Strategic Insights from Leading Bankers: WSFS Financial Corp.

RankingBanking will be further examined as part of Bank Director’s Inspired By Acquire or Be Acquired, featured on BankDirector.com, which will include a discussion with WSFS CEO Rodger Levenson and Al Dominick, CEO of Bank Director, about weaving together technology and strategy. Click here to access the content.

Digital transformation in the banking industry has become an important factor driving deal activity, evidenced by recent acquisition announcements involving First Citizens BancShares, PNC Financial Services Group and Huntington Bancshares. A more tech-forward future also drove $13.8 billion WSFS Financial Corp.’s August 2018 acquisition of $5.8 billion Beneficial Bancorp, expanding its presence around Philadelphia and putting it well over the $10 billion asset threshold. Importantly, it provided the scale WSFS needed to make a $32 million, five-year investment in digital delivery initiatives.

The Wilmington, Delaware-based bank’s long-term focus on strategic growth, particularly in executing on its digital initiatives, led to a fourth-place finish in Bank Director’s 2021 RankingBanking study, comprised of the industry’s top performers based on 20-year total shareholder return. Crowe LLP sponsored the study. Bank Director Vice President of Research Emily McCormick further explores the bank’s digital transformation in this conversation with WSFS Chairman and CEO Rodger Levenson. The interview, conducted on Oct. 27, 2020, has been edited for brevity, clarity and flow.

BD: How does WSFS strategically approach strong, long-term performance?

RL: It comes from the top. The board has always managed this company with the goal of sustainable long-term performance, high performance. Every discussion, every decision and every strategic plan that we put together is looked [at] through that lens. And I would point to the most recent decision around the Beneficial acquisition as an opportunity for us to invest in [the] long term while recognizing that we’d have some short-term negative impact. And by that I mean, if you look back over the last decade or so, coming out [of] ’09, 2010 — WSFS had been on a fairly consistent, nicely upward-sloping trajectory of high performance. … But what the board said as part of our strategic planning process and the conversation with Beneficial was that we could only continue down that path for so long if we didn’t address a couple of important issues.

One was, if you look at that growth, it was primarily centered on our physical presence, mostly in Delaware. It’s our home market, but it’s a pretty small market, less than a million people. A very nice economy, but certainly not as robust as we grew to the size that we had grown to support that. We needed to get into a larger market, particularly into Philadelphia, [which is] very robust demographically, very large to give us that opportunity to continue to grow at above-peer levels.

The second thing as part of that process is like everybody else — and this was obviously all pre-pandemic — we were analyzing and watching our customers shift how they interacted with us to more digital interaction and less physical interaction. And we said, for us to keep up we’re going to have to start shifting some of that long-term investment, that we’ve historically [put] into building branches, into funding our technology initiatives.

The two of those things came together for Beneficial, [which] obviously gave us the larger market; it also gave us the scale to attack that transition from physical to digital. We knew it would impact earnings for a couple of years while we put that together and prepared for the next decade or so of growth. The board had a very robust dialogue around the trade-offs that were involved, and clearly said that we need to manage the company for the long term.

This is a great opportunity to invest in the long term; we’ll take the short-term knock on performance because of where we’re ultimately headed. We saw that with the reaction of the Street to our stock price, but that didn’t change or waiver the long-term vision. … Our board principles and guidelines [have] been ingrained in us all the way down through management: If you want to provide the best long-term value for your shareholders, you have to not get tied up in quarter-to-quarter or year-to-year performance. You have to look at it over longer horizons and make decisions that support that.

BD: How are you strategically approaching technology investment?

RL: It was really a decision to follow our customers. … There’s nothing we can do to try and compete with [the] big guys. You know the stats. You know how many billions of dollars they’re spending on technology. We’re not trying to catch up to them or be like them. We want to have a digital product offering that allows us to be very flexible and have optionality so that when new products and services come along that our customers want, we can move quickly toward offering those products and services, and have an offering that is competitive with the big guys, but maybe not the bleeding edge. We’re marrying it with the traditional community bank model of access to decision-making, local market knowledge [and] a high level of associate engagement, which translates into what we think is world-class service. Our vision is to have a product offering that we can marry up with those other things that will allow us to compete effectively against the big guys.

Most of what the big guys spend their money on is R&D. They have teams and teams of technology people, data [scientists and] all those other things, because they’re building their proprietary products and services. Our view is we don’t have to do that R&D, because that R&D is getting done in the fintech space for us.

BD: WSFS has brought on board some high-level talent around digital transformation; you’ve also got expertise on the board. You’re working to recruit more in the data space, as well as building your in-house technology expertise. In addition to building relationships with fintechs, why is that internal expertise important, and how are you leveraging that?

RL: When we got started on this, we had almost nobody focused on it in the company. We realized for us to be as effective as we felt we needed to be, we needed to have some teams that were fully involved in this as a day-to-day job. In terms of funding it, obviously we closed or divested a quarter of our branches with Beneficial after the deal. When you do that, you not only have the cost savings from the savings in the lease expense, but there’s people expense as well. Fortunately, even though net/net, our positions in our retail network decreased by about 150 from those closures or divestitures, nobody lost their job. We were able to absorb that through natural attrition or in the one case, we sold six of our branches in New Jersey, and all those people were guaranteed a job as part of that deal.

This was a process that occurred over the course of a year. It was methodically laid out, leading up to the conversion of the brand and the systems in August 2019. Over that year, our teams did a fabulous job [of] managing people and the normal attrition that goes on in that business. That gave us the ability to fund not only some of the technology that we’re buying, but also some of these other positions internally. It’s exactly aligned with shifting that investment that we made in branches — which is not just the bricks and mortar; it’s the people, it’s the technology, it’s everything else — shifting a chunk of that into digital. This is a part of that whole process.

EM: How did the pandemic impact your strategy?

RL: The pandemic confirmed and accelerated everything that we’ve seen over the last few years, and reinforced our desire to [respond] as quickly as we can to the acceleration of these trends. Clearly, 2020 has been a totally different year because of remote work and all those things, but the longer-term trends have been validated and reinforced the strategic direction that we embarked upon before the pandemic. At some point, we will start moving back to a more normal environment, and we feel like we’re uniquely positioned.

It feels like there’s not a week that goes by with a bank that’s announcing some big branch reduction program and shifting that money into digital. We’re not trying to pat ourselves on the back, but I do think we happened to have that opportunity with Beneficial. It provided us the forum for attacking that issue sooner rather than later, so we’ve got somewhat of a head start down that road. This is just a confirmation of everything we saw when we did that analysis.

Strategic Insights From Leading Bankers: Bank OZK

RankingBanking will be examined further as part of Bank Director’s Inspired By Acquire or Be Acquired virtual platform, which will include a panel discussion with Gleason and Mark Tryniski, CEO of Community Bank System. Click here to access the agenda.

Is Bank OZK misunderstood?

The $26.9 billion bank may be based in Little Rock, Arkansas — with offices primarily in the southeastern United States — but Chairman and CEO George Gleason II will quickly, but politely, correct you if you refer to Bank OZK as a community bank.

“We consider our bank a truly national bank and presence,” Gleason says, adding that in 2019, he spent 153 days outside of the bank’s headquarters traveling across the United States and internationally. “Sometimes people [comment] that we do a lot of loans outside of our area,” he adds. “I consider it absurd, because the United States is our market, and we do loans all over the United States. It’s a very balanced, diversified portfolio by product type and geography.”

Bank OZK’s unique business model positioned it to top Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP. To delve further into the bank’s performance, Bank Director Vice President of Research Emily McCormick interviewed Gleason about his views on factors impacting long-term performance, including how OZK positions itself to take advantage of opportunities in the marketplace. The interview was conducted on Oct. 26, 2020, and has been edited for brevity, clarity and flow.

EM: First off, tell me how you approach long-term performance for Bank OZK and balance that with short-term expectations.

GG: I’ve been doing this job over 41 years now, and I hope to continue to do it a number of years more. When you’ve been in a job a long time, and you expect to be in it a long time in the future, thinking about long-term performance is much easier than if you’re new to a job, and you’re in it for a very short period of time. With that said, we all live in a world where our stock price moves day to day based on short-term results, and many investors seem to be overly focused on short-term results. So, it takes a lot of discipline and a willingness to be viewed as not doing the best you can do in the short run to achieve the long-term results.

But we have always focused preeminent attention on achieving longer-term objectives, and that has paid off for us tremendously well. Probably the best example of that is our unwavering commitment to asset quality, credit quality. There have been a number of times in my 41-year career where our growth for a few quarters or even a few years has been disappointing, relative to what people thought we were capable of doing, because we held to our credit standards and our discipline, and let competitors take share from us when we thought some of those competitors were being too aggressive. That has always paid off for us in the long run, every single time.

EM: Out of the last crisis, Bank OZK participated in several FDIC deals. We’re in another, very different crisis. Are you applying some lessons that you learned through the last crisis, or through your experience in banking, to what we’re going through now?

GG: I’ve been through a lot of downturns, and the causes are always different. It may be excesses in real estate; it may be excesses in subprime mortgage finance. It may be a bust in the oil and gas industry [or] the savings and loan crisis. [N]ow you’ve got the Covid-19 pandemic-induced recession. Causes vary, but all economic downturns result in people being out of work and suffering economically, and businesses struggling and suffering, and businesses closing. Every economic downturn creates challenges for people that are in the credit business, as we are, but it also creates a lot of opportunities.

The key to being able to capitalize on the opportunities is No. 1, being appropriately disciplined in the good times so that you are not so consumed with problems in the bad times that you can’t think opportunistically. No. 2, you’ve got to have adequate capital, adequate liquidity and adequate management resources. If you have those ingredients and combination … you’re able to spend much more time in a downturn focused on capitalizing on opportunities, as opposed to mitigating your risk. That’s been an important part of our story for several decades now, is we have almost universally been able to find great opportunities in those downturns. … [W]e’re already finding some ways to benefit in this downturn. So, the causes are different, but the result is always the same: [Y]ou’ve got challenges, you’ve got opportunities and you’ve got to be ready to capitalize on those opportunities.

EM: What opportunities are you seeing now, George?

GG: Obviously in the very early days, there was some tremendous dislocation in the bond market. We had a couple of good weeks where we were able to buy things at really advantageous prices. The Fed was so aggressive in their efforts to fix the plumbing of the monetary system that they took those opportunities away literally in a matter of weeks.

We’ve seen a lot of competitors pull back from the [commercial real estate] space; that’s given us an opportunity to both gain market share and improve pricing. We have seen customers evolve [in] how they deal with our branches; it’s given us an opportunity to create some efficiencies [and] advance our rollout of some future technology, all of which have helped us accelerate our movement toward a more consumer-friendly, technology-oriented way of dealing with our customers.

And frankly, Emily, we’re so early in seeing all of the economic impacts from this recession. Some of the impacts, I think, have been pushed out several quarters by the aggressive monetary and fiscal policy actions out of Washington. I think that really good, attractive opportunities will appear in 2021 and 2022. I think we’re just getting started on seeing opportunities begin to emerge.

EM: OZK maintains high capital levels. Why do you view that as important, and how are you strategically thinking through capital?

GG: We’re operating from a position of having excess capital, and that is probably a great and appropriate thing in this environment. [We’re] certainly in an environment where you’d rather have too much capital than too little today and … I believe there are a lot of opportunities that will emerge over the next four to eight quarters where we’ll be able to put that capital to work in a very profitable manner for our shareholders. So, we feel very good about the fact that today we have one of the highest capital ratios of all of the top 100 banks.

EM: Bank OZK has seen some high-level departures in the past few years; most recently, your chief credit officer. I think sometimes that gives people pause, and I wanted to give you the opportunity to address that.

GG: The reality of that is we are very dependent upon human capital and intellect in running our business. … I have always put an emphasis on hiring, training and developing really smart people who have intense work ethics, and who love to win and want to be part of a winning team. We have an abundance of talent in our company, and we’re constantly training, grooming and improving that talent.

When you hire and develop that quantity and quality of well-trained, well-developed staff, hard-charging people who want to win and want to succeed and want to push, some of those people are going to go on and pursue other opportunities, and that is great. And because we have such an abundance of talent, we’re in a position where we can say, “Congratulations, we’re happy for you. Thank you for everything you have done for us,” and I can turn around and say, “Next man up; let’s go.” That really is our culture. So yes, we plan for people to leave. We have plans in place on how we’re going to replace people if they are not available for one reason or another, and we’ve got the depth of talent that it lets us move on without missing a beat.

EM: One more question: Bank OZK has a record of strong performance, which is why it’s included in this year’s RankingBanking study. That said, I sometimes hear whispers of doubt about what you guys are doing, perhaps due to your unique model. I’m curious about how you respond to those doubts from the financial and investment communities.

GG: We feel under-appreciated ourselves sometimes. [W]e have built an extraordinary bank with an extraordinary team of people and a great business model; maybe one of the absolute best business models in the banking industry. I think it will prove to be very durable and very profitable over a long period of time.

Because our model is so heavily involved in commercial real estate, and commercial real estate is something that is sometimes in fashion and sometimes out of fashion, I think we experience that sense of being out of step sometimes. But we do commercial real estate day-in, day-out, every day, up-cycle, down-cycle, and we do it in a way that allows us to be successful no matter which direction the CRE cycle is trending at any point in time.

I believe as this pandemic-induced recession plays out, our business model is going to prove its mettle and equip itself very well. I think that sense [of], “Wow, do we really want to own a CRE bank at this stage in the cycle?” will go away, because people will realize we’re a bank committed to consistent, high asset quality, and we’ve underwritten and will continue to underwrite our portfolios in a way that facilitates that. I think we’ll finally get the credit that my team deserves for the excellent work they’ve done.

I’m told a lot of times by investors, “You’re a great bank. We want to own you. Maybe in a couple of quarters will be the right time to buy a CRE bank.” I think that reflects a less than full understanding of the power of our franchise.

Embracing Gender Diversity as a Pathway to Success

A prolonged flat yield curve, economic contraction, increasing compliance and technology costs, not to mention the pandemic-induced pressure on stock valuations, have left banks in a difficult operating environment with limited opportunities for profitability.

Yet, there is an untapped opportunity for banks to capitalize on a strong and growing talent pool and profitable customer base: women. Research repeatedly shows that increasing gender diversity on bank boards and in C-suites drives better performance. Forward-thinking banks should look to women in their communities for growth inside and outside the institution.

Women now receive nearly 60% of all degrees, make up 50% of the workforce and, prior to the pandemic, held more jobs in the U.S. than men. They are the primary breadwinner in over 40% of U.S. households and comprise more than 50% of stock owners. A McKinsey & Co. report found that U.S. women currently control $10.9 trillion in assets; by 2030, that could grow to as much as $30 trillion in assets. Women also started 1,821 net new businesses a day in 2017 and 2018, employing 9.2 million in 2018 and recording $1.8 trillion in revenues. Startups founded by women pulled in $18.6 billion in investments across 2,304 deals in 2019 — still, lack of capital is the greatest challenge reported by female small business owners.

Broadly, research also supports a positive correlation between a critical mass of gender diversity in leadership and performance.

A study of tech and financial services stocks found a 20% increase in stock price momentum within 24 months of appointing a female CEO, a 6% increase in profitability and 8% larger stock returns with a female CFO. And they may achieve better execution on deals. In a review of 16,763 publicly announced M&A transactions globally over the last 20 years, boards that were more than 30% female performed better in terms of stock price and operational metrics than all-male boards.


Note: Performance metrics are market-adjusted
Source: M&A Research Centre at Cass Business School, University of London and SS&C Intralinks: “Gender Diversity and M&A Outcomes; How Female Board-Level Representation Affects Corporate Dealmaking” (February 2020)

But as of 2018, women held just 40 CEO positions at U.S. public banks, or 4.31%. Nearly 20% of banks have no women board members; the median is just over 16%. Banks should start by gender diversifying their boards; gender-diverse boards lead to gender-diverse C-suites.

Usually, boards feature an “accidental” composition that results from social norms: board members source new directors from their social and immediate networks. An intentional board, by comparison, is deliberate in composing a governance structure that is best equipped to evaluate and address current demands and future challenges. Boards can address this in three ways.

  1. Expand your networks. The median male board member has social connections to 62% of other men on their boards but no social connections to women on their boards. Broaden the traditional recruitment channels to ensure a more qualified, diverse slate.
  2. Seek diverse skill sets. Qualified female candidates may emerge through indirect career paths, other sectors of the financial industry or are in finance but outside of financial services. Women with nonprofit experience and small business owners can bring local market knowledge and relevant experience to bank boards.
  3. Insist on gender diverse slates. A diverse slate of candidates negates tokenism, while a diverse interviewer slate demonstrates to candidates that your bank is diverse.

But diversity in recruiting and hiring alone won’t improve a bank’s performance. To be effective, a diverse board must intentionally engage all members. Boards can address this in three ways.

  1. Ensure buy-in. Support from key board members when it comes to diversifying your board is critical to success. Provide coaching for inclusive leadership.
  2. Review director on-boarding and ongoing engagement. Make sure it’s welcoming to people with different connections or social backgrounds, builds trust and facilitates open communication.
  3. Thoughtful composition of board committees. Integrate new directors into the board’s culture and make corporate governance more inclusive and effective.

The long-term performance benefits of a gender diverse board and c-suite are compelling, especially in the current challenging operating environment for banks. Over time, an intentional board and C-suite that mirrors the gender diversity of your bank’s key constituents — your customer base, your employee base and your shareholder base — will out-perform banks that do not adapt.

Talent and Customer Experience Can Be Evaluated Three Different Ways


incentive-10-31-18.pngTo maintain a competitive advantage over peers, two areas of strategic focus we have seen increase include enhancing the customer experience and attracting and retaining the right talent. Specifically, many banks are focused on digital transformation and technological efficiencies as well as human capital management to attract the right talent, including diverse talent, to be able to achieve the strategic priorities.

Companies are clearly emphasizing the importance of these two strategic priorities, but how you measure success is challenging. And, do you incentivize management based on progress? The goal for boards is to have executives focus on objectives that will ultimately drive performance and long-term shareholder value.

Some organizations are beginning to align incentive-based compensation with these strategic priorities; however, objective measurement of progress or success may often require a subjective judgement.

Customer experience and engagement: The banking industry runs on relationships and maintaining these connections, which is shifting as customer demand for new and faster technology evolves. While ensuring customer security is still important, the focus once on customer service has now shifted to the customer experience. To measure this, we often see a portion of the total incentive tied to customer engagement, typically measured through surveys, customer retention, or strategic technological or digital initiatives.

Two examples of companies that utilize customer-centric metrics include American Express and Unum Group. Both weight customer experience and satisfaction as standalone metrics in the annual incentive plan. Citigroup uses a scorecard to assess top management performance and compensation, 30 percent of which is tied to non-financial objectives.

Digital Transformation: The changes in the banking industry have increased the demand for tech talent to implement digital strategies, particularly those involved in improving the customer experience. Banks need to decide whether they will rely on internal talent and resources to develop proprietary new technologies, or if they will go outside the industry to find talent. In recruiting this talent, financial services firms find themselves in competition with tech companies that can provide significant equity opportunities and may have less-traditional work arrangements.

Financial services companies must be creative in attracting this talent with perks like open offices, flexible work arrangements and separate pay structures for niche talent. Goldman Sachs’ dress code, and JP Morgan Chase & Co.’s relocation of its tech team to a more modern, open-floor office are examples.

Diversity and Inclusion: Driving some of these strategic priorities are talent issues that have been a hot topic in the boardroom. Studies have shown a diverse workforce provides for more diverse thinking, and a better performing organization. We are seeing some organizations incorporate improvements in diversity and inclusion in their incentive plan metrics:

  • Prudential Financial: Performance shares include a diversity and inclusion modifier (+/- 10 pp). Executives at the senior vice president level and above will be subject to a performance objective to improve the representation of diverse persons among senior management through 2020.
  • Citigroup: 18-member operating committee will be measured on the progress of raising the percentages of women and African Americans in management positions by 2021.
  • American Express: Has had talent retention and diversity representation goals as part of the annual incentive plan since 2013.
  • Old National Bancorp: Has included diversity and inclusion targets in the annual incentive plan as a negative modifier since 2016.

The use of a modifier for Prudential Financial and Old National Bancorp may be due to the amount of influence an executive may have over the goal. Regardless of the weighting, inclusion of these metrics is a signal about the importance of the issue.

When boards are considering which strategic metrics to incentivize executives, the focus should be on management’s priorities, such as innovation, security, employee satisfaction or employee diversity. The key is attracting, hiring and retaining the right people who will align with the company’s strategic priorities. That is what differentiates one company from the next and those with a competitive edge.

The Hidden Value in Performance Evaluations


10-22-14-meyer-chatfield.pngI am not sure when performance evaluations became standard practice in business, but I can say with confidence I have never met one executive, director, manager or employee who relishes the process. It is laborious, and in many circumstances, antiquated. The reason is pretty simple: It is often a cold, process-driven meeting, with little intellectual or emotional investment beyond checking off a few boxes on a performance evaluation software application and giving a rah-rah speech to the employee. In other words, it’s something you just have to do.

There is no question that performance evaluations have a role to play within organizations. However, employees who are performing tangible, quantifiable tasks will be more suited to a traditional evaluation than more relationship driven, strategically focused employees—but a company still needs to know how these individuals are performing in respect to their job duties. I am not suggesting that performance evaluations should be abolished, but at the very least, they should be complimented with a different approach to achieve maximum value from the process no matter the level of responsibility of the employee in the organization.

The suggestions that follow are not solely my own, but rather blended insights from our experience in the banking industry and the experience of other successful business leaders, such as Andy Stanley, founder of North Point Ministries in Alpharetta, Georgia, who uses a similar approach in his organization.

Some employers, such as North Point Ministries, have developed questions that replace the standard evaluation for senior level managers who typically interact on a daily basis, may know each other well and have a high degree of accountability to other members of the team. What is the true purpose of an evaluation where the executives know how they are performing and the board of directors knows how they are performing? To formalize what is already known? Shouldn’t we want to accomplish more?

That brings us to the Employee Evaluated Experience. As opposed to checking a few boxes in a standard evaluation form, try developing a set of questions that drills down into the employee’s experience. Below are few examples—there is no right or wrong here.

 

  1. What are you most excited about right now?
  2. What do you want to spend more time on?
  3. What’s most challenging?
  4. Anything bugging you?
  5. What can I do to help?

These are designed to be permission giving questions, providing the opportunity for the employees to share experiences with the company through his or her manager in a safe environment. The importance of safeness cannot be overstated. If employees don’t trust the process and fear that candor could put their jobs at risk, they will be very reluctant to express their true feelings. As you begin to ask employees these questions, patterns will emerge that will provide tangible insights into the organization. And if acted on, this insight will begin to fundamentally strengthen the organization.

A word of caution: These questions are not meant to be answered all in one sitting during a two-hour timed session, in a group setting or in a hurried, ‘let’s-get-this-over-with’ manner.

The intent behind these questions is to integrate them into natural conversations—perhaps over an evening cocktail or a morning cup of Joe. But even in a slightly more formal setting, the employee is still engaged and is typically excited to share their experiences. Leaders, be ready for what you may hear and do not take the conversation lightly because that will only undermine the authenticity of the conversation.

No matter what your set of questions, always end the conversation with question number five. The role of a leader within any organization should be to remove obstacles that infringe upon the ability of people to do their job. Take this role seriously and help your associates, team members and colleagues accomplish more.

As an experiment, try asking these questions informally of your executive team members, managers and line employees. Perhaps even board members should be asked these questions. Why would you not want to know what excites your board members about the company you’re leading? Start with those trusted confidants. See what answers begin to pop up. You may learn something you did not know, or confirm something you already did. Regardless, the exercise of giving your employees permission to provide their Evaluated Experience will only provide added value to you and your organization.