2023 Bank M&A Survey: Complete Results

Bank Director’s 2023 Bank M&A Survey, sponsored by Crowe LLP, surveyed 250 independent directors, chief executives, chief financial officers and other senior executives of U.S. banks below $100 billion in assets to examine current growth strategies, particularly M&A. The survey was conducted in September 2022, and primarily represents banks under $10 billion in assets. Members of the Bank Services program have exclusive access to the full results of the survey, including breakouts by asset category.

Despite a significant decline in announced deals in 2022, the survey finds that acquisitions are still part of the long-term strategy for most institutions. Of these prospective buyers, 39% believe their bank is likely to acquire another financial institution by the end of 2023, down from 48% in last year’s survey who believed they could make a deal by the end of 2022.

Less than half of respondents say their board and management team would be open to selling the bank over the next five years. Many point to being closely held, or think that their shareholders and communities would be better served if the bank continues as an independent entity. “We obviously would exercise our fiduciary responsibilities to our shareholders, but we feel strongly about remaining a locally owned and managed community bank,” writes the CEO of a small private bank below $500 million in assets.

And there’s a significant mismatch on price that prohibits deals from getting done. Forty-three
percent of prospective buyers indicate they’d pay 1.5 times tangible book value for a target meeting their acquisition strategy; 22% would pay more. Of respondents indicating they’d be open to selling their institution, 70% would seek a price above that number.

Losses in bank security portfolios during the second and third quarters have affected that divide, as sellers don’t want to take a lower price for a temporary loss. But the fact remains that buyers paid a median 1.55 times tangible book in 2022, based on S&P data through Oct. 12, and a median 1.53 times book in 2021.

Click here to view the complete results.

Key Findings

Focus On Deposits
Reflecting the rising rate environment, 58% of prospective acquirers point to an attractive deposit base as a top target attribute, up significantly from 36% last year. Acquirers also value a complementary culture (57%), locations in growing markets (51%), efficiency gains (51%), talented lenders and lending teams (46%), and demonstrated loan growth (44%). Suitable targets appear tough to find for prospective acquirers: Just one-third indicate that there are a sufficient number of targets to drive their growth strategy.

Why Sell?
Of respondents open to selling their institution, 42% point to an inability to provide a competitive return to shareholders as a factor that could drive a sale in the next five years. Thirty-eight percent cite CEO and senior management succession.

Retaining Talent
When asked about integrating an acquisition, respondents point to concerns about people. Eighty-one percent worry about effectively integrating two cultures, and 68% express concerns about retaining key staff. Technology integration is also a key concern for prospective buyers. Worries about talent become even more apparent when respondents are asked about acquiring staff as a result of in-market consolidation: 47% say their bank actively recruits talent from merged organizations, and another 39% are open to acquiring dissatisfied employees in the wake of a deal.

Economic Anxiety
Two-thirds believe the U.S. is in a recession, but just 30% believe their local markets are experiencing a downturn. Looking ahead to 2023, bankers overall have a pessimistic outlook for the country’s prospects, with 59% expecting a recessionary environment.

Technology Deals
Interest in investing in or acquiring fintechs remains low compared to past surveys. Just 15% say their bank indirectly invested in these companies through one or more venture capital funds in 2021-22. Fewer (1%) acquired a technology company during that time, while 16% believe they could acquire a technology firm by the end of 2023. Eighty-one percent of those banks investing in tech say they want to gain a better understanding of the space; less than half point to financial returns, specific technology improvements or the addition of new revenue streams. Just one-third of these investors believe their investment has achieved its overall goals; 47% are unsure.

Capital to Fuel Growth
Most prospective buyers (85%) feel confident that their bank has adequate access to capital to drive its growth. However, one-third of potential public acquirers believe the valuation of their stock would not be attractive enough to acquire another institution.

2023 Bank M&A Survey Results: Can Buyers and Sellers Come to Terms?

Year after year, Bank Director’s annual M&A surveys find a wide disparity between the executives and board members who want to acquire a bank and those willing to sell one. That divide appears to have widened in 2022, with the number of announced deals dropping to 130 as of Oct. 12, according to S&P Global Market Intelligence. That contrasts sharply with 206 transactions announced in 2021 and an average of roughly 258 annually in the five years before the onset of the pandemic in 2020.

Prospective buyers, it seems, are having a tough time making the M&A math work these days. And prospective sellers express a preference for continued independence if they can’t garner the price they feel their owners deserve in a deal.

Bank Director’s 2023 Bank M&A Survey, sponsored by Crowe LLP, finds that acquisitions are still part of the long-term strategy for most institutions, with responding directors and senior executives continuing to point to scale and geographic expansion as the primary drivers for M&A. Of these prospective buyers, 39% believe their bank is likely to acquire another financial institution by the end of 2023, down from 48% in last year’s survey who believed they could make a deal by the end of 2022.

“Our stock valuation makes us a very competitive buyer; however, you can only buy what is for sale,” writes the independent chair of a publicly-traded, Northeastern bank. “With the current regulatory environment and risks related to rising interest rates and recession, we believe more banks without scale will decide to sell but the old adage still applies: ‘banks are sold, not bought.’”

Less than half of respondents to the survey, which was conducted in September, say their board and management team would be open to selling the bank over the next five years. Many point to being closely held, or think that their shareholders and communities would be better served if the bank continues as an independent entity. “We obviously would exercise our fiduciary responsibilities to our shareholders, but we feel strongly about remaining a locally owned and managed community bank,” writes the CEO of a small private bank below $500 million in assets.

And there’s a significant mismatch on price that prohibits deals from getting done. Forty-three percent of prospective buyers indicate they’d pay 1.5 times tangible book value for a target meeting their acquisition strategy; 22% would pay more. Of respondents indicating they’d be open to selling their institution, 70% would seek a price above that number.

Losses in bank security portfolios during the second and third quarters have affected that divide, as sellers don’t want to take a lower price for a temporary loss. But the fact remains that buyers paid a median 1.55 times tangible book in 2022, based on S&P data through Oct. 12, and a median 1.53 times book in 2021.

Key Findings

Focus On Deposits
Reflecting the rising rate environment, 58% of prospective acquirers point to an attractive deposit base as a top target attribute, up significantly from 36% last year. Acquirers also value a complementary culture (57%), locations in growing markets (51%), efficiency gains (51%), talented lenders and lending teams (46%), and demonstrated loan growth (44%). Suitable targets appear tough to find for prospective acquirers: Just one-third indicate that there are a sufficient number of targets to drive their growth strategy.

Why Sell?
Of respondents open to selling their institution, 42% point to an inability to provide a competitive return to shareholders as a factor that could drive a sale in the next five years. Thirty-eight percent cite CEO and senior management succession.

Retaining Talent
When asked about integrating an acquisition, respondents point to concerns about people. Eighty-one percent worry about effectively integrating two cultures, and 68% express concerns about retaining key staff. Technology integration is also a key concern for prospective buyers. Worries about talent become even more apparent when respondents are asked about acquiring staff as a result of in-market consolidation: 47% say their bank actively recruits talent from merged organizations, and another 39% are open to acquiring dissatisfied employees in the wake of a deal.

Economic Anxiety
Two-thirds believe the U.S. is in a recession, but just 30% believe their local markets are experiencing a downturn. Looking ahead to 2023, bankers overall have a pessimistic outlook for the country’s prospects, with 59% expecting a recessionary environment.

Technology Deals
Interest in investing in or acquiring fintechs remains low compared to past surveys. Just 15% say their bank indirectly invested in these companies through one or more venture capital funds in 2021-22. Fewer (1%) acquired a technology company during that time, while 16% believe they could acquire a technology firm by the end of 2023. Eighty-one percent of those banks investing in tech say they want to gain a better understanding of the space; less than half point to financial returns, specific technology improvements or the addition of new revenue streams. Just one-third of these investors believe their investment has achieved its overall goals; 47% are unsure.

Capital To Fuel Growth
Most prospective buyers (85%) feel confident that their bank has adequate access to capital to drive its growth. However, one-third of potential public acquirers believe the valuation of their stock would not be attractive enough to acquire another institution.

To view the high-level findings, click here.

Bank Services members can access a deeper exploration of the survey results. Members can click here to view the complete results, broken out by asset category and other relevant attributes. If you want to find out how your bank can gain access to this exclusive report, contact bankservices@bankdirector.com.

How Bank Executives Can Address Signs of Trouble

As 2021’s “roaring” consumer confidence grinds to a halt, banks everywhere are strategizing about how best to deal with the tumultuous days ahead.

Jack Henry’s annual Strategic Priorities Benchmark Study, released in August 2022, surveyed banks and credit unions in the U.S. and found that many financial institutions share the same four concerns and goals:

1. The Economic Outlook
The economic outlook of some big bank executives is shifting. In June 2022, Bernstein Research hosted its 38th Annual Strategic Decisions Conference where some chief executives leading the largest banks in the U.S., including JPMorgan Chase & Co., Wells Fargo & Co. and Morgan Stanley, talked about the current economic situation. Their assessment was not entirely rosy. As reported by The New York Times, JPMorgan Chase Chairman and CEO Jamie Dimon called the looming economic uncertainty a “hurricane.” How devastating that hurricane will be remains a question.

2. Hiring and Retention
The Jack Henry survey also found 60% of financial institution CEOs are concerned about hiring and retention, but there may be some hope. A 2022 national study, conducted by Alkami Technology and The Center for Generational Kinetics, asked over 1,500 US participants about their futures with financial institutions. Forty percent responded they are likely to consider a career at a regional or community bank or credit union, with significant portion of responses within the Generation Z and millennial segments.

3. Waning Customer Loyalty
The imperative behind investing in additional features and services is a concern about waning customer loyalty. For many millennials and Gen Z bank customers, the concept of having a primary financial institution is not in their DNA. The same study from above found that 64% of that cohort is unsure if their current institution will remain their primary institution in the coming year. The main reason is the ease of digital banking at many competing fintechs.

4. Exploding Services and Payment Trends
Disruptors and new competition are entering the financial services space every day. Whether a service, product or other popular trend, a bank’s account holders and wallet share are being threatened. Here are three trends that bank executives should closely monitor.

  • The subscription economy. Recurring monthly subscriptions are great for businesses and convenient for customers: a win-win. Not so much for banks. The issue for banks is: How are your account holders paying for those subscriptions? If it’s with your debit or credit card, that’s an increased source of revenue. But if they’re paying through an ACH or another credit card, that’s a lost opportunity.
  • Cryptocurrency. Your account holders want education and guidance when it comes to digital assets. Initially, banks didn’t have much to do with crypto. Now, 44% of execs at financial institutions nationwide plan to offer cryptocurrency services by the end of 2022; 60% expect their clients to increase their crypto holdings, according to Arizent Research
  • Buy now, pay later (BNPL). Consumers like BNPL because it allows them to pay over time; oftentimes, they don’t have to go through a qualification process. In this economy, consumers may increasingly use it to finance essential purchases, which could signal future financial trouble and risk for the bank.

The Salve for It All: The Application of Data Insights
Banks need a way to attract and retain younger account holders in order to build a future-proof foundation. The key to dealing with these challenges is having a robust data strategy that works around the clock for your institutions. Banks have more data than ever before at their disposal, but data-driven marketing and strategies remains low in banking overall.

That’s a mistake, especially when it comes to data involving how, when and why account holders are turning to other banks, or where banks leave revenue on the table. Using their own first-party data, banks can understand how their account holders are spending their money to drive strategic business decisions that impact share of wallet, loyalty and growth. It’s also a way to identify trouble before it takes hold.

In these uncertain economic times, the proper understanding and application of data is the most powerful tool banks can use to stay ahead of their competition and meet or exceed account holder expectations.

Where Banks Can Find Tech Talent

Even as the labor market cools, the need for tech talent remains particularly acute. The problem for banks is that they compete not just with other banks, credit unions and financial technology companies for data scientists, software engineers and product designers. 

“The reality is, when we start talking about engineers, designers, product individuals, every company on the face of the planet is hiring those types of talents,” says Nathan Meyer, head of innovation strategy at $545 billion Truist Financial Corp. 

That’s why Meyer and several other bankers are turning to the Georgia Fintech Academy, a unique program that trains college students across the University System of Georgia for technology jobs in financial services. Students in 26 institutions such as Georgia State, Georgia Tech and Kennesaw State, totaling 340,638 enrolled as of fall 2021, can work toward a certificate in financial services from a mix of nine undergrad courses and six graduate level courses. They might be majoring in computer science or business and taking those classes as electives. To complete the certification work, they need to finish three classes and complete an internship. The goal of the program is to help students find jobs in financial technology with employers across the nation. 

Normally, Generation Z students don’t gravitate to a career at Truist, BankSouth in Greensboro, Georgia, or Ally Financial, all of which are involved in the program, says Tommy Marshall, executive director of the Georgia Fintech Academy. Nor have they heard of the fintechs that have used the program, such as core providers FIS, Fiserv, or U.S. Bancorp’s payment processor Elavon. “If you say Square or CashApp, they’ll say yes, or Venmo, they’re there,” he says. 

Banks could improve their message to attract college students, says Meyer. “We’ve just started to do a better job around telling the story of banking, and helping students understand why it’s important,” he says. 

And the need is great. Marshall estimates that bigger banks are hiring 800 to 1,000 people from college campuses every year for technology jobs. Meyer says that Charlotte, North Carolina-based Truist needs to hire hundreds of software engineers annually and adds that even the business side of banking needs people who have an understanding of technology, as well as people who can articulate the technology needs to upper management. 

And it’s not just big banks that are hiring. Even community banks are looking for tech talent as they transform digitally. Kim Kirk, the chief operations officer for $2 billion Queensborough National Bank & Trust Co. in Louisville, Georgia, is looking for application program management and business intelligence folks. When she started working at the bank more than six years ago, a lot more employees performed mundane, clerical tasks. The bank’s business intelligence director now focuses on getting a better handle on customer information across the different departments and visualizing that data. “The talent you need is quite a bit different than what you needed maybe even five years ago,” Kirk says. 

This fall, she hopes to work with Fintech Academy students on a way to use predictive analytics to foresee when a customer is going to close an account. “We really need a way to be able to get a 360-degree view of our customers,” she says. 

Meyer, meanwhile, was interested to the program as a way to recruit racially and ethnically diverse prospects to Truist, so the bank’s employee base looks like the communities it serves. Truist has its heaviest branch concentration in the Southeast, following the consolidation of SunTrust Banks and BB&T Corp. in 2019, but it also crawls up the Eastern Seaboard into Washington, D.C., New Jersey and Pennsylvania. Marshall estimates that 71% of the students in the Fintech Academy belong to minority racial or ethnic groups and a third are women, due to the nature of the schools inside the Georgia university system. In its three years of operation, the Georgia Fintech Academy has placed 1,600 students in internships or jobs.

Although Marshall says other universities offer certificates in fintech, they’re mostly associated with graduate degrees or executive-level education, and won’t nearly meet the demand for talent. Outside of Georgia, the Centre for Finance, Technology and Entrepreneurship in London has noncredit courses, and Duke University, The Wharton School at the University of Pennsylvania and New York University all have programs. 

“There’s no other school system in the United States of America doing anything like what we’re doing now,” asserts Marshall.

Bank Director magazine’s third quarter 2022 issue has an additional article for subscribers on what banks are doing to attract and retain technology talent. 

What Drives Success in Banking?

As a founder and managing principal at Castle Creek Capital, a private equity firm that invests in community banks, John Eggemeyer has a unique perch from which to observe what’s going on in banking.

The San Diego-based firm has approximately $900 million under management, and usually has between 20 to 25 banks in its investment portfolio at any given time, according to Eggemeyer.

We have the opportunity to look at a lot of different ideas,” he says. “I don’t consider myself to be an originator of any particularly interesting ideas, but I am an observer of a lot of interesting ideas that other people have worked with and made success of — or not made success of.”

Eggemeyer may be selling himself a little short. Prior to starting Castle Creek in 1990, he spent nearly two decades as a senior executive for several large U.S. banks. He also sits on the boards of many of those portfolio companies, and that combined experience gives him a very strong sense of what drives success in banking.

Eggemeyer will moderate a panel discussion at Bank Director’s upcoming Acquire or Be Acquired Conference focusing on subtle trends that bankers need to be talking about. The conference runs Jan. 30-Feb. 1, 2022, at the JW Marriott Desert Ridge Resort and Spa in Phoenix.

In today’s banking market, Eggemeyer believes that success begins with the customer. Period. End of sentence.

“It’s critical that you understand who your customer is and what your customer wants,” he says. “I think we’ve learned from the fintech community that they have segmented the customer [base] and identified very clearly the customer that they’re going after. And they have built their service model around the needs and wants of their customer group. And I think that has been harder for banks to actually do from an intellectual standpoint.”

Increasingly, success in banking is also a matter of scale. Not necessarily scale in the size of the organization, but scale in product lines or customers. “The businesses that have the greatest value, and the customer segments that offer the greatest value, are those that are the most scalable,” Eggemeyer says. “And again, I think in the fintech world, they have figured out how to apply technology to the needs and wants of the segment that they’ve gone after, and that has allowed their businesses greater scalability. … Businesses that are the most scalable offer the greatest opportunities for generating incremental returns.”

A cynic might argue that applying technology to scalable customer segments is fintech’s game, not banking’s. But Eggemeyer disagrees. “I’m not sure that fintechs are better positioned to apply technology to financial services than our banks,” he says. “So much of the technology that one would apply either operationally or in serving the customer is available off the shelf. You just have to be committed to making that transition.”

A third driver of success is talent; Eggemeyer says there is “an acute shortage of highly skilled trained executives” in the banking industry today. Talent and institutional knowledge has left as the bank space as the industry has gone through a number of difficult economic periods, he says, and banks managed their expense base in part by shortchanging the training and development of younger employees.

“I’ve watched this over a lot of cycles having spent over 50 years in the business. The great era of training in the bank industry was pre-1986,” he says. “And [since] that period of time, we have successfully downsized our investment in the development of people. And I think now we’re facing that challenge.”

In 1968, Eggemeyer was hired by the First National Bank of Chicago while still pursuing his undergraduate degree at Northwestern University. The bank had a program that hired up to 10 undergraduates a year for an extensive training program, then put them through an MBA program — in Eggemeyer’s case, at the University of Chicago. He spent 10 years working for the bank and was never in the same position for more than two years. That experience provided him with a very broad introduction to the industry.

The U.S. economy has changed greatly since the late 1960s. Graduates from top MBA programs today have many more options to choose from if they’re interested in a career in finance, including investment banking and private equity.

“It’s much harder for banks to compete for that level of talent,” Eggemeyer says. “And I don’t think there’s anything that you can do about that, other than look harder for the talented people who are not necessarily aspiring to [work in] private equity. And they may come from less traditional backgrounds, unlike the program that I went through at the First National Bank of Chicago. I just don’t see that happening very much in banking today.”

Attracting Talent in a Brave New World

Getting the talent your bank needs — even just getting candidates to apply and turn up for an interview — has increasingly challenged financial institutions as the country emerges from the Covid-19 pandemic. And the cost to pay them a competitive wage — and benefits — keeps climbing.

Every year in Bank Director’s annual Compensation Survey — which is sponsored by our firm, Newcleus Compensation Advisors — bank executives and directors identify managing compensation and benefit costs as a key challenge for their institution. In this year’s survey, it rates as the second-highest challenge for bank leaders, behind tying compensation to performance.

These tensions are particularly felt by community banks. Those located in urban or suburban markets face stiff competition from large employers like Bank of America Corp., which recently announced plans to increase its minimum wage over the next few years to $25 an hour. Rural banks face similar challenges along with a smaller pool of talent, particularly in high-demand areas including technology, lending, and risk and compliance.

How can your bank attract and retain the talent it needs to survive in today’s environment? We suggest that you consider the following questions as you weigh how to become an employer of choice in your community.

How flexible is your bank willing to be?
Most banks introduced or expanded remote work options and flexible scheduling in 2020. Now that operations are returning “back to normal,” more or less, bank leaders are left to question what worked and what didn’t from a nationwide experiment that occurred during abnormal conditions.

Expectations have shifted over the past year, particularly for younger, digitally-native employees — resulting in a generational divide between staff and management teams. Consider the following from MetLife’s 2021 U.S. Employee Benefit Trends Study:

  • More than two-thirds of employees who can work remotely believe that they should be allowed to choose where they work — not their employer.
  • Half of young employees in their 20s — young millennials and Gen Z — say their work/life balance has improved during the pandemic, and they’re happier as a result. Just a quarter of baby boomers agree.
  • And, crucially: More than three-quarters of employees say they want more flexible scheduling, perhaps splitting their time between remote work and the office. Conversely, the majority of companies surveyed by MetLife expect staff to return to their pre-Covid status quo.

Some employees are interested in returning to the office, but others aren’t. They’ve had months to enjoy a break from long commutes and create an environment that’s comfortable for them.

Will remote work be a passing fad, or a permanent part of the talent landscape? Even if you believe that remote work isn’t a cultural fit for your bank, be aware that you’re competing against it.

Can talented employees from outside the industry strengthen your organization?
Opening your bank up to remote work can broaden the talent pool; so can having an open mind to hiring talent from outside the financial sector. Employees can be educated on the fundamentals of banking; there are training programs all across the country. But a skilled salesperson or someone with deep technology or cybersecurity expertise can fill critical roles at your institution — no matter their background.

 Do you have a good reputation?
Bank leaders often tout the value of their culture — but it can be difficult for leadership teams to truly understand how staff down the ranks view the organization. Conducting employee engagement surveys can help bridge this gap, but also consider how your current and former employees rate your company on external review sites such as Glassdoor, Indeed and Monster.com.

While these websites often attract more negative comments than positive ones, they still can provide a clearer picture of how you’re viewed as an employer — and the perception that prospective employees may have of your organization.

Does your compensation package really stack up?
Your bank isn’t competing solely with other financial institutions for talent — it’s competing against all kinds of companies in your market. We received several comments touching on this in the 2021 Compensation Survey:

Competing employers (not just banks) in our markets can sometimes offer better benefits. We now participate in an internship program at a major state university to develop a pipeline of young talent.” —  Chief executive of a public bank between $1 billion and $10 billion in assets 

“We operate in a highly competitive market, so retaining and attracting technology talent is always an issue. We are competing with Amazon[.com] — hiring 50[,000] workers in our market, as an example.” —  Director of a public bank between $1 billion and $10 billion in assets

Compensation surveys help banks compare their pay packages to peer institutions, but your leadership and human resources teams need to know how your bank compares to local competitors outside the industry, too. This is where boards can provide valuable insights based on their networks and experience, since they’re likely facing the same challenges in their own industries. Leverage that advice.

And consider asking your employees what they value. We’ve found this information to be invaluable to banks, allowing them to review compensation benefits and culture from the employee’s perspective.

The Secrets Behind Diverse Boards

Four women currently serve on the board at Eagle Bancorp Montana, the $1.3 billion asset holding company for Opportunity Bank of Montana. That’s by design, says Chairman Rick Hays.

“[We] decided that we needed to have a larger board,” Hays says, after a 2012 branch acquisition doubled its footprint in Montana and prompted a later increase from seven to nine members. The Helena, Montana-based commercial bank wanted to add directors representing its expanded geography, along with younger board members and women. Maureen Rude, who joined the board in 2010, was the sole female director at that time.

“We had all the board members, all the executive officers, the local market presidents in those communities, all looking for people with the characteristics we were looking for,” says Hays. Expanding its networks worked: Two women joined in 2015, and the fourth, public accountant Cynthia Utterback, in 2019. During that time, the bank also replaced a male director with another man with a technology background.

“We’re looking for the best possible candidates,” Hays says. “If you decide what you want and commit to getting it, you can get it done.” Adding new perspectives and backgrounds benefits the board and the bank, he adds. “I firmly believe that diversity is about the best possible business decision we can make; I’ve experienced it over and over in a variety of organizations.”

Almost 60% of the directors  and CEOs responding to Bank Director’s 2021 Governance Best Practices Survey believe that diversity in the boardroom improves corporate performance. However, fewer than half — 39% — have three or more board members who they’d consider to be diverse, based on gender, race or ethnicity.

The benefits of diversity in the boardroom are frequently touted by corporate governance experts, and many of the survey participants shared their experience. Here are a few of the comments we received:

“[D]iversity has helped shape everything from policies to product positioning.” — Lead director of a public bank between $1 billion and $10 billion in assets

“We have diversity in age, gender, geography, ethnicity and career experience. Creates more robust questioning when discussing products, trends, issues to ensure full vetting, understanding and ramifications of decisions.” — Independent director, public bank above $10 billion in assets

“[Due to diversity] [w]e have re-visited agendas, meeting logistics, and historical approaches to initiatives with a fresh lens.” — Independent chair at a private bank between $1 billion to $10 billion in assets

Sixty-five percent of respondents want to add more directors with diverse backgrounds, but almost as many (61%) believe it’s difficult to identify and recruit them to serve on the board. These candidates may be in high demand, but the survey finds that respondents representing more diverse boards report that it’s easier to recruit diverse candidates with the skills and expertise their organization needs.

 

As Rick Hays at Eagle Bancorp Montana illustrates, diverse boards broaden their networks to recruit diverse, qualified candidates. But an analysis of the habits of diverse boards yields further clues about their practices. They tend to have mechanisms in place to create space on the board, and to identify the skills and attributes they’re seeking.

Board evaluations can be valuable tools to evaluate governance practices and identify disengaged members. The survey finds that diverse boards more frequently use and also make deeper use of performance assessments, from assessing the effectiveness of the entire board, to identifying underperforming directors and conducting one-on-one conversations with directors.

Bank Director offers a board evaluation and peer assessment through its membership program. Mascoma Bank, a Lebanon, New Hampshire-based mutual, uses this evaluation annually. Clay Adams, the $2.4 billion bank’s CEO, says the tool provides a framework for the board to assess its practices, such as ensuring that the board is receiving an appropriate level of detail about the bank’s operations.

“We’re always thinking about how to do things better,” says Adams. “We use the board effectiveness survey to make sure that we’re on the right path.”

Peer evaluations are less commonly used by bank boards — 24% say their board uses one. Respondents representing boards with three or more diverse members (36%) are more likely to use this tool.

Mascoma’s board conducts a peer assessment every other year, under the purview of the governance committee. Adams has served on other boards that used similar assessments, which he believes provide tremendous value in driving conversations with underperforming directors. “Diverse board member or not,” he adds, “if a person is not fulfilling the duties — duty of trust, duty of care, duty of loyalty — then they shouldn’t be on the board.”

Bank Director included Mascoma Bank in its analysis of the Top 25 Bank Boards for Women earlier this year; the mutual has since added two more women to its board, so its composition is now evenly split between men and women. Adams emphasizes the importance of intention in building a diverse, skilled board. “We’re constantly talking about it [and encouraging] board members to think about people they come across in their lives or reaching out to communities where we may not — as a board, as individuals — interact,” he says.

Adams hopes to further diversify the boardroom. “We’d like to have a [person of color] on our board,” he says. “We live in a predominantly white region, northern New England. Therefore, we need to work a little harder to network with people who are members of that community.”

Mascoma also incorporates term limits for directors — 15 consecutive years — and a mandatory retirement age, at 72, as mechanisms to regularly open seats on the board. These policies were last examined by Bank Director in 2020; our survey found that boards with “several” diverse directors were slightly more likely to use a mandatory retirement age or term limits.

Getting the right mix of skill sets, backgrounds and experiences results from a gradual, deliberate process, says Hays. “When we’ve filled any of our board slots, we’ve probably had discussions for a year and a half to two years to get there,” he says, due to the value Hays and the board place on its composition. “It takes time to find the people we were so fortunate to find [and] bring onto the board. We could not have done it any sooner.”

How Banks in Texas Built a Recruiting Pipeline

Banking is an accidental profession.

Some bankers start as tellers trying to pay for college. Others are accountants and lawyers hired by bank clients. Still others are entrepreneurs who get frustrated with banks and start their own.

This is one reason banks face such a challenge in recruiting high-quality candidates.

Well, God helps those who help themselves. That’s Scott Dueser’s philosophy.

Dueser is the chairman and CEO of First Financial Bankshares, a $10.3 billion bank based in Abilene, Texas. It trades for the highest valuation on the KBW Regional Banking Index. Over the past two decades, it’s produced a total shareholder return of more than 2,000%.

Five years ago, Dueser started lobbying his alma mater, Texas Tech University, to launch an Excellence in Banking program that would offer classes in banking to undergraduate and graduate students studying finance.

For years, First Financial hired students from Sam Houston State University’s banking and financial institutions program in Huntsville. It did the same with Texas A&M University’s commercial banking program in College Station.

Why not construct a similar recruiting pipeline, Dueser thought, in First Financial’s West Texas stomping grounds? Other banks agreed. Much of the program’s endowment came from upwards of three dozen banks.

The inaugural group of students started earlier this year, three of whom interned at Dueser’s bank over the summer.

The program’s director is Mike Mauldin, who spent 17 years leading First Financial’s Hereford region.

“Mike is the perfect guy for the job,” Dueser says. “He’s not an academic; he’s a banker. A really good one. He’s also great with kids.”

Mauldin has structured the program around four pillars.

The first is a bank management class, covering the gamut of issues that lower and mid-level managers face in banks. The second is a marketing course, delving not only into traditional marketing strategies, but also into etiquette, teaching students how to navigate a professional environment.

The third pillar is a credit and lending course. This is where the rubber meets the road insofar as banking is concerned. According to the syllabus, students learn how to work with customers, read financial statements and assess credit risk.

Finally, students must intern at a bank. They’re required to write weekly papers as a part of it, Mauldin says, making them reflect on what they’ve learned.

“I don’t think of it as an internship,” Mauldin says. “I think of it as a long job interview. What we want at the end of the process is for the students to get jobs.”

Now, as a publication read by practitioners, we can be honest: No one learns much in college. At least I didn’t. But you do learn how to learn —a critical skill in an industry as dynamic as banking.

The program also acclimates students to banking. It’s a profession that everybody knows about, but few people understand.

Banking is to business what ballet is to dance, requiring a combination of both strength and grace. It’s an art and a science to balance the fragility associated with leverage and the stabilizing influence of capital and prudent credit policies.

“When assets are twenty times equity — a common ratio in this industry — mistakes that involve only a small portion of assets can destroy a major portion of equity,” Warren Buffett wrote in his 1990 shareholder letter. “And mistakes have been the rule rather than the exception at many major banks.”

Programs like the one at Texas Tech are designed to combat this.

A second rationale for the program, Dueser explains, is the need to diversify the industry’s workforce, which has proved to be a perennial issue in banking.

And so far, the program has lived up to expectations. Half the inaugural class consists of minority and women candidates.

Done right, banking is a lucrative and fulfilling profession. No community can thrive without a bank. The more students that appreciate this, the easier it’ll be to recruit them.

The Biggest Priorities for Banks in Normal Times

Banks are caught in the midst of the COVID-19 pandemic sweeping across the United States.

As they care for hurting customers in a dynamic and rapidly evolving environment, they cannot forget the fundamentals needed to steer any successful bank: maintaining discipline in a competitive lending market, attracting and retaining high-quality talent and improving their digital distribution channels.

Uncovering bankers’ biggest long-term priorities was one of the purposes of a roundtable conversation between executives and officers from a half dozen banks with between $10 billion and $30 billion in assets. The roundtable was sponsored by Deloitte LLP and took place at Bank Director’s annual Acquire or Be Acquired conference at the end of January, before the brunt of the new coronavirus pandemic took hold.

Kevin Riley, CEO of First Interstate BancSystem, noted that customers throughout the $14.6 billion bank’s western footprint were generally optimistic prior to the disruption caused by the coronavirus outbreak. Washington, Oregon and Idaho at the time were doing best. With trade tensions and fear of an inverted yield curve easing, and with interest rates reversing course, businesses entered 2020 with more confidence than they entered 2019.

The growth efforts reflect a broader trend. “In our 2020 M&A Trends survey, corporate respondents cited ‘efficiency and effectiveness in change management’ and ‘aligning cultures’ as the top concerns for new acquisitions,” says Liz Fennessey, M&A principal at Deloitte Consulting.

A major benefit that flows from an acquisition is talent. “More and more, we’re seeing M&A used as a lever to access talent, which presents a new set of cultural challenges,” Fennessey continues. “In the very early stages of the deal, the acquirer should consider the aspects core to the culture that will help drive long-term retention in order to preserve deal value.”

One benefit of the benign credit environment that banks enjoyed at the end of last year is that it enabled them to focus on core issues like talent and culture. Tacoma, Washington-based Columbia Banking System has been particularly aggressive in this regard, said CEO Clint Stein.

The $14.1 billion bank added three new people to its executive committee this year, with a heavy emphasis on technology. The first is the bank’s chief digital and technology officer, who focuses on innovation, information security and digital expansion. The second is the bank’s chief marketing and experience officer, who oversees marketing efforts and leads both a new employee experience team and a new client experience team. The third is the director of retail banking and digital integration, whose responsibilities include oversight of retail branches and digital services.

Riley at First Interstate has employed similar tactics, realigning the bank’s executive team at the beginning of 2020 to add a chief strategy officer. The position includes leading the digital and product teams, data and analytics, as well as overseeing marketing, communications and the client contact center.

The key challenge when it comes to growth, particularly through M&A, is making sure that it improves, as opposed to impairs, the combined institution’s culture. “It is important to be deliberate and thoughtful when aligning cultures,” says Matt Hutton, a partner at Deloitte. “It matters as soon as the deal is announced. Don’t miss the opportunity to build culture momentum by reinforcing the behaviors you expect before the deal is complete.”

Related to the focus on growth and talent is an increasingly sharp focus on environmental, social and governance issues. For decades, corporations were operated primarily for the benefit of their shareholders — a doctrine known as shareholder primacy. But this emphasis has begun to change and may accelerate alongside the unfolding health crisis. Over the past few years, large institutional investors have started promoting a more inclusive approach known as stakeholder capitalism, requiring companies to optimize returns across all their stakeholders, not just the owners of their stock.

The banks at the roundtable have embraced this call to action. First National Bank of Omaha, in Omaha, Nebraska, publishes an annual community impact report, detailing metrics that capture the positive impact it has in the communities it serves. Columbia promotes the link between corporate social responsibility and performance. And First Interstate, in addition to issuing an annual environmental, social and governance report, has taken multiple steps in recent years to improve employee compensation and engagement.

Despite the diversity of business lines and geographies of different banks, these regional lenders shared multiple common priorities and fundamental focuses going into this year. The coronavirus crisis has certainly caused banks to change course, but there will be a time in the not-too-distant future when they and others are able to return to these core focuses.

Seven Secrets of Succession Success


succession-1-19-18.pngOne of a bank board’s most vital responsibilities is overseeing the plan of succession for the CEO. Whether driven by a looming retirement or change in the incumbent’s personal timeline, a well-orchestrated plan of succession and leadership continuity reassures employees, investors and communities. Unfortunately, too many bank boards still take a passive approach to CEO succession, rather than acknowledging that as directors, they are responsible for the selection and ongoing evaluation of CEO performance.

Good succession planning for any executive role starts with understanding the potential succession timeline and the bank’s strategy. These seven steps will help to guide the board and incumbent CEO in developing a solid succession plan.

  1. Understand the succession timeline. What is the intended horizon for the incumbent leader to remain at the helm? This timeline is often fluid, which can create a challenge for the board. It is natural for many healthy CEOs to struggle with stepping out of a role that has been so closely tied to their personal identity. Yet, boards must insist on some understanding of the timing in order to maximize the development of potential internal contenders and to avoid frustrating executives who are waiting in the wings.
  2. Strategy informs profile. One of the most critical elements of planning for CEO succession is the bank’s strategic plan. The direction of the bank going forward should help to clarify the skills and attributes required in the bank’s next leader. Given the massive transformation of the industry over the past decade, the old maxim—what got you here may not get you there—may truly apply. Directors need to align around the bank’s strategy to develop a profile for the bank’s next CEO.
  3. Identify key skills. There are countless technical and industry skills needed in a bank leader today—so many, in fact, that it is virtually impossible to find an executive with all of the ideal requisite experiences. So, prioritize the specific banking skills that the bank must have versus those the board would like to have. Key experiences such as commercial credit skills, regulatory experience, balance sheet management, board experience and risk management are often considered critical to success as a bank CEO today.
  4. Determine critical attributes. What are the most important elements of a potential leader’s personal style and leadership philosophy that are necessary at this time for the institution? For example, most community banks see a CEO’s community presence and visibility as critical for success, as well as creating and achieving a strategic vision. Strong communication skills, cultural agility and the ability to attract top talent also rank high these days.
  5. Develop a process. Successful succession at the CEO and other executive levels involves a robust and thoughtful process, not just putting together a list of who the board knows or who the incumbent leader suggests. Boards today not only need to select a superior executive as their next leader, but are often called upon to defend their decision—and how they made it—to investors, customers and their communities. This does not mean that an external or formal search is always warranted, but it does mean that there needs to be a genuine effort to source, screen, assess and validate serious contenders, which ultimately adds credibility to the board and the selected leader.
  6. Make your bank attractive to star talent. Despite the declining number of banks in the country today, the crop of qualified bankers available to fill the growing ranks of retiring CEOs is not deep enough. Thus, the market is competitive for top bankers, and relocating someone to a new and potentially smaller market remains a challenge. Star bankers will ask tough questions of the board and will want to understand the bank’s strategy, as well as the level of support, engagement and strategic value they can expect from the bank’s directors.
  7. Prepare for an emergency. As most boards know, the bank should plan for the best and prepare for the worst. Reviewing and updating the bank’s emergency succession plan on a regular basis is a must for good governance and regulatory satisfaction. There have been too many instances where this backup plan has been called into action. Having a scenario ready to keep the train on the tracks during an unexpected situation is critical to keeping the institution moving forward.

There is no greater responsibility for a bank’s board of directors than ensuring that the organization has the right leader in place. While there are many important elements to successful CEO succession, the most important point is to maintain the topic of leadership succession as a regular and ongoing board-level discussion.