Using Strategic Planning to Drive Value

strategic-planning-6-15-15.pngIt is certainly no secret to banking professionals and bank board members that the banking landscape has changed significantly following the financial crisis of 2008. Banks of all sizes now face radically altered economic and regulatory realities. To survive and, more importantly, thrive in this new environment requires banks and bank boards to be more proactive than ever before.

An important—perhaps the most important—element to proactivity is strategic planning. In our business, we run across banks of all shapes and sizes. I’ve spent years as a regulator and now an investment banker visiting with and observing the “haves” and the “have-nots” in our industry—and the associated outcomes associated with each type. If there was one element of bank oversight I could improve tomorrow, it would be the strategic planning process. We often tell bank boards of clients and prospective clients, “Whatever you are doing, do it on purpose.” In other words, have a plan.

Sometimes we are greeted with skepticism: We’ve all heard a variation of the old saw that no battle plan survives contact with the enemy. And that may well be true—but Dwight Eisenhower, no slouch at preparing and executing battle plans, reminds us that plans may be useless, but “planning is indispensable.” In other words, the process of systematically evaluating the challenges and opportunities facing your organization as it seeks to accomplish a set of defined goals is always worthwhile. It teases out differences in approach, sets the tone on corporate culture, and outlines benchmarks against which progress can be measured.

There are many benefits to instituting a planning process at your bank, but perhaps the most important is that the regulators expect it. The Office of the Comptroller of the Currency and the Federal Reserve endorse it. The Fed’s own examination manual stresses the importance of “designing, implementing and supporting an effective strategic plan.”  But we all know there is the “spirit” of the regulatory guidance and the “letter.” You can certainly go through the motions to ensure you have a document that passes muster with your regulator—but in my experience effective organizations do much more than this.

Far more than a perfunctory regulatory expectation, an effective strategic plan ensures continuity between the board and the management team on key matters of setting strategic goals, the process by which progress will be measured, the talent needed to achieve the goals, the challenges the organization currently faces, and planning for contingencies (or known unknowns). Done right, a good strategic plan is the backbone around which an organization can evaluate managerial effectiveness, design compensation structure, orchestrate team building and hiring decisions, ensure infrastructure is in place well in advance of each phase of growth, execute on plans to enter or exit lines of business, and position itself to take advantage of unexpected opportunities and challenges.

Having a common mindset on these matters will enhance organizational effectiveness and avoid crippling delay when presented with new and unexpected developments. As a regulator during the financial crisis, I was amazed that, in the stretch of a single morning’s phone conversations, I would visit with executives in both severely crippled organizations as well as strong banks methodically plotting how to seize on the opportunities presented by the downturn to expand, grow and strengthen their companies. One group was in harm’s way and the other was positioned to succeed. Often, the difference came down to planning, or the lack thereof.

Another benefit of planning is to position the organization for the future. A well developed strategy along with a track record of delivering on strategic promises can position an organization nicely for more advanced stages of growth. A community bank considering institutional investors, in anticipation of well thought out expansion or a public stock offering, for example, will benefit from a disciplined and thoughtful planning process. The track record presents a benchmark against which investors can evaluate management and board performance. The bank can anticipate questions investors may ask when a robust and performance-based discussion is already part of the bank’s internal dialogue.

Finally, a strategic plan can help the bank avoid foreseeable bad outcomes. Strategic plans don’t protect the bank from all harm. But the planning process can identify employees, customers, or lines of business out of step with the organization’s carefully considered tolerances for risk. It can help companies avoid needless and unproductive spats with regulators (over the failure to plan, for example) and tense conversations with restless investors, whose first question is often: What is the plan? Good execution can establish a track record which will serve the organization well in considering mergers or acquisitions — and it can drive greater value when it comes time to sell.

Clear–eyed and realistic self-assessment, plus robust planning and benchmarking, should be elevated to a much higher prominence in the company than a simple checked box on a regulatory form. Done right, it can result in an enhanced and more disciplined corporate culture, ensuring the organization is positioned to grow responsibly and drive shareholder value.

How Size Matters: Regulatory Considerations for Growth

Growth is good, right? But what about new regulations that apply to your bank after you reach certain asset thresholds? While increasing asset size to new levels is ideal, there could be unforeseen challenges your bank could encounter. Gregory Lyons of Debevoise discusses the nuances of different asset thresholds and what banks must consider.

The Regulatory Tiers: Should You Grow Past $1 Billion, $5 Billion or Even $10 Billion in Assets?

5-15-15-Debevoise_article.pngFor the largest U.S. banks, the incentives and objectives of the current regulatory landscape are clear—you must shrink to reduce your regulatory burden and concurrently become less systemically important. However, for the vast majority of U.S. banks, those with less than $50 billion of assets (including the large majority of much smaller banks), the framework resulting from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and other regulatory initiatives provides a much more muddled context for growth decisions.

Dodd-Frank imposes greater regulatory burdens on all banks, including the smallest U.S. institutions. Prudent organic or acquisitive growth is a typical way to increase economies of scale, and thus reduce the relative costs of such burdens. However, at the $1 billion, $10 billion and $50 billion asset thresholds, Dodd-Frank and the rest of the U.S. framework impose increasing regulatory burdens, offsetting the benefits of growth to at least a degree. The banking agencies have indicated little desire or ability to materially reduce these burdens.

This article is intended to assist community and regional bank leadership in the above asset level ranges to make informed judgments as to whether the benefits of a particular growth opportunity outweigh its regulatory burdens.

$1 Billion of Assets

In a 2014 survey published by the Mercatus Center at George Mason University, covering banks with a median asset size of $220 million, almost 60 percent of these banks stated that they were altering mortgage offerings in response to Dodd-Frank regulatory requirements, with a specific focus on the regulations of the Consumer Financial Protection Bureau (CFPB). The stated reason for these retrenchments is the increased compliance costs (including doubling of compliance staffing) after Dodd-Frank.

In the interest of completeness, it also should be noted that at $500 million of assets, a non-Dodd-Frank requirement applies—the Federal Deposit Insurance Corp.’s annual independence and reporting requirements for audit committees. However, the FDIC began implementing those rules in the 1990s, and the 2014 survey did not cite them as a disincentive to growth.

Thus, to reduce the Dodd-Frank burdens, there appears to be a significant scale advantage in a small community bank prudently growing to close to $1 billion of assets. Moreover, as discussed in the next section, if a less than $1 billion bank or thrift does not have a holding company, the Federal Reserve Board recently provided a substantial funding benefit to such a bank establishing one.

$1 Billion to $10 Billion of Assets

Until recently, there was no regulatory disincentive to a bank holding company or savings and loan holding company crossing $1 billion of assets. However, on May 15, 2015, the Federal Reserve Board’s revised Small Bank Holding Company Policy Statement (the Policy Statement) becomes effective. The revised Policy Statement increases the asset threshold of institutions to which its benefits apply from $500 million to $1 billion.

Subject to certain limitations, the revised policy statement excludes holding companies (but not their underlying banks/thrifts) with less than $1 billion of consolidated assets from the risk-weighted and leverage capital requirements (further heightened by Dodd-Frank) that apply to larger holding companies. This capital requirement elimination makes it much cheaper for these holding companies to raise funds for acquisitions and other activities (including replacing more costly capital instruments), principally by enabling them to issue more senior debt. In this regard, an analysis by a prominent investment bank states that the Policy Statement will allow up to 3:1 senior debt to equity funding, which could lower an eligible holding company’s weighted average cost of capital to 6.15 percent compared to 12 percent for exclusively common equity funding.

Given this funding advantage, a holding company with assets approaching $1 billion must carefully evaluate any growth strategy. On the one hand, growth above $1 billion should provide important economies of scale to reduce the impact of Dodd-Frank’s enhanced compliance burdens. On the other hand, growth above $1 billion of assets will remove an important funding advantage (i.e., greater use of senior debt) that less-than-$1 billion asset institutions have over larger competitors.

There also is a new Dodd-Frank Act-required compensation rule to consider if a bank goes above $1 billion in assets. All banks and thrifts at that level will have to disclose more about their compensation practices, including their incentive pay practices, in a rule proposed in 2011 by joint banking regulatory bodies, but not yet implemented.

$10 Billion to $50 Billion of Assets

Crossing $10 billion
Dodd-Frank’s asset size-triggered burdens first truly apply to a banking institution crossing $10 billion of assets. Rather than simply being subject to CFPB regulations as administered by their primary bank regulator (as occurs with less than $10 billion asset banks), the CFPB itself examines institutions above $10 billion. Many of our clients have commented that the CFPB moves much more rapidly to burdensome and costly enforcement actions than their primary bank regulators, and even have taken the added precaution of asking us to perform pre-exam reviews to reduce the likelihood of such actions.

Moreover, these institutions for the first time become subject to mandatory regulatory stress testing. These stress tests impose systems and operational burdens, and also can impair the institution’s reputation because it must publish the results. If the institution is publicly traded, and most banks above this level are, it is required to establish a stand-alone risk committee with a “risk” expert as defined in the statute. Finally, the Dodd-Frank Durbin Amendment applies to these banks. By capping the interchange fees that banks issuing debit cards can charge on merchant transactions at about half of their previous level, the Durbin Amendment costs the banking industry about $8 billion per year. Crossing the $10 billion asset threshold thus can be particularly costly for banks that are significant debit card sponsors.

Approaching $50 billion
Although efforts to raise this threshold are under way, Dodd-Frank currently imposes its most substantial asset-based enhanced burdens at the $50 billion asset level. However, banks with assets even $10 billion or more below that level, and experiencing or contemplating material growth, may consider preparing for, and even implementing, elements of this enhanced framework. These banks thereby can seek both to protect themselves from adverse regulatory action by demonstrating a commitment to “best practices,” and to position themselves for prompt regulatory approval of growth opportunities if they cross $50 billion, by showing an ability to satisfy the enhanced requirements.

Because the enhanced burdens at $50 billion are material, publicly traded banks further face difficult disclosure decisions. Publicly traded banks approaching $50 billion, and even those banks well below $50 billion, need to consider and review their disclosure as a whole—from regulation and supervision disclosure to Risk Factors and Management’s Discussion and Analysis (MD&A) disclosure in offering documents and ongoing reports —to reflect the full scope of the impact of approaching and eventually crossing $50 billion. The Securities and Exchange Commission (SEC) regularly issues comments to banks requesting additional discussion of the impact of heightened prudential standards and increased compliance expense that result upon crossing $50 billion. Disclosure procedures for these banks also need to be reviewed to integrate Basel III’s Pillar 3 reporting standards into existing disclosure review procedures. For example, while final Basel III Pillar 3 rules provide banks flexibility on how to make Pillar 3 disclosure, this flexibility raises questions about whether to include Basel III Pillar 3 disclosures in SEC reports, whether to furnish or file these Pillar 3 disclosures with the SEC, and whether and how to incorporate these Pillar 3 disclosures into securities offering documentation.

As the above indicates, while Dodd-Frank largely focuses on the biggest U.S. banks, the current regulatory framework also requires complex analyses by community and regional banks as to whether particular opportunities are worth the enhanced compliance burdens they may raise.


Gregory Lyons of Debevoise discusses the nuances of different asset thresholds and what banks must consider. Video length: 6 minutes

2014 Growth Strategy Survey: Technology’s Role in a More Profitable Bank

8-22-14-Growth-Survey.pngIt’s not overstating the case to say that meeting strategic growth goals in today’s current climate is a huge challenge for the nation’s banks. In fact, 84 percent of the officers and board members who responded to Bank Director’s 2014 Growth Strategy Survey, sponsored by Vernon Hills, Illinois-based technology firm CDW, say that today’s highly competitive environment is their institutions’ greatest challenge when it comes to organic growth—a challenge further exacerbated by the increasing number of challengers from outside the industry primed to steal business from traditional banks.

Technology can be a valuable tool in differentiating the bank’s offerings to consumers, and as a part of the bank’s overall strategy, can help make the institution more profitable. Many of the directors and executives responding to the survey reveal that they want to know more about how technology can make the bank more efficient, and which technology trends can improve their customers’ experience. The technology is out there—but many industry leaders don’t know what technology to use, or how to deploy it. So bank boards give the topic a wide berth: Just 30 percent say that technology is on the agenda for every board meeting.

More than 100 directors and senior executives of banks nationwide responded to the survey, which was conducted by email in June and July.

Key Findings:

  • Respondents reveal a strong need to better understand how technology can make the bank more efficient and improve the customer experience – but just 30 percent say that their board discusses technology at every board meeting. The majority of respondents, 47 percent, address the issue quarterly.
  • Fifty-two percent of directors and officers want to better understand business intelligence and analytics. More than 40 percent of all respondents, 78 percent of those from banks with more than $5 billion in assets, currently use data to support the bank’s growth goals. An additional 15 percent plan to use analytics over the next 12 months.
  • More than half reveal concerns about how their bank will address the evolving state of mobile banking. Eighty-seven percent offer mobile banking and 12 percent plan to offer this service to customers.
  • Omnichannel banking, which integrates delivery channels such as mobile, online and branch, is a great source of uncertainty for senior management and directors. Almost half say that they want a better understanding of this approach to banking. More than one-third use or plan to use omnichannel banking to grow within the next year—but an almost equal number are unsure how or when omnichannel banking will be integrated within their organization.
  • Core processors can make or break the organization’s ability to innovate, especially at community banks that depend on vendors for their technological know-how. Half reveal that their core processor is slow to respond to innovations.
  • One-quarter of respondents say that their IT staff lacks the resources to support the bank’s growth plans and current operations, with many citing a need for additional or more highly trained staff.

Download the summary results in PDF format.

What’s Driving M&A: Buyer and Seller Perspectives

1-10-14-McGladrey.pngMerger and acquisition activity was flat for financial institutions in 2013, with whole bank deal volume down 2 percent from the previous year to 241 deals in 2013, according to SNL Financial. However, the average price to tangible book value increased by 7 percent to 123.89.

Prices aren’t headed up for everyone, though. In 2013, the average price to tangible book value for banks rose 7 percent, while it only rose 3 percent for thrifts. Why? Thrifts tend to be smaller and have less diverse portfolios. Plus, thrifts are now regulated under the Office of the Controller of the Currency (OCC), which adds a degree of regulatory pressure that many buyers would prefer to avoid.

Strategy Is Not Just in the Numbers

Many banks are looking to grow to survive. But prudent organic growth of more than 10 to 15 percent a year is difficult. That leaves acquisition as an alternative growth strategy.

Much of the consolidation occurring in the industry is in response to questions boards are asking due to the financial crisis and the resulting regulatory and market changes, including:

  • Are we the appropriate size to survive in today’s regulatory environment?
  • Are we in the appropriate markets to support operations and growth?
  • Do we have enough capital based upon increasing regulatory expectations?
  • Do we have the right management team to achieve growth?
  • Can we afford the specialized expertise to meet rising regulatory standards?
  • Do we have economies of scale and infrastructure to be competitive?
  • Do we have the right products, services and technology to meet the evolving needs of our customer base?
  • Do we have the energy and motivation necessary to move our organization to the next level?

The answers to these questions are the real drivers for transactions. Success in the M&A market isn’t driven by average multiples. It’s driven by strategy. That strategy should start long before a target is identified and must continue well beyond any transaction.

Buyer Perspectives

Buyers are not looking to buy just any bank. Most buyers are looking for acquisition targets that are:

  • Clean. Increased regulatory attention means that buyers are more sensitive than ever to clean loan portfolios, low non-performing assets and compliance concerns. CAMELS 1 or CAMELS 2-rated banks are attractive targets.
  • Well located. Attractive facilities in the right markets are vital. Urban and suburban banks are selling for higher multiples than rural banks. That doesn’t mean there are no opportunities in rural areas, though. With larger national banks abandoning many low-population areas, some rural banks are seizing the opportunity to use acquisitions to become the dominant brand in their specific markets.
  • Appropriate size. Larger banks are choosing larger acquisition targets. Smaller transactions take too much time and capital. This trend removes some of the historic active buyers in the smaller community bank space.
  • Market demographics and product mix. Banks looking to branch out into new customer segments or to expand their product offerings may consider these issues the same or even more heavily than the target’s geographical footprint.
  • Solid management. Banking has seen a talent drain in recent decades as many candidates who once might have chosen a banking career have instead opted for investment banking or other options. The result is a shortage of management talent in the banking industry today. Banks with solid management teams who are likely to stay on after the transaction are particularly attractive.

Seller Perspectives

Sellers have their own set of motivations. Sales are driven by a variety of concerns, including:

  • Age. Older owners, board members and executive management may want out of the industry.
  • Regulatory concerns. Many smaller banks are finding it hard to deal with the increased regulatory burden using their limited resources. Constraints on their activities due to new regulations are also squeezing profits. Finally, the risks associated with regulatory failures are an increasing concern. Directors, too, are concerned about their increased liability exposure.
  • Return on investment. For banks with the right risk and market characteristics, the current deal environment offers an excellent opportunity to realize a solid return for their investors.

New buyers are also entering the market, including payday and other specialty lenders, off-shore buyers and Native American tribes, but thus far with limited success. Based on increasing values and regulatory issues, we anticipate more growth in M&A activity in 2014 than we saw in 2013. In any case, it’s a good time to consider your options.

The Revenue Is Not Coming Back: It’s Time to Manage Costs Differently

The revenue’s not coming back: PwC partners John Garvey, Bob Lieberberg & Bob Ross discuss the results of a new study, and why financial firms must focus on expense management to achieve the results they desire.

Related PwC Publication:
PwC Viewpoint: The Revenue is Not Coming Back: It’s Time to Manage Costs Differently

Additional Resources:

Different Routes to Reach Strategic Success

For Banker, By Banker Video Series
As many banks continue to look for new ways to make up for lost revenue opportunities, a smart and focused strategy that makes the most of available growth opportunities is vital for success. As part of our For Banker, By Banker video series, three leading bank chairmen share their board’s role in developing a foundation for sustainable growth.

Facing Headwinds: What Concerns Today’s Banking Leaders

Financial leaders are facing major headwinds this year. Declining net interest margins, loan growth and regulatory challenges are top concerns for banking leaders, according to the results of an audience survey at Bank Director’s Acquire or Be Acquired conference in Arizona in January. Jordan discusses the top concerns and what to do about them.

Download the full survey results in PDF format.

Bank M&A Expectations in 2013

Bank M&A may face serious challenges in 2013. In this video, Rick Childs of Crowe Horwath LLP highlights findings from the 2013 Bank Director & Crowe Horwath LLP M&A survey, revealing a disconnect between buyers and sellers that may hinder the pace of M&A. Some banks might be willing to look outside of core banking as an avenue for growth – but for smaller banks, branch acquisitions should not be overlooked.

Demystifying Social Media

foggy-walk.jpgIn a recent McKinsey & Co. article “Demystifying Social Media,” Roxane Divol, David Edelman, and Hugo Sarrazin explain how senior leaders can break down social media into its four primary functions when developing social media campaigns and assessing the financial impact of their social media presence. 

1. Monitor

 Such brand monitoring—simply knowing what’s said online about your products and services—should be a default social-media function, taking place constantly.

2. Respond

Valuable though it is to learn how you are doing and what to improve, broad and passive monitoring is only a start. Pinpointing conversations for responding at a personal level is another form of social-media engagement. This kind of response can certainly be positive if it’s done to provide customer service or to uncover sales leads. Most often, though, responding is a part of crisis management.

3. Amplify

“Amplification” involves designing your marketing activities to have an inherently social motivator that spurs broader engagement and sharing.

4. Lead

Social media can be used most proactively to lead consumers toward long-term behavioral changes. In the early stages of the consumer decision journey, this may involve boosting brand awareness by driving Web traffic to content about existing products and services.

To read the full article at, click here.