The Biggest Changes in Banking Since 1993


acquire-1-25-19.pngWhen Bank Director hosted its first Acquire or Be Acquired Conference 25 years ago, Whitney Houston’s “I Will Always Love You” held the top spot on Billboard’s Top 40 chart.

Boston Celtics legend, Larry Bird, was about to retire.

Readers flocked to bookstores for the latest New York Times best seller: “The Bridges of Madison County.”

Bill Clinton had just been sworn in as president of the United States.

And the internet wasn’t yet on the public radar, nor was Sarbanes Oxley, the financial crisis, the Dodd-Frank Act, Occupy Wall Street or the #MeToo movement.

It was 1993, and buzzwords like “digital transformation” were more intriguing to science-fiction fans than to officers and directors at financial institutions.

My, how times have changed.

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When we introduced Acquire or Be Acquired to bank CEOs and leadership teams a quarter century ago, there were nearly 11,000 banks in the country. Federal laws prohibited interstate banking at the time, leaving it up to the states to decide if a bank holding company in one state would be allowed to acquire a bank in another state. And commercial and investment banks were still largely kept separate.

Today, there are fewer than half as many commercial banks—of the 10 banks with the largest markets caps in 1993, only five still exist as independent entities.

It’s not only the number of banks that has changed, either; the competitive dynamics of our industry have changed, too.

Three banks are so big that they’re prohibited from buying other banks. These behemoths—JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp.—each control more than 10 percent of total domestic deposits.

Some people see this as an evolutionary process, where the biggest and strongest players consume the weakest, painting a pessimistic, Darwinian picture of the industry.

Yet, this past year was the most profitable for banks in history.

Net income in the industry reached a record level in 2018, thanks to rising interest rates and the corporate tax cut.

Profitability benchmarks in place since the 1950s had to be raised. Return on assets jumped from 1 percent to 1.2 percent, return on equity climbed from 10 percent to 12 percent.

Nonetheless, ominous threats remain on the horizon, some drawing ever nearer.

  • Interest rates are rising, which could spark a recession and influence the allocation of deposits between big and little banks.
  • Digital banking is here. Three quarters of Bank of America’s deposits are completed digitally, with roughly the same percentage of mortgage applications at U.S. Bancorp completed on mobile devices.
  • Innovation will only accelerate, as banks continue investing in technology initiatives.
  • Credit quality is pristine now, but the cycle will turn. We are, after all, 40 quarters into what is now the second-longest economic expansion in U.S. history.
  • Consolidation will continue, though no one knows at what rate.

But it shouldn’t be lost that certain things haven’t changed. Chief among these is the fact that bankers and the institutions they run remain at the center of our communities, fueling this great country’s growth.

That’s why it’s been such an honor for us to host this prestigious event each year for the past quarter century.

For those joining us at the JW Marriott Desert Ridge outside Phoenix, Arizona, you’re in for a three-day treat. Can’t make it? Don’t despair: We intend to share updates from the conference via BankDirector.com and over social media platforms, including Twitter and LinkedIn, where we’ll be using the hashtag #AOBA19.

Today’s Outlook For Bank M&A



Bank Director’s 2019 Bank M&A Survey finds that many banks see themselves as prospective acquirers. However, as a result of a recent wave of industry optimism—fueled by strong loan demand and regulatory relief—fewer banks may want to sell in 2019. So how can buyers position themselves to win in a more competitive M&A marketplace? Rick Childs, a partner at survey sponsor Crowe LLP, shares how a strong strategy is key to success. He also provides his outlook for the banking environment in 2019.

  • Advice for Prospective Acquirers
  • Expectations for Bank M&A in 2019

In accordance with applicable professional standards, some firm services may not be available to attest clients. © 2019 Crowe LLP, an independent member of Crowe Global. crowe.com/disclosure

Dealing With Nonbank Buyers


merger-1-16-19.pngMergers and acquisitions in the banking industry historically have been relatively straight forward, but things are beginning to change.

Typically, there’s a familiar pattern: Bank A wants to sell. Banks B, C and D bid, and the winner moves forward with a merger at the bank or holding company level.

Over the past few years, there have been more instances where the buyer is not a traditional bank. Investor groups, fintech entities, credit unions and other nontraditional bank acquirers are becoming more interested in acquiring banks. There may be specific regulatory or operational challenges when the buyer is not a traditional bank or bank holding company.

Here are some factors that sellers should keep in mind at the beginning of the process.

The acquirer and transaction will need approval from regulators. If a buyer is not already “known” to banking, regulators may scrutinize the transaction more than if a traditional bank were involved.

Individual investors may need to submit Interagency Biographical and Financial Reports, or IBFRs, and that process may be more invasive and time consuming than a person not familiar with the banking industry would expect. If the buyer is forming an entity that will eventually control the bank, then the Federal Reserve will need to approve it as a bank holding company in connection with the change in control.

Ensure the buyer is prepared for the process. The sophistication and deal experience of nontraditional buyers varies broadly. Working through the process with investor groups and credit unions is important. Regulators may expect to see a detailed business plan regarding how the buyer plans to operate the bank following the transaction.

A seller should carefully review the business plan prior to committing to a transaction to ensure it is viable and to be comfortable regulators will approve the plan. In many instances, it may be appropriate to have pre-transaction conferences with the regulators to get their preliminary indication on any strengths and weaknesses of the proposed acquirers and their business plan.

The seller’s management team may be required post-closing. Many nontraditional buyers will not have their own, full management team in place to run the organization after closing. In those situations, the buyer may have additional pressure to deliver management along with the transaction.

Sellers should ensure management is on board with the transaction and that appropriate compensation tools like change-in-control agreements and stay-bonus arrangements are in place at the start of the process. Additionally, both parties should work early in the process to lock in any post-transaction employment arrangements.

Understand and negotiate the transaction structure. In a bank-to-bank transaction, the buffet of possible deal structures is fairly limited. The menu may expand with a nontraditional buyer, if it does not already have a holding company or existing entity formed. Depending on the situation, particularly the desired tax treatment by both parties, transactions can be structured as a stock purchase or merger at either the holding company or bank level. It is important to plan the transaction structure early, as it will impact what regulatory and corporate approvals are needed to complete the transaction.

Be sure the board is aware of, and understands, alternative strategies. There is enhanced risk that it will be more difficult to obtain regulatory approval for a transaction with a nontraditional buyer, and it may take longer to close the transaction. Therefore, it is that much more important that the board understands the process. For a potential seller, the board should be aware of the alternatives, so the company can change gears and execute a different strategy if the nontraditional buyer ends up not being a viable partner.

Every potential bank deal should be approached with the realization that the process can be lengthy. When a nontraditional buyer is involved, both the buyer and seller should work closely with one another in the beginning to help ensure that it will go as smoothly as possible. Fully understanding in the beginning what the resulting entity will look like at the end of the transaction (financially, structurally and operationally) is critical to being able to properly plan the transaction and to receive regulatory approval.

Four Interesting Insights From High-Performing Bank CEOs


insight-1-11-19.pngThere comes a point in the process of mastering a subject (in this case, banking) when reading books or articles, or studying data, begins to offer diminishing returns.

After reaching that point, the best way to maintain a steep learning curve is to speak directly with authorities on the topic.

There are lots of authorities on banking—academics, consultants and lawyers, to name a few—but the ones who know the most are seasoned executives sitting atop high-performing banks.

I had many conversations with top-performing bankers in 2018. Here are four of the most valuable insights I picked up along the way.

1. The benefit of skin in the game
People in business talk all the time about the importance of a long-term mindset. Thinking long-term is especially critical in banking, given the leverage used by banks and the severe cycles that afflict the industry.

Unfortunately, in a world geared toward quarterly performance, maintaining a long-term mindset is easier said than done. When times are good and there are no signs of economic trouble, it’s only natural to relax lending standards to maintain market share.

Steering clear of this requires discipline. And one way to impose discipline is through skin in the game. If executives own large stakes in the institutions they run, they’re less likely to take imprudent risks.

This was one of the takeaways from my conversation with Joe Turner, CEO of Great Southern Bancorp, one of the industry’s top-performing banks over the past four decades.

“There are always going to be cycles in banking, and we think the down cycles give us an opportunity to propel ourselves forward,” he said. “Having a big investment in the company plays into this. It gives you credibility with institutional investors. When we tell them we’re thinking long-term, they believe us. We never meet with an investor that our family doesn’t own at least twice as much stock in the bank as they do.”

2. The pace of innovation in banking
It’s tempting to think the pace of innovation in the banking industry has accelerated over the past few years.

Even most millennials can probably remember when they had to visit a branch to make a deposit or check their account balance. Today, by contrast, three-quarters of deposits at Bank of America Corp., the nation’s second biggest bank by assets, are completed through its digital channels.

But this doesn’t mean bankers are strangers to change, because they aren’t. The industry has been in an acute state of evolution since the 1970s, when laws against branch and interstate banking started to come down.

Furthermore, while change is indeed happening, perhaps even accelerating, one benefit associated with operating in a heavily regulated industry is it won’t change overnight.

This was one of the takeaways from my conversation with John B. McCoy, CEO from 1984-99 of the notoriously innovative Bank One, which is now a part of JPMorgan Chase & Co.

“The digital thing is happening—it’s changing things—but it’s not going at warp speed or anything,” said McCoy “Maybe one of the reasons is that banks are still highly regulated, so it’s hard for an outsider to come in and disrupt the whole system. … But absolutely it’s going to make a difference, and in 10 years things will look totally different than they look today. But I don’t see any one thing that will change things overnight.”

3. Continuous self-improvement
In 2015, Phil Tetlock, a Wharton Business School professor, published his book, Superforecasting: The Art and Science of Prediction.

Don’t let the corny title fool you. Tetlock is a leading authority on the accuracy of predictions. The book walks readers through an experiment he conducted to determine whether some people can forecast more accurately than others.

Not only did Tetlock find some people were in fact better at forecasting than others—the so-called superforecasters—he also found those people shared certain traits.

Foremost among those traits is perpetual beta, “the degree to which one is committed to belief updating and self-improvement.” According to Tetlock, perpetual beta was nearly three times as powerful a predictor as its closest rival, intelligence.

It should be no surprise then that many top executives at top-performing banks share a similar trait, dedicating large amounts of time to learning and self-improvement.

Here’s how Brian Moynihan, chairman and CEO of Bank of America, answered my question about what he reads:

“It’s an eclectic mix, but basically newspapers, periodicals and I get a lot of books sent to me. It’s mainly just a lot of articles. The world has changed. It used to be when I delivered papers in college that I’d read The Boston Globe, The New York Times and The Providence Journal because I delivered them every morning. I still read them, but where I pick up most stuff now is from the article flow on a given day coming through all the feeds.”

He went on:

“Reading is a bit of a short hand for a broader type of curiosity. The reason I attend conferences is to listen to other people, to pick up what they’re thinking and talking about. So it’s broader than reading. It’s about being willing to listen to people and think about what they say. It’s about being curious and trying to learn. That’s what we try to instill in our people. The minute you quit being educated formally your brain power starts to shrink unless you educate yourself informally.”

4. Continuity of leadership
Some sort of panic, crash or credit crisis has struck the banking industry an average of once every decade going back to the Civil War. Yet, every time a crisis strikes, it catches bankers by surprise and leads to legions of bank failures.

The problem is that each new generation of banker has to re-learn the lessons of history. And these lessons are often learned the hard way.

This is why it’s important for banks to maintain institutional consciousness, passing lessons learned from the older generation of bankers down to the younger generation.

One bank that’s done this particularly well is First Financial Bankshares, the dominant locally owned bank in West Texas and one of the top-performing regional banks in the country over the past two decades.

There are a number of explanations for First Financial’s success during this time, which encompasses the financial crisis, but one is that its current chairman and CEO Scott Dueser lived through an acute banking crisis in Texas in the 1980s and is determined to avoid doing so again.

“The 1980s was this super education,” said Dueser. “I learned what not to do. And I learned how to get out of problem loans. I’m so glad I went through it because I remember it today and am not ever going to go through it again. And that’s why in the 90’s [and through the financial crisis] we did so well. That’s the value of having somebody like me in a bank that remembers. All these young guys, they don’t remember that. So how do you teach them? Well, you just tell them this is what happens when you do that.”

2019 Bank M&A Survey: What’s Driving Growth


acquisition-12-3-18.pngOver the past year, Congress has passed both tax reform and regulatory relief—signed into law by President Donald Trump in December 2017 and May 2018, respectively. And the Trump administration has appointed regulators who appear to be more favorable to the industry, including former bankers Joseph Otting, to the Office of the Comptroller of the Currency, and Jelena McWilliams, to the Federal Deposit Insurance Corp.

As a result, the 184 bank executives and directors participating in the 2019 Bank M&A Survey, sponsored by Crowe LLP, voice a resoundingly positive view of Washington, particularly for Trump and Mick Mulvaney. Eighty-seven percent say the Trump administration has had a positive impact on the banking industry. The same percentage give glowing marks to Mulvaney, the interim head of the Consumer Financial Protection Bureau who has turned the agency into less of a regulatory cop and more into a regulator with an even-handed approach toward the financial industry.

The survey examines industry attitudes about issues impacting M&A and growth, along with expected acquisition plans and expectations for the U.S. economy through 2019. It was conducted in September and October 2018.

Tax reform had a big impact on the industry, with many making investments to grow their business. Thirty-seven percent say their bank invested in new growth initiatives as a result of tax reform, and 36 percent in new technology. One-quarter indicate the bank raised employee salaries, and 19 percent paid a one-time bonus to employees. Some shareholders saw gains as well: 25 percent of respondents say their bank paid a dividend, and 10 percent bought back stock.

When asked where the bank designated the largest percentage of its tax windfall, 32 percent point to new growth initiatives, and 26 percent to shareholders.

Additional Findings

  • More than half believe the current environment is more favorable for deals, and 50 percent say they’re likely to acquire another bank by the end of 2019.
  • Thirty percent believe their bank is more likely to acquire as a result of the Economic Growth, Regulatory Relief and Consumer Protection Act, which rolled back some regulations for the banking industry. Two-thirds indicate regulatory reform will have no impact on their M&A plans.
  • Acquiring deposits is very attractive to today’s potential dealmakers: 71 percent say the potential target’s deposit base is a highly important factor in making the decision to acquire. 
  • To better compete for deposits, 29 percent say their bank will acquire deposits via acquisition.
  • Fifty-three percent say branch locations in attractive or growing markets are highly important, and 49 percent place high value on lending teams or talented lenders at the target.
  • Despite more sympathetic regulators and the passage of regulatory relief, 72 percent say their bank’s examiners have grown no less stringent over the past two years.

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

Zelle Costs Bankers Money, Venmo Can Make Bankers Money


payments-11-29-18.pngZelle, the personal payments platform developed by a consortium of large banks, is poised to become the most used P2P app by the end of the year—outpacing PayPal’s Venmo service, according to the market research company eMarketer.

But does that make Zelle a must-offer capability for the banking industry? Not necessarily.

eMarketer projects the personal payments market to grow nearly 30 percent in 2018, to 82.5 million people—or about 40 percent of all smartphone users in the U.S.

Zelle was developed by the likes of JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. to compete with Venmo, Square Cash, also known more simply as just “the Cash app,” and other up-and-coming third-party P2P services.

You can think of Zelle as the banking industry’s containment strategy—just like France’s vaunted Maginot Line in World War II that was supposed to keep out the German army.

The network of banks offering Zelle has grown to 161, but is a closed system where consumers at participating banks can send personal payments—for free, and in real time—to anyone at another Zelle bank.

One factor that probably accounts for Zelle’s fast growth was the decision to include it in each participating bank’s mobile app. So, if a customer’s bank belongs to the Zelle network, they are automatically a potential user.

While Zelle is a weapon that banks can use to beat back Venmo and Square Cash, the third-most frequently used P2P app, it does have its drawbacks. While Zelle is both free to the user and instantaneous, it costs the participating bank between $0.50 to $0.75 per transaction. So as Zelle’s transaction volume increases, so will each bank’s costs.

Charging users a transaction fee to offset that cost probably isn’t realistic since Venmo and Square Cash are free, although Venmo does charge $0.25 for instant transfers. A good analogy is online bill pay. It costs banks something to offer that service, but most banks don’t charge for it. They offer it for free because all their competitors do, and because it’s a hassle for customers to disentangle their finances from one bank’s online bill pay service and connect with another bank’s service, which can be a disincentive to switching.

Free online bill payment has become table stakes in retail banking, and P2P may go that way as well. But P2P transaction volume has yet to build to such levels that there’s a sense of urgency for all banks to offer Zelle today, lest they find themselves at a competitive disadvantage.

“Urgency means I immediately need to get Zelle. I don’t necessarily think that’s the case,” says Tony DeSanctis, a senior director at Cornerstone Advisors. “Why am I better off offering a product where I’m going to pay 50 to 75 cents a transaction to move money … and also pay the fixed costs to [integrate] it?”

There is, in fact, an argument to offering Zelle and Venmo, or maybe just Venmo. If a bank allows its consumers to include the Venmo app in their digital wallet and prefund the account, Venmo will pay them an interchange fee on every transaction. So while Zelle costs its participating banks money, Venmo offers them a small revenue opportunity to offset their costs.

Zelle is also a private network (which means other people can’t see your transactions) that is marketed to all demographic groups. Venmo, on the other hand, is a social payment network popular with younger generations who are among its biggest users. Richard Crone, CEO of Crone Consulting LLC, says banks are missing out on an important opportunity in social payments.

“A social network is not about [being] social,” says Crone. “It’s a marketing platform and it’s the most effective marketing out there because it’s word-of-mouth. It’s a referral. It’s peer pressure. And that’s how Venmo grows virally.”

Embracing Zelle and other non-bank payments options like Venmo, Square Cash, Apple Pay Cash and Google Pay could be described as a ubiquity strategy. Both DeSanctis and Crone argue that banks should accommodate a variety of payment options within their mobile apps that are linked to their debit and credit cards, just to stay relevant in the evolving payments space.

The problem is that when it comes to payments, most banks really don’t have a strategy. And hiding behind a virtual Maginot Line probably isn’t going to work.

Indeed, history is instructive. The invading German army easily flanked the Maginot Line, which now serves as a metaphor for a false sense of security.

Correction: An earlier version of this article stated that transfers sent over the Zelle app do not occur in real time. This is incorrect. We regret the error.

Three Lessons for Bankers From Warren Buffett


strategy-11-16-18.pngIt’s reasonable to argue that the greatest banker in the United States today isn’t a banker at all—he’s an insurance guy.

You might have heard of him.

Warren Buffett.

As the chairman and CEO of Berkshire Hathaway, an insurance-focused conglomerate based in Omaha, Nebraska, Buffett oversees one of the largest portfolios of bank investments in the country.

Berkshire owns major stakes in a Who’s Who list of historically high-performing banks:

  • 9.9 percent of Wells Fargo & Co. 
  • 6.8 percent of Bank of America Corp.
  • 6.3 percent of U.S. Bancorp
  • 5.3 percent of The Bank of New York Mellon Corporation
  • 3.7 percent of M&T Bank Corp.

That Buffett made such substantial investments in banks isn’t a coincidence.

If there are two things he appreciates at a visceral level, owing to his experience in insurance, it’s leverage and cycles—the same two qualities that make banking so unique.

This is why it’s worth listening to Buffett when he opines on banking, as he often does in his annual letters and media interviews.

This is from his 1991 shareholder letter:

“When assets are 20 times equity—a common ratio in [the bank] industry—mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the ‘institutional imperative:’ the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.”

Buffett is referring to the havoc wreaked on banks during a pronounced downturn in commercial real estate in the early 1990s, when Berkshire bought 10 percent of Wells Fargo.

His point is that it’s critical for bankers to maintain discipline, especially when all of those around you are not.

Another thing Buffett talks about a lot is competitive advantage.

Here he is in a 2009 interview with Fortune:

“If you’re the low-cost producer in any business—and money is your raw material in banking—you’ve got a hell of an edge. If you have a half-point edge . . . half a point on $1 trillion is $5 billion a year.”

And here‘s a selection from his 1987 shareholder letter flushing out the idea more fully, though in the context of the insurance industry, which faces nearly identical competitive dynamics to banking:

“The insurance industry is cursed with a set of dismal economic characteristics that make for a poor long-term outlook: hundreds of competitors, ease of entry, and a product that cannot be differentiated in any meaningful way. In such a commodity-like business, only a very low-cost operator or someone operating in a protected, and usually small, niche can sustain high profitability levels.”

One nuance about efficiency in banking is it doesn’t just boost profitability directly by freeing up more revenue to fall to the bottom line; equally important is its indirect effect.

This is a point U.S. Bancorp’s chairman and CEO Andy Cecere made in a recent, albeit unrelated, interview about the bank with Bank Director.

Efficient banks needn’t stretch on credit quality to generate satisfactory returns, which reduces loan losses at the bottom of the credit cycle, Cecere says. And as a corollary, efficient banks can compete more aggressively for the most creditworthy customers, further limiting credit losses in tough times.

It isn’t a coincidence, in turn, that U.S. Bancorp has consistently been one of the industry’s most efficient banks and disciplined underwriters since its transformative merger nearly two decades ago.

And while neither Buffett nor his philosophy came up during the interview with Cecere, Berkshire Hathaway is one of U.S. Bancorp’s biggest shareholders.

A final lesson about banking that can be gleaned from Buffett involves his approach to mergers and acquisitions.

Buffett has said repeatedly in the past that he’d rather pay a fair price for a wonderful company than a wonderful price for a fair company. Also, all things being equal, Buffett has always preferred for existing management to stay and continue on their path of success.

“Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a ‘cheap’ price. Instead, our only interest is in buying into well-managed banks at fair prices.”

It’s a style reminiscent of the uncommon partnership approach to mergers and acquisitions used by John B. McCoy, who dined annually with Buffett, to transform the former Bank One from the third largest bank in Columbus, Ohio, into the sixth largest bank in the country, before later merging into JPMorgan Chase & Co.

In short, although it’s true that most people don’t think of Buffett as a banker, that doesn’t mean bankers can’t learn a lot from his observations on the industry.

How To Manage Talent in a Parfait Organization


talent-11-7-18.pngThe banking industry sits at an interesting crossroads from a talent management perspective. Demographically, many banks are layered like a parfait, with as many as four distinct generations working in the organization, each with its own set of personality traits, likes and dislikes.

The oldest generation—the baby boomer generation, now running the bank for several years—is beginning to retire in increasing numbers. The Generation X cohort, which follows the boomers, is moving into senior management, the best and brightest among them soon to rise to the CEO and CFO level, if they haven’t already.

Generation Y, otherwise known as millennials, are now far enough along in their careers to have gained some meaningful experience, and the really talented ones are identifiable to the bank. Most members of the final and largest cohort, Generation Z, are still in high school and college, although the oldest ones are entering the workforce. At 26 percent of the population, Gen Z will be a force for the next several decades.

This dramatic generational shift is forcing banks to become more proactive in how they manage their talent, particularly millennials, who will comprise a significant part of the industry’s workforce in the near future. The importance of creating opportunities for those individuals was a significant theme in day two of Bank Director’s 2018 Bank Compensation and Talent Conference, held at the Four Seasons Resort and Club at Las Colinas in Dallas, Texas.

In a session on talent management, Beth Bauman, an executive vice president and head of human resources at the Bank of Butterfield, a NYSE-listed $11 billion asset bank domiciled in Bermuda, described the situation at the bank when she joined it in 2015. Butterfield had frozen salaries and done relatively little hiring for several years as it struggled to recover from the financial crisis. So Bauman, along with senior management, has worked to bring in new talent so the bank can continue to grow.

A key element of that hiring effort has been to create a talent management program so Butterfield’s younger employees can have their careers guided, with the most talented groomed for higher positions within the bank.

Bauman sees this as a key to successfully managing the generational change occurring now throughout the industry. “Regardless of the size of your bank, you can have an effective talent management program,” she says.

Talent management has been very much on the minds of the conference attendees. In an audience survey that polled the 300-plus people who were there, 45 percent said it has become both more difficult and costly to attract and retain talented staff—a result not surprising in an economy where the unemployment rate is just 3.7 percent. Banking also has the disadvantage of not being perceived as an exciting employment opportunity for many job seekers, particularly millennials.

Sixty-one percent of the survey respondents said their bank is actively and intentionally recruiting younger employees like millennials and Gen Z’ers.

Similarly, more than 70 percent said in the last two years their bank has expanded its internal training programs to develop younger leaders within the organization.

As increasing numbers of baby boomers approach retirement (the youngest boomers are in their mid-50’s), and Gen X’ers take their place in the management hierarchy, it will create an opportunity for millennials to move up as well. Gen X’ers are the smallest of the four demographic groups at just 20 percent of the population, so the banking industry will be forced to rely disproportionately on millennials as this generational shift occurs.

This is why training programs that focus on talented younger employees in the organization are so important.

We’ve all heard the jibes about millennials’ self-absorption, or their refusal to return voicemail messages, but the fact is the oldest among them are already buying homes and raising families, and when the day comes to run the bank, they’ll need to be ready.

You’ll Never Guess Where BB&T Gets Its Big Ideas


strategy-10-19-18.pngIt is well worth any banker’s time to read the vision, mission and purpose statements of BB&T, the eighth biggest commercial bank in the United States.

They will sound at first like similar statements from any other bank, but what makes BB&T’s unique is the inspiration behind them.

They weren’t drawn up with the help of consultants or survey data; they are grounded instead in the writings of philosophers—classical thinkers as well as modern proponents of capitalism.

“The philosophers that influenced me the most are Aristotle, Thomas Aquinas, John Locke, and Ayn Rand,” writes John Allison, the chairman and CEO of BB&T from 1989 to 2008, in his 2014 book, The Leadership Crisis and the Free Market Cure.

BB&T has published an entire pamphlet outlining its culture, encapsulated in its vision, mission and purpose statements, which reduce to one key objective: “Our ultimate purpose is to create superior long-term economic rewards for our shareholders.”

The $223-billion bank based in Winston-Salem, North Carolina, doesn’t just talk the talk; it walks the walk. It ranks in the 98th percentile among publicly traded banks in terms of the total amount of shareholder value it has created during its time as a public entity.

Yet, there’s a nuance to BB&T’s philosophy on creating value that’s easy to overlook. It doesn’t talk about “maximizing” long-term economic rewards for shareholders; it talks instead about “optimizing” those rewards.

Why the difference?

As Allison writes in his book:

When free market economists and finance theorists refer to maximizing shareholders’ returns, they imply a long-term context. In the real world, maximizing tends to be a short-term concept. BB&T’s mission also focuses on ‘creating a safe and sound investment,’ The goal with this wording is to communicate to potential purchasers of the company’s stock that we are in the game for the long-term and will not take inordinate risk even if that risk could maximize short-term returns.

In no industry is a long-term view more important than banking. Banks, as a group, use more leverage than companies in any other industry, typically borrowing $10 for every $1 worth of capital.

This is by design, of course, as a principal purpose of banking is to leverage society’s capital to fuel economic growth—a point Bank of America’s chairman and CEO, Brian Moynihan, made in a recent interview with Bank Director:

[B]anks came up to help people borrow money, which helps economies grow faster. If you’re constrained to only your equity, you only have so much money to spend. But if you borrow against it, now you can spend more. That’s the magic of leverage in terms of accelerating progress.

But there is a downside to all that leverage—it makes banks vulnerable to economic cycles, explaining why more than 17,000 banks have failed since the Civil War.

Bankers are prone to the same impulses that, at the top of a cycle, cause real estate developers to break ground on skyscrapers, retailers to over-invest in inventory and technology entrepreneurs to believe that traditional rules of economics no longer apply.

The difference is that, thanks to leverage, there’s less margin for error in banking than there is in other industries. A mere 10 percent decline in the value of a typical bank’s assets will render it insolvent.

This is one reason BB&T chose the words of its mission statement so carefully in terms of “optimizing” as opposed to “maximizing” shareholder value.

Another reason is that shareholders aren’t a bank’s only constituency—there are also clients, employees and communities. A bank that doesn’t tend to all four is like a table with only three legs.

It’s by optimizing returns among multiple constituencies, in other words, that a bank can maximize the returns to anyone of them. And if a bank does that through multiple cycles, the outcome is even better.

The net result at BB&T, writes Allison, is that “we operate our business in a long-term context by adding value to our clients, employees, and communities and in that context create superior rewards for shareholders.”

In short, while Aristotle, Thomas Aquinas, John Locke and Ayn Rand may seem like an unlikely source for inspiration in banking, if BB&T’s success is any indication, it’s safe to say they were onto something.