Four Traits That Will Define Successful Lenders in the Future

Covid-19 and the Paycheck Protection Program have fundamentally changed the banking industry.

In just a few months, lenders were forced to learn how to process a year’s worth of loans in six weeks. Numerated worked with lenders to process nearly a quarter of a million PPP loans on our platform. We had a front-row seat to how the pandemic transformed lending and drove a technological reckoning (which we shared with Bank Director).

We’ve identified a number of strategies, perspectives and traits that contributed to lenders’ success during the crisis. Working with banks to shift their focus to a post-PPP world, we’re seeing how incorporating these key learnings from the program will separate the winners from the losers going forward.

As banks and credit unions pivot to the new normal, the most successful lenders will be those who accomplish these four things:

Successful lenders will lean in on digital. It goes without saying that in the middle of a pandemic, every bank needed to figure out how to serve customers with closed branches. Digital capabilities were put to the test — everyone quickly figured out where their digital footprint fell short. A lot of sensitive documents were emailed, workflow was lost and most processes wouldn’t have passed audits in normal times. Digitally-mature lenders and those who successfully adopted technology for PPP had efficient, secure processes that didn’t burn out their customers or employees. Technology will be key to keeping customers satisfied and employees happy during inevitable future crises or unexpected shifts in the industry.

Successful lenders will prioritize speed to market. When Congress first announced the PPP, lenders had to make a quick decision: lean in and figure out how to help their businesses or sit it out. One of the biggest differences in PPP performance we’ve identified was how quickly lenders got into the market.

Two client banks in California both did the same number of PPP loans — despite one being 10 times larger than the other. The smaller bank identified their needs, adopted our platform and rapidly rolled it out to their borrowers faster than their larger counterpart. This gave the smaller bank a foot up in the market. Some banks think committees and consensus mean they can’t move quickly. In 2021, successful banks will understand speed matters, crisis or not.

Successful lenders will achieve efficiency ratios not previously thought possible. The workflow on Small Business Administration loans is complicated; despite the SBA’s best efforts, this was true for PPP as well. The best lenders leveraged technology to get PPP loans done the same day as applications. They pre-filled applications, automated decisions, automatically generated and digitally executed loan documents, and used APIs to board to the SBA. Loans that would have taken a banker five to six hours were done in less than an hour.

At the height of PPP, we saw lenders processing nearly two loans a second — the equivalent of $250 million of PPP loans per hour. Banks will need to find radical efficiencies like these to grow earnings in a challenging 2021 budget season. The most successful lenders are already using PPP learnings to reengineer their normal loan operations.

Using data is key. In 2021 and beyond, it will no longer be enough for lenders to digitize their processes. Going beyond these commonplace efficiency gains will require using reliable, actionable data that can automate and eliminate work. Unfortunately, as anyone who’s worked with financial technology knows, bank data is a mess.

During PPP, we worked with the SBA to create a connection to their systems that let us detect errors in our banks’ data. There were many, many errors; enabling our banks to fix these data issues saved countless hours of rework. Successful lenders are finding ways to clean their data so that software can automate more of their normal lending processes. These conversations are integral to their 2021 plans.

As the pandemic still grips the nation and without further government assistance in the immediate future, banks find themselves in uncharted waters as they set their budgets for the new year.

One of Numerated’s investors is Patriot Financial Partners’ Kirk Wycoff — one of the most successful community bank investors in the United States. In a recent Numerated webinar, he shared his perspective that this year’s budget conversations will be more focused on technology than ever before. “We need to get that message across to senior leadership teams that for investment in technology, there needs to be a realization that the building’s on fire.”

The ability to put out that fire effectively will determine much of lenders’ success in 2021 and beyond.

Beware Third-Quarter Credit Risk

Could credit quality finally crack in the third quarter?

Banks spent the summer and fall risk-rating loans that had been impacted by the coronavirus pandemic and recession at the same time they tightened credit and financial standards for second-round deferral requests. The result could be that second-round deferrals substantially fall just as nonaccruals and criticized assets begin increasing.

Bankers must stay vigilant to navigate these two diametric forces.

“We’re in a much better spot now, versus where we were when this thing first hit,” says Corey Goldblum, a principal in Deloitte’s risk and financial advisory practice. “But we tell our clients to continue proactively monitoring risk, making sure that they’re identifying any issues, concerns and exposures, thinking about what obligors will make it through and what happens if there’s another outbreak and shutdown.”

Eight months into the pandemic, the suspension of troubled loan reporting rules and widespread forbearance has made it difficult to ascertain the true state of credit quality. Noncurrent loan and net charge-off volumes stayed “relatively low” in the second quarter, even as provisions skyrocketed, the Federal Deposit Insurance Corp. noted in its quarterly banking profile.

The third quarter may finally reveal that nonperforming assets and net charge-offs are trending higher, after two quarters of proactive reserve builds, John Rodis, director of banks and thrifts at Janney Montgomery Scott, wrote in an Oct. 6 report. He added that the industry will be closely watching for continued updates on loan modifications.

Banks should continue performing “vulnerability assessments,” both across their loan portfolios and in particular subsets that may be more vulnerable, says James Watkins, senior managing director at the Isaac-Milstein Group. Watkins served at the FDIC for nearly 40 years as the senior deputy director of supervisory examinations, overseeing the agency’s risk management examination program.

“Banks need to ensure that they are actively having those conversations with their customers,” he says. “In areas that have some vulnerability, they need to take a look at fresh forecasts.”

Both Watkins and Goldblum recommend that banks conduct granular, loan-level credit reviews with the most current information, when possible. Goldblum says this is an area where institutions can leverage analytics, data and technology to increase the efficiency and effectiveness of these reviews.

Going forward, banks should use the experiences gained from navigating the credit uncertainty in the first and second quarter to prepare for any surprise subsequent weakening in credit. They should assess whether their concentrations are manageable, their monitoring programs are strong and their loan rating systems are responsive and realistic. They also should keep a watchful eye on currently performing loans where borrower financials may be under pressure.

It is paramount that banks continue to monitor the movement of these risks — and connect them to other variables within the bank. Should a bank defer a loan or foreclose? Is persistent excess liquidity a sign of customer surplus, or a warning sign that they’re holding onto cash? Is loan demand a sign of borrower strength or stress? The pandemic-induced recession is now eight months old and yet the industry still lacks clarity into its credit risk.

“All these things could mean anything,” Watkins says. “That’s why [banks need] strong monitoring and controls, to make sure that you’re really looking behind these trends and are prepared for that. We’re in uncertain and unprecedented times, and there will be important lessons that’ll come out of this crisis.”

Strategic Planning in an Age of Uncertainty

How do you plan in an environment where the future is so uncertain?

If this was a bad joke, the answer might be “very carefully.” The real answer is more like “very nimbly.”

The Covid-19 pandemic has presented the banking industry with an almost-unprecedented set of challenges, including a deep recession and the necessity to manage a distributed work force. The variable that no one can predict is the pandemic.

Most economist agree that the U.S. economy won’t fully recover until the pandemic has been brought to heel — and that probably won’t occur until an effective vaccine has been widely distributed. Many banks are also reluctant to repatriate their remote employees in large numbers until it’s safe to do so.

Strategic planning in such a confused situation has to be different than at other times. In a webcast discussion for Bank Director’s AOBA Summer Series — a run-up to the 2021 Acquire or Be Acquired conference in January — Stephen Steinour, chairman and CEO at Huntington Bancshares in Columbus, Ohio, talked about the challenges of strategic planning today.

In an audio recording of that conversation with Editor-at-Large Jack Milligan, Steinour detailed some of the steps that Huntington has been taking through the pandemic, including processing tens of thousands of Paycheck Protection Program loans for its business customers and adapting to a virtual work arrangement for most of its employees.

Steinour also describes a new approach that Huntington’s senior management teams and board of directors is adopting toward strategic planning. Traditionally the bank has planned on a three to five-year cycle, but today’s uncertain environment requires a shorter time horizon.

“I think we’re going more into a continuous planning mode rather than a cyclical mode,” he says. “It requires us to be more nimble.”

Four Digital Lessons from the Pandemic

2020, so far, is the year of digital interactions.

Without the ability to interact in the physical world, digital channels became the focal point of contact for everyone. Industries like retail and restaurants experienced a surge in the use of digital services like Instacart, DoorDash and others.

This trend is the same for banks and their customers. In a survey conducted by Aite Group, 63% of U.S. consumers log into financial accounts on a desktop or laptop computer to check accounts at least once a week, while 61% use a smartphone.

The coronavirus pandemic has certainly accelerated the move to the digital channel, as well. In a Fidelity National Information Services (FIS) survey, 45% of respondents report changing the way they interacted with their financial institution because of the pandemic. The increased adoption of the digital channel is here to stay: 30% of respondents from the same survey noting they plan to continue using online and mobile banking channels moving forward.

The same is true for payments. FIS finds that consumers are flocking to mobile wallets and contactless payment to minimize virus risks, with 45% reporting using a mobile wallet and 31% planning to continue using the payment method post-pandemic.

This pandemic-induced shift in consumer preferences provides a few important lessons:

1. Experience Matters
Customers’ experiences in other industries will inform what they come to expect from their bank. Marketing guru Warren Tomlin once said, “a person’s last experience is their new expectation.” No matter where it came from, a great digital experience sets the standard for all others.

Banks should look to other industries to see what solutions can offer a great customer experience in your online and mobile banking channels. Customers’ service experiences with companies like Amazon.com’s set the bar for how they expect to interact with you. Their experience making payments with tools from PayPal Holdings, like Venmo, may inform their impression of how to make payments through the bank.

2. Personalization is Key
Providing a personalized experience for customers is key to the success of your bank, both now and in the future. Your bank’s online and mobile tools must generate a personalized experience for each customer. This makes them feel valued and well served — regardless of whether they are inside a branch or transacting through a mobile app.

Technologies like artificial intelligence can learn each customer’s unique habits and anticipate specific needs they might have. In payments, this might look like learning bill pay habits and helping customers manage those funds wisely. AI can even make recommendations on how users can ensure they have enough funds to cover the month’s bills or save anything they have left over.

AI is also able to look at customer data and anticipate any services they might need next, like mortgages, car loans or saving accounts. It brings the personal banker experience to customers in the digital world.

3. Weave the Branch Into the Digital
The ability to interweave the personalized, in-branch experience into the digital world is crucial. There are positives and negatives in both the branch and digital channels. The challenge for banks is to take the best of both worlds and provide customers with an experience that shines.

Customers want to know that someone is looking out for them, whether they can see that person or not. A digital assistant keeps customers engaged with the bank and provides the peace of mind that, whether they are in the branch or 100 miles away, there is always someone looking out for their financial well-being.

4. Embrace the “Now” Normal
To state that the Covid-19 pandemic changed the world would be a big understatement. It has disrupted what we thought was “business as usual,” and irrevocably changed the future.

The “new normal” changes day by day, so much that we choose to more accurately refer to it as the “now normal.” The increased dependency on digital has made it critical to have the right infrastructure in place . You truly never know what is coming down the line.

Customers enjoy the ease of digital and, more than likely, will not go “back to normal” when it comes to banking and payments. Now, more than ever, is the time to examine the digital experiences that your bank offers to further ensure its prepared for this endless paradigm shift that is the “now normal.”

What Employers Need to Know about Coronavirus, Paid Leave

From lobby closures to Paycheck Protection Program loans, the COVID-19 pandemic has thrown a lot at banks and other financial services providers during this pandemic. One more item to add to the list is the Families First Coronavirus Response Act (FFCRA).

The FFCRA is not one law but a suite of laws targeted at lessening the effects of the pandemic, including two laws that establish paid leave requirements on covered employers: the Emergency Family and Medical Leave Expansion Act (EFMLEA) and the Emergency Paid Sick Leave Act (EPSLA). As is the case with many employment laws and rules, a bank that fails to comply with the FFCRA paid leave requirements does so at its peril.

Who are covered employers?
The paid leave requirements generally apply to all private employers with fewer than 500 employees. There are limited exceptions to the Emergency Family and Medical Leave Expansion Act leave requirements for employers with fewer than 50 employees relating to leave for school and child care closures. A bank looking to take advantage of the EFMLEA exceptions should closely study the circumstances and the exception criteria. Further, while the federal rules apply only to small (under 500 employee) employers, some states’ paid leave laws cover large employers as well.

Who are eligible employees?
Employee eligibility is one area where Emergency Family and Medical Leave Expansion Act and Emergency Paid Sick Leave Act diverge. Paid leave under the EFMLEA is available to employees who have been employed for a minimum of 30 calendar days. For EPSLA related leave, all employees qualify, regardless of their length of employment. EFMLEA and EPSLA each apply to part-time as well as full-time employees and neither require an employer to provide paid leave to furloughed employees.

When can employees utilize paid leave benefits?
This is another area where the two statutes diverge. The EPSLA provides for paid leave if the employee is unable to work (or telework) because the employee:

  1. Is subject to a federal, state or local quarantine or isolation order.
  2. Has been advised by a health care provider to self-quarantine.
  3. Is experiencing symptoms of COVID-19 and is seeking a diagnosis.
  4. Is caring for an individual covered by (1) or (2) above.
  5. Is caring for a son or daughter whose school or place of care is closed or whose child care provider is unavailable due to COVID-19 precautions.
  6. Is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.

The Emergency Family and Medical Leave Expansion Act, as its name implies, is an expansion of the Family and Medical Leave Act and is triggered by the need for the employee to care for someone else, in this case the employee’s child. Specifically, EFMLEA provides for paid leave to employees who must care for a minor child because of a coronavirus-related school closure or childcare provider loss. EFMLEA benefits only are available if the employee is unable to work from home or telework. We should note, however, that employees who become ill with COVID-19 or are caring for family members who have COVID-19 may still be covered by the FMLA original unpaid “serious health condition” provision.

What are the paid leave benefits?
Under the Emergency Paid Sick Leave Act, full-time employees are entitled to 80 hours (i.e., 10 days) of emergency paid sick leave at either full-rate (reasons 1, 2 and 3 above) or two-thirds rate (reasons 4, 5 and 6 above). The benefit is capped at $511 per day when the employee is absent for reasons 1, 2 or 3, and $200 per day for reasons 4, 5 and 6. Part-time employees are entitled to receive a proportionately similar amount of leave based on their average hours worked in a two-week period.
For 10 weeks an eligible employee is entitled to receive up to two-thirds of their regular rate of pay, capped $200 per day under the EFMLEA. We should note here, that an employee can take advantage of the EPSLA benefit of up to $200 per day for the first 10 days of leave to care for a child due to school or childcare closing, bringing the maximum paid leave benefit to $12,000 for child care reasons.

How does a bank pay for this new requirement?
To soften the blow on banks and other employers of the mandatory paid leave under the FFCRA, the law provides for a dollar-for-dollar refundable tax credit for amounts paid by eligible employers. The refundable tax credit applies to all EPSLA and EFMLEA wages paid during the period from April 1 to Dec. 31, 2020. Compliance with the eligibility and record-keeping requirements of the law will be critical to the bank qualifying for the tax credit.

Reducing Contact Center Hold Times to Improve Service

The continuing coronavirus pandemic is pushing banks to think even more productively about how they can help their customers.

American workers are increasingly concerned about their ability to stay current on credit card and mortgage payments as workplaces continue to close and more jobs are lost amid Covid-19 uncertainty. What products and services can banks offer customers to offset their financial burden and address or alleviate their worries? Plainly, there’s never been a better opportunity for banks to focus on deepening their relationship with the customer.

Today’s bank looks a bit different than the bank of six months ago. Six months ago, customers willingly moved in and out of bank branches, offering many touch points with which the bank could engage with them and vice versa. Now, branch foot traffic is declining significantly, and the contact center has become the dominant human touchpoint.

The shift in demand means that some banks are struggling to efficiently answer basic customer service queries, let alone deal with unique and complex scenarios. Many institutions are offering the most basic customer experience at best. At worst, they are offering a terrible experience, with customers complaining of hold times lasting hours during Covid-19’s onset.

This is a problem for banks for many reasons. Customers don’t want to sit on hold for an extended period (if at all) for nearly anything, especially to get an answer to a simple question. And most of the questions are in fact simple. Our call driver data shows that approximately 70% of customer service queries are basic or transactional: routine requests for information and actions on an existing customer account. Not surprisingly, the most common requests are account access issues — typically a password reset or login confusion.

The next largest group, making up 25% of all requests, are complex. These are customer specific problems or special cases that require detailed attention and assistance to resolve. In these circumstances, the customer often has already attempted other digital methods of finding the answer before reaching for live help. These situations offer the opportunity to provide personal service with a warm human touch, cementing customer loyalty to the institution. This is where customer experience reputations are made and where customer service agents can really shine.

But customers with routine requests are forced to sit on hold when they don’t want to, and those with complex requests who need to speak with an agent can’t do so efficiently because agents are stuck servicing routine requests, according to our recent data report. Banks can solve this problem in two ways: they could hire more customer service agents to reduce wait times or they can automate certain functions using AI.

Handling transactional queries with a conversational chatbot offers the highest value to the customer and to the bank. Instead of hiring more agents, banks can free up the time of existing agents by offloading routine tasks. Contact center agents can focus on more complex or high-value problems, supporting more consumers with the same resources. A large bank reported that their AI chatbot halves the average handling time for customer inquiries, saving customers an average of 12 minutes per chat when handled by the bot.

To get started, banks shouldn’t look at conversational banking as a niche channel but as an important part of their overall customer experience strategy. Consumers no longer decide where to bank based on whether there’s a branch nearby. Banks need to look deeper, creating meaningful engagement with their customers. Excellent customer service is the baseline.

Key Compensation Issues in a Turbulent Market

As compensation committee chair, Susan knew 2020 was going to be an important year for the bank.

The compensation and governance committee had taken on the topic of environmental, social and governance (ESG) for the coming year. They had conducted an audit and knew where their gaps were; Susan knew it was going take time to address all the shortfalls. Fortunately, the bank was performing well, the stock was moving in the right direction and they had just approved the 2020 incentive plans. All in all, she was looking forward to the year as she put her finished notes on the February committee meeting.

Two months later, Susan had longed for the “good old days” of February. With the speed and forcefulness that Covid-19 impacted the country, states and areas the bank served, February seemed like a lifetime ago. The bank had implemented the credit loss standard at the end of March — due to the impact of the unemployment assumptions, the CECL provision effectively wiped out the 2020 profitability. This was on top of the non-branch employees working from home, and the bank doing whatever it could to serve its customers through the Paycheck Protection Program.

Does this sound familiar to your bank? The whirlwind of 2020 has brought a focus on a number of issues, not the least of which is executive compensation. Specifically, how are your bank’s plans fairing in light of such monumental volatility? We will briefly review annual and long-term performance plans as well as a construct for how to evaluate these programs.

The degree to which a bank’s annual and long-term incentive (LTI) plans have been impacted by Covid-19 hinge primarily on two factors. First, how much are the plans based upon GAAP bottom-line profitability? Second, and primarily for LTI plans, how much are the performance-based goals based upon absolute versus relative performance?

In reviewing annual incentive plans, approximately 90% of banks use bottom-line earnings in their annual scorecards. For approximately 50% of firms, the bottom-line metrics represent a majority of their goals for their annual incentive plans. These banks’ 2020 scorecards are at risk; they are evaluating how to address their annual plan for 2020. Do they change their goals? Do they utilize a discretionary overlay? And what are the disclosure implications if they are public?

There is a similar story playing out for long-term incentive plans — with a twist. The question for LTI plans is how much are performance-based goals based upon absolute versus peer relative profitability metrics? Two banks can have the same size with the same performance, and one bank’s LTI plan can be fine and the other may have three years of LTI grants at risk of not vesting, due to their performance goals all being based on an absolute basis. In the banking industry, slightly more than 60% of firms use absolute goals in their LTI plans and therefore have a very real issue on their hands, given the overall impact of Covid-19.

Firms that are impacted by absolute goals for their LTI plans have to navigate a myriad level of accounting and SEC disclosure issues. At the same time, they have to address disclosure to ensure that institutional investors both understand and hopefully support any contemplated changes. Everyone needs to be “eyes wide open” with respect to any potential changes being contemplated.

As firms evaluate any potential changes to their executive performance plans, they need to focus on principles, process and patience. How do any potential changes reconcile to changes for the entire staff on compensation? How are the executives setting the tone with their compensation changes that will be disclosed, at least for public companies? How are they utilizing a “two touch” process with the compensation committee to ensure time for proper review and discourse? Are there any ESG concerns or implications, given its growing importance?

Firms will need patience to see the “big picture” with respect to any changes that are done for 2020 and what that may mean for 2021 compensation.

Community Risks That Community Banks Should Address

States and counties are starting to reopen after a prolonged period of sheltering in place due to the Covid-19 pandemic.

Many community banks that function as the primary lenders to small businesses in the rural Midwest have yet to see a significant negative financial impact because of the shutdown. In fact, many community banks stand to receive significant loan origination fees from the U.S. Small Business Administration for participating in the Paycheck Protection Program. They’re also flush with cash, report the community bank CEOs I’ve asked, as many borrowers haven’t used their PPP loan funds and consumers have been holding their stimulus payments in their checking accounts.

But just because things look stable from a financial perspective doesn’t mean there isn’t risk in your community and to your bank. Let’s take a brief look at some issues community banks should be monitoring today:

Increasing personal debt caused by prolonged unemployment. Unemployed Americans received an unprecedented amount of unemployment benefits that for the most part ended on July 31, 2020. What are Americans doing now? Some furloughed employees have been recalled, but others weren’t. When income is scarce, the use of credit cards, overdraft protection, and personal loans increases. What is your bank doing to monitor the increasing financial pressure of your individual borrowers and account holders?

Delayed business closures. Small businesses without a significant online presence are finding it difficult to operate in this new environment. “Nonessential” small businesses survived the shutdown by using government funds, furloughing employees, drawing on credit lines, or using personal savings. The lost sales may not have been deferred to a later date. Instead, they are truly lost and won’t be recaptured. Without a fast and heavy recovery for small businesses, they may be forced to close and may not be able to support their current debt load. How is your bank monitoring the performance of your small business customer?

Reduced need for office and retail space. With the increase in employees working remotely, especially at businesses that typically use commercial office space, the perceived need for office space is declining. Once a lease term expires, community banks should expect some commercial borrowers to experience reduced rental income as tenants negotiate for less square footage or overall lower rates. Are you tracking the going rate for rent per square foot in your market?

Increased fraud risk. When people experience all three sides of the fraud triangle (rationalization, opportunity, and pressure), they’re more likely to commit fraud. Identification of the fraud can be significantly delayed. A bookkeeping employee whose spouse has been laid off can rationalize the need for the company’s money, has the opportunity to take it, and feels the financial pressure to use it for personal needs. This person may be able to cover it for a short time; but, covering it becomes more difficult as it grows. That can happen within the bank or at any of your commercial borrowers.

Community banks have yet to see a dramatic increase in past dues or downgrades in loan ratings; it’s likely too early to see the financial stress. Several community banks are adding earmarked reserves to the allowance for loan losses in each loan category as “Covid-related.” However, community banks should carefully evaluate loans that were “on the bubble” prior to the shutdown, were granted some form of deferral by the bank, or are in certain industries like hospitality. Interagency guidelines permit banks to not account for these loans as troubled debt restructures (TDR) if they meet certain criteria, but banks are still responsible for maintaining a proper allowance. A loan in deferral may need an increased reserve, even if it isn’t accounted for as a TDR. The time it takes for that stress to show (called “loss emergence period” in accounting) is longer than many think.

Two other significant financial impacts to banks relate to overdraft fees and interchange fees. As spending decreased, so did overdrafts and associated fee income. And without the discretionary debit card swipes, interchange fees fell significantly as well.

How much of the above information will you use as you prepare the 2021 budgets this fall? What will your baseline for 2021 be: 2019 or 2020? Regardless, assess the risks to the bank and plan accordingly.

This article is for general information purposes only and is not to be considered as legal advice. This information was written by qualified, experienced BKD professionals, but applying this information to your particular situation requires careful consideration of your specific facts and circumstances. Consult your BKD advisor or legal counsel before acting on any matter covered in this update.

Focus on Survival

Comp-WP-Report.pngThe pressures brought to bear upon the banking industry as a result of Covid-19 and the related economic downturn promise to exacerbate two long-term challenges facing bank boards and management teams: tying compensation to performance, and managing compensation and benefits costs.

In early July, the U.S. remained “knee deep in the first wave” of the Covid‑19 pandemic, according to Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases. States paused or began rolling back their efforts to reopen businesses and public areas. Tens of millions of Americans were unemployed. By September, newly reported cases remained above infection levels in March and April nationally. Many states were experimenting with school reopenings, and case counts were rising in the U.S.

“I’m really concerned about it,” said William Demchak, chairman and CEO of PNC Financial Services Group, who warned of an impending wave of loan defaults in a July interview. “I don’t know that it’s going to devastate us, but I think it’s going to put us into a period of really slow growth.”

Bank Director’s 2020 Compensation Survey, sponsored by Compensation Advisors, was conducted in March and April, just as Covid-19’s broad reach became clear, leading banks to embrace remote work and respond to the monumental task of issuing Paycheck Protection Program loans.

The survey highlights key concerns for bankers in this unusual environment, which will be explored in this white paper. How will bank boards evaluate CEO pay? What about director compensation and efforts to refresh the board? Finally, will banks be prepared for the impending turnover in the C-suite once baby boomers retire?

Forward-looking banks could emerge stronger from this crisis, says Flynt Gallagher, president of Compensation Advisors. “This environment is an opportunity for them, because it gives them the ability to make the changes they’ve been wanting to make,” he says. With so many Americans unemployed, more high-quality talent is available, and he believes institutions should find a way to bring them into the organization — even if a position isn’t open.

“You never go wrong when you get good people,” Gallagher says.

To read more about addressing board and CEO pay challenges, read the white paper.

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

Why Two Community Banks Raised Debt to Repurchase Shares

The coronavirus pandemic has motivated some banks to raise capital and others to repurchase shares.

Two banks opted to do both.

These institutions recently paired subordinated debt raises to buy back discounted shares in immediately accretive transactions. Leadership of both banks attribute the pair of opportunities — and the pricing they were able to obtain — to the pandemic, and other community banks could make a similar trade.

What had happened was a perfect storm of an opportunity to buy back at a pretty good discount because of the Covid-19 impact on financial stocks, and the popularity or the market that had developed for subordinated debt,” says Paul Brunkhorst, CEO of Crazy Woman Creek Bancorp in Buffalo, Wyoming.

The bank constructed a twofer trade that would leverage investors’ demand for yield while capitalizing on the persistent discount in its shares. Brunkhorst reached out to a larger in-state financial institution about a $2 million private placement of its subordinated debt at a 5% rate; he says the direct placement kept pricing low for the $138 million bank. Crazy Woman Creek then repurchased 15% of its outstanding common stock. The transactions were included in the same Aug. 18 release.

“It wasn’t taken lightly. We are affecting shareholder value in a positive manner. We’re also incurring this debt, so we better be darn sure of the capital position, the asset quality and the regional economy,” he says. “We were comfortable going after the subordinated debt with the primary reason of repurchasing those shares.”

Executives at Easton, Maryland-based Shore Bancshares decided to pad robust capital levels with an additional $25 million in subordinated debt as “safety capital” at the end of August.

So far, the safety capital hasn’t been needed. Second loan modification requests declined to about 10%, and the $1.7 billion bank has yet to experience defaults. Management decided to deploy $5.5 million of those newly raised funds toward restarting its halted share repurchase program at the beginning of September.

The repurchase, which required sign off from the Federal Reserve, was immediately accretive to tangible book value. If fully exercised, the buyback would reduce share count by 4.5%.

When you can buy stock back at 60% or 70% of tangible book, that’s probably the best thing you could ever do for your shareholders,” says CEO Lloyd “Scott” Beatty Jr. “In terms of rewarding them, I can’t think of a better way to do it.”

Both executives say shareholders have been pleased with the buyback announcements. They also found the capital raise to be straightforward and relatively quick, with healthy demand and pricing. Brunkhorst says he’s surprised more banks haven’t cut out the middleman to solicit demand and conduct their own private placements. It was Shore’s first time raising sub debt; its offering carried a rating from Kroll Bond Rating Agency and a price of 5.38%.

“I would say probably if you’re thinking about [raising capital], I’d get out there as soon as possible. There’s a lot of activity in this,” Beatty says. “I’d be inclined to pick your investment banker and get out and enter the market as quickly as you can.”