Do we have enough banks in the U.S.?

Posted on May 17, 2013 by Al Dominick

As I do each Friday morning, what follows are three things I’ve learned this week that apply to the financial community. Let me start with the inspiration for today’s title and end with that for the picture of Pittsburgh’s PNC Park above.

(1) I’ve shared ideas from KBW’s Fred Cannon in the past; let me do so again based on a note he put out this Monday (FSW No New Bank Charters) that I strongly encourage you to read. In my opinion, Fred is at the top of his field, so when he looks at the decline in new bank charters during the last two years (to zero) and wonders if we have enough banks in place today, its a thought provoking question. To wit:

U.S. banking is being squeezed from the top, with high levels of concentration, and from the bottom, with no new banks, creating a less dynamic financial sector. While regulators and legislators worry about the size and concentration of the largest banks, there is an equally concerning trend on the opposite side of the bank size spectrum. There have been no new bank or thrift charters issued during the past two years. This trend stands in sharp contrast to history, with dozens to hundreds of new banks starting each year, including during years of deep recessions. The lack of new bank startups may be causing limited competition for loans for small regional businesses and builders and pushing lending outside the banking system, essentially meaning that there aren’t enough banks in the country to promote maximum economic growth. Concentration and limits on size at the top end, and the dearth of new banks at the small end, will push greater market share of banking into mid-sized banks, in our view. This is good news for profitable mid-sized banks that can take advantage of both trends.

(2) Switching gears to the biggest of the big, we might have to honor Jamie Dimon by making it “his” week if the amount of media coverage continues for the man. From American Banker to Bloomberg’s Businessweek to the WSJ, not a day went by without some mention of Wall Street’s “Indispensable Man.” With JPMorgan Chase & Co.’s annual meeting in Tampa next week, our own editor thinks it should be a doozy for Chairman and CEO Jamie Dimon and the company’s 11-member board. The country’s largest bank has come in for some withering criticism ever since it lost a reported $6 billion last year on a disastrous credit derivatives trading strategy. Ah, trading credit derivatives… I wonder if they will soon replace collateralized debt obligations as the scorn of the American public.

(3) Finally, a tip of the cap to Mars National Bank near Pittsburgh for “tapping a native son’s ties to America’s pastime to raise its local profile.” According to a piece in the American Banker, the $351 million-asset institution in Mars, Pa., has formed a marketing campaign around pitchman Neil Walker, 27, a second baseman for the Pittsburgh Pirates who grew up seven miles away from the bank’s headquarters. Mars National is “among several banks that have recently turned to sports stars to build business and spur goodwill;” for those interested in examples of how smaller banks are working to build brand loyalty in their community, this is an easy read that might inspire.

Aloha Friday!

Standing Out on a Friday

Posted on May 10, 2013 by Al Dominick

Coming off of last week’s Growth Conference, I found myself planning for next year’s program. As we recognized Customers Bank, State Bank & Trust and Cole Taylor Bank for “winning” our annual Growth rankings, I spent some extra time looking at other banks that performed exceptionally well this past year. So today’s Friday-follow inspired post shares a few thoughts and conversations I’ve had about three very successful banks.

(1) While easy to frame the dynamics of our industry in terms of asset size, competing for business today is more of a “smart vs. not-so-smart” story than a “big vs. small.” During one of my favorite sessions last week — David AND Goliath — Peter Benoist, the president and CEO of St. Louis-based Enterprise Financial Services Corp, reminded his peers that as more banks put their liquidity to work, fierce competition puts pressures on rates and elevates risk. My biggest takeaway from his presentation: we all talk about scale and net interest margins… but it’s clear that you need growth today regardless of who you are. It is growth for the sake of existence.

(2) During the afore mentioned presentation, the participants all agreed that you cannot compete with BofA on price. Consequently, the ability to introduce new products (e.g. increasing deposit platforms) is key for many banks today. So from diversification to differentiation, let me turn my attention to San Francisco-based First Republic. Their story is a fascinating one. While not with us in New Orleans, I heard a lot about them yesterday while I was in NYC visiting with KBW. Subsequently, our editor wrote me with some background: Jim Herbert founded the bank in 1985, sold it to Merrill in 2007 for 360% of book, took it private through a management-led buyout in July 2010 after Merrill was acquired by Bank of America, then took it public again in December through an IPO. First Republic is a great bank: it finished 3rd out of 80+ in the $5-$50 billion category in Bank Director magazine’s 2012 performance rankings. But not only is it solely focused on organic growth, it’s also focused solely on private banking.

(3) Finally, as we move our attention from growth to risk in advance of our annual Bank Audit Committee conference, I started to think about the challenges facing banks of all sizes. Admittedly, I started with Fifth Third as their Vice Chairman & CEO will be joining us in Chicago as our keynote speaker. Yes, I am very interested to hear his perspectives on the future of banking. Quite a few small bank deals have recently been announced, and I have to believe many sales came together thanks to escalating compliance costs and seemingly endless regulation. For larger institutions like Fifth Third, it will be interesting to see what transpires over the next few years and where he thinks the market is moving for banks of all sizes. If you’re interested, take a look at our plans for this year’s event.

Aloha Friday!

About today’s picture:

I’m a die-hard Boston RedSox fan, and for anyone whose been early to, or stayed late at, Fenway Park, you’ve probably seen one red seat in the right field bleachers (Section 42, Row 37, Seat 21). Did you know it signifies the longest home run ever hit at Fenway, one struck by the great Ted Williams on June 9, 1946? While a nice chance for me to share my love for the RedSox, I thought the visual made a lot of sense when writing about standing out from the crowd… -AD

Dass de Thing

Posted on May 3, 2013 by Al Dominick

Today’s Friday Follow-inspired column takes a decidedly cajun turn (I tink dats rite) with a look back on time spent at the Ritz-Carlton in New Orleans. Fancy, for sure. Financially focused? Absolutely, thanks to Bank Director’s inaugural Growth Conference.

The slow economic recovery continues to challenge banks ability to grow as businesses both large and small reduce their leverage. Additionally, tepid growth (or in some cases, continued decline) in real-estate values presents challenges in the growth of consumer and commercial mortgage portfolios. Layer on the increased focus of larger banks on growing their C&I and small business lending portfolios due to increased regulatory pressure on consumer products and you understand how challenging it is for community or regional bank CEOs and boards to devise effective growth strategies. These obstacles did not, however, deter a crowd of nearly 200 bankers and industry executives from sharing their insight and opinions earlier this week.

(1) For example, Josh Carter from PwC covered what some of the fastest growing community banks are doing, both those who have grown through M&A, as well as digging a level deeper into those who are successfully growing organically. In his address, he noted a few bright spots have given the banking industry hope that economic and financial recovery is just around the corner (e.g. consumer confidence continues to improve, unemployment is on the decline and the home price index continues to tick up). As such, he believes there are five key areas that community banks should focus on to drive growth in their respective markets:

Emphasize productivity over efficiency;
Sharpen your business model; that is, serve niche segments, provide tailored offerings, excel at service quality, etc.;
Innovate within your business model, as banks that succeed most often are the ones that continually evolve and out-innovate their peers;
Pursue opportunistic M&A deals; and
Broaden your product portfolio.

(2) Preceding Josh was Jay Sidhu, the Chairman & CEO at Customers Bank. If you’re looking for a bank that is leading the field in terms of core income, net loans/leases and core non-interest income, look no further than his bank, which is expanding its business in three states — Pennsylvania, New York and New Jersey. Jay captivated his peers with a look at the changing face of banks in the United States and the role of a board and CEO in positioning bank to take advantage of this changing environment. Tops for him: an “absolute clarity of your vision, strategy, goals and tactics; there must be absolute alignment between board and management… (along with a) passion for continuous improvement.”

(3) Finally, Brett King and Sankar Krishnan explored the “end-game” in the emergence of the mobile wallet and what it means for the “humble bank account.” With more than 60% of the world’s population without a bank account and the ubiquitous nature of mobile phone handsets and the increasingly pervasive pre-paid ‘value store’ – the two openly considered will banks still be able to compete. I’ll have more on this session in a subsequent post that combines Brett’s presentation with one made by John Cantarella, President, Digital, Time Inc. News and Sports Group. For now, let me suggest a trip to Amazon to check out Brett’s latest book, Bank 3.0: Why Banking Is No Longer Somewhere You Go But Something You Do.

A big shout out to the entire Bank Director team who made this first conference such a success. Laura, Michelle, Mika, Kelsey, Jack, Misty, Jennifer, Daniel, Naomi, Joan, Bill… way to go!

Aloha Friday!!

Industry at a Crossroads: the Investor View

Posted on April 30, 2013 by Al Dominick

A curveball from New Orleans this afternoon… since I was on stage this morning to moderate a panel discussion on what makes a bank successful (to open this year’s Growth Conference at the Ritz-Carlton – #BDGrow13), my friend, colleague and Managing Editor of Bank Director magazine agreed to author today’s column. The first guest post on About That Ratio, courtesy of Naomi Snyder, summarizes the investor community’s view on banks today.

As an industry veteran of more than 40 years and private equity investor in 15 banking companies, John Eggemeyer loves banks. But the co-founder of Castle Creek Capital LLC and Castle Creek Financial LLC had some hard-to-swallow statistics and opinions for a crowd of nearly 200 bankers and industry executives (198, but who’s counting) at Bank Director’s inaugural “Growth Conference” in New Orleans today.

Publicly traded banks from $1 billion to $5 billion in assets have seen their stock values rise at about half the rate of the broader market as a whole since early 2009.
Of the 300 or so publicly traded banks in that size range, only about 60 of them are trading at their pre-recession price multiples, he said.
In the last 40 years, bank stocks always followed the same pattern in a recession: falling in value quicker than the rest of the market and recovering quicker.

That didn’t happen during the latest recession. “We have lost a tremendous amount of value relative to the broader market,’’ he said at a session focused on the views of bank investors.

It may be that investors are recognizing tough times ahead for the banking industry, where there are simply too many banks offering similar products and services. Low interest rates and a slow economy aren’t helping. Eggemeyer predicts that there will be substantial consolidation in the industry, both in terms of banks gobbling up other banks, and also in terms of branch reduction.

Collyn Gilbert, a managing director at Keefe, Bruyette & Woods, reiterated that view. “At the end of the day, how many unique stories are there?” she said. Eggemeyer says he prefers to invest in banks that have strong pre-tax, pre-provision earnings that are operating in good growth markets. Bank of America can’t outgrow the U.S. economy and it can’t acquire other big banks. A smaller community bank in a good market can do both those things, he said. However, he thinks investors focus too much of their time on growth. In reality, strong profitability will position a bank for growth. Gilbert agreed. “I think there needs to be a much better focus on the earnings side,’’ Gilbert said.

Naomi Snyder, awarded the coveted “Gila Monster” moniker at this year’s Acquire or Be Acquired conference, is Managing Editor at Bank Director magazine. Prior to joining our team, she spent 13 years as a business reporter for newspapers in South Carolina, Texas and Tennessee. Most recently, she was a reporter for The Tennessean, Nashville’s daily newspaper. She also was a correspondent for USA Today. Naomi has a bachelor’s degree from the University of Michigan and a master’s degree in Journalism from the University of Illinois.

Financially Focused on Aloha Friday

Posted on April 26, 2013 by Al Dominick

From Kona, a reminder about Aloha Fridays...

Hula dancers in Kona

Each Friday morning, I do my best to share three things I heard, watched, discussed or read. If you’re game to share in the comment section below, I’d be really interested to read what you consider noteworthy from the week-that-was. And before I forget, the tradition continues: Aloha Friday!

(1) Who says there’s no growth in banking? Certainly not our editor, Jack Milligan, although the lead in to his cover story in the current issue of Bank Director magazine might suggest otherwise:

If you’re not growing, you’re dying. It’s an often-used aphorism that has been attributed to such disparate sources as former college football coach Lou Holtz, the legendary Bob Dylan and a character played by the actor Morgan Freeman in “The Shawshank Redemption.” Unfortunately, it’s also a painful truth that a lot of bankers are living with nowadays as they search for growth in an environment that seems specifically designed to strangle it.

If you’re not familiar with Bank Director, the 23-year old publication reaches over 24,000 officers and directors — a community of virtually every leader in banking. Published on a quarterly basis, the articles focus on issues fundamental to a bank’s CEO, senior leadership team, chairman and independent directors. Think big, risky and expensive. For the last three years, many in this audience struggled to grow their bank’s revenue and sustain a level of profitability. However, not all are struggling to produce top line growth. Take a read if you’re interested to learn how some banks today are building their businesses.

(2) While Jack’s cover article looks at four categories of non-M&A growth*, I’m afraid that our low growth economy looks like it will persist for a while longer. Not surprisingly, some wonder if its possible to develop a sustainable, differentiable business strategy that has strong organic growth. This is will be just one of many topics and trends addressed in New Orleans next week during our inaugural Growth Conference at the Ritz-Carlton. I’ll be sharing my thoughts on the strategies and tactics banks might consider to expand their franchises’ value via twitter (@aldominick) — and know most of our team will as well. If you’re interested, let me suggest a follow of @BankDirectorAP, @BankDirectorEd, @NaomiSnyder and of course, @bankdirector.

(3) While tempted to complete the hat trick with a final point from Bank Director, I defer to Fiserv’s President and CEO Jeff Yabuki remarks as he opened their client conference last week. In his kickoff, he asked their attendees to “re-imagine the financial experience of the future.” While the short video is unfortunately more sales speak than suggestion, the firm does post several good related reads. In particular, one entitled To Better Serve Small Business, Define Their Needs. The gist? With “profitability from retail lines of businesses under pressure, many institutions are reviewing their strategies for addressing the small business market. For regional and community institutions, which often serve communities where small businesses play an outsized role in economic development, effectively reaching small business is an imperative.” Being that I work in a small business that interacts with numerous community banks, two thumbs up to the author and company for this perspective.

___________

*The four categories in Bank Director’s inaugural Growth Leaders Ranking are core income (defined as net-interest income plus non-interest income, excluding available-for-sale gains and losses and other-real-estate-owned gains and losses), core deposits, net loans and leases and core non-interest income. Of the four categories, the most important is core income since it is inclusive of the other three revenue sources.

Boston Strong on this Financial Friday

Posted on April 19, 2013 by Al Dominick

Yes, I typically compile a list of three things that I heard, saw and learned this week that are financially focused. Today, it still feels hollow to post such points when my attention has admittedly stayed with the acts of courage, strength and community in Boston. Instead of a normal Friday post, let me share the following. Like 9/11, we will never forget. And yes, together, we are all #BostonStrong.

Since the senseless acts of violence in my hometown earlier this week, I’ve been playing over and over in my head my time in NYC on 9/10/01 and 9/12/01. Having watched both towers fall from the roof of my old east village apartment — 60 east 1st Street — the Boston Marathon’s bombing has me really shaken. You see, I grew up in Needham, MA and lived at 221 Newbury Street for several years after moving post-World Trade Center attacks. For those not familiar with Boston, this is a mere 1 1/2 blocks from the finish line on Comm Ave. Still, from the darkness of this week comes these three points of light:

(1) If you haven’t seen this already, watch the crowd sing the National Anthem at the Boston Bruins / Buffalo Sabres hockey game on Wednesday night. Massive chills for both the Bruins feed from the ice above (seriously, stop reading + watch this now) and this one from the rafters as a full house of patriots take over for Boston Bruins’ legendary anthem singer Rene Rancourt…

(2) To me, the RedSox ARE Boston… and their immediate actions following Monday’s tragedy conjured memories of the Patriots’ post-9/11 (*running out on the field with American flags held high). Sometimes baseball is more than just a sport. This is one of those times…

3) Finally, they are our most hated rival — and in this case, our greatest ally. The New York Yankees are a class act & deserve more than just a tip of the cap for this immediate show of support. Despite our differences, what makes our country great is the love of our country.

New York Stands With Boston

“If they sought to intimidate us, to terrorize us … It should be pretty clear right now that they picked the wrong city to do it” ~ President Obama

Its Aloha Friday

Posted on April 12, 2013 by Al Dominick

An example of organic growth in Chevy Chase D.C.

Earlier this week, as part of Bank Director’s annual Bank Chairman/CEO Peer Exchange, I was lucky enough to spend time with key leaders from 40+ community banks averaging nearly $900M in asset size. As I reflect on various growth-focused conversations I had with CEOs of NASDAQ-listed banks, I think I’ve found a common thread. Each person runs an institution profitable enough to make acquisitions — all while maintaining adequate capital ratios. The interesting part (for me at least) concerns the strategies these executives set to build their brand and tactics put in place to “organically” grow their franchise. As our industry continues to rally back from the past few years of pessimism, it really is fun to hear success stories. So what follows are three thoughts from this week that builds on my time at the Four Seasons in Chicago.

If you’re looking for a bank that is leading the field in terms of core income, net loans/leases and core non-interest income, look no further than Customers Bank*. While not in Chicago with us, it was interesting to read a Washington Business Journal report that the Pennsylvania based bank called off their merger agreement with Northern Virginia’s Acacia Federal Savings Bank yesterday. Maybe this falls into the category “sometimes the best deal is the one not done.” Yes, the D.C. market has some great community banks — Eagle Bank, Bank of Georgetown, etc. — but it appears that regulatory issues, more than competitive ones, kept this from happening. [*FWIW, Customers' CEO will join us in a few weeks in New Orleans]

While M&A offers immediate growth to the acquirer, I’m hearing that “stocking the bank for talent” is a real long-term challenge. While a bank’s CEO and Chairman must work even more closely to drive bottom line performance while enhancing shareholder value, I left Chicago convinced this team must more aggressively identify — and groom — the next generation of bank leadership. Without the big banks providing management training like they once did (an unintended pipeline of talent for community banks), its time to get creative. For example, while most at our event appreciate the need to get mobile, few community banks have the senior strategist on hand to do so right now. While that opens the door to outside advisors to support an institution, it does present longer term dangers as customers expect access to their banks sans branch or ATM use.

Keeping on the tech-to-grow theme, I read an interesting “big data,” bank-specific piece by McKinsey on my way home to D.C. Personally, I’ve been interested in the various tools and tactics banks employ to analyze their massive amounts of data to detect/prevent fraud, devise customer loyalty plans and proactively approach consumers. This overview, complete with video, touch on these points and show how some are using big data and analytics to sharpen risk assessment and drive revenue.

Aloha Friday to all, especially my niece and sister-in-law on their birthdays.

About That Ratio…

Capitol ideas on financial institutions