Rebranding the Bank: One Bank’s Transformation

3-24-14-emilys-rebranding.pngThe Problem
A need to grow, coupled with brand confusion in the market, drove the transformation in late 2012 of Kaiser Federal Bank to Simplicity Bank, a savings bank with $855 million in assets headquartered in Covina, California. Simplicity operated as Kaiser Permanente Federal Credit Union from its founding in 1953 until 1999, when it converted to a savings bank and changed its name to Kaiser Federal Bank. In the more than a decade since that conversion, many potential customers still thought the institution was a credit union, with membership limited to Kaiser Permanente employees and families. The bank’s name was no longer relevant. “Nobody thought we were an option,” says Simplicity President and CEO Dustin Luton. “If we wanted to be able to make inroads in the community, then we knew we needed to do something with the name.” 

The Solution
Tim Pannell, president and CEO of Financial Marketing Solutions, a Franklin, Tennessee-based marketing firm, says that Simplicity Bank’s story highlights how a rebrand’s success is directly tied to the commitment of the institution’s management and board. “They had full support from the top down and they all understood what they were doing,” he says. While it’s too early to measure rebranding’s impact, Luton sees more interest in the bank within his market as well as a more focused culture at the bank. “It definitely strengthens the mission and the objective of the organization,” he says.

So when should the bank consider a rebrand? Simplicity’s shift from a credit union to a bank charter is just one example. Pannell says expansion into a new market, whether through acquisition or organic growth, could create a need to rebrand, especially if your name evokes a certain geographic location that might not be relevant to other markets. Rethinking the bank’s brand could also come down to a change in strategic direction, perhaps through a change in management or a perceived need to shift corporate goals to remain relevant in the marketplace.

Here are four points to consider if you are rebranding the bank. 

Answer the question: Who are you?
A brand initiative is not an advertising campaign, says Pannell. Ideally, a brand should describe what the organization is about, both for customers and employees. When it came time to consider a new name at Simplicity, Financial Marketing Solutions met with the board and management and conducted focus groups with customers, potential customers and employees to look into these groups’ perceptions of the bank’s brand. Luton says the new name needed to align with how the bank was already doing business—making life simple for its customers and building a strong employee culture around that goal. 

The new brand “needed to be something that we felt the organization could live and breathe and execute,” he says. Part of making life simple for the customer includes investment in streamlined technology and self-help options so the bank can be available when needed. The bank is trying to identify points where a customer has to call or visit the bank, perhaps to stop payment on a check, and build that option into online and mobile banking to give the customer more flexibility. “To be simple, you have to embrace technology,” says Luton. 

Create internal brand awareness from the top down.
If bank employees don’t own the brand, then it won’t catch on with customers. That ownership comes from the top down, usually from the CEO, says Pannell. Communicating a consistent brand message to each employee reinforces the brand, with employees championing this message to customers. 

Simplicity’s management team continues to focus on communicating the brand message within the bank. “The more employees hear it from me, the more I recognize employees for making banking simpler for customers, the more it becomes ingrained in the philosophy and culture” at Simplicity, Luton says.

And Luton feels that the brand strengthens the institution’s goals by communicating one basic idea—simplicity—to all employees. Expanding mobile and online banking while still maintaining phone and branch channels offers the access and convenience that is key to making the customer’s life easier. “Everybody has the same strategic imperative, from me all the way down to the front line. That’s one of the values of this brand for us,” he says.

Don’t forget the bank’s existing customers.
Simplicity originally planned to focus its marketing budget on attracting new customers within the market, but scaled back those plans to also explain the merits of the new brand to existing customers. “The greatest opportunity for most banks to grow and increase profitability is within their existing customer base,” says Pannell. The return on investment for deepening the relationship with current customers is typically greater than that of attracting new business, and encouraging adoption of mobile banking and online services like bill payment is a great way to retain customers, according to Pannell.

Be patient. Building brand awareness takes time.
“Brands aren’t built in a year,” says Luton. “Don’t think that you’re going to change the name and all of the sudden everybody’s going to start showing up.” He expects growth to take place over several years as awareness of the brand builds within the market. 

“When you think about rebranding, you must always think about long-term vision and goals, not short term,” Pannell says. “It’s really about a 3-, 5-, 7-year vision of where this organization is moving.”

What’s Wrong with the Sales Process at Banks?

3-7-14-Ignite-Sales.pngRetail banking is at an inflection point.

Together with the obvious pressures from regulations and low interest rates, non-financial institutions such as PayPal and Walmart are threatening banks’ bottom lines. They are under attack in areas they have felt most secure, such as business banking. Walmart’s Sam’s Clubs are offering Small Business Administration (SBA) loans and PayPal has hired a lending team under an executive vice president of business banking. At the same time, customers are also taking greater control of their banking relationships: They are switching banks, changing their behavior and demanding improvements.

Banks need to reestablish their relationships with their current customers and evolve their consultative sales process to be consistent and repeatable throughout all their channels. They need to adopt best practices in sales found in other retail industries, as well as measure results. They also need to embrace technology to survive and remain competitive.

All banking channels, including mobile, branch, and online, are struggling with sales productivity and performance. These reasons include:

Loss of fee income: Ninety-five percent of non-interest, fee generating products are opened in the branch. Due to increased regulation, banks have seen a decline in revenue from these products and need to find ways to recoup fee income that was generated prior to regulation.

Too many expense centers: Banks are facing many challenges managing profitability across their branch network, which happens to be their biggest expense. They haven’t had the insight they needed to determine potential profits from their branch network.

Sales process has not been a priority: Banks have paid little attention to the sales process, and therefore, the buying process. Banking has never had to focus on a comprehensive sales process. Because of healthy margins from loans and fees, banks have historically shied away from proven sales methods found in other industries. However, now that the market has become competitive, the lack of sales infrastructure hurts. More progressive banks have begun to hire experienced sales management from other industries that bring the expertise needed to change this culture.

Making decisions on intuition, not real data: Most banks don’t have methods in place to capture data at the point-of-sale. As a result, management is unable to accurately track what is sold, or determine whether the revenue in each channel or branch is generating fee income or interest income. They have no real data that shows which channels are profitable, and which need coaching or even closing.

Fear of technology: Technology has rapidly evolved over the past several years. It is challenging to keep pace with the rate of change. Banking’s internal culture is slow to accept these changes, giving non-traditional competitors a window to use technology to capture market share from traditional banks.

Tackling each one of these issues is a formidable challenge on its own. Collectively, they become a board level issue. Banks that do not address these issues will continue to struggle or will not be able to remain independent.

The first step is to close the gap between the buying process and the sales process. To do this, banks need to:

  1. Put successful and repeatable sales processes in place to ensure that the bank is opening profitable accounts and to ensure a consistent customer experience;
  2. Collect data at the point of sale to be able to measure productivity and profitability in real-time, so that the bank can adjust to changing market conditions;
  3. Be agile enough to embrace technologies quickly to remain competitive.

Banks that take the first steps in modernizing the sales process and embracing technology will be well on their way to compete in the new age.

Bank Director’s Story: How a Community Bank Survived the Financial Crisis and Continues to Thrive

2-25-14-alarion-bank.pngCo-founding two banks in the past 15 years, one right before the financial crisis hit, has taught me many invaluable lessons as a director. The first bank, which opened in 1999, was an incredible success. The second bank, opened in 2005, was one of the few banks that got started in that time frame to survive in Florida. That bank, Alarion Bank, has had two years of positive net income growth and a healthy dose of fee income. First, I will give you a historical picture.

I was an advisory board member of SouthTrust Bank in North Central Florida in the mid-1990s. Three of us left the bank and raised the money to open a state chartered community bank in 1999, Millenium Bank in Gainesville, Florida. Our greatest problem with the new bank back then was the expenses and worry over the impact of Y2K on our computer and banking systems. After January 1, 2000, when the technological and banking world did not end, it was smooth sailing all the way until we sold the bank for three times book value in just four years.

Shortly after the sale, I was approached by an executive of a larger bank who wanted to open another community bank. We opened Alarion Financial Services in 2005 after handpicking a board of directors and raising $20 million. By our organizational documents, we were only allowed to raise $15 million, so we had to return $5 million to our enthusiastic potential shareholders. We sold to more than 500 shareholders in order to increase our potential customer base and spread the ownership to include grassroots investors in our two communities. We had six locations in Alachua and Marion Counties in North Central Florida. In addition to our board of directors, we created an advisory council in each county. These community councils became very powerful in helping us attract new and veteran businesses as clients for Alarion Bank.

We were achieving all our milestones and were on top of the world. It looked like another success story in the making. Then came the economic crash, which was much worse in Florida than most other states. After tourism, one of the largest economic generators in Florida is real estate. Therefore, it made perfect sense that our bank, like most other community banks in the state, had a higher concentration of loans in real estate than other banks in the country. We had almost no manufacturing in our state.  In addition, Taylor Bean & Whitaker Mortgage Corp. suddenly closed in 2009 in Marion County, where our bank headquarters was located, and 1,000 jobs, many high paying, were lost.

How did we get through it? What are we doing today to make our $275-million asset bank grow successfully and be profitable? In 1999, I had attended a bank conference and the keynote speaker was Charles Hughes, former CEO of SouthTrust Bank of Florida, who spoke emphatically about how important fee income would be in the future because interest margins were thinning. Remembering this strong advice, when we opened Alarion in 2005, our approved organization plan contained a template for a strong residential mortgage division. We wanted this strong, stable fee income stream. My main role as a director in the new bank was to help build the mortgage division. I have owned the number one market share real estate company for more than 25 years in Gainesville, Florida. We put together a marketing agreement between my real estate company, Bosshardt Realty Services, and Alarion’s residential mortgage division. This plan was approved by all the appropriate regulators prior to the bank opening. Desk rental and marketing agreements are still working and working well. These agreements are common in the industry and, if done correctly, can be very profitable for banks. I had previously partnered in a joint venture with SunTrust Bank and it was profitable from the first month due to the base that was created by the real estate salespeople. However, my partner was in Richmond, Virginia, and my company was in Florida, and there was also a third party manager who was 40 miles from us. In the end, it was too complicated.

This time around, Alarion Bank hired two originators who rented prime spaces in our real estate offices and a processor as well. The poor economic conditions did not hurt our residential mortgage division because it derived its income from the top real estate salespeople in our area. Even though real estate sales were down dramatically, the top real estate associates still were productive. Refinances helped our business; however, our basic bread and butter has always been referrals from real estate agents. When Realtors find a good originator who gives good service, they keep bringing more buyers to them. The mortgage division of Alarion experienced great repeat business from our Realtors and the bank subsequently opened three more desk agreements with other real estate companies in surrounding counties.

Alarion has the top market share in mortgage purchase volume in our county, which is pretty good for a community bank. No one has really been able to understand why such a small bank with only six locations could do better than the banking giant in residential purchases. It even has had the regulators surprised. In 2013, Alarion did $150 million in residential mortgage volume. We did not do subprime loans: We work strictly within the Fannie Mae/Freddie Mac guidelines, and we sell to investors rather than direct to Fannie and Freddie. These investors each have their own requirements (known as overlays) in addition to Fannie and Freddie’s guidelines, so there is a tremendous amount of scrutiny over our files. Our bank also has its own in-house portfolio for various deals where we only do short-term, adjustable rate mortgages.

We hired and continue to retain an outside auditing firm to review all of our residential loans on a monthly basis, in addition to our extremely competent in-house compliance team. Our mortgage division has carried our bank through the worst of times. Our regulators seem pleased with our system of originating, selling and auditing loans. We are always coming up with more creative ways to secure more business and have built a template for success in residential lending for the future. What was once a small side line has now become the business with the best risk model.

At Alarion Bank, we found our banking niche to make the bank very profitable and get us through the difficult financial crisis. Diversity and economies of scale were very important to keep us going through the past six years. A community bank can still compete and win over the larger financial institutions by creating a “hypermart” model which puts different related financial businesses under one company with one set of overhead expenses. Those businesses could be insurance brokerage, warehousing, investment brokerage, or in our case, residential mortgage lending.

A Banker’s Story: Lessons from a Start Up Bank

2-7-14-Samuels.pngSeven years ago after I left a large regional bank as president of the Nashville, Tennessee market, I wrestled with the idea of starting a bank, considering that as well as other career options. Weighing the pros and cons, my wife wrote on a cocktail napkin, “Ron likes to be in charge.” That was the end of that discussion and the start of Avenue Bank.

Over the past few years, I’ve been asked many times about starting a bank during the economic crisis and how we managed to survive, and thrive. So, within the limitations of this space, following are some of the keys to our success.

The #1 rule in real estate, “location, location, location,” proves true in banking as well, because your market has a significant impact on your ability to be successful. Market demographics, business environment and real estate values all determine whether your market is on the upswing or downturn—whether investments will be made or if they will go to other market areas.

In Nashville, we are enjoying unprecedented national recognition for our positive market growth, the rebound of real estate values, and our ability to recruit business investments. In the past 20 years, Nashville’s population has grown 60 percent with a strong demographic profile, and 234,000 new jobs have been created. But along with that, Nashville’s unique character and personality, our creative spirit, really defines us.

In founding Avenue Bank in 2007, we wanted to embody that creative spirit and redefine how clients experience banking. We established our brand with client evangelists who tell others about their surprising and incomparable relationship with Avenue Bank.

With more than 60 banks in our market area, people would say to us, “We don’t need another bank,” so we took that statement head on and one of our first marketing phrases was, “Not Another Bank.” It was a bold introduction, and delivering on that promise meant that we had to hire the best, empower them to take care of clients, create a great work environment, and focus every employee on achieving a few well-defined goals, as a team, each year. The strategic selection of our four branch locations positioned us in proximity of 70 percent of the deposits in this market area. And the decision to open all four within 18 months of starting the bank was another bold move that showed our commitment to the market.

One of the biggest factors in our success has absolutely been living by the mantra “right person in the right job.” Every employee has a role, and the team has to work together to deliver the kind of service we are known for. So, those employees who do not directly interact with clients know that they are in a key support role that is directly tied to client service.

Our concierge banking model allowed us to staff the branch locations leanly, with every banker trained to conduct transactions as well as open accounts or serve any other retail banking need. The use of free-standing TCRs (teller cash recyclers) eliminated the barriers of a traditional teller row, creating a modern and accessible environment. A benefit of our growth and success is our ability to hire top performing employees in a highly competitive environment. We seek servant leaders who have a real passion for taking care of clients, and we place a great importance on finding those that are the right cultural fit.

As a recognized employer of choice, we have been able to recruit seasoned commercial and private client bankers to join our team; many of them cite our local decision making as key to their decision to move. The same is true for experienced operations associates, many of them seeking an environment where they are valued.

As with any organization, leadership is vitally important. We have built trust in our leadership team by being transparent about our finances and decisions that impact employees. We use weekly all-employee meetings and newsletters to communicate, avoiding the interpretation that can occur when messages are passed through a hierarchy. Employees see and hear directly from me. Our leadership team establishes focused goals, bears the burden of tough decisions, and sets the tone for success.

I feel extremely proud when I look at our balance sheet and see $890 million in total assets, all organic growth. Avenue Bank achieved profitability in the first quarter of 2010, and now has shown 16 consecutive quarters of sustained profitability through 2013. Last year, our loan portfolio grew 26 percent, again all organic growth, which I attribute to the right bankers, in the right job, and a harmonious relationship with our credit team that works together to get a deal done.

But even as we look forward to achieving our next milestone of $1 billion in assets, I am more satisfied thinking about the relationships those numbers represent, the jobs we have created, and the support we’ve given to so many organizations in our community. Avenue Bank has more than fulfilled my vision.

Is Banking’s Business Model Broken?

5-28-13_Hovde.pngThe banking industry—by most measures—has improved markedly from the depths of the credit crisis. The industry’s return on average assets (ROAA) has increased through additional noninterest income and fewer charge-offs; credit quality is stronger; capital reserves are at all-time highs; and the number of banks on the Federal Deposit Insurance Corp.’s (FDIC) problem list has declined for the past seven quarters. Additionally, public bank stocks either have tracked or outperformed the S&P 500 in recent years.

Despite these positive trends, banking’s business model is significantly challenged in today’s interest rate environment. With deposit costs near zero and fierce competition for loans driving down yields, many banks are running on fumes.

As higher yielding loans mature, banks are replacing them with lower yielding assets, resulting in significant net interest margin (NIM) compression across the industry. Regardless of whether the Federal Reserve’s accommodative monetary policy has helped or hurt the economy, it is wreaking havoc on banks’ profit models. Indeed, it would be nearly impossible to start a de novo bank today and make money through traditional means.

According to the FDIC, the industry’s NIM in Q4 2012 was 3.32 percent—the 3rd lowest quarterly NIM since 1990. Since Q1 2010, net interest margins have declined each quarter except one, with no sign of near-term relief. To combat the NIM squeeze, some banks are taking more interest rate and credit risk. By venturing further out on the yield curve and underwriting riskier assets, banks can generate more revenue; however, the risks may not justify the returns. In the short-term, the strategy could increase profits. In the long-term, it could create less stable institutions and the conditions for another credit crisis.

Yet loan growth will be critical to maintaining earnings over the next several years if the Fed continues its low interest rate policy. Unfortunately, most regions of the country have not recovered sufficiently to support such growth. Since 2009, the banking industry’s net loans have grown at a compounded annual rate of 2.2 percent compared to 7.0 percent between 1990 and 2007, and during this time, many banks have experienced loan declines. Furthermore, competition for the few available high quality loans is intense and driving yields even lower.

Even if a bank were able to grow its loan portfolio, it would take exceptional growth just to maintain current net income levels if NIMs continue to deteriorate. Consider the following example: if net interest margins were to decline by 15 basis points per year, a bank with $500 million in assets and a current NIM of 4.0 percent would need to grow loans by $50 million each year just to maintain the same level of net income (assuming all other profitability measures remained static). Under these circumstances, the bank’s ROA would decline each year, and the present value of the franchise would decrease. Furthermore, there are very few, if any, banks that can achieve 10 percent year-over-year loan growth today.

In addition to the sobering interest rate environment, regulatory changes—including BASEL III, the Dodd-Frank Act, and the Consumer Financial Protection Bureau—are looming large over the decisions of bank management and boards. Compliance costs associated with the new regulations remain uncertain, but undoubtedly will increase.

The one-two punch of the interest rate environment and increased compliance costs could prove too painful for many banks—particularly smaller institutions with older management teams who may be frustrated and don’t want to slog out any more years of lackluster performance and regulatory scrutiny.

Industry observers have been awaiting a renewed wave of bank M&A activity, and growing frustration just might be the catalyst. With organic loan growth almost nonexistent, strategic M&A is the only other way to amass scale today. Banks hoping to enhance franchise value will need to grow through acquisition, and there could be a large supply of frustrated sellers coming to the market. Unfortunately, if this occurs there is likely to be a supply and demand imbalance between sellers and buyers, which will hurt smaller, community banks the most. Active buyers have moved upstream and are looking for acquisitions that “move the needle.” Many buyers simply won’t bother with sellers under a certain asset size. This attitude could prompt smaller banks to consider a “strategic merger” in which they join together in a stock exchange to increase scale and attractiveness to buyers down the road.

Other banks may be content to grind it out knowing earnings are likely to suffer in the near-term. If rates rise, those banks with deep core deposit franchises will once again become more valuable, but the wait could be painful.

Until then, banking’s operating model remains impaired, if not broken.

Building Momentum: How Community Banks Can Compete on More Than Price

Raymond P. Davis, president & CEO of Umpqua Holdings Corp. and keynote presenter at Bank Director’s 2013 Acquire or Be Acquired Conference in Scottsdale, Arizona, shares his insight on how community banks can remain competitive during this challenging economic environment.

Video Length: 45 minutes

Presentation Highlights:

  • Creating a meaningful value proposition
  • Differentiating yourself from the competition
  • What does a strong culture look like?
  • Advice and warnings about valuations

About the Speaker

Ray Davis is the president and CEO of Umpqua Holdings Corporation. Mr. Davis pioneered a new approach to the delivery of financial products and services built on the development of innovative store designs that engage and excite customers. Mr. Davis joined Umpqua Bank in 1994 and has grown the bank from six banking locations and $140 million in assets to nearly 200 stores and $12 billion assets today.

Board Oversight of the Compliance Function: Coaching Fundamentals

football-strategy.jpgDespite all that has been made of Dodd-Frank, the new Consumer Financial Protection Bureau, and the increased focus on consumer compliance throughout the banking industry, we think that the fundamental formula for effective board oversight of the compliance function has not materially changed. We encourage directors to take stock to make sure their bank’s program is adequate. In this season of great contests on the gridiron, we would emphasize that blocking and tackling—and defense generally—remain the keys to success in this area. Be a good coach and make sure that these fundamentals are practiced at your bank.

Bank Regulatory Expectations

We start with the black-letter guidance and then read between the lines based on our experience and judgment. Each of the prudential bank regulators has outlined its expectations for board oversight of the compliance function. Although it’s stated in various ways, the basic recipe for the “compliance management system” is this:

  1. Compliance program documents and reporting
  2. Compliance audit
  3. Board and management oversight

Think of board oversight as “coaching” and the rest as blocking and tackling.  

Compliance Program Documents and Reporting

A successful compliance program has and will continue to be based on an effective internal controls environment—your defense. The most important things a board can do here are to maintain effective policies and to expect excellence out of your management team. Designate a chief compliance officer like you would a starting quarterback.  Every compliance examiner expects to see a body of current written policies and procedures, including a compliance program document, and strong compliance management leadership.

As is often said, policies establish “what” and procedures say “how.”  It is probably not effective or appropriate for your average director to be involved in articulating how compliance gets done.  On the other hand, policies should be reviewed at least annually, and the board should ensure that its committees—typically risk or audit—receive and digest reporting sufficient to describe the state of the compliance function. Are we staffed to keep up with changes in law? Is our training sufficient? What complaints do we generally receive? Do we need new or additional software or equipment? Perhaps most importantly, and the subject of our next discussion point, does evidence demonstrate that the program is working?

Compliance Audit

The regulators describe compliance audit as the means of testing the effectiveness of your compliance program. A related function is self-monitoring. The difference is generally in the level of independence and frequency of reviews. A robust compliance program will include regular self-reviews. Annual testing, either by your internal audit department or by a third party, is a required step, but it cannot take the place of ongoing review through internal monitoring and testing and a formal risk assessment process.  

This conclusion has at least two justifications:  first, self-monitoring (either by business units or compliance staff) generates real-time data useful to board and management oversight and is most likely to result in swift corrective action. Second, regulators typically “draft” behind compliance audit findings—that is, they make preliminary conclusions about the state of your program based on these reviews. While a genuine, independent and comprehensive compliance audit is an important aspect of a good system, it is preferable to go into these audits with confidence that your program is clean.

The Role of the Coach

While the compliance atmosphere has undoubtedly changed, a board that emphasizes the fundamentals—like a good coach—should succeed on every front. Take an active interest in your compliance management program and make sure it has what is necessary to get the job done.  

The Bank Director’s Approach to M&A: Stay Out of Hot Water

trouble.jpgIn today’s environment, many bank directors are faced with difficult strategic decisions regarding the future of their organizations.  We have been involved in many great board discussions of whether it is best for the bank to continue to grind away at its business plan in this slow growth environment or to look for a business combination opportunity that will accelerate growth.  There is rarely a clear answer in these discussions, but some guidelines are helpful: All directors must respect the conclusion of the full board of directors and follow the appropriate process established by the board with respect to merger opportunities.

Over the years, we have seen a number of instances in which one or more bank directors conduct merger discussions with potential partners without bringing the opportunity to the full board of directors immediately. In many cases, these directors are acting in good faith and simply leveraging relationships they have with other bankers or bank directors. In other cases, these directors may feel the need to engage in these discussions because they disagree with the full board’s strategy of remaining independent. However, all directors should understand that it is in the bank’s best interest, and the director’s own personal best interest, not to take matters into their own hands without authorization by the board of directors.

As a result, we have long recommended that bank and holding company boards adopt a formal policy regarding corporate change. This formal policy establishes guidelines for all bank directors and members of management to follow when they become aware of merger opportunities. Specifically, the policy requires:

  • that all merger and other strategic business opportunities be presented to the full board of directors or a designated committee thereof before any substantive discussions take place;
  • that no officer or director initiate such discussions without authorization of the full board of directors; and
  • that no confidential information regarding the bank be shared with a third party without the authorization of the full board of directors.

The policy also provides talking points for each director or officer to follow if he or she is presented with an opportunity. We find that these talking points are helpful to directors who are not often involved in merger discussions. The policy may also set forth certain procedures to be followed, including requirements for the timely entry into confidentiality agreements and the identification of a designated spokesperson for the bank in the discussions.

We believe there are numerous benefits to adopting and following such a policy.  Those benefits include the following:

  • ensuring that the board of directors speaks with “one voice” and does not cloud the market with mixed signals, which often helps the bank achieve more favorable terms if it enters into a transaction;
  • ensuring that only accurate and up-to-date information is provided to interested parties, which can reduce reputation risks and legal risks; and
  • helping to insulate the directors from personal liability with respect to the transaction by following an appropriate process.

In terms of the personal liability of directors, it is very important for the bank and its directors to be able to defend the decision to shareholders to enter into a transaction, given the current environment where pricing may not meet investor expectations. From a legal standpoint, many states have a “business judgment rule” that will insulate directors from personal liability regarding such decisions so long as they are related to a rational purpose and so long as the directors acted with loyalty and due care. Courts carefully review the process followed by boards of directors in determining whether the business judgment rule should be applied. We believe following the steps outlined above provides a critical start to establishing an appropriate process for obtaining the protection of the business judgment rule, and judicial decisions confirm this notion.

Many bank directors are currently facing very interesting and challenging times with respect to the long-term strategies of their organizations. Through respecting the processes established by the full board of directors, bank directors can help ensure the best possible outcome for their banks and for themselves.

Strategic Planning for Bank Boards: Proactive Governance in the New Regulatory Environment

planning.jpgSweeping new regulations and unprecedented scrutiny of the banking industry have combined to place a greater emphasis on the role of boards of directors in the leadership of banks. Although the board’s primary responsibilities have not changed—to maximize shareholder value and to hire, compensate and supervise qualified management—there is now a greater need to address these responsibilities within the context of a well considered strategic plan.

Many bank boards primarily employ a month-to-month approach to the oversight of their institutions, which can result in heavy reliance on bank management to chart the strategic course of the bank. It is valuable for a board occasionally to set time aside to take stock of the bank’s strengths, weaknesses and opportunities, and then proactively engage in a process of determining the strategic goals and direction for the bank. This gives the board a frame of reference within which to measure the performance of the bank going forward, and it will give management a clearer sense of the goals to be pursued and how aggressively to pursue them.

In our experience, directors can be skeptical of the benefits of strategic planning sessions – their enthusiasm dampened by visions of a day spent listening to consultants equipped with PowerPoint decks and sharing the latest buzz words. Too often, such sessions focus on tactical, not true strategic, issues. We recommend that board members be included in preparation for the planning session, in an effort to make the session more relevant to them and to foster a sense of ownership of the process. One approach is to seek input from the directors through short questionnaires in which they can describe their vision for the bank’s future, share their thoughts and analysis regarding the bank’s performance and its strengths and weaknesses, and indicate their preference of strategy for maximizing value to the bank’s shareholders. Such questionnaires are valuable in sharpening the focus of the strategic planning session.

A well crafted strategic plan is only as good as the people who will implement it. Since it involves future plans, the board should consider the depth, quality and enthusiasm of the bank’s senior management team. The question to be asked is do we have the right people to accomplish our goals, and are they in the management roles which are best suited for their skill sets, personalities, and energy levels? The board’s analysis should not be limited to senior management, but should also include the board members themselves. There has never been a more demanding time to be a bank director. Gone are the days when three or four members of a ten-person board can, or should, be expected to fill the gaps created by inattentive or non-involved board members. Good strategic planning will result in goals and objectives for the key people as well as for the organization.

A detailed description of best practices for a strategic planning session is beyond the scope of this brief article, but we have two suggestions for topics to begin the planning session and to lay the foundation for a productive strategic discussion:

  • Orienting the Board to the “New Normal.”  In order to formulate a viable strategic plan, it is helpful for the board members to have an informed appreciation of the overall environment in which the bank is operating. This should include an overview of the developing regulatory environment, a description of how the bank’s local and regional market areas are performing, and a description of how the bank is performing relative to its peers. Consider bringing in a trusted professional to provide this information, as the impact on the board can often be greater from an outside assessment. Providing this baseline information should also lessen the chance that anecdotal or speculative information shared by a board member will take the planning discussion off track. Such a presentation might also include information on the lower expectations for stock price and acquisition multiples in today’s market, which may come as a surprise to some board members.
  • The Threshold Question. The threshold question to be addressed in strategic planning is the board’s general vision for the bank’s future. Does the board think the bank should “buy, sell or hold” in the near to intermediate term? The answer to this threshold question can drive the direction of the discussion, and lead to more fruitful and specific conversation in the planning session. For example, if the board believes the bank should be positioned for sale, management will need to be careful about entering into new long-term contracts or commitments. If, on the other hand, the board believes the institution should position itself as an acquirer, steps will need to be taken to ensure sufficient capital. Care should be taken in this threshold discussion to engage the full board in the conversation. Almost everyone will have an opinion on this topic, and they should be encouraged to share it with the group.

In our experience, there is no magic formula for successful strategic planning. Each bank board is different because it consists of a unique collection of individuals. We suggest that you tailor your board’s strategic planning session to the needs of your bank and the desires of the board. The important part, as in beginning an exercise program, is to take the first step.  Schedule a strategic planning meeting, get input in advance from board members, and make sure you address the most important issues facing your bank. Be proactive in planning for your bank’s future and for securing a worthwhile return for its shareholders.