Research Report: A Practical Guide to ESG

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For years, investors and activists have worked to compel large, public companies to report their stance on environmental, social and governance issues — better known as ESG. And recently, additional pressure has come from bank regulators on one specific ESG risk: climate. Smaller banks, meanwhile, see the writing on the wall and are taking steps to beef up their ESG programs.

As regulated entities, banks are no strangers to many elements of ESG, which Bank Director explores in the newly launched research report Choose Your Path: A Practical Guide to ESG, which is sponsored by Crowe LLP. Board structure and composition, cybersecurity and data privacy, risk management and regulatory compliance are all areas that fall under the governance umbrella. Social elements, which include financial access, diversity and community involvement, also incorporate into day-to-day operations as financial institutions comply with fair lending rules and other regulations. But it’s the ‘E’ for environmental — specifically, measuring greenhouse gas emissions — that frustrates some bankers who would rather focus on serving their communities than spending time and resources on that complex assessment.

In this report, Bank Director provides intelligence for bank boards and leadership teams seeking to better understand the current regulatory and investor landscape, and uncover what’s relevant for their own organizations. Inside, you’ll find:

  • A quick overview of how ESG has become a language of sorts to describe a company’s activities to investors and other stakeholders
  • Where Washington stands on ESG
  • How investors have focused their attention
  • How banks leverage ESG to uncover new opportunities, including how three community banks have identified core areas that are relevant to their own operations
  • Key material matters for banks to prioritize
  • What role boards could play in ESG oversight, and questions directors might ask

“[A]s disclosures grow, [investors] have more information to make comparable decisions, and that will just continue to grow because of the regulatory environment,’’ says Chris McClure, a partner at Crowe who leads the firm’s ESG team.

On Dec. 2, 2022, the Federal Reserve issued a request for comment on proposed principles for institutions over $100 billion in assets. These principles focus on climate-related financial risks: everything from ​​governance and policies and procedures to strategic planning and risk management. It’s in line with similar guidance issued by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.

At least one Fed Governor doesn’t believe the guidance is necessary: “Climate change is real, but I disagree with the premise that it poses a serious risk to the safety and soundness of large banks and the financial stability of the United States,” stated Christopher Waller. “The Federal Reserve conducts regular stress tests on large banks that impose extremely severe macroeconomic shocks and they show that the banks are resilient.”

In 2023, the Securities and Exchange Commission is expected to finalize its rule around climate disclosure, adding another element of compliance for all publicly traded companies — not just the biggest banks. While some exemptions are anticipated for smaller companies, the rule would expect companies to share how climate-related risks are managed and governed, along with the material impacts of these risks on operations and strategy. Companies could be required to measure greenhouse gas emissions — including emissions by vendors and clients — and share their goals for transitioning to a greener economy.

At the same time, governments in conservative states are working to oppose these rules, going after banks and asset managers that they believe discriminate against the oil and gas or gun sectors. It’s a tricky environment to navigate. Increasingly, some disclosure will be mandated, at least for publicly traded institutions. But bank leaders will still determine their own strategies for the road ahead — and banks that are successful will find the path that’s right for their organization.

To access the report, click here.

If you have feedback on the contents of this report, please contact Bank Director’s vice president of research, Emily McCormick, at [email protected].

Community Banks Fuel the Future of Renewable Energy

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The transformational Inflation Reduction Act (IRA) contains a number of provisions designed to entice a large numbers of community and regional banks to deploy capital into renewable energy projects across the US.

Large U.S. banks and corporations have made significant renewable energy tax credit investments for over a decade. Through the IRA, there is greater opportunity for community and regional banks to participate.

The act extends solar tax credits, or more broadly renewable energy investment tax credits, (REITCs) for at least 10 more years, until greenhouse gas emissions are reduced by 70%. It also retroactively increases the investment tax credit (ITC) rate from 26% to 30%, effective Jan. 1, 2022. This extension and expansion of ITCs, along with other meaningful incentives included in the act, should result in a significant increase in renewable energy projects that are developed and constructed over the next decade.

Community banks are a logical source of project loans and renewable energy tax credit investments, such as solar tax equity, in response to this expected flood of mid-size renewable projects. REITCs have a better return profile than other types of tax credit investments commonly made by banks. REITCs and the accelerated depreciation associated with a solar power project are fully recognized after it is built and begins producing power. This is notably different from other tax credit investments, such as new markets tax credits, low-income housing tax credits and historic rehabilitation tax credits, where credits are recognized over the holding period of the investment and can take 5, 7, 10 or 15 years.

Like other tax equity investments, renewable energy tax equity investments require complex deal structures, specialized project diligence and underwriting and active ongoing monitoring. Specialty investment management firms can provide support to community banks seeking to make renewable energy or solar tax credit investments by syndicating the investments across small groups of community banks. Without support, community banks may struggle to consistently identify suitable solar project investment opportunities built by qualified solar development partners.

Not all solar projects are created equally; and it is critical for a community bank to properly evaluate all aspects of a solar tax equity investment. Investment in particular types of solar projects, including utility, commercial and industrial, municipal and community solar projects, can provide stable and predictable returns. However, a community bank investor should perform considerable due diligence or partner with a firm to assist with the diligence. There are typically three stages of diligence:

  1. The bank should review the return profile and GAAP financial statement impact with their tax and audit firm to validate the benefits demonstrated by the solar developer and the anticipated impact of the investment on the bank’s earnings profile and capital.
  2. The bank should work with counsel to identify the path to approval for the investment. Solar tax equity investments are permissible for national banks under a 2021 OCC Rule (12 CFR 7.1025), and banks have been making solar tax equity investments based on OCC-published guidance for over a decade. In 2021, the new rule codified that guidance, providing a straightforward roadmap and encouraging community banks to consider solar tax equity investments. Alternatively, under Section 4(c)(6) of the Bank Holding Company Act, holding companies under $10 billion in assets may also invest in a properly structured solar tax equity fund managed by a professional asset manager.
  3. The bank must underwrite the solar developer and each individual solar project. Community banks should consider partnering with a firm that has experience evaluating and underwriting solar projects, and the bank’s due diligence should ensure that there are structural mitigants in place to fully address the unique risks associated with solar tax equity financings.

Solar tax credit investments can also be a key component to a bank’s broader environmental, social and governance, or ESG, strategy. The bank can monitor and report the amount of renewable energy generation produced by projects it has financed and include this information in an annual renewable energy finance impact report or a broader annual sustainability report.

The benefits of REITCs are hard to ignore. Achieving energy independence and reducing carbon emissions are critical goals in and of themselves. And tax credit investors that are funding renewable energy projects can significantly offset their federal tax liability and recognize a meaningful annual earnings benefit.

A Look Inside Fifth Third’s ESG Journey

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Mike Faillo was recently promoted to the new role of chief sustainability officer at Fifth Third Bancorp, with a team focused on the Cincinnati-based regional bank’s environmental, social and governance (ESG) program, including its climate strategy and social and governance reporting. Faillo started his career in public accounting at PwC in 2008, just in time for the collapse of Lehman Brothers and the onset of the financial crisis. He spent the next several years auditing a trillion dollar bank, and then working on Comprehensive Capital Analysis and Review (CCAR) stress tests and developing resolution plans.

Faillo says those experiences informed his journey to lead ESG at $211.5 billion Fifth Third. 

When he joined the bank’s investor relations team in 2019, he dug into Fifth Third’s ESG profile and learned that the organization wasn’t effectively telling its story. So with support from the bank’s executive leadership team, including Chairman and CEO Greg Carmichael, Faillo transformed Fifth Third’s corporate social responsibility report into a broader, data-driven report in 2020 that tells the bank’s complete ESG story. Faillo jokes that he went from writing about the death of a bank through living wills to the life of it in the ESG report.

In this edition of the Slant podcast, Faillo also discusses the need for agility and teamwork on ESG, and how he works across the organization to uncover opportunities for the bank. He also digs into the complexities of measuring carbon emissions, and why it’s a great opportunity to work with business clients to help them on their own journeys to net zero. And he addresses what’s easiest — and hardest — for banks to get right on ESG. The interview was conducted in advance of Bank Director’s Bank Audit & Risk Committees Conference, where Faillo appears as part of a panel discussion, “How Banks Are Stepping Up Their ESG Plans.”

What New Climate Disclosure Means for Banks

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Climate risk assessment is still in its infancy, but recent pronouncements by federal regulators should have bank directors and executives considering its implications for their own organizations.   

Under a new rule proposed by the Securities and Exchange Commission, publicly traded companies would be required to report on certain climate-related risks in regular public filings. 

Though the SEC’s proposal only applies to publicly traded companies, some industry observers say it’s only a matter of time before more financial institutions are expected to grapple with climate-related risks. Not long after the SEC issued its proposal, the Federal Deposit Insurance Corp. issued its own draft principles for managing climate risk. While the principles focus on banks with over $100 billion of assets, Acting Chair Martin Gruenberg commented further that “all financial institutions, regardless of size, complexity, or business model, are subject to climate-related financial risks.” 

The practice of assessing climate risk has gained momentum in recent years, but many boards aren’t regularly talking about these issues. Just 16% of the directors and officers responding to Bank Director’s 2022 Risk Survey say their board discusses climate change annually.

To understand what this means for their own organizations, boards need to develop the baseline knowledge so directors can ask management smarter questions. They should also establish organizational ownership of the issue and think about the incremental steps they might take in response to those risk assessments. 

“Climate risk is like every other risk,” says Ivan Frishberg, chief sustainability officer at $7 billion Amalgamated Financial Corp. in New York. “It needs the same systems for managing it inside a bank that any other kind of risk does. It’s going to require data, it’s going to require risk assessments, it’s going to require strategy. All of those things are very traditional frameworks.” 

The SEC’s proposed rule intends to address a major challenge with sizing up climate risk: the lack of uniform disclosures of companies’ greenhouse gas emissions and environmental efforts. The agency also wants to know how banks and other firms are incorporating climate risks into their risk management and overall business strategies. That includes both physical risk, or the risk of financial losses from serious weather events, and transition risk, arising from the shift to a low-carbon economy.  

Bank Director’s Risk Survey finds that many boards need to start by getting up to speed on the issue. Though 60% of survey respondents say that their board and senior leadership have a good understanding of physical risks, just 43% say the same about transition risk. Directors should also get a basic grasp of what’s meant by Scope 1, Scope 2 and Scope 3 emissions to better gauge the impact on their own institutions.  

Understanding Carbon Emissions

Scope 1: Emissions from sources directly owned or controlled by the bank, such as company vehicles.

Scope 2: Indirect emissions associated with the energy a bank buys, such as electricity for its facilities. 

Scope 3: Indirect emissions resulting from purchased goods and services (business travel, for example) and other business activities, such as lending and investments.

 

The SEC’s proposal would not require scenario analysis. However, directors and executives should understand how their loan portfolios could be affected under a variety of scenarios. 

Talking with other banks engaged in similar efforts could help institutions benchmark their progress, says Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, a nonprofit that works with financial institutions on corporate sustainability. Boards could also look to trade associations and recent comments by federal regulators. In a November 2021 speech, Acting Comptroller of the Currency Michael Hsu outlined five basic questions that bank boards should ask about climate risk. The Risk Management Association recently established a climate risk consortium for regional banks. 

Assessing climate risk involves pulling together large amounts of data from across the entire organization. Banks that undertake an assessment of their climate-related risks should appoint somebody to coordinate that project and keep the board apprised.  

Banks might also benefit from conducting a peer review, looking at competing institutions as well as banks with similar investor profiles, says Lorene Boudreau, co-leader of the environment, social and governance  working group at Ballard Spahr. “What are the other components of your investors’ profile? And what are they doing? Use that information to figure out where there’s a [gap], perhaps, between what they’re doing and what your company is doing,” she says.

Finally, boards should think about the shorter term, incremental goals their bank could set as a result of a climate risk assessment. That could look like smaller, sector-specific goals for reducing financed emissions or finding opportunities to finance projects that address climate-related challenges, such as storm hardening or energy efficiency upgrades. 

A number of big banks have made splashy pledges to reduce their greenhouse gas emissions to net zero by 2050, but fewer have gotten specific about their goals for 2030 or 2040, Boudreau says. “It doesn’t have a lot of credibility without those interim steps.” 

While many smaller financial institutions will likely escape regulatory requirements for the near term, they can still benefit from adopting some basic best practices so they aren’t caught off guard in a worst-case scenario. 

“Climate risk is financial risk,” says Rothstein. “If you’re a bank director thinking about the safety and soundness of a bank, part of your job has to be to look at climate risk. Just as if someone said, ‘Is the bank looking at cyber risk? Or pandemic risk or crypto risk?’ All of those are risks that directors, through their management team, have to be aware of.” 

Focusing on ESG

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In this episode of Looking Ahead, Crowe LLP Partner Mandi Simpson talks with Al Dominick about what’s driving greater focus on environmental, social and governance (ESG) issues, and explores some of the fundamentals that boards should understand. She also sheds light on how boards can consider shareholder return and balance long-term ESG strategy with a short-term view on profitability, and provides tips on how boards can better focus on this important issue.

3 Steps to Planning for Climate Risk

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Last year, President Joe Biden’s Executive Order on Climate-Related Financial Risk and the resulting report from the Financial Stability Oversight Council identified climate change as an emerging and increasing threat to U.S. financial stability.

A number of financial regulatory and agency heads have also spoken about climate risk and bank vulnerability.

Now the question is: What should banks be doing about it now? Here are three steps you can take to get started:

1. Conduct a Risk Assessment
Assessing a financial institution’s exposure to climate risk poses an interesting set of challenges. There is the short-term assessment for both internal operations and business exposures: what is happening today, next month or next year. Then there are long-term projections, for which modeling is still being developed.

So where to begin?
Analyzing the potential impacts of physical risk and transition risk begins with the basic question, “What if?” What if extreme weather events continue, how does that impact or alter your operational and investment risks? What if carbon neutral climate regulations take hold and emissions rapidly fall? Widen your scope from credit risk to include market, liquidity and reputational risk, which is taking on new meaning. Bank executives may make reasonable decisions to stabilize their balance sheet, but those decisions could backfire when banks are seen as not supporting their customers in their transition.

Regional and smaller financial institutions will need more granular data to assess the risk in their portfolios, and they may need to assemble local experts who are more familiar with climate change’s impact on local companies.

2. Level Up the Board of Directors
Climate change has long been treated as part of corporate social responsibility rather than a financial risk, but creating a climate risk plan without executive support or effective oversight is a fool’s errand. It’s time to bring it into the boardroom.

Banks should conduct a board-effectiveness review to identify any knowledge gaps that need to be filled. How those gaps are filled depends on each organization, but climate change expertise is needed at some level — whether that be a board member, a member of the C-suite or an external advisor.

The next step is incorporating climate change into the board’s agenda. This may already be in place at larger institutions or ones located in traditionally vulnerable areas. However, recent events have made it clear that climate risk touches everything the financial sector does. Integrating climate risk into board discussions may look different for each financial institution, but it needs to start happening soon.

3. Develop a Climate-Aware Strategy
Once banks approach climate risk as a financial risk instead of simply social responsibility, it’s time to position themselves for the future. Financial institutions are in a unique position when formulating a climate risk management strategy. Not only are they managing their own exposure — they hold a leadership role in the response to carbon neutral policies and regulation.

It can be challenging, but necessary, to develop a data strategy with a holistic view across an organization and portfolio to reveal where the biggest risks and opportunities lie.

Keeping capital flowing toward clients in emission industries or vulnerable areas may seem like a high risk. But disinvestment may be more detrimental for those companies truly engaged in decarbonization activities or transition practices, such as power generation, real estate, manufacturing, automotive and agriculture. These exposures may be offset by financing green initiatives, which have the potential to mitigate transition risk across a portfolio, increase profit and, better yet, stabilize balance sheets as the economy evolves into a carbon neutral world.

Banks Enter a New Era of Corporate Morality

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Are we entering a new era of morality in banking?

Heavily regulated at the state and federal level, banks have always been subjected to greater scrutiny than most other companies and are expected to pursue fair and ethical business practices — mandates that have been codified in laws such as the Community Reinvestment Act and various fair lending statutes.

The industry has always had a more expansive stakeholder perspective where shareholders are just one member of a broad constituency that also includes customers and communities.

Now a growing number of banks are taking ethical behavior one step further through voluntary adoption of formal environmental, social and governance (ESG) programs that target objectives well beyond simply making money for their owners. Issues that typically fall within an ESG framework include climate change, waste and pollution, employee relations, racial equity, executive compensation and board diversity.

“It’s a holistic approach that asks, ‘What is it that our stakeholders are looking for and how can we – through the values of our organization – deliver on that,” says Brandon Koeser, a financial services senior analyst at the consulting firm RSM.

Koeser spoke to Bank Director Editor-at-Large Jack Milligan in advance of a Sunday breakout session at Bank Director’s Acquire or Be Acquired Conference. The conference runs Jan. 30 to Feb. 1, 2022, at the JW Marriott Desert Ridge Resort and Spa in Phoenix.

The pressure to focus more intently on various ESG issues is coming from various quarters. Some institutional investors have already put pressure on very large banks to adopt formal programs and to document their activities. Koeser says many younger employees “want to see a lot more alignment with their beliefs and interests.” And consumers and even borrowers are “beginning to ask questions … of their banking partners [about] what they’re doing to promote social responsibility or healthy environmental practices,” he says.

Koeser recalls having a conversation last year with the senior executives of a $1 billion privately held bank who said one of their large borrowers “came to them and asked what they were doing to promote sustainable business practices. This organization was all about sustainability and being environmentally conscious and it wanted to make sure that its key partners shared those same values.”

Although the federal banking regulators have yet to weigh in with a specific set of ESG requirements, that could change under the more socially progressive administration of President Joe Biden. “One thing the regulators are trying to figure out is when a [bank] takes an ESG strategy and publicizes it, how do they ensure that there’s comparability so that investors and other stakeholders are able to make the appropriate decision based on what they’re reading,” he says.

There are currently several key vacancies at the bank regulatory agencies. Biden has the opportunity to appoint a new Comptroller of the Currency, a new chairman at Federal Deposit Insurance Corp. and a new vice chair for supervision at the Federal Reserve Board. “There’s a unique opportunity for some new [ESG] policy to be set,” says Koeser. “I wouldn’t be surprised if we see in the next two to three years, some formality around that.”

Koeser says he does sometimes encounter resistance to an ESG agenda from some banks that don’t see the value, particularly the environmental piece. “A lot of banks will just kind of say, ‘Well, I’m not a consumer products company. I don’t have a manufacturing division. I’m not in the transportation business. What is the environmental component to me?’” he says. But in his discussions with senior executive and directors, Koeser tries to focus on the broad theme of ESG and not just one letter in the acronym. “That brings down the level of skepticism and allows the opportunity to engage in discussions around the totality of this shift to an ESG focus,” he says. “I haven’t been run out of a boardroom talking about ESG.”

Koeser believes there is a systemic process that banks can use to get started on an ESG program. The first step is to identify a champion who will lead the effort. Next, it’s important to research what is happening in the banking industry and with your banking peers and competitors. Public company filings, media organizations such as Bank Director magazine and company websites are all good places to look. “There’s a wealth of information out there to start researching and understanding what’s happening around us,” Koeser says.

A third step in the formation process is education. “The [program] champion should start presenting to the board on what they’re finding,” Koeser says. Then comes a self-assessment where the leadership team and board compare the bank’s current state in regards to ESG to the industry and other institutions it competes with. The final step is to begin formulating an ESG strategy and building out a program.

Koeser believes that many banks are probably closer to having the building blocks of an effective ESG program than they think. “It’s really just a matter of time before ESG will become something that you’ll need to focus on,” he says. “And if you’re already promoting a lot of really good things on your website, like donating to local charities, volunteering and supporting your communities, there’s a way to formalize that and begin this process sooner rather than later.”

Confronting M&A Headwinds & Tailwinds In 2022

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Deal activity picked back up in 2021 — and 2022 promises a similar pace, including enhanced interest in scale-building mergers of equals, according to Bank Director’s 2022 Bank M&A Survey, sponsored by Crowe LLP. Rick Childs, a partner at the firm, explains what factors could drive and hinder deal volume. He also discusses external pressures on the banking space, and how potential buyers and sellers should incorporate environmental, social and governance (ESG) matters.

  • Expectations for Deals in 2022
  • What Buyers Want
  • Balancing the Regulatory Burden
  • Weaving ESG With M&A

The 2022 Bank M&A Survey examines current growth strategies, including expectations for acquirers and what might drive a bank to sell, and provides an outlook on economic and regulatory matters. The survey results are also explored in the 1st quarter 2022 issue of Bank Director magazine.

Creating a Comprehensive ESG Approach, From Compliance to Competitiveness

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Not only are investors increasingly incorporating environmental, social and governance, or ESG, factors in decisions about how to allocate their capital, but customers, employees and other stakeholders are also placing greater emphasis on ESG matters.

ESG will also continue to be a focus for regulators, with a particular emphasis on climate-related risks. It has rapidly evolved from a compliance matter to a strategic and competitive consideration; boards of directors and management teams should respond with both short-term action and preparation for the longer term. We review key developments and offer six steps that boards and management can take now to position a bank for the current ESG environment.

SEC’s Approach to Climate Change
The Securities and Exchange Commission has made considerations relating to ESG topics a top priority going forward, especially with respect to climate change-related issues. Chair Gary Gensler has charged SEC staff with developing a rule proposal on mandatory climate risk disclosure by the end of this year. Based on Gensler’s statements, the rulemaking is likely to be distinct from approaches developed by private framework providers and may not necessarily be tailored according to company size, maturity or other similar metrics.

Gensler has emphasized the importance of climate change disclosures generating “consistent and comparable” and “decision-useful” information. These disclosures may be contained in Form 10-K; given the tight timeframes associated with preparation of Form 10-K filings, this approach may require certain registrants to adjust their data collection and verification practices.

Bank Regulators’ Approach to Climate Change
Federal Reserve Chair Jerome Powell has indicated that he supports the Fed playing a role in educating the public about the risks of climate change to help inform elected officials’ policy decisions. The Fed established a Financial Stability Climate Committee to identify, assess and address climate-related risks to financial stability across the financial system, as well as the Supervision Climate Committee to help understand implications of climate change for financial institutions, infrastructure and markets.

The Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. are also taking climate risk seriously. In July, the OCC joined the Network of Central Banks and Supervisors for Greening the Financial System and announced the appointment of Darrin Benhart as its first climate change risk officer. Most recently, Acting Comptroller of the Currency Michael Hsu said the OCC is working with interagency peers to develop effective climate risk management guidance. The FDIC expects financial institutions to consider and address climate risks in their operating environment.

ESG as Competitive Advantage
Many companies have begun integrating ESG considerations into their products and strategies. Some research has shown that ESG can drive consumer preferences, with certain consumer demographics using ESG factors to differentiate among products. Younger demographics, for example, are choosing banks according to ESG credentials. Moreover, ESG considerations are becoming increasingly important to certain employee bases.

ESG issues are also top-of-mind for many investors, driven by prominent institutional investors that are linking a company’s ESG profile with its long-term financial performance and other stakeholders who want to align investments with social values and goals.

Directors and management teams should engage in an honest self-assessment of their bank’s ESG status, including determining which ESG matters are most material to their business. They should establish processes for board-level ESG strategy and oversight, along with clear management authority and reporting lines. They should also strengthen controls around ESG quantitative reporting. Ultimately, management should now consider whether and how to begin integrating ESG into commercial activities and overall strategy. With that in mind, here are six steps that boards and management can take now:

  1. Conduct a self-assessment on ESG matters, including on materiality, performance and controls.
  2. Begin preparations for an imminent SEC rulemaking on mandatory climate change disclosure that could potentially apply to Form 10-Ks in time for the 2022 fiscal year.
  3. Strengthen ESG processes and controls, while allowing flexibility for frequent reevaluation.
  4. Understand the key players in the ESG space and their varied perspectives.
  5. Establish responsibility for maintenance of a core ESG knowledge base and awareness of key developments.
  6. Monitor ESG developments as part of operational and strategic planning.

Bank M&A Survey Results: Technology, Competitive Pressures Drive Deal Activity in 2022

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On Oct. 12, banking industry observers awoke to a surprise: Umpqua Holdings Corp. and Columbia Banking System announced their intent to form a $50 billion-plus franchise on the West Coast. Prior to the deal, Umpqua appeared to prioritize its organic growth strategy, Piper Sandler & Co. Managing Director Matthew Clark explained in a note published later that day. Columbia, on the other hand, seemed more interested in smaller deals. 

The combination is the latest transformative, scale-building deal announced in 2021, including M&T Bank Corp. and People’s United Financial, Webster Financial Corp. and Sterling Bancorp, and New York Community Bancorp and Flagstar Bancorp. The rationale of those deals aligns with the M&A drivers identified by senior executives and board members in Bank Director’s 2022 Bank M&A Survey, sponsored by Crowe LLP. When asked about the primary factors that make M&A an important piece of their bank’s growth strategy, more than half seek to achieve scale to invest in technology and other key areas. Further, respondents point to a complementary culture (64%), locations in growing markets (58%) and efficiency gains (56%) when asked to identify the attributes of an effective target.

“This is an exciting combination that brings together two well-respected organizations and talented teams, accelerating our shared strategic objectives to create the leading regional bank headquartered in the West,” said Umpqua CEO Cort O’Haver in a press release. Added scale will allow further investment in technology and expand the bank’s offerings, enhancing its competitive position across “high-growth, attractive markets” in Oregon, Washington, California, Idaho and Nevada. 

In an environment characterized by digital acceleration, high competition for customers and talent, and continued low interest rates, a strategic combination may prove too compelling for some to pass up.

Almost half of survey respondents say their institution is likely to purchase another bank by the end of 2022 — a significant increase compared to the previous year, and more in line with the pre-pandemic environment. Given the usual pace of M&A, it’s unlikely that most of these prospective acquirers will find a willing target. But the same factors that spur acquirers to build scale also propel sellers: 42% of respondents to Bank Director’s 2022 Bank M&A Survey say that an inability to keep pace with the digital evolution could drive their bank to sell.

Key Findings

The Right Price
Price remains a key barrier to deals, as noted by 73% of respondents. The plurality of prospective buyers (43%) indicate they’re willing to pay up to 1.5 times tangible book value for a target. Nineteen percent say they’d pay up to 1.75 times book; 9% would pay more.

Many Open to MOEs
Almost half of respondents say they’d consider a merger of equals or similar strategic combination in today’s environment. Of these, 39% say their board and management team is more likely to consider such a deal compared to before the pandemic — representing a shift in mindset for some bank leaders.

Increased Focus on ESG in M&A
While most banks are unlikely to take a comprehensive view of environmental, social and governance (ESG) issues when examining a potential deal, the majority of banks consider ESG factors when assessing strategic fit. Key among those are cultural alignment (89%), reputational risks and opportunities (73%), employee relationships/engagement (62%) and data security/privacy (51%), which can be classified as social or governance within the ESG umbrella. 

Optimism About the Economy
Almost three-quarters of respondents believe the U.S. economy will experience modest growth in 2022; 14% say it will grow significantly. Further, almost all say that businesses have recovered in their markets, though some sectors remain stressed. And while 88% report that business clients express concerns about supply chain disruptions and labor shortages, most believe that this won’t have a material impact on credit quality. 

Reduced Credit Risk Concerns
Last year’s survey found the top barrier to deals was asset quality; 63% of respondents named it the top concern. This year, just 36% express concerns about asset quality. In addition, fewer express concerns about loan concentrations in commercial real estate, retail or the oil sector.

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