Five Reasons Why Banks Might Consider Selling in 2016

You might think every bank CEO I meet wants to talk about buying another institution; truth-be-told, some recognize that tying up with another makes a lot of sense.  So this post looks at why now may be the right time for a bank’s CEO and board to consider a sale.  It plays off the idea that in many markets, organic growth options are limited and times are tough for banks, especially those under $1Bn in asset size.

By Al Dominick, President & CEO, Bank Director

Over the past three years, a number of bank executives and board members have struggled with whether to buy or sell their bank — or pursue growth independently.  Over the same time, Bank Director has welcomed more than 1,300 bankers — from more than 500 financial institutions — to our annual M&A conference to explore their short- and long-term options.

This year, those numbers go up in a BIG way. Indeed, we have 600 bankers from 300+ banks joining us at the Arizona Biltmore for “AOBA” this upcoming Sunday through Tuesday.  To me, this signals that more potential buyers & sellers are getting off the sidelines and into the bank merger and acquisition game.  So in advance of Bank Director’s 22nd annual conference, here are five challenges that a bank’s CEO and board might want to consider.

  • Peer-to-peer lenders, credit unions and some — not all — FinTech startups either are (or will be) fierce competitors to community banks.  In addition, non-bank giants in technology, retail, media, entertainment and telecom are making noise about entering banking.
  • When margins decline, bankers try to compensate by improving operational efficiencies.  While slow growth + strong cost controls may allow for short term survival, such an equation doesn’t bode well for the long-term viability of many institutions where investors expect more significant gains.
  • The pressures prompting larger banks to innovate — sluggish loan demand, depressed revenue, higher compliance costs — are the same ones that will continue to force smaller banks to pursue a sale.
  • Let’s face it: the typical bond between a bank and a customer is is not personal nor very strong and the absence of real customer loyalty undermines the traditional business model most banks operate from (*and yes, I know that banks with dedicated customer bases enjoy significant advantages over any potential competitors. But let’s be honest about how dedicated such customers really are).
  • Finally, at many community banks, older management teams and a dearth of local talent mean there may be no one to hand over the reins to in the coming years.

Now, it has been said that business is not about longevity, it is about relevance.  So as Bank Director’s team continues to gear up for this year’s Acquire or Be Acquired conference, these five questions merit serious conversation and consideration both leading up to, and at, our 22nd annual event. For those not able to join us — but interested in following conversations such as these — I invite you to follow me on Twitter via @AlDominick, the host company, @BankDirector, and search & follow #AOBA16 to see what is being shared by (and with) our attendees.

4 Things to Know In Advance of Bank Director’s 2016 Acquire or Be Acquired Conference

Why banks are bought or sold involves much more than just the numbers making sense. Indeed, to successfully negotiate a merger transaction, buyers & sellers must bridge the gap between a number of financial, legal, accounting and social challenges. So in advance of this year’s biggest merger and acquisitions (M&A) conference, a few things I feel attendees of “AOBA” should know.

By Al Dominick, President & CEO, Bank Director

Starting this Sunday at the Arizona Biltmore, Bank Director’s team once again opens the doors to our annual Acquire or Be Acquired Conference — affectionately called “AOBA” (ay-oh-bah).  About this time last year, I wrote about a record turnout, one we will exceed in a few days when 925 men and women arrive at this architectural gem.

By design, the numbers I share in the image above only reflect key data from the financial institutions attending.  In fact, we are prepared to welcome another 60+ professional services firms and product companies to the Biltmore.   While I am particularly impressed by the caliber of support provided to the industry by our sponsoring companies, today’s post focuses on a handful of issues impacting the officers and directors joining us from strong and well performing community banks.

While big banks typically garner mainstream headlines — Wells Fargo, Citi, JPMorganChase and Bank of America account for a whopping $8.1 Trillion of the $17.3 Trillion assets held by banks in the U.S. — the buying and selling of banks takes place outside their domain.  The overwhelming majority of deals today involve community banks, many of whom have their CEOs attending AOBA.  So for this hugely influential audience, here are my key points to know and consider before the conference kicks off.

  • M&A remains attractive inasmuch as successful transactions improve operating leverage, earnings, efficiency and scale.
  • Today’s regulatory environment can hold up a deal — so it has become popular to note that banks can make acquisitions depending on how “clean” both the buyer and seller are + how big the resulting bank becomes.
  • As seen in their superior financial metrics (e.g. ROAA and ROAE), larger banks are growing and consistently outperforming smaller banks.
  • Small and mid-sized banks’ importance to the overall economy and select business sectors remains in place; however, their earnings potential is less diverse then big banks, making them more vulnerable to new competitors and shifts in pricing of financial products.

Certainly, the buying and selling of banks has been the industry’s “great game” for the last couple of decades.  As the conference agenda reflects, we dive deeper into topics like these and look at pre-deal considerations, post-integration challenges and everything in between.  So for those not able to join us — but interested in following the conversations — I invite you to follow me on Twitter via @AlDominick, the host company, @BankDirector, and search & follow #AOBA16 to see what is being shared with (and by) our attendees.

A Complete Guide to Bank Director’s Audit & Risk Committees Conference

Whether it is a complex product, new service or emerging line of business, this year’s Bank Audit & Risk Committees Conference examines the many issues and opportunities being faced in boardrooms at financial institutions of all sizes across the country.

By Al Dominick // @aldominick

While much has been written about how and where banks might grow, with new opportunities come new challenges.  With our industry undergoing significant change, boards must be highly informed in order to proactively oversee the management of security risks, compliance challenges and reputational issues.  At this year’s Bank Audit & Risk Committees Conference, we focus in on key accounting, risk and regulatory issues that challenge bankers and board members alike.  Today’s column tees up this year’s program, one that opens on Wednesday at the JW Marriott in Chicago, IL.

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Wednesday, June 10

Before the curtains officially come up, we offer a series of pre-conference programs; most notably, a series of peer exchanges exclusive to a bank’s audit and risk committee chairs.  Modeled upon our annual Bank Chairman/CEO Peer Exchange, small groups of directors meet in closed door, off-the-record peer exchanges for candid discussions about various hot topics.  In addition, we have added a cyber security workshop that allows attendees to play out various scenarios that involve a hack, breach or attack.  Finally, we offer a primer for newer audit and risk committee members and chairs that provides a framework for both roles and responsibilities.

Thursday, June 11

According to several bankers I have recently talked to, this has become a must-attend event for audit committee members, audit committee chairs, CEOs, CFOs, presidents, corporate secretaries, internal auditors, chief risk managers and other senior executives who works closely with the audit and/or risk committee.  This year, we cover pertinent issues such as enterprise risk management, fraud, relations with internal and external auditors, audit committee oversight and regulatory changes for banks.  It is this ability to focus in on critical concerns and complex scenarios to a very specific group of officers and directors that sets us apart from others.  At a time when audit and risk committee members are being asked to take on more responsibilities and perform at higher levels than ever before, the presentations made on day one are laser-focused on key financial, risk management and regulatory issues.

Friday, June 12

A significant imperative for members of a bank’s board today?  Fully integrate risk management, compliance and ethics “that fit” into a particular bank’s culture.  On day two, we look at how this might be done while addressing many other challenges.  Indeed, some of the key risks facing banks today (that regulators expect boards and senior managers to address) include:

  • Strategic risk as banks adapt business models to respond to the current economic and competitive landscapes;
  • Management succession and retention of key staff;
  • Loosening loan underwriting standards;
  • Expansion into new products and services;
  • Exposure to interest rate risk;
  • Oversight of third party service providers;
  • Increased volume and sophistication of cyber threats;
  • BSA/AML risk from higher-risk services and customer relationships; and
  • Maintaining effective compliance management systems.

The presenters at this event are some of the leading experts in accounting, legal, consulting and regulatory areas, as well as experienced bank officers and directors.  From Sullivan & Cromwell to KPMG, Arnold & Porter to Crowe, Latham & Watkins to FIS, we are pleased to bring some of the industry’s foremost advisors together in Chicago.

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To follow the conversation via Twitter, check out #BDAUDIT15, @bankdirector and @aldominick.

The Fight for Relevancy

I’m sure it is really simple for those not invested in the future of banking to write that CEOs, their boards and executive teams should cut branches and full-time employees to make their banks more efficient.  But I’m of the belief that you can’t save your way to long-term profitability and viability — and not everyone can be like Capital One and reinvent their business model from digital to analog on the fly.

Last October, Richard Fairbank, the Chairman and CEO of Capital One, expressed the following opinion on an earnings call: “Ultimately, the winners in banking will have the capabilities of a world-class software company. Most of the leverage and most of our investment is in building the foundational underpinnings and talent model of a great digital company. To succeed in a digital world (you) can’t just bolt digital capabilities onto the side of an analog business.”  Now, I am a big believer that many banks have immediate opportunities to expand what banking means to individual and business customers. Heck, I wrote as much to open a special supplement to Bank Director magazine that highlights a number of interesting technologies that have re-shaped the fortunes of banks across the U.S.  As you can see in the graphic above (produced for and by our team), the intersection of financial services with technology tools is immense.

Nonetheless, the interaction, communication, coordination and decision-making in regulated banks is vastly different than those of an up-and-coming technology company.  No matter how much both sides want to work with the other (to gain access to a wider customer footprint, to incorporate emerging technologies, etc.), the barriers to both entry and innovation are high.

Keep in mind that there has been an enormous shift in asset concentration and customer loyalty during the past two decades. Today, the ten biggest banks in the U.S. now have more assets than all of the other institutions combined. Concurrently, major consumer brands such as Apple and Google have emerged as significant non-bank competitors while “upstarts” like LendingClub and OnDeck jockey to provide loans to traditional bank customers.

So to stay both relevant and competitive, I believe a bank’s leadership team needs to develop a culture of disciplined growth that encourages creativity and yes, risk taking.  For a leadership team, this requires a combination of knowledge, skill and courage — all things we designed our annual Bank Board Growth & Innovation Conference at the Ritz-Carlton New Orleans to provide (*fwiw, this is a complement to our annual M&A conference — Acquire or Be Acquired).

In the coming days, I’ll be looking at how the processes of interaction, communication, coordination and decision-making in a regulated bank are vastly different than those of a tech firm.  Cleary, the fight for relevancy is on in the banking space… and to see what’s being written and said, I invite you to follow @bankdirector, @aldominick + #BDGrow15.

Bank Director’s 2015 Acquire or Be Acquired Conference: A Week in Pictures

As we wrap up “AOBA week” there are so many to thank… be it Kelsey for reminding me that “coffee is for closers“… Katilyn, Robert and Daniel for their contributions as recognized by their peers (“stay thirsty my friends”)… Laura, Mika and Michelle for bringing the prize patrol to the golf course… the list goes on & on of the super heroes we had band together to make this year’s event such a success.  Also, a HUGE congratulations to our controller, Ryan McDonald, and his wife who welcomed their first child into the world this week (a healthy baby boy).  So allow me to share some “behind the scenes” pictures from our time at The Phoenician. 

If you’re interested to see what we’ve covered, you can click on a number of posts (this video about a CEO panel and this  recap of three things I noticed on Sunday, this video about the new consolidators, this video from Sunday night, this written recap from Monday, this video from Monday evening, this video from Tuesday and this written recap from Tuesday).  Also, our managing editor, Naomi Snyder, authored a number of great highlights pieces that posted to BankDirector.com.  And as a final recap of Acquire or Be Acquired, let me share the video I used to welcome the team to our wrap-up dinner on Tuesday night (w/ thanks to our friends at Snapshot for doing this with me!)

P.S. – it is Aloha Friday!

Wrapping Up Bank Director’s 2015 Acquire or Be Acquired Conference

To paraphrase the New England Patriot’s Bill Belichick, we are #OnToNashville.  Yes, Bank Director’s 2015’s Acquire or Be Acquired conference is solidly in the books and our annual Bank Board Training Forum at the historic Hermitage hotel in Nashville, TN is now “on the clock.”  But before I depart from sunny Arizona, a very big thank you to everyone who made this possible!

Three Observations From Bank Director’s 2015 Acquire or Be Acquired Conference (Tuesday)

News and notes from the final day of Bank Director’s annual Acquire or Be Acquired conference.

Key Takeaway

As always, the one constant in life is change.  Right now, with deflation in the Eurozone (is it time to bid Greece goodbye from the EU?), declining oil prices and the sluggish growth of the U.S. economy, optimism about banking’s future is tempered by present uncertainties.  As we heard from KBW, a handful of factors have contributed to the slower pace of our economic recovery:

  • Resetting of global GDP growth expectations;
  • Europe nearing closer to deflation;
  • Japan expanding its stimulus spending;
  • Modest wage growth; and
  • Conservative consumer and small business confidence.

Nonetheless, there is a true sense of optimism permeating the conference here at The Phoenician… especially in terms of the future of community banking.

Trending Topics

A spirited half-day of conversations and presentations that ranged from capital raises to digital growth opportunities.  With respect to trending topics, I made note of the following: to drive growth, the biggest banks are exploring opportunities in three areas: (1) deals for smaller product/technology/capability based companies, (2) analytics and (3) digital; as I noted on Sunday, bank M&A deals per year (as a % of total banks) are at historically high levels — and we see banks with strong tangible book value multiples dominating the M&A space; finally, there is a widening gap in terms of buyer valuations meeting seller expectations.

Picked Up Pieces

I made note of the following this morning:

  • Google’s partnership with Lending Club came up early and sparked quite a few sidebar-type conversations;
  • New skills, better analytics is where bigger banks are struggling the most.
  • Per Josh Carter at PwC, mobile phones, wearables and integrated devices (car, shopping cart, item RFID tags) have barely scratched the surface in terms of how they will shape our lives.
  • Several presenters noted the multi-charter bank model is under pressure.
  • Looking ahead, bank stocks may struggle to outperform the broader market if unable to meet earning-per-share (EPS) expectations.
  • By extension, if the Federal Reserve does not raise interest rates, EPS estimates will be at risk for negative revisions.

I will post a recap video tomorrow morning on About That Ratio and you can use the hashtag #AOBA15 to read through the last three days tweets.  Now, it is time for me to head out to the golf course to shake off the rust at our annual golf tournament.

From Bank Director’s 2015 Acquire or Be Acquired Conference: A 45 Second Video Recap of Day Two

On Tap For Day Three

Last night, I shared three takeaways from our second full day at AOBA (Three Observations From Bank Director’s 2015 Acquire or Be Acquired Conference). Looking ahead to our final half day, we kick things off with a series of discussion groups that address the following issues:

  • New Lending Markets for Community Banks
  • Growing with SBA Loans
  • Everything You Wanted to Know about Civil Money Penalties
  • Capital Plans & Nontraditional Alternatives
  • Incorporating M&A into Your Strategic Planning Process
  • Beyond eMail – Purpose-Built Tools for Mobile Executives

With coffees in hand, we move into our first general session, led by PwC, entitled “What You Can Learn from the Country’s Biggest Banks.” Following that presentation, we have back-to-back breakout sessions available before closing with “The Butterfly Effect of Technology on Banks Today.”  To see an abbreviated PDF version of the three day agenda, please click 2015 AOBA Agenda (Overview).

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To follow the conversation on Twitter, I invite you to follow me @aldominick, follow @bankdirector and tweet using the hashtag #AOBA15.

Three Observations From Bank Director’s 2015 Acquire or Be Acquired Conference (Monday)

News and notes from the second day of Bank Director’s annual Acquire or Be Acquired conference.

Key Takeaway

My biggest takeaway from the second full day of Acquire or Be Acquired (#AOBA15 via @bankdirector): instead of asking why take the risk of doing a deal or why take the risk of creating a high performing bank, a better question might be can you be relevant if you don’t?

Trending Topics

To start the day, I polled the audience — using an automated response system — on a number of non-M&A topics.  Of note, the majority of attendees believe the greatest organic loan growth opportunity is in commercial real estate.  Likewise, the majority of people voted for cash management services to businesses when asked what provides them with the greatest fee-growth opportunities.  Anecdotally, the issues I took note of where, in no particular order:

  • The expansive views of the regulators continue to frustrate bankers;
  • Where stock will be issued in a merger, an auction may not only be not required, but can be counterproductive from maximizing value to shareholders — hence the reasons why negotiated sales processes are gaining in popularity;
  • Key regulatory obstacles remain centered on compliance -‒ for buyers and sellers alike (e.g. BSA, consumer and increasingly, CRA);
  • There have been 28 transformational mergers — one bank acquiring another that is over 25% of its size — since 2013. These are merger of like-sized companies (yes, we are getting away from the term MOE). The market likes these deals — stocks in these deals have out-performed the market.

Picked Up Pieces

A really full day here in Scottsdale, AZ with quite a few spirited discussions/debates.  Here are some of the more salient points I made note of throughout the program:

  • The only thing worse than a flat yield curve is an inverted one.
  • If stocks do well after a deal, means you have the runway to do more deals in the future.
  • When it comes to buying another institution, keep in mind just because somebody has the money doesn’t mean they are going to spend the money.
  • Per Bill Hickey at Sandler O’Neill, capital markets are “open for business” given the lower rate environment and attractive yields/costs for both issuers and investors alike.
  • Without big bank M&A, community groups now review and protest transactions by much smaller banks.
  • A fundamental truth: as you grow, compliance & regulatory expectations grow with you.

More to come from The Phoenician and Acquire or Be Acquired tomorrow morning.

From Bank Director’s 2015 Acquire or Be Acquired Conference: The “New Consolidators” (Video)

To kick things off today, we took a look at those banks reshaping the banking industry.  With M&A providing an avenue for banks to drive improved operating leverage, earnings, efficiency and scale, we focused on the emergence of mid-sized regional banks that are growing through the consolidation of smaller banks.  My thanks to Jack Kopnisky, President & CEO, Sterling National Bank & Sterling Bancorp (NYSE: STL), Ben Plotkin, Vice Chairman of the Board, Stifel Financial Corp (NYSE: SF) and Frank Sorrentino, Chairman & CEO, ConnectOne Bank (NASDAQ: CNOB) for sharing their time and opinions in their session entitled “The New” Consolidators this morning.

From Bank Director’s 2015 Acquire or Be Acquired Conference: A 45 Second Video Recap of Day One

On Tap For Day Two

Last night, I shared three takeaways from our first day at AOBA (Three Observations From Bank Director’s 2015 Acquire or Be Acquired Conference).  Looking ahead to our second full day, we kick things off with a series of discussion groups that address the following issues:

  • IPO or Sale? Key Factors Bank Executives Should Consider
  • How Banks Should Make the Decision to Sell or Buy – Lessons for Buyers & Sellers
  • How Size Matters: Regulatory Considerations for Deals
  • How Does a Buyer Begin The M&A Process?
  • The Characteristics of a Well Received Deal: The Importance of Gauging the Market’s Reaction For Both Buyers and Sellers

From there, we move into various general and breakout sessions.  These range from presentations on “The Power of In-Market Mergers” to “Are You a Buyer or Seller… or Something Else?”  To see a high-level, PDF version of the three day agenda, please click 2015 AOBA Agenda (Overview).

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This afternoon, I’ll post a brief video recap of our first general session and later, three things I picked up over the course of the day.  To follow the conversation on Twitter, I invite you to follow me @aldominick, follow @bankdirector and tweet using the hashtag #AOBA15.

Three Observations From Bank Director’s 2015 Acquire or Be Acquired Conference (Sunday)

News and notes from the first day of Bank Director’s annual Acquire or Be Acquired conference.

Key Takeaway

As was the case at last year’s Acquire or Be Acquired, the most successful banks have a clear understanding and focus of their market, strengths and opportunities.  One big takeaway from the first full day of Bank Director’s conference (#AOBA15 via @bankdirector): to be a successful player in today’s bank M&A market, one needs adequate capital and earnings for regulatory approval of a deal, the infrastructure in place to both acquire and grow an institution and available sellers in the bank’s target market.

Trending Topics

Overall, the issues I took note of where, in no particular order: $5 to $10Bn public banks are in the sweetest of the sweet spot for investors; cash is often useful to sellers as a form of price protection — and can benefit buyers as fewer shares are issued in a transaction; earnings estimates, not P/E Expansion, will drive bank stocks in 2015; deal pricing has a direct correlation to the size of the seller and the size of the buyer; bank boards should be particularly mindful of shadow banking’s strong relative growth.

Picked Up Pieces

I had a chance to talk with a number of attendees and introduce quite a few of our presenters.  Here are some of the anecdotes I made note of throughout the day:

  • There were 281 bank M&A transactions in ’14 as compared with 214 in ’13.
  • This M&A activity, in terms of deal value, increased from $14bn in ’13 to $18bn in ’14.
  • Whereas Mergers-of-Equals (MOEs) were the hot topic at this time last year, I can count on one hand the number of mentions today.
  • Per KBW, we have had 20 current straight quarters of improving credit quality — the longest since 1991.
  • According to Curtis Carpenter with Sheshunoff Investment Banking, 19x earnings is becoming a common median deal price.
  • From a discussion on M&A-related capital raising… “in general, the pool of private placement buyers is increasing and includes many private equity firms as well as traditional institutional investors.”
  • Bank executives would be wise to plan for this low-rate environment to last “forever.”

More to come from The Phoenician and Acquire or Be Acquired tomorrow.