2020 has been unprecedented on many fronts. The way in which community banks have risen to the myriad challenges is one of the many reasons we appreciate being part of the industry and helping navigate the evolving landscape. As we look toward 2021, there are several recurring themes we are helping clients anticipate and manage. Here is a brief overview of some of those items.
Adapting to shifts in work and customer interaction
The pandemic has accelerated changes in two key aspects of everyday life – remote work and digital banking. We believe the way in which banks anticipate and adapt to these shifts will be a key differentiator in attracting and retaining talent and customers. By now, most businesses have figured out how to accommodate their staff working remotely while managing customer service and COVID-19 protocols. There will continue to be a number of legal, technological and operational issues to consider as banks begin migrating people back to in-person work environments. Likewise, finding a way to strike the appropriate balance between in-lobby banking and the various digital delivery channels will pose unique challenges and opportunities. For both, the wants, needs and desires of the various employee and customer demographics, skill sets and priorities must be considered.
As banks anticipate the eventual impact of COVID-19 on loan portfolios, the consequences of the impending adoption of CECL, and their various strategic goals and investments, having a robust and well-conceived capital plan will be more important than ever. Among questions to consider:
- Should dividend policies be reconsidered to preserve capital? Are dividends still as important to the current shareholder base as they have been historically?
- Should share buyback programs be considered (or reconsidered)? On the one hand, there is an increasing demand for shareholder liquidity as shareholders age and many banks view share repurchases as a beneficial investment to shareholders. On the other hand, you must weigh capital preservation.
- Do you have access to contingency capital if needed? Do you have a holding company loan in place? Will it be available if circumstances deteriorate? Have you at least considered raising capital through the issuance of equity, the issuance of sub-debt or otherwise?
- Are your articles up-to-date so that you can move quickly if a strategic opportunity presents itself?
Diversifying revenue streams
As net interest margin compression continues, many clients are actively seeking alternative revenue streams beyond the traditional sources of non-interest fee income. Recently, there has been a noticeable increase in investment in, or acquisition of, insurance agencies, mortgage companies, trust businesses and fintech opportunities. We anticipate that will continue and accelerate.
While traditional M&A activity has slowed (for now), there has been a significant increase in banks divesting of branches, acquiring branches, reconfiguring existing locations and considering how to incorporate technology interactive teller machines and others) into their overall customer experience. What is your bank’s strategy and why?
Technology (and revisiting data processing relationships)
Do you have a written strategy for what will continue to be increased expenditures in technology? Not only is the pace of innovation in digital delivery systems accelerating, but so are the needs for consistent enhancements in security. As such, you should have a well thought out and documented technology plan and should also revisit all of your vendor contracts and relationships. Increasingly, we are seeing vendors make contractual concessions we have not seen before as banks work to incorporate various applications and disparate modules into a comprehensive user experience. The technological landscape is changing quickly. It is important to remain “on top of” your documentation.
Fraud prevention & mitigation
COVID-19 has increased the already abundant levels of fraud against financial institutions and their customers. This is not only a technology issue, but also one requiring an immense commitment and focus on documentation, education and reinforcement. While the best prevention is to continually educate staff and your customers, it is equally important that you are employing commercially reasonable security procedures (a term that is constantly evolving), and thoroughly and accurately document all of your efforts.
In light of the various challenges and increased competition, the need to attract, retain and continually refresh talent at all levels (staff, management and board) is greater than ever. In furtherance of that objective:
- Do you have a comprehensive incentive structure, including such things as equity incentives or equivalents?
- Do you have your key people contractually committed?
- Are you identifying and deliberately grooming successors for key positions, including the board?
- Are you developing policies and procedures to accommodate some level of remote working on a permanent basis and the many employment and technological challenges that arise?
We realize there is understandable fatigue around this topic, so we will be brief. 2020 saw the substantial consolidation of recent years come to an abrupt halt. That said, since July, discussions have resumed anew and we expect that to continue, if not accelerate throughout 2021. We do not believe you need to engage in any M&A to thrive in the years ahead. However, we firmly believe that it is essential directors and management devote time to considering the challenges facing banks, how they will address them and the benefits and risks of exploring various strategic transactions. The key is that you control your strategic direction and options, and doing so will help ensure you do not find yourself in three to five years in a position where your options are being dictated for you.
John Reichert and Melissa Lanska are attorneys with the Milwaukee-based law firm of Reinhart Boerner Van Deuren. Contact information: Melissa Lanska (414-298-8706; [email protected]); John Reichert (414-298-8445; [email protected]).