3 Ways Banks Can Pick Up their Pace of Creativity

Quickly:

  • Financial institutions need a culture that allows for, and encourages, leadership teams to test & implement new approaches to traditional banking.

PHOENIX — Many financial institutions face a creativity crisis.  Legacy systems and monolithic structures stifle real change at many traditional banks — while newer technology leaders move quickly to pick up the slack.  During the first day of our annual FinXTech Summit at the Phoenician, I picked up on a few practical ideas to break down a few of the most common barriers to innovation inside financial institutions.

As our managing editor, Jake Lowary, wrote for BankDirector.com this morning, “the cultural and philosophical divides between banks and fintech companies is still very apparent, but the two groups have generally come to agree that it’s far more lucrative to establish positive relationships that benefit each, as well as their customers, than face off on opposite ends of the business landscape.”

So with this in mind, I invite you to follow the conference conversations via our social channels, where our team continues to shares ideas and information from Day 2 of this event using @BankDirector and @Fin_X_Tech on Twitter. In addition, you can search & follow #FinXTech18 to see what’s being shared with (and by) our attendees.

Do You Know These 3 Cs of Banking?

Quickly:

  • When it comes to talk about bank mergers and acquisitions, It has been written that the questions rarely change — but the conversations prove irresistible.

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

PHOENIX, AZ — If you’re with us here at the Arizona Biltmore for Bank Director’s annual Acquire or Be Acquired Conference, you’ve heard that banks with low‐cost core deposits continue to attract interest from acquirers.  So as banks wrestle with increased funding costs, that observation sparked an idea about what constitutes the “three Cs” of banking today:

  1. Compliance
  2. Cost Control
  3. Consolidation

For instance, having good on-going relations with one’s regulators is hugely important. In fact, I heard several prominent attorneys share that regulatory risk remains the greatest obstacle to completing an M&A deal.  So having the bank in position to act quickly and confidently when an opportunity arises is a major advantage in today’s competitive M&A environment.  I take this to mean no enforcement actions, satisfactory CRA, good HCR results, etc.

As was discussed yesterday afternoon, when an acquirer can present a credible narrative that a potential deal is consistent with a well-considered strategy — and that the company has the infrastructure appropriate to the new organization, you find a well received merger.

In terms of consolidation, we saw a number of presentations note the 261 bank M&A deals, worth an aggregate $26.38 billion, announced in 2017.  As a point of reference, 241 deals were announced — worth an aggregate $26.79 billion — in 2016.  According to S&P Global Market Intelligence, the median deal value-to-tangible common equity ratio climbed significantly in 2017 to 160.6%, compared to 130.6% for 2016.  Last December alone, 32 deals worth a combined $1.84 billion were announced and the median deal value-to-tangible common equity ratio was 156.5%.

Throughout the fourth quarter, there were 74 bank deals announced in the US, which was the most active quarter since 83 deals were announced in the fourth quarter of 2015. However, last quarter’s $4.4 billion aggregate deal value was the lowest since the third quarter of 2015, which totaled $3.43 billion.

These are by no means the only Cs in banking.  Credit, core technology providers, (tax) cuts… all, huge issues.  So along these lines, I made note of a few more issues for buyers, for sellers — and for those wishing to remain independent.  Take a look:

If you are interested in following the final day of the conference via our social channels, I invite you to follow me on Twitter via @AlDominick, the host company, @BankDirector, or search #AOBA18 to see what is being shared with (and by) our nearly 1,200 attendees.

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.)

Whether They Want To or Not, Banks Need to Open Up

Apart from interest rates, the two biggest issues that bank executives seem to wrestle with are regulatory and compliance costs.  I sense another emerging challenge coming to shore; specifically, how to “open up” one’s business structure in terms of developing partnerships and permitting others to leverage their customer data and/or capabilities.

For bankers, this challenge comes with significant reputation and customer risk.

Now, it is hard to truly disrupt the concept of banking — and I shared this opinion from the stage at Bank Director’s annual Bank Executive & Board Compensation Conference this morning.  However, I did adjust some of my welcoming remarks based on the Consumer Finance Protection Bureau’s position that consumers can control their own financial data, including to let third parties help them manage their finances.  As I learned from Jo Ann Barefoot’s Fireside Chat with CFPB Director Richard Cordray at Money 2020, the CFPB “is not content to sit passively by as mere spectators watching these technologies develop.”  According to his prepared remarks:

Many exciting products we see… depend on consumers permitting companies to access their financial data from financial providers with whom the consumer does business. We recognize that such access can raise various issues, but we are gravely concerned by reports that some financial institutions are looking for ways to limit, or even shut off, access to financial data rather than exploring ways to make sure that such access, once granted, is safe and secure.

Since reading the CFPB’s position, Ms. Barefoot’s recap and the Wall Street Journal’s synopsis, I decided to talk with various bank executives and board members that are here with us at the Ritz-Carlton in Amelia Island about this stance.  As I note in this video, I sense both an ongoing struggle — and a sincere interest — to truly understand the role of technology.  For those I talked with, this is as much about “becoming sticky” to their customers as it is about embracing or defending themselves against “the new.”

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For more about this year’s conference, I invite you to take a look at BankDirector.com.  Also, a virtual high-five to the team here for a great first day.  You all rock!

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Acquire or Be Acquired: Don’t Overlook This

Thanks to our keynote speaker, J. Michael Shepherd, pictured above. The Chairman & CEO, Bank of the West and BancWest Corporation, he inspired quite a few with both his wit and wisdom.

Over the past few days at Bank Director’s annual Acquire or Be Acquired conference, various speakers have touched on a number of key strategic growth issues.  From exploring an acquisition to growing loans, controlling expenses to managing capital, the discussions hit the “timely and relevant” standard that we consider essential.  They also reinforced my sense that more boards and their management teams are seriously considering an acquisition as their primary growth plan than at this time last year.

As our editor-in-chief opined, the heightened level of interest could certainly be explained by the continued margin pressure that banks have been operating under for the last several years.  For those thinking about buying another, my short video recap from the mid-way point of AOBA offers a heads up about a pre-deal consideration not to be overlooked.

 

Mid-April Bank Notes

I recently wrote How the Math Works For Non-Financial Service Companies.  Keeping to the quantitative side of our business, I’m finding more and more advisors opining that banks of $500 – $600M in asset size really need to think about how to get to $2B or $3Bn — and when they get there, how to get to $7Bn, $8Bn and then $9Bn.  With organic growth being a bit of a chore, mergers and acquisitions remain a primary catalyst for those looking to build.  But what happens if you don’t have a board (or shareholder base for that matter) that understands what it takes to grow a company through acquisitions?  This question — not deliberately rhetorical — and two more observations, form today’s post.

A Collection of Individual Relationships

Just because a bank is in a position to consider a merger or acquisition doesn’t mean it is always the best approach to building a business.  This thought crossed my mind with Nashville-based Pinnacle Bank’s recent acquisition of Chattanooga’s CapitalMark Bank & Trust — the first deal struck by the bank in the last eight years (h/t to my fellow W&L’er Scott Harrison at the Nashville Business Journal for his writeup).  Run by Terry Turner, the bank enjoys a great reputation as a place to work and business to invest in.  As Terry shared with the audience at this year’s Acquire or Be Acquired conference, he doesn’t hire someone who’s been shopping their resume, a point that stuck with me and resonated with a number of other executives I was seated near.  So when I think of team building, his institution is one I hold in high regard.

The same can be said for First Republic, who like Pinnacle, is known for organic growth and fielding a standout team.  The bank recently posted a 90 second video from its CEO and Founder, Jim Herbert, that gives his thoughts on culture and teamwork.  Having written about Jim as part of a “Best CEO” series, this clip highlights the foundation for their continued success.

General Electric decides it no longer needs to be a bank

If you somehow missed GE’s announcement, the Wall Street Journal reported this is the conglomerate’s most significant strategic move in years.  While I will let others weigh in on the long-term benefits in selling its finance business that long accounted for around half the company’s profits, it was nice to see our friends at Davis Polk advising GE through the sale of most of GE Capital’s assets.  So the assets of the 7th largest bank in the country, some $500 billion in size, will be sold or spun off over the next two years.  Why?  “The company concluded the benefits aren’t worth bearing the regulatory burdens and investor discontent.”  Feel free to share your comments on this below.