Compensation Survey Results: An “Untenable” Talent Climate

Intensifying competition for talent is forcing banks to pay up for both new hires and existing employees.

There were two jobs for every job seeker as recently as March, according to the Bureau of Labor Statistics, and employers of all stripes may be feeling like the balance of power has shifted. The results of Bank Director’s 2022 Compensation Survey, sponsored by Newcleus Compensation Advisors, show the banking industry is no exception to these dynamics.

Seventy-eight percent of responding directors, human resources officers, CEOs and other senior executives say that it was harder in 2021 to attract and keep the talent their bank needs than in past years. They’re responding to that challenge, in large part, by raising pay. Ninety-eight percent say their organization raised non-executive pay in 2021, and 85% increased executive compensation. Overall, compensation increased by a median 5%, according to participants.

That’s led bankers to shift their priorities. Managing compensation and benefits costs (46%), paying competitively (40%) and recruiting commercial lenders (34%) have emerged as respondents’ top compensation-related challenges this year. The proportion of respondents most concerned with tying compensation to performance — the top challenge identified in past surveys, going back to 2019 — fell sharply to 21% from 43% last year.

Even in the face of rising compensation costs, they’re also focusing on retaining and keeping staffing levels stable. Fully half of respondents say their bank added staff over the past year and 34% maintained staffing levels. Just 16% decreased their total number of employees. More than half (54%) of those whose bank decreased head count cite competition from other financial institutions and companies in their markets as the primary reason for the decline.

When asked about the specific challenges their organization faces in attracting and retaining talent, bankers and directors point to an insufficient number of qualified candidates (76%), rising wages in their markets (68%) and rising pay for key positions (43%). In anonymous comments, respondents describe other difficulties, such as competition from other industries, challenges with remote or hybrid work and younger workers’ disinclination for certain types of long-term compensation.

“[W]age pressure is incredible,” writes one community bank executive . “Our most significant competitor just implemented [four] weeks of vacation for ALL new hires and pays up to 25% higher for retail banking positions. That cost structure is untenable unless we earn more. We are under extreme pressure for talent at the same time we are building out revenue business lines.”

Key Findings

Banks Pay Up
Banks almost universally report increased pay for employees and executives. Of these, almost half believe that increased compensation expense has had an overall positive effect on their company’s profitability and performance. Forty-three percent say the impact has been neutral.

Lenders In Demand
Seventy-one percent expect to add commercial bankers in 2022, which is almost certainly driven by a desire to grow commercial portfolios and offset expense growth. Over half of respondents say their bank did not adjust its incentive plan for commercial lenders in 2022, but 34% have adjusted it in anticipation of more demand.

Additional Talent Needs
Banks also plan to add technology talent (39%), risk and compliance personnel (29%) and branch staff (25%) in 2022. Respondents also indicate that commercial lenders, branch and entry-level staff, and technology professionals were the most difficult positions to fill in 2020-21.

Image Enhancement
Forty percent of respondents say their organization monitors its reputation on job-posting platforms such as Indeed or Glassdoor. Further, 59% say they promote their company and brand across social media in an effort to build a reputation as an employer of choice, while just 20% use Glassdoor, Indeed or similar platforms in this manner.

CEO Turnover
Sixty-one percent of respondents indicate that they’re not worried about their CEO leaving for a competing financial institution, while a third report low to moderate levels of concern. More than half say their CEO is under the age of 60. Respondents report a median total compensation spend for the CEO at just over $600,000.

Remote Work Persists
Three quarters of respondents say they continue to offer remote work options for at least some of their staff, and the same percentage also believe that remote work options help to retain employees. Thirty-eight percent of respondents believe that remote work hasn’t changed their company’s culture, while 31% each say it has had either a positive or negative impact.

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.

2022 Compensation Survey: Complete Results

Bank Director’s 2022 Compensation Survey, sponsored by Newcleus Compensation Advisors, surveyed 307 independent directors, chairs, CEOs, human resources officers and other senior executives of U.S. banks below $100 billion in assets, with the majority of respondents representing regional and community banks. Members of the Bank Services program have exclusive access to the full results of the survey, including breakouts by asset category, ownership structure and region.

The annual survey benchmarks CEO pay and compensation for independent directors and non-executive chairs, and supplements respondent input with data collected from 96 public banks. This year, it also examines a competitive talent landscape, and CEO succession and performance. The survey was conducted in March and April 2022.

Click here to view the complete results.

Key Findings

Talent Challenges
Managing compensation and benefits costs (46%), paying competitively (40%) and recruiting commercial lenders (34%) have emerged as respondents’ top compensation-related challenges this year. While half say their bank added staff over the past year, 78% say that it was harder in 2021 to attract and keep the talent their bank needs.

Banks Pay Up
Banks almost universally report increased pay for employees and executives. Of these, almost half believe that increased compensation expense has had an overall positive effect on their company’s profitability and performance. Forty-three percent say the impact has been neutral.

Lenders In Demand
Seventy-one percent expect to add commercial bankers in 2022, which is almost certainly driven by a desire to grow commercial portfolios and offset expense growth. Over half of respondents say their bank did not adjust its incentive plan for commercial lenders in 2022, but 34% have adjusted it in anticipation of more demand.

Additional Talent Needs
Banks also plan to add technology talent (39%), risk and compliance personnel (29%) and branch staff (25%) in 2022. Respondents also indicate that commercial lenders, branch and entry-level staff, and technology professionals were the most difficult positions to fill in 2020-21.

Image Enhancement
Forty percent of respondents say their organization monitors its reputation on job-posting platforms such as Indeed or Glassdoor. Further, 59% say they promote their company and brand across social media in an effort to build a reputation as an employer of choice, while just 20% use Glassdoor, Indeed or similar platforms in this manner.

CEO Turnover
Sixty-one percent of respondents indicate that they’re not worried about their CEO leaving for a competing financial institution, while a third report low to moderate levels of concern. More than half say their CEO is under the age of 60. Respondents report a median total compensation spend for the CEO at just over $600,000.

Remote Work Persists
Three quarters of respondents say they continue to offer remote work options for at least some of their staff, and the same percentage also believe that remote work options help to retain employees. Thirty-eight percent of respondents believe that remote work hasn’t changed their company’s culture, while 31% each say it has had either a positive or negative impact.

Using the Succession Plan to Evaluate Talent

Boards have many duties, from overseeing the long-term strategy of the institution, to approving executive pay packages, to vetting and approving the budget. But one job that they often leave for another day: succession planning. Yet, for forward-thinking banks, having a process for succession not only can strengthen the organization in the future, but also build talent today.

Brian Moynihan, chairman and CEO of Bank of America Corp., recently spoke about this very fact. Despite not having plans to leave the institution he’s led since 2010, the 62-year-old Moynihan explained that the bank reworks its succession plan twice a year.

We have a deep succession planning process that we go through every six months [on] the board that alternates between the senior most people and then … I do it multiple levels down so we’re always looking,” said Moynihan in an interview last December with CNBC’s Closing Bell. “The board will pick somebody. My job is to have many people prepared.”

Such a clear process makes Bank of America unique, in some regards. While surveys over the years have tried to pinpoint how many companies have formal succession plans, organizations often avoid outlining it to investors, leaving it an open question. The Securities and Exchange Commission revised disclosure rules in November 2020 to encourage companies to outline human capital resources, like diversity rates, employment practices, and compensation and benefits. Of the first 100 forms filed by companies with $1 billion in market capitalization, only 5% of the companies added any additional detail to the succession planning process, according to researchers working with Stanford University and corporate data provider Equilar. Bank Director’s 2019 Compensation Survey found 37% of bank executives and board members reporting that their bank had not designated a successor or potential successors for the CEO.

So much of a bank’s long-term success has to do with having a clear plan if the head of the business must leave. This becomes especially true if the CEO must step aside suddenly, like for a health concern or other emergency. It’s on the board to lead this search. But when done right, it can also become a powerful tool to prepare internal and external talent, a process embraced by the current CEO. 

David Larcker has studied CEO succession planning as a professor at Stanford Graduate School of Business, where he leads the school’s Corporate Governance Research Initiative. “One of the two key things that boards do is hiring and firing the CEO,” says Larcker. Many boards, though, “do not put in enough time and effort in succession,” he adds.

By not taking an active approach to this part of the job, it can lead to the wrong hire, resulting in years of poor management. Larcker says one of the reasons for a lack of proper succession plans is often because it’s one of the least exciting roles a board undertakes, so it gets put to the backburner. Plus, since you rarely replace the CEO, it’s not always a priority.

Larcker and his research team sought to identify what occurs when a board lacks a succession plan. They looked at scenarios where the CEO left abruptly, either because the person resigned, retired or made other transitions. These are often the reasons disclosed to the public; in reality, the company may have fired a CEO without stating that fact. Out of the various scenarios, the researchers identified situations where the board and CEO likely parted ways due to performance. 

Out of all the media citations, 67% of the time the company named a permanent successor in the announcement; in 10% of the cases, it appointed a permanent successor but after a delay; and 22% of the time it named an interim successor. Those moments of upheaval provide investors with the clearest insight into whether the board took a proactive approach to succession, since the plans aren’t often public.

When a company named an interim successor, that was one of the clearest signs that the organization fired the CEO without a plan in place, and the stock performance of the company performed the worst after the announcement. Also, it’s worth noting that 8% of the time, the company named a current board member to the CEO role. When that occurred, the company’s stock price often performed worse than when internal or external candidates were chosen. 

What separates the organizations that can name a successful permanent successor from those that can’t? Often, it’s the organizations that have a clear line to the talent that’s growing inside and outside of the bank.

John Asbury knows all too well the need for this line of succession — it’s how he got the head role at Atlantic Union Bankshares, Corp., a $20 billion public bank based in Richmond, Virginia.  When Asbury was tapped as CEO in 2017, he followed G. William Beale, who had helmed the bank — then known as Union Bankshares Corp. — for almost 25 years. The bank had done a full executive search starting two years before Beale stepped away. Now, despite not having any plans to retire, Asbury, 57, takes the job of building succession within the entire organization seriously. 

“There are too few people in the industry who understand how the bank actually works or runs front to back,” Asbury says. “Oftentimes they have their area of specialty and not much else.”

Asbury, who sits on the board of directors as well, works with his human resources and talent evaluators to identify those within the organization who can fill executive roles. In addition to empowering them as executives, he gets them face time with the board. This provides the board with the ability to interact and know the talent that the bank has in the stable. 

“We want these folks to understand how the organization works, and we want them at the table to talk about not just strategy for their business unit, but the bank strategy as well,” Asbury says.

Asbury recently showed this leadership style in a public way by announcing that President Maria Tedesco would add the role of chief operating officer, and he would hand over managing many of the day-to-day operations to Tedesco. This isn’t a succession plan put in place. Instead it’s giving Tedesco the ability to have 85% of the organization reporting to her, while she and other executives at the bank continue to report to Asbury. 

Asbury thinks the move was needed to allow him the freedom to focus on growing Atlantic in other ways. But it also provides Tedesco with hands-on training in managing the organization. Despite the move, Asbury says that it doesn’t prevent him from working with the board on succession plans. 

The compensation committee, which Asbury does not sit on, also runs succession planning at Atlantic Union Bank. Sometimes boards may be hesitant to discuss succession if the current CEO views the discussion as antagonistic. But Atlantic Union undergoes an emergency succession plan evaluation once a year — currently, Tedesco would step in as interim CEO if something unexpected occurred to Asbury. She even sits in on every board meeting except when the executive team is being discussed. 

It’s a conversation that boards cannot be afraid to have. “If the CEO is on the board, that committee or board, has to own the process,” Larcker says.

What doesn’t work when it comes to succession planning? Having the new CEO step into the company while the outgoing CEO continues to helm the business for a few months to a year, added Larker. This design creates confusion from both the leadership and the staff on who they should listen and report to. “Ultimately, it’s a bad sign,” Larcker says.

Asbury knows that all too well. When he took the Atlantic Union role, Beale held the CEO position for three months while Asbury got acquainted with the organization. Within a few weeks, though, Beale let Asbury know that he would clear out the office and Asbury could call him if any questions arose. “Shorter is better in terms of transition,” Asbury adds. 

That can only happen with a plan in place.

Top 25 Bank Boards for Women

In early December, Nasdaq filed a proposal with the Securities and Exchange Commission that would require its listed companies to disclose diversity statistics about their board’s composition. Boards must include at least one female and, at minimum, one minority or LGBTQ board member. While the exchange recently made some changes to the proposal - to address the concerns of small boards with five or fewer members, for instance — there’s no denying that pressure has been mounting when it comes to improving diversity on corporate boards.

Just look at 2020 alone: Institutional Shareholder Services reiterated that it would vote against the nominating chair of Russell 3000 and S&P 1500 companies that lack female representation. Goldman Sachs Group announced that it will only take companies public if they have at least one diverse board member. And California and Washington both had gender diversity requirements in place for companies headquartered there.

“Diversity of thought forces [boards] to look at solutions in a different way, to look at problems in a different way,” says Kara Baldwin, a partner at Crowe LLP. “It’s simply good business to make sure you have those differing viewpoints.”

But corporate boards often do the bare minimum when it comes to adding women: An analysis of Russell 3000 boards by 50/50 Women on Boards finds that only 5% are gender-balanced, meaning women hold roughly half of board seats.

In a new analysis using its proprietary database of the nation’s 5,000 public, private and mutual bank boards, Bank Director identified the 25 bank boards with the highest representation of women. We focused on banks above $300 million in assets, given the lack of data on very small, private institutions. Only 11 of the banks we examined would meet the goal set by 50/50 Women on Boards.

Women, it should be noted, comprise 51% of the population and 58% of the workforce, according to the U.S. Census Bureau.

Both big and small banks, public and private, topped our list, showing that diversity is not exclusively a big bank issue. Webster Financial Corp. of Waterbury, Connecticut, with $32.6 billion in assets, and The Falls City National Bank, with $456 million in assets out of Falls City, Texas, top our list. Both boast boards with a membership that’s 56% female — well above the normal balance typically found on corporate boards. Rounding out the list are $1.9 billion First Bank of Highland Park, in Highland Park, Illinois, and Principal Financial Group, the holding company for $4.5 billion asset Principal Bank in Des Moines, Iowa. Both 12-person boards include five women, comprising 42% of membership. Last year, 50/50 Women on Boards found that women held 23% of board seats at Russell 3000 companies.

About six years ago, First United Corp., which has $1.7 billion in assets, started to intentionally focus on its composition, both in terms of skills and backgrounds. “We want to be more relevant to our customers and to our communities, for our shareholders, looking at that whole stakeholder group [including] employees,” says Carissa Rodeheaver, the Oakland, Maryland-based bank’s chair and chief executive. That includes representing diverse backgrounds, in terms of gender, race and ethnicity, and age.

This year, First United will begin using a skills matrix — a practice that helps boards map their directors’ expertise and backgrounds to identify gaps. A diversity and inclusion policy, put in place by the nominating and governance committee, will ensure the board considers a diverse slate of director candidates. “The pool has to be diverse, and that will continue to naturally lend itself to keeping that diversity of thought on the board,” says Rodeheaver. “It’s a great formula that leads to a well-rounded board.”

First United brought on three new directors in the past year — all women, it turns out, who are skilled in regulatory compliance, finance and project management, says Rodeheaver.

Lisa Oliver, the chair and CEO at The Cooperative Bank of Cape Cod, a $1.2 billion mutual bank headquartered in Hyannis, Massachusetts, places a high value on the “lived experiences” often uncovered when building diverse boards.

While the traditional executives and professionals often found on corporate boards — current and former CEOs, accountants, regulators and attorneys — still provide valuable insights, banks “have to think about the new needs of banking, and how that aligns with a whole different genre of people and the pipeline we need to cultivate,” says Oliver. For example, boards often seek technology and cybersecurity expertise; these skills aren’t often found at the top of an organization. Or a board might look for someone who can represent an industry that’s important to their bank, like healthcare.

C-suites are still predominantly male and predominantly white: Looking further down an organization chart might serve up an experienced candidate who also brings a diverse perspective to the table.

“You have to work harder; you have to expand that group of who you know,” says Baldwin. “You must be intentional — that’s really important.”

Oliver also wants to attract and retain younger directors to the board at “The Coop,” as the bank is called locally, but has struggled to retain young women as board members and corporators during the pandemic. (Corporators elect board members, but the position can also serve as a training ground of sorts for board candidates.)

“The pandemic has created great stress for young people to [serve] on the board,” says Oliver. One director, a business owner and single mother with a child at home, had to resign, she says. Oliver believes boards should consider how they can structure meetings to make the role more manageable for younger board members who are building their careers and businesses. “Not death by committee meeting, but what are the critical four committees we need to have?” she says. “There’s an art and a science to creating the agenda within that and providing the data to analyze risk, make it manageable.” A 400-page board packet can be difficult to fit into anyone’s schedule, much less that of a Gen X or millennial professional balancing family and career.

Oliver wonders if today’s more remote environment — with boards meeting virtually — could help them attract candidates from nearby Boston — a technology hub boasting a highly educated workforce.

Boards should consider looking outside their local community to find diverse, qualified board members, says Baldwin. Nearby cities, as Oliver posits, could be a valuable well of talent.

Both First United and The Coop are putting practices in place to help make room for new views: First United will declassify its board this year, and Oliver says her bank is putting term limits in place.

And both CEOs tell me that building the board their bank needs is a continuous process. “We need to constantly be looking and identifying individuals that make sense [for our board] and backfill that pipeline,” says Rodeheaver.

“We have to reflect the community around us, or else we’re not able to hit on some of the challenges that we face,” Oliver adds. “It takes effort, and it takes time, and it has to be a constant process.”

Top 25 Bank Boards For Women

Bank Name (Ticker) State Total # Directors % Women on the Board
Webster Financial Corp. (WBS) CT 9 56%
The Falls City National Bank TX 9 56%
Lead Financial Group MO 9 55%
First United Corp. (FUNC) MD 12 50%
The Cooperative Bank of Cape Cod MA 14 50%
First National Bank Alaska (FBAK) AK 8 50%
Boston Private Financial Holdings (BPFH) MA 8 50%
New Triplo Bancorp PA 6 50%
Andrew Johnson Bancshares TN 8 50%
Johnson Financial Group WI 10 50%
Minnwest Corp. MN 16 50%
GSB, MHC MA 15 47%
Cambridge Bancorp (CATC) MA 17 47%
First Capital (FCAP) IN 13 46%
Mascoma Bank VT 13 46%
Ledyard Financial Group (LFGP) VT 11 45%
First Seacoast Bancorp (FSEA) NH 9 44%
Orbisonia Community Bancorp PA 7 43%
Stearns Financial Services MN 7 43%
Lockhart Bankshares TX 7 43%
National Cooperative Bank OH 14 43%
MidFirst Bank OK 7 43%
Olympia Federal Savings and Loan Assn. WA 7 43%
Principal Financial Group (PFG) IA 12 42%
First Bank of Highland Park* IL 12 42%

Source: Bank Director internal data, plus bank websites and public filings, as of February 2020. Banks under $300 million in assets weren’t examined given the scarcity of data about these institutions.
*First Bank of Highland Park was left off this ranking when it first published. Bank Director regrets the omission.

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.

One Way to Compensate and Keep Your Bank’s Top Talent

compensation-6-11-19.pngBank-owned life insurance (BOLI) continues to be an attractive investment alternative for banks, given the number of banks that hold policies and high retention rates across the industries. An increasing percentage of banks hold BOLI, many of them using the policies as an important part of their compensation and retention strategies for key personnel.

A significant industry trend driving interest in BOLI is their use by banks in compensation strategies to attract and retain the best talent. Bank management and boards of directors are reevaluating their existing compensation plans and strategically implementing new ones in order to retain key executives given increasing competition for scarce talent.

BOLI assets reached $171.16 billion at the end of 2018, growing 2 percent year-over-year, according to the Equias Alliance/Michael White Bank-Owned Life Insurance (BOLI) Holdings Report. Sixty-four percent of banks reported holding BOLI assets; about 71 percent of banks with more than $100 million in assets owned BOLI. Most BOLI purchased is by banks that hold existing policies; of those banks, more than half have purchased BOLI as an add-on for a current group of executives. In 2018, about 86 percent of new premiums were invested in general account products, compared to hybrid and separate account products, according to IBIS Associates.

Although the pace of BOLI purchases slowed last year compared to 2017, purchases exceeded $1.7 billion and were steady throughout 2018. The reasons for slower BOLI purchases were due to continued strong loan demand that reduced bank liquidity and the reduction in the tax-equivalent yield on BOLI following the federal corporate tax cut.

Credited interest rates and net yields, the crediting rate minus the cost of insurance charges, on new BOLI purchases are expected be similar to 2018 figures. The interest rates that carriers can obtain on investment-grade securities held for between five and 10 years has remained relatively flat, given the modest increases in this portion of the yield curve. Corporate bonds usually comprise the largest holding in the portfolio, but it can also include commercial mortgages and mortgage-backed securities, private placements, government and municipal bonds, a small percentage of non-investment grade bonds and other holdings.

BOLI plans fund many of the most common retention plans, which can include supplemental executive retirement plans, deferred compensation plans, split-dollar plans and survivor income plans. Additionally, some banks are using deferred compensation plans to create flexibility in designing plans to retain young “up and coming” officers. Unlike a supplemental executive plan, which provides a specific benefit at a specific date or age, a deferred compensation plan allows the bank to make contributions to the executive’s account using a fixed dollar amount, fixed percentage of salary or bonus or a variable amount based on performance. A deferred compensation plan also permits voluntary deferrals of compensation, which could be valuable to executives who would prefer to defer more compensation but are limited in the 401(k) plans.

BOLI financing helps offset and recover some or all of the expenses for the employer. For example, a bank provides an officer with supplemental retirement benefits of $50,000 per year for 15 years, for a total cost of $750,000. The bank could purchase a BOLI policy on the officer with a net death benefit of $1 million to $2 million that would allow it to recover the cost of the paid benefits, as well as a return on its premium.

We expect that community banks will continue to implement these types of nonqualified benefit plans in 2019, using BOLI to help attract and retain key personnel.

Takeaways from the BB&T-SunTrust Merger


merger-2-27-19.pngIn early February, BB&T Corp. and SunTrust Banks, Inc. announced a so-called merger of equals in an all-stock transaction valued at $66 billion. The transaction is the largest U.S. bank merger in over a decade and will create the sixth-largest bank in the U.S. by assets and deposits.

While the transaction clearly is the result of two large regional banks wanting the additional scale necessary to compete more effectively with money center banks, banks of all sizes can draw important lessons from the announcement.

  • Fundamentals Are Fundamental. Investors responded favorably to the announcement because the traditional M&A metrics of the proposed transaction are solid. The transaction is accretive to the earnings of both banks and BB&T’s tangible book value, and generates a 5-percent dividend increase to SunTrust shareholders. 
  • Cost Savings and Scale Remain Critical. If deal fundamentals were the primary reason for the transaction’s positive reception, cost savings ($1.6 billion by 2022) were a close second and remain a driving force in bank M&A. The efficiency ratio for each bank now is in the low 60s. The projected 51 percent efficiency ratio of the combined bank shows how impactful cost savings and scale can be, even after factoring in $100 million to be invested annually in technology.
  • Using Scale to Leverage Investment. Scale is good, but how you leverage it is key. The banks cited greater scale for investment in innovation and technology to create compelling digital offerings as paramount to future success. This reinforces the view that investment in a strong technology platform, even on a much smaller scale than superregional and money center banks, are more critical to position a bank for success.
  • Mergers of Equals Can Be Done. Many have argued that mergers of equals can’t be done because there is really no such thing. There is always a buyer and a seller. Although BB&T is technically the buyer in this transaction, from equal board seats, to management succession, to a new corporate headquarters, to a new name, the parties clearly went the extra mile to ensure that the transaction was a true merger of equals, or at least the closest thing you can get to one. Mergers of equals are indeed difficult to pull off. But if two large regionals can do it, smaller banks can too.
  • Divestitures Will Create Opportunities. The banks have 740 branches within 2 miles of one another and are expected to close most of these. The Washington, D.C., Atlanta, and Miami markets are expected to see the most branch closures, with significant concentrations also occurring elsewhere in Florida, Virginia, and the Carolinas. Deposit divestitures estimated at $1.4 billion could present opportunities for other institutions in a competitive environment for deposits. Deposit premiums could be high.
  • The Time to Invest in People is Now. Deals like this have the potential to create an opportunity for community banks and smaller regional banks particularly in the Southeast to attract talented employees from the affected banks. While some banks may be hesitant to invest in growth given the fragile state of the economy and the securities markets, they need to be prepared to take advantage of these opportunities when they present themselves.
  • Undeterred by SIFI Status. The combined bank will blow past the new $250 billion asset threshold to be designated as a systemically important financial institution (“SIFI”). While each bank was likely to reach the SIFI threshold on its own, they chose to move past it on their terms in a significant way. Increased scale is still the best way to absorb greater regulatory costs – and that is true for all banks.
  • Favorable Regulatory Environment, For Now. Most experts expect regulators to be receptive to large bank mergers. Although we expect plenty of public comment and skepticism from members of Congress, these efforts are unlikely to affect regulatory approvals in the current administration. It is possible, however, that the favorable regulatory environment for large bank mergers could end after the 2020 election, which could motivate other regionals to consider similar deals while the iron is hot.
  • Additional Deals Likely. The transaction may portend additional consolidation in the year ahead. As always, a changing competitive landscape will present both challenges and opportunities for the smaller community and regional banks in the market. Be ready!

How to Build Shareholder Value When Economic Growth Slows


shareholder-12-4-18.pngBanking has been on an impressive run since the end of the 2009 recession. Now, as the industry finds itself with sky-high valuations, the market is wondering what banks can do for an encore.

Whatever comes next must be defined by a clear strategy for building shareholder value. That’s because the next 12-18 months are likely to show some level of marketplace pullback. A recent Wall Street Journal article reported that the U.S. economy has likely peaked and that we should expect slower growth on both the consumer and business sides. This means that formulating a strategic plan is increasingly vital.

These six ideas offer some places to start:

1) Balance CRE exposure with C&I growth
One of the commercial growth engines has been the commercial real estate space. But as the demand cycle begins to flatten, many small and mid-size banks are refocusing their attention on the commercial and industrial loan sector. Although it’s a slower, relationship-oriented build, there is an opportunity for a more sustainable, mutually beneficial relationship that could span several years. As a result, we expect continued demand for high-performing C&I lenders over the next 18-24 months who can drive the right kind of volume for the banks.

2) Bolster non-interest income businesses
Non-interest income has always been a big topic. But the banking industry needs to go beyond simply focusing on service-fee opportunities. That can mean creating new businesses around payments, treasury management and areas of wealth management. It can also include non-traditional businesses like insurance, which can offer a nice annuity-based income stream.

3) Play hard in the talent wars
Nearly 60 percent of employers struggle to fill job vacancies within 12 weeks—and by 2030, the global talent shortage could reach upwards of 85 million people. For banks, this means emphasizing three basic strategies that go beyond monetary compensation: a) Develop and enhance career development and retention programs; b) create an emotional bond between employees and the bank itself; and c) involve human-resource executives in formulating deliberate talent-search strategies.

4) Ensure value realization in a pricey M&A market
Banks need a clearly defined strategy around managing mergers and acquisitions. Where will banks find targets and opportunities? Whether the strategy is opportunistic or deliberately acquisitive, banks must create a structured playbook that more than earns back the premium paid by the acquirer.

5) Develop a deliberate deposit strategy
There is no single answer to the deposit funding challenge facing most banks today. But here are areas worth exploring: a) Make sure retail checking and money market products are positioned to retain loyal checking customers; b) bolster treasury management solution capabilities and develop industry niches to grow specialty deposits; and c) align sales team goals and incentives to reflect the priority of deposit growth and retention. The key is putting together a detailed funding plan–and executing a deposit strategy that balances deposit growth with overall cost of funds in 2019.

6) Execute on the channel delivery shift
Make plans to keep moving into a digital world and navigate the world of tech. This really comes down to ensuring a significant return on your channel investments. When making any investments in delivery channels—whether brick-and-mortar, contact centers or a digital strategy—they have to be looked at in three areas. How much will the investment help with customer acquisition? How much will it help to retain profitable clients? And what is the cost?

Building a great strategic plan is actually creating a great story—for the board, for investors, for the employee base and for prospective talent. Then, when looking at financial rigor and value, embrace the idea of relentless execution with milestones, key performance indicators and focus. Success is derived not just from the plan, but also from the notion that everybody has their fingerprints on it by the time the process is done.

No matter the focus over the next three to five years, break it down into its basic parts, create a story and execute on it. Because in the end, success comes down to relentless execution.

How To Manage Talent in a Parfait Organization


talent-11-7-18.pngThe banking industry sits at an interesting crossroads from a talent management perspective. Demographically, many banks are layered like a parfait, with as many as four distinct generations working in the organization, each with its own set of personality traits, likes and dislikes.

The oldest generation—the baby boomer generation, now running the bank for several years—is beginning to retire in increasing numbers. The Generation X cohort, which follows the boomers, is moving into senior management, the best and brightest among them soon to rise to the CEO and CFO level, if they haven’t already.

Generation Y, otherwise known as millennials, are now far enough along in their careers to have gained some meaningful experience, and the really talented ones are identifiable to the bank. Most members of the final and largest cohort, Generation Z, are still in high school and college, although the oldest ones are entering the workforce. At 26 percent of the population, Gen Z will be a force for the next several decades.

This dramatic generational shift is forcing banks to become more proactive in how they manage their talent, particularly millennials, who will comprise a significant part of the industry’s workforce in the near future. The importance of creating opportunities for those individuals was a significant theme in day two of Bank Director’s 2018 Bank Compensation and Talent Conference, held at the Four Seasons Resort and Club at Las Colinas in Dallas, Texas.

In a session on talent management, Beth Bauman, an executive vice president and head of human resources at the Bank of Butterfield, a NYSE-listed $11 billion asset bank domiciled in Bermuda, described the situation at the bank when she joined it in 2015. Butterfield had frozen salaries and done relatively little hiring for several years as it struggled to recover from the financial crisis. So Bauman, along with senior management, has worked to bring in new talent so the bank can continue to grow.

A key element of that hiring effort has been to create a talent management program so Butterfield’s younger employees can have their careers guided, with the most talented groomed for higher positions within the bank.

Bauman sees this as a key to successfully managing the generational change occurring now throughout the industry. “Regardless of the size of your bank, you can have an effective talent management program,” she says.

Talent management has been very much on the minds of the conference attendees. In an audience survey that polled the 300-plus people who were there, 45 percent said it has become both more difficult and costly to attract and retain talented staff—a result not surprising in an economy where the unemployment rate is just 3.7 percent. Banking also has the disadvantage of not being perceived as an exciting employment opportunity for many job seekers, particularly millennials.

Sixty-one percent of the survey respondents said their bank is actively and intentionally recruiting younger employees like millennials and Gen Z’ers.

Similarly, more than 70 percent said in the last two years their bank has expanded its internal training programs to develop younger leaders within the organization.

As increasing numbers of baby boomers approach retirement (the youngest boomers are in their mid-50’s), and Gen X’ers take their place in the management hierarchy, it will create an opportunity for millennials to move up as well. Gen X’ers are the smallest of the four demographic groups at just 20 percent of the population, so the banking industry will be forced to rely disproportionately on millennials as this generational shift occurs.

This is why training programs that focus on talented younger employees in the organization are so important.

We’ve all heard the jibes about millennials’ self-absorption, or their refusal to return voicemail messages, but the fact is the oldest among them are already buying homes and raising families, and when the day comes to run the bank, they’ll need to be ready.

Solving the Puzzle of Compensation Plans and Diversity


compensation-11-6-18.pngThere are some tasks that seem innocuous and administrative, but are nevertheless incredibly important. Assembling the puzzle pieces of effective executive and employee compensation plans is one such task.

This is why hundreds of bank executives and directors have assembled at Bank Director’s 2018 Bank Compensation and Talent Conference in Dallas, Texas, this week.

A number of themes began to emerge on the first day of the annual event, hosted at the Four Seasons Resort and Club at Las Colinas, the first of which is that many banks and their boards are still fully figuring out exactly how to structure executive and employee pay.

The starting point, according to a panel of experts from Compensation Advisory Partners and Kilpatrick Townsend & Stockton LLP during a morning workshop, is the interagency guidance issued in 2009 by the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

There are three overarching principles:

  • Provide employees incentives that appropriately balance risk and reward.
  • Be compatible with effective controls and risk-management.
  • Be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

These may seem simple in theory, but the challenges for banks are real and complicated, which explains why compensation plans at so many banks are still a work in process.

On one hand, banks face one of the most competitive labor markets in decades, with the lowest unemployment rate in half a century. To attract talented workers, banks have to pay accordingly, which is why so many bankers raised their hands during a Monday morning workshop when asked if their banks boosted their minimum wages after tax reform passed Congress late last year.

On the other hand, as Steve Hovde, chairman and CEO of Hovde Group LLC, pointed out in his analysis of the industry, banks are facing well-seasoned business and credit cycles. This creates a quandary about how aggressive a bank should be in incenting rapid growth, as loans made at the top of an up cycle tend to be the first to go sour at the bottom of the next down cycle.

Moreover, while this may seem counterintuitive, there was wide agreement among attendees at the workshop that regulators aren’t currently focused on the design of compensation plans. The sole exception, according to at least one attendee, concerns how mortgage originators are being compensated, likely a reaction to the issues that surfaced two years ago at Wells Fargo & Co.

Another theme to emerge during the workshop involved diversity and inclusion initiatives, which all banks seem focused on addressing.

It’s important to distinguish between those two initiatives, observed one of the workshop’s panelists.

“Diversity is about inviting people to the party,” she noted. “Inclusion is about giving everyone an opportunity to dance.”

The challenge in banking, as in other industries, is tackling unconscious bias—social stereotypes people form outside their own conscious awareness.

No rational banker today would admit being biased against hiring or promoting women or minorities. Yet the demographic statistics in the industry speak clearly to a lack of diversity, especially at the upper levels of management.

One way to address this is simply through awareness. This was a point that Kate Quinn, the chief administrative officer of U.S. Bancorp, echoed two months ago at Bank Director’s Bank Board Training Forum in Chicago.

“Everyone has prejudices,” said Quinn at the time. “To address them, you first have to be aware they are there.”
And this isn’t just about hiring a diverse workforce; all employees must also be given an equal opportunity to excel. This is the distinction between diversity and inclusion in the corporate world.

An interesting point brought up during the workshop was that entry-level jobs throughout the financial industry tend to be fairly representative of the broader population. But as you look up the organizational chart, that diversity dissipates.

The lack of diversity at the top sends a strong signal, noted one attendee. Her point was, if, as a woman or minority, there isn’t someone like you on the board or who serves as an executive, then you are left with the impression you don’t have the same opportunity to advance.

Ultimately, though, if you listen to bankers, it’s clear that diversity and inclusion have become priorities at many institutions.
After all, to compete for talent, it’s not only how much you pay, it’s also the culture of your institution that will serve as a magnet for the next generation of employees.