Good is the Enemy of Great

Jim Collins once wrote “good is the enemy of great,” opining that the vast majority of companies “never become great, precisely because the vast majority become quite good – and that is their main problem.”  I have heard many use the title of today’s piece to explain the unexpected; most recently, while talking with a friend about Jurgen Klinsmann’s decision to exclude Landon Donovan from his 23-man World Cup roster (hence today’s picture c/o USA Today).  While I’ll steer clear of any soccer talk until the U.S. takes the field against Ghana in a few weeks, Collins’ statement sparked the three thoughts I share today. Indeed, being “just good” will not cut it in our highly competitive financial industry.

usatsi_7848706_168380427_lowres Let’s Be Real — Times Remain Tough

In yesterday’s Wall Street Journal, Robin Sidel and Andrew Johnson began their “Big Profit Engines for Banks Falter” with a simple truth: “it is becoming tougher and tougher being a U.S. bank.  Squeezed by stricter regulations, a sputtering economy and anemic markets, financial institutions are finding profits hard to come by on both Main Street and Wall Street.”  Now, the U.S. financial sector and many bank stocks have “staged a dramatic recovery from the depths of the financial crisis;” as the authors point out, “historically low-interest rates aren’t low enough to spur more mortgage business and are damping market volatility, eating into banks’ trading profits.”  While I’ve written about the significant challenges facing most financial institutions – e.g. tepid loan growth, margin compression, higher capital requirements and expense pressure & higher regulatory costs — the article provides a somber reminder of today’s banking reality.

Still, for Banks Seeking Fresh Capital, the IPO Window is Open

Given how low-interest rates continue to eat into bank profits, its not surprising to hear how “opportunistic banks capable of growing loans through acquisition or market expansion” are attracting investor interest and going public.  To wit, our friends at the Hovde Group note that seven banks have filed for initial public offerings (IPOs) already this year, putting 2014 on pace to become the most active year for bank IPOs in a decade.  Based on the current market appetite for growth, “access to capital is becoming a larger consideration for management and boards, especially if it gives them a public currency with which to acquire and expand.”  If you’re interested in the factors fueling this increase in IPO activity, their “Revival of the Bank IPO” is worth a read.

Mobile Capabilities Have Become Table Stakes

I’m on the record for really disliking the word “omnichannel.”  So I smiled a big smile while reading through a new Deloitte Center for Financial Services report (Mobile Financial Services: Raising the Bar on Customer Engagement) that emphasizes the need for banks to focus more on a “post-channel” world rather than the omnichannel concept.  As their report says, this vision is “where channel distinctions are less important and improving customer experience becomes the supreme goal, no matter where or how customer interactions occur, whether at a branch, an ATM, online, or via a mobile device.”  As mobile is increasingly becoming the primary method of interaction with financial institutions, the information shared is both intuitive and impactful.

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To comment on today’s column, please click on the green circle with the white plus sign on the bottom right. If you are on twitter, I’m @aldominick.  Aloha Friday!

The Growth Conference – Thursday Recap

It is obvious that the most successful banks today have a clear understanding of, and laser-like focus on, their markets, strengths and opportunities.  One big takeaway from the first full day of Bank Director’s Growth Conference (#BDGrow14 via @bankdirector): banking is absolutely an economies of scale business.

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A 2 Minute Recap

 

Creating Revenue Growth

At events like these, our Publisher, Kelsey Weaver, has a habit of saying “well, that’s the elephant in the room” when I least expect it.  Today, I took her quip during a session about the strategic side of growth as her nod to the significant challenges facing most financial institutions — e.g. tepid loan growth, margin compression, higher capital requirements and expense pressure & higher regulatory costs.  While she’s right, I’m feeling encouraged by anecdotes shared by growth-focused bankers considering (or implementing) strategies that create revenue growth from both net interest income and fee-based revenue business lines. Rather than lament the obstacles preventing a business from flourishing, we heard examples of how and why government-guaranteed lending, asset based lending, leasing, trust and wealth management services are contributing to brighter days.

Trending Topics
Overall, the issues I took note of were, in no particular order: bank executives and board members need to fully embrace technology; there is real concern about non-bank competition entering financial services; the board needs to review its offerings based on generational expectations and demands;  and those that fail to marry strategy with execution are doomed. Lastly, Tom Brown noted that Bank of America’s “race to mediocrity” actually makes it an attractive stock to consider.  Who knew being average can pay off?

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To comment on this piece, click on the green circle with the white plus (+) sign on the bottom right.  More tomorrow from the Ritz-Carlton New Orleans.

The Single Greatest Constraint on Growth

With the revenue pressures facing the banking industry being some of the most intense in decades, banks need to think more constructively about their businesses. At the same time, changing consumer behavior could drive the industry to reallocate its resources to less traditional growth channels in order to stay ahead.  In my view, the words of an English naturalist reflect the single greatest constraint on growth today.

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Powerful Forces

One of our long-term corporate sponsors, PwC, recently shared their thoughts on the future of the retail banking industry.  In their view, “powerful forces are reshaping the banking industry, creating an imperative for change. Banks need to choose what posture they want to adopt – to lead the change, to follow fast, or to manage for the present. Whatever their chosen strategy, leading banks will need to balance execution against… critical priorities and have a clear sense of the posture they wish to adopt.”  If you, like our friends from PwC, are joining us in New Orleans later this week to dive into this very topic, their compelling “Retail Banking 2020” report might make for good airplane company.

Looking Back in Order to Look Ahead

Last year, John Eggemeyer, a Founder and Managing Principal of Castle Creek Capital LLC, helped me to kick off our inaugural Growth Conference.  As a lead investor in the banking industry since 1990, he shared his views on our “mature industry,” That is, banking follows a historic pattern of other mature industries: excess capacity creates fierce competition for business which in turn makes price, not customer service, the key differentiator.  While offering myriad thoughts on what makes for a great bank,  John did share some hard-to-swallow statistics and opinions for a crowd of nearly 200 bankers and industry executives:

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

I share these three points to provide context for certain presentations later this week.  Some build on his perspectives while others update market trends and behavior.  Still, an interesting reminder of where we were at this time last year.

Getting Social-er

Yesterday, I shared the hashtag for The Growth Conference (#BDGrow14).  Thanks to our Director of Research — @ehmccormick — and Director of Marketing — @Michelle_M_King — I can tell you that nearly 30% of the attending banks have an active twitter account; 78% of sponsors do.  On the banking side, these include the oldest and largest institution headquartered in Louisiana — @IBERIABANK, a Connecticut bank first chartered in 1825 with over $3.5 billion in assets — @LibertyBank_CT and a Durham, NC-based bank that just went public last month — @Square1Bank.  On the corporate side of things, one of the top marketing and communications firms for financial companies —@wmagency, a tech company that shares Bank Director’s love of orange — @Fiserv and a leading provider of personal financial management — @MoneyDesktop join us.  Just six of many institutions and service providers I’m looking forward to saying hello to.

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More to come — from New Orleans, not D.C. — tomorrow afternoon.

FI Tip Sheet: Is 2014 the Year of the Bank IPO?

Good things come in threes — like insightful/inspiring meetings in New York, Nashville and D.C. this week.  By extension, keep an eye out for a Sunday, Monday and Tuesday post on About That Ratio.  Yes, I’m heading to Chicago for Bank Director’s annual Chairman/CEO Peer Exchange at the Four Seasons (#chair14) and plan to share my thoughts and observations on issues like strategic planning, risk management and leveraging emerging technologies each day.  Finally, I hope the three points I share today (e.g. a look at what the future holds for branches to a rise in public offerings) prove my original sentiment correct.

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I’ve been surprised… by the # of conversations I’ve had about branch banking.

With many of the mega and super-regional banks focused on expense control, I find myself talking fairly regularly about how these institutions are taking a “fresh look” at reducing their branch networks.  Typically, these conversations trend towards well-positioned regional and community banks — and how many now look to branch acquisitions as low risk and cost effectives ways to enter a new market or bolster an existing market.  I expect these conversations to continue next week in Chicago — but thought to share today as it again came to the fore earlier this week in NYC.  While there, I had a chance to catch up on PwC’s latest offerings and perspectives.  Case-in-point, one of their current research pieces shows that, despite the emergence of new competitors and models:

“the traditional bank has a bright future – the fundamental concept of a trusted institution acting as a store of value, a source of finance and as a facilitator of transactions is not about to change. However, much of the landscape will change significantly, in response to the evolving forces of customer expectations, regulatory requirements, technology, demographics, new competitors, and shifting economics.”

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The two images above come from an information-rich micro-site (Retail Banking 2020) PwC shares.  Personally, I found these statistics fascinating and foreshadow my second point about creative approaches to win new business.

I’ve been thinking about… fin’tech companies + their “solutions.”

Here, I want to give major props to our friends at the William Mills Agency in Atlanta.  Their annual “Bankers as Buyers” report shares ideas, concepts and research about financial technology from 30 of the top influencers in the country and those forces driving change today.  This year’s report lays out trends for the coming year, including:

  • Branch Network Transformation;
  • Mobile 3.0;
  • Big Data Drives Marketing & Fights Fraud;
  • Payments Technology Stampede;
  • Banks Focus on Underbanked and Wealthy; and
  • Compliance Strategies.

Take a look at their work and download the free report if you’re interested.

I’ve been talking about… the number of banks going public.

Is 2014 the year of the bank IPO? According to Tom Michaud, the president and CEO of Stifel Financial’s KBW, it just might be.  I had a chance to get together with Tom earlier this week and he got me thinking about how many are going to pursue a public market to raise capital versus doing so privately.  He shared the story of Talmer Bancorp (TLMR), which went public on Valentine’s Day.  When it did, it marked the biggest bank IPO in three years (yes, KBW’s Banking & Capital Markets teams completed the $232 million Initial Public Offering, acting as joint bookrunner).  As he shared their story with me, it became clear that as more banks go public, we will see more buyers entering into the M&A market — since most bank deals are being done with stock these days.  It strikes me that going public presents an alternative for private banks… rather than sell now, they might find a more receptive market should their story be a good one.

Aloha Friday!

Expectations +/- Capacity

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Heading up to 8 at the Four Seasons

The topic of a seller’s expectations and a buyer’s capacity is particularly relevant in light of what Cathy Nash and Jim Wolohan of Citizens Republic Bancorp shared earlier today.   Given that our economic environment is challenging, valuations are depressed and size and scale matter now more than ever, we turned our attention to matters like pricing expectations and the overall state of our financial community by welcoming Ben Plotkin, Vice Chairman of Stifel, to the stage.

Noticeably absent from the bank M&A market in 2012 were the “mega-deals” of years past that have often helped stimulate takeover activity. As I wrote about earlier today, the market made a modest rebound last year, with 230 acquisitions of healthy banks totaling $13.6 billion. But while there were only 150 bank deals in 2011—the third lowest volume since 1989—they totaled $17 billion.  While low levels of loan growth and continued net interest margin compression continue to challenge banks, there is “good news” according to Ben:

  • Profitability has improved (*primarily due to credit leverage);
  • Capital levels are at 70-year highs;
  • Valuations have improved significantly; and
  • M&A discussions are elevating.

To this last point, Ben cites capital access (or the lack thereof) as the driver of consolidation. Thanks to recent stock appreciation, potential buyers enjoy an increased capacity to pay meaningful premiums for smaller institutions and still preserve tangible book value.  As a result, larger institutions with access to the capital markets will most likely pursue M&A in order to overcome their more organic growth challenges.  

On the flip side, smaller institutions, especially those perceived by the investment community as not being able to earn their cost of equity and unable to access the marekets, may consider an “upstream” partnership.  In closing, Ben reiterated that asset growth is essential in order to create the revenue necessary to overcome the cost of doing business.

As with Cathy and Jim, our thanks to Ben for sharing his time and thoughts with us this morning.

Friday Fun

Below are three stories related to the financial community that I read/watched/heard this week… An added bonus? After this sentence, About That Ratio is 100% free of any mention of today’s nonsensical sequester.

(1) So, the IPO market for banks is ringing? This week, McKinney, Texas-based Independent Bank Group (the parent of Independent Bank) went loud with its plans to raise up to $92 million in an initial public offering. The bank plans to use the proceeds from the IPO to, surprise, surprise, repay debt, shore up its capital ratios for growth & acquisitions and for working capital.  This filing comes only a few weeks after ConnectOne in NJ (CNOB) closed its previously announced offering of 1.6M shares of common stock @ $28/share.  Good to see…

(2)… and with Independent Bank’s news, now might be time to take a read through this brief overview of the JOBS Act put out by the attorneys at MoFo.  Why?  A centrepiece of the Act is its new IPO on-ramp approach…

(3) On the non-IPO tip, check out this cool/intuitive infographics for tech trends posted by NASDAQ to its Facebook page yesterday afternoon.  Who said social media + banks ain’t quite as simpatico as they might be…

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Aloha Friday to all!

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