More Banks Want To Sell For This Reason


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


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


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.

Twelve Steps for Successful Acquisitions


acquisition-11-21-18.pngOftentimes bankers and research analysts espouse the track records of acquisitive banks by focusing on the outcomes of transactions, not the work that went into getting them announced. As you and your board consider growing your bank franchise via purchases of, or mergers with, other banks, consider these steps as a guideline to better outcomes:

  1. Prepare your management team
    Does your team have any track record in courting, negotiating, closing and integrating a merger? If not, perhaps adding to your team is warranted.
  2. Prepare your board
    Understand what your financial goals and stress-points are, create a subcommittee to work with management on strategy, get educated about merger contracts and fiduciary obligations.
  3. Prepare your largest shareholders
    In many privately held banks there are large shareholders, families or individuals, who would have their ownership diluted if stock were used as currency to pay for another bank. It is important to get their support on your strategy as the value of their holdings will be impacted (hopefully positively) by your actions.
  4. Prepare your employees 
    While you cannot be specific about your targets until you need to broaden the “circle of trust,” let key employees know that their organization wants to grow via purchases. They will deal with the day-to-day reality of integration, get them excited that your organization is one they want to be with long-term.
  5. Prepare your counsel
    Just as some bankers focus on commercial or consumer loans, some law firms focus on regulatory matters, loan documents or corporate finance. Does your current counsel have demonstrated experience in merger processes? In addition, your counsel should help to educate your Board about the steps required to complete a transaction.
  6. Prepare the Street
    We have seen in recent months several large bank acquisitions announced where the market was unpleasantly surprised; a bank they viewed as a seller suddenly became a buyer. Some of these companies have since underperformed the broader bank market by 5 to 10 percent. If it has been several years between acquisitions, prep the market beforehand that you might resume the strategy. BB&T recently laid parameters for going back on the acquisition trail. And while their stock was down some on the news, it has since more than recovered.
  7. Prepare your IT providers 
    Most customers are lost when you close your transaction by the small annoyances that come with a systems conversion. Understand if your current core systems have additional capacity or begin to get systems in place that can grow as you grow.
  8. Prepare your regulator(s)
    Whether it is the state, the FDIC, OCC or the Fed, they generally do not like surprises. Get some soft guidance from them on their expectations for capital levels and growth rates. Before you formally announce any merger, with your counsel, give the regulators a courtesy heads-up.
  9. Prepare your rating agency
    If you are a rated bank, think about your debt holders as well as equity holders, especially if you need access to acquisition financing. Share with them the broad plan of growth and your tolerances for goodwill and other negative capital events.
  10. Prepare your financing sources
    Do you have a line-of-credit in place at the holding company that could be drawn to finance the cash portion of acquisition consideration? Have you demonstrated that you can fund in the senior or subordinated debt markets, perhaps by pre-funding capital? Are there large shareholders willing to commit more equity to your strategy?
  11. Prepare your targets
    If the Street does not know, and your shareholders do not know, and your bankers and lawyers do not know, then the targets you might have in mind also will not know you are a buyer. Courting another CEO is a time-consuming process, but completely necessary and should be started 12-18 months before you are in the position to pull the trigger. Your goal is to be on their “A” list of calls, and have the chance to compete, either exclusively or in a controlled auction process.
  12. Prepare to walk away 
    After you have done all this work, it is easy to get “deal fever” when that first process comes along. Sometimes you need to recognize it is a trial run for the real thing and be prepared to pack your bags and go home. The best deal most companies have ever done is the one they didn’t do.

Three Lessons for Bankers From Warren Buffett


strategy-11-16-18.pngIt’s reasonable to argue that the greatest banker in the United States today isn’t a banker at all—he’s an insurance guy.

You might have heard of him.

Warren Buffett.

As the chairman and CEO of Berkshire Hathaway, an insurance-focused conglomerate based in Omaha, Nebraska, Buffett oversees one of the largest portfolios of bank investments in the country.

Berkshire owns major stakes in a Who’s Who list of historically high-performing banks:

  • 9.9 percent of Wells Fargo & Co. 
  • 6.8 percent of Bank of America Corp.
  • 6.3 percent of U.S. Bancorp
  • 5.3 percent of The Bank of New York Mellon Corporation
  • 3.7 percent of M&T Bank Corp.

That Buffett made such substantial investments in banks isn’t a coincidence.

If there are two things he appreciates at a visceral level, owing to his experience in insurance, it’s leverage and cycles—the same two qualities that make banking so unique.

This is why it’s worth listening to Buffett when he opines on banking, as he often does in his annual letters and media interviews.

This is from his 1991 shareholder letter:

“When assets are 20 times equity—a common ratio in [the bank] industry—mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the ‘institutional imperative:’ the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.”

Buffett is referring to the havoc wreaked on banks during a pronounced downturn in commercial real estate in the early 1990s, when Berkshire bought 10 percent of Wells Fargo.

His point is that it’s critical for bankers to maintain discipline, especially when all of those around you are not.

Another thing Buffett talks about a lot is competitive advantage.

Here he is in a 2009 interview with Fortune:

“If you’re the low-cost producer in any business—and money is your raw material in banking—you’ve got a hell of an edge. If you have a half-point edge . . . half a point on $1 trillion is $5 billion a year.”

And here‘s a selection from his 1987 shareholder letter flushing out the idea more fully, though in the context of the insurance industry, which faces nearly identical competitive dynamics to banking:

“The insurance industry is cursed with a set of dismal economic characteristics that make for a poor long-term outlook: hundreds of competitors, ease of entry, and a product that cannot be differentiated in any meaningful way. In such a commodity-like business, only a very low-cost operator or someone operating in a protected, and usually small, niche can sustain high profitability levels.”

One nuance about efficiency in banking is it doesn’t just boost profitability directly by freeing up more revenue to fall to the bottom line; equally important is its indirect effect.

This is a point U.S. Bancorp’s chairman and CEO Andy Cecere made in a recent, albeit unrelated, interview about the bank with Bank Director.

Efficient banks needn’t stretch on credit quality to generate satisfactory returns, which reduces loan losses at the bottom of the credit cycle, Cecere says. And as a corollary, efficient banks can compete more aggressively for the most creditworthy customers, further limiting credit losses in tough times.

It isn’t a coincidence, in turn, that U.S. Bancorp has consistently been one of the industry’s most efficient banks and disciplined underwriters since its transformative merger nearly two decades ago.

And while neither Buffett nor his philosophy came up during the interview with Cecere, Berkshire Hathaway is one of U.S. Bancorp’s biggest shareholders.

A final lesson about banking that can be gleaned from Buffett involves his approach to mergers and acquisitions.

Buffett has said repeatedly in the past that he’d rather pay a fair price for a wonderful company than a wonderful price for a fair company. Also, all things being equal, Buffett has always preferred for existing management to stay and continue on their path of success.

“Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a ‘cheap’ price. Instead, our only interest is in buying into well-managed banks at fair prices.”

It’s a style reminiscent of the uncommon partnership approach to mergers and acquisitions used by John B. McCoy, who dined annually with Buffett, to transform the former Bank One from the third largest bank in Columbus, Ohio, into the sixth largest bank in the country, before later merging into JPMorgan Chase & Co.

In short, although it’s true that most people don’t think of Buffett as a banker, that doesn’t mean bankers can’t learn a lot from his observations on the industry.

How To Prepare Compensation Plans For An IPO


IPO-11-5-18.pngThe decision to take your bank public will set the course of your company for years to come. There are several critical steps to prepare your compensation program before the IPO and before your bank is a public company.

Steps to prepare for the IPO

1. Assemble Your Compensation Team
Determine the team focused on compensation matters. If you have employees with IPO experience and compensation plans, they could be a key asset. Similarly, if you have employees without IPO experience but have public company experience, they could be a key team member as well.

2. Create Your IPO-Related Task List
Your bank may have implemented many compensation and governance related items already, but they should be reviewed for their appropriateness for a public company.

Key tasks required prior to the IPO will vary, however, here is a list of compensation tasks on every pre-IPO list.

  • Develop an executive compensation philosophy and key objectives – What is your bank’s strategy? Where do you target compensation? Is your pay aligned with performance? What are the objectives of your compensation program? What message do you want to send to shareholders? Craft overarching guidelines to support the process going forward.
  • Evaluate and establish appropriate executive and director compensation levels – Prior to the IPO, your company will have to disclose its executive and director compensation. You want to be sure your compensation programs are reasonable, competitive, and based on peer group data. Establishing a suitable peer group and incorporating the data into your process is key.
  • Equity plan considerations – Will a new equity plan be required, and when will you need shareholder approval? How will you determine the share pool so long-term incentive and equity grant needs can be met for three to five years? Have you evaluated the shareholder advisory firms’ current standards to receive favorable support? Avoid any pitfalls that would result in a “no” vote recommendation.

    If the company is considering one-time IPO-related equity grants, evaluate these in light of market trends, shareholder expectations, retention concerns, financial impact to the company and dilution. Many institutions consider sizeable one-time grants a front-loaded award, and decide to wait before awarding additional equity. Such decisions are based on share pool impact, financial implications, and size of the one-time grants. Carefully determine the value of these awards to minimize risks of unfavorable optics and legal actions.

  • Design ongoing annual and long-term incentive plans – As a public company, it is important to have annual and long-term incentive plans that align pay and performance, are competitive, consistent with company objectives and provide an appropriate mix of pay. As new incentive plans are designed, know that plan details will be disclosed in future public filings. Private banks are accustomed to implementing plans that are regulatory compliant and competitive, but public disclosure has not been required.
  • Implement executive agreements – In many cases, new employment and change-in-control agreements are put in place, often the case even if similar agreements were in effect before the IPO. Several details, including the terms, are subject to public disclosure. Shareholder advisory firms take issue with certain terms and, and having them can automatically result in ‘no’ vote for Management Say on Pay and the re-election of the board’s compensation committee. It is critical to be aware of these pitfalls and avoid them whenever possible.

3. Determine appropriate technical and governance actions
There are key technical and governance issues to evaluate. Some items are required while others are not. Many are considered best practices and important to achieving strong governance. Some of the key items in this category include:

  • Drafting of the SEC required filings including the CD&A (Compensation Discussion and Analysis), compensation tables and other requirements. Reporting errors and omissions can delay the IPO.
  • Determining company stock ownership guidelines – Many new public banks do not adopt stock ownership guidelines immediately, however, if one-time equity grants are awarded, adopting such guidelines immediately sets the parameters for holding these shares. Determine who will be covered by the guidelines (e.g., executives, Section 16 officers, non-employee directors), what the required holdings are, the timeframe permitted, and other terms.
  • Drafting the Compensation Committee Charter – A charter establishes the role and responsibilities of the committee, how it will interact with the board and management, and its ability to engage outside advisors. The charter is typically published on the company’s website.

4. Create a compensation committee calendar after the IPO
Once the IPO is completed, it is important for the compensation committee to focus on its new role, responsibilities and annual tasks. Setting up a calendar of activities supports effective management and should include all areas of committee oversight.

Taking your bank public can be a very exciting endeavor. Do not underestimate the number of new issues management, the compensation committee and the board will have to become familiar with to complete a successful IPO and operate a public company. Being organized, having the right knowledge and support and a flexible timeline will be great tools to help your organization get through this process.

You’ll Never Guess Where BB&T Gets Its Big Ideas


strategy-10-19-18.pngIt is well worth any banker’s time to read the vision, mission and purpose statements of BB&T, the eighth biggest commercial bank in the United States.

They will sound at first like similar statements from any other bank, but what makes BB&T’s unique is the inspiration behind them.

They weren’t drawn up with the help of consultants or survey data; they are grounded instead in the writings of philosophers—classical thinkers as well as modern proponents of capitalism.

“The philosophers that influenced me the most are Aristotle, Thomas Aquinas, John Locke, and Ayn Rand,” writes John Allison, the chairman and CEO of BB&T from 1989 to 2008, in his 2014 book, The Leadership Crisis and the Free Market Cure.

BB&T has published an entire pamphlet outlining its culture, encapsulated in its vision, mission and purpose statements, which reduce to one key objective: “Our ultimate purpose is to create superior long-term economic rewards for our shareholders.”

The $223-billion bank based in Winston-Salem, North Carolina, doesn’t just talk the talk; it walks the walk. It ranks in the 98th percentile among publicly traded banks in terms of the total amount of shareholder value it has created during its time as a public entity.

Yet, there’s a nuance to BB&T’s philosophy on creating value that’s easy to overlook. It doesn’t talk about “maximizing” long-term economic rewards for shareholders; it talks instead about “optimizing” those rewards.

Why the difference?

As Allison writes in his book:

When free market economists and finance theorists refer to maximizing shareholders’ returns, they imply a long-term context. In the real world, maximizing tends to be a short-term concept. BB&T’s mission also focuses on ‘creating a safe and sound investment,’ The goal with this wording is to communicate to potential purchasers of the company’s stock that we are in the game for the long-term and will not take inordinate risk even if that risk could maximize short-term returns.

In no industry is a long-term view more important than banking. Banks, as a group, use more leverage than companies in any other industry, typically borrowing $10 for every $1 worth of capital.

This is by design, of course, as a principal purpose of banking is to leverage society’s capital to fuel economic growth—a point Bank of America’s chairman and CEO, Brian Moynihan, made in a recent interview with Bank Director:

[B]anks came up to help people borrow money, which helps economies grow faster. If you’re constrained to only your equity, you only have so much money to spend. But if you borrow against it, now you can spend more. That’s the magic of leverage in terms of accelerating progress.

But there is a downside to all that leverage—it makes banks vulnerable to economic cycles, explaining why more than 17,000 banks have failed since the Civil War.

Bankers are prone to the same impulses that, at the top of a cycle, cause real estate developers to break ground on skyscrapers, retailers to over-invest in inventory and technology entrepreneurs to believe that traditional rules of economics no longer apply.

The difference is that, thanks to leverage, there’s less margin for error in banking than there is in other industries. A mere 10 percent decline in the value of a typical bank’s assets will render it insolvent.

This is one reason BB&T chose the words of its mission statement so carefully in terms of “optimizing” as opposed to “maximizing” shareholder value.

Another reason is that shareholders aren’t a bank’s only constituency—there are also clients, employees and communities. A bank that doesn’t tend to all four is like a table with only three legs.

It’s by optimizing returns among multiple constituencies, in other words, that a bank can maximize the returns to anyone of them. And if a bank does that through multiple cycles, the outcome is even better.

The net result at BB&T, writes Allison, is that “we operate our business in a long-term context by adding value to our clients, employees, and communities and in that context create superior rewards for shareholders.”

In short, while Aristotle, Thomas Aquinas, John Locke and Ayn Rand may seem like an unlikely source for inspiration in banking, if BB&T’s success is any indication, it’s safe to say they were onto something.

Gender Pay Equity and Board Gender Diversity – Is Your Board Prepared?


governance-8-1-18.pngGender pay equity and board gender diversity are two areas of focus for both the media and investors. Lately, many large institutional investors have turned their attention to environmental, social and governance (ESG) issues, where board diversity has taken center stage and questions around gender pay equity are increasing. Boards and management should proactively gain an understanding of their current position and any concerns on these fronts to avoid adverse reactions from employees and/or shareholders.

Slow progress on gender diversity in the boardroom has led many large investors to push for an increase in the number of women on boards. Several influential institutional investors such as Blackrock, State Street Global Advisors and Vanguard have added diversity stipulations to their engagement and voting policies, citing studies that link increased female representation on boards with improved shareholder returns. More specifically, these institutions may vote against, and proxy advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis may recommend voting against, the nominating and governance committee members if there are not a least one or two women on the board. These voting policies have been very impactful, and we have seen a dramatic increase in women serving in board roles at the largest organizations.

Compensation Advisory Partners (CAP) researched the 15 largest public diversified financial services companies in the Fortune 100 and found that approximately 50 of companies had at least three women on their board and an additional 20 percent had at least two. As a comparison, CAP researched the board composition of 90 smaller financial services companies with assets between $5 billion and $20 billion and found approximately 15 have at least three females on their board and an additional 15 have at least two. Similar to other compensation and governance trends, we expect smaller financial organizations to catch up with the increased external pressure.

In addition, initiatives such as the NYC Comptroller’s Boardroom Accountability Project 2.0, focus on enhancing disclosure of board composition through a skills matrix. California is now the first state considering a bill to require a minimum number of women on all boards of the state’s more than 400 companies. These initiatives are driving heightened attention to the diversity and competencies of the board as a whole.

While information on director composition and profiles is public, this is not the case with gender pay equity across an organization. In the U.K. there is a requirement to disclose gender pay statistics for organizations with at least 250 employees, but that does not currently exist in the U.S. Even so, we have observed some institutional investors use shareholder proposals to pressure large organizations to provide public reports on gender pay.

Several financial institutions have been under scrutiny for a lack of female representation in senior roles despite a majority of their employees being female. Unlike the U.K., where all employees must be included in the sample, shareholder proposals in the U.S. focus on a comparison of “like-for-like jobs.” Over the last three years, companies recommended shareholders vote against the proposal, and support averaged around 15 percent. Only 5 proposals (compared to 14 in 2017) have gone to a vote in 2018, none at financial services companies (compared to 7 in 2017), since several large financial organizations such as Citigroup, Bank of America, JPMorgan Chase & Co., and Wells Fargo & Co. were able to have these requests withdrawn from their annual proxy statement and in exchange agreed to publish their gender pay. In all cases, the reports have shown almost no gap, but the approach by company can vary.

These two movements have put a spotlight on the underlying issue of equal representation in the boardroom and pay equality across organizations. The push for board equality has already resulted in progress especially at larger organizations. Boards are reviewing nominating and governance committee charters and adopting policies to promote diversity in the board recruitment process. On the gender pay equity front, even though disclosure is not required in the U.S., momentum and pressure are building from institutional investors for companies to disclose gender pay gaps.

We expect boards of all companies to start asking management if a gender pay gap exists, and what they should be doing to address any gaps that do exist. Conversations on both these topics should be an agenda item in all boardrooms today.

A Timely Reminder About the Importance of Capital Allocation


capital-7-6-18.pngCapital allocation may not be something bank executives and directors spend a lot of time thinking about—but they should. To fully maximize performance, a bank must both earn big profits and allocate those profits wisely.

This is why the annual stress tests administered each year by the Federal Reserve are important, even for the 5,570 banks and savings institutions that don’t qualify as systemically important financial institutions, or SIFIs, and are spared the ritual. The widely publicized release of the results is an opportunity for all banks to reassess whether their capital allocation strategies are creating value.

There are two phases to the stress tests. In the first phase, the results of which were released on June 21, the Fed projects the impact of an acute economic downturn on the participating banks’ balance sheets. This is known as the Dodd-Frank Act stress test, or DFAST. So long as a bank’s capital ratios remain above the regulatory minimum through the nine-quarter scenario, then it passes this phase, as was the case with all 35 banks that completed DFAST this year.

The second phase is the Comprehensive Capital Analysis and Review, or CCAR. In this phase, banks request permission from the Fed to increase the amount of capital they return to shareholders by way of dividends and share buybacks. So long as a bank’s proposed capital actions don’t cause its capital ratios from the first phase to dip below the regulatory minimum, and assuming no other deficiencies in the capital-planning process are uncovered by the Fed during CCAR, then the bank’s request will, presumably, be approved.

There’s reason to believe the participating banks in this year’s stress tests will seek permission to release an increasingly large wave of capital. Banks have more capital than they know what to do with right now, which causes consternation because it suppresses return on equity—a ratio of earnings over equity. And last year’s corporate income tax cut will only further fuel the buildup going forward, as profits throughout the industry are expected to climb by as much as 20 percent.

We probably won’t know exactly how much capital the SIFIs as a group plan to return over the next 12 months until, at the soonest, second-quarter earnings are reported in July. But early indications suggest a windfall from most banks. Immediately after CCAR results were released on June 28, for example, Bank of America Corp. said it will increase its dividend by 25 percent and repurchase $20.6 billion worth of stock over the next four quarters, nearly double its repurchase request over last year.

The importance of capital allocation can’t be overstated. It’s one of the most effective ways for a bank to differentiate its performance. Running a prudent and efficient operation is necessary to maximize profits, but if a bank wants to maximize total shareholder return as well, it must also allocate those profits in a way that creates shareholder value.

One way to do so is to repurchase stock at no more than a modest premium to book value. This is easier said than done, however. The only time banks tend to trade for sufficiently low multiples to book value is when the industry is experiencing a crisis, which also happens to be when banks prefer to hoard capital instead of return it to shareholders.

As a result, the best way to add value through capital allocation is generally to use excess capital to make acquisitions. And not just any ole’ acquisition will do. For an acquisition to create value, it must be accretive to a bank’s earnings per share, book value per share or both, either immediately or over a relatively brief period of time.

If you look at the two best-performing publicly traded banks since 1980, measured by total shareholder return, this is the strategy they have followed. M&T Bank, a $119 billion asset bank based in Buffalo, New York, has made 23 acquisitions since then, typically doing so at a discount to prevailing valuations. And Glacier Bancorp, a $12 billion asset bank based in Kalispell, Montana, has bolstered its returns with two dozen bank acquisitions throughout the Rocky Mountain region.

The point is that capital allocation shouldn’t be an afterthought. If you want to earn superior returns, the process of allocating capital must be approached with the same seriousness as the two other pillars of extraordinary performance—prudence and efficiency.

The Dos and Don’ts of Shareholder Recordkeeping for Private Banks


shareholder-5-1-18.pngPublic and private banks are vastly different, but in some areas, they might be more alike that you may think.

Public banks are required to work with a transfer agent for their investor recordkeeping. Private banks, including institutions that are not listed on a stock exchange or regularly file financial reports with the Securities and Exchange Commission, do not have the same obligations as their publicly traded counterparts; however, this does not mean that sound recordkeeping practices are not just as important.

Based on my more than 30 years in the industry, these are the most important Do’s and Don’ts to consider when it comes to managing your investor records:

DO keep a close eye on your overall share balance. It is critical that the shares held on your share register match the number of shares outstanding that your financial reporting office says are there. Changes in shares outstanding (where there is an increase or decrease in this overall figure) don’t happen very often and may not cause an issue in your day-to-day business. But, if shares are not in balance, trouble will arise in the instance of a change-in-control event, such as an acquisition. The need to rehabilitate the list could complicate and delay the corporate event.

DON’T let share issuance discrepancies linger. When a share transfer takes place, the transaction must be recorded for both the transferor and transferee. For private banks, shares are often not liquid and transfers rarely happen. Given their rarity, it’s important to take special care to properly record transfers on the books of the company. Errors can be hard to find later on— especially when the person who had a photographic memory of the list has retired. It’s best not to let discrepancies happen in the first place, but if they do, resolve them now and avoid a messy accounting issue much later on.

DO pay special attention to executive equity awards. It’s usually not a good idea—or a good career move—to keep improper and inaccurate equity award records of your executives and directors.

DON’T underestimate the importance of data security. Keeping accurate shareholder records is important. Safeguarding that information is even more important. This means protecting data from both outside intrusion and weak internal processes that could threaten it. Data security and security breach notifications are also legal matters that need to be addressed to comply with state and federal law.

DO maintain regular communications with your investors. Part of the C-suite’s business is to continue to attract investors to the company—both to help boost the demand for the stock but also to try to attract some liquidity as well. You can make the C-suite’s job easier by delivering timely communications to your existing investors, keeping them happy.

DON’T lose sight of your regulatory obligations. Companies that file with the SEC obviously need to follow its reporting guidelines. But even those that don’t report to the SEC will need to comply with state or federal regulations applicable to the bank regarding governance and investor relations.

DO perform a regular review of your company charter and bylaws. You should have your counsel review these documents from time to time. This gives you the opportunity to make updates that support your business objectives. For example, you should consider the elimination of stock certificates if they are specifically mentioned in the bylaws.

Making this update allows for the use of book-entry statements (much like those one might see if they own a mutual fund or have their own brokerage account) and for more modern communications and proxy voting technology such as the electronic delivery of annual meeting materials and online voting. Your counsel will need to review applicable banking regulations to ensure these options are available.

Proper tracking of your investors and their holdings is as critical to the success of your business as your relationship with your banking customers. Adhering to strong governance and compliance practices will reduce opportunities for mistakes and risk going forward.