consideration when thinking about mergers and acquisitions. Prospective buyers should consider how other footprints complement growth opportunities against their own, lest they make critical and expensive mistakes. In this video, Kamal Mustafa, chairman of the Invictus Group, explains why bank buyers should assess a target’s footprint, and how to value the industries and lending opportunities within a new market.

  • Market Considerations and Assessments
  • Focusing on Industries, Not Loans
  • Target Valuations

Banks Enter a New Era of Corporate Morality

Are we entering a new era of morality in banking?

Heavily regulated at the state and federal level, banks have always been subjected to greater scrutiny than most other companies and are expected to pursue fair and ethical business practices — mandates that have been codified in laws such as the Community Reinvestment Act and various fair lending statutes.

The industry has always had a more expansive stakeholder perspective where shareholders are just one member of a broad constituency that also includes customers and communities.

Now a growing number of banks are taking ethical behavior one step further through voluntary adoption of formal environmental, social and governance (ESG) programs that target objectives well beyond simply making money for their owners. Issues that typically fall within an ESG framework include climate change, waste and pollution, employee relations, racial equity, executive compensation and board diversity.

“It’s a holistic approach that asks, ‘What is it that our stakeholders are looking for and how can we – through the values of our organization – deliver on that,” says Brandon Koeser, a financial services senior analyst at the consulting firm RSM.

Koeser spoke to Bank Director Editor-at-Large Jack Milligan in advance of a Sunday breakout session at Bank Director’s Acquire or Be Acquired Conference. The conference runs Jan. 30 to Feb. 1, 2022, at the JW Marriott Desert Ridge Resort and Spa in Phoenix.

The pressure to focus more intently on various ESG issues is coming from various quarters. Some institutional investors have already put pressure on very large banks to adopt formal programs and to document their activities. Koeser says many younger employees “want to see a lot more alignment with their beliefs and interests.” And consumers and even borrowers are “beginning to ask questions … of their banking partners [about] what they’re doing to promote social responsibility or healthy environmental practices,” he says.

Koeser recalls having a conversation last year with the senior executives of a $1 billion privately held bank who said one of their large borrowers “came to them and asked what they were doing to promote sustainable business practices. This organization was all about sustainability and being environmentally conscious and it wanted to make sure that its key partners shared those same values.”

Although the federal banking regulators have yet to weigh in with a specific set of ESG requirements, that could change under the more socially progressive administration of President Joe Biden. “One thing the regulators are trying to figure out is when a [bank] takes an ESG strategy and publicizes it, how do they ensure that there’s comparability so that investors and other stakeholders are able to make the appropriate decision based on what they’re reading,” he says.

There are currently several key vacancies at the bank regulatory agencies. Biden has the opportunity to appoint a new Comptroller of the Currency, a new chairman at Federal Deposit Insurance Corp. and a new vice chair for supervision at the Federal Reserve Board. “There’s a unique opportunity for some new [ESG] policy to be set,” says Koeser. “I wouldn’t be surprised if we see in the next two to three years, some formality around that.”

Koeser says he does sometimes encounter resistance to an ESG agenda from some banks that don’t see the value, particularly the environmental piece. “A lot of banks will just kind of say, ‘Well, I’m not a consumer products company. I don’t have a manufacturing division. I’m not in the transportation business. What is the environmental component to me?’” he says. But in his discussions with senior executive and directors, Koeser tries to focus on the broad theme of ESG and not just one letter in the acronym. “That brings down the level of skepticism and allows the opportunity to engage in discussions around the totality of this shift to an ESG focus,” he says. “I haven’t been run out of a boardroom talking about ESG.”

Koeser believes there is a systemic process that banks can use to get started on an ESG program. The first step is to identify a champion who will lead the effort. Next, it’s important to research what is happening in the banking industry and with your banking peers and competitors. Public company filings, media organizations such as Bank Director magazine and company websites are all good places to look. “There’s a wealth of information out there to start researching and understanding what’s happening around us,” Koeser says.

A third step in the formation process is education. “The [program] champion should start presenting to the board on what they’re finding,” Koeser says. Then comes a self-assessment where the leadership team and board compare the bank’s current state in regards to ESG to the industry and other institutions it competes with. The final step is to begin formulating an ESG strategy and building out a program.

Koeser believes that many banks are probably closer to having the building blocks of an effective ESG program than they think. “It’s really just a matter of time before ESG will become something that you’ll need to focus on,” he says. “And if you’re already promoting a lot of really good things on your website, like donating to local charities, volunteering and supporting your communities, there’s a way to formalize that and begin this process sooner rather than later.”

What Drives Success in Banking?

As a founder and managing principal at Castle Creek Capital, a private equity firm that invests in community banks, John Eggemeyer has a unique perch from which to observe what’s going on in banking.

The San Diego-based firm has approximately $900 million under management, and usually has between 20 to 25 banks in its investment portfolio at any given time, according to Eggemeyer.

We have the opportunity to look at a lot of different ideas,” he says. “I don’t consider myself to be an originator of any particularly interesting ideas, but I am an observer of a lot of interesting ideas that other people have worked with and made success of — or not made success of.”

Eggemeyer may be selling himself a little short. Prior to starting Castle Creek in 1990, he spent nearly two decades as a senior executive for several large U.S. banks. He also sits on the boards of many of those portfolio companies, and that combined experience gives him a very strong sense of what drives success in banking.

Eggemeyer will moderate a panel discussion at Bank Director’s upcoming Acquire or Be Acquired Conference focusing on subtle trends that bankers need to be talking about. The conference runs Jan. 30-Feb. 1, 2022, at the JW Marriott Desert Ridge Resort and Spa in Phoenix.

In today’s banking market, Eggemeyer believes that success begins with the customer. Period. End of sentence.

“It’s critical that you understand who your customer is and what your customer wants,” he says. “I think we’ve learned from the fintech community that they have segmented the customer [base] and identified very clearly the customer that they’re going after. And they have built their service model around the needs and wants of their customer group. And I think that has been harder for banks to actually do from an intellectual standpoint.”

Increasingly, success in banking is also a matter of scale. Not necessarily scale in the size of the organization, but scale in product lines or customers. “The businesses that have the greatest value, and the customer segments that offer the greatest value, are those that are the most scalable,” Eggemeyer says. “And again, I think in the fintech world, they have figured out how to apply technology to the needs and wants of the segment that they’ve gone after, and that has allowed their businesses greater scalability. … Businesses that are the most scalable offer the greatest opportunities for generating incremental returns.”

A cynic might argue that applying technology to scalable customer segments is fintech’s game, not banking’s. But Eggemeyer disagrees. “I’m not sure that fintechs are better positioned to apply technology to financial services than our banks,” he says. “So much of the technology that one would apply either operationally or in serving the customer is available off the shelf. You just have to be committed to making that transition.”

A third driver of success is talent; Eggemeyer says there is “an acute shortage of highly skilled trained executives” in the banking industry today. Talent and institutional knowledge has left as the bank space as the industry has gone through a number of difficult economic periods, he says, and banks managed their expense base in part by shortchanging the training and development of younger employees.

“I’ve watched this over a lot of cycles having spent over 50 years in the business. The great era of training in the bank industry was pre-1986,” he says. “And [since] that period of time, we have successfully downsized our investment in the development of people. And I think now we’re facing that challenge.”

In 1968, Eggemeyer was hired by the First National Bank of Chicago while still pursuing his undergraduate degree at Northwestern University. The bank had a program that hired up to 10 undergraduates a year for an extensive training program, then put them through an MBA program — in Eggemeyer’s case, at the University of Chicago. He spent 10 years working for the bank and was never in the same position for more than two years. That experience provided him with a very broad introduction to the industry.

The U.S. economy has changed greatly since the late 1960s. Graduates from top MBA programs today have many more options to choose from if they’re interested in a career in finance, including investment banking and private equity.

“It’s much harder for banks to compete for that level of talent,” Eggemeyer says. “And I don’t think there’s anything that you can do about that, other than look harder for the talented people who are not necessarily aspiring to [work in] private equity. And they may come from less traditional backgrounds, unlike the program that I went through at the First National Bank of Chicago. I just don’t see that happening very much in banking today.”

Aligning Strategy and the Board

The board plays an important role in guiding the bank’s strategy and supporting the strategic plan. That requires a varied mix of skills, backgrounds and expertise in the boardroom. In this video, Scott Petty of Chartwell Partners shares the gaps that some boards may need to fill, and provides tips on how to expand your board’s network to attract candidates.

  • Three Questions to Consider
  • Attributes Every Board Needs
  • Building Diversity in the Boardroom
  • Expanding Your Network

Stacking the Deck: Secrets of High-Performing Banks

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.

Reconsidering Pay Strategy in the Wake of Inflation

Say goodbye to the Goldilocks economy, where moderate growth and low inflation sustained us for years. Our global economy and social norms have careened from crisis to crisis over the last 24 months. The world has faced down a pandemic, unprecedented restriction of interpersonal interactions, and disruption of worldwide supply chains. And yet the world economy is booming.

Opinions vary about the reality, root cause, and associated solutions for inflation and low unemployment. But what’s critical is that the growing expectation of future inflation is a self-fulfilling prophecy, and that it stresses the systems for retaining and motivating employees.

Inflation simply is another type of disruption, albeit one that impacts companies and employees at nearly every level. Higher input costs lead to lower corporate margins. Higher costs of goods lead to lower individual savings rates (i.e., margins).

People costs are rising, too. Thinking about people cost as in investment allows strategic discussion about maximizing return. The good thing about people investments relative to say, commodity costs, is that cost levers are largely in corporate control and the tradeoffs can be managed. We view it as an imperative to consider changing pay strategy to reflect the reality of a world where the dollar does not go as far.

Companies and boards should think about how well pay strategy addresses four needs:

Need 1: Is our pay/reward strategy about more than dollars and cents?
Employees have far more choices for employment at this time and can command dollars from multiple places and roles. It is worthwhile to think hard about culture — what makes your culture unique, what people value in their roles, and what might be missing — and then build incentives and reward systems that support those activities in balance with financial performance.

Need 2: Does the pay strategy create the right balance of stability and risk?
Adapting pay programs to be more “risk-off” in the face of a highly uncertain external environment may be appropriate. Think about employees as managing to a “total risk” equation. When the expectation was that corporate growth was close to a given, then the risk meter could accommodate taking more risks to earn potentially more money.

Need 3: Are we making the best possible bets on our top talent?
Paradoxically, it might be a time to take more talent risk by digging deep to find your best people and providing them with differentiated rewards, visibility and responsibility. This is the heart of performance management, and it can always improve. The increased risk comes from investing more in fewer people. What if the assessment turns out to be incorrect or if someone leaves? Managing this risk versus avoiding it is the path to success.

Need 4: How are we sure performance in the face of a more volatile outside world is being rewarded?
This is the most “structural” of the needs. Elements to consider would include:

  • Higher merit budgets
  • More modest annual incentive upside and downside
  • Incorporation of relative measurement into incentive programs
  • Rationalization of equity participation and limitations to a smaller group as needed
  • Designation of equity awards based on overall dilution or shares awarded versus dollar amounts

Each of these needs has material tactical considerations that require much discussion about implementing, communicating and managing change. But unlike other major costs, rising people costs present an investment opportunity for increased returns rather than just a hit to the bottom line.

Why the Time is Right to Enable Payments on Real-Time Rails

Despite strong adoption worldwide, U.S. financial institutions have been slow to embrace real-time payments.

This reluctance is largely due to the complexity of the financial landscape, established consumer payment habits and lack of a federal mandate driving change. But the coronavirus pandemic fueled greater demand for real-time payments, as consumers and businesses increasingly transact digitally. As the share of real-time payment transactions in the U.S. doubled in 2020, financial institutions have an opportunity to launch real-time services that meet demand and enhance the customer experience.

Real-time payments are irrevocable, account-to-account payments that can be initiated through any device — laptop, mobile, or tablet. Because they are cleared and settled nearly instantly, 24 hours a day, seven days a week, 365 days a year, the funds are available to the recipient immediately. This has significant cash flow and liquidity advantages over traditional payment options.

More than 60 countries are live with real-time payment systems today, and real-time payments grew 41% globally from 2019 to 2020. The U.S. ranks ninth worldwide with 1.2 billion transactions; well behind real-time leader India, which had 41 million real-time transactions per day in 2020.

The Clearing House was an initial driver of real-time in the U.S., launching its RTP® network in 2017. Currently reaching more than 60% of U.S demand deposit accounts, RTP is open to any federally insured depository institution. The Federal Reserve’s FedNow, which is now live with a pilot program, will drive further adoption when it launches in 2023. 

Real time payments have been primarily driven by person-to-person (P2P) and consumer-to-business (C2B) uses cases. Services like Zelle®, which was introduced in 2017 by Early Warning Services (EWS), have propelled adoption by making it easy for consumers to pay digitally; for example, paying a friend for dinner or making a rent payment on the day it’s due. In late 2020, Zelle® was integrated with RTP, making these transactions truly real time.

EWS reported a 51% year-over-year increase in Zelle® transactions in the third quarter of 2021, noting growing use of its service by businesses. Having the flexibility to pay rent, process payroll or pay for supplies in real time has particularly strong benefits for small businesses with liquidity challenges.

Disbursements also represent a growing use case, with businesses taking advantage of the ability to efficiently send refunds and make other payments in real time. An insurance company paying claims following a car accident or hurricane could avoid the overhead associated with processing paper checks. At the same time, real-time disbursements boost customer satisfaction by making funds available immediately. Payroll is another example, with the gig economy companies particularly benefitting from the ability to pay workers instantly.

Nowhere has the need for real-time payments been more apparent than in issuance of pandemic stimulus checks. As Federal Reserve Board Governor Lael Brainard said, “The rapid expenditure of COVID emergency relief payments highlighted the critical importance of having a resilient instant payments infrastructure with nationwide reach, especially for households and small businesses with cash flow constraints.”

Request for Payment
Popular in countries like India, Request for Payment is emerging as a convenient tool to facilitate real-time payments on a mobile device. A push notification and short series of prompts detail the payment request, and the payee can authorize payment from a banking app within a few clicks.

Businesses using Request for Payment benefit from immediate funds availability and a more efficient, cost-effective billing process; consumers gain convenience and control. Consumers issuing Requests for Payment can use it to avoid awkward reminders to friends or colleagues by simply sending a request digitally when money is owed.

Establishing a Real-Time Strategy
As financial institutions look to broaden their real-time payments offering, it’s important to consider the technological infrastructure needed to support them. As transactions and use cases continue to grow, both consumers and businesses will come to expect real-time options from their financial institution, and availability of well-established services like Zelle® and newer tools like Request for Payment will become table stakes.

A partnership with a digital banking provider that not only prioritizes real-time payment offerings today, but also has plans for future integrations with real-time focused fintechs, will prove critical to long-term success.

The Evolving, Post-Pandemic Role of Management and Directors

Many community bankers and their boards are entering the post-pandemic world blindfolded. The pandemic had an uneven impact on industries within their geographic footprints, and there is no historical precedent for how recovery will take shape. Government intervention propped up many small businesses, disguising their paths forward.

Federal Reserve monetary policies have hindered the pro forma clarity that bank management and boards require to create and evaluate strategic plans. Yet these plans are more vital than ever, especially as M&A activity increases.

“The pandemic and challenging economic conditions could contribute to renewed consolidation and merger activity in the near term, particularly for banks already facing significant earnings pressure from low interest rates and a potential increase in credit losses,” the Federal Deposit Insurance Corp. warned in its 2021 risk review.

Bank management and boards must be able to understand shareholder value in the expected bearish economy, along with the financial markets that will accompany increased M&A activity. They need to understand how much their bank is worth at any time, and what market trends and economic scenarios will affect that valuation.

As the Office of the Comptroller of the Currency noted in its November 2020 Director’s Book, “information requirements should evolve as the bank grows in size and complexity and as the bank’s environment or strategic goals change.”

Clearly, the economic environment has changed. Legacy financial statements that rely on loan categories instead of industries will not serve bank management or boards of directors well in assessing risks and opportunities. Forecasting loan growth and credit quality will depend on industry behavior.

This is an extraordinary opportunity for bank management to exploit the knowledge of their directors and get them truly involved in the strategic direction of their banks. Most community bank directors are not bankers, but local industry leaders. Their expertise can be vital to directly and accurately link historical and pro forma information to industry segments.

Innovation is essential when it comes to providing boards with the critical information they need to fulfill their fiduciary duties. Bank CEOs must reinvent their strategic planning processes, finding ways to give their boards an ever-changing snapshot of the bank, its earnings potential, its risks and its opportunities. If bank management teams do not change how they view strategic planning, and what kind of data to provide the board, directors will remain in the dark and miss unique opportunities for growth that the bank’s competitors will seize.

The OCC recommends that boards consider these types of questions as part of their oversight of strategic planning:

  • Where are we now? Where do we want to be, and how do we get there? And how do we measure our progress along the way?
  • Is our plan consistent with the bank’s risk appetite, capital plan and liquidity requirements? The OCC advises banks to use stress testing to “adjust strategies, and appropriately plan for and maintain adequate capital levels.” Done right, stress testing can show banks the real-word risk as certain industries contract due to pandemic shifts and Fed actions.
  • Has management performed a “retrospective review” of M&A deals to see if they actually performed as predicted? A recent McKinsey & Co. review found that 70% of recentbank acquisitions failed to create value for the buyer.

Linking loan-level data to industry performance within a bank’s footprint allows banks to increase their forecasting capability, especially if they incorporate national and regional growth scenarios. This can provide a blueprint of how, when and where to grow — answering the key questions that regulators expect in a strategic plan. Such information is also vital to ensure that any merger or acquisition is successful.

How Banks Can Solve the Problem of the Unbanked

The tenacious problem of the unbanked may have a powerful opponent: a consumer-friendly checking account offered by banks across the country.

More than 7 million U.S. households didn’t have a bank account in 2019, according to the Federal Deposit Insurance Corp.; and a quarter of those households were “very or somewhat interested” in opening one. To close that gap, more than 100 financial institutions have certified one of their checking accounts as safe, affordable and transparent. The program, called Bank On, aims to leverage banks as a community partner to make it easier and cheaper to bring unbanked and underbanked individuals into the bank space.

The Bank On program pairs certified checking accounts issued by local banks to community programs that support financial empowerment and wellbeing. The account standards were created by the Cities for Financial Empowerment Fund, with input from financial institutions, trade associations, consumer groups, nonprofits and government parties. The accounts must be “safe, affordable and fully transactional,” says David Rothstein, who leads the national Bank On initiative as a senior principal at the CFE Fund. These accounts don’t carry overdraft fees or high monthly fees. They have a low minimum opening deposit and the account holder must be a full bank customer, with access to other services.

The standards address some of the concerns that unbanked households have about bank accounts or their experience with banking. Almost 50% of respondents told the FDIC that they didn’t have enough money to meet minimum balance requirements, 34% said account fees were too high and 31% said fees were too unpredictable (respondents could select more than one reason).

The FDIC found that not having a bank account translates into greater reliance on potentially costly nonbank financial services. Among unbanked households, 42% said they used money orders.

“People are far more likely to reach their savings goals when they have a bank account and they’re getting [financial] counseling. They’re much more likely to improve their credit scores and pay down debt as well,” Rothstein says.

Chicago-based First Midwest Bancorp recently decided to certify its Foundation Checking account, a product it has offered for decades that is at the crux of how the bank helps its customers find financial success and independence. First Midwest offers Foundation Checking customers financial counseling either in-house or through nonprofit partners; having a Bank On-certified account was a “natural extension” and puts the $21.6 billion bank on the radar of even more nonprofit partners that are focused on financial wellness within its Illinois, Wisconsin and Iowa markets, says Thomas Prame, head of retail banking. He adds that the application process was simple and smooth.

Millions of Bank On accounts have been opened in recent years. The Federal Reserve Bank of St. Louis maintains a data hub of account activity submitted by 10 participating banks, ranging from Bank of America Corp. and JPMorgan Chase to $2.9 billion Carrollton Bank, the bank unit of Carrollton, Illinois-based CBX Corp.

More than 5.8 million accounts have been opened at these banks to date; 2.6 million accounts were open and active in 2019. The Federal Reserve Bank of St. Louis found that almost $23 billion was deposited into Bank On-certified accounts at those banks in 2019, according to its most-recent report, with an average monthly balance of $345 per account. A little more than a quarter of the account holders used direct deposit; three-quarters were digitally active. In 2019, 85% of the customers who opened a Bank On-certified account at one of these banks was a new customer.

Adoption of these accounts is “greatest in areas with high concentrations of lower-income and minority households,” using zip code as a proxy, according to a July analysis of the data by the Bank Policy Institute, a big bank trade association. In 2017, nearly 60% of new Bank On-certified accounts were for customers residing in a zip code with more than 50% ethnically diverse populations, even though 30% of the participating bank branches were in these zip codes.

Banks that offer certified accounts are eligible to receive credit for the Community Reinvestment Act for the accounts themselves as well as volunteering or financially contributing to local coalitions that promote these accounts within their markets. Additionally, the accounts can attract new and younger customers to a bank, forging relationships that could deepen over time as the customer ages. More than 115 financial institutions have certified one of their accounts in the program.

Account certification is simple and straightforward. The CFE matches a bank’s account to the terms and conditions of the program and alerts the institution if it needs to make any changes. Certification can take as little as a week; the CFE can also pre-certify an account that hasn’t launched yet. Banks with qualifying accounts can use the Bank On seal of approval in marketing and other communications.

2021 Governance Best Practices Survey Results: Who’s Driving Bank Strategy?

The best banks balance short-term thinking with long-term strategy.

“Long-term performance is always our paramount objective,” Bank OZK Chair and CEO George Gleason told Bank Director at its recent Inspired by Acquire or Be Acquired virtual event. The $27 billion bank topped Bank Director’s 2021 RankingBanking study. “If short-term results suffer because of our focus on long-term objectives, then that’s just part of it.”

Strategic discipline starts with a bank’s leadership team — and the board should play an important role in developing the strategy and monitoring its execution. But that’s not always the case, according to the results of the 2021 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP.

The survey explores the board’s approach to strategic planning, as well as governance practices, board composition and the relationship between executives and the board. The results find that most boards don’t drive strategic planning at their institutions: Just 20% say the board drives this process and collaborates with management to develop the strategic plan. Most — 56% — say their board establishes the risk appetite but relies on management to develop the strategy.

The vast majority believe their strategic planning process is effective. But of the 11% who believe their process to be ineffective, some express regret over the lack of input from their board. One respondent believes their bank’s strategic plan to be “too in the weeds,” while another holds the opposite concern. “It flies at 30,000 feet for [the] most part,” says one independent chair. “[We] need to get a little closer to the ground with metrics and clear paths for management to build.”

Most — 84% — reviewed their strategic plan during the pandemic, but few shortened the time horizon of their strategy. This may seem surprising, given previous indicators that Covid-19 accelerated bank strategy in some areas, particularly around the implementation of digital technology. Perhaps this indicates that, for most bank leadership teams, balancing short-term results and long-term strategy remains top of mind.

Key Findings

Strategic Review
Three-quarters of respondents say their board reviews the strategic plan annually. Roughly two-thirds bring in an outside advisor or consultant to assist in developing the strategic plan — but not generally every year.

Board Responsibilities
When asked to identify the board’s most important functions, the majority of respondents point to holding management accountable for achieving goals in a safe and sound manner (61%) and meeting its fiduciary responsibilities to shareholders (60%). Just 34% say that setting strategy is a key board responsibility.

Competitive Pressures
Respondents say that pressure on net interest margins (52%), the ability to grow organically in their markets (44%) and meeting customer demands for digital options (37%) threaten the long-term viability of their bank.

Interacting With Management
The vast majority of independent directors, chairs and lead directors believe they’re getting the right level of information from bank executives. Almost all interact at least quarterly with the bank’s CEO (98%), CFO (94%) and chief risk officer (85%).

Credible Challenge
Three-quarters say their board has several directors willing to ask tough questions when warranted; 92% find their management team receptive to feedback.

Needle Moving on Board Diversity
Almost 60% believe that fostering diversity in the boardroom improves corporate performance. Thirty-nine percent have three or more board members who bring diverse characteristics to the board, based on gender, race or ethnicity.

Assessing Performance
Less than half conduct an annual evaluation of their board’s performance, which most use to assess the effectiveness of the board as a whole (84%), improve governance processes (60%), identify training needs for the board (59%) or assess committee performance (58%).

To view the full results of the survey, click here.