What We’ve Learned From the Pandemic (So Far)

Year in and year out, Bank Director’s surveys tap into the views of bank leaders across the country about critical issues: risk, technology, compensation and talent, corporate governance, and M&A and growth.

But 2020 has been a year for the record books. It’s been an interesting time for me as head of research for Bank Director, with the results of our recent surveys revealing changes that, in my view, will continue to have far-ranging effects for the industry.

As boards plan for 2021 and beyond, here are a few things I believe you should be considering.

The Great Tech Ramp-Up
The Covid-19 pandemic dramatically accelerated technology adoption by the industry, an issue we explored in Bank Director’s 2020 Technology Survey.

Sixty-five percent of the executives and board members responding to that survey told us that their bank implemented or upgraded technology to respond to Covid-19, primarily to issue Paycheck Protection Program loans. As a result, most banks reported increased spending on technology, above and beyond their budgets for 2020.

The primary drivers that fuel bank technology strategies remain the same — improving customer experience and generating efficiencies — and pressure has only grown on financial institutions to adapt. More than half of the survey respondents told us that their bank’s technology plans had been adjusted due to the pandemic, with most focused on enhancing their digital banking capabilities.

“The next generation will rarely use a branch,” one survey respondent commented, “so a totally quick efficient comprehensive digital experience will be necessary to survive.”

The 2020 Compensation Survey confirmed that most banks dialed back on branch service early in the pandemic; by the time we fielded the Technology Survey in June and July, bank leaders finally recognized the digital channel’s preeminence in terms of growing the bank and serving customers. (The previous year’s survey found respondents placing equal emphasis on digital and branch channels.)

Our FinXTech Special Report on mobile banking provides tips on evaluating your bank’s mobile app.

The Technology Survey revealed gaps in small business and commercial lending as well — deficiencies that have been laid bare as a result of the pandemic. More than half of respondents that have adjusted or accelerated their technology strategy indicated they’d expand digital lending capabilities.

Some bankers I spoke with about the survey results indicated concerns that banks could dial back on technology spending due to the profitability pressures facing the industry. However, given the changes we’ve seen, I don’t believe it’s sustainable to dial back on this investment.

That leaves bank leaders facing a few key challenges, starting with determining where to invest their technology dollars. It’s difficult to gauge where the wind will blow, but the survey provides solid clues: 42% believe process automation will be one of the most important technologies affecting their bank, followed by data analytics (39%). Almost 40% believe the security structure to be vitally important; cybersecurity is a perennial concern for bank leaders and as banking grows more digital, this will require additional investment.

Additionally, 64% told us that modernizing their bank’s digital applications forms a core element of their bank’s strategy.

Implementing new technology requires expertise, and the 2020 Compensation Survey found most respondents (79%) telling us that it’s difficult to attract technology and digital talent.

But this may not mean bringing data scientists or other highly-specialized roles on staff. Olney, Maryland-based Sandy Spring Bancorp hired a senior data strategist who is responsible for the use, governance and management of information across the organization; that individual also reviews vendor capabilities and identifies areas that help the bank achieve its goals. “The senior data strategist should be on the lookout for ways to find opportunities for and through data analytics, whether that’s predicting customer trends or finding new revenue-generating opportunities,” said John Sadowski, chief information officer at the $13 billion bank.

Finally, 69% told us their bank didn’t streamline vendor due diligence processes in response to Covid-19. As technology adoption accelerates, consider whether your bank’s third-party management process is sufficiently comprehensive, while still allowing it to quickly and efficiently put new solutions into place. 

Work-From-Home Will Alter the Workplace
The 2020 Compensation Survey found that banks almost universally implemented or expanded remote work options as a result of the pandemic; the 2020 Technology Survey later told us that for many banks (at least 42%) that change will be permanent for at least some of their staff.

In late October, $96 billion Synchrony Financial — a direct, virtual bank — announced that remote work will become permanent for its employees, allowing them to choose from three options. Some can simply work from home. Others can schedule office space, while some will have an assigned desk. This third group includes executives, who will be asked to work remotely at least a couple days a week to reinforce the cultural shift.

It’s a move that the bank believes will make employees happy, but it also promises to yield significant cost savings by cutting real estate expenses.

It could also yield competitive benefits for banks seeking top talent. Glacier Bancorp, for example, doesn’t limit hires to its Kalispell, Montana-based headquarters — instead, it hires anywhere within its multi-state footprint. That helps the $18 billion bank recruit the technology talent it needs, human resources director David Langston told me in May.

Remote work is a cultural shift that many bank executives will be reticent to make. But even if a long-term remote work option doesn’t align with your bank’s culture, offering flexibility will help support employees, who have their own struggles at home with virtual schooling or caring for high-risk family members.

Too often, working parents are forced to choose between their children and their career, meaning companies are losing valuable employees or, in the least, productivity.

A recent McKinsey study finds that a lack of flexibility, among other issues, drives women in particular to leave the workforce. The authors also advise that companies “should look for ways to re-establish work-life boundaries” — putting policies in place to assure meeting times and work communications occur within set hours, and encouraging employees to take advantage of flexible scheduling. Unfortunately, employees often worry that taking advantage of these benefits will damage their reputation at work. “To mitigate this, leaders can assure employees that their performance will not be measured based on when, where, or how many hours they work. Leaders can also communicate their support for workplace flexibility [and] can model flexibility in their own lives. … When employees believe senior leaders are supportive of their flexibility needs, they are less likely to consider downshifting their careers or leaving the workforce.”

Flexibility and remote work can help companies retain valued employees.

It’s difficult to change a culture, especially if you believe that what you’re doing works. But sometimes, culture can change around you.  I’d encourage you to approach these issues with fresh eyes to ensure your leadership team can direct the change — not the other way around.

Don’t Put Diversity on the Backburner
Almost half of respondents to Bank Director’s 2020 Compensation Survey told us their bank doesn’t measure its progress around diversity and inclusion, indicating to me that they don’t have clear objectives around creating an inclusive culture that hires, retains and rewards employees despite race, ethnicity or gender.

Further, just 39% of the CEOs and directors responding to our 2020 Governance Best Practices Survey told us their board has several members who are diverse, based on race, ethnicity or gender. And almost half believe that diversity’s impact on a company’s performance is overrated.

Employees and customers take this issue seriously. Rockland, Massachusetts-based Independent Bank Corp., which has been recognized for LGBTQ workplace equality by the Human Rights Campaign since 2016, incorporates inclusion in its “cycle of engagement.” This starts with engaged employees who provide a higher level of service that delights customers, resulting in strong financial performance for the institution, allowing the company to invest back into its employees — continuing the virtuous cycle.

The $13 billion bank’s culture promotes respect, teamwork, empathy — and inclusion, COO Robert Cozzone told me in a recent interview. “Think about working for a company where you enjoy being around the people that you work with, you enjoy the work that you do, you buy into the mission of the company — you’re going to be much more productive than if you don’t have those things,” he says. Today, “It’s all that more important to show [employees] care and empathy and understanding.”

Small, rural banks may believe it’s difficult to hire diverse talent, making it nearly impossible for them to tackle this issue. Expanding remote work options, mentioned earlier, can help. But ultimately, it’s an issue that companies nationwide will need to address as the demographics of the country change. “We all need to do better [on] diversity and inclusion,” one survey respondent wrote. “Many of us out in rural America don’t have as many opportunities, but we need to keep this topic front of mind, and [read] information and stories on how to be more intentional.”

Directors Must Be Engaged and Educated
The 2020 Governance Best Practices Survey also found 39% indicating that at least some members of their board aren’t actively engaged in board meetings; 36% said some members don’t know enough about banking to provide effective oversight.

That survey, conducted just before the pandemic effectively shut down the U.S. economy, found executives and directors identifying three top challenges to the viability of their institution: pressure on net interest margins (53%), meeting customer demands for digital options (40%) and industry consolidation and the growing power of big banks. Further, most directors said that staying on top of the changes occurring in the industry is one of the great challenges facing their board.

Confronting these issues will require engaged and knowledgeable leadership.

Bank Director’s 2020 Compensation Survey, sponsored by Compensation Advisors, surveyed 265 independent directors, CEOs, human resources officers and other senior executives of U.S. banks to understand trends around the acquisition of talent, CEO performance and pay, and director compensation. The survey was conducted in March and April 2020.

Bank Director’s 2020 Technology Survey, sponsored by CDW, surveyed more than 150 independent directors, CEOs, chief operating officers and senior technology executives of U.S. banks to understand how technology drives strategy at their institutions and how those plans have changed due to the Covid-19 pandemic. It also includes compensation data collected from the proxy statements of 98 public banks. The survey was conducted in June and July 2020.

Bank Director’s 2020 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner, surveyed 159 independent directors, chairmen and CEOs of U.S. banks under $50 billion in assets to understand the practices of bank boards, including board independence, discussions and oversight, engagement and refreshment. The survey was conducted in February and March 2020.

Bank Director has published several recent articles and videos about issues related to today’s economic environment. Our Online Training Series includes units on “Managing the Balance Sheet in a Zero-Rate Environment” and “Managing Through the Coronavirus Pandemic.” You may also consider watching Bank Director Editor at Large Jack Milligan’s conversation with Huntington Bancshares CEO Steve Steinour, which focuses on “Strategic Planning in an Age of Uncertainty.”

Our Bank Services membership program also includes licenses to FinXTech Connect, which helps banks identify technology providers. You can find out more about that tool and how to access it here.

Is an Independent Chair a Best Practice?

Independence is a foundational principal in corporate governance.

Many good governance proponents would argue that corporate boards should be comprised primarily of outside directors who meet the legal definition of independence. In laypersons’ terms, this means they are free of any conflicts of interest that would prevent them from discharging their fiduciary responsibilities to the company’s owners.

Likewise, many governance experts would say that splitting the chair and CEO roles between two individuals also is a best practice. In this instance, the chair would be an independent director who focused their attention on managing the board, while the CEO ran the company.

Having an independent chair can be especially helpful when the board has appointed a new CEO who has never held that position before; the chair can focus on board governance while the CEO transitions into their new role. Splitting the jobs can also provide a check on an overbearing CEO who might dominate the board if they were also the chair.

This approach would seem to enhance the board’s independence, but is it a best practice? And does splitting the chair and CEO roles necessarily improve the company’s profitability?

Results from Bank Director’s 2020 Governance Best Practices Survey suggest that most bank boards have a majority of independent directors. The survey included 159 independent directors, chairs and CEOs at banks under $50 billion in assets. It was sponsored by Bryan Cave Leighton Paisner.

Forty-four percent of the survey participants say they have just one inside director on their boards, while 27% have two, 12% have three and 18% have more than three. An inside director is normally a member of management. Survey banks with more than $10 billion in assets were more likely to have just one inside director, while banks under $500 million in assets were more likely to have multiple insiders on their boards.

A majority of survey participants — 58% — have an independent director as their board chair, while the CEO was also the board chair at 31% of the respondents. Interestingly, survey banks under $500 million in assets were more likely to have split the chair and CEO roles (73%), while banks over $10 billion were less likely to have dual roles (50%).

James McAlpin Jr., a Bryan Cave partner who leads the firm’s banking practice group, says that while a combined role can make a difference in a situation where the board has to replace the CEO because of a performance issue, he does not consider it to be a best practice.

“Maybe 10 years ago I would have said, ‘Yes, it is a best practice for the chair not to be the CEO,’ but I have changed my opinion,” McAlpin says. “I do think it absolutely matters who the individual is. And in an instance where you have a well performing and highly respected CEO, it may make the most sense for that person to be the chair because they often want to run the board. And it would be difficult to retain them if they are not the chair.”

McAlpin’s point speaks to a simple truth at most banks: It is the CEO who drives the company’s performance, not the board or an independent chairman. A strong governance culture can certainly have a positive impact on a bank’s financial performance by establishing an effective risk management culture, adopting compensation practices that reward high performance and making sure that a capable CEO is in place. And an independent chairman can provide a CEO with an important sounding board if the two have a good relationship. But the CEO runs the company, not the board or the independent chair.

“I’ve never seen a study of this, but I doubt you would see any statistical advantage in terms of performance for having an independent chair,” McAlpin says. “In fact, it might be the opposite where the banks perform better if the chair and CEO are the same person.”

Greg Carmichael was not given the chairman’s title when he became the CEO at Fifth Third Bancorp, a $203 billion regional bank in Cincinnati, in November 2015.

“When we made the transition to myself as the new incoming CEO, we elevated our lead director to become the chairman for a period of time,” Carmichael explains. “It was decided and voted on when I became CEO that at some point I would become the chairman. And that time frame was roughly two years. They didn’t want to put the burden of the chairman role on me initially, which was appropriate. They also wanted to make sure that I had a chairman in place to help me through that transition to CEO.”

Carmichael was later appointed chairman in January 2018, and he says it was helpful that initially he could just focus his attention on running the company. “When you become a new CEO, you’re drinking from a fire hose and you’re just inundated with a ton of information and there are things you have to demonstrate and manage that take a lot time,” he says. “You have to get your operating rhythm in place. You have to get your credibility with [Wall Street], with your own organization; you have got to chart your vision, what you’re about and where you’re taking the company, and that takes an inordinate amount of time your first couple of years. They didn’t want that to be encumbered by me worrying about the board dynamics and the board meetings and so forth.”

Marsha Williams, Fifth Third’s chair during Carmichael’s early years as CEO, had served on the bank’s board since 2008; prior to her elevation, she had been the board’s lead director for two years. “It was very helpful to me because I had a great relationship with Marsha and it was always just a reassuring conversation or good guidance if there was input on something she thought was important,” he says.

After Carmichael assumed the title of chairman, Williams returned to her previous role as the board’s lead director. Carmichael says they continue to work together well. “There’s probably not a week that goes by that we don’t talk,” he says. “She’s a great sounding board on ideas and thoughts that I have. She’s good at giving me independent feedback from the board [about] things they’d like to hear more about.”

Carmichael’s relationship with Williams highlights the importance of having a lead director when the CEO is also the board chair. Lead directors have less authority than board chairs, but they can help build an important bridge between the CEO and the independent directors.

Unfortunately, of the survey banks that have appointed an independent chair, only 55% have also appointed a lead director. “I think having a lead director is a best practice,” says McAlpin. “It’s important to have someone [the CEO] can talk to without having to talk to the entire board to bounce ideas off. I think it’s important for both the board and the CEO.”

Governance Survey Results: Directors Sound Off on Diversity, Performance

SURVEY.pngU.S. banks have made modest progress on improving the diversity of their boards of directors, but more work needs to be done, based on the results of Bank Director’s 2020 Governance Best Practices Survey.

Sponsored by Bryan Cave Leighton Paisner, the survey was conducted in February and March of this year and included the perspectives of 159 independent directors, chairmen and CEOs of U.S. banks under $50 billion in assets.

Thirty-nine percent of the survey participants say their boards have several diverse directors, based on gender or ethnic and racial backgrounds. Thirty percent have one of two diverse directors but hope to recruit more. Thirteen percent indicate they have one or two diverse directors and believe that is sufficient, while another 13% say they have no such directors and would like to recruit some. And 5% say they have no diverse directors and aren’t seeking to add those attributes.

“What I say to boards is to look at your communities,” says James McAlpin Jr., a partner at Bryan Cave and leader of the firm’s banking practice group. “Many communities in the United States have undergone fundamental demographic change over the last 15 years.” Included in this demographic evolution is an increase in the number of women and minority business owners. “Then look around your board table,” he continues. “I think it’s really important for the board to reflect the bank’s demographic customer base.”

There is a solid body of academic research that diverse boards make better decisions, resulting in stronger financial performance. But not all of the survey’s respondents are on board with that assessment. While 52% agree that diversity improves a board’s performance, 40% believe it does to an extent but the impact is overrated, and 8% do not believe that diversity improves performance.

The survey also finds that a significant number of participants report a lack of engagement by some members of their board, with 39% saying that some or few of their directors are actively engaged during board and committee meetings.

Not unsurprising perhaps, the survey found that a significant number — 42% — report having at least one or two underperforming directors.

McAlpin suggests that engagement and performance issues “need to be addressed through board evaluation and feedback to those directors.” Unfortunately, less than half of the survey participants say their boards perform some type of periodic performance review, and just 31% include individual director assessments in that process.

Other Survey Results Include

  • Fifty-eight percent of the respondents serve on board where the chair is an independent director. On boards where the CEO is also the chair, only 55% have a lead independent director.
  • The median length of board service for the participants is 12 years; 76% are over the age of 60.
  • Eighty-four percent identify as white and 78% as male. Just 1% are Black and 1% are Hispanic.

Click HERE to view the full survey results.

For a further analysis of the findings that examines process, independence, composition, oversight and refreshment, access “How Bank Boards Manage Their Business” HERE.

Cast a Wider Net for Your Next Director

Few factors determine a corporate board’s effectiveness more than its composition, and yet many banks take a slapdash approach to the recruitment of new directors.

Even really good banks are guilty of this. When I asked the independent chairman of a bank that regularly scores well on our annual Bank Performance Scorecard, a performance ranking of the 300 largest publicly owned banks in the country, what his board’s process was for recruiting new directors, he said it really didn’t have one. The board had recruited two new directors recently, including one who was added following an acquisition, but the chairman didn’t want to hold up his board as a model for director refreshment.

Part of the problem is that director succession is not taken seriously enough at many banks, so when a vacancy does occur the board doesn’t have a tested process in place. That sets off a “who do we know” scramble that is reactive rather than proactive.

“Historically, the way most community banks have found directors is through the CEO and possibly through some directors, and it’s in a personal context,” says James J. McAlpin Jr., an Atlanta-based partner at Bryan Cave Leighton Paisner and head of the firm’s banking practice. “It’s people in the community who are known to the CEO or key board members and who seem to be qualified to serve on the board, have an interest in serving on the board. What I see changing — not dramatically, but gradually — is a sense, particularly for [small community banks] that want to become larger, that they need to go outside of their circle of friends to find individuals with skillsets that are needed or attributes that are needed.”

I think an emerging best practice for bank boards is to perform a periodic board needs assessment to determine whether the skills and experience of the bank’s current directors supports its strategic plan, particularly if that plan calls for major changes like expansion into new lending categories or geographies, or a decision to go public. This assessment essentially summarizes the skills and experience of all your directors, grouping them into categories. Smaller banks often find that they are overweighted in certain categories – CPAs and attorneys come to mind – while underweighted in categories like technology, and female and minority directors.

“It’s really a process of who can bring either expertise or business to the bank,” says Donald Musso, president of FinPro, a consulting firm in Gladstone, New Jersey, that often handles director searches for its bank clients. “And I think it’s a combination of the two that we’re seeing people look for.”

Musso cites the example of a client bank in northern New Hampshire. “This organization has been very rural, and two or three of the board members are now living in Florida, and they’ve come to the conclusion that they can’t make it work,” he says. “[These directors] can’t come up in the middle of winter for meetings, and they can’t do the meetings digitally because it’s not the same.” FinPro put together a strategic plan for the bank that calls for it to expand into new markets south of its current location, and Musso will search for new directors in those markets who can not only replace the Florida-based members but help the bank with business development. “We’re looking for people who are really well connected in those marketplaces, who can introduce us to the right business owners and the right political leaders to get quickly accepted,” Musso explains. “We know that folks from northern New Hampshire don’t have any contacts down there.”

Once you know the kind of director you want to fill a vacancy or expand the board, how do you find them? McAlpin says that board chairs (or whoever that task has been delegated to, like the governance committee) often reach out to trusted advisors for suggestions and referrals. “They’ll talk to their attorneys, their accountants, bank consultants they may know … and other bankers,” he says.

McAlpin also suggests that boards actively research their communities for good director candidates. If the chief executive officer or board chair only recruit from within their personal universe of known people, they are by definition restricting the pool of likely candidates.

“What I’ve suggested to people is if you really are looking for skill sets, mount some kind of proactive search within your market,” says McAlpin. “Have someone at the bank do some research on who’s heading up the local manufacturing plant for an automotive manufacturer. Is that a woman? Is that an African American? Who are the people making a splash in the community? So, it’s still word of mouth, but it’s a wider circle of word of mouth. That’s how I’m seeing it work.”

Musso tries to cast a wide net when fishing for board candidates. He agrees with McAlpin that boards should thoroughly research their communities when conducting their own director search. “We don’t use a search firm; we call folks directly,” he says. “So we can look up female CPAs pretty quickly. We can get lists of minority-owned businesses pretty quickly. A lot of that stuff is readily available data from Dun & Bradstreet and other sources.” Musso has found that local accounting firms that handle audits for area businesses are another good referral source. “They’ve been a huge, huge help in finding people and bringing names to the table,” he says.

And when he conducts a search, Musso is often looking for someone who can help the bank accomplish a strategic objective. “We’re constantly seeking spheres of influence,” he explains. “We want to know who is most connected to a given strategic thrust we have in the bank. That’s the ideal person. When we find them, we want to get them on the board as quickly as we can.”

Other recruiting suggestions include financial technology companies, which Musso says offer a pool of potential director candidates who can help banks manage the digital transformation process, as well as former directors who left their boards after their banks were acquired. And while they generally have a different mission, people serving on nonprofit boards are another pool of potential candidates.

These recruiting tips all tend to be reactive in nature; they are things you can do after a vacancy opens up on your board. A more proactive approach would be to establish an advisory board of local business and community leaders to not only advise the bank on important issues, but also to scout them as possible directors for the bank board.

“Particularly if your bank is in multiple geographic locations, just set up some advisory boards,” McAlpin says. “You get local business people together and buy them lunch or dinner. They get the opportunity to interact with each other, and they can talk about their business, and then you learn from them about what it is they think is important to the bank or what the bank can be doing for the community. You also get the opportunity to assess these people in terms of potential future board members.”

While smaller community banks often do their own board recruiting, larger banks often retain an experienced search firm to help them fill board vacancies. “When we’re engaged by a board to conduct a director search, they often are … engaging us to go out and find a very specific level of expertise,” says J. Scott Petty, a Dallas-based partner who leads the financial services practice at the executive recruiting firm Chartwell Partners.  “Or they’re looking for somebody that’s both bringing the expertise we’re looking for and diversity.”

The process from that point on is pretty straightforward, Petty says. He will develop a “position description” based on what the bank is looking for in a prospective candidate. “In that position description, it would be a description of the bank; it would be a description of the qualifications of the background that we’re looking for. And it would also outline if they’re a public bank and their meeting dates for the board.”

Petty says that at the beginning of any engagement, it’s important that he and the board get to know each other. “We would get together face to face to talk about their need and through that process, they would need to get comfortable with me as their ambassador in the marketplace doing the recruiting,” he says. “And that comes by just getting to know me professionally, understanding the experience that I bring to the table, understanding some of the assignments that we’ve worked on before where we’ve had success and then getting to know me a bit personally. Again, they’d have to get comfortable with me representing them and that I understand their culture. And in that process, they would need to see how I feed back the information that I’m receiving from them to give them comfort that I’m the best person to go out and execute this process for them.”

On the Radar For the Pandemic’s Next Phase

The banking industry must address and satisfy several competing interests as executives and the workforce adjust to the new normal of life during a pandemic.

Banks across the nation have stepped up as leaders in the fight against the Covid-19 pandemic. Now as the dust settles from the initial shock in mid-March, what are issues that your bank should be prepared to address looking forward?

When and how should we reopen our physical locations?

While banks have continued operations during the pandemic, many limited their services. It is not clear when these services will fully ramp back up. As your bank debates the best course of action for your circumstance, consider the following:

  • Prioritize health and safety by installing physical protection at branches and offices, including sneeze guards at teller windows, medical screening of employees, enhanced cleaning procedures and required use of personal protective equipment.
  • When considering return-to-work policies, be flexible and responsive to employee concerns and location-specific issues.
  • Apply the lessons learned during this period and embrace (or even improve) the technology for working remotely.
  • Task teams with understanding federal, state and local requirements related to the pandemic and the bank’s corresponding compliance obligations. These teams should meet regularly to ensure full compliance at all locations.

The ABA published a free matrix to assist banks in their reopening efforts.

We participated in the Paycheck Protection Program; now what?

There are some important post-lending matters for banks that participated in the Paycheck Protection Program to consider:

Brace for litigation. Some banks have faced lawsuits from applicants that failed to receive PPP funding. While your bank may not be able to avoid a similar lawsuit, it should avoid liability in these suits by following established procedures and demonstrating that your bankers did not deny applicants on a prohibited basis (race, religion, gender, age, among others).

Additionally, banks have encountered complaints filed by agents of borrowers seeking lender fees. You should not face liability in these suits if you did not execute a binding agreement with an agent before loan origination. Your bank’s defense will be even stronger if you mitigated this issue on the front end —for example by requiring borrowers to certify whether they used an agent, and if so, requiring the agent to complete a Form 159.

Stay current on loan forgiveness requirements. The Small Business Administration stated that it would review all PPP loans over $2 million following each loan forgiveness application submission. Thankfully for lenders, banks can rely on borrower certifications on loan forgiveness amounts. Nevertheless, agencies continue to release new guidance, and customers will rely on lenders to help them through the process.

Look for new opportunities to serve your customers and communities. There are rumors that Congress may issue a third round of PPP funding that will apply to more eligible borrowers. The Federal Reserve announced the expansion of its Main Street Lending Program, which can be a valuable source of liquidity as banks seek to meet customer needs. The SBA also released guidance on the sale of participating interests in PPP loans.

What regulatory or supervisory concerns should we be prepared to address?

Credit Decisions. Your bank must continue to balance meeting customer needs and making prudent credit decisions in the current economic environment. Many banks have started tightening credit standards, but this comes with a potential uptick in complaints about harmful lending practices. Regulators have indicated that they will scrutinize lending activity to ensure banks comply with applicable laws and meet customer needs in a safe and sound manner. The Office of the Comptroller of the Currency urged banks to “prudently document” their PPP lending decisions. The Consumer Financial Protection Bureau instructed small business owners “who believe they were discriminated against based on race, sex, or other protected category” to file complaints. Your decisions on credit parameters must be well thought out and applied uniformly.

Bank Secrecy Act/Anti-Money laundering Focus. Banks may face heightened risks from new customers or new activities from existing customers. For the first time since 2014, the Federal Financial Institutions Examination Council released updates to the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) examination manual. While these updates are not directly related to the pandemic, regulators may scrutinize BSA/AML efforts at your next examination. Use this updated guidance as a springboard to assess your BSA/AML compliance program now.

IT and Security Concerns. Banks used technology enabling virtual or remote interactions during the pandemic, increasing risks associated with IT security. The regulators issued a joint statement addressing security risk management, noting that bank management cannot rely on third-party service providers and must actively ensure technological security. Expect this to be an area of focus at your next examination.

Coronavirus Tests Banks’ Emergency Succession Planning

When it comes to emergency succession planning, banks prepare for the worst and hope for the best.

The coronavirus crisis has reminded us of the importance of emergency succession planning at banks, as well as related disclosure considerations. Boards must create emergency succession plans in the event a key executive become incapacitated. Some institutions may need to activate these plans during the pandemic and may wish they had spent more time detailing them in calmer, more predictable times.

“When you think of disasters, a lot of people think of natural disasters and don’t really think about pandemics. That’s where that succession planning comes in: Not that we wouldn’t have this for a natural disaster, but the chances of somebody dying is pretty small,” says Laura Hay, a managing director at executive compensation firm Pearl Meyer. “Here, there’s a much higher likelihood of, at least temporarily, needing some additional support.”

The coronavirus pandemic may last for months, if not over a year, in the United States. There were about 800,000 confirmed cases and about 40,000 deaths as of April 22, according to economic data firm YCharts; 4.16 million tests have been administered. Some groups are at higher risk for a severe illness from Covid-19 than others, according to the Center for Disease Control and Prevention, including adults over than 65 and individuals who have underlying medical conditions.

Executives and directors at many banks are particularly vulnerable, based off this. Seventy-two percent of CEOs at institutions participating in Bank Director’s 2019 Compensation Survey were 55 or older; 2% were older than 74. Board members were in the same demographic, with a median director age of 64.

At least one financial firm has disclosed a death of an executive due to Covid-19: Jefferies Group CFO Peg Broadbent died of complications related to the coronavirus in late March, according to Jefferies Financial Group.

Spirit of Texas Bancshares Chairman and CEO Dean Bass took medical leave after contracting the coronavirus, according to an April 7 regulatory filing from the Conroe, Texas-based bank. The board appointed Chief Lending Officer David McGuire to serve as interim CEO and director Steven Morris to serve as acting chairman in his absence. Bass resumed his duties at the $2.4 billion bank on April 13, according to a subsequent filing.

Emergency succession plans differ from long-term succession plans in key ways, Hay says. It is prudent for boards to inform the individual who will be appointed interim or successor in an emergency to prepare them for the role, while directors may want to keep their thoughts on long-term succession plans under wraps. More than one-third of respondents to Bank Director’s 2019 Compensation Survey had not designated or identified successors for the CEO.

“People need to get more detail in their plans, and they should not just focus on the CEO,” Hay says. “You need to identify and communicate who that person is, and probably allow them to talk about how a succession would work, with a certain level of detail.

In times like these, banks may want to extend contingency planning to the board as well. This will not be a theoretical exercise for some companies, Hay says; a director at one of her clients recently died from Covid-19. Other directors may be available to step in, though banks should have conversations about appointing an acting committee head who could fill the potential vacancy.

Another major consideration for banks during the pandemic will be the decision to disclose a diagnosis or illness of an executive. Securities rules gives “substantial discretion” to boards weighing the material nature of such disclosures, according to a January article by Fenwick & West attorneys. A disclosure is only necessary when there is “‘a present duty to disclose’ and the information is considered ‘material,’” they wrote.

The wide range of Covid-19 symptoms and outcomes means the disclosures will probably be on a “case by case” basis, factoring in the materiality of the individual or affected operations, says John Spidi, a partner in the corporate practice group at Jones Walker.

“In those cases where it is not completely clear disclosure is required under SEC regulations, it’s probably a good idea to make the disclosure if the individual involved has a material impact on the company or its results of operations,” he says.

Boards may even opt to not disclose if the executive can continue performing their key duties, which seems to be what Morgan Stanley did after Chairman and CEO James Gorman tested positive for Covid-19 in mid-March. Gorman led regular calls with the bank’s operating committee and board of directors in self-isolation. He shared the news in early April via a video message to employees, saying that he did not experience severe symptoms and has fully recovered, Reuters reported.

Hopefully very few banks will need to activate their emergency succession plans, but Hay says creating detailed strategies protects shareholders and keeps operations stable during an otherwise chaotic time.

“If you don’t have a plan, or your plan is super high level where you have to think about how you’re actually going to deploy it, you’re behind the eight ball,” she says.

How the Covid-19 Crisis Turned One CEO Into Counselor in Chief

Since taking over as CEO of Amalgamated Bank in 2014, Keith Mestrich has demonstrated his management chops by reengineering the $5.3 billion institution’s balance sheet and improving its profitability.

But that experience pales in comparison to the challenge of running a company headquartered in New York City, which is ground zero for the Covid-19 pandemic. Most of Amalgamated’s 400 employees have been working from home since mid-March, including Mestrich. “I never thought that I’d be in the sixth week of running a bank from the basement of my house, by myself,” he says.

The pandemic has had a devastating impact on the U.S. economy; the likelihood of a severe recession requires management teams to carefully monitor their banks’ vital signs, including loan losses, liquidity and regulatory capital levels. But most bankers are experienced at this, most recently during the Great Recession in 2008. They know how to manage balance sheets through an economic downturn.

Managing employees through a crisis of this magnitude is another matter entirely.

One obvious way in which the current situation is starkly different from the last recession is the incredible personal stress the pandemic has placed on employees. Social distancing and sheltering orders have forced most employees to work remotely, either isolating them or requiring them to juggle work and parenting if young children are in the home.

These stresses are layered on top of the fear of infection. In New York City, where most of Amalgamated’s employees work, there were more than 138,000 confirmed cases of Covid-19, with nearly 10,000 confirmed deaths and more than 5,000 probable deaths through April 22, according to the New York City Department of Health and Mental Hygiene. And of course, the news has been full of stories about the city’s overcrowded hospital emergency rooms and the desperate, daily search for ventilators and protective gear.

People are frightened, including many Amalgamated employees. One of Mestrich’s jobs now is to be counselor in chief.

“I spend a huge amount of my time just checking in with people at all levels of the bank,” Mestrich says. “People who have to come in and work have different levels of fear and … and that is calibrated by their own family situation. I talked to one woman who works in one of our branches, who has three kids, and she’s a single mom, and knows that if anything were to happen to her, [it] could be really devastating, so her fear level is very different than somebody who’s a single person and relatively young and healthy.”

He has also heard positive stories from his employees. “I got a great message from one guy – the only member of our staff who I know was actually hospitalized – [that] he was going back to work,” Mestrich says. “He’s recovered and doing well.”

The fear that some Amalgamated employees experience could magnify when they’re asked to return to their old work environment. “I think coming back is going to be really challenging, especially for organizations that are in hot spots,” he says.

Will companies be required to test their employees and verify the results, and will social distancing requirements remain in place in the office? Amalgamated will rely on guidance from the government in repatriating employees, although Mestrich notes that “guidance right now, as of today … is very all over the place.”

No matter how this normalization process is executed, Mestrich says it will have to be done with great sensitivity. “I think we’re going to have to be unbelievably empathetic to people who have any number of situations, whether they’re a little bit older worker or they have underlying medical conditions or they still have kids at home and don’t have any other childcare arrangements or they’re just fearful,” he says.

Amalgamated has its roots in the U.S. labor movement. The bank was founded in 1923 by the Amalgamated Clothing Workers of America to provide banking services to its members and is still 40% owned by the union’s modern day successor, Workers United. Mestrich says many of the private sector unions that bank with Amalgamated have “seen significant layoffs and a lot of stress, both in terms of trying to figure out how to service their members, but also concerned about revenue dropping from dues income.”

And of course, many union members lave been laid off as well. In early April, Amalgamated launched the Frontline Workers Fund to provide financial support to workers impacted by the pandemic, including health care, grocery, cleaning service, food service, domestic and retail workers. It contributed $50,000 to stand up the fund and will donate 10 cents whenever a customer opens a new account or spends over $10 using the bank’s debit card. Amalgamated will donate proceeds from the fund to other union organizations for distribution.

The Amalgamated Foundation has also joined several other large foundations to establish the Families and Workers Fund. This fund will also focus on workers, families and communities that have been impacted by the pandemic. It has an initial commitment of $7.1 million, with a goal of raising $20 million. Amalgamated will also manage the fund’s operations.

In one sense, these two initiatives are just larger examples of the empathy that Mestrich has for his own employees. After all, what is philanthropy but empathy in action.

How Leaders Meet Followers’ Critical Needs During COVID-19

Humans experience the worldabout 30% rationally and 70% emotionally. Effective bank executives and directors would be well served by remembering that during this time.

Right now, many of those emotions tend toward fear and uncertainty. While what you as a leader communicate is important, how you do it and how it makes your people feel is crucial for effective leadership. Gallup has found that most critical emotional needs of followers — be it employees or customers — are trust, compassion, stability and hope. Yet, many banks are starting with deficits in these areas

Trust: Predictability In Unpredictable Times
Right now, employees are not only looking for honesty and clarity — they’re also watching intently for behavioral predictability. Leaders can’t predict the future, but they must be predictable. It’s hard to trust an erratic leader.

But bank leaders may be starting from a trust deficit. Most bank employees didn’t trust their leadership before the COVID-19 pandemic. Gallup research shows that just three in 10 financial services employees strongly agree that they trust the leadership of their organization, and just two in 10 say leadership communicates effectively with the rest of the organization.

Most banks are prioritizing employee and customer safety, which is necessary for trust. But employees are wondering how a health and economic crisis will affect their jobs and how leadership is making decisions for the future: the principles they’re using, how they conform to the organization’s purpose, the outcomes they’re aiming for.

Don’t shy away from difficult topics like layoffs or pay. Clearly lay out the scenarios and the decision criteria. Make firm commitments in critical areas wherever possible. Just as weather sirens indicate when people should be on high alert, companies should do the same. Otherwise, employees will live and work in constant anxiety.

Compassion: Loud and Reinforced
This is the time to show care. Your employees are juggling new responsibilities, fears and problems. They need to hear their managers and leaders say, out loud, that they understand, that the company is behind them and that everyone at the firm will get through this new situation together. They need to feel genuine compassion.

However, bank leaders may face a deficiency here as well: only three in 10 financial services employees strongly agreed in pre-pandemic times that their company cared about their well-being.

Compassion should also be boldly practiced through a bank’s policy decisions. The commitments, support and sacrifices executives make to keep employees, customers and communities whole are a reflection and demonstration of their priorities. Put bluntly: verbal compassion without policy compassion is insulting. Real compassion changes things — when the pandemic has passed, how you treated employees and companies will be remembered most.

Stability: Psychological Safety Without Tunnel Vision
There are two elements to stability, the practical and the psychological. Providing practical stability means making sure employees have the materials, equipment and technology they need to work under rapidly changing circumstances.

But the core of stability is psychological security — the need to know where a company is headed and that one’s job is secure. This is why executives must clearly define, communicate and act on their decision principles, especially when it comes to employment and pay.

Leaders need to provide a sense of normalcy to prevent tunnel vision. Not every conversation needs to be about COVID-19. Regularly communicate progress and accomplishments during this difficult time so that it doesn’t feel like the world has completely stopped.

Hope: The Most Precious Asset During Turmoil
Hope sits on the foundation of trust and stability. It pulls people forward and invites them to participate in creating a future that’s better than the present.

Leaders should view hope as precious capital. Hopeful workers are more resilient, innovative and agile, better able to plan ahead and navigate obstacles — valuable assets in good times and bad. Tell people what you want to achieve this week, this month, this quarter — and why you’re confident those goals can be reached.

Change The Lens
Amid the chaos and uncertainty, when employees are looking to you, know one thing for sure: You don’t have to have all the answers. But you do need to know how to meet your followers’ four basic needs in every plan, action and communication.

Remember, the employees most vulnerable to the ripple effects of COVID-19 are often the ones closest to your customers. Your people are looking to you for trust, compassion, stability and hope. Their eyes are on you — will you rise to the challenge?

Pandemic Upends Annual Meetings, Forcing Virtual Plan Bs

The COVID-19 pandemic has thrown a wrench in a yearly tradition for publicly traded banks: the annual shareholder meeting.

The United States was struck by the coronavirus crisis in the spring and it may drag into the early summer. In addition to halting the economy and throwing bank operations into overdrive, stay-at-home orders and prohibitions on large gatherings have wreaked havoc on the tradition of the annual shareholder meeting. In response, banks are considering virtual options.

Under normal conditions, shareholders of First Bancorp in Damariscotta, Maine, would assemble at the Samoset Resort for an hourlong annual shareholder meeting followed by lobster rolls for lunch, says CFO Richard Elder. But like many states, Maine Governor Janet Mills issued executive orders in March closing nonessential businesses and implementing other social distancing practices. The $2 billion bank lost its venue at the same time as large gatherings were deemed unsafe.

John Spidi, a partner in the corporate practice group at Jones Walker, had bank clients that faced similar predicaments. One bank planned to hold their meeting at a restaurant that’s now closed, another at a hotel and a third in one of its own branches.

“We’ve had to scramble and figure out what our options were,” he says. “That became a little tricky because every state has different rules on these things.”

The U.S. Securities and Exchange Commission issued guidance permitting virtual meetings and allowing companies that had mailed out proxies to update them with a proxy amendment and a press release accessible on the website. But some states initially only permitted hybrid meetings that included an in-person component. Spidi says some of his clients weighed complying with the law against taking their chances and moving to a virtual meeting.

“That was not an approach that I was comfortable with at all,” he says. “I couldn’t recommend it. I was telling the client what the options were, and the clients were basically saying, ‘We’re going to take that risk. We’re not going to get people together.’”

Fortunately, governors have waived these in-person meeting requirements during public health emergencies, sparing his clients. And in Maine, First Bancorp discussed postponing the annual meeting, but encountered bylaw considerations. So they decided to move online.

Banks that have already distributed proxy materials calling their meetings may be in similar situations, Spidi says. Most states require an annual meeting to elect directors, which a bank could feasibly do up until the last day of the year. But most include their proxies with their annual reports from the year prior, which are typically mailed in the first quarter. An option for banks that haven’t sent out their proxy materials is to hold off on calling the meeting until after stay-at-home orders are lifted, he says.

To hold a virtual meeting, First Bancorp’s board needed to sign off on the shift and its basic procedures, though it did not need to update its bylaws. Spidi says other banks may need to call a board meeting to update their bylaws and permit a virtual meeting, and then file a notification with the SEC that the bylaws have been updated.

Elder says First Bancorp briefly considered hosting its own virtual meeting before running into issues around shareholder authentication and voting. They ultimately reached out to Broadridge Financial Solutions, which they use for transfer and proxy services, to organize the event.

Broadridge has offered virtual shareholder meetings for a decade and has seen slow but steady pickup in companies electing the approach, says Cathy Conlon, Broadridge’s head of corporate issuer strategy and product management. Unsurprisingly, demand for virtual meetings has skyrocketed this year, from 326 companies last year 1,500 this year (and counting).

Beyond pandemics, virtual or hybrid meetings make it easier for shareholders to participate, especially if disability, availability or geography is a constraint. The meetings are similar to an earnings call for executives, which shareholders can access through a web address with no required installation or downloads.

“The technology is fairly straightforward,” Conlon says. “This whole situation will allow more and more companies to feel really confident [about virtual meetings], because they’re getting used to this being a virtual world.”

First Bancorp will conduct its first, and potentially only, virtual annual meeting on April 29. Elder says executives have joked about not returning to the resort after the pandemic ends, but adds they might consider a hybrid approach in the future that marries the virtual approach with the lobster roll lunch.

“I think you’ve got to think outside of the box, be open to new ideas and be willing to implement them,” he says. “This just shows when forced to make a change, you can do it.”

CECL Delay Opens Window for Risk Improvements

The delay in the current expected credit loss accounting model has created a window of opportunity for small banks.

The delay from the Financial Accounting Standards Board created two buckets of institutions. Most of the former “wave 1” institutions constitute the new bucket 1 group with a 2020 start. The second bucket, which now includes all former “wave 2 and 3” companies are pushed back to 2023 — giving these institutions the time required to optimize their approach to the regulation.

Industry concerns about CECL have focused on two of its six major steps: the requirement of a reasonable and supportable economic forecast and the expected credit loss calculation itself. It’s important to note that most core elements of the process are consistent with current industry best practices. However, they may take more time for banks to do it right than previously thought.

Auditors and examiners have long focused on the core of CECL’s six steps — data management and process governance, credit risk assessment, accounting, and disclosure and analytics. Financial institutions that choose to keep their pre-CECL process for these steps do so at their own peril, and risk falling behind competitors or heightened costs in a late rush to compliance. Strategically minded institutions, however, are forging ahead with these core aspects of CECL so they can fully vet all approaches, shore up any deficiencies and maintain business as usual before their effective date.

Discussions over the impact of the CECL standard continue, including the potential for changes as the impacts from CECL bucket 1 filings are analyzed. Unknown changes, coupled with a three-year deadline, could easily lead to procrastination. Acting now to build a framework designed to handle the inevitable accounting and regulatory changes will give your bank the opportunity to begin CECL compliance with confidence and create a competitive advantage over your lagging peers.

Centering CECL practices as the core of a larger management information system gives institutions a way to improve their risk assessment and mitigation strategies and grow business while balancing risk and return. More widely, institutions can align the execution across the organization, engaging both management and shareholders.

Institutions can use their CECL preparations to establish an end-to-end credit risk management framework within the organization and enjoy strategic, incremental improvements across a range of functions — improving decision making and setting the stage for future standards. This can yield benefits in several areas.

Data management and quality: Firms starting to build their data histories with credit risk factors now can improve their current Allowance for Loan and Lease Losses process to ensure the successful implementation of CECL. Financial institutions frequently underestimate the time and effort required to put the required data and data management structures in place, particularly with respect to granularity and quality. For higher quality data, start sourcing data now.

Integration of risk and financial analysis: This can strengthen the risk modeling and provisioning process, leading to an improved understanding and management of credit quality. It also results in more appropriate provisions under the standard and can give an early warning of the potential impact. Improved communication between the risk and finance functions can lead to shared terminologies, methods and approaches, thereby building governance and bridges between the functions.

Analytics and transparency: Firms can run what-if scenario analysis from a risk and finance perspective, and then slice and dice, filter or otherwise decompose the results to understand the drivers of changes in performance. This transparency can then be used to drive firms’ business scenario management processes.

Audit and governance: Firms can leverage their CECL preparations to adopt an end-to-end credit risk management architecture (enterprise class and cloud-enabled) capable not only of handling quantitative compliance to address qualitative concerns and empower institutions to better answer questions from auditors, management and regulators. This approach addresses weaknesses in current processes that have been discovered by audit and regulators.

Business scenario management: Financial institutions can leverage these steps to quantify the impact of CECL on their business before regulatory deadlines, giving them a competitive advantage as others catch up. Mapping risks to potential rewards allows firms to improve returns for the firm.

Firms can benefit from CECL best practices now, since they are equally applicable to the current incurred loss process. Implementing them allows firms to continue building on their integration of risk and finance, improving their ALLL processes as they do. At the same time, they can build a more granular and higher quality historical credit risk database for the transition to the new CECL standards, whatever the timeframe. This ensures a smoother transition to CECL and minimizes the risk of nasty surprises along the way.