Three Things You Missed at Experience FinXTech


technology-9-11-19.pngThe rapid and ongoing digital evolution of banking has made partnerships between banks and fintech companies more important than ever. But cultivating fruitful, not frustrating, relationships is a central challenge faced by companies on both sides of the relationship.

The 2019 Experience FinXTech event, hosted by Bank Director and its FinXTech division this week at the JW Marriott in Chicago, was designed to help address this challenge and award solutions that work for today’s banks. Over the course of two days, I observed three key emerging trends.

Deposit displacement
The competition for deposits has been a central, ongoing theme for the banking industry, and it was a hot topic of conversation at this year’s Experience FinXTech event.

In a presentation on Monday, Ron Shevlin, director of research at Cornerstone Advisors, talked about a phenomenon he calls “deposit displacement.” Consumers keep billions of dollars in health savings accounts. They also keep billions of dollars in balances on Starbucks gift cards and within Venmo accounts. These aren’t technically considered deposits, but they do act as an alternative to them.

Shevlin’s point is that the competition for funding in the banking industry doesn’t come exclusively from traditional financial institutions — and particularly, the biggest institutions with multibillion-dollar technology budgets. It also comes from the cumulative impact of these products offered by nondepository institutions.

Interestingly, not all banks struggle with funding. One banker from a smaller, rural community bank talked about how his institution has more funding than it knows what to do with. Another institution in a similar situation is offloading them using Promontory Interfinancial Network’s reciprocal deposit platform.

Capital allocation versus expenses
A lot of things that seem academic and inconsequential can have major implications for the short- and long-term prospects of financial institutions. One example is whether banks perceive investments in new technologies to be simply expenses with no residual long-term benefit, or whether they view these investments as capital allocation.

Fairly or unfairly, there’s a sense among technology providers that many banks see investments in digital banking enhancements merely as expenses. This mindset matters in a highly commoditized industry like banking, in which one of the primary sources of competitive advantage is to be a low-cost producer.

The industry’s justifiable focus on the efficiency ratio — the percent of a bank’s net revenue that’s spent on noninterest expenses — reflects this. A bank that views investments in new technologies as an expense, which may have a detrimental impact on efficiency, will be less inclined to stay atop of the digital wave washing over the industry.

But banks that adopt a more-philosophical approach to technology investments, and see them as an exercise in capital allocation, seem less inclined to fall into this trap. Their focus is on the long-term return on investment, not the short-term impact on efficiency.

Of course, in the real world, things are never this simple. Banks that approach this decision in a way that keeps the short-term implications on efficiency in mind, with an eye on the long-term implications of remaining competitive in an increasingly digitized world, are likely to be the ones that perform best over the long run.

Cultural impacts
One of the most challenging aspects of banking’s ongoing digital transformation also happens to be its least tangible: tailoring bank cultures to incorporate new ways of doing old things. At the event, conversations about cultural evolution proceeded along multiple lines.

In the first case, banks are almost uniformly focused on recruiting members of younger generations who are, by habit, more digitally inclined.

On the flipside, banks have to make hard decisions about the friction that stems from existing employees who have worked for them for years, sometimes decades, and are proving to be resistant to change. For instance, several bankers talked about implementing new technologies, like Salesforce.com’s customer relationship management solutions, yet their employees continue to use spreadsheets and word-processing documents to track customer engagements.

But there’s a legitimate question about how far this should go, and some banks take it to the logical extreme. They talk about transitioning their cultures from traditional banking cultures to something more akin to the culture of a technology company. Other banks are adopting a more-tempered approach, thinking about technology as less of an end in itself, and rather as a means to an end — the end being the enhanced delivery of traditional banking products.

A Dangerous Force in Banking


culture-8-23-19.pngThe more you learn about banking, the more you realize that just a few qualities separate top-performing bankers from the rest.

One of the most important of these qualities, I believe, is the ability of bankers to combat what famed investor Warren Buffett calls the “institutional imperative.”

Buffett, the chairman and CEO of Berkshire Hathaway, wrote about this in his 1990 shareholder letter:

“The banking business is no favorite of ours. When assets are twenty times equity — a common ratio in this 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.”

At the time, Buffett was referring to a credit-fueled bubble in the commercial real estate market. The bubble was in the process of popping; commercial real estate prices would decline 27% between 1989 and 1994.

The subprime mortgage and leveraged lending markets in the lead-up to the financial crisis offer more recent examples. No bank wanted to lose market share in either business line, even if doing so was prudent. This was the impetus for Citigroup CEO Chuck Prince III’s oft-repeated quote about having to dance until the music stops.

“When the music stops, in terms of liquidity, things will be complicated,” Prince told the Financial Times in 2007. “But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Here’s the problem: A bank that loses market share is vulnerable to criticism by analysts and commentators.

In 2006, for instance, JPMorgan Chase & Co. began offloading sub-prime mortgages and pulling back from the market for collateralized debt obligations. “Analysts responded by giving JPMorgan Chase what one insider calls ‘a world of [expletive] for our fixed-income revenues,’” writes Duff McDonald in “Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase.”

“One of the toughest jobs of the CEO is to look at all the stupid stuff other people are doing and to not do them,” a long-time former colleague of JPMorgan’s Chairman and CEO Jamie Dimon told McDonald.

You would think that analysts and commentators would, at some point, realize that it’s ill-advised to pressure bankers into prioritizing short-term results over long-term solvency, but there’s no evidence of that.

Darren King, the chief financial officer of M&T Bank Corp., noted at a conference in late 2018 that, “The narrative around the industry is that M&T has forgotten how to lend.”

M&T Bank has been one of the top-performing banks in the country since the early 1980s. King was referring to analysts and commentators’ reaction to the fact that M&T’s loan growth over the past two years has lagged the broader industry.

But as King went on to explain: “Generally what you find is when economic times are strong, we’re growing but generally not as fast as the industry. And in times of more economic stress, we tend to grow faster.”

So, how does a bank combat the institutional imperative?

The simple answer is that banks need to cultivate a culture that insulates decision-makers from external pressures to chase short-term performance. This culture is a product of temperament and training, as well as institutional knowledge about the frequency and consequences of past credit cycles.

This culture should be buttressed by structural support, too. Skin in the game among executives is a good example; a supportive board focused on the long term is another. A low efficiency ratio also enables a bank to focus on making better long-term decisions while still generating satisfactory returns.

In short, while the institutional imperative may be one of the most dangerous forces in banking, there are ways to defeat it.

Exclusive: How KeyCorp Keeps Diversity & Inclusion in Focus

Banks large and small are focusing more sharply on diversity and inclusion as a way to attract and retain the best talent, regardless of gender, race, ethnicity or sexual orientation.

One bank demonstrating a robust D&I program is $141.5 billion asset KeyCorp, headquartered in Cleveland, Ohio. It’s perhaps no coincidence that it’s the largest bank led by a woman: CEO Beth Mooney, who took the reins at the superregional bank in 2011 to become the first female CEO of a major U.S. financial institution.

Heading KeyCorp’s D&I efforts since 2018 is Kim Manigault, who joined Key in 2012. She previously served as the chief financial officer in the bank’s technology and operations groups; before that, she spent 12 years at Bank of America Corp. in similar roles.

“I’ve had lots of different opportunities at different organizations, but I’ll say in coming to Key, what I realized here is a really firm and demonstrated commitment to creating opportunities for women as well [as men] in our senior ranks,” Manigault told Bank Director Vice President of Research Emily McCormick, who interviewed her as part of the cover story for the 2nd quarter 2019 issue of Bank Director magazine. (You can read the story, “A Woman’s Place is in the C-Suite,” by clicking here.)

A strong D&I strategy isn’t solely the domain of big banks. In this transcript—available exclusively to members of our Bank Services program—Manigault delves into KeyCorp’s intentional and deliberate focus on diversity and inclusion, and shares the tactics that work within the organization.

She also discusses:

  • Components of KeyCorp’s D&I program
  • Measuring Success
  • Creating a Culture of Inclusion

The interview has been edited for brevity, clarity and flow.

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 Download transcript for the full exclusive interview

A Woman’s Place is in the C-Suite

As a young girl in Arkansas, Natalie Bartholomew always knew she wanted to be a banker. She collected credit card applications at department stores and deposit tickets from her grandfather, a banker, so she could “play bank” at home. She joined a junior bank board in high school and was employed as a teller by her senior year.

Today, Bartholomew is the chief administrative officer at Grand Savings Bank, a $455 million asset community bank based in Grove, Oklahoma. But as she was promoted through the ranks at a succession of Arkansas-based community banks, and began attending industry networking groups and conventions, she noticed something. “It was just a boys’ club,” she says. This isn’t an anecdote from banking’s yesteryears: Bartholomew is in her 30s. “Oh my gosh: This is the industry I’m in,” she thought at the time. “There are no other young females, and no wonder they don’t want to be here, because this is the road you have to go down, this is the hill to climb … these guys have ruled the roost for so long, then why would a young woman want to even attempt to conquer this industry?”

Women are ready, willing and able to lead in today’s C-suites and boardrooms: Forty-five percent of working women aspire to hold an executive role, according to Gallup’s research on women and the workplace. Yet, corporate America remains dominated by men. Fewer than 5 percent of S&P 500 companies are led by a female chief executive officer, including two financial services companies—Beth Mooney of KeyCorp and Margaret Keane of Synchrony Financial. Women hold just 21 percent of senior leadership roles, according to Catalyst, a nonprofit focused on promoting gender inclusion. In fact, the nonprofit claims there are fewer female leaders in the U.S. than there are men named John.

Too frequently, executives and boards assume women aren’t willing to work as hard or put in the long hours that can be required to advance through the ranks. That’s a misconception, says Teresa Tschida, a senior practice expert at Gallup. “Our research would say that, for women [who] want to move up to those senior roles, they are just as willing to work long hours.”

A gender-diverse leadership team can also strengthen strategic decisions. While individual strengths vary widely, women are generally better at relationship building, according to Gallup’s research, along with structure, routine and planning. “They do work smarter—they’re more efficient,” says Tschida.

A study examining the effect of gender diversity on profitability, published in 2016 by the Peterson Institute for International Economics, found “the correlation between women at the C-suite level and firm profitability is demonstrated repeatedly.” And the proportion of female executives and female board members is instrumental, which “underscores the importance of creating a pipeline of female managers and not getting lone women to the top.”

“Diverse teams bring different life experiences and different perspectives and function better,” says Deborah Streeter, a Cornell University professor who leads the Bank of America Institute for Women’s Entrepreneurship. Unfortunately, most companies have a “leaky pipeline” when it comes to female talent. “The pool of women, by the time you get to the C-suite level, is too small,” she says.

The gender-diverse executive team at $1.3 billion asset First United Corp., based in Oakland, Maryland, generates a positive reaction among its employees and community. Four executives on the seven-member senior management team are women, including the chief executive and chief financial officer. People “will comment to me how inspiring it is for them to see that the company provides opportunity equally,” says CEO Carissa Rodeheaver. “It’s really representative of the fact that you can do whatever you set your mind to, and it doesn’t matter what your gender is in moving through a company. It’s all about your ambition, it’s all about your skill sets, it’s all about your desire, it’s all about your passion to continue to move forward, whether you’re a man or a woman. We will recognize that—we’ll foster that, and we’ll help you to grow.”

In most cases, a leaky talent pipeline isn’t the result of outright discrimination, but rather relying on outdated approaches to leadership development and corporate culture.

Building diversity on leadership teams—in the C-suite and on the board—doesn’t happen by accident. It’s the result of intentional practices and strategies that reward women as well as men, and programs that help banks better identify and promote their best employees—regardless of gender.

“We’re not specifically aiming to have more women in our workplace. We’re aiming to be inclusive and have top talent, and we recognize that that talent comes in all shapes and sizes,” says Kim Manigault, the chief diversity and inclusion officer at Cleveland, Ohio-based KeyCorp, with $140 billion in assets. “That doesn’t happen by accident. That happens when you have a very direct and deliberate and committed focus on diversity and inclusion across all the programs and policies within your organization.”

Diversity can’t be achieved overnight. “It’s a long-term process of cultivating candidates inside the company,” says John Daniel, chief human resources officer at $41 billion asset First Horizon National Corp., based in Memphis, Tennessee.
A number of banks, including First Horizon and KeyCorp, have leadership development programs in place. “Women who get development—of any kind—actually show a greater confidence than the men who go through the same program in their ability to apply their skills, because they felt supported, and they got that development, and they worked on leadership skills,” says Stephanie Neal, a senior research consultant at the talent management firm Development Dimensions International, based in Pittsburgh, Pennsylvania.

Focusing on developing female leaders is paying off at Fifth Third Bancorp, says Chief Administrative Officer Teresa Tanner. Female employees at the $146 billion asset Cincinnati, Ohio-based bank were working hard but staying under the radar. So, the bank created a program—tailored to women—to address development gaps. “We really felt that doing a gender-specific program that could really talk about those skills that women need at an executive level, creating a safe space with other women to stretch and grow, would be a great investment,” she says. One-third of the program’s graduates have already received promotions or taken on new responsibilities. “It has far exceeded my expectations,” she says.

Personalized development plans can enhance development, especially for female employees. “It helps [leaders] to target where they put their energy and then, of course, they see greater results,” says Neal. Women, in general, tend to have specific development needs, including “building confidence, knowing how to build stronger networks, and knowing how to create greater influence in an organization, especially when the status quo works against them,” she says.

Fifth Third’s program works on building soft skills that may not be as readily developed among female talent—confidence in promoting oneself, for example, and learning how to network. “Things that we haven’t historically been so overt about teaching women how to do, and I’ve seen it pay off,” says Tanner.

Personalized development appeals to men and women—particularly to millennials. “We find this desire for the culture of coaching, and about growth and development, is coming from some of the younger generation in the workplace today,” says Tschida.

Individual development plans play a key role in developing executives at First United. “Every person in the company has an individual development plan, and it talks about areas where they feel that they are strong and want to continue to grow in, or areas where they have an opportunity to improve,” says Rodeheaver. The bank introduced a “skip-a-level” approach this year that has Rodeheaver reviewing all development plans for employees who report to her direct reports, so she can better understand where coaching is needed, which she sees as vital to succession planning.

“Succession doesn’t just happen at the executive level—it really needs to happen throughout the company,” Rodeheaver says. “This gives me the opportunity to look one layer below my direct staff to see, who do we need to continue to develop for succession in the future.”

Women are less likely to receive feedback on their performance, according to a study conducted in 2016 by McKinsey and LeanIn.org—underscoring the important role mentorship programs can play in developing female leaders.

Rodeheaver says she benefited personally when former CEO Bill Grant took her under his wing. “He opened doors for me, he introduced me to people in the industry,” she says. “If you look at our organization, we have a lot of women in leadership positions, so he was an excellent mentor for all of us and, I think, he really was a champion for women in the bank, not because he set women apart—because he didn’t set women apart.”

Unfortunately, women often don’t receive the same mentorship opportunities as men. There are a few reasons for this. First, few banks have a formal mentorship program in place. Just 15 percent of executives and directors said their bank offered a mentorship program in Bank Director’s 2018 Compensation Survey. Men hold the majority of executive positions, so informal programs tend to exclude women.

It can be difficult to naturally develop cross-gender relationships, so formalizing the process helps level the playing field between men and women to ensure the bank is developing the best employees, regardless of gender. “Leaving things to be more chance, more informal really puts those powerful mentorships for women at risk,” says Neal.

At KeyCorp, 450 employees participated in mentoring last year, says Manigault. Seventy percent of those mentor/mentee matches included a woman. “We had a significant component of those groups that were multicultural as well, meaning you can get guidance, coaching, development from somebody who doesn’t look like you, or who isn’t in the line of business you’re in or who hasn’t had the experiences you’ve had. It’s all about where you are going to get the guidance, coaching and development that’s the best for you.”

Employee resource groups, deployed at organizations like KeyCorp and First Horizon, also play an important role. “We have a population of women in our organization [who] want to come together, rise and grow through the ranks together, from junior level to executive level,” says Manigault.

Managers are particularly hesitant to provide constructive feedback to their female reports. Streeter refers to this lack of feedback as “ruinous empathy,” and despite the best intentions on the part of managers, it does more harm than good.

“Nobody can grow without feedback,” she says. Ruinous empathy cheats employees—particularly women—out of opportunities to improve and grow.

And rather than indirectly punishing talented female employees by declining to mentor them, male executives who feel nervous about interacting with women in the #MeToo era should rethink their approach. “Male leaders now say, ‘Look, I am worried, I don’t want to take a young woman to lunch at a restaurant, because I’m worried that I’ll be a target,’” she says. “If that’s true, don’t take either men or women for lunch at a restaurant, use a different method for interacting with them.” 
Reconsider other practices too, like networking on the golf course. That could be another practice that more frequently rewards men over women.

“Provide a safe structure, so people can become sponsors—it’s one of the major things that women lack in many environments is access to mentors and sponsors,” says Streeter. And executives should be responsible for developing potential successors. “Mentoring and sponsoring both women and men has to be part of the way that leaders are also evaluated by the board.”

Bartholomew found herself looking outside for mentors, and building that support system led her to create her blog, “The Girl Banker.” Women in banking are hungry for these connections—and they want advice, she says. “There [are] always a lot of questions about additional education and resources to help further them in their career,” says Bartholomew. Work/life balance is also a hot topic, and one of her most popular blog posts discusses so-called mom guilt. “Working moms, they love their children, they love their family, and they love their career, and they don’t want to be held back by either one,” she says.

Motherhood plays a big role in delaying or even derailing women’s careers, but banks can provide perks that benefit both men and women in the company, including expanded paternity/maternity leave benefits and flexible schedules.

At First United, flexibility can be as simple as giving employees—no matter their family situation—time to spend on what matters to them, whether that’s attending PTA meetings or coaching their child’s soccer team—or something else entirely, says Rodeheaver. That can mean working some hours from home as well, if the position permits it. “I don’t mind where you work, as long as the work’s getting done,” she says. “It’s very common for me to have my staff send me an email and say, ‘One of the kids is sick, I’m going to be working from home today.’ And it’s having that trust that they’re going to be able to pull that off.”

Some banks are rethinking the benefits they offer employees so they can better retain women or attract them back into the workforce. The “Career Comeback” program at the Swiss financial services company UBS Group offers permanent positions to men and women worldwide who want to reenter the workforce, along with the education and mentorship they need to make the transition.

Fifth Third has focused its efforts on retaining women through its maternity concierge program. “We were seeing women at mid-career leave the workforce at a much higher rate—it was almost double the turnover rate of a typical employee,” says Tanner. Employees who wanted to stay on to build their careers struggled to balance the demands of work and family. The solution? “We basically give someone their own personal assistant,” she says, to run errands, from getting groceries to planning a baby shower to helping buy a car seat. “They give them that extra set of hands that they need so that they can worry about work and continue in their career, but let somebody help them through this huge transitionary change in their life.” It’s had an impact on Fifth Third’s ability to retain these employees: Women who used the program were 25 percent more likely to stay on the job.

Women have access to the maternity concierge program until their child’s first birthday. After that, they can use the bank’s general concierge program, a similar perk offered to both men and women.

Access to expanded maternity perks and flexible scheduling can have a big impact on employees, but companies should also ensure they’ve removed any cultural stigmas around using these benefits, advises Cathleen Clerkin, a senior research faculty member at the nonprofit Center for Creative Leadership. If applicable, ensure that men and women are using the benefit equitably. For example, she says that women say flexibility is important to them, but research suggests men are more likely to receive this benefit. “Women might not want to ask what the options are, for fear of backlash,” she says.

Setting transparent policies around flexible scheduling and similar benefits can help combat this concern. “When there is fuzziness, that’s where you see implicit bias sneak in,” says Clerkin.

Implicit or unconscious bias—the unconscious stereotypes held by the average person—are perhaps the trickiest issue to tackle when creating an inclusive culture that rewards and advances all, rather than some, employees.

We all hold some form of unconscious bias. Most of us just don’t know it.

“For the most part, people really mean well, and they really want to support women,” says Clerkin. But leaders often make assumptions that don’t align with a talented female employee’s actual goals. It’s a pattern of behavior called protective hesitation, and results in fewer opportunities for women to grow as leaders. They may be passed up for a challenging assignment, for example, or a promotion that requires the employee to relocate. “There’s this protective hesitation around trying to do the right thing, [which] can actually prevent women from getting through the pipeline,” says Clerkin.

She recommends a simple solution. “It sounds so simple, but just asking women, ‘What do you want, how can I advocate for you, what kind of feedback do you need, what kind of positions do you want,’ instead of trying to guess what the best decisions are, I think is something that would really make a difference.”

At Fifth Third, the management committee—comprised of the bank’s top 100 leaders—recently spent two hours with a neuroleadership expert to learn more about bias and diversity. “We have to model it from the top, and we have to continue to educate and challenge the way we think about this,” says Tanner.

Streeter recommends a saying to weigh your own unconscious bias: “Detect, inspect, reject.” Detecting the bias requires being aware of the problem. From there, leaders should inspect whether a decision—who should be promoted to fill a key role, for example—is based on facts or influenced by bias. Based on that, the leader can then accept or reject a decision. 
First Horizon counteracts bias by conducting multiple panel interviews to determine who will be accepted into its leadership development program or fill senior roles. “Bias operates on individual decision making,” says Daniel. “If you’re working in a group, and you have what I would call real factors—competencies that are used as an assessment tool—the group selection process counteracts and helps offset a lot of the bias.”

Relying on personal networks tends to reward the male-dominated status quo, so a diverse slate of candidates must be considered before filling key positions. “Our search guys [are] told, ‘You will present us a diverse slate, and we will pick the best candidate,’” he says. “It’s not an accident that the last two hires that we made were both female.”

Transparency and measurement are crucial elements in a bank’s battle against unconscious bias. Relying on relationship-building over quantitative measures will ensure that a bank maintains the status quo—a primarily white, male C-suite with a couple of token diversity hires sprinkled in.

KeyCorp shares the progress it’s making on its diversity goals to anyone who visits its website. “We are very frank about our numbers,” even when those numbers make some uncomfortable, says Manigault. Monitoring and measuring helps KeyCorp understand what’s working and what’s not, and meet the diverse talent needs of business line leaders.

“Any time you can track who’s applying for positions and who’s getting them, what kind [and] how much resources people are getting—any time you can track metrics, it helps us find out where our blind spots are,” says Clerkin.

Are women advancing and developing at similar rates to men? Is there a wage gap between genders? These are the types of metrics companies can monitor, in addition to the composition of the leadership team and board, says Streeter. And set specific goals—just like you would for a line of business. “Nothing will happen if you don’t set a goal that is measurable, and then track it and work your way toward it,” she says.

And when performances are evaluated based on quantitative measures, rather than gut instinct or personal relationships, women fare better. And focus on the quality of the performance, not face time or hours spent in the office, says Tschida. “If you tell [women] what the outcome is, and you allow their more natural inclination to structure and discipline in their own right, they can be efficient, and they can hit that outcome in different ways,” she says. “Men would like that, too.”

Focusing on the employee’s outcome, rather than gut instinct, means the organization is advancing its best talent. That’s better for the bank.

Women tend to get stuck in organizations just below the C-suite. KeyCorp’s total workforce was 60 percent female in December 2017, compared to 27 percent for its executive and senior officers, and 31 percent for its board. At the end of 2016, FifthThird’s workforce looked roughly the same, with 61 percent women overall compared to 31 percent of its board, and 23 percent of its executive and senior team. At the end of 2018, First Horizon reported that 30 percent of its executive management committee was female, compared to 60 percent overall. And this is among banks that are actively working to create a more diverse workforce, rather than being content with the status quo.

All things equal, Streeter recommends hiring the diverse candidate. “When candidates are really quite equal, people will use some gut instinct—they will say something like, ‘She’s just not as good a fit as he is,’” says Streeter. “If all things are equal when you look at the qualifications of people, you’ve got to start opting in favor of diversity, if you lack diversity. That’s not giving women preferential treatment, it’s just saying, our corporation needs to have more diverse leadership, that’s one of our goals and to meet that goal, we have to start looking at environments and opportunities to diversify the leadership.”

That could also mean making the table a little bigger to include women. This enabled First Horizon to add more women to its executive management committee. “The enlargement of the committee was to make sure that we had the opportunity for lots of people to have a seat at the table when corporate decision making and policy making” occurred, says Daniel.

As for the lack of women ready to lead? Fifth Third’s Tanner calls that a cop out. “There are a lot of executive women out in the workforce … Go find them, and bring them to your company, and if they’re deeper in your organization, then develop and bring them up,” she says. “We have to quit with the excuses. If we really want to develop a workforce of tomorrow that is going to lead us into our future generations, we have to fix this, and we can’t do it at the rate we’ve been doing it.”

A Former Regulator Shares His Advice for Boards


regulator-6-13-19.pngDeveloping a positive relationship with regulators is important for any bank. How can banks foster this?

There’s no one better to answer this question than a former regulator.

Charles Yi served as general counsel of the Federal Deposit Insurance Corp. from 2015 to 2019, where he focused on policy initiatives and legislation, as well as the implementation of related rulemaking. He also served on the FDIC’s fintech steering committee.

In this interview, Yi talks about today’s deregulatory environment and shares his advice for banks looking to improve this critical relationship. He also explains the importance of a strong compliance culture and what boards should know about key technology-related risks.

Yi, now a partner at the law firm Arnold & Porter, in Washington, D.C., spoke to these issues at Bank Director’s Bank Audit & Risk Committees Conference. You can access event materials here.

BD: You worked at the FDIC during a time of significant change, given a new administration and the passage of regulatory relief for the industry. In your view, what do bank boards need to know about the changes underway in today’s regulatory environment?
CY: While it is true that we are in a deregulatory environment in the short term, bank boards should focus on prudent risk management, and safe and sound banking practices for the long term. Good fundamentals are good fundamentals, whether the environment is deregulatory or otherwise.

BD: What hasn’t changed?
CY: What has not changed is the cyclical nature of both the economy and the regulatory environment. Just as housing prices will not always go up, [a] deregulatory environment will not last forever.

BD: From your perspective, what issues are top of mind for bank examiners today?
CY: It seems likely that we are at, or near, the peak of the current economic cycle. The banking industry as a whole has been setting new records recently in terms of profitability, as reported by the FDIC in its quarterly banking profiles. If I [were] a bank examiner, I would be thinking through and examining for how the next phase of the economic cycle would impact a bank’s operations going forward.

BD: Do you have any advice for boards that seek to improve their bank’s relationship with their examiners?
CY: [The] same thing I would say to an examiner, which is to put yourself in the shoes of the other person. Try to understand that person’s incentives, pressures—both internal and external—and objectives. Always be cordial, and keep discussions civil, even if there is disagreement.

BD: What are some of the biggest mistakes you see banks make when it comes to their relationship with their examiner?
CY: Even if there is disagreement with an examiner, it should never become personal. The examiner is simply there to do a job, which is to review a bank’s policies and practices with the goal of promoting safety and soundness as well as consumer protection. If you disagree with an examiner, simply make your case in a cordial manner, and document the disagreement if it cannot be resolved.

BD: In your presentation at the Bank Audit & Risk Committees Conference, you talked about the importance of projecting a culture of compliance. How should boards ensure their bank is building this type of culture?
CY: Culture of compliance must be a focus of the board and the management, and that focus has to be communicated to the employees throughout the organization. The incentive structure also has to be aligned with this type of culture.

Strong compliance culture starts at the top. The board has to set the tone for the management, and the management has to be the example for all employees to follow. Everyone in the organization has to understand and buy into the principle that we do not sacrifice long-term fundamentals for short-term gain—which in some cases could end up being [a] long-term loss.

(Editor’s note: You can learn more about building a strong culture through Bank Director’s Online Training Series, Unit 16: Building a Strong Compliance Culture.)

BD: You served on the FDIC’s fintech steering committee, which—in a broad sense—examined technology trends and risks, and evaluated the potential impact to the banking system. Banks are working more frequently with technology partners to enhance their products, services and capabilities. What’s important for boards to know about the opportunities and risks here?
CY: Fintech is the next frontier for banking, and banks are rightly focused on incorporating technology into their mix of products and services. One thing to keep in mind as banks increasingly partner with technology service providers is that the regulators will hold the bank responsible for what the technology service provider does or fails to do with regard to banking functions that have been outsourced.

BD: On a final note: In your view, what are the top risks facing the industry today?
CY: I mentioned already the risks facing the industry as we contemplate the downhill side of the current economic cycle. One other issue that I know the regulators are and have been spending quite a lot of time thinking about is cybersecurity. What is often said is that a cyber event is not a question of if, but when. We can devote volumes of literature [to] talking about this issue, but suffice for now to say that it is and will continue to be a focus of the regulators.

Arnold & Porter was a sponsor of Bank Director’s Bank Audit & Risk Committees Conference.

Avoid the Risk of Complacency


growth-5-10-19.pngBank directors have a golden opportunity to position their banks for future growth and prepare them for change—if they can resist the lull of complacency, according to speakers at the opening day of Bank Director’s 2019 Bank Board Training Forum on May 9.

The current economic environment remains benign, as regulators have paused interest rate increases and credit quality remains pristine, says Joseph Fenech, managing principal and head of research at Hovde Group. Further, he argues that banks today are better equipped to withstand a future economic downturn.

But speakers throughout the day say the risk is that board members may feel lulled by their banks’ current performance and miss their chance to position these institutions for future growth.

“We’re going through the good years in banking. I would argue your biggest competitor is complacency,” says Don MacDonald, chief marketing officer at MX Technologies. He adds that bank boards needs to be asking hard questions about the future despite today’s positive operating environment.

Banks are grappling with the rapid pace of change and technology, shifting customer demographics and skills gaps at the executive and board levels. Speakers during the conference provided a variety of ways that directors can address these concerns with an eye toward future growth.

One way is to redefine how community banks think about their products and their markets, according to Ron Shevlin, director of research at Cornerstone Advisors. Shevlin says many community banks face competition from firms outside of their geographic marketplace. In response, some community banks are moving away from a geographic community and toward affinity, or common bond, groups. These firms have identified products or loans they excel at and have expanded their reach to those affinity customers. He also advises banks to examine how their products stack up to competing products. He uses the example of checking accounts, pointing out that large banks and financial technology firms sometimes offer rewards or personal financial management advice for these accounts.

“Everyone talks about customer experience, but fixing the customer experience of an obsolete product is a complete waste of money,” he says.

Another challenge for boards is the makeup of the board itself. Directors need to have a skill set that is relevant to the challenges and opportunities a bank faces. Today, directors are concerned about how the bank will respond to technology, increase the diversity of their boards and remain relevant to the next generation of bank customers, says J. Scott Petty, managing partner of financial services at Chartwell Partners, an executive search firm.

He challenges directors to consider the skills and experiences they will need in a few years, as well as how confident they are that they have the right board and leadership to run the bank.

“Change doesn’t happen overnight. It has to be planned for,” he says. “Board composition should reflect the goals of the financial institution.”

Banks can resist complacency with their culture, according to Robert Hill, Jr., CEO of South State Corp. Hill says there is never a point in time when “you’ve got it made and your bank is cruising.” Various headwinds come and go, but the overarching theme behind the bank’s challenges is that pace of change, need for customer engagement and competition are all increasing.

In response, Hill says the bank is very selective about who they hire, and looks for passion, values and engagement as well as specific skills. South State prioritizes soundness, profitability and growth—in that order—and wraps its cultural fabric around and throughout the company. A large part of that is accomplished through leadership, and the accountability that goes with it.

“If the culture is not strong and foundation is not strong, it will be much harder for a company to evolve,” he says.

One Strategy to Improve Board Performance


performance-4-19-19.pngDoes greater diversity improve the performance of corporate boards, or is it just an exercise in political correctness?

Cognitive diversity—also called diversity of thought—has particular relevance to bank boards of directors, which are overwhelmingly made up of older white men with general business backgrounds.

This is not an indictment against older white men per se, but rather a recognition that a group of people with similar backgrounds and experiences are more likely to think alike than not. The same could be said about other homogenous social groups. For example, a team of older Latinas or younger black men might also be subject to groupthink.

“We’re only going to get the right outcomes if we have the right people around the table,” says Jayne Juvan, a partner at Tucker Ellis who is vice chair of the American Bar Association’s corporate governance committee and frequently advises corporate boards on governance matters.

It would be a mistake to dismiss board diversity as a political issue pushed by feminists, LGBT advocates and progressive Democrats. Even some of the world’s largest institutional investors think it’s a good idea.

In his annual letter to chief executive officers in 2018, BlackRock CEO Larry Fink said the investment company would “continue to emphasize the importance of a diverse board” at companies BlackRock invests in. These companies are “less likely to succumb to groupthink or miss threats to a company’s business model,” he wrote. “And they are better able to identify opportunities that provide long-term growth.”

State Street Global Advisors, another big institutional investor, announced in September of last year that it will update its voting guidelines in 2020 for firms that have no women on their boards and have failed to engage in “successful dialogue on State Street Global Advisor’s board diversity program for three consecutive years.”

As part of the new guidelines, State Street will vote against the entire slate of board members on the nominating committee of any public U.S. company that does not have at least one woman on its board.

There is, in fact, a strong business case for cognitive diversity. Studies show that diverse groups or teams make better decisions than homogenous ones.

Companies in the top quartile for gender diversity of their executive teams were 21 percent more likely to experience above-average profitability than companies in the bottom quartile, according to a 2017 study by McKinsey & Co. The study also found that companies in the top quartile for ethnic and cultural diversity were 33 percent more likely to outperform companies in the bottom quartile. Both findings were statistically significant.

“On the complex tasks we now carry out in laboratories, boardrooms, courtrooms, and classrooms, we need people who think in different ways,” wrote University of Michigan professor Scott Page in his book “The Diversity Bonus: How Great Teams Pay Off in the Knowledge Economy.”

“And not in arbitrarily diverse ways,” he continued. “Effective diverse teams are built with forethought.”

Page differentiates cognitive diversity from “identity” diversity, which is defined by demographic characteristics like race, gender, ethnicity, sexual orientation and national origin. But striving for identity diversity, through characteristics such as race and gender, and the different life experiences and perspectives that result, can help boards and organizations cultivate cognitive diversity.

Yet, Juvan says boards also need to gain insight into how potential directors think and process information, which they can do by appointing them to advisory boards or working with them in other capacities. Banks that have separate boards for their depository subsidiaries, for instance, could use those as a farm system to evaluate candidates for the holding company board.

“I think it’s about creating a pipeline of candidates well in advance of the time that you actually need them, and really getting to know those candidates in a deeper way … as opposed to thinking a year out that we’re going to have an opening and … [working] with a recruiting firm,” she says. “I don’t think it’s something that, even if you work with a recruiting firm, you should fully outsource to somebody else.”

Advice for Buyers & Sellers in 2019



The need for stable, low-cost deposits is driving deals today, and the increasing use of technology is changing how banks should approach integrating an acquisition. In this video, Bill Zumvorde of Profit Resources shares what prospective buyers and sellers need to know about the operating environment. He also explains how bank leaders can better integrate an acquisition and how potential sellers can get the best price for their bank.

  • Today’s M&A Environment
  • Common Integration Mistakes
  • Maximizing Acquisition Success
  • Tips for Prospective Sellers

The Story Behind 2018’s Most Transformative Deal


acquisition-2-8-19.pngMalcolm Holland, the CEO of Veritex Holdings in Dallas, Texas, wanted to expand in the Houston market in 2017 and was looking for a deal. He pursued three targets, but they were all snapped up by competing buyers.

Just as Holland was resigning himself to expand more slowly through de novo branch expansion, his phone rang. It was Geoffrey Greenwade, the president of Green Bancorp, a Houston-based bank with $4.4 billion in assets.

Would Holland be interested in meeting with Greenwade and Manuel Mehos, Green’s CEO and chairman? Greenwade asked.

Holland thought the executives were courting him. Instead, they asked if Veritex wanted to acquire Green.

It’s a unique story, as the now-$8 billion Veritex was smaller than Green when the deal was announced—Green’s balance sheet was 40 percent larger than Veritex’s.

The acquisition of Green—which closed on Jan. 1, 2019—has more than doubled the size of Veritex, and significantly increased its share in a second Texas market. It’s for these reasons that Bank Director identified this deal as the most transformative of 2018.

A deal as transformative as this—in which the seller is bigger than the buyer—is rare. With good reason: Most banks prefer bite-sized deals to minimize integration risk.

But this kind of deal can work well for the right buyer—expanding its capabilities and markets in one fell swoop.

To measure which of the deals announced in 2018 were the most transformative, Bank Director calculated seller assets as a percentage of buyer assets, using data from S&P Global Market Intelligence. The larger the seller compared to the buyer, the greater the opportunity and the more complicated the integration. We also examined seller size as an absolute value, to represent the deal’s transformative impact in its market.

You’ll find a list of the top ten deals at the end of this story.

Because the list does not award deal size alone, the two largest deals announced last year—Fifth Third Bancorp’s acquisition of $20 billion asset MB Financial and Synovus Financial Corp.’s acquisition of $12 billion asset FCB Financial Holdings—did not make the list. MB represented just 14 percent of Fifth Third’s assets and FCB 38 percent of Synovus.

Despite the difference in size, the deal between Veritex and Green made sense. “What we provided for them [was] a really clean credit history, and our stock had a higher value,” says Holland.

Just as importantly, says Holland, “I needed to mark their balance sheet. If they were going to be the accounting acquirer …. The deal would not have penciled out. So, I needed to acquire them, from an accounting standpoint, and mark their balance sheet down where it was appropriate.”

“Investors viewed the Veritex franchise maybe a little better than Green,” says Brett Rabatin, a senior research analyst at Piper Jaffray who covers Veritex. In 2015, a troubled energy sector resulted in a higher level of charge-offs in Green’s loan portfolio, raising concerns among investors that there could be further credit problems down the road.

Green addressed the energy exposure, and oil and gas represent a small portion of Veritex’s loan portfolio today, says Holland.

The combination roughly doubled Veritex’s branch footprint and has greatly expanded its presence in Houston—from one office to 11, giving Veritex the scale it needs to better compete in that market. The bank also gained expertise in commercial and middle market lending, as well as new treasury management products and services.

Green CFO Terry Earley has stayed on with Veritex in the same role, and Donald Perschbacher, Green’s chief credit officer, also joined the executive team. Greenwade is now president of the Houston market. Six directors from Veritex and three from Green, including Mehos, form the current board.

Holland isn’t afraid to adopt new practices from a seller that will improve his bank. It’s a lesson he’s learned over the years integrating the bank’s six previous acquisitions. “Individually, none of us could probably get where we can get together, and so let’s pick the best of each side, and together we will be better,” says Holland.

He’s also learned that integrating people—not technology and systems—ultimately determines the success of a transformative deal.

“The question is, how do you take that culture, your culture that’s been so successful, and institute it into their culture, yet picking up some of the things they do and putting into yours,” says Holland. The integration team spends time reviewing employee handbooks, for example, picking up new practices from the seller.

Culturally, Holland believes the Green acquisition is the best deal his bank has done. “Everybody pulling in the same direction, everybody working toward the same target. The openness and the collaboration have been unbelievable,” he says.

Veritex is now the 10th largest Texas-based banking franchise as a result of this transformative merger. “We think this bank has the ability to be a Texas powerhouse,” says Holland.

Ten Most Transformative Deals in 2018

Rank Buyer Seller Size of acquired bank (millions) Impact on size of acquirer Score*
1 Veritex Holdings (VBTX) Dallas, TX Green Bancorp (GNBC) Houston, TX $4,392 140% 3.33
2 WSFS Financial Corp. (WSFS) Wilmington, DE Beneficial Bancorp (BNCL) Philadelphia, PA $5,770 81% 8.33
3 Vantage Bancorp San Antonio, TX Inter National Bank McAllen, TX $1,379 250% 9.33
4 North Easton Savings Bank South Easton, MA Mutual Bank Whitman, MA $518 94% 24.7
5 CVB Financial Corp. (CVBF) Ontario, CA Community Bank (CYHT) Pasadena, CA $3,747 45% 27.0
6 Allegiance Bancshares (ABTX) Houston, TX Post Oak Bancshares Houston, TX $1,431 50% 27.7
7 Adam Bank Group College Station, TX Andrews Holding Co. Andrews, TX $639 60% 27.7
8 Ameris Bancorp (ABCB) Moultrie, GA Fidelity Southern Corp. (LION) Atlanta, GA $4,812 42% 28.3
9 Cadence Bancorp. (CADE) Houston, TX State Bank Financial Corp. (STBZ) Atlanta, GA $4,924 42% 28.7
10 Independent Bank Group (IBTX) McKinney, TX Guaranty Bancorp (GBNK) Denver, CO $3,722 42% 29.3

Source: S&P Global Market Intelligence
*The score reflects how each deal ranked in terms of the impact of the seller’s size on that of the acquiring bank and the absolute size of the seller.

The New Philosophy That’s Catching on With Banks


customer-12-21-18.pngBankers are right to be concerned that Amazon will one day emerge as a competitor in the financial services industry, but that shouldn’t stop banks from stealing a page from the ecommerce company’s playbook.

Banking is a relationships business. For ages, banks have tried to leverage that relationship to grow and maximize shareholder return.

Some of the ways they’ve done so seem antiquated now, like giving away toasters to anyone that opens a checking account. But the underlying logic remains sound.

That’s why many top banks are now starting to think more like Jeff Bezos, Amazon’s chairman and CEO.

In 1997, the year Bezos wrote his first shareholder letter, he cycled through the usual subjects, boasting about growth and maximizing the return for shareholders. But he also talked about the long game Amazon would play by eschewing even faster growth and profitability by instead focusing “relentlessly” on customers.

We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise,” he wrote in his inaugural letter.

Why? Because Bezos wanted Amazon to be engrained in people’s lives, far more than just the books they were getting 20-some years ago.

“Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies,” Bezos wrote, noting that Amazon’s first and foremost priority would be serving customers, not buckling under pressure from Wall Street.

Two decades later, everything Amazon does is driven by what the “divinely discontent” customer wants, which they learn through data collection and analysis. And as a result, Amazon has become an integral part of many consumers’ lives.

“I sense that the same customer empowerment phenomenon is happening broadly across everything we do at Amazon and most other industries as well. You cannot rest on your laurels in this world. Customers won’t have it,” Bezos wrote two decades later in his 2018 shareholder letter.

It’s this relentless, single-minded drive to satisfy customers that banks are beginning to adopt, especially when it comes to serving customers over digital distribution channels.

Many banks have modernized their digital offerings to attract digitally savvy customers. An ancillary benefit is that the interactions conducted over these channels generate immense amounts of valuable data. It’s be effectively using this data that banks can build out an Amazon-like experience.

Brian Moynihan, CEO of Bank of America, recently explained to Bank Director the value of that data, and also how the $2 trillion bank can leverage it to improve customers’ experience: “We know that customer better than everybody else, because we’re seeing everything they do.”

Another bank doing this is Citizens Bank, a New England-based bank with $155 billion in assets. Citizens CEO Bruce Van Saun talked his focus on customers at the Wharton Leadership Conference this summer.

This focus is behind the bank’s decision to launch its digital offshoot, Citizens Access. It has also informed how they think and obsess over—what else—data. Van Saun said it allows them to leverage it in “moments of truth” for customers that the bank knows better than anyone.

“Citizens is doing this through an intense focus on ‘customer journeys’ – transforming the way we engage with customers at critical moments so that they are compelling, differentiated, personalized and highly user-friendly. This process starts with putting the customer – not the organization – at the center.”

Sounds an awful lot like Bezos and Moynihan. It also sounds a lot like “The Law of The Customer,” a theory discussed in Stephen Denning’s book, “The Age of Agile.”

Denning discusses a “Copernican revolution” of management that puts the customer at the center, rather than the firm. Nicolas Copernicus, of course, was first with the theory the Earth revolved around the Sun, not vice versa, a blasphemous idea in the 16th century.

What that means is delivering things like delight, enthusiasm and passion instead of products or services.

This requires a cultural transformation at organizations, Denning argues, and especially at banks that have long been driven by traditional metrics.

That is where not just the CEO, but the entire C-suite, comes in.

“If the drive to delight customers comes from the CEO alone, or from the bottom alone, the firm is lost,” Denning writes.

Most banks don’t have the manpower or capital to invest in tech capabilities like the biggest banks, but many are now realizing they do have the most prized collection of data about their customers.

That data can be leveraged, and it’s data that would make Bezos even more obsessed than he already is about customers.