In a Challenging Earnings Climate, There Is No Room for Lazy Capital

The persistently challenging earnings environment stemming from a stubbornly flat yield curve requires bank management teams examine all avenues for maximizing earnings through active capital management.

The challenge to grow earnings per share has been a major driver behind more broadly based capital management plans and playbooks as part of larger strategic planning. Management teams have a number of levers available to manage capital. The key as to when and which lever to pull are a function of the strategic plan.

A strong plan predicated on staying disciplined also needs to retain enough nimbleness to address the unforeseen and inevitable curveballs. Effective capital management is, in large part, an exercise in identifying and understanding future risks today. Capital and strategy are tightly linked: A bank’s strategic plan is highly dependent on its capital levels and its ability to generate and manage it. In our work with clients, we discuss and model a range of capital management techniques to help them understand the costs and benefits of each strategy, the potential impact on earnings per share and capital and, ultimately, the potential impact on value creation for shareholders.

Bank acquisitions. M&A continues to offer banks the most significant strategic and financial use of capital. As internal growth slows, external growth via acquisitions has the ability to leverage capital and significantly improve the pro forma company’s earnings stream. While materially improved earnings per share should help drive stock valuation, it is important to note that the market’s reaction to transactions over the last several years has been much more focused on the pro forma impact to capital, as represented by the reported dilution to tangible book value per share and the estimate of recapturing that dilution over time, alternatively known as the “earnback period”.

Share repurchases. Share repurchases are an effective and tax-efficient way to return excess capital to shareholders, compared to cash dividends. Repurchases generally lift the value of a stock through the reduction in shares outstanding, which should increase earnings per share and the stock price. They’re generally favored by institutional owners, and can make tremendous sense for broadly held and liquid stocks. They can also be very effective capital management tools for more thinly traded community banks with growing capital levels, limited growth prospects and attractive stock valuations.

Cash dividends. Returning capital to shareholders in the form of cash dividends is generally viewed very positively both by the industry and by investors. Banks historically have been known as cash dividend paying entities, and the ability and willingness to pay them is often perceived as a mark of a healthy and stable company. Cash dividends are often viewed as more attractive to individual shareholders, where quarterly income can be a more meaningful objective in managing their returns.

Business line investment. Community banking at its core is a spread dependent business. The ability to diversify the revenue stream through development or acquisition of a fee generating business can be an effective and worthwhile use of capital. Common areas of investment include mortgage banking, wealth management, investment products and services, insurance and the lift out of lending teams. A recent development for some is investing in technology as an offensive play rather than a defensive measure.

Capital Markets Access. Effective capital management plans also consider the ability to access the capital markets. In the community banking space, accessing capital is not always a foregone conclusion.  Community banks need to remain alert to market conditions and investor appetite. Over the past couple of years, the most common forms of capital available have been preferred equity and subordinated debt. It’s our view that for banks of a certain size and market cap, it’s a prudent capital management strategy to file a shelf registration, or Form S-3. The optionality provided by having a shelf registration far outweighs the concern that the shelf itself suggests a shareholder dilutive activity is on the horizon.

There are a couple of guidelines that managements should bear in mind as they develop their capital management plans. First, the plan needs to be realistic and achievable; there is limited value in building a plan around an outcome that is unrealistic. Second, don’t look a gift horse in the mouth. If there is credible information from trusted sources indicating that capital is available, get it.

It’s important to note that these capital management activities can be utilized individually or in combination. An acquisition may necessitate the need to access the capital markets. Or given the relative inexpensiveness of sub debt, raising some for the purpose of a share repurchase could make sense. A strong capital management plan can position a company to manage through the good times and maybe, more importantly, the challenging times.

Honing Your Strategic Vision

The financial institutions examined in Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP, demonstrate the fundamentals of successful, long-term performance. What can we learn from these top performers — and how should bank leaders navigate today’s challenging environment? Crowe Partner Kara Baldwin explores these issues, based on the lessons learned in the RankingBanking study, and shares her own expertise. To view the complete results of the 2021 RankingBanking study, click HERE.

  • Weaving Digital Into Your Bank’s Strategy
  • Being Efficient Without Being “Cheap”
  • Today’s Uncertain Credit Environment
  • Considerations for Bank Boards

Assessing the Broker, Advisor Approach in Bank Investment Portfolios

Investment portfolios and overnight cash positions have grown significantly at many financial institutions due to a recent surge in deposits and lower loan demand. Carrying excess cash on the balance sheet has been costly, given record low interest rates.

These factors are forcing executive teams to re-focus on the investment portfolio as a way of reducing net interest margin pressure stemming from declining earning asset yields. In general, banks have two options for managing the investment portfolio: the broker and the advisor approach.

The Broker Approach
Bankers have the option of working directly with brokers and brokerage firms to make investments for the portfolio. Usually, brokers present different products for consideration often via frequent emails. Building personal relationships is often how brokers “win” ongoing bond business. But executives are ultimately responsible for understanding the investment, determining how it fits on the balance sheet and ensuring best-trade execution. The broker is compensated through trade commission.

The Advisor Approach
Partnering with an investment advisor is a co-management approach, where the bank executives and advisor work together on strategy development and execution. Experienced investment advisors consider the entire balance sheet when making investment recommendations. Advisors are typically independent and are often compensated by an advisory fee.

Neither approach is universally right or wrong, but one could be a better fit for your institution. A common mistake institutions make is failing to properly monitor their brokers or advisors. However, it is important to periodically evaluate these relationships, to make sure the investment process is complementing overall balance sheet objectives.

Have you been relying on your brokers for investment ideas and managing the portfolio? How are they doing? Have their recommendations resulted in above-peer performance? Has your advisor delivered on their value-added proposition?

If you are considering a change from the broker approach to the advisor approach or switching advisors, below are seven benefits of working with an investment advisor:

  • Investment Management from a Whole Balance Sheet Perspective: Financial institutions’ bond portfolios should never be managed as a stand-alone group of assets. Instead, it should be viewed in concert with the overall balance sheet, serving as a key component alongside loans and deposits.
  • Accountability and Transparency: An investment advisor is a fiduciary who is completely aligned with your institution’s objectives. Portfolio returns are advisors’ report cards, and they are accountable to their clients. In contrast, brokers’ have an inherent conflict of interest from commission-based compensation. These commissions are often opaque and can vary significantly depending on the bond.
  • Strategy and Relative Value Analysis: Experienced advisors constantly analyze the relative value of various sectors when making portfolio-specific recommendations. Advisors spend a lot of time identifying securities to improve your institution’s portfolio returns.
  • Better/Best Execution for Security Transactions: Investment advisors utilize a wide network of securities underwriters and dealers to improve trade execution. Robust investment technology and daily market participation allows experienced advisors to achieve pricing transparency.
  • Exclusive Product Access: Investment advisors with a proven track record have access to a wide network of deal underwriters and have significant leverage to dictate favorable deal structure.  Brokerage firms often do not have the same access to other firms’ exclusive deals.
  • Staying in Control: Partnering with an independent investment advisor should not feel like a sacrifice of control. The key is finding an advisor that acts in a co-management capacity, freeing bank executives from time-consuming tasks while retaining important strategic decisions such as asset allocation, duration and credit profile.
  • Redirected Productivity: Executives often lack the time needed to manage the investment portfolio. Fielding brokers calls and responding to emails is time consuming. Managing the investment portfolio should not be a part-time job, and investment advisors are dedicated to the oversight of this earning asset.

Taylor Advisors Take
With weaker loan demand and growing overnight cash balances, investment portfolios are playing a greater role in overall bank profitability. Many financial institutions have relied heavily on the broker approach for investment advice, but should wary of hidden costs and potential conflicts of interest.

One reason that institutions partner with an independent investment advisor is to improve portfolio performance within context of risks. To evaluate your bank’s investment portfolio performance relative to peers, start by studying the most recent quarterly data. Executives should understand where their institution’s portfolio yield ranks, compared to institutions in their market. Below-average portfolio yield may indicate a strategy/process that needs adjustment.

Taylor Advisors will present as part of Bank Director’s Inspired By Acquired or Be Acquired, an online board-level intelligence package for members of the board or C-suite. The session is titled “Balance Sheet Optimization: Driving Bank Performance” Click here to review program description.

The Secret to Increasing Wallet Share

Quick, name a bank.

Did you name your bank, or another local or national bank? It is often easier for people to think of a national bank than a local one, thanks to name recognition through advertising and branches.

But as important as top of mind awareness is, staying top of wallet is even more important. When your organization comes to both customers and prospective customer’s minds, you increase the chances at becoming their primary financial institution (PFI).

At Wallit, we define PFI as a customer having an active checking account, a debit card and direct deposit with a financial institution. There are five ways banks can accomplish this objective, increase deposit growth and boost non-interest income in a way that maintains healthy, growing customer relationships.

1. Elevate the debit card. The debit card isn’t just a payment card, method or option. It is a powerful and valuable lifestyle tool that many community banks underutilize.

At the point of sale, consumers decide whether to use a credit or debit card, based on their own needs. They make this decision multiple times each day.

I’m sure that most community bank customers that have a checking account also have that bank’s debit card in their wallet. But do they use it? Do they use a competitor’s card? Do they reach for a credit card?

2. Be Visible. Consumers have more options than ever when choosing financial services providers. So many, in fact, that consumers actively avoid marketing and advertising. Community banks have to be more visible, but not pushy.

Look for opportunities to connect your brand to things your customers value by linking it to places that your customers already think deliver value. Connect your brand to local businesses in the communities you serve, building and growing relationships with these businesses.

Promoting local businesses and providing information people need extends your bank’s reach and gets your name out there. This also borrows the brand halo of those businesses and makes your brand top of mind and top of wallet in the process.

3. Capitalize on Connections. The best businesses succeed through collaboration. Leveraging current relationships and connecting local merchants to local consumers unlocks the trapped value of your bank in the digital age.

Your bank can create a sense of belonging for members of your community, with your institution at the center. Think about it this way – Connecting buyers and sellers is far more valuable than merely connecting the bank accounts of buyers and sellers.

4. Generate Word of Mouth. Consumers will always share what they think of brands, products and services with others in their network across a wide range of communication channels. These recommendations are highly credible and relevant; they’re generally more effective than the marketing and advertising your bank currently pays for.

The best tactic to generate word of mouth is to impress current customers with a card-linked, cash back offer when they visit one of your local businesses. Your customers already have your bank’s debit card with them, making it a tool for spreading positive word of mouth, building your brand and driving revenue by offering and rewarding unique, highly personal, share-worthy experiences.

5. Experiment. Create a culture of experimentation. Start small and learn fast. Having the courage to apply new technologies and reinvent existing ways of working can improve financial performance.

Develop and improve your bank’s ability to be hyper-relevant and serve customers more effectively by sensing and addressing their changing needs. Consider starting a pilot with employees, then extending to scale with a portion of your customers.

Increasing share of wallet and becoming a primary financial institution requires intention, commitment and experimentation.

By leveraging your bank’s current strengths and investing in your debit card and merchant services programs, such as offering and marketing cash back rewards to local businesses and consumers, you can tip the scale in your favor.

Strategic Insights From Leading Bankers: Bank OZK

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

Is Bank OZK misunderstood?

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

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

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

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

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

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

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

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

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

EM: What opportunities are you seeing now, George?

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

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

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

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

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

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

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

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

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

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

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

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

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

Strategic Insights From Leading Bankers: First Financial Bankshares

Few banks have built value for their shareholders like Abilene, Texas-based First Financial Bankshares.

Over the 20-year period ending June 30, 2020 — the cut-off date for institutions featured in Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP — the $10.6 billion bank generated a 2,074% total shareholder return. That figure is second only to Bank OZK in Little Rock, Arkansas, for the entire banking industry. First Financial placed sixth overall in the study and earned top honors in the Best Bank for Creating Value category. It also rated highly for its retail strategy.

“They’re one of the best banks out there,” says Brett Rabatin, head of equity research at Hovde Group. First Financial’s culture, M&A track record and competitive strategy — delivering a high level of service in small-town markets — set it apart. “A lot of banks like to say, ‘we’re relationship lenders,’ [but] this is one of the few banks where it shows up. It shows up in their loan yield, it shows up in the profitability.”

To delve further into First Financial’s performance for the RankingBanking study, Bank Director Vice President of Research Emily McCormick interviewed First Financial Chairman and CEO Scott Dueser about the bank’s customer-centric philosophy, prospective M&A opportunities and how he leverages his Texas connections. The interview was conducted on Oct. 14, 2020, and has been edited for brevity, clarity and flow.

BD: Based on my earlier reporting on First Financial and its culture, I know you have placed a strong cultural emphasis on building excellence and serving the customer. How does that differentiate First Financial from other institutions in its markets?

SD: I like to think of us as the Ritz-Carlton of banks because of what [Ritz-Carlton Hotel Co. co-founder] Horst Schulze has done for us. Horst has been outstanding, not only [in] training us [on] customer service, but also as a mentor on business and dealing with people. Horst doesn’t call it hiring people; you select people and that changes your whole attitude about it. We have a very strong team of people that work together extremely well.

I’m disappointed if somebody leaves our bank and is not extremely happy. That’s what we want to accomplish every time somebody walks in.

Our philosophy of how we do business is very important to us, and adds to the bottom line and the value of our stock. That’s the fact that we’re not in the big city, we’re in the small towns around the big city, where we can be the big fish in the little pond and be the No. 1 bank. We’re not in the big cities fighting the big boys; that takes a lot of money and a lot of time, and it’s a battle that frankly, I don’t think we can win. Why not stay in the areas [where] we do well and focus on that? That’s been our focus, along with credit quality and going after the better customers in our markets. 

BD: Covid-19 has impacted how banks serve the customer. Has anything really shifted for your bank in that regard, or do you feel like the situation is proving your strategy out in a way?

SD: It’s proven the strategy out. I will tell you the best thing that we did was we never closed our doors. We stayed open, and we came to work every day, and we learned how to work through Covid and how to serve the customer [in that environment]. We got a lot of business from it, because when customers went to their bank and found it locked, they didn’t like it. Those banks that locked their doors lost a lot of business, because 33% of the [Paycheck Protection Program] loans that we made were somebody else’s customers. To do that, we asked [those customers] for all their business, and they moved all their business. We grew about a billion dollars through the pandemic.

We made the decision not to cut hours and not to lock our doors, but to be here. We split big departments [where] half the people went home, half the people stayed here, but everybody that was customer facing had to come to work. Our goal was to make the workplace the safest place our people could be. Frankly, today we still feel like the safest place to be is here at work. We’ve kind of managed Covid, not that we haven’t gotten it. We manage it by masking and social distancing, and don’t come to work if you feel bad. We don’t want you to work [then]. That’s kind of the main rules.

I have been on the governor’s task force to reopen Texas. That has helped me tremendously, because I knew the inside scoop of how the state was fighting Covid.

BD: You also had a hand in the Texas Tech Excellence in Banking program that opened in 2020. I assume you see some indirect benefits to keeping those types of networks and communication lines open.

SD: No question. The Excellence of Banking Program was something that I took to Tech and said, “We really need to do this. It will be great for Tech. It’ll be great for the banking industry.” We were able to raise $12 million to endow that program; that’s from foundations and banks. There were about 50 banks involved in that program that gave $1,000 and above.

What’s neat about this program is it is focused [on] bringing minorities and women into banking. That’s something that we really need. We had interns from that program here this summer, and I’m very impressed with the high level of students that we have. I think all the banks that have participated are impressed with the interns that they got out of it. We are hiring people out of that program as we speak. It’s a direct benefit to the bank, but also a direct benefit to my alma mater.

BD: Looking at your past few M&A deals, First Financial does an excellent job of keeping costs down. With pricing coming down, do you see some opportunities on the horizon?

SD: I think there’ll be lots of opportunities next year. I do think Covid has made a lot of people think about whether they want to stay in the industry or not, and whether they want to keep their bank. If they don’t have people lined up to run their bank, they probably need to put it on the market. I think we’ll see a lot of banks go on the market, especially from the fact that a lot of banks missed their heyday when they could have gotten a premier price a year ago. That’s not going to happen today. Pricing is down. They’re going to say, “Hey, I’d rather take today’s price and see what happens next.”

With our price and our premium on the price, even in today’s market, we can go buy some banks that other people probably can’t, because they can’t make the deal work. With our stock price, we can make the deal work.

RankingBanking will be examined further as part of Bank Director’s Inspired By Acquire or Be Acquired virtual platform. Click here to access the agenda.

Keeping Optimism Alive

We are all in survival mode.

While the health and safety of one’s constituents takes top billing, keeping a business relevant — and viable — during these times should top the shortlist of any board’s agenda.

And while nobody has a compass to navigate these times, we at least have the means to aggregate an incredible amount of information and insight, vis-a-vis BankBEYOND.

With many fatigued from virtual conferences, we challenged ourselves to bring concise, novel ideas to a hugely influential audience. We followed Steve Jobs’ principle of design, working backward from the user’s experience to present board-level issues in new ways on BankDirector.com.

Our North Star in crafting the BankBEYOND agenda and experience: Respecting viewers’ time while surfacing issues that are both specific and relevant to their interests and responsibilities. Hence, our focus on issues that are strategic, risky and potentially expensive.

Since March, the industry has witnessed — and undergone — a rapid evolution of financial services. As a result, officers and directors must now assess the potential of their bank’s business in a post Covid-19 world. Growing a bank prudently and profitably took center stage at our Acquire or Be Acquired Conference in January; today, I suspect many boards and executives today emphasize efficiency to protect their franchise’s value. Indeed, a 50% efficiency ratio used to be the stretch goal for many banks; now, that might be closer to 35%.

Banks across the country are grappling with the tough choices they will need to make to rapidly bring those ratios down while delivering consistent service across physical and digital channels. We appreciate how so many institutions quickly embraced new technologies to solve specific business challenges, like the rollout of the Small Business Administration’s Paycheck Protection Program. In recent merger announcements, the drive to leverage technologies proved a primary catalyst for striking a deal. In fact, that’s where many efficiency gains come from.

However, boards realize that many of these technology additions can be expensive, which is why economies of scale becomes critical. We have seen how mergers can become the most expeditious way to generate meaningful economies of scale. But of course, much of the bank space is stuck in neutral at the moment when it comes to bank M&A.

We know that BankBEYOND’s audience has the responsibility for finding answers, rather than identifying barriers. We are tackling issues like:

  • Setting high-priority, short-term goals;
  • Keeping optimism and a sense of purpose alive; and
  • Weaving the best of the past eight months into everything the bank does going forward.

These are only three of the topics we’ll address with the help of various advisors and executives. Unlike a digital conference, with specific dates and watch times, we release families of videos and presentations at 8 a.m. CST. Beginning Monday, Nov. 9, we explore strategic and governance issues. The next day, we add information geared to the audit committee and risk committee. We conclude on Wednesday, Nov. 11, by sharing content developed for the compensation and nominating/governance committees.

BankBEYOND tees up the topics that allow for proactive — not reactive — change. By placing a premium on complex issues that all directors must address, we strengthen the knowledge of a bank’s board. And we rarely find a strong board at anything but a strong bank.

Strategic Planning in an Age of Uncertainty

How do you plan in an environment where the future is so uncertain?

If this was a bad joke, the answer might be “very carefully.” The real answer is more like “very nimbly.”

The Covid-19 pandemic has presented the banking industry with an almost-unprecedented set of challenges, including a deep recession and the necessity to manage a distributed work force. The variable that no one can predict is the pandemic.

Most economist agree that the U.S. economy won’t fully recover until the pandemic has been brought to heel — and that probably won’t occur until an effective vaccine has been widely distributed. Many banks are also reluctant to repatriate their remote employees in large numbers until it’s safe to do so.

Strategic planning in such a confused situation has to be different than at other times. In a webcast discussion for Bank Director’s AOBA Summer Series — a run-up to the 2021 Acquire or Be Acquired conference in January — Stephen Steinour, chairman and CEO at Huntington Bancshares in Columbus, Ohio, talked about the challenges of strategic planning today.

In an audio recording of that conversation with Editor-at-Large Jack Milligan, Steinour detailed some of the steps that Huntington has been taking through the pandemic, including processing tens of thousands of Paycheck Protection Program loans for its business customers and adapting to a virtual work arrangement for most of its employees.

Steinour also describes a new approach that Huntington’s senior management teams and board of directors is adopting toward strategic planning. Traditionally the bank has planned on a three to five-year cycle, but today’s uncertain environment requires a shorter time horizon.

“I think we’re going more into a continuous planning mode rather than a cyclical mode,” he says. “It requires us to be more nimble.”

Eliminate Customer Friction to Unlock Your Bank’s Growth

Why don’t your target customers want to join your bank? Because they’re not impressed.

Banks often sabotage their own attempts at success through their siloed, disjointed, out-of-touch and unimpressive approaches to doing business that leave small-to-medium businesses, private wealth clients, upwardly mobile millennials and even commercial customers underwhelmed by their service delivery.

Eliminating customer friction must be your guiding policy
For 10 years, the rallying cry of the C-Suite has been “invest in technology to stay relevant.” The next 10 years must be defined by a singular, focused, and undeviating devotion to eliminating the friction of doing business with your institution.

Fixing customer friction will be challenging and expensive, but it will also offer the best return for your shareholders. Your bank must organize teams around this mission. Executives need to evaluate resource and budget requests against a simple criterion: How much friction will this reduce, compared to the cost of funding it? Every budget request should be accompanied by a detailed user story, a list of friction points, and a proposed solution that describes the customer experience. Every touchpoint is an opportunity to reinforce your brand as customer-friendly or customer-hostile. Your bank should move quickly through these three steps:

  1. Get aligned. Your bank needs support from your board, your C-suite and even your investors to pivot to this focus. Once you have the buy-in and mission statements crafted, it’s time to designate the priority projects.
  2. “Shovel-ready” projects come first. Rescore projects that were previously denied funding or resources because they were too difficult to execute or didn’t cross a financial hurdle on a simple 2×2 matrix that evaluates improvement in customer experience and reduced friction vs. cost and complexity to implement. The projects in the top-right corner should be your initial list of funded initiatives.
  3. Deliver quick wins and results that measurably drive customer engagement. This will define success for the next 10 years. Re-engineer how you extend customer offers and execute pricing for standard and relationship clients. Your investment in tech will pay off if you accelerate this function.

For a fast return on investment, examine how your bank prices on base versus relationship status and rewards customer behaviors. Segmenting customers into single-service households, small to medium-size businesses, commercial, or mass-market and tying rewards or pricing adjustments to their categories can mean the difference between retaining or losing target customers. One-size-fits-all pricing, or even pricing by geography, will leave customers feeling like they do today: you don’t understand them or price according to their life stage or needs.

Aim for high-frequency iterations so you can test and learn everything before you scale it. Imagine being able to execute 100 or more micro-campaigns and evergreen trigger-based offers annually, with multivariant testing. Drill down to specific customer personas, identify specific trigger events, and act on intelligence that demonstrates to your customers that your bank understands them.

Get in the habit of defining a user story, designing a process and executing an offer or pricing schema in a sprint. I was astounded how quickly banks moved on preparing their infrastructure to administer Paycheck Protection Program loans. Imagine being able to consistently move at that speed — without the associated late nights and headaches.

Lastly, installing an agile middleware layer will unshackle your bank from the months-long cycles required to code and test customer offers and fulfillment. High-speed, cloud-based offer management that crosses business lines and delivers omni-channel offer redemption will be a game changer for your institution.

Installing a high-speed offer and pricing engine may seem like science fiction for your bank, but it’s not. It will require investments of time and money, coordinated efforts and lots of caffeine. But the results will allow your financial institution to prove success, build a model and inspire your teams to get serious about bulldozing customer friction.

The financial rewards of executing better offers, engaging more customers and delivering relevant, optimized pricing will give your bank the financial resources to remain independent while your competitors shop for merger partners.

Three Concepts that Drive Performance

The former top general in the Marine Corps, Gen. Jim Mattis, wrote in his memoirs, published last year, that “If you haven’t read hundreds of books, you are functionally illiterate, and you will be incompetent, because your personal experiences alone aren’t broad enough to sustain you.”

That’s bold. But given its source, it can’t be discounted.

“Thanks to my reading, I have never been caught flat-footed by any situation, never at a loss for how any problem has been addressed (successfully or unsuccessfully) before,” Mattis wrote in a 2003 email to a colleague. “It doesn’t give me all the answers, but it lights what is often a dark path ahead.”

In no industry is experience by proxy as important as it is in banking, thanks to a pair of peculiar dynamics. Banks use three or more times as much leverage as the typical company. They’re also exposed to the unforgiving vicissitudes of the credit cycle.

It follows that in banking, as in the military, though in an obviously less lethal context, there is little margin for error. To be a high-performing bank, your credit decisions must be right 99% of the time — a high bar to clear.

With this in mind, here are three concepts from three books that can help sharpen one’s decision-making and reduce the incidence of error.

Cognitive Dissonance
The study of behavioral finance gained traction after the financial crisis of 2008-09, which eroded confidence in the efficient market hypothesis — the assumption that markets operate best when they are most unfettered by rules and regulation.

Behavioral finance is predicated on the general rule that markets tend to produce rational outcome. More important than this rule, however, are multiple exceptions to it, called “behavioral biases,” which are so powerful that they can swallow the general rule.

The granddaddy of behavioral biases is cognitive dissonance. This is the “state of tension that occurs whenever a person holds two cognitions (ideas, attitudes, beliefs, opinions) that are psychologically inconsistent,” explained Carol Tavris and Elliot Aronson in “Mistakes Were Made (but not by me): Why We Justify Foolish Beliefs, Bad Decisions, and Hurtful Acts.”

An example is the belief that “‘Smoking is a dumb thing to do because it could kill me’ and ‘I smoke two packs a day,’” Tavris and Aronson wrote.

People don’t like hearing information that they disagree with. It’s why so many of the banks that got into trouble in the financial crisis of 2008-09 tended to minimize the ominous warnings from the risk managers, preferring instead to believe the lofty predictions of their revenue generators.

Deliberate Practice
If you want to get better at something, it helps to practice. But not all practice is equally effective.

“There are various sorts of practice that can be effective to one degree or another, but one particular form — which I named ‘deliberate practice’ back in the early 1990s — is the gold standard,” wrote Anders Ericsson in “Peak: Secrets From the New Science of Expertise.”

There is an assumption that after reaching a satisfactory skill level at something, the more you do that thing, the better you’ll be at it. But this isn’t necessarily true.

Research has shown that, generally speaking, once a person reaches that level of ‘acceptable’ performance and automaticity, the additional years of ‘practice’ don’t lead to improvement,” Ericsson explained. “If anything, the doctor or the teacher or the driver who’s been at it for twenty years is likely to be a bit worse than the one who’s been doing it for only five, and the reason is that these automated abilities generally deteriorate in the absence of deliberate efforts to improve.”

Deliberate practice has several characteristics that distinguish it from what Ericsson calls “naïve practice.” These include specific, well-defined goals; focused and intentional effort; regular feedback; and the willingness to get out of one’s comfort zone.

Level 5 Leadership
A central paradox lies at the heart of effective leadership: while leadership calls for confidence, it also demands humility.

Jim Collins encapsulates in the concept of Level 5 Leadership, which he developed in his book, “Good to Great: Why Some Companies Make the Leap and Others Don’t.”

Level 5 leaders display a powerful mixture of personal humility and indomitable will,” Collins explained. “They’re incredibly ambitious, but their ambition is first and foremost for the cause, for the organization and its purpose, not themselves.”

“The good-to-great executives were all cut from the same cloth,” he continued. “It didn’t matter whether the company was consumer or industrial, in crisis or steady state, offered services or products. It didn’t matter when the transition took place or how big the company. All the good-to-great companies had Level 5 leadership at the time of transition.”

Ultimately, there are no silver bullets to achieve exceptional performance — in banking or elsewhere — but concepts like these are fundamental building blocks that will accelerate one’s progress toward that goal.