The Emerging Impacts of Covid Stimulus on Bank Balance Sheets

In the middle of 2020, while some consumers were stockpiling essentials like water and hand sanitizer, many businesses were shoring up their cash reserves. Companies across the country were scrambling to build their war chests by cutting back on expenses, drawing from lines of credit and tapping into the Small Business Administration’s massive new Paycheck Protection Program credit facility.

The prevailing wisdom at the time was that the Covid-19 pandemic was going to be a long and painful journey, and that businesses would need cash in order to remain solvent and survive. Though this was true for some firms, 2020 was a year of record growth and profitability for many others. Further, as the SBA began forgiving PPP loans in 2021, many companies experienced a financial windfall. The result for community banks, though, has been a surplus of deposits on their balance sheets that bankers are struggling to deploy.

This issue is exacerbated by a decrease in loan demand. Prior to the pandemic, community banks could generally count on loan growth keeping up with deposit growth; for many banks, deposits were historically the primary bottleneck to their loan production. At the start of 2020, deposit growth began to rapidly outpace loans. By the second quarter of 2021, loan levels were nearly stagnant compared to the same quarter last year.

Another way to think about this dynamic is through the lens of loan-to-deposit (LTD) ratios. The sector historically maintained LTDs in the mid-1980s, but has recently seen a highly unusual dip under 75%.

While these LTDs are reassuring for regulators from a safety and soundness perspective, underpinning the increased liquidity at banks, they also present a challenge. If bankers can’t deploy these deposits into interest-generating loans, what other options exist to offset their cost of funds?

The unfortunate reality for banks is that most of these new deposits came in the form of demand accounts, which require such a high degree of liquidity that they can’t be invested for any meaningful level of yield. And, if these asset and liability challenges weren’t enough, this surge in demand deposits effectively replaced a stalled demand for more desirable timed deposits.

Banks have approached these challenges from both sides of the balance sheet. On the asset side, it is not surprising that banks have been stuck parking an increasing portion of the sector’s investment assets in low-yield interest-bearing bank accounts.

On the liabilities side, community banks that are flush with cash have prudently trimmed their more expensive sources of funds, including reducing Federal Home Loan Banks short-term borrowings by 53%. This also may be partially attributable to the unusual housing market of high prices and low volumes that stemmed from the pandemic.

As the pandemic subsides and SBA origination fees become a thing of the past, shareholders will be looking for interest income to rebound, while regulators keep a close eye on risk profiles at an institutional level. Though it’s too soon to know how this will all shake out, it’s encouraging to remember that we’re largely looking at a profile of conservative community banks. For every Treasury department at a mega bank that is aggressively chasing yield, there are hundreds of community bank CEOs that are strategically addressing these challenges with their boards as rational and responsible fiduciaries.

Visit https://www.otcmarkets.com/market-data/qaravan-bank-data to learn more about how Qaravan can help banks understand their balance sheets relative to peers and benchmarks.

The Topic That’s Missing From Strategic Discussions

As of Oct. 8, 2021, the U.S. experienced 18 weather-related disasters with damages exceeding the $1 billion mark, according to the National Oceanic and Atmospheric Administration (NOAA). These included four hurricanes and tropical storms on the Gulf Coast — the costliest disaster, Hurricane Ida, totaled $64.5 billion, destroying homes and knocking out power in Louisiana before traveling north to cause further damage via flash flooding in New Jersey and New York. Out West, the financial damage caused by wildfires, heat waves and droughts has yet to be tallied but promises to be significant. More than 6.4 million acres burned, homes, vegetation and lives were destroyed, and a hydroelectric power plant outside Sacramento even shut down due to low water levels.

These incidents weren’t unique to 2021. In fact, the frequency of costly natural disasters — exceeding $1 billion, adjusted for inflation — have been ticking up since at least the 1980s.

 

Scientists at the NOAA and elsewhere point to climate change and increased development in vulnerable areas such as coastlines as the cause of these more frequent, costlier disasters, but bank boards aren’t talking about the true risks they pose to their institutions. Bank Director’s 2021 Risk Survey, conducted in January, found just 14% of directors and senior executives reporting that their board discusses the risks associated with climate change at least annually. An informal audience poll at Bank Director’s Bank Audit & Risk Committees Conference in late October confirmed little movement on these discussions, despite attention from industry stakeholders, including regulators and investors that recognize the risks and opportunities presented by climate change.

These include acting Comptroller of the Currency Michael Hsu, who on Nov. 3 announced his agency’s intent to “develop high-level climate risk management supervisory expectations for large banks” above $50 billion in assets along with guidance by the end of the year. He followed that announcement with a speech a few days later that detailed five questions every bank board should ask about climate change. While his comments — and the upcoming guidance — focus on larger institutions, smaller bank boards would benefit from these discussions.

Hsu’s first two questions for boards center on the bank’s loan portfolio: “What is our overall exposure to climate change?” and “Which counterparties, sectors or locales warrant our heightened attention and focus?” Hsu prompts banks to dig into physical risks: the impacts of more frequent severe weather events on the bank’s markets and, by extension, the institution itself. He also asks banks to look at transition risks: reduced demand and changing preferences for products and services in response to climate change. For example, auto manufacturers including General Motors Co. and Ford Motor Co. announced in November that they plan to achieve zero emissions by 2040; those shifts promise broad impacts to the supply chain as well as gas stations across the country due to reduced demand for fuel.

Consider your bank’s geographic footprint and client base: What areas are more susceptible to frequent extreme weather events, including hurricanes, floods, wildfires and droughts? How many of your customers depend on carbon intensive industries, and will their business models be harmed with the shift to clean energy? These are the broad strategic areas where Hsu hopes boards focus their attention.

But the changes required in transitioning to a clean economy will also result in new business models, new products and services, and the founding and growth of companies across the country. It’s the other side to the climate change coin that prompts another question from Hsu: “What can we do to position ourselves to seize opportunities from climate change?

Some large investors agree. In Larry Fink’s 2021 letter to CEOs, the head of BlackRock reaffirmed the value the investment firm places on climate change, noting the opportunities along with the risks. “[W]e believe the climate transition presents a historic investment opportunity,” he wrote in January. “There is no company whose business model won’t be profoundly affected by the transition to a net zero economy – one that emits no more carbon dioxide than it removes from the atmosphere by 2050. … As the transition accelerates, companies with a well-articulated long-term strategy, and a clear plan to address the transition to net zero, will distinguish themselves with their stakeholders.”

Some banks are positioning themselves to be early movers in this space. These include $187 billion Citizens Financial Group, which launched a pilot green deposit program in July 2021 that ties interest-bearing commercial deposits to a sustainable-focused lending portfolio. The challenger bank Aspiration launched a credit card in November that plants two trees with every purchase. And $87 million Climate First Bank opened its doors over the summer, offering residential and commercial solar loans, and financing environmentally-friendly condo upgrades. Climate First is founder and CEO Kenneth LaRoe’s second bank focused on the environment, and he sees a wide range of opportunities. “I call myself a rabid environmentalist — but I’m a rabid capitalist, too,” he told Bank Director magazine earlier this year.

 

Select Green Initiatives Announced in 2021

Source: Bank press releases and other public information

Climate First Bank (St. Petersburg, Florida)
Specialized lending to finance sustainable condo retrofits and residential/commercial solar loans; contributes 1% of revenues to environmental causes.

Citizens Financial Group (Providence, Rhode Island)
Launched pilot green deposit program in July 2021, totaling $85 million as of Sept. 30, 2021.

Aspiration (Marina Del Rey, California)
Fintech introduced Aspiration Zero Credit Card, earning cash back rewards and planting two trees with every purchase.

JPMorgan Chase & Co. (New York)
Designated “Green Economy” team to support $1 trillion, 10 year green financing goal.

Bank of America Corp. (Charlottesville, North Carolina)
Increased sustainable finance target from $300 million to $1.5 trillion by 2030.

Fifth Third Bancorp (Cincinnati, Ohio)
Issued $500 million green bond to fund green building, renewable energy, energy efficiency and clean transportation projects.

 

Boards that don’t address climate change as a risk in the boardroom will likely overlook strategic opportunities. “Banks that are poorly prepared to identify climate risks will be at a competitive disadvantage to their better-prepared peers in seizing those opportunities when they arise,” Hsu said.

Hsu offered two additional questions for bank boards in his speech. “How exposed are we to a carbon tax?”references the price the U.S. government could place on greenhouse gas emissions; however, he also stated that the passage of such a tax in the near future is unlikely. The other, “How vulnerable are our data centers and other critical services to extreme weather?” certainly warrants attention from the board and executive team as part of any bank’s business continuity and disaster recovery planning.

Most management teams won’t be able to answer broader, strategic questions on climate initially, Hsu said, but that shouldn’t keep boards from asking them. “Honest responses should prompt additional questions, rich dialogue, discussions about next steps and management team commitments for action at future board meetings,” Hsu stated. “By this time next year, management teams hopefully should be able to answer these questions with greater accuracy and confidence.”

The Road Ahead for Digital Banking

DigitalBanking.pngThe largest bank in the United States, the $3.4 trillion global behemoth known as JPMorgan Chase & Co., hesitated to put a retail bank in the crowded and competitive United Kingdom in the past.

That changed in 2021. JPMorgan Chase CEO Jamie Dimon announced a digital retail bank with headquarters in London and a customer center in Edinburgh. But no branches.

International expansion was cost-prohibitive in the past, Dimon admitted, but the economics of banking have changed. Even the biggest U.S. banks, which haven’t abandoned branches, know that.

“What we always said is we’re not going to do retail overseas … I can open 100 branches in Mumbai or 100 branches in the U.K., and there’s no chance I’d gain enough share to make up for the additional overhead,” he said at a Morgan Stanley conference in June of 2021. “Digital changes that.”

This shifting landscape means digital platforms hold a lot of promise for banks seeking to grow profitably. This report, sponsored by Nymbus Labs, will focus on these business models, return on investment and elements of success of digital-first banks and banking platforms.

Of course, terms such as neobank, challenger bank and digital bank get thrown around a lot these days. Some of the newcomers are chartered and regulated banks. Others are offshoots of a bank. Most are financial technology companies that rely on banks to access payment rails, compliance programs or deposit insurance. For simplicity’s sake, we’ll call them digital banks. Whether they are banks or just call themselves a bank, we’ll include them in this report. The goal is to reveal how they are changing the banking marketplace.

To learn more, download our FinXTech Intelligence Report, Digital Banking: Profit and Purpose.

Three Things Bankers Learned During the Pandemic

It’s been well documented how the pandemic lead to the digitization of banking on a grand scale.

But what bankers discovered about themselves and the capabilities of their staff was the real eye-opener. Firms such as RSM, an audit, tax and consulting company that works with banks nationwide, saw how teams came together in a crisis and did their jobs effectively in difficult circumstances. Banks pivoted toward remote working, lobby shut-downs, video conferencing and new security challenges while funneling billions in Paycheck Protection Program loans to customers. The C-suites and boards of financial institutions saw that the pandemic tested their processes but also created an opportunity to learn more about their customers.

Overall, the pandemic changed all of us. From our discussions with the leaders of financial institutions, here are three major things bankers learned about themselves and their customers during the pandemic.

1. Customers Want to Use Technology
Banks learned that customers, no matter their generation, were able to use technology effectively. Banks were able to successfully fulfill the needs of their customers, as more devices and technologies are available to banks at all price points and varying degrees of complexity. Post-pandemic, this practice will continue to help increase not only internal efficiencies but convenience for customers. As banks compete with many of the new digital providers, this helps even the playing field, says Christina Churchill, a principal and national lead for financial institutions at RSM US LLP.

Did you have a telemedicine appointment during the pandemic? Do you want to go back to driving to a doctor and sitting in a waiting room for a short appointment, given a choice? Probably not. Nor will bank customers want to come to a branch for a simple transaction, says Churchill.

The pandemic made that all too clear. Banks had to figure out a way to serve customers remotely and they did. Digital account opening soared. Banks stood up secure video conferencing appointments with their customers. They were successful on many counts.

2. Employees Can Work Remotely
The myth that bankers were all working effectively while in the office was exposed. Instead, some found employees were more effective while not in the office.

Technology helped bridge the gap in the existing skill set: Bankers learned how to use technology to work remotely and used it well, says Brandon Koeser, senior manager at RSM. Senior leaders are finding that getting employees back to the office on a strict 8 a.m. to 5 p.m. schedule may be difficult. “Some bankers have asked me, ‘do we return to the office? Do we not go back?’” says Koeser. “And I think the answer is not full time, because that is the underlying desire of employees.”

After surveying 27,500 Americans for a March 2021 study, university researchers predicted that Covid-19’s mass social experiment in working from home will stick around. They estimate about 20% of full workdays will be supplied from home going forward, leading to a 6% boost in productivity based on optimized working arrangements such as less time commuting.

Still, many senior bank leaders feel the lack of in-person contact. It’s more difficult and time-consuming to coach staff, brainstorm or get to know new employees and customers. It’s likely that a hybrid of remote and in-person meetings will resume.

3. Banks Can Stand Up Digital Quickly
Banks used to spend months or years building systems from scratch. That’s no longer the case, says Churchill. Many banks discovered they can stand up technological improvements within days or weeks. Ancillary tools from third-party providers are available quickly and cost less than they did in the past. “You don’t have to build from scratch,” Koeser says. “The time required is not exponential.”

Recently, RSM helped a bank’s loan review process by building a bot to eliminate an hour of work per loan by simply pulling the documentation to a single location. That was low-value work but needed to be done; the bot increased efficiency and work-life quality for the bank team. A robotic process automation bot can cost less than $10,000 as a one-time expense, Churchill says.

Throughout this year, senior bankers discovered more about their staff and their capabilities than they had imagined. “It really helped people look at the way banks can process things,” Churchill says. “It helped gain efficiencies. The pandemic increased the reach of financial institutions, whom to connect with and how.”

The pandemic, it turned out, had lessons for all of us.

Risk Practices For Today’s Economy

Organizations’ ability to strategically navigate change proved crucial during the Covid-19 pandemic, which required financial institutions to respond to a health and economic crisis. The resiliency of bank teams proved to be a silver lining in 2020, but banks can’t take their eye off the ball just yet.

Bank Director’s 2021 Risk Survey, sponsored by Moss Adams LLP,  focuses on the key risks facing banks today and how the industry will emerge from the pandemic environment. In this video, Craig Sanders, a partner in the financial services practice at Moss Adams, shares his perspective and expertise on these issues.

  • Managing Credit Uncertainty
  • More Eyes on Business Continuity
  • Cybersecurity Today

How Digital Channels Can Complement Physical Branches

With the rise of digital services and changing customer habits during Covid-19, the future of brick-and-mortar banking may seem in doubt.

Looking ahead, physical bank branches remain crucial for any community bank’s outreach and distribution strategy, but their use and purpose will continue to evolve. Digital acceleration is an opportunity for community banks to reshape the in-person banking environment. Incorporating the digital channel allows banks to offer more comprehensive, customer-focused experiences that complement their brick-and-mortar branches.

Physical Banks Remain a Valuable Asset
Digital banking is a critical way for community banks to provide excellent service. Integrating best-in-class online services allows financial institutions of all sizes to compete against larger banks that may be slower to innovate. Digital branch tools can bring greater accessibility and convenience for customers, a larger customer base and enhanced automation opportunities.

While many customers are excited by digital tools, not every demographic will adapt right away. Customers of all ages may lack confidence in their own abilities and prefer to talk to someone in person. These visits can be a prime opportunity for staff to educate customers on how to engage with their digital platforms.

In-person banking is an opportunity for banks to offer above-and-beyond customer service, especially for more complex services that are difficult to replicate digitally. An in-person conversation can make all the difference when it comes to major financial decisions, such as taking out a mortgage or other loans. Customers may start out with remote tools, then visit a branch for more in-depth planning.

How One Community Bank Is Evolving
Flushing Bank in Uniondale, New York, is using digital account opening software to accelerate growth. The $8 billion bank’s mobile and online banking capabilities went live in March 2020 — the timing of which allowed the bank to more easily serve customers remotely. Digital deposit account openings comprised 19% of Flushing’s customer growth between April and June.

Implementing digital account opening expanded Flushing Bank’s geographic footprint. The online account opening software allowed the existing branches to become more efficient and have a wider reach within the surrounding community, servicing more customers without building new branches.

At the same time, in-person branches and staff remain irreplaceable for Flushing Bank. The bank is leveraging digital tools as more than just an online solution: New technology includes appointment booking, improved phone services and enhance ATM video capabilities, creating a digital experience that is safe, convenient and delightful.

Transforming Brick-and-Mortar Banking for the Future
Digital tools allow more transactions to occur remotely, which may lessen in-person branch traffic while expanding the institution’s geographic reach. Banks can focus on the transactions that do occur in person, and ensure that digital tools improve customer service in branches.

A report from Celent and Reflexis surveying banks on their current strategies noted how more institutions could use digital tools for maximum effect. Just as digital channels offer comprehensive data analysis capabilities, banks can more effectively track each customer’s in-person journey as well. One starting point is to determine why customers visit physical locations — in one case, a bank learned many customers come in looking for a notary and will quickly leave if one is not available.

The report suggests that digital tools can automate their staff’s workflow, ultimately contributing to an improved customer experience. For instance, only a third of surveyed banks offer digital appointment booking, a service that can create a more efficient experience for both customers and staff. Or, banks could onboard customers with account opening software on tablets at physical branches. These tablets are often easier for customers to understand, lower the burden on staff, and help prevent fraud with thorough identity validation.

Community banks have an opportunity during this transitional time to develop a digital strategy that complements their physical branches. A comprehensive plan includes best-in-class digital tools for remote transactions while bringing new digital capabilities to brick-and-mortar locations to ensure the highest-quality customer service.

Honing Your Strategic Vision

The financial institutions examined in Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP, demonstrate the fundamentals of successful, long-term performance. What can we learn from these top performers — and how should bank leaders navigate today’s challenging environment? Crowe Partner Kara Baldwin explores these issues, based on the lessons learned in the RankingBanking study, and shares her own expertise. To view the complete results of the 2021 RankingBanking study, click HERE.

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

Keeping the Digital Accelerant Going

Digital transformation and strategy are further examined as part of Bank Director’s Inspired By Acquire or Be Acquired, launched today on BankDirector.com. Click here to access the content.

The coronavirus pandemic has been an accelerant for digital bank transformations. Banks must now keep that fire going.

“There’s never been a more important time for bank executives to think strategically,” says Cornerstone Advisors cofounder Steve Williams. The pandemic accelerated digital transformation plans by about two to three years, he estimates. It will soon be up to opportunistic bankers to continue that transformation in order to better position their institutions for the future and increase shareholder value during what could be a prolonged economic recovery.

The pandemic’s impact on physical spaces like branches underscored the importance of digital channels, capabilities and products. No longer was it acceptable for institutions to tack digital offerings onto existing branch initiatives and force customers to do a cross-channel dance: Open an account or loan in the branch but service it online, for instance.

Going forward, outperformers will be the banks that successfully overhaul or transform legacy tech, expenses, buildings, organizational structures and vendor contracts into next-generation capabilities. Williams says smarter banks are led by executive teams with a focused strategy, that leverage data strategically and actively manage vendor partnerships, rather than relying on their core processors. They also attract the talent and skills that the bank will need in the future, rather than just filling the vacancies that exist today.

The first place that banks direct their energies and attention to continue their digital momentum is the legacy branch network, says Tim Reimink, a managing director at Crowe. Branches are expensive to operate, have been closed for an extended period of time and were potentially underperforming prior to the pandemic. Banks also have the data to prove that customers will continue banking with them if locations are closed, and that many are now comfortable using digital channels.

“Every single location must be evaluated,” says Crowe Senior Manager Robert Reggiannini. Executives should weigh the market opportunity, penetration and existing wallet share of small businesses and consumer customers, as well as how the branch fits in with the rest of the network. Rationalizing the network frees up capital to redeploy into digital transformation or other areas of operation that need greater investment in the post-pandemic economy.

Certainly some banks have gotten that message. It wasn’t uncommon to see banks across the country announce double-digit rationalizing efforts, often announcing they would cut 20%. In December 2020 alone, banks opened 43 branches but permanently closed 240, according to S&P Global Market Intelligence data. For the year, they opened 982 locations and closed 3,099.

Reducing the branch network will necessitate changes in how bank staff interact with customers, Reggiannini adds. Banks should not assume tellers at a branch will find the same success in the digital chat environment, call center or at in-person meetings conducted outside of the branch.

He says banks should train staff in developing the skills needed to service a customer outside of a branch and consider how they will manage and measure staff for flexibility and productivity. “Engagement with customers is going to be critical going forward,” Reggiannini says.

The branch network, and the foot traffic and relationships they used to attract, have been under pressure from digital banks, often focused on consumer and retail relationships. But Williams warns that the pandemic underlined the vulnerability of commercial relationships. Numerous fintechs competed successfully against banks in issuing Paycheck Protection Program loans from the Small Business Administration, and a number of businesses are shifting more of their relationships to payment processors like Stripe and Square.

“Disruption will come to business banking – not as fast as retail banking but it’s coming,” Williams says. “If we lose the deposit and business relationship with commercial customers, will banks be able to keep their returns? We don’t think so.”

Why Banks Should Scrap Their Digital Strategy

The last thing banks need when they pursue a digital transformation is a digital strategy.

Not too many banks get this right. Rather than create a digital strategy, companies instead need one cohesive enterprise strategy for how to be the best in serving their clients’ needs.

Setting up distinct channel strategies, or a digital strategy that runs outside of your bank strategy, only generates a bunch of disparate go-to-market ideas. That siloed approach puts your bank on a road to failure by generating and instigating conflicts, as teams vie for differentiated levels of support and resources to strengthen now-competing channels.

Instead of standing on its own, digital should shape and drive your single banking strategy. You are striving for integrated omnichannel delivery, which will translate into the best experience no matter how customers engage with you. Even if you want customers to handle the overwhelming percentage of their banking online, many will continue to walk into branches, particularly for complex transactions like mortgage applications, and call you with questions.

Granted, safer-at-home guidance in response to the coronavirus pushed digital adoption forward, more by necessity than desire. In July, nearly five months after the pandemic started, 91% of consumers conducted banking online, mostly to deposit checks or review account balances. Even more striking: 40% of consumers reported using their bank’s mobile app more often. But bankers shouldn’t take these adjustments for granted or consider them permanent.

Customers don’t care that different teams manage your digital, branch and telephone channels. They want to trust you to meet them wherever they are, and not have to explain who they are and what they want every time they interact with your bank. Digital allows you to walk that fine line with insights to follow their electronic footprints to specific products that match their financial needs.

Digital Is a Tool, Not a Product
This is so important that I need to repeat it: Digital is a tool, not a product.

I already know some folks are saying, “But, yes, it is. We produced a mobile app.” That’s not the same. You created that app for its own purpose. It also needs to be connected to something else — your banking systems — and deliver a real solution.

Granted, your bank needs digital visionaries who can envision powerful, engaging capabilities and stay ahead of customers. But these leaders must start with your banking strategy and weave their innovative ideas into that bedrock. Your team should be constantly stepping up its capabilities and services, and positioning them in a near-linear fashion alongside the customer journey so that customers can get what they want, when they need it.

And while you should never have a distinct digital strategy, you do need a dedicated team to monitor and track performance in this channel and identify new customer needs and opportunities. This is the essence of digital transformation, as you continue iterating your offerings and migrating more customers and transactions into your digital channel.

Changing the Internal Mindset
Digital transformation is about changing who you are as a bank and bringing that to your customers. The starting point is always your enterprise strategy, which anchors your value propositions on how you serve customers and your role in the community.

Every bank associate will have a role in achieving the future vision defined in that strategy. Be clear on how digital connects to your bank strategy and communicate expectations so that everyone from the call center team to the C-suite understands where they fit in. Even as your bank inches forward, it remains on a treadmill: continuing to advance to stronger performance that outpaces the competition but never crossing the finish line.

As you develop your bank’s enterprise strategy, establish and monitor metrics upfront to gauge success and maturity, including in the digital channel. Some metrics to consider include improved efficiency, the amount of customers adopting digital behaviors and successfully escalating the right transactions in your digital channel.

Be sure to measure progress in three dimensions: Are you getting more efficient as customers migrate to higher digital usage? Are you freeing up funds to invest in other initiatives? And are you maintaining the customer experience that defines your bank?

Because if you lose that in the long run, you’re going to lose your customers.

Strategic Insights from Leading Bankers: WSFS Financial Corp.

RankingBanking will be further examined as part of Bank Director’s Inspired By Acquire or Be Acquired, featured on BankDirector.com, which will include a discussion with WSFS CEO Rodger Levenson and Al Dominick, CEO of Bank Director, about weaving together technology and strategy. Click here to access the content.

Digital transformation in the banking industry has become an important factor driving deal activity, evidenced by recent acquisition announcements involving First Citizens BancShares, PNC Financial Services Group and Huntington Bancshares. A more tech-forward future also drove $13.8 billion WSFS Financial Corp.’s August 2018 acquisition of $5.8 billion Beneficial Bancorp, expanding its presence around Philadelphia and putting it well over the $10 billion asset threshold. Importantly, it provided the scale WSFS needed to make a $32 million, five-year investment in digital delivery initiatives.

The Wilmington, Delaware-based bank’s long-term focus on strategic growth, particularly in executing on its digital initiatives, led to a fourth-place finish in Bank Director’s 2021 RankingBanking study, comprised of the industry’s top performers based on 20-year total shareholder return. Crowe LLP sponsored the study. Bank Director Vice President of Research Emily McCormick further explores the bank’s digital transformation in this conversation with WSFS Chairman and CEO Rodger Levenson. The interview, conducted on Oct. 27, 2020, has been edited for brevity, clarity and flow.

BD: How does WSFS strategically approach strong, long-term performance?

RL: It comes from the top. The board has always managed this company with the goal of sustainable long-term performance, high performance. Every discussion, every decision and every strategic plan that we put together is looked [at] through that lens. And I would point to the most recent decision around the Beneficial acquisition as an opportunity for us to invest in [the] long term while recognizing that we’d have some short-term negative impact. And by that I mean, if you look back over the last decade or so, coming out [of] ’09, 2010 — WSFS had been on a fairly consistent, nicely upward-sloping trajectory of high performance. … But what the board said as part of our strategic planning process and the conversation with Beneficial was that we could only continue down that path for so long if we didn’t address a couple of important issues.

One was, if you look at that growth, it was primarily centered on our physical presence, mostly in Delaware. It’s our home market, but it’s a pretty small market, less than a million people. A very nice economy, but certainly not as robust as we grew to the size that we had grown to support that. We needed to get into a larger market, particularly into Philadelphia, [which is] very robust demographically, very large to give us that opportunity to continue to grow at above-peer levels.

The second thing as part of that process is like everybody else — and this was obviously all pre-pandemic — we were analyzing and watching our customers shift how they interacted with us to more digital interaction and less physical interaction. And we said, for us to keep up we’re going to have to start shifting some of that long-term investment, that we’ve historically [put] into building branches, into funding our technology initiatives.

The two of those things came together for Beneficial, [which] obviously gave us the larger market; it also gave us the scale to attack that transition from physical to digital. We knew it would impact earnings for a couple of years while we put that together and prepared for the next decade or so of growth. The board had a very robust dialogue around the trade-offs that were involved, and clearly said that we need to manage the company for the long term.

This is a great opportunity to invest in the long term; we’ll take the short-term knock on performance because of where we’re ultimately headed. We saw that with the reaction of the Street to our stock price, but that didn’t change or waiver the long-term vision. … Our board principles and guidelines [have] been ingrained in us all the way down through management: If you want to provide the best long-term value for your shareholders, you have to not get tied up in quarter-to-quarter or year-to-year performance. You have to look at it over longer horizons and make decisions that support that.

BD: How are you strategically approaching technology investment?

RL: It was really a decision to follow our customers. … There’s nothing we can do to try and compete with [the] big guys. You know the stats. You know how many billions of dollars they’re spending on technology. We’re not trying to catch up to them or be like them. We want to have a digital product offering that allows us to be very flexible and have optionality so that when new products and services come along that our customers want, we can move quickly toward offering those products and services, and have an offering that is competitive with the big guys, but maybe not the bleeding edge. We’re marrying it with the traditional community bank model of access to decision-making, local market knowledge [and] a high level of associate engagement, which translates into what we think is world-class service. Our vision is to have a product offering that we can marry up with those other things that will allow us to compete effectively against the big guys.

Most of what the big guys spend their money on is R&D. They have teams and teams of technology people, data [scientists and] all those other things, because they’re building their proprietary products and services. Our view is we don’t have to do that R&D, because that R&D is getting done in the fintech space for us.

BD: WSFS has brought on board some high-level talent around digital transformation; you’ve also got expertise on the board. You’re working to recruit more in the data space, as well as building your in-house technology expertise. In addition to building relationships with fintechs, why is that internal expertise important, and how are you leveraging that?

RL: When we got started on this, we had almost nobody focused on it in the company. We realized for us to be as effective as we felt we needed to be, we needed to have some teams that were fully involved in this as a day-to-day job. In terms of funding it, obviously we closed or divested a quarter of our branches with Beneficial after the deal. When you do that, you not only have the cost savings from the savings in the lease expense, but there’s people expense as well. Fortunately, even though net/net, our positions in our retail network decreased by about 150 from those closures or divestitures, nobody lost their job. We were able to absorb that through natural attrition or in the one case, we sold six of our branches in New Jersey, and all those people were guaranteed a job as part of that deal.

This was a process that occurred over the course of a year. It was methodically laid out, leading up to the conversion of the brand and the systems in August 2019. Over that year, our teams did a fabulous job [of] managing people and the normal attrition that goes on in that business. That gave us the ability to fund not only some of the technology that we’re buying, but also some of these other positions internally. It’s exactly aligned with shifting that investment that we made in branches — which is not just the bricks and mortar; it’s the people, it’s the technology, it’s everything else — shifting a chunk of that into digital. This is a part of that whole process.

EM: How did the pandemic impact your strategy?

RL: The pandemic confirmed and accelerated everything that we’ve seen over the last few years, and reinforced our desire to [respond] as quickly as we can to the acceleration of these trends. Clearly, 2020 has been a totally different year because of remote work and all those things, but the longer-term trends have been validated and reinforced the strategic direction that we embarked upon before the pandemic. At some point, we will start moving back to a more normal environment, and we feel like we’re uniquely positioned.

It feels like there’s not a week that goes by with a bank that’s announcing some big branch reduction program and shifting that money into digital. We’re not trying to pat ourselves on the back, but I do think we happened to have that opportunity with Beneficial. It provided us the forum for attacking that issue sooner rather than later, so we’ve got somewhat of a head start down that road. This is just a confirmation of everything we saw when we did that analysis.