Risk Versus Return in M&A Transactions


transactions-2-20-17.pngMergers and acquisition (M&A) transactions need to be looked at from a risk versus return perspective. Participants in deals, both the buyer and seller, should understand the value proposition of the transaction and determine whether it is better to continue to grow and thrive organically or execute on a deal. Understanding value drivers and how to optimize value is the key to prospering in the future.

1. Know your value and what drives it.
There are both value creators and value detractors that exist for every company. It might be weak internal controls, a consent order or a multimillion-dollar, unfunded pension that weakens your deal prospects. On the other hand, you may have strong core deposits, strong profitability metrics or an experienced and actively engaged management team with deep client relationships that drive growth and value.

Value detractors specific to each company can be corrected over time. As the risk profile of the company improves, it is shown that valuation multiples will also improve. A company that has many value detractors can improve its risk profile over time. By improving its risk profile, the company increases the market’s perception of the value of the company, leading to higher valuation multiples. As your institution’s comparative value to the market changes over time, you must conduct periodic valuations to understand what the company’s current value is and what is driving it.

2. Understand your bank’s strategic paths, value and the execution risks of each path.
Once a company has a better understanding of its current value, it must understand the different decision tree paths available. Each of these paths will have a resultant present value of the company based upon executing on each path into the future. The risks and return associated with each path needs to be assessed. Below is an example of a strategic decision tree with five different paths. Each of these future strategic paths is modeled to determine the resultant present value resulting from each scenario path.

community-bank-chart.png

Not only is a present value calculated for each path, but the key risks and value drivers for each path need to be determined as well. For instance, if the company remains independent (path A), a key risk is that it may not be able to attract and retain key talent necessary for the company to thrive in the future.

In addition to the execution risks associated with each path, the financial value of the company under each scenario is also based upon a set of assumptions. Those assumptions must be reviewed carefully and the management team and the board of directors must critically review and sign off on those assumptions. More specific to M&A transactions, here are some of the major factors that impact an M&A deal:

  • Price: A stronger buyer currency shortens the work-back period of tangible book value dilution in a stock transaction.
  • Form of Consideration: Cash may decrease the work-back period of dilution in a transaction relative to utilizing stock consideration, due to higher earnings per share accretion, but utilizing cash will reduce the amount of capital at the combined entity.
  • Cost Savings: Acquisition of smaller banks and in-market deals will generally have higher savings (30-50 percent), while market or business line expansions generally have somewhat lower savings (25-35 percent).
  • Synergies: Deals can provide many synergies such as higher legal lending limit, greater franchise, new combined customer base, new sources of fee income, complementary loan and deposit products, or additional management bench depth for the combined entity.
  • Transaction Expenses: These are nonrecurring expense items and therefore should not be included in the pro forma combined income statement going forward but will impact tangible book value per share (TBVS) dilution and work-back period. Transaction expenses should generally be 7-12 percent for community bank deals and levels outside the range should be reviewed.
  • Mark-to-Market Assumptions: The target gets marked-to-market in a deal and these marks will initially impact TBVS upward or downward. The marks will be amortized/accreted through earnings over time. The marks generally have a bigger initial impact on TBVS and the earnings impact will be taken over a longer time period.

3. Recognize that a good deal on paper does not translate to a successful resultant entity.
Even with an extensive review of the assumptions, modeling and financial aspects of a transaction, a good deal on paper does not necessarily translate into a successful entity. Merger integration will make or break an institution’s ability to realize value in a transaction. Practical issues including vendor selection, branding and employee retention impact restructuring expenses. Social issues, such as corporate culture and leadership structure, define the bank moving forward.

Remember that there is an inherent risk versus return tradeoff in every M&A transaction. Understanding your institution’s risk profile, corporate culture, and all possible strategic paths will mitigate risk and maximize return.

Why a Compliance Mindset Is Hurting Community Banks


risk-management-1-20-17.pngCommunity banks are wasting money on compliance. They are spending more than ever, hiring additional risk officers, internal auditors, compliance officers, vendors and consultants. They are checking every box and fulfilling every mandate. And they are doing it all wrong.

A recent study by the supervision division at the Federal Reserve Bank of St. Louis found that spending more on compliance isn’t leading to higher regulatory ratings for the smallest community banks. It isn’t elevating the bank’s regulatory management scores, or positioning banks for success.

That’s because having a compliance mindset is a recipe for mediocrity, no matter the size of the bank. The banks that will earn the most leeway with regulators—and maximize value for shareholders—will naturally implement and utilize the tools and processes that are a prerequisite for compliance as a critical function of their strategic and capital planning processes.

When that happens, compliance becomes a mere afterthought; something that is more icing on a cake that doesn’t need icing to begin with. This type of approach is actually easy to execute. You don’t need expensive, overrated and highly misleading black-box models and software. You don’t need an entire department dedicated toward enterprise risk management.

What you do need is a cultural mindset, which starts with the CEO and the board of directors. They must change the outlook in the bank so that risk management tools are used to play offense, not defense. These proactive and forward-looking tools enable the team to see problems before they materialize. The CEO can then position the bank to gain a competitive edge, while its competitors (from both an operational and capital markets perspective) get blindsided.

I participated in a recent regulatory panel with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The topic was how best to manage commercial real estate concentrations. Part of the discussion revolved around the role of stress testing, which can be critical to showing examiners that a bank has enough capital to handle a risky portfolio.

Stress testing is a great tool for the job, but it’s a tool, not the job. Banks that simply submit stress tests to regulators as evidence that they can manage a loan portfolio aren’t going to get what they want.

Instead of viewing stress tests as an end game, bank CEOs need to think of them as tools to provide insights. Reports must be discussed at the board level and understood by the highest levels of management. And then the bank must adjust its strategy if the tests show a potential problem. This lesson applies to much more than concentrations. The results of adequate stress testing offer a strategic guide to capital planning, M&A and more.

The trick to compliance is to not treat it as a compliance exercise. It must be an integral part of strategic planning. A CEO cannot give a stress test to the chief risk officer and say, “Make the problem go away.” CEOs must look at the results, understand them and use them to adjust their strategic thinking. If organic growth is not working, the proper analytics can guide the executive team’s strategic course toward a merger or acquisition.

A funny thing happened when I began talking about this compliance mindset on the recent regulatory panel. The regulators nodded their heads in agreement.

How Many Banks Look 10 Years Ahead?


FutureOfBankingArticle.jpgWhat is the biggest challenge facing bank directors today?

The list of possible answers is pretty long. Is it the continuation of a low interest rates squeezing net interest margins for years? The cost of all the new regulations since the financial crisis? The cybersecurity cat-and-mouse game, where the hackers always seem to be one step ahead of you? Or is it keeping pace with the rapid changes in digital technology, particularly in the mobile space?

All of those are very plausible answers, but I’d like to suggest another one—preparing for the future. I think that most bank boards spend their time on what’s happening today in their institutions and relatively little time thinking about the future, and by that I mean looking deep into the future—10 years out, where emerging trends can have a transformative impact on the entire industry. There are reasons for this, of course. Today’s operating environment for banks is challenging, so it’s not surprising that bank boards tend to place most of their focus on performance issues, particularly at public companies. Boards do engage in strategic planning on an annual basis, and the resultant business plans often have a five-year time horizon, but they are usually based on what the bank will do in the current environment. It’s harder to understand how larger, more systemic issues will impact the bank. 

Bank Director will hold its third annual Bank Board Training Forum on September 29-30 in Chicago. This event was designed to be a little different than our other events, which focus on specific activities like risk management, compensation and mergers and acquisitions, and often appeal to senior executives or directors who are focused on that one issue. The Training Forum, by contrast, looks at a wide range of issues that impact the entire board, and tries to synthesize those into a holistic view for all of the directors.

In the spirit of that approach, I will be giving a presentation on the future of banking 10 years out. Of course, 10 years is a big chunk of time, so any predictions one makes today could very well turn out to be wrong. For example, who would have predicted the following in 2006?

  • The worst financial crisis since the Great Depression.
  • The total collapse of the U.S. housing market.
  • The Dodd-Frank Act and Basel III. However, if you had predicted the crisis, then you could have predicted with reasonable certainty that regulatory consequences would follow, since history shows this to be the case.
  • The over-the-top popularity of smartphones and their impact on banking and just about everything else. In fact, Apple didn’t introduce the iPhone until 2007.
  • An emerging financial technology sector which is beginning to revolutionize banking.

It’s not that some of these transformative trends or events weren’t already in evidence 10 years ago. A minority of economists were concerned in 2006 that the Federal Reserve’s accommodative monetary policy of low interest rates was creating a bubble in housing prices, but even they did not predict the cataclysm that later occurred. And smartphones had already been on the market for a couple of years in 2006, but their numbers were small and their capabilities limited compared to their market dominance today.

If predictions about the future are hard to make, I don’t think the predictions themselves are as important as the process of constantly looking forward. A board that has its eye on the future as well as the present is going to be better prepared to react to changing circumstances.

As for what I think the next 10 years has in store for banking, those will come in a later post.

The Little Bank That Could


strategy-9-23-16.pngSoon after Josh Rowland’s family bought Lead Bank in Garden City, Kansas, in 2005, the small financial institution felt the full impact of the financial crisis. The loan portfolio was in bad shape. Several employees lost their jobs. The entire experience lead to a lot of soul searching.

“It was really existential,’’ Vice Chairman Rowland says. “What do we survive for? What’s the point of a community bank? The situation was that dire. We had to really decide whether we should give it up.”

After much discussion, the family decided to hire Bill Bryant as the chief executive officer to help clean up the bank, now with $164 million in assets, and really focus on its niche: small business owners. A lot of community banks say they are serving small business owners, but Lead Bank decided to go a step further. In 2011, it launched a business advisory division for the purpose of coaching small business owners on cash flows, provide part-time or interim chief financial officers, and advice on strategic planning and even mergers and acquisitions. Rowland says a lot of small businesses could use advisory services, especially if they can’t afford to hire a full-time CFO. Lead Business Advisors has senior managing director Patrick Chesterman, a former energy executive for a large propane company and Jacquie Ward, a trainee analyst. The bank overall made a profit of $500,000 in the first six months of the year and saw assets grow 30 percent in the last year and a half, according to Federal Deposit Insurance Corp. data.

But the investment in advisory services is not a quick payback. Rowland says the division is not profitable yet. The challenges include marketing the program to a business community more accustomed to relying on trusted accountants or lawyers for such advice. Banks naturally have a lot of financial information and expertise, but they fail to provide it to their clients. “We ought to be figuring out every possible way to deliver that kind of financial expertise to Main Street business,” he says.

The tactic is an unusual one for community banks, which might have a wealth management division but not a business advisory division per se. And it’s expensive. Baker Boyer, a $571 million bank in Walla Walla, Washington, has been offering business advisory services as part of its wealth management division for years. But it has taken some 15 years to restructure the bank to offer such services, says Mark Kajita, president and chief executive officer. The average personnel expense per employee for the bank is roughly $80,000 annually with six lawyers on staff and the bank’s efficiency ratio is 73 percent, higher than the peer average of 66 percent.

However, the bank made $2.5 million in profits during the first half of 2016, with half of that coming from the wealth and business advisory division. Kajita says what made it possible was the fact that the bank is family owned and can invest in the long term without worrying about reporting quarterly financial results to pubic shareholders.

Community banks of that size have a real need to create a niche,’’ says Jim McAlpin, a partner at Bryan Cave in Atlanta who advises banks. “Historically, community banks have been focused on the small businesses of America, and to offer services to those small businesses is a great strategy.”

Joel Pruis, a senior director at Cornerstone Advisors in Phoenix, says banks have done themselves a disservice by relinquishing advisory services to CPAs and attorneys. “In terms of empowering lenders, in terms of providing more advice, we definitely need more of that,’’ he says. “Bankers need to be seen as a resource and an expert in the financial arena instead of just application takers.”

For Rowland, rethinking the role of the community bank is fundamental to its survival. “I don’t know how we expect to keep doing the same things and expect different results,’’ he says. People don’t feel their bank is adding any value for them, he says. “If that’s our industry’s problem that we haven’t given them an experience, that’s our fault,’’ Rowland says. “We have taught them over years and years that our services are so cheap, they ought to be free.”

Considering a Sale of the Bank? Don’t Forget the Board’s Due Diligence


due-diligence-5-16-16.pngIn today’s competitive environment, some bank directors may view an acquisition offer from another financial institution as a relief. With directors facing questions of how to gain scale in the face of heightened regulatory scrutiny, increased investor expectations, and general concerns about the future prospects of community banks, a bona fide offer to purchase the bank can change even the most entrenched positions around the board table.

So, how should directors evaluate an offer to sell the bank? A good starting place is to consider the institution’s strategic plan to identify the most meaningful aspects of the offer to the bank’s shareholders. The board can also use the strategic plan to provide a baseline for the institution’s future prospects on an independent basis. With the help of a financial advisor, the board can evaluate the institution’s projected performance should it remain independent and determine what premium to shareholders the purchase offer presents. Not all offers present either the premium or liquidity sought by shareholders, and the board may conclude that continued independent operation will present better opportunities to shareholders.

Once the board has a framework for evaluating the offer, it should consider the financial aspects of the offer. The form of the merger consideration—be it all stock, all cash, or a mix of stock and cash—can dictate the level of due diligence into the business of the buyer that should be conducted by the selling institution.

If the proposed offer consists of primarily cash consideration, the selling institution’s board should focus on the buyer’s ability to fund the transaction at closing. Review of the buyer’s liquidity and capital levels can signal whether regulators may require the buyer to raise additional capital to complete the transaction. Sellers bear considerable risk once a merger agreement is signed and the proposed transaction becomes public. The seller’s customers often think of the announcement as a done deal and the merger also naturally shifts the seller’s attention to integration rather than its business plan, which can benefit the combined company, but affect the seller’s independent results. It is difficult for the seller to mitigate these risks in negotiations, so factoring them into the board’s valuation of a sale offer is the best approach.

When considering a transaction in which a significant portion of the merger consideration is the buyer’s stock, the board has additional diligence responsibilities. First, the board should consider whether the buyer’s stock is publicly traded on a significant exchange or lightly traded on a lesser exchange. As the liquidity of the buyer’s stock decreases, the burden on the seller to understand the buyer’s business and future plans increase, as its shareholders will be “investing” in the combined company, perhaps for a lengthy period of time. The board should also consider if and when there will be opportunities for future shareholder liquidity.

On the other hand, when the seller’s shareholders are receiving an easily-traded stock, both parties will have an interest in mitigating the effects of market fluctuations on the pricing of the transaction. In most cases, a pricing collar, fixing the minimum and maximum amounts of shares to be issued, can allocate market risk between the parties. Such a structure can ensure that a market fluctuation does not cause the seller to lose its premium on sale or make the transaction so costly that it could affect the prospects of the buyer.

In addition to the financial terms of the proposed transaction, the seller’s organizational documents may include language allowing the board to consider a broad range of non-financial matters as part of the evaluation of a proposal. Certain matters, particularly with respect to how the seller’s executives and employees are integrated into the resulting institution and how the buyer’s business plan fits into the seller’s market, can have a significant impact on the success of the transaction. Just as community banking is largely a relationship-based model, the most successful mergers are those that make not only economic sense, but also address the “human element” to maintain key employee and customer relationships. The board can add value by raising these issues with management as part of its discussion of the merger proposal and definitive agreement.

In evaluating an offer to sell, the board is responsible for determining whether the bank’s financial advisors and management have considered a range of relevant items in evaluating an offer, including the offer’s financial terms, execution risks associated with the buyer, and social issues relating to the integration of the transaction. Using the bank’s strategic plan to determine which issues require closer scrutiny can focus the board’s attention on truly meaningful issues that will provide additional value to the institution’s shareholders.

Building An M&A Blueprint



Scale is driving buyers and sellers today, with acquirers seeking growth and sellers seeing scale as an obstacle. Christopher Olsen of Olsen Palmer outlines how both buyers and sellers can plan for a successful deal, and explains how even banks focusing on organic growth strategies will be impacted by consolidation.

  • Scale and M&A
  • A Buyer’s Plan
  • A Seller’s Plan
  • Impact on Organic Growth Strategies

Five Steps for Dealing With Subjective Regulation


bank-regulation-2-24-16.pngThere has always been a level of subjectivity in the regulatory process. In the past, it manifested itself as interpretations of written regulations. The post-crisis regulatory environment continues to evolve—as does the subjective aspect of regulation—creating new challenges for bank boards. Bank directors are now faced with subjective terms like “risk culture” and “deceptive acts and practices” included in their exam reports as standards, as well as a regulatory focus on “adequacy” when evaluating strategic planning and capital and liquidity management. Bank directors are now challenged to understand what needs to be done to meet these evolving subjective expectations of the regulators and, in turn, hold senior management accountable.

Trying to define these terms is probably futile, but there are things the board can and should do to ensure these standards are being met.

Educate Yourself
Directors should start by learning as much as they can about these subjective requirements. Understanding how they evolved and what they are intended to correct or prevent will help you understand what has to be done to meet them. The regulators have made it clear they have higher expectations for director oversight of risk taking activities, and the board is expected to challenge, question and, where necessary, oppose management proposals. Education is key to meeting these expectations.

Identify Behaviors
Actions speak louder than words. Too many organizations rely solely on policies or pronouncements to demonstrate compliance with subjective requirements. Take risk culture, for example. The board should ask and understand how everyone in the firm is held accountable for risk. How do compensation plans incorporate risk concepts? How do you deal with policy violations? Are employees rewarded for identifying and addressing risk matters? Directors must then ask whether the answers to these questions demonstrate the type of risk culture the firm is trying to achieve.

Learn From Others
Directors should be acutely aware of industry trends when it comes to subjective regulation. Regulators are relying more and more on horizontal reviews of financial firms to identify best practices. Understanding what has been considered inadequate when it comes to a financial firm’s capital or liquidity planning can provide guidance on evaluating a firm’s own plans. For example, the Federal Reserve publishes the results of its Comprehensive Capital Analysis and Review for the largest banks, which is a good place to start. The public release of capital planning results showed there is both a quantitative and qualitative aspect to planning. While the quantitative aspect of planning is made public through establishing acceptable minimums, the qualitative aspect (how you got there) can best be met by understanding how others succeeded or failed to properly plan.

Create a Program
Understanding what needs to be done is the first part of the challenge. The second step is making sure your firm is doing it properly. Subjective standards have to be incorporated into risk and audit programs. It may seem impossible to audit for something like risk culture, and an audit of risk culture is certainly more art than science, but some questions the audit should include are:

  • Is there an understanding, communication and alignment of values in the firm? 
  • Are risk commitments being met and does the firm and management do what they say they will do?
  • Are there any exploitations of gray areas to benefit individuals?
  • Is there evidence of a balance in the firm between achieving results and managing risk?

Bottom line is the board should insist audits and risk assessments take into consideration how these areas of subjective regulation are reflected in the operation of each area, procedure or process they review.

Tell Your Story
Directors should be ready and able to express their understanding of how they meet today’s subjective standards. For example, understanding the strategic planning process and the manner risk factors are taken into account in both planning and execution of strategy allows directors to ask the right questions throughout the process. The same is true for capital and liquidity planning, where reflecting the right level of question and debate in the minutes will likely be crucial to meeting the regulatory “adequacy” standard.

The examples shared are just some of the subjective terms permeating the regulatory process in today’s environment. Like written regulations, they will continue to evolve and will be heavily influenced by the regulatory climate. Dealing with this regulatory uncertainty will continue to be an important practice for directors.

Four Reasons Why Waiting to Sell May Be a Bad Idea


bank-strategy-2-5-16.pngMost community banks have a timeframe for liquidity in mind. Strategic plans for these institutions are often developed with this timeframe as a key consideration, driven by the timing of when the leader of the bank is ready to retire.

We meet with a lot of bank CEOs, and we regularly hear some version of the following: “I’m in my early 60s and will retire by 70, so I’m looking to buy not sell.” When we ask these CEOs to describe their ideal acquisition target, the answer often involves size, market served, operating characteristics and, most importantly, talent. After all, banking is a relationship business and great bankers are needed to build those relationships with customers. Buyers will undoubtedly pay a higher premium for a bank with great talent that still has “fire in the belly.” It is hard to recall a time when a buyer was looking for a tired management team ready to retire. So, it seems ironic that a buyer cites talent as the key component to a desirable acquisition candidate, but that same buyer is planning to wait until retirement to sell. Put differently, they’re planning to sell at the point their bank will become less desirable.

We have highlighted four key items for boards and management teams to consider when evaluating the timing of a liquidity event as part of the strategic planning process: the timing of management succession, likely buyers or merger partners, shareholders and the overall economy and market for community banks.

Management Succession
Timing of management succession is critical to maximize price for shareholders. As referenced above, if the leadership of an organization would like to retire within the next five years, and there isn’t a logical successor as part of senior management, the board should begin evaluating its options. Waiting until the CEO wants to retire may not be the best way to maximize shareholder value.

Likely Buyers/Merger Partners
The banking industry is consolidating, which means fewer sellers and buyers will exist in the future. While there may be a dozen or more banks that would be interested in a good community bank, once price is considered, there may only be one or two banks that are both willing and able to pay the seller’s desired price. These buyers are often looking at multiple targets. Will a buyer be ready to act at the exact time your management is ready to sell? In fact, there are a number of logical reasons that your best buyer may disappear in the future. For example, they could be tied up with other deals or they may have outgrown the target so it no longer “moves the needle” in terms of economic benefit.

Shareholder Pressure
Shareholders of most banks require liquidity at some point. While the timing of liquidity can range from years to decades, it is worthwhile for a bank to understand its shareholders’ liquidity expectations. And liquidity can be provided in many ways, including from other investors, buybacks, listing on a public exchange, or a sale of the whole organization. As time stretches on, pressure for a liquidity event begins to mount on management and, in some cases, a passive investor will become an activist.

Overall Economy and Markets
With the Great Recession fresh in mind, virtually every bank investor is aware the market for bank stocks can go up or down. Before the Great Recession, managers who were typically in their mid-50s to early 60s  raised capital with a strategic plan to provide liquidity through a sale in approximately 10 years, which would correspond with management’s planned retirement age. We visited with a number of bankers in their early 60s from 2005 to 2007 and indicated that the markets and bank valuations were robust and it was an opportune time to pursue a sale. Many of these bankers decided to wait, as they were not quite ready to retire. We all know what happened in the years to follow, and many found themselves working several years beyond their desired retirement age once the market fell out from under them.

Over the past two years, we had very similar conversations with a lot of bankers and once again we see some who are holding out. While bankers and their boards generally can control the timing of when they would like to pursue a deal, the timing of their best buyer(s), the overall market and shareholder concerns are beyond their control. Thorough strategic planning takes all of these issues into account and will produce the best results for all stakeholders.

How to Get the Most out of Your Annual Reviews


annual-review-12-14-15.pngThere has never been a more challenging time to be a bank director. The combination of today’s hugely competitive banking market, increased regulatory burden and rapid technological developments have raised the bar for director oversight and performance. In response, an increasing number of community banks have begun to assess the performance of directors on an annual basis.

Evaluation of board performance is done in many ways, and ranges from an assessment by the board of its performance as a whole to peer-to-peer evaluation of individual directors. Public company boards are increasingly being encouraged by institutional investors and proxy advisory firms to conduct meaningful assessments of individual director performance. The pace of turnover and change on most bank boards is slow, and more often the result of mandatory retirement age limits than focus by the board on individual director performance. This may be untenable, however, as the pace of external change affecting financial institutions often greatly exceeds the pace of changes on the bank’s board.

While some institutions prefer a more ad hoc approach to assessing the strengths and weaknesses of the board and its directors, we suggest that a more formal approach, perhaps in advance of your board’s annual strategic planning sessions, can be a powerful tool. These assessments can improve communication between management and the board, identify new skills that may not be possessed by the current directors, and encourage engagement by all directors. If used correctly, these assessments often provide valuable information that can focus the board’s strategic plan and help shape future conversations on board and management succession.

So what are the key considerations in designing an effective board evaluation process? Let’s look at some points of emphasis:

  • Think big picture. Ask the board as a whole to consider the skill sets needed for the board to be effective in today’s environment. For example, does the board have a director with a solid understanding of technology and its impact on the financial services industry? Are there any board members with compliance experience in a regulated industry? Does the board have depth in any areas such as financial literacy, in order to provide successors to committee chairs when needed? Do you have any directors who graduated from high school after 1985?
  • Develop a matrix. Determine the gaps in your board’s needs by first writing down all of the skill sets required for an effective board, and then chart which of those needs are filled by current directors. Then discuss which of the missing attributes are most important to fill first. In particular, consider whether demographic changes in your market will make recruiting a diverse and/or female candidate a priority.
  • Determine the best approach to assessment. Engaging in an exercise of skills assessment will often focus a board on which gaps must be filled. It can also focus a board on the need to assess individual board member performance. Many boards are not prepared to launch into a full peer evaluation process, and a self-assessment approach can be a good initial step. Prepare a self-assessment form that touches upon the aspects of being an effective director, such as engagement, preparedness, level of contribution and knowledge of the bank’s business and industry. Then, have each director complete the self-assessment, with a follow-up meeting scheduled with the chair of the governance committee and lead independent director for a conversation about board performance. These conversations are often the most impactful part of the assessment process.

In addition to assessing the human capital needs of the board, several other topics should be raised in most board assessments.

  • Communication between management and the board: As demands on the board change, providing directors with the same board packets and agenda as ten years ago may not make sense. Soliciting thoughts on how the content and presentation of board materials could be more helpful and whether the board’s agenda should change is a good exercise for any institution.
  • Buy, sell or hold? While strategic matters are best addressed through group discussion, gauging directors’ views on the strategic direction of the institution can also help shape the tenor of the board’s future discussions. Understanding individual directors’ justifications for a potential sale as part of the assessment process may allow for solutions short of a sale of the bank.

Board assessments are a key component of a healthy board environment, as they can provide management and the board with insight into the true feelings of the board of directors on a variety of issues. Careful evaluation of which assessments to utilize and the timing in doing so can allow a board to better adapt to a rapidly changing marketplace.

What to Look for in Your Next CEO: Part I


bank-ceo-10-1-15.pngSelecting a chief executive to lead your institution is a bank board’s single most important responsibility. Everything flows from this decision, including the bank’s strategy, reputation, the ability to attract critical talent, investor and employee confidence and the credibility of the board itself. Selecting an underprepared or inadequate leader—no matter how well liked or how long employed—can quickly send a bank in the wrong direction.

The list of optimal skills required in a bank CEO today could easily include dozens of items. Here we will highlight ten technical skills that we see as “must haves.” Next month, we will highlight ten leadership competencies and attributes which will complement the qualifications below.

Experience Working with Regulators
Regulatory relations were barely on the radar screen for bank leaders a decade ago, unless the bank was in trouble. However, in today’s altered regulatory climate, the ability to forge a positive working relationship with a bank’s varied regulators has become a critical element of success.

Balance Sheet Management Experience
The extended low interest rate environment has put pressure on bank spreads like never before. With interest rate risk and margin pressures on the front burner, CEOs need to understand the construction of their balance sheet, including capital strategy, more deeply than before.

Commercial Credit Skills
You can never have too much credit skill in a bank, in our opinion. Credit quality issues will quickly turn a good bank into an underperformer. The path to the CEO’s desk still goes through the commercial lending area more often than any other area.

Experience with Corporate Governance
Boards are under increased scrutiny from investors, customers, regulators, communities and even employees. CEOs need to appreciate the pressures facing directors (even for privately held and mutual institutions), and respect the ongoing challenges facing the board.

Technology Savvy, Including Evolving Channels
Technology in banking has moved from the back office to the front lines. Understanding how the rapidly shifting technological landscape is impacting the industry—and how to respond in real time—has become a vital ingredient for ongoing success.

A New Perspective on Risk Management
In the good old days, risk meant credit, fraud or simple liability for slip-and-fall accidents. Nowadays, this category has broadened to include cybersecurity, counterparty risk, compliance issues, legal challenges and more. Being able to identify and triage the bank’s risk factors is more important than ever.

Marketing and Social Media Knowledge
As mentioned, technology has become a front-line channel for growth. The integration of social media with technology has changed how many banks must go to market, build brand awareness, drive engagement and respond to customer needs. CEOs need to be plugged into these shifts, even if they are not active themselves on social media.

Exposure to Fee-Based Lines of Business
Given the decline in interest margins, boosting fee revenue appears to be on almost every bank’s strategic planning agenda. Even for banks with a low percentage of fee-driven revenue, CEOs need to explore alternative ways to grow the top line.

Transaction and Integration Experience
Many banks that never previously considered a transaction are now exploring all options, including acquisitions, mergers of equals, branch sales and purchases and fee business acquisitions. Exposure to the transactional arena has become more critical, as has the ability to successfully integrate post-transaction. Otherwise, the value derived from “doing a deal” may not be achieved.

Strategic Planning Skills
Everyone seems to have a plan, but how real and achievable is it? A CEO’s ability to craft a meaningful path forward and drive the plan’s execution has become a differentiator for successful banks.

There is no perfect template of skills which will guarantee success, particularly in the pressure-filled and constantly evolving banking industry. However, finding a CEO with a foundation grounded in these ten industry skills will increase your bank’s odds of surviving and thriving.