How Can the Board Assess Corporate Culture



With several of the largest banks experiencing ethical scandals in recent years, Bank Director digital magazine set out to interview Terry Strange, the audit and compliance committee chair at BBVA Compass Bancshares, the $86.7 billion institution based in Houston. As a former vice chair and managing partner of the U.S. audit practice to KPMG, LLP, he is uniquely qualified to talk about how bank board members can assess the culture of their organization and look for red flags.

He discusses with Naomi Snyder, editor of Bank Director digital magazine:

  • The importance of integrity.
  • Red flags that you have an ethical problem.
  • What he would have asked Wells Fargo & Co. management.
This video first appeared in the Bank Director digital magazine.

Four Tips for Choosing a Bank Partner


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In January, I shared four tips for banks to consider when considering whether to enter into a new fintech partnership. How about the other half of that relationship? If you work for a fintech company, let me give you my perspective as a banker who has worked with many of them.

Cultural Alignment: This is probably one of the most important considerations for both parties. If you’re in the early stages of growth, you’re probably used to making decisions quickly, collaboratively and doing it without much red tape. For that reason, you probably consider most bankers to be seem slow-moving by comparison. First, I’d say that understanding the regulatory environment in which banks operate may alleviate some frustration. (There are often good reasons for banks to operate with caution. See tip number four, compliance buy-in, from my January article.) However, that doesn’t mean you should settle for a partner that doesn’t understand your culture—or worse yet, has established one that is at odds with yours. Look for a bank that’s responsive, allows you access to key decision makers, is open-minded to your ideas and commits itself to finding ways to make things work.

Strategic Fit:If you’re able to “check the box” on cultural alignment, you’ll want to consider strategic plans. Make sure you understand a few critical issues: How does this relationship fit into your strategic plan? Do you understand how the bank sees your service or technology fitting into its strategic goals? Exploring these questions helps lay the foundation for a mutually beneficial partnership. If you’re setting out to create a specific product or service, go past the initial implementation phase and consider sharing roadmaps with your potential bank partner. Just as it is important for us to understand where you’re looking to take your company over the next six to 24 months, it is important for you to know where the bank is headed and understand our approach to executing projects—both with the partnership and with other key initiatives.

Compliance Expertise: Look for a partner that not only has deep knowledge of the regulatory field, but is willing to work with you to navigate it. Having the compliance talk early on allows you to test if the bank is one that can help you avoid potential compliance headaches down the line, is willing to help develop alternatives where appropriate, and is genuinely invested in the success of the partnership.

Business Terms: If you have found a bank partner that is both culturally and strategically aligned with your company and has the right mindset when it comes to risk management, the discussions around business terms—while critically important—should fall into place rather easily. Beware of a contentious, back-and-forth negotiation; at this point both organizations should be in agreement around what success looks like. While it is important for you to establish an agreement that allows you to achieve your goals, remember that is exactly what your bank partner is looking for as well. Having a “we’re in this together” mentality also helps. You have a great idea to bring to market and an innovative team to make it happen. Your bank partner provides industry experience, a charter, access to a balance sheet and FDIC coverage—all of which will be valuable (and depending on your business plan, potentially necessary) contributions that will prove to be even more important down the road.

Keeping a few of these concepts in mind as you approach your next business development meeting with a potential bank partner will increase the likelihood that you will have a successful experience.

Four Tips for Choosing a Fintech Partner


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Over the last three years we’ve implemented five strategic partnerships with fintech companies in industries such as mobile payments, investments and marketplace lending. In doing so, we’ve developed a reputation of being a nimble company for fintechs to partner with, yet we remain very selective in who we decide to work with.

We are very often asked–in places like the board room, at conferences and at networking events, how we choose what fintech companies to work with. It is a great question and one that needs to be looked at from a few angles. If you’re a financial institution looking to potentially begin partnering with fintech companies, below are some criteria to consider when vetting an opportunity.

A Strategic Fit: How does this relationship fit into your strategic plan? Finding a fintech that helps advance your goals may sound obvious, but it can be easy to get caught up in the fintech excitement, so don’t allow the latest fad to influence your choice of a partner. Don’t lose sight of your vision and make sure your potential partners buy into it. It’s better to have a few, meaningful partnerships than a host of relationships that may inadvertently distract you from your goals and spread your resources too thin.

Cultural Alignment: Make sure to do some research on the fintech’s management team, board of directors and advisory board. How do they–and their company’s mission-fit with your organization’s mission? Do you trust their team? Our CEO, Mike Butler, likes to say that we have a culture of trying to do things, not trying to NOT doing things. That’s important to us, and we want to work with teams that think similarly. Spending time together in the early stages of the relationship will help set the stage for a solid partnership in the future.

A Strong Business Plan: Is the company financially sound? Is their vision viable? Back to earlier commentary on not getting too caught up in the latest technology trend, consider testing the business idea on someone who isn’t a banker, like a friend or family member. While you might think it’s a great idea, does it appeal to a consumer that is not in our industry? If the business plan passes muster, another issue to consider is the fintech’s long-term plan and possible exit strategy, and the impact it would have on your business if the relationship went away. It’s important to understand both the fintech’s short- and long-term business plans and how those will impact your bank’s balance sheet and income statement today and in the future.

Compliance Buy-In: Does the fintech team appreciate the importance of security? Do they appreciate the role of regulation in banking and finance? Do they understand they may need to modify their solution in light of certain regulations? We know fintechs can sometimes look at banks with impatience, feeling that we’re slow to move. And while some might move at a slower pace than other, we banks know that there are good reasons to proceed cautiously and that compliance isn’t a “nice to have” when it comes to dealing with other people’s money. We are never willing to compromise security and are sure to emphasize that early in the conversation. It’s critical to find a partner with a similar commitment.

We’re in an exciting time; the conversations on both the bank and fintech sides are increasing about collaboration rather than competition. Considering criteria like the above will help banks take advantage of new possibilities in a meaningful way.

Banks Make Changes Following Wells Fargo Crisis


incentive-12-16-16.pngIt seems almost everyone with a bank account knows the story: a relatively small group of people within a large organization committed fraud by opening unapproved customer accounts in order to earn performance bonuses under a production-based incentive plan. The scandal badly bruised the bank’s stellar reputation, forced the CEO to step down, and resulted in a significant loss of shareholder value, before the election turned the tide for many bank stocks.

It has also prompted a widespread industry examination of retail incentive practices. Whether it is through the OCC’s horizontal review of sales and marketing practices or board requests at smaller community banks, the industry is taking a look at both the cultural aspects of sales expectations and the design and controls of the programs themselves.

In November 2016, Pearl Meyer conducted a survey of actions banks are taking to address the potential issues uncovered by the scandal. This study included 57 respondents representing both small and large institutions across the country. The key outcomes indicate that four out of five banks have had an internal or external inquiry regarding their retail incentive plan practices. Most banks are unlikely to make significant changes to their retail incentive plan design and instead are focusing on communication and training as well as enhanced documentation, controls and monitoring.

The aftermath of the Wells Fargo scandal will be that banks are expected to examine their retail incentive programs and the controls supporting them. To that end, we believe there are five questions that banks should ask and answer with respect to their retail incentive programs.

What does our plan reward? About half of respondents to our bank survey indicated using volume metrics and cross-selling metrics (55 percent and 47 percent respectively), which have been criticized as a part of the scandal. However, few are planning to discontinue these metrics (6 percent to discontinue volume and 4 percent to discontinue cross-selling). Use of either metric may put additional pressure on banks to demonstrate how their controls and administrative procedures curtail fraud or misconduct.

Approximately 70 percent of respondents use growth metrics and 34 percent use profitability or revenue, which are much more difficult to manipulate. Nearly one-third have a discretionary component for branch or individual performance that can help reinforce positive behaviors and “right size” awards.

How is our plan monitored? Participants received inquiries from executive management (72 percent) and their boards (51 percent) who may be unfamiliar with the specific details of the retail incentive programs. Banks are addressing the additional oversight through increased monitoring and controls (46 percent) and greater reporting to senior management or the board (42 percent). Reporting elements need to remedy the fact that boards have a responsibility to ensure the bank’s incentive compensation arrangements do not encourage inappropriate risk. Directors often have no visibility into retail incentive plans, have no easy way to quickly understand the impact, do not know what their rights or authority are in understanding, determining, and remedying the risk, and have no plan for how to react. These issues need to be addressed to appropriately monitor the risk.

Are our expectations reasonable? The last element of reporting—how many employees are meeting performance goals—can identify unreasonable expectations or flag the need for better training or management. Collecting performance data over time to see trends in performance, expectations and payouts may also prove useful.

What are our customers experiencing? More than a quarter of respondents indicated that they will develop or enhance their customer complaint process. The process should not only handle specific complaints but also aggregate the complaint types to identify systematic breakdowns in the customer experience.

Are we staying true to our values? Critics have indicated that perhaps the largest failing at Wells Fargo was an environment where branch staff feared that nonperformance would result in job loss. Monitoring of employee satisfaction by business line and mechanisms to provide feedback without repercussions can help identify problems before they escalate.

Given the large-scale publicity of the Wells Fargo scandal, someone—customers, employees, regulators, or shareholders—will likely ask how your retail incentive program is different and what you have done to protect against fraud or misconduct. Accordingly, banks should conduct an assessment of retail incentive plan designs, risks and controls, as well as gain a better understanding of the branch sales culture and leadership.

A CEO’s Hottest Topics



Before incentive programs can be determined, staffing needs are addressed and a succession plan is developed, a CEO needs to articulate a vision and communicate key priorities to his or her team. Gerry Cuddy, CEO of Beneficial Bank, Kent Ellert, CEO of Florida Community Bank and Chris Murphy, CEO of 1st Source Bank, explore what is capturing the attention and imaginations of bank CEOs today in this panel discussion from Bank Director’s 2016 Bank Executive & Board Compensation Conference, lead by Scott Petty, managing director, financial services at Chartwell Partners.

Highlights from this video:

  • Managing Talent in the Current Environment
  • Incentive Compensation After the Wells Fargo Scandal
  • Rising Cost of Risk & Compliance Talent
  • Competing with Bigger Banks for Talent
  • External Threats to the Industry

Video length: 38 minutes

 

What Does the Wells Fargo Debacle Mean for Incentive-Based Compensation?


incentive-pay-10-31-16.pngWith all of the recent press coverage from the Wells Fargo & Co. phony account scandal, you’d have to be living in a cave not to have heard about it. As the details come to light, I’m certain it will be a test case for how not to design an incentive-based compensation program. But, does it mean that incentive-based compensation is a bad thing? In my opinion, a properly designed program can be well within the measure of safety and soundness, can create proper inducements for the appropriate segment of your workforce, and, can avoid creating the negative results that were realized by Wells Fargo.

In our firm, Bank Compensation Consulting, one of the most common short-term, incentive-based compensation designs has at its heart a deferral component. When a participant obtains a bonus based on achieving the goals set forth in the design, all or a portion of that bonus is deferred until some point in the future, say, five years from earning it. The deferral component accomplishes a number of goals. For one, it creates a reason for the participating employee to continue to remain employed with the bank If the employee leaves the bank prior to receiving the deferral amount, it is forfeited. Also, it allows the bank to comply with clawback rules requested by the regulators. Since the unvested portion has not yet been remitted, it can more easily be “clawed back” should there be a violation of terms outlined in the plan document.

Would this deferral design have helped in the Wells Fargo situation? As of this writing, the answer to that question is unclear. I will say that, when I consider how many years I’ve been working with banks and non-financial institutions to implement incentive-based compensation programs, and I consider how many of those haven’t had the result that Wells Fargo has, I think the answer is clear. As a CPA who did his requisite time at one of the large accounting firms, I have to ask myself questions like: What types of internal controls exist at Wells Fargo? What management oversight is in place to ensure an employee can’t easily create a fake account? Weren’t there ‘red flags’? Certainly, when your inventory is cash, there is always an element of temptation that some people simply cannot overcome. But, the sheer volume of the fraudulent accounts created indicates, at least to me, that at some level Wells Fargo management was sending the wrong message to the staffers involved. The corporate culture in the division of Wells Fargo where this took place must have played an enormous role.

The fact that an incentive-based compensation program existed shouldn’t mean that its utilization was the culprit that induced employees to create fraudulent accounts. For me and my colleagues, we feel that the malleability of such programs is extremely advantageous when trying to encourage certain actions by one or a group of employees. However, care and experience should be used when creating a safe and sound incentive-based compensation design.

You might just want to get inside a cave if you were an executive at Wells Fargo right now. Designing an effective and safe incentive-based compensation program and making sure it’s implemented correctly is one way to avoid the glare of bad publicity.

Going The Distance: Top Four Social CEOs


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How many bank CEOs actively engage with their communities through social media? Bank Director found that few truly do, but spending a few extra minutes online can have positive results for their institutions. Bank Director identified four CEOs of North American banks who make the most of their personal social media platforms, focusing on those who have more than 1,000 Twitter followers, tweet several times a week and engage with customers and the community, or who currently use LinkedIn’s publishing platform (more than 6 times in the past year) and average more than 5,000 views per published post. Few bank CEOs even come close to meeting these criteria: Bank Director identified just 7 who have more than 1,000 followers on Twitter, but not all have conversations with their followers and community. For LinkedIn, just one CEO meets the criteria.

Read the full article here on BankDirector.com.

Private Banks Can Get Deals Done


The vast majority of the banking industry is composed of privately owned stock banks. Of the 794 non-FDIC assisted bank M&A deals that were announced in 2013 through 2015, almost two-thirds involved a non-exchange traded buyer. Non-publicly traded banks are clearly getting deals done. There are several key facets that FinPro Capital Advisors (FCA) works on with its non-exchange traded bank clients in order to get an M&A transaction done.

1. Know Your Value
Value for a bank is driven by earnings per share (EPS) and tangible book value per share (TBVS). A bank’s stock price is equal to TBVS multiplied by a TBVS market multiple and EPS multiplied by an EPS market multiple. Those market multiples are the market’s perception of the risk profile of the bank, and a bank can influence that market multiple by changing its risk profile and communicating the appropriate risk profile to the public. As seen below in the table, a lower risk profile bank will likely have a higher TBVS market multiple, resulting in a much higher value.

Tangible Book Value Per Share – Range of Market Multiples 2016Q1
    High Risk Average Risk Low Risk
A Tangible Common Equity $150,000 $150,000 $150,000
B Common Shares Outstanding $5,000 $5,000 $5,000
C=A/B Tangible Book Value Per Share $30.00 $30.00 $30.00
D Price/TBVS Multiple 80.00% 100.00% 120.00%
C x D Stock Price $24.00 $30.00 $36.00

Value is measured primarily by stock price, which means that for both potential nonpublic buyers and sellers it is critical to conduct a quarterly valuation. A private bank can actually have more control over its valuation and the communication around the bank’s value proposition. A private bank controls its message, whereas a publicly traded bank’s message is heavily influenced by the market. FCA believes banks must continue to fix their risk profile, enhance value creators and reduce value detractors in order to increase inherent value. Then, this inherent value must be conveyed to the potential partner involved in the transaction.

2. Know Your Opportunities
In order to reflect all strategic options available, FCA periodically analyzes for each of its clients a full range of buy-side and sell-side options to reflect the full universe of options available to the institution. The detailed process includes:

  1. Comprehensive screening based on strategy
  2. Prioritizing the initial screen to approximately 10 potential targets (or buyers/strategic partners)
  3. Modeling to ensure appropriate assumptions with pro forma financials
  4. Rankings reflecting long-term strategy and multiple pro forma analyses

Once this preliminary list is established, further refinement and prioritization of both buyers and targets can be conducted based on M&A parameters, strategic rationale, and market knowledge as established by your institution’s board of directors. Once you have a prioritized list of strategic partners, be active in staying in contact with those institutions. You can never be sure when another institution on your list will seek a strategic partner.

3. Model Transactions Based On Quantitative and Qualitative Factors
After a short-list is established, comprehensive pro forma financials can be modeled. A buy-side institution needs defined parameters before modeling to maintain discipline. Exceptions to parameters require a strong qualitative rationale behind the deal. Whether you are a buyer or target, a more sophisticated understanding of modeling assumptions directly relates to unlocking greater value in the transaction and recognizing synergies. Regardless of whether you are a buyer or a seller, remember that banking is a people business so make sure to lock up key people as part of the transaction.

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4. Understand Key Issues for Consideration
Though a deal must work financially, it is not just about the numbers. FCA spends a great deal of time working with its clients on nonfinancial aspects of the deal:

  • Choosing the correct legal, corporate and operating structure
  • Maintaining or reducing the risk profile of the combined entity
  • Understanding the regulatory view of the transaction
  • Understanding synergies (not just financial synergies) for the combined entity
  • Establishing the branding and marketing of the combined entity
  • Recruiting and retaining key talent is vital to any transaction
  • Establishing the corporate culture going forward
  • Effectively integrating the target to ensure future value

Just because an institution doesn’t trade on a national exchange, doesn’t mean it can’t be involved in M&A. Know your value, know your opportunities and understand the process. Whether you engage in a transaction or not, the organizations which move the quickest to capitalize on these opportunities are the ones which follow these four steps on a regular basis. Just make sure to choose your strategic M&A partner based upon the long term value of the combined entity.

Four Predictions for Bank M&A in 2016



M&A pricing and shareholder activism are both on the rise as 2015 comes to a close. In this video, Peter Weinstock, a partner at Hunton & Williams LLP, outlines his predictions for bank M&A in 2016.

  • Will sellers command a higher price in 2016?
  • How will deals be structured?
  • Will there be more shareholder activism?
  • Where will community banks find growth opportunities?

What to Look for in Your Next CEO: Part II


CEO-11-2-15.pngSelecting your bank’s next chief executive officer remains the board’s single most important responsibility. The risk of selecting an underprepared or inadequate leader is high, and can impact the bank’s strategic direction, reputation and ultimately, its viability. As highlighted last month, there are many critical banking industry skills needed in a leader today. In addition, there are intangible competencies and leadership qualities which are equally vital for the success of the CEO and the institution. Here, we emphasize ten leadership competencies and attributes which have proven vital for bank CEOs.

Leadership and Vision
As the late great management guru Peter Drucker famously stated, “management is doing things right; leadership is doing the right things.” CEOs must be able to set the proper course for an institution by outlining the company vision, and inspire employees to follow this mission.

Broad-based Communication Skills and Executive Presence
Every board member should desire these qualities in a CEO, but they can’t be taken for granted. Today’s CEO must communicate through a broader array of channels than ever before, and to a wide audience beyond the bank’s customers, employees and communities. When you add investors and regulators to the mix, the presence and style of communication become increasingly important.

Cultural Agility
The U.S. today is a bigger melting pot than ever. As a result, a bank’s customers and employees have become ever more diverse. A growing number of new businesses are started by women and minorities, so the agility to appreciate a more varied constituency is critical for banks that want to grow.

The Ability to Assess and Attract Top Talent
This may be one of the most underappreciated elements of successful leadership. Stars want to work with stars, and the ability to bring superior talent into the organization has never been more important. Talented employees have become one of the few remaining differentiators between banks.

Adaptable and Flexible
The banking industry continues to evolve rapidly and, at times, dramatically. Adaptability and flexibility are newer traits that successful CEOs must deploy. Technology leads the pack in terms of change, but regulatory focus and customer desires shift as well, and banks need leaders who can respond quickly and effectively.

Strong Execution Skills
While having a current and well-developed strategic plan will always be important, execution is the other side of the coin. The ability to drive the plan forward is the key to enhanced performance, and the variable in successful execution always comes down to managing people.

Ahead of the Curve on Industry Trends
It’s not enough to know what the current trends are. Standout leaders not only see where the industry is heading, but begin formulating responses to these trends so their bank can stay ahead of the pack.

A Focus on Accountability
There is little room in today’s bank for complacency. In a competitive and cost-conscious environment, many banks seek a leader who can enhance accountability, and recognize and reward individual performance.

Builds a “Culture of Excellence”
Excellence is a habit, as the saying goes. Banks that truly seek to distinguish themselves should cultivate a culture that practices excellence every day. Leaders who understand the need to “raise the bar” to survive and thrive will drive this focus home.

Knows How to Work Constructively With a Board of Directors
One of the quickest ways for a bank CEO to falter is to lose the trust of the board. A successful CEO must appreciate the pressure that directors face, from regulators, investors and communities, and partner with the board to manage the pressures and challenges that the institution is facing almost daily. A truly constructive working relationship benefits everyone.

For banks today, the intangible aspects of effective leadership are as important as the technical skills and industry expertise. While the tangible proficiencies may be more obvious and identifiable on the surface, it is often the attributes, competencies and qualitative elements of leadership that make the difference in the success of truly great CEOs.