The Evolving, Post-Pandemic Role of Management and Directors

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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

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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?

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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.

Using Profitability to Drive Banker Behavior

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There used to be a perception that bankers found it tough to innovate because they are largely left-brained, meaning they tend to be more analytical and orderly than creative right brainers. While this may have been true for the founding fathers of this industry, there’s no question that bankers have been forced into creativity to remain competitive.

It could have been happenstance, natural evolution, or the global financial crisis of 2008 — it doesn’t matter. Today’s bankers are both analytical and creative because they have had to find new, more convenient pathways to profitability and use those insights for continuous coaching.

The current economic landscape may require U.S. banks to provision for up to $318 billion in net loan losses from 2020 to 2022, the Deloitte Center for Financial Services estimates. These losses are expected to be booked in several lending categories, mainly driven by the pandemic’s domino effect on small businesses, income inequality and the astounding impact of women leaving the workforce pushing millions into extreme poverty. Additionally, net interest margins are at an all-time low. Deloitte forecasts that U.S. commercial banks won’t see revenues or net income reach pre-pandemic levels until 2022.

In the interim, bankers are still under pressure to perform and increase profitability. Strong performance is possible — economic “doom and gloom” isn’t the whole story. In fact, the second-largest bank in America is projecting loan growth in 2021, of all years, after six years of decline. These industry challenges won’t last forever. so preparation is key. One of the first steps in understanding profitability is establishing if your bank’s business model is transactional, relational or a mix of the two, then answering these questions:

  • How much does a loan pay for the use of funds? How much does a deposit receive for the use of funds?
  • How much does a loan pay for the current period and identified level of credit risk?
  • How much capital does the bank need to assign to the loan or deposit?
  • What are the appropriate fees for accounts and services used by our clients?
  • What expenses are allocated to a product to determine its profitability?

There should never be a question about why loans need to pay for funds. The cash a bank provides for a loan comes from one of three sources: capital investments, debt and borrowing or client deposits.

From there, bankers have shown incredible creativity and innovation in adopting simpler, faster ways to better understand their bank’s profitability, especially through sophisticated technologies that can break down silos by including all clients, products and transactions in a single database. By comparison, legacy databases can leave digital assets languishing in inaccessible and expensive silos. Bankers must view an entire client relationship to most accurately price the relationship.

This requires a mindset shift. Instead of thinking about credit structure — the common approach in the industry – to determine relationship pricing, think instead about the client relationship holistically and leave room to augment as necessary. Pricing models should reflect your bank’s profitability calculations, not adjusted industry average models. And clients will need a primary and secondary owner to break down silos and ensure they receive the best experience.

How does any of this drive optimal banker behavior? A cohesive, structurally sound system that allows bankers to better understand profitability via one source of the truth allows them to review deal performance every six months to improve performance. Further, a centralized database allows C-suite executives to literally see everything, forging connections between their initiatives to banker’s day-to-day actions. It creates an environment where bankers can realize opportunities through execution, accountability and coaching, when necessary.

A Simple Tweak to Increase Financial Wellness, Engagement

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Between the economic uncertainty among U.S. consumers caused by the pandemic and some recent high profile predicaments involving new market entrants, now is the ideal time for bankers to stake their claim as true advocates for their customers’ financial well-being.

Too often, however, financial institutions are guilty of merely engaging in virtue signaling when it comes to their level of commitment in truly supporting their customers. But those institutions that truly focus on providing financial literacy and educational resources to their customers are realizing the benefits of those initiatives, most notably through the increased usage of bank services and increased brand loyalty and “stickiness” within their customer bases.

We know, for example, that just 14% of consumers utilize their bank’s bill pay services, and most of these customers tend to be baby boomers and Generation X. Banks are looking to deepen existing customer relationships, drive usage of available services like bill pay and add younger customers; but the first steps toward developing an impactful financial wellness program don’t have to be complicated. The key is focusing in on an existing need that customers and providing immediate, tangible value to them.

Upwards of 80% of consumers in the U.S. overpay their monthly bills — creating an opportunity for bankers. Each of these consumers are in a position to generate savings simply by renegotiating routine services, canceling recurring subscriptions and monitoring for service outages and added fees. Bills like cable, internet, phone, alarms and gym memberships are usually negotiable, especially since all of these providers typically face healthy degrees of competition within their own markets. Consumers are generally unaware of this, or lack the time needed to do so. By providing services like these to their customers, either directly or through strategic partnerships, bankers can become more active participants in supporting their customers’ financial wellness initiatives, and ultimately become more valued partners and advisors over time.

These incremental savings can add up into meaningful amounts for bank customers and are not difficult to identify. Canceling unwanted subscriptions that began as a free trial offer often yields noticeable results. Pairing subscription management or bill reduction with the transaction makes managing bills and associated costs a seamless, frictionless experience for customers. By providing customers a way to easily unsubscribe with the click of a button within the mobile app, banks can both increase customer engagement within the channel and strengthen customer relationships.

Banks are already ideally positioned to help consumers improve their financial wellness: they possess detailed customer information, transaction data and an established level of trust with their customers. The introduction of new technologies and new digital entrants into the retail banking industry have created an increasingly competitive market — particularly with U.S. consumers embracing a digital-first approach to banking. Banks must be more creative in developing ways to connect with their customers and nurture those relationships. The institutions that go beyond merely identifying themselves as financial wellness providers to actively playing a role in supporting customers stand to benefit the most.

Inspired by The Joshua Tree

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Thirty-four years ago, an Irish band came up with an album that sounded revolutionary for its time. U2’s “The Joshua Tree” went on to sell more than 25 million copies, firmly positioning it as one of the world’s best-selling albums. Hits like “I Still Haven’t Found What I’m Looking For” remain in heavy rotation on the radio, television and movies.

Talk about staying relevant. As it turns out, U2 has some wisdom for us all.

Relevance is one of those concepts that drives so many business decisions. For Bank Director, the term carries special importance, as we postpone our annual Acquire or Be Acquired Conference to January 30 through Feb. 1, 2022. In past years, this special event drew more than 1,300 bankers, bank directors and advisors to discuss concepts of relevance and competition in Phoenix.

While we wait for our return to the Arizona desert, we got to work on a new digital offering to fill the sizable peer-insight chasm that now exists.

The result: Inspired By Acquire or Be Acquired.

This new, on-demand offering goes live on February 4. Available exclusively on BankDirector.com, it consists of timely short-form videos, CEO interviews, live “ask me anything”-type sessions and proprietary research. Topics range from raising capital to deal-making, pricing to culture — and yes, technology’s continued impact on our industry.

Everything within this board-level intelligence package provides insight from exceptionally experienced investment bankers, attorneys, consultants, accountants, fintech executives and bank CEOs. So, with a nod towards Paul David Hewson (aka Bono) and his bandmates in U2, here’s a loose interpretation of how three of their songs from “The Joshua Tree” are relevant to bank leadership teams, together with our Spotify #AOBA21 playlist for your enjoyment.

With or Without You

(The question all dealmakers ask themselves.) 

Many aspects of an M&A deal are quantifiable: think dilution, valuation and cost savings. But perhaps the most important aspect — whether the deal ultimately makes strategic sense — is not. As regional banks continue to pair off with their peers, I talked with a successful dealmaker, D. Bryan Jordan, the CEO of First Horizon National Corp., about mergers of equals.

 

Where the Streets Have No Name

(Banks can help clients when they need it most.)

A flood of new small businesses emerged in 2020. In the third quarter 2020 alone, more than 1.5 million new business applications were filed in the United States, according to the U.S. Census Bureau, nearly double the figure for the same period the year before. Small businesses need help from banks as they wander the streets of their new ventures. So, I asked Dorothy Savarese, the Chair and CEO of Cape Cod 5, how her community bank positions itself to help these new business customers. One part of her answer really resonated with me, as you’ll see in this short video clip.

 

Running to Stand Still

(Slow to embrace new opportunities? Don’t let this become your song.)

With the rising demand for more compelling delivery solutions, banks continue to find themselves in competition with technology companies. Here, open banking provides real opportunities for incumbents to partner with newer players. Ideally, such relationships provide customers greater ownership over their financial information, a point reinforced by Michael Coghlan, the CEO of BrightFi.

These short videos provide a snapshot of the conversations and presentations that will be available February 4. To find out more about Inspired By Acquire or Be Acquired, I invite you to take a longer look at what’s on our two-week playlist.

Why Record Deposit Growth Should Spur Funding Rebalancing

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Is there such thing as a gold lining?

In a year with seemingly constant crises, finding silver linings has been crucial in maintaining optimism and planning for a post-pandemic future. Banks have faced myriad challenges, but core deposit growth may represent a fundamental strategic advantage for profitability enhancement.

Total FDIC-insured domestic bank deposit balances increased by nearly 18%, or just under $2.6 trillion, over the first nine months of 2020. While government stimulus efforts and the Federal Reserve’s return to a zero interest rate policy are driving factors, higher levels of deposits should remain on bank balance sheets into the foreseeable future. Forward-thinking banks should be proactive in repositioning this funding to aid profitability improvement for years to come. Core deposit growth gives banks a chance to reduce exposure to higher cost non-transaction deposits, brokered deposits, repurchase agreements and borrowings. But despite this year’s massive deposit inflows, the Federal Deposit Insurance Corp. reports that other borrowed funds have only declined by 12%, or $167 billion, over the first nine months of 2020.

Higher loan-loss provisioning in 2020 has strained net income across the banking sector, reducing net operating income to levels not seen since the Great Recession. This may make the costs of funding restructuring — such as prepayment fees or relationship discounts on loan pricing — seem like exorbitant earnings constraints, representing an impediment to action. We believe this is short-sighted.

Economic weakness and macro uncertainty has tempered loan growth, and forced banks to maintain larger balances of lower-yielding liquid assets on the asset side of the balance sheet. Most community banks remain heavily reliant on net interest income to drive higher operating revenues. But net interest margin pressure has accelerated in 2020; combined with negligible core loan growth (excluding participation in the Small Business Administration’s Paycheck Protection Program), operating revenues have been stuck in neutral. As a result, return on equity and return on assets metrics have suffered.

There are three reasons why banks should judiciously adjust their funding profiles while the yield curve maintains a positive slope and before competitive factors limit alternatives.

Driving higher core deposit balances in challenging economic times through above-peer rates not only promotes growth, but engenders customer goodwill and loyalty. Banks have the luxury of growing customer deposit balances by increasing their offered interest rates, which  can be offset by reducing the reliance on higher-cost borrowings. Furthermore, assuming the Federal Reserve’s interest rate policy stays in place for several years, future opportunities will emerge to gradually adjust core deposit products’ rates. 

Funding adjustments provide the chance to rethink deposit products, loans or investments that may no longer be core to the business strategy. Liability restructuring can be the impetus for corresponding changes to the asset side of the balance sheet. Perhaps certain loan categories are no longer strategic, or investment securities have moved beyond risk parameters. Asset and liability rebalancing can refresh and refocus these efforts. 

Banks with higher core deposits as a percentage of total deposits higher tangible book value (TBV) multiples than peers. Our research at Janney shows that for all publicly traded banks, price-to-TBV multiples are 15% higher for banks with core deposit ratios above 80% compared to banks with less than 80% core deposit ratios. Better funding should also result in a higher core deposit premium, when a more-normalized M&A environment returns.

Nobody expects banks to perfectly forecast the future, but it would be a low-probability wager to assume that Fed intervention and the current interest rate policy will remain in place indefinitely. Banks that allow market forces to dictate deposit pricing and borrowings exposure without taking action are missing a huge opportunity. Making mindful funding decisions today to reduce reliance on non-core liabilities lays the groundwork for changes in future profitability and shareholder value.

Strategic Planning in an Age of Uncertainty

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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.”

A Bank’s Most Valuable — and Riskiest — Asset

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“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
  • Leadership trust
  • Leadership inspiration
  • Disruption
  • Employee engagement
  • Performance management
  • Well-being
  • Sustainability
  • 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.

Jennifer Robison contributed to this article.

Don’t Under-estimate the Megabank Threat

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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.