Talking Too Much About Board Diversity

Written by

A backlash has emerged in response to diversity and inclusion initiatives.

In the past several years, activists, institutional investors and some companies — including banks — have advocated for increased diversity and inclusion on their boards and throughout their firms. These groups believe that a diversity of race, gender, age and opinion is good for business and, ultimately, for shareholders.

But two recent studies draw attention to a burgeoning backlash to these efforts. Whether from message fatigue or concern about the board’s focus, companies may need to be mindful about the promotion and communication of their D&I efforts.

Director support to increase gender and racial diversity in the boardroom fell for the first time since 2013 in PwC’s 2019 governance survey. Thirty-eight percent of directors said gender diversity was very important in 2019, down from 46% in 2018. Those who said racial and ethnic diversity was very important fell to 26%, down from 34% the year prior.

Directors seem to be fatiguing of these messages, says Paula Loop, leader of PwC’s Governance Insights Center, who adds she was surprised at the recent trend.

“The way that we rationalized it is that it appears that directors have heard the message and they’re trying to acknowledge that,” she says.

Respondents to PwC’s survey acknowledged that diversity has added value to their discussions and decisions, Loop says, and that it increasingly makes sense from a business perspective. This finding is supported more broadly: Bank Director’s 2018 Compensation Survey found that 87% of respondents “personally believe” that board diversity, either through age, race or gender, has a positive impact on the bank’s performance.

“We have to remember, especially when you’re thinking about boards, they … don’t move necessary as quickly as one might think,” Loop says. “I feel like we’re in an evolution — but there’s been a lot in the last couple of years.”

Interestingly, PwC observed different responses to the survey based on the gender of respondents. A higher percentage of female directors reported that gender and racial/ethnic diversity on the board was “very important.” Male directors were less inclined to report seeing evidence of the benefits of diversity, and more than half agreed that diversity efforts “are driven by political correctness.”

Male directors were three times as likely as a female director to assert that investors “devote too much attention” to both gender and racial/ethnic diversity. Overall, 63% of directors believe investors are too focused on gender diversity, up from 35% in 2018; 58% report the same when it comes to racial/ethnic diversity, up from 33%.

The different responses along gender lines demonstrates why diversity matters, Loop says. The report shows that gender-diverse slate of directors do have a “different emphasis or different way of thinking.”

“It validates why it’s good to have a diverse group of people in a room when you have a conversation about an important issue,” she says.

But even if a bank makes headway on increasing the gender diversity on its board, there is still another group to think about: shareholders. A recent study found that companies that appoint women to the board experience a decline in their share price for two years after the appointment. The study looked at more than 1,600 U.S. companies between 1998 and 2011.

“Investors seem to be penalizing, rather than rewarding, companies that strive to be more inclusive,” wrote INSEAD researchers Isabelle Solal and Kaisa Snellman in a November 2019 Harvard Business Review article about their study.

“What we think is happening is that investors believe that firms who choose to appoint women are firms who care more about diversity than about maximizing shareholder value,” writes Solal, a postdoctoral research fellow at the Stone Centre for the Study of Wealth Inequality at INSEAD, in an email interview.

In subsequent research, they found that investors view appointments of female directors with a company’s “diversity motivation.” The association is “not that surprising,” she writes, given that “almost all” press releases feature the gender of the appointee when that person is a woman, and will often include other references to diversity.

“Gender is never mentioned when the director is a man,” she writes.

Solal says that companies should still appoint women to their boards, especially given that the shareholder skepticism dissipates in two years. But companies should be mindful that overemphasizing a director’s gender or diversity may be unhelpful, and instead highlight the “skills and qualifications of their candidates, regardless of their gender.”

Four Interesting Insights from Two Very Interesting Bankers

Written by

The greatest benefit of being a writer is that you get to talk with lots of interesting people. It’s a constant education. Particularly if you appreciate the opportunity and structure your conversations accordingly.

My style is to conduct broad interviews across a range of topics, whether all the topics are germane to the piece I’m working on at the moment or not. This has helped me construct a mental model of banking, but it also means that a lot of material is left on the cutting room floor, so to speak.

With this in mind, I decided to revisit some of the conversations I’ve had with bankers over the past few months to share the most interesting insights.

Foremost among these is a series of conversations with Robert and Patrick Gaughen, the CEO and president, respectively, of Hingham Institution for Savings, a $2.6 billion bank based in the Boston metropolitan area.

Since the Gaughens gained control of Hingham in 1993, following a two-year proxy contest with its former managers, it has generated a total shareholder return of more than 5,400%, according to my math. That’s more than double the total return of other well-run banks like JPMorgan Chase & Co. and PNC Financial Services Group.

One thing that strikes you when talking with the Gaughens is the depth and sophistication of their banking philosophy. All bankers understand banking. But some understand it on a deeper level than others — that’s the Gaughens.

They approach the industry as investors, or capital allocators, instead of bankers. This seems to be a product of the fact that both Robert Gaughen and his father — Patrick’s grandfather — practiced law before becoming de facto bankers in order to protect investments they had made in banks.

This may seem like a vacuous nuance, but it isn’t. It’s always tempting to subordinate the process of capital allocation to operational processes. After all, if your operations aren’t profitable, you won’t have excess capital to allocate.

What true capital allocators appreciate, however, is that the distinction between capital allocation and operations is nebulous. Everything can be viewed through the prism of capital allocation — from how many employees you hire to which technologies you implement to whether you increase your dividend or repurchase stock.

In this respect, capital allocation is less of a mechanical process than it is a mindset, concentrating one’s attention on measuring the return on each incremental decision.

Another interesting insight that came up in our conversations is the importance of studying other industries. Not only the importance of doing so, I should say, but why it’s so important to do so.

The drive to constantly learn is something that many people preach, but few people practice. This is an element of leadership that can’t be overstated. It serves as the common denominator underlying the performance of the most successful CEOs in banking.

It’s well known that banking is an acutely competitive and commoditized industry, and that those characteristics compress profit margins. But there are two other forces that lead to a lack of differentiation as well.

As Patrick points out, high consultant reuse and an overbearing regulatory schema contribute to a high degree of homogeneity in terms of the way banks are run. The net result is that studying other banks can be less fruitful than one might think.

This isn’t to say that a mastery of banking isn’t critical — it is. But after accumulating a critical mass of knowledge about best practices within banking, the incremental return from intermittently studying other industries, it seems, will exceed the return of concentrating exclusively on banking.

The final point that both Gaughens stress relates to the importance of skin in the game, or executive and director ownership of stock. In their case, their immediate and extended family owns upwards of 40% of Hingham’s outstanding stock. This provides a powerful incentive to care not only about the return on their capital, but also the return of their capital.

Many companies talk about the mystical benefits of alignment between executives and shareholders, as well as having employees that act like owners. But there is simply no substitute for having actual skin in the game. It hones one’s appreciation for the virtues of extraordinary banking, from efficiency to risk management to disciplined growth.

None of this is to say that the Gaughens have everything figured out; they would be the first to admit they don’t. But their philosophy and approach to banking is not only unique, but also tried and true.

Tackling M&A as a Board

Written by

Success in executing a bank’s growth strategy — from acquiring another institution to even selling the bank — begins with the discussions that should take place in the boardroom. But few — just 31%, according to Bank Director’s 2020 Bank M&A Survey — discuss these issues at least quarterly as a regular part of the board’s agenda.

Boards have a fiduciary duty to act in the best decisions of shareholders, and these discussions are vital to the bank’s overall strategy and future. Even if management drives the process, directors must deliberate these issues, whether it’s the prospective purchase or another entity of selling the bank.

The survey affirms the factors driving M&A activity today: deposits, increased profitability and growth, and the pursuit of scale. There are common barriers, as well; price in particular has long been a sticking point for buyers and sellers.

M&A plays an important role in most banks’ strategies. One-quarter intend to be active acquirers, and 60% prefer to focus on organic growth while remaining open to making an acquisition.

However, roughly 4% of banks are acquired annually — a figure that doesn’t line up with the 44% of survey respondents who believe their bank will acquire another institution this year.

Conversations in the boardroom, and the strategy set by the board, will ultimately lead to success in a competitive deal landscape.

“Having strong, frequent communications with the board is very much part of our M&A process, and I can’t emphasize how important it is,” says Alberto Paracchini, CEO at Chicago-based Byline Bancorp. The $5.4 billion asset bank has closed three deals in the past five years. “With proper communication, good transparency and frequent communication as to where the transaction stands, the board is and can be not only a great advisor but a good check on management.”

The board at Nashville, Tennessee-based FB Financial Corp. discusses M&A as part of its annual strategic planning meeting. Typically, an outside advisor talks to the board at that time about the industry and provides an outlook on M&A. Also, they’ll “talk about our bank and how we fit into that from their perspective,” including potential opportunities the advisor sees for the organization, says Christopher Holmes, CEO of the $6.1 billion asset bank. Progress on the strategy is discussed in every board meeting; that includes M&A.

So, what should directors discuss? Overall, survey respondents say their board focuses on markets where they’d like to grow (69%), deal pricing (60%), the size of deals their bank can afford (57%) and/or specific targets (54%).

“It starts with defining what your acquisition strategy is,” says Rick Childs, a partner at Crowe LLP. Identifying attractive markets and the size of the target the bank is comfortable integrating is a good place to start.

At $6.1 billion asset Midland States Bancorp, strategic discussions around M&A center around defining the attributes the board seeks in a deal. Annually, directors at the Effingham, Illinois-based bank discuss “what do we like in M&A — deposits and wealth management and market share,” says CEO Jeffrey Ludwig. “[We] continue to define what those types of items are, what the marketplace looks like, where’s pricing today.”

Given the more than 400 charters in Illinois, the board sees ample opportunity to acquire, and the board evaluates potential deals regularly. The framework provided by the board ensures management focuses on opportunities that meet the bank’s overall strategy.

The board at $13.7 billion asset Glacier Bancorp, based in Kalispell, Montana, is “very involved in M&A,” says CEO Randall Chesler. Management shares with the board which potential targets they’re having conversations with and how these could fuel the bank’s strategy. “We start to show them financial modeling early on [so] that they can start to understand what a transaction might look like,” he says. “They’re really engaged early on, through the process and afterwards.” Once a transaction goes through, the board keeps tabs on the status of the conversion and integration.

Having M&A experience on the board can aid these discussions. Overall, 78% of respondents say their board includes at least one director with an M&A background.

These directors can help explain M&A to other board members and challenge management when necessary, says Childs. “They can be a really valuable member of the team and add their experience to the overall process to make sure that it isn’t all groupthink; that there’s somebody that can challenge the process, and make sure [they’re] asking the right questions and keeping everybody focused on what the impact is.”

A number of banks don’t plan to acquire via acquisition. How often should these boards discuss M&A? More than half of survey respondents who say their bank is unlikely to acquire reveal that their board discusses M&A infrequently; another 20% only discuss M&A annually.

Jamie Cox, the board chair at $265 million asset Alamosa State Bank, based in Alamosa, Colorado, says her bank strongly prefers organic growth. Still, the board discusses M&A quarterly at a minimum. “We would be remiss if we ignored it completely, because opportunity is always out there, but you’ve got to be looking for it,” she says. “Whether it’s your key strategy or a secondary strategy, it’s always got to be on the table.”

In charter-rich Wisconsin, Mike Daniels believes too many community bank boards aren’t adequately weighing whether now’s the time to sell. “I don’t want to be as bold as to say that they’re not doing their fiduciary responsibility to their shareholders, but are they really looking at what their strategic options are?” says Daniels, executive vice president at $3.1 billion asset Nicolet Bancshares and CEO of its subsidiary, Nicolet National Bank.

Green Bay, Wisconsin-based Nicolet has an investment banker on staff who can model the financial results for potential acquisition targets. “We’re having M&A dialogue on a regular basis at the board level because we can do this modeling — here’s who we’re talking to, here’s what we’re talking about, here’s what it would mean,” says Daniels.

The board sets the direction for what the bank should evaluate as a potential target. How success is measured should derive from those initial discussions in the boardroom.

“We’re real disciplined on that tangible book value earnback and making sure there’s enough earnings accretion,” says Ludwig. A deal isn’t worth the effort if earnings per share accretion is less than 2% in his view. Any cost saves or revenue synergies are factored into the bank’s earnback estimate. “We’re fairly conservative on the expense saves and diligent about getting at least what we’ve disclosed we could get, and we don’t put any revenue synergies in our model.”

Bank Director’s 2020 Bank M&A Survey, sponsored by Crowe, surveyed more than 200 independent directors, CEOs and senior executives to examine acquisition and growth trends. The survey was conducted in August and September 2019. Bank Director’s 2020 RankingBanking study, also sponsored by Crowe, examines the best M&A deals completed between Jan. 1, 2017, and Jun. 30, 2018, detailing what made those deals successful. Additional context around some of these top dealmakers can be found in the article “What Top Acquirers Know.” The Online Training Series also includes a unit on M&A Basics.

Improving Shareholder Liquidity, Employee Performance through ESOPs

Written by


ESOP-6-18-19.pngMost banks face challenges to find, incentivize and retain their best employees in an increasing competitive market for talent. Often, smaller banks and banks structured as Subchapter S corporations have the added challenge of providing liquidity for their shareholders and founders. An employee stock ownership plan can be an excellent tool for addressing those issues.

An ESOP creates a buyer for the bank’s stock, generating liquidity for shareholders of private or thinly traded banks and providing market support for publicly traded ones. An ESOP’s buying activity can reduce shares outstanding and increase a bank’s earnings per share. It can also increase employee benefits and gives them a sense of ownership that can improve recruitment, retention and performance.

ESOPs are tax-qualified defined contribution retirement plans for employees that primarily invest in employer securities. ESOPs offer accounts to employees, similar to 401(k) retirement plans. But unlike a 401(k), employees do not contribute anything to the plan; instead, the bank makes the contribution on their behalf.

ESOPs are an excellent employee benefit and a recruitment, retention and performance tool. ESOPs do not pay taxes on an annual basis, so taxes are deferred while the stock remains in a plan. When the employee retires or takes a distribution from the plan, the value of the distribution is taxed as ordinary income. Employees also have the ability to roll over the distribution to an individual retirement account.

Employees at companies that offer an ESOP have, on average, 2.6 times more in retirement assets than employees working at companies that do not have an ESOP, according to the National Center for Employee Ownership. Additionally, companies with broad-based stock option plans experienced an increase in productivity of 20 percent to 33 percent above comparable firms after plans were implemented. Medium-sized companies saw gains at the higher end of the scale. Employee ownership is also associated with higher rates of employee retention. According to a survey by the Rutgers University’s NJ/NY Center for Employee Ownership, workers at employee-owned companies are less likely to look for other jobs and more likely to take action when co-workers are not working well.

There are a couple of different ways that banks can establish ESOPs. The simplest and most efficient is called a non-leveraged ESOP, where the bank or holding company makes a tax-deductible cash contribution. The contribution can be in stock or cash and is recorded as compensation expense. If the bank contributes cash, those funds can be used to purchase stock directly from shareholders and create liquidity and demand in the stock. However, it can take years for a non-leveraged ESOP to accumulate a significant enough position to make a meaningful difference to a bank.

The other method, called a leveraged ESOP, uses a bank’s holding company to lend money directly to the ownership plan. The holding company is required because banks are not permitted to lend directly to the ESOP or guarantee a loan made to the ESOP. The holding company can use cash on its balance sheet, borrow it from a third-party lender or guarantee a third-party loan made directly to the ESOP. The ESOP uses the funds to purchase a large block of non-issued shares from the holding company or directly from shareholders. Although leveraged ESOPs have higher costs and complexity, they can make an immediate, meaningful difference in liquidity and employee benefits. This approach also has the benefit of increasing earnings per share upfront, since the shares underlying the ESOP loan to make the purchase are not considered outstanding. However, the repurchased shares negatively impact tangible common equity and tangible book value.

An ESOP can help the right bank accomplish many of its goals and objectives. Banks should carefully review their goals and objectives with qualified professionals that know and understand both the ESOP and commercial bank industries.

12 Questions Directors Should Ask About New Bank Activities

Written by

A bank’s board of directors must answer to a variety of constituencies, including shareholders, regulatory agencies, customers and employees. At times those constituencies may have competing interests or priorities. Other times, what may appear to be competing interests are actually variations of aligned interests.

One area where this is particularly true is the board’s responsibility to strike the right balance between driving revenues and ensuring the bank adheres to its risk appetite established as part of its enterprise risk management framework.

The failure to strike this proper balance can be devastating to the institution, and if widespread, could result in consequences across the entire industry, such as the 2008 financial crisis. As technology and innovation accelerate the pace of change in the banking industry, that balance will become more critical and difficult to manage. And as banks explore ways to increase profits and remain competitive, especially with respect to noninterest income, bank directors will need to remain diligent in their oversight of new bank activities.

Regulators have offered guidance to bank boards on the subject. For example, the Office of the Comptroller of the Currency (OCC) issued a bulletin in 2017 that defines “new activities” to include new, modified, and/or expanded products and services and provide guidance related to risk management systems for new activities. While it is management’s role to execute strategy and operate within the established risk appetite on a day-to-day basis, the board’s role is to oversee and evaluate management’s actions, and the board should understand the impact and risks associated with any new activities of the bank.

To exercise this responsibility, directors should challenge plans for new activities by posing the following questions to help them determine if the proper risk approach has been taken. Questions may include:

  • Does the activity align with the bank’s strategic objectives?
  • Was a thorough review of the activity conducted? If so what were the results of that review and, specifically, what new or increased risks are associated with the activity, the controls, and the residual risk the bank will be assuming?
  • Is the associated residual risk acceptable given the bank’s established risk appetite?
  • Is the bank’s infrastructure sufficient to support the new activity?
  • Are the right people in place for the activity to be successful (both the number of people required and any specific expertise)?
  • Are there any new or special incentives being offered for employees? If so, are they encouraging the correct behavior and, just as importantly, discouraging the wrong behavior?
  • What are the specific controls in place to address any risks created?
  • How will success be measured? What reporting mechanism is in place to track success?
  • Will there be any impact on current customers? Or in the case of consumers, will there be any disparate impact or unfair or deceptive acts or practices (UDAAP) implications?
  • What third parties are required for successful implementation?
  • What limits on the amount of new business (concentration limits) should be established?
  • Are the applicable regulators aware of the bank’s plans, and what is their position/guidance?

These threshold questions will assist directors in becoming fully informed about the proposed new activities, and the answers should encourage follow up questions and discussions. For example, if third parties are necessary, then the focus would shift to the bank’s vendor management policies and procedures. Discussions around these questions should be properly documented in the meeting minutes to evidence the debate and decision-making that should be necessary steps in approving any new bank activity.

If these questions had been posed by every bank board contemplating the subprime lending business as a new activity, it may have averted the challenges faced by individual banks during the financial crisis and lessened the impact on the entire industry.

In the future, if boards seek the answers to these questions, the following discussions will help ensure directors will give thoughtful consideration to new activities while properly balancing the interests of all of their constituencies.

 

Should 1,900 Banks Restructure After Tax Reform?

Written by


strategy-2-18-19.pngOne of the big story lines of 2018 was tax reform, which should put more money in the pockets of consumers and businesses to grow, hire, and borrow more from banks.

Shareholders of Subchapter-S banks may ask whether the benefits of Sub-S status are as meaningful in the new tax environment. Roughly 35 percent of the 5,400 banks in the U.S. are Subchapter-S corporations, and given the changes brought by the Tax Cuts and Jobs Act, some choices made under the prior tax regime should be revisited.

Prior to tax reform, the benefits of Sub-S status were apparent given the double taxation of C-Corp earnings with its corporate tax rate of 35 percent, plus the individual dividend tax rate of 20 percent. That’s compared to the S-Corp, which only carried the individual income tax rate up to 39.5 percent.

Tax reform lowered the C-Corp tax rate to 21 percent, lowered the maximum individual rate to 37 percent, and created a potential 20 percent deduction of S-Corp pass-through earnings, all of which make the choice much more complicated.

Add complexities about how to calculate the 20 percent pass-through deduction on S-Corp earnings, the 3.8 percent net investment income tax on C-Corp dividends and some S-Corp pass-through earnings, and it becomes more challenging to decide which is best.

Here are some broad concepts to consider:

  • S-Corp shareholders are taxed on the corporation’s earnings at the individual’s tax rate. If the corporation does not pay dividends to shareholders, the individual tax is being paid before the individual receives the actual distribution. 
  • The individual tax on S-Corp earnings may be mitigated by the 20 percent pass-through deduction allowed by the IRS, but not all the rules have been written yet. 
  • A C-Corp will pay the 21 percent corporate tax, but individual tax liability is deferred until shareholders are paid dividends. The longer the deferral, the more likely a C-Corp structure could be more tax efficient.

The impact of growth, acquisitions, distributions, and capitalization requirements are interrelated and critical in determining which entity makes the most sense.

If a bank is growing quickly and distributing a large percentage of its earnings, its retained earnings may not be sufficient to maintain required capital levels and may require outside capital, especially if the bank is considering growth through acquisition. Because an S-Corp is limited in the type and number of shareholders, its access to outside capital may also be limited, often to investments by management, board, friends, family and community members.

A bank with little or no growth may be able to fully distribute its earnings and still maintain required capital levels. Depending on the impact of Internal Revenue Code Section 199A, state taxes, the 3.8 percent net investment income tax and other factors, Subchapter S status may be more tax efficient.

Section 199A permits the deduction of up to 20 percent of qualifying trade or business income and can be critical to determining whether Subchapter-S makes sense. For shareholders with income below certain thresholds, the deduction is not controversial and can have a big impact.

For shareholders with income above the thresholds, the deduction could be limited or eliminated if the business income includes specified service trade or business income, which includes investment management fees and may include trust and fiduciary fees and other non-interest income items.

S-Corp structures can be terminated at any time. If your bank is a C-Corp and considering a Subchapter S election for the 2019 calendar tax year, the election is due on or before March 15, 2019.

Given the level of complexity and amount of change brought about by the new tax legislation, it is clear that that decisions made under the old rules should be revisited.

Balancing the Relationships of Constituents

Written by


investor-1-16-19.pngOftentimes, as supporters of community banks, we can perceive an inquiring shareholder might not favor the bank remaining independent. But there are times when this perception might be warranted.

Shareholders, in the end, are still people. Though they align into different groups with different interests, people are ultimately in charge. Often, it is a misunderstanding of the role of management and the board, the bank’s role, the shareholder’s role, and the goals and objectives of each that cause distractions.

Here are several points to consider.

Management and the board
Management must understand that they work for the board. The board works for the shareholders. The amount of influence any board can have is directly correlated to its collective ownership of the company. Without a meaningful stake, outside investors will have the most say. If the board doesn’t own 100 percent of the stock, it has a fiduciary duty to the other shareholders. This seems an elementary concept, but if the board and management team don’t really understand the legal and practical implications of ownership and reporting, it can precipitate a communication breakdown and misalignment of interests.

Insiders must align independent shareholders’ interests with their own and avoid setting themselves up for a lifetime job to only serve themselves.

Transparency and communication
Banking is one of the most transparent industries in the U.S., so communicate often with your shareholders. A lack of communication and transparency leads to mistrust and misalignment of interests. If the bank is private, then a quarterly newsletter with summary financials should be included, along with book value per share and market value per share, if known or done by a third party. At minimum, book value per share should be provided.

Market for stock
If the bank is public, this is not much of an issue, but privately-held banks need a market of some kind. The bank should get a valuation once a year, and engage a third party to make a market in the stock or facilitate communication between shareholders with knowledge of last trades.

Pricing is important. If you have your private bank stock selling for tangible book or less, an enterprising shareholder may seek to put the bank in play for control value.

If the private bank stock is selling at 1.5 to 2 times tangible book value, it makes it much more difficult to put it in play, and most shareholders feel thankful for the rich minority valuation. Valuation can be very important as a strategy for independence.

Types of shareholders
When adding shareholders during a capital raise, consider their investment horizon, type, and propensity for involvement and activism. An ongoing assessment of these qualities is very important.

Generational transfers can change all these goals, and if the bank’s management and board are not prepared for these different investment goals, it can be a shock.
Private equity funds are short term, focused on internal rate of return (IRR) and controlling, or at least heavily involved, as investors. Some institutional investors are passive and long term. Some are very familiar with long-term community bank investing, and some are not.

Local, long-term community-based individuals can make wonderful investors but can present problems as well. A good investment banking advisor will categorize these diverse investor types and offering type situations, and analyze them with the bank.

Inquiring shareholders
When a shareholder asks about performance, liquidity or selling the bank, your first reaction is key to setting the tone. You should always take a meeting, listen and politely consider your response.

This will probably be a two-meeting process. Two things to make certain: Don’t bring your lawyer and investment banker to the initial meeting, and certainly don’t ignore the shareholder.

Bringing the bank’s lawyer and investment banker, and ignoring the shareholder are two responses by management teams and boards that have things to hide. Attorneys and investment bankers may provide you counsel and advice but need not participate in the initial meeting.

The bottom line
Hold an annual or semi-annual meeting at your bank to address potential shareholder issues. Frequently, too little importance is placed on all constituent groups involved in the success of the bank and its future.

The management team and the board can and should be steering toward a successful future for their bank, and doing so with satisfied shareholders.

More Banks Want To Sell For This Reason

Written by


liquidity-1-14-19.pngPeople often ask what are the main factors that are motivating banks to sell. Not surprisingly, sellers frequently cite a lack of succession planning, a lack of scale and increasing costs for technology and compliance.

But one surprising area that is becoming more influential is shareholder liquidity, now more often the primary factor we see pushing institutions to sell.

For many banks, the age of their average shareholder is approaching or exceeds 70. This leads to three primary challenges:

  • As shareholders pass away, the personal representative often needs to liquidate shares in order to settle the estate. If the issuer can’t provide a source of liquidity, the estate will “dump” the shares, sometimes at a steep discount.
  • Other shareholders are engaged in estate planning and seeking to sell shares.
  • Local shareholders are bequeathing shares to children and grandchildren spread all over the country who have no commitment to the community or desire to hold shares in the local bank.

There are also de novo banks whose investors bought in during the late 1990s and early 2000s with the promise of a 10- to 15-year time horizon. They are 20 years older and eager for a liquidity event.

There are many tools institutions can use to provide shareholders with increased liquidity, including:

1. Matching Programs. Some of our clients keep “interested purchaser” and “interested sellers” lists, in order to help match prospective buyers and sellers. This can be a simple way to help shareholders find an avenue for sale. If a shareholder asks for help in selling their shares, you can provide them with a list including the contact information of interested purchasers.

There are important considerations when administering a matching program. You will want to (1) avoid activity that would require registration with the SEC as a broker-dealer, and (2) make sure you, as the issuer, are not seen as “offering” the shares. To mitigate those risks, you should play a very limited role in any matching transaction. You should not negotiate, offer opinions, handle transaction money, or actively promote the service or solicit customers. You may, however, provide certain limited information and make shareholders aware of the service.

2. Repurchase Programs. Repurchase programs can take many forms, but the two most common are buyback programs and tender offers. With a buyback program, the board adopts a policy authorizing the company to repurchase shares within certain parameters. You may then inform shareholders of the program, but you may not actively solicit shareholders to participate in the program. Alternatively, a tender offer is an active solicitation whereby you ask a shareholder to make an investment decision in a limited amount of time. Furthermore, a tender offer is often more successful because it is “easy.” A shareholder simply needs to accept the issuer’s offer and doesn’t need to engage in negotiations with the company or other unfamiliar shareholders. Tender offers also allow the issuer to target strategic goals, such as offering redemption to small shareholders or out-of-state shareholders.

There are certain bank regulatory considerations involved with any share buyback or redemption transaction. In addition, specific securities laws and requirements apply to tender offers.

3. Transfer Services. Legislation enacted in recent years (the JOBS Act and the FAST Act) allows the use of a third-party online platform to implement certain securities transactions. By using a third-party platform, you can remain involved and offload most of the compliance risk to the vendor. Such platforms can often act as a white-labeled bulletin board for your shareholders to interact.

4. Listing. There are always the options of listing your securities over-the-counter (or OTC), on the recently-created bank-specific OTCQX, or going public and listing your shares on NASDAQ or NYSE.

To fund some of the repurchase initiatives identified above, some banks have successfully raised new capital from community members and customers, many of whom have not had the opportunity to invest in the bank. When a repurchase program is coupled with an offering, several banks have successfully “recycled” their shareholder base, buying time to execute their strategy without the added pressure of liquidity concerns.

There are a lot of options to consider, but community bank executives and boards should be aware of the increasing challenge shareholder liquidity is presenting to their peers and how to manage it proactively.

The Three M&A Virtues of M&T

Written by


merger-1-4-19.pngM&T Bank Corp.—the $117 billion asset bank holding company headquartered in Buffalo, New York—is well-known for its disciplined approach to M&A, a strategy that has served the big regional bank well through the 18 whole-bank acquisitions it has made since 1987.

Its most recent deal, which closed in November 2015, was also its biggest—the purchase of Hudson City Bancorp, a Paramus, New Jersey-based regional thrift that expanded M&T’s reach in New Jersey, Connecticut and parts of New York City, adding $37 billion in assets and $18 billion in deposits.

The well-priced deal led to M&T’s first-place tie with Phoenix, Arizona-based Western Alliance Bancorp. for the Best M&A Strategy in Bank Director’s 2019 RankingBanking study.

Given M&T’s three decades of successful deals, Bank Director interviewed M&T Chief Financial Officer Darren King to explore the bank’s philosophy around M&A. He says three values drive its M&A strategy.

The first—and perhaps most important value—is patience. Put simply, if a deal doesn’t align with M&T’s strategy, it won’t happen.

“We’ve never been a bank that’s been interested in growth just for growth’s sake,” says King. M&T is laser-focused on getting a return on the dollars invested, whether that’s for an acquisition, an investment in technology or any other investment made to grow and improve the business.

“Our job is to provide our shareholders with a better-than-average return on their investment,” says King. That focus on returns—rather than chasing growth—yields the discipline the bank needs to execute on its strategy.

Part of that patience means the bank will wait for the right partner—one that is committed to the long-term success of the deal. This is the second value that drives dealmaking at M&T.

“One of the places that helps you earn that return [on investment] is the price that you pay,” says King. Committed partners tend to hold to a more long-term view on that point. “Our hope is that anyone who is a willing partner—which is precondition for us for the combination—would like to be paid in our stock, and therefore the price [paid] isn’t necessarily a reflection of the value that would be created for both [entities’] shareholders by putting the two organizations together.” A lower price in a successful transaction will have a positive impact on M&T’s stock—which benefits the seller as a stockholder.

Having so-called skin in the game by taking stock in the transaction also represents a commitment from the seller that the acquired bank’s management team will stay on board to ensure the future success of the merged entity—and raise the value of the stock.

“They don’t want someone to sell their bank to M&T, and go away and retire,” says Brian Klock, a managing director at Keefe, Bruyette and Woods, who covers M&T. “They want to have those local managers and executives that will make a difference and be the M&T leader in that market, so they want those executives to stay around. If they take M&T stock and don’t take as big a price, that’s a commitment from the bank that’s selling to them.”

The final value for M&T is its consideration for the size and location of the target.

“We’re cautious not to go too big, because then it increases the risk,” says King. Integrating a large deal can get out of hand if a bank bites off more than it can chew. But a deal can’t be too small either, he says, because some of the risks related to integration and conversion aren’t scalable. “If you’re going to take on that risk, it needs to be worth the trip,” King says.

M&T also prefers in-market deals or locations in contiguous markets, where its brand is well known.

Outsiders may see M&T as a bank focused on price, but that’s not the case, says King. “If you look at our history, people would describe us as focused on price, and we buy troubled assets,” he says.

Economic downturns tend to yield troubled franchises with strong long-term potential. Having the discipline to focus on long-term returns—not just price—puts M&T in a position to take advantage of opportunities in the marketplace. M&T scooped up four banks—totaling more than $10 billion in assets—from late 2007 through August 2009. It gained another $10.8 billion through its acquisition of Wilmington Trust in May 2011.

It’s often said the best deal is the one you don’t make. By making deals that adhere to three key M&A virtues—patience, focusing on in-market targets that are the right size, and finding a committed partner—M&T’s disciplined approach has served it well.

The New Philosophy That’s Catching on With Banks

Written by


customer-12-21-18.pngBankers are right to be concerned that Amazon will one day emerge as a competitor in the financial services industry, but that shouldn’t stop banks from stealing a page from the ecommerce company’s playbook.

Banking is a relationships business. For ages, banks have tried to leverage that relationship to grow and maximize shareholder return.

Some of the ways they’ve done so seem antiquated now, like giving away toasters to anyone that opens a checking account. But the underlying logic remains sound.

That’s why many top banks are now starting to think more like Jeff Bezos, Amazon’s chairman and CEO.

In 1997, the year Bezos wrote his first shareholder letter, he cycled through the usual subjects, boasting about growth and maximizing the return for shareholders. But he also talked about the long game Amazon would play by eschewing even faster growth and profitability by instead focusing “relentlessly” on customers.

“We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise,” he wrote in his inaugural letter.

Why? Because Bezos wanted Amazon to be engrained in people’s lives, far more than just the books they were getting 20-some years ago.

“Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies,” Bezos wrote, noting that Amazon’s first and foremost priority would be serving customers, not buckling under pressure from Wall Street.

Two decades later, everything Amazon does is driven by what the “divinely discontent” customer wants, which they learn through data collection and analysis. And as a result, Amazon has become an integral part of many consumers’ lives.

“I sense that the same customer empowerment phenomenon is happening broadly across everything we do at Amazon and most other industries as well. You cannot rest on your laurels in this world. Customers won’t have it,” Bezos wrote two decades later in his 2018 shareholder letter.

It’s this relentless, single-minded drive to satisfy customers that banks are beginning to adopt, especially when it comes to serving customers over digital distribution channels.

Many banks have modernized their digital offerings to attract digitally savvy customers. An ancillary benefit is that the interactions conducted over these channels generate immense amounts of valuable data. It’s be effectively using this data that banks can build out an Amazon-like experience.

Brian Moynihan, CEO of Bank of America, recently explained to Bank Director the value of that data, and also how the $2 trillion bank can leverage it to improve customers’ experience: “We know that customer better than everybody else, because we’re seeing everything they do.”

Another bank doing this is Citizens Bank, a New England-based bank with $155 billion in assets. Citizens CEO Bruce Van Saun talked his focus on customers at the Wharton Leadership Conference this summer.

This focus is behind the bank’s decision to launch its digital offshoot, Citizens Access. It has also informed how they think and obsess over—what else—data. Van Saun said it allows them to leverage it in “moments of truth” for customers that the bank knows better than anyone.

“Citizens is doing this through an intense focus on ‘customer journeys’ – transforming the way we engage with customers at critical moments so that they are compelling, differentiated, personalized and highly user-friendly. This process starts with putting the customer – not the organization – at the center.”

Sounds an awful lot like Bezos and Moynihan. It also sounds a lot like “The Law of The Customer,” a theory discussed in Stephen Denning’s book, “The Age of Agile.”

Denning discusses a “Copernican revolution” of management that puts the customer at the center, rather than the firm. Nicolas Copernicus, of course, was first with the theory the Earth revolved around the Sun, not vice versa, a blasphemous idea in the 16th century.

What that means is delivering things like delight, enthusiasm and passion instead of products or services.

This requires a cultural transformation at organizations, Denning argues, and especially at banks that have long been driven by traditional metrics.

That is where not just the CEO, but the entire C-suite, comes in.

“If the drive to delight customers comes from the CEO alone, or from the bottom alone, the firm is lost,” Denning writes.

Most banks don’t have the manpower or capital to invest in tech capabilities like the biggest banks, but many are now realizing they do have the most prized collection of data about their customers.

That data can be leveraged, and it’s data that would make Bezos even more obsessed than he already is about customers.