21 Reasons I Am Excited About Acquire or Be Acquired

Quickly:

  • Making banking digital, personalized and in compliance with regulatory expectations remains an ongoing challenge for the financial industry. This is just one reason why a successful merger — or acquisition — involves more than just finding the right cultural match and negotiating a good deal.

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech.

PHOENIX, AZ — As the sun comes up on the Arizona Biltmore, I have a huge smile on my face. Indeed, our team is READY to host the premier financial growth event for bank CEOs, senior management and members of the board: Bank Director’s 24th annual Acquire or Be Acquired Conference. This exclusive event brings together key leaders from across the financial industry to explore merger & acquisition strategies, financial growth opportunities and emerging areas of potential collaboration.

AOBA Demographics

The festivities begin later today with a welcoming reception on the Biltmore’s main lawn for all 1,125 of our registered attendees.  But before my team starts to welcome people, let me share what I am looking forward to over the next 72 hours:

  1. Saying hello to as many of the 241 bank CEOs from banks HQ’d in 45 states as I can;
  2. Greeting 669 members of a bank’s board;
  3. Hosting 127 executives with C-level titles (e.g. CFO, CMO and CTO);
  4. Entertaining predictions related to pricing and consolidation trends;
  5. Hearing how a bank’s CEO & board establishes their pricing discipline;
  6. Confirming that banks with strong tangible book value multiples are dominating M&A;
  7. Listening to the approaches one might take to acquire a privately-held/closely-held institution;
  8. Learning how boards debate the size they need to be in the next five years;
  9. Engaging in conversations about aligning current talent with future growth aspirations;
  10. Juxtaposing economic expectations against the possibilities for de novos and IPOs in 2018;
  11. Getting smarter on the current operating environment for banks — and what it might become;
  12. Popping into Show ’n Tells that showcase models for cooperation between banks and FinTechs;
  13. Predicting the intersection of banking and technology with executives from companies like Salesforce, nCino and PrecisionLender;
  14. Noting the emerging opportunities available to banks vis-a-vis payments, data and analytics;
  15. Moderating this year’s Seidman Panel, one comprised of bank CEOs from Fifth Third, Cross River Bank and Southern Missouri Bancorp;
  16. Identifying due diligence pitfalls — and how to avoid them;
  17. Testing the assumption that buyers will continue to capitalize on the strength of their shares to meet seller pricing expectations to seal stock-driven deals;
  18. Showing how and where banks can invest in cloud-based software;
  19. Encouraging conversations about partnerships, collaboration and enablement;
  20. Addressing three primary risks facing banks — cyber, credit and market; and
  21. Welcoming so many exceptional speakers to the stage, starting with Tom Michaud, President & CEO of Keefe, Bruyette & Woods, Inc., a Stifel Company, tomorrow morning.

For those of you interested in following the conference conversations via our social channels, I invite you to follow me on Twitter via @AlDominick, the host company, @BankDirector and our @Fin_X_Tech platform, and search & follow #AOBA18 to see what is being shared with (and by) our attendees.

Three Things to Know About the Digital Delivery of Financial Products and Services

Quickly:

  • Technology continues to reshape what it means to lead, to innovate and to offer in terms of financial goods and services.

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech.

WASHINGTON, DC — It is no secret that financial institutions are in a race to figure out how and where innovative technologies can help win and keep loyal customers, improve operational efficiencies and enhance their overall cyber-security measures.  While we might disagree on how fast changes will occur, can we all agree that the ever-expanding expectations for the digital delivery of products and services will dramatically impact banking’s future?

I put this not-quite-rhetorical question out in advance of our annual Acquire or Be Acquired Conference at the Arizona Biltmore.  Indeed, the technological shifts taking place in this industry are significant, and I anticipate quite a few conversations about what our “digital future” might look like.  In the spirit of sharing information and ideas prior to this Sunday’s presentations, this video surfaces a few areas I think a bank’s board needs to pay closer attention to.

If you’re interested in following conversations that focus on issues like these during Acquire or Be Acquired, I invite you to follow me on Twitter via @AlDominick, check out what the team shares through @BankDirector plus our @Fin_X_Tech platform and search & follow #AOBA18 to see what the social shares with (and by) our attendees.

*This video — which is normally available only through our special bank membership program — foreshadows several presentations at Acquire or Be Acquired.  It also tees up our FinXTech Annual Summit.  Held the past few years at the NASDAQ’s MarketSite in NYC, we’ve partnered with Promontory Interfinancial Network to best explore opportunities to generate top line growth and bottom line profits through partnerships, collaboration and investments. Held at The Phoenician in Scottsdale, AZ on May 10th and 11th, I invite you to take a peek at the recently updated agenda.

Ranking the 10 Biggest Banks

Quickly:

  • Bank Director’s year-long Ranking Banking study focuses less on current profitability and market capitalization & more on how the top 10 banks in the U.S. are strategically positioned for success.

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech

WASHINGTON, DC — It is with tremendous pride that I share the results of Bank Director’s year-long study on America’s 10 largest banks.
  As my colleague, Bill King, wrote to open our inaugural Ranking Banking, we felt that a truly comprehensive analysis of the largest banks was missing, one that includes not just profitability or customer satisfaction ratings, but also compiles numerous measures of strength and financial health — a project to rank each of the largest banks for each major line of business based on qualities that all big banks need.

For instance, we decided to rank banks for branch networks, mobile banking, innovation and wealth management. We analyzed corporate banking and small business lending. We interviewed experts in the field and did secret shopper visits to the biggest banks to find out what the customer experience was like.  Unlike other rankings, we even included complaints lodged with the Consumer Financial Protection Bureau as one of many customer satisfaction metrics that we analyzed.  In other words, there is little about the biggest banks in the nation that we left out.

So who came out on top?

JPMorgan Chase & Co. topped Bank Director’s 2018 Ranking Banking study.

In fact, Chase won five of the ten individual categories and ranked near the top in three more, and was judged by Bank Director to be the most worthy claimant of the title Best of the Biggest Banks.  The individual category winners are:

Best Branch Network: Wells Fargo & Co.

Despite its well-publicized unauthorized account opening scandal, Wells Fargo topped the branch category by showing the best balance of deposit growth and efficiency, and scored well on customer experience reports from Bank Director’s on-site visits.

Best Board: Citigroup

In ranking the boards of directors of the big banks, Bank Director analyzed board composition by factors such as critical skill sets, diversity, median compensation relative to profitability and independence. Citigroup’s board best balanced all components.

Best Brand: JPMorgan Chase & Co.

Chase and runner-up Capital One Financial Corp. stood out for their media spend as a percentage of revenue, and both exhibited strong customer perception metrics.

Best Mobile Strategy: JPMorgan Chase & Co.

Chase has been successful in driving new and existing customers to its mobile products, leading to an impressive digital footprint, measured through mobile app downloads. The bank’s app also scored well with consumers.

Best Core Deposit Growth Strategy: BB&T Corp.

BB&T had a low cost of funds compared to the other ranked banks, and its acquisitions played a strong role in its core deposit growth, which far surpassed the other banks in the ranking.

Most Innovative: JPMorgan Chase & Co.

Chase most successfully balanced actual results with sizeable investments in technological innovation. These initiatives include an in-residence program and a financial commitment to the CFSI Financial Solutions Lab. Chase has also been an active investor in fintech companies.

Best Credit Card Program: JPMorgan Chase & Co.

Chase barely edged out fast-growing Capital One to take the credit card category, outpacing most of its competitors in terms of credit card loan volume and the breadth of its product offering. Chase also scored well with outside brand and market perception studies.

Best Small Business Program: Wells Fargo & Co.

Wells Fargo has long been recognized as a national leader in banking to small businesses, largely because of its extensive branch structure, and showed strong loan growth, which is difficult to manage from a large base. Wells Fargo is also the nation’s most active SBA lender and had the highest volume of small business loans.

Best Bank for Big Business: JPMorgan Chase & Co.

Big banks serve big businesses well, and finding qualitative differences among the biggest players in this category—Chase, Bank of America and Citigroup—is difficult. But Chase takes the category due to its high level of deposit share, loan volume and market penetration.

Best Wealth Management Program: Bank of America Corp.

With Merrill Lynch fueling its wealth management division, Bank of America topped the category by scoring highly in a variety of metrics, including number of advisors (more than 18,000 at last count) and net revenue for wealth and asset management, as well as earning high marks for market perception and from Bank Director’s panel of experts.

FWIW…

The 10 largest U.S. retail banks play an enormously important role in the nation’s economy and the lives of everyday Americans. For example, at the end of 2016, the top 10 banks accounted for over 53 percent of total industry assets, and 57 percent of total domestic deposits, according to the Federal Deposit Insurance Corp. The top four credit card issuers in 2016—JPMorgan Chase & Co., Bank of America Corp., Citigroup and Capital One Financial Corp.—put more than 303 million pieces of plastic in the hands of eager U.S. consumers, according to The Nilson Report.

Bank CEOs and Their Boards Can Lay Claim to These 5 Technologies

Quickly:

▪ Regional and community banks continue to lay claim to innovative technologies that attract new customers, enhance retention efforts, improve efficiencies, cut costs and bolster security.

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech

ATLANTA — The digital distribution of financial goods and services is a HUGE issue for bank executives and their boards.  Margins on banking products continue to decline due to increased competition.  In my opinion, this provides ample incentivize for banks to seek partnerships with specialized product and service providers.

I shared this thought earlier today at Bank Director’s annual Bank Board Training Forum. During my remarks to an audience of 203 officers and directors (representing 84 financial institutions), I laid out five potential area of collaboration that community bank CEOs and their boards might spend more time discussing:

1. New core technologies;
2. Machine learning / Artificial intelligence applications;
3. RegTech;
4. Payments; and
5. White labeling product offerings.

I elaborated on why I think our audience needs to explore each area before expanding on how banks might take steps to incorporate such technologies into their culture and business.  I wrapped up by providing examples of companies in each space that attendees might learn more about.

For instance, when it comes to the core technological systems offered by Fiserv, Jack Henry and FIS, many banks are investing in “integration layers” to bridge the needs of client‐facing systems with their core system. While these layers have proven valuable, banks are also aware of the need to migrate away from legacy cores should the flexibility they desire not come from these companies.  Hence the advent of companies like Finxact, a cloud banking platform promising to be the most transparent and open core banking system available.

In terms of machine learning and artificial intelligence, I see five potential use cases for banks to consider: smarter customer acquisition, better Know-Your-Customer efforts, improved customer service, smarter and faster account openings and the ability to offer more competitive loans.  Here, I am impressed with the work being done by companies like Kasisto, whose conversational AI platform is pre-loaded with thousands of banking intents and millions of banking sentences.  It promises to fulfill requests, solve problems, predict customers’ needs and improve performance on its own using sophisticated machine learning.

Given the cost and complexity of compliance, RegTech offerings promise to simplify fraud prevention and detection, improve the interpretation of regulation while accelerating reporting functions.  Further, RegTech companies held simplify data access, storage and management while strengthening risk management efforts.  There are quite a few companies in this fast-growing space that I highlighted.  One is Fortress Risk Management, a company whose advanced analytics predict and detect financial crime while its tool enable efficient case management, dispute management, reporting and regulatory compliance.

With respect to payments, our rapidly changing and oh-so-interconnected markets of debit, credit, mobile, prepaid and digital payments proves both a blessing and a potential curse for traditional institutions. As we move toward a cashless society and payments become less visible, banks need to maximize their opportunities to become the default payment method, and keep abreast of innovations in credit scoring, faster payments, analytics, security and fraud detection.  Case-in-point, BluePay delivers non-interest income to banks of all sizes by aggregating customer data coupled with the latest merchant processing technology.

Finally, white label product offerings are nothing new.  However, technology companies like SimplyCredit and StrategyCorps continue to help banks reshape and rethink customer engagement, setting new and higher bars for their’s clients’ experiences.  For banks seeking innovations like rapid loan adjudication, partnering with technology providers like these enables a bank to keep pace with the customer experience expectations set by large technology firms.

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If you weren’t able to join us in Atlanta and are curious about today’s featured image, here is a link to the pdf: 2017 Bank Board Training Presentation (Tech-focused). As I shared, New Zealand’s All Blacks are the world’s most successful sporting outfit, undefeated in over 75% of their international rugby matches over the last 100 years.  Their willingness to change their game (and their culture) when they were at the top of their game inspired me — and allowed me to challenge our attendees to think if they are willing to do the same with their banks.  I’m also inspired by my colleagues who helped develop this year’s program. From our conference team to editorial group, marketing to data departments, I’m proud to work with a great group dedicated to the idea that a strong board makes contributes to a strong bank.

Strong Board. Strong Bank

Quickly:

  • A bank’s CEO, Chairman and board of directors face a number of challenges in today’s ever competitive, highly regulated and rapidly evolving financial services industry.

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech

ATLANTA — Complex regulations, technological innovations and a highly competitive environment that leaves little room for error have placed unprecedented demands on the time and talents of bank boards.  Still, no one I’m with today seems interested in pity or sympathy.  To wit, I’m in Atlanta, at the Ritz-Carlton Buckhead, as we host Bank Director’s annual Bank Board Training Forum.  With us are 200+ men and women committed to strengthening their bank’s performance by enhancing the skills and abilities of their boards.

I’m buoyed by their collective optimism, especially having surfaced myriad governance issues, compliance challenges, audit responsibilities, risk concerns and areas of potential liability. What follows are five takeaways from presentations made today that are growth, risk or team-oriented.

  1. When it comes to growing one’s bank, an acquisition of another institution certainly helps a buyer achieve operating scale efficiencies, which in turn increases its valuation.
  2. In addition to traditional M&A as a driver of growth, we are seeing more partnerships with (and outright acquisitions of) non-banks in order to enhance non-interest income and the expansion of net interest margins.
  3. Personally, I appreciated Jim McAlpin (a partner at the law firm of Bryan Cave) for elaborating on the phrase “Strong Governance Culture.” As he explained, the regulatory community takes this to mean a well developed system of internal oversight and a board culture focused on risk management.
  4. When it comes to risk, financial institutions face a quite a few. Indeed, Eve Rogers, a Partner at Crowe Horwath, touched on cybersecurity, economic factors, regulatory changes, shrinking margins and fee restrictions. As she made clear, proactively identifying, mitigating, and, in some cases, capitalizing on these risks provides a distinct advantage to the banks here with us.
  5. In terms of compensation, a good checklist for all banks includes (a) the bank’s compensation philosophy, (b) specific details for how to incorporate a performance plan against a strategic plan and (c) details around how one’s compensation peer group was formed — and when was it last updated.

Tomorrow morning, I share some new ideas for approaching technology in terms of growth and efficiency given the digital distribution of financial goods and services.  As I noted from the stage, we’re seeing some banks, rather than hire from the ground up, take a plug-and-play approach for partnering (or acquiring) FinTech companies. While I certainly intend to talk about the culture and team aspects of technology tomorrow, my focus goes to how and where machine learning, RegTech, payments, white labeling opportunities and core providers allow financial institutions to present a cutting-edge looks and feels to its customers under the bank’s brand.  (*If you’re interested, click here.)

The Paths High Performing Banks Take to Growth and Innovation

Quickly:

  • I’m in Utah at the Montage Deer Valley for the second day of the Association for Financial Technology’s Fall Summit.
  • This afternoon, I shared my thoughts on the pace of change impacting banks as part of AFT’s Fintech Leadership Industry Update.

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech

PARK CITY — For those that attended Bank Director’s Acquire or Be Acquired conference this January, you may recall slides illustrating the consolidating nature of the banking industry over the past 25 years.  This decrease in the number of banks is the result of several major factors; most notably, changing banking laws, changing technologies, changing economics and changing consumer behaviors.

Given the audience we share information with (e.g. bank CEOs and their leadership teams), I continue to hear talk about steady, albeit slow, loan growth, some margin improvement and a continued emphasis on expense control.  However, it is apparent from the outside looking in that many banks still lack the true flexibility to continually innovate in terms of both products and services — and how they are delivered.

This is downright scary when you consider that Amazon’s Lending Service surpassed $3 billion in loans to small businesses since it was launched in 2011.  As I shared in my remarks, Amazon loaned over $1 billion to small businesses in the past twelve months.  Over 20,000 small businesses have received a loan from Amazon and more than 50% of the businesses Amazon loans to end up taking a second loan.  This is a major threat to the established financial community, because if there is one thing community banks and large banks agree on, it is that the small business market is important.  This will not change any time soon, and for community banks in particular, a greater share of the small business market may be their only path to survival.

So what I shared this afternoon were real-world examples of bank CEOs focused on carrying out a long-term growth strategy in creative, yet highly focused, ways.  For instance, several of the banks I referenced are attempting to re-engineer their technology and data infrastructure using modern systems and processes, developed internally and augmented through partnerships with fintech companies.  For instance, I cited a newer partnership between First Horizon’s First Tennessee bank unit and D3 Banking. In addition, I used examples like US Bancorp, PNC and Fifth Third before highlighting five more institutions that range from $10Bn to $50Bn in asset size.

I did so because we are witnessing an intense struggle on the part of financial services providers to harness technology in order to maintain relevance in the lives of their customers.  The eight banks I cited today have different leadership approaches; all, however, are considered high-performers. For those interested, here is a link to my presentation: Bank Director and FinXTech 2017 AFT Presentation.

The caveat to my presentation, remarks and writing: it might appear easy to create a strategic direction to improve efficiency and bolster growth in the years ahead. But many bank executives and their boards are being cautioned to prepare for false starts, unexpected detours and yes, stretches of inactivity — all of which impacts tech companies like those here in Park City at AFT.  Still, a vision without action is a dream; action without vision, a nightmare.  For these banks, strong leadership have set a clear course for their futures.

A Community Bank Can Build Innovation Into Its Growth Strategy

Quickly:

  • I’m at the Montage Deer Valley for the Association for Financial Technology’s Fall Summit.
  • “Who do we want to be when we grow up in this new digital, always-on financial services environment?” might be the most important question for a bank CEO to strategize on with his or her team.

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech

PARK CITY, UTAH — For the technology companies looking to make a real difference in the financial services world, let me suggest a stronger focus on regional and community banks.  At a time when JPMorgan Chase, Wells Fargo, BofA and the like are investing heavily in digital engagement strategies to connect with digital-savy customers, there are significant pressures on banks not able to spend what the biggest banks do to develop or adopt digital strategies.

As I listened to an afternoon panel discussion on the need for banks to create sustainable, scalable and relevant business models, I went back to my notes on a newer partnership between First Horizon’s First Tennessee bank unit and D3 Banking.  Developed to overhaul First Tennessee using D3’s API-driven platform, I see this type of partnership as one that positions a strong regional player to better compete with much larger banks.

First Tennessee and D3 is one of a number of bank/fintech arrangements I think technology executives here in Park City should know about.  A smaller bank “doing it right” in terms of partnering with technology companies is Somerset Trust Co., a $1 billion asset bank out of western Pennsylvania.

Their COO, John Gill, participated in the panel that precipitated this post.  As we’ve written about at Bank Director, Somerset has learned to play the innovation game by partnering up with some impressive fintech companies.  For example, they teamed up with Malauzai Software in Austin, Texas, to develop a mobile banking solution that allows Somerset’s retail banking customers to securely check balances, use picture bill pay and remotely deposit checks from any location or device.  More recently, Somerset Trust partnered up with BOLTS Technologies to improve its mobile new account customer experience.

It strikes me that figuring out how to move ones business towards a foundation of flexibility is essential.  So too is being open to new ideas and partnership opportunities. Most importantly, just because a bank is small doesn’t mean it can’t build innovation into its growth strategy.

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As part of AFT’s Fall Summit, I shared a few stories about bank CEOs leadership styles, their team’s investments in fintech companies and ideas, and several innovative solutions that caught my attention.  Interested?  Here is a link to both my presentation and post.

Consolidation Trends in Banking

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech

Quickly:

  • Nationwide consolidation in the banking space will continue; at least, that is my sense based on conversations and presentations at Crowe Horwath’s Bank Leadership and Profitability Improvement Conference.

_ _ _

So much of this morning was spent talking about growth through mergers and acquisitions (M&A) that I couldn’t help but flash back to January’s Acquire or Be Acquired conference.  Thematically, I went into that event expecting the unexpected.  Given this morning’s presentations on growing one’s bank, I believe that mindset still holds water.

For example, Tom Michaud, the president and CEO of Keefe, Bruyette & Woods, described 2016 and 2017 as one bumpy ride.  From recession fears to lower-for-longer rates, the initial euphoria after the presidential election (at least in terms of stock prices, which went up 27% – 30%) to the uncertainty of regulatory relief, he reminded us of where we are coming from relative to where we might be heading.  I am always curious to hear what Tom thinks about the state of banking; below, ten things I learned from him this morning:

  1. The interest rate outlook is a bit cloudier than it was in November;
  2. Regional banks have had excellent earnings per share growth relative to the overall market;
  3. We have an active pace of consolidation — nearly 5% of the industry is merging;
  4. The most prolific acquirers can buy 2, maybe 3 banks, at best each year;
  5. M&A deals are getting bigger — not ’97 or ’98 levels, but bigger than where they’ve been;
  6. Large buyers are not in the game right now — buyers $25Bn and below continue to drive M&A activity (case-in-point, 95% of total M&A deals since 2011 have buyer assets less than $25Bn);
  7. Buyers are completing their acquisitions in 6 months or less;
  8. Banks with strong tangible book value multiples are dominating M&A;
  9. There have been 37 bank IPOs since 2013 — and the market today is open to small bank IPOs; and
  10. If you’re running a bank, you better be watching (like a hawk) the FinTech charters being pursued by companies like SoFi.

Following Tom’s presentation, we doubled down on growing-the-bank type topics with a session involving Rick Childs, a partner at Crowe Horwath, Jim Ryan, the CFO at Old National Bancorp, Jim Consagra, EVP and COO at United Bancshares and Bryce Fowler, chief financial officer at Triumph Bancorp.

From pricing discipline to acquisitions of privately-held/closely-held companies, the guys made clear that “there are only so many deals out there.”  They shared how boards need to determine the size they want to be, honestly assess the talent they have relative to such aspirations and determine how growth through M&A aligns with enterprise risk management positioning.  Essentially, their remarks made clear that a successful merger or acquisition involves more than just finding the right match and negotiating a good deal.

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As I shared with yesterday’s post, my thanks to Crowe Horwath, Stifel, Keefe Bruyette & Woods and Luse Gorman for putting together this year’s Bank Leadership and Profitability Improvement Conference at The Inn at Spanish Bay in Pebble Beach, California.

The Intersection of Leadership and Profitability

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech

Quickly

  • Key takeaways from one of my favorite summer banking events, Crowe Horwath’s Bank Leadership and Profitability Improvement Conference.

_ _ _

This morning, on the first of my two flights from Washington National to Monterey, California, I learned that Walmart customers might soon be able to get installment loans for big-ticket items through Affirm, a San Francisco-based FinTech I first wrote about in 2014 (For Banks, the Sky IS Falling).  Per the Wall Street Journal, the companies reportedly are nearing an agreement on a pilot program.  This potential partnership caught my eye as I prepared for today and tomorrow’s conference.  Indeed, relationships like these make clear that when it comes to growth and efficiency, the digital distribution of financial goods and services is a significant issue for the banking industry.

This idea took further shape when I walked into the conference center at the Inn at Spanish Bay.  Immediately upon entering the room, I found John Epperson, a partner at Crowe and Jay Tuli, senior vice president retail banking and residential lending at Leader Bank, sharing their opinions on partnership strategies involving banks and FinTechs.  From the stage, they touched on increasing net interest margins via improved pricing strategies on commercial loans, approaches to streamline mortgage application processes, ideas to reduce staff counts for loan administration processes and how to improve customer experiences through online rent payment solutions.

Their perspectives lined up with those we recently shared on BankDirector.com.  To wit, “many banks have realized advantages of bank-FinTech partnerships, including access to assets and customers.  Since most community banks serve discreet markets, even a relatively simple loan purchase arrangement can unlock new customer relationships and diversify geographic concentrations of credit.  Further, a FinTech partnership can help a bank serve its legacy customers; for instance, by enabling the bank to offer small dollar loans to commercial customers that the bank might not otherwise be able to efficiently originate on its own.”

Of all the difficult issues that bank leadership must deal with, I am inclined to place technology at the top of the list.  Banks have long been reliant on technology to run their operations, but in recent years, technology has become a primary driver of retail and small business banking strategy.  John and Jay simply reinforced this belief.

In addition to their thoughts on collaboration, this afternoon’s sessions focused on ‘Liquidity and Balance Sheet Management,’ ‘Fiscal Policy During Regulatory Uncertainty’ and ‘Managing Your Brand in a Digital World.’  While I took note of a number of issues, three points really stood out:

  • Yes, banks can make money while managing decreasing margins and a flat yield curve.
  • Asset growth without earnings growth is a concern for many because of loan pricing.
  • How a CFO sets a target(s) for interest rate risk may start with an “it depends” type response — but gets nuanced quickly thereafter.

Finally, I’m not holding my breath on the industry receiving regulatory relief any time soon.  I get the sense many here aren’t either.  But it would be nice to see some business people brought in to run various agencies and I’m looking forward to the perspectives of tomorrow’s first guest speaker, Congressman John Ratcliffe.

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My thanks to Crowe Horwath, Stifel, Keefe Bruyette & Woods + Luse Gorman for putting together this year’s Bank Leadership and Profitability Improvement Conference at The Inn at Spanish Bay in Pebble Beach, California.  I’ll check in with additional takeaways based on tomorrow’s presentations.

Bank Director’s 2018 Acquire or Be Acquired Conference

January 28-30, 2018 | Arizona Biltmore Resort | Phoenix, AZ

While we’re in the dog days of summer, our team continues to build towards the winter and the premier bank M&A event for CEOs, senior management and board members: Bank Director’s annual Acquire or Be Acquired Conference.  This special event, AOBA for short, brings together key bank leaders from across the country to explore merger & acquisition strategies, consolidation trends and financial growth opportunities.  Earlier this year, we welcomed 1,000+ to the Arizona desert — and anticipate a similar audience when we return a week before next year’s Super Bowl.  We’ve added a ton of new information on January’s program to BankDirector.com; if you’re interested to see what we’re planning, please click here.

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For those curious about the ideas and issues covered in late January, I posted a number of pieces on About That Ratio.  As a quick reference:

Finally, a twitter search using #AOBA17 should quickly return results that aggregate what a number of people thought and shared with us.  A deeper dive using the @BankDirector and @Fin_X_Tech handle also works wonders.

What Makes M&T A Great Community Bank?

A few months ago, the Wall Street Journal ran a story about M&T Bank appearing “to be just another big regional lender — but that doesn’t account for its CEO.”  Their piece coincided with our editorial team’s preliminary analysis of this strong financial institution.  We wondered: what’s behind M&T’s consistent success, why and how does M&T work like a community bank — and how is M&T playing a unique role reshaping public schools in Buffalo, New York?  These questions form the basis for Bank Director Magazine’s current cover story.  Authored by our Editor-in-Chief Jack Milligan, what follows is an account of how this upstate New York bank grew by making “quality loans to worthy borrowers” while following the lead of its dynamic Chief Executive..
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Any bank that exceeds $50 billion in assets carries the regulatory designation of being a Systemically Important Financial Institution, or SIFI. As such, they are subject to stricter supervision by the Federal Reserve than smaller banks receive, including higher capital requirements and mandatory stress testing. A community bank is an amorphous concept that means different things to different people, but certain characteristics are implied in the common understanding: It usually has a strong business focus and makes most of its money from lending, it has deep roots in the community because that is where its customers are located, and it is small. “Small” within this context is also imprecise. Certainly any institution that meets that definition under $1 billion would be considered a community bank, although many institutions over that threshold level would make the same claim.

But what about a Buffalo, New York-based $123 billion asset bank that operates in eight states and the District of Columbia?

M&T Bank Corp., the top ranked bank in Bank Director’s 2017 Bank Performance Scorecard for the $50 billion and above asset category, lives in both worlds.  M&T is the country’s 18th largest commercial bank and must adhere to all the requirements of a SIFI. But it also has deep roots in the communities it serves—as deep as most smaller banks. M&T not only meets the consumer and business banking needs of those communities, but also spends time and money trying to make them better places to live.

In this, M&T reflects the interests and values of its 83-year-old chairman and chief executive officer, Robert G. Wilmers, who has run the bank since 1983 when it had just $2 billion in assets. Wilmers believes deeply in the importance of strong local communities, if his 2016 letter to M&T’s shareholders is any guide. In the letter, Wilmers expressed concern about the health and well being of middle-class families and small-business owners who form the foundation of M&T’s customer base. The culprits that Wilmers identified are a monetary policy that has kept interest rates low, and excessive regulation. Low rates have benefited the wealthy more than middle-class families, who tend to be savers rather than investors. And M&T’s customer research has found that while small companies could benefit from borrowing at today’s low rates, many business owners are reluctant to expand in what they feel is an overregulated environment.

“Policies designed to benefit the majority have perversely only benefited a few,” he wrote. “The impacts of these decisions … are real,” Wilmers added. “In particular, the middle class and small businesses are losing ground. So, too, are their communities.”

M&T has a relatively straightforward business model compared to other institutions its size. M&T focuses its lending on consumers and small- and middle-sized businesses, and also provides wealth management and fiduciary services through its Wilmington Trust subsidiary to individuals and corporations. It doesn’t have a capital markets operation or wide array of specialty lending businesses, so it has some of the business model characteristics of a community bank, if not the size.

As is common with many Scorecard winners, M&T’s performance was marked by its balance. It did not place first in any of the five metrics that make up the Scorecard—return on average assets, return on average equity, the ratio of tangible common equity to tangible capital, nonperforming assets as a percentage of loans and other real estate owned, and net charge offs as a percentage of average loans. Its best scores were fifth place finishes for return on assets and net charge offs out of 22 banks in the $50 billion and above category. Scorecard winners tend to be those banks that do well on all of the metrics rather than dominating one or two.

The bank reported net income for 2016 of $1.32 billion, a 22 percent increase over 2015. Although fee income growth was essentially flat in a year-over-year comparison, loan growth was strong in 2016, with commercial and industrial credits growing 11 percent and commercial real estate loans 15 percent for the year. Residential real estate loans actually declined 14 percent last year as the bank let many of the jumbo mortgages that came with its 2015 acquisition of Hudson City Bancorp run off. M&T also shed nearly $2.6 billion in interest-bearing deposits it acquired with Hudson City, a thrift that relied on certificates of deposit for most of its funding. This 34 percent decline in high-cost liabilities, combined with its strong loan growth, resulted in a 22 percent rise in the bank’s net interest income for the year. M&T’s efficiency ratio dropped from 58.0 percent in 2015 to 56.1 last year, and this improvement also helped boost its profitability.

Over the long term, M&T has been a good performer in terms of asset quality and their earnings profile … and they tend to do well among large bank peers,” says Rita Sahu, a credit research analyst who covers M&T for Moody’s Investors Service. Sahu points out that M&T’s expenses were higher in 2014 and 2015 because of some charges related to the Hudson City purchase, and also because the bank had to spend heavily to strengthen its Bank Secrecy Act compliance infrastructure before the Fed would approve the Hudson City acquisition. Putting those issues behind it also helped boost the bank’s profitability last year.

M&T has attracted a strong following among institutional investors who value its predictability. The bank hasn’t posted a quarterly loss going back to 1976, and also had the lowest percentage of credit losses among money center and superregional banks during the financial crisis. Investors especially appreciate how much the bank’s stock price has, well, appreciated. Frank Schiraldi, an equity analyst at Sandler O’Neill + Partners who covers M&T, says the stock’s total return since June 1997 is 747 percent. This performance easily beats both the S&P 500 and SNL Mid Cap U.S. Bank Index for total return. M&T’s own investor presentation points out that just 23 of the 100 largest U.S. banks that were operating in 1983 when Wilmers took over are still around today. Among those, M&T ranks number one in stock price appreciation, with a compound average growth rate of 15 percent. “That’s pretty special,” Schiraldi says.

An important contributor to M&T’s performance last year was the acquisition of Hudson City, which closed in November 2015. Headquartered in Paramus, New Jersey, Hudson City operated on a traditional thrift model with its reliance on high- cost time deposits to fund a home loan origination platform that was heavily focused on jumbo mortgages, a product that M&T did not offer. So why did M&T do the deal? “If you looked at our distribution network prior to Hudson City, it was like a bagel and New Jersey was the hole,” explains Vice Chairman Rich Gold. “We had it surrounded, but we had nothing in New Jersey. This strategically filled a hole and now when you look at our distribution we’re covered from New York all the way down to Richmond, Virginia.”

While Hudson City was important for its geography, there were certain things it didn’t offer. As a traditional thrift, it had only a small percentage of core deposits and little in the way of business or consumer loans. “Our challenge now is to make something more out of the franchise than what it was,” says Gold. That transformation is underway, and it’s a process that M&T is very practiced at. Hudson City was M&T’s 23rd acquisition of either branches or whole institutions since 1987, and many of those deals involved thrifts. Gold says that successfully introducing a bank culture to a thrift takes time, and is facilitated by taking experienced M&T managers and seeding them throughout the old thrift franchise. “They understand the drill,” he says. “They understand what needs to be done. They understand the cultural complexion of [M&T] and are able to not only represent that but teach it.”

Announced in August 2012, the Hudson City deal would take over three years to close because of deficiencies the Fed found in M&T’s risk management infrastructure, particularly its BSA and anti-money laundering compliance efforts. The acquisition of Hudson City was going to substantially increase M&T’s asset size, and the Fed required that the bank strengthen its risk management program accordingly. “We probably did outgrow our infrastructure,” says Gold. “That’s shame on us. We missed that cue and we shouldn’t have, and I think we all recognize that and readily admit that.” M&T would eventually invest hundreds of millions of dollars building out an enterprise risk management infrastructure, including BSA and anti-money laundering compliance, an effort that was led by Gold.

And yet for all that, Hudson City has still turned out to be a good acquisition for M&T, even if it took much longer for the benefits to surface than anyone there expected. “It was still accretive from an earnings standpoint and from a tangible book value standpoint, so financially it was still a very good deal,” says Schiraldi. The Hudson City deal could also turn out to be a big driver of M&T’s growth over the next couple of years as the bank continues to build out the New Jersey franchise.

The bank made a $30 million tax-deductible cash contribution to the M&T Charitable Foundation in the fourth quarter of last year, which reduced its net income by $18 million, or 12 cents of diluted earnings per common share. For all of 2016, the M&T Charitable Foundation contributed $28 million to more than 3,600 not-for-profit organizations across its footprint, and its employees contributed over 234,000 volunteer hours.

Of course, many banks support community activities with their time and money. But few bank CEOs have stated their commitment quite so publicly as Wilmers has, and one undertaking in particular reflects both his values and interests—as do many things at the bank. With an undergraduate degree from Harvard College and an MBA from Harvard Graduate School of Business Administration, Wilmers has put his stamp on the bank during the 34 years that he has run it. Its relatively simple business model of checking accounts, loans and investment management advice fits comfortably with Wilmers’ description of the role that banks are supposed to play. “Banks are there to take care of people’s surplus liquidity, and help them buy a car and build a house and manage a business,” he said in an interview. “Part of that is making sure that things go well in the community, and that’s sort of like being for Mother’s Day.”

Wilmers is not the easiest interview for a journalist. He is polite and courteous, but has a tendency to reply to most questions with a brief answer or a deflection. An hour spent with him is to experience a fox hunt from the perspective of the hound. But Wilmers’ commitment to community—and particularly education—is real. He gives full voice to both in his 2016 shareholders letter, with roughly half of its 34 pages devoted to those concerns. (He also spent a lot of time complaining about bank regulation.) But when asked whether the American Dream, as it is embodied in middle-class families and small-business owners, is beginning to fray, Wilmers had this to say: “[Thirty years ago], 70 percent of the work force didn’t have a high school degree. Thirty years from now, 70 percent of the work force will need more than a college degree, in a time when arguably our educational system is getting worse, not better. That’s a big, big problem.”

And it’s a problem that M&T has spent its own time and money on. In 1993, the bank took over School 68, a poorly performing public school in the northeast section of Buffalo, an inner city neighborhood where, today, 33 percent of the residents live below the poverty line, and the unemployment rate is nearly 12 percent. School 68 was converted to a not-for-profit charter school in 2004 and renamed the Westminster Community Charter School, and today it teaches 550 students in kindergarten through the eighth grade. M&T has invested $16.6 million in the school to date, which includes a significant renovation to the building, and it manages all of the school’s operations. “Bob’s whole goal with Westminster was to see if he could change student academic outcomes and students’ lives and [their] families’ lives,” says Pamela Hokanson, president and senior director of schools for Buffalo Promise Neighborhood (BPN), an umbrella organization that oversees the school. As a charter school, Westminster receives about 60 percent of its funding from the State of New York. M&T and the Annie Casey Foundation provide the balance of the funding.

Walking through the facility with Hokanson and Principal Rob Ross on an afternoon in late May of this year, the halls were full of the joyful noise of children who seemed very happy to be there. Tuition is free and the school has a 95 percent attendance rate, the highest of any school in the City of Buffalo, according to Ross. “Of course, social ills creep in every now and then, but our goal is that the students’ experience in school should be safe, it should be positive, and we want them to walk away thinking of something they did today, whether it was the book they read or how they solved a problem with classmates as they were working through math or science,” Ross says.

In 2011, M&T was awarded a five-year, $6 million grant by the U.S. Department of Education to establish BPN, which M&T matched and Hokanson was then able to use as leverage to raise an additional $18 million from other organizations. The Buffalo Promise program now includes two additional schools, one of them an early learning center that was built in 2013 and acts as a feeder to Westminster. M&T contributed $3.5 million toward its construction. The bank also spent approximately $1.5 million renovating homes in the BPN footprint in 2014 and 2015.

M&T’s financial support is vital to BPN in other ways as well. Hokanson is actually an employee of the bank—her bank title is administrative vice president—but she is just one of eight bank employees who work for BPN. Sixteen other BPN employees are funded through an Annie Casey Grant and the M&T Charitable Foundation.

It is doubtful that M&T makes much, if any, money off of the nearly 12,000 residents who live in the BPN community. But it is a community that Wilmers and M&T have invested heavily in nonetheless. And there are children at Westminster whose lives are being changed as a result. Some years back, BPN created a scholarship program, also funded by M&T, that pays the tuition for its best students to attend the top private high schools in Buffalo. There are currently 30 students in the program. In May, the school hosted a dinner that was attended by all of the previous scholarship winners, plus the new class. Ross smiled when he talked about “seeing the dining hall filled with grandmas, and moms and dads and realizing that every one of those kids—yes, they got a scholarship—but they were working really hard not just to keep the scholarship but excel.”

Trying to make lives better. By anyone’s definition, that’s the work of a community bank.

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Our Bank Performance Scorecard is a ranking of the 300 largest U.S. banks, broken into three asset size categories. For a full explanation of the Scorecard and all of the rankings, click here.

Looking for Inspiration? Look to USAA

Quickly:

  • Next week, my team hosts 350+ leaders from across the United States at Bank Director’s annual Bank Audit & Risk Committees Conference at the JW Marriott Chicago.
  • In advance of welcoming people to this popular event, it strikes me that the business of banking remains difficult despite improving economic conditions; indeed, the drive to digitize a bank’s operations continues to pose significant challenges to most.
  • Digital is, in my estimation, a CEO topic that requires a healthy dose of creativity and ambition.  As such, I’m sharing the following article on innovation — authored by John Maxwell and featured in Bank Director magazine’s current “Great Ideas” digital issue.  It focuses on how USAA taps the creative side of its employees to pre-position itself for the next new products, tools and technologies to benefit its diverse customer base.

USAA - ASD

“USAA was the first major financial institution to allow customers to deposit physical checks by taking a picture of them on their smartphones, rolling out the service in August 2009. It wasn’t until months later that Bank of America Corp., the nation’s second biggest bank by assets, said it would test the same functionality, by which point upward of 40,000 USAA members had already used the software to deposit more than 100,000 checks. And it wasn’t until the following year that JPMorgan Chase & Co., the nation’s biggest bank by assets, followed suit.

This was neither the first nor the last time that USAA, a niche player in the financial services industry serving current and former members of the military and their families, had beaten larger rivals to the punch in introducing a big, transformative idea. In 2015, the $78 billion asset company became the first major U.S. financial institution to roll out facial and voice recognition technology that allows members to log in to its mobile app without entering a password.

What is it about USAA that explains how it’s regularly at the forefront of big ideas? Is it serendipity, or is there something more at play? And if it’s the latter, are there aspects of USAA’s approach that can be replicated by other banks that want to accelerate their own internal innovation engines?

One explanation for USAA’s success is that the company has always had to think creatively about distribution because of its dispersed member base. With members stationed at military installations around the world, some in active combat zones, simply building more branches has never been a viable distribution strategy. It has a single bank branch at its headquarters in San Antonio, and it wasn’t until 2009 that it began opening a small collection of financial centers near domestic military bases—there are 17 of these centers currently. This is why USAA so readily embraced mobile banking, which enables its members to access their accounts irrespective of location.

Yet, chalking up USAA’s accomplishments in the sphere of innovation to the idea that “necessity is the mother of all invention” doesn’t do the story justice. More than any other major company in the financial services space, USAA has made it a priority to harness each of its 30,000 employees in order to stay on the cutting edge. It began doing so in earnest in 2010 by launching a so-called ideas platform on the company’s intranet. Anyone from the CEO to frontline personnel to security guards can post and vote on ideas that have been entered on the platform. Between 10,000 and 11,000 ideas were submitted in each of the last two years. Ideas that get at least 1,000 favorable employee votes are escalated to USAA’s in-house innovation team overseen by Zack Gipson, USAA’s chief innovation officer.  Last year, 1,206 employee ideas were implemented, while 189 of them have come to fruition thus far in 2017.

USAA also hosts events and challenges for employees that are designed to elicit ideas for new or improved products and services. There are 28 such activities planned this year, taking the form of multi-week coding and design challenges as well as single-day hackathons where teams are tasked with solving a specific problem, says Lea Sims, assistant vice president of employee and member innovation. At an event in 2015, USAA happened upon the idea for voice-guided remote deposit capture, which uses voice commands to guide visually impaired members through the process of depositing checks on a mobile device. The service went live in July of 2016.

On top of these specific initiatives, USAA uses incentives and a consistent messaging campaign to encourage employees to brainstorm and share innovative ideas. Rewards are handed out to winners of challenges, as well as to any employee behind an idea that gets 1,000 votes on the ideas platform—an additional reward is meted out if the idea is implemented, explains Sims. These rewards come in the form of company scrip, which can be redeemed for actual products. A total of 94 percent of USAA employees have participated one way or another in its various innovation channels, with three quarters of a million votes submitted on its internal ideas platform in 2016 alone. “We put a premium on innovation,” says Sims. “It starts in new employee orientation as soon as you walk in the door to be part of our culture.”

USAA has taken steps to crowdsource ideas from its 12 million members, or customers, as well. In February it introduced USAA Labs, where members can sign up to share innovative ideas and participate in pilot programs of experimental products. “The goal of our membership channel is, quite frankly, to replicate the success of our employee channel,” says Sims. Thus far, over 770 members have signed onto the program, which is still in its early stages but could become a major part of USAA’s innovation channel in the future.

Last but not least, sitting atop USAA’s employee and member-based innovation channels is a team of 150 employees who focus solely on bringing new ideas to life. This is its strategic innovation group, which executes on crowdsourced ideas but spends most of its time brainstorming and implementing large, disruptive concepts such as remote deposit capture and biometric logins. It’s this final component of USAA’s strategy that adheres most closely to the institutional structure articulated by Harvard professor Clayton Christensen, a leading expert on the process of innovation. In his seminal book, The Innovator’s Dilemma, Christensen makes the case that established firms should vest the responsibility to bring ideas to life in organizationally independent groups. This is especially important when it comes to disruptive ideas that threaten to cannibalize other products and services sold by the firm, not unlike the way that remote deposit capture reduces the need for physical branches.

In short, the reason USAA has consistently been at the forefront of innovation in the financial services industry has next to nothing to do with serendipity. It traces instead to the company’s strategy of engaging all of its stakeholders in the idea generation process, harnessing the creative power of 30,000 employees, 12 million members and a select team of internal innovators who focus on nothing but bringing new ideas to life. It’s this structural approach to innovation, and the focus on employee engagement in particular, that offers a valuable model for other banks to follow. Indeed, out of the many big ideas USAA has introduced over the years, its strategy of crowdsourcing innovation may very well be the biggest.”

*John J. Maxfield is a writer and frequent contributor to Bank Director.  To read more of this month’s issue (for free), click here.  In full disclosure, I’m a loyal USAA member — as is my entire family — tracing back to my father’s days at the Naval Academy.  I can attest to the “awesomeness” of the bank’s various mobile offerings — like facial recognition, remote check deposit, the integration of Coinbase (that lets me see the balance of my bitcoin and ethereum balances alongside my checking and savings accounts), etc.