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.

7 Bank M&A Trends for 2016

With this morning’s news that Huntington and FirstMerit are set to merge, it is clear that more and more buyers & sellers are getting off the sidelines and into the bank merger and acquisition (M&A) game.  So in advance of Bank Director’s 22nd annual Acquire or Be Acquired Conference, seven M&A trends to consider.

By Al Dominick, President & CEO, Bank Director

As I shared in yesterday’s post, we are putting the finishing touches on this year’s Acquire or Be Acquired conference. With nearly 600 bank officers & directors from 300+ banks joining us at the Arizona Biltmore for “AOBA” this Sunday through Tuesday, what follows are seven trends in bank M&A that I expect this hugely influential audience to hear and work to address.

  • Deal volume is holding steady; however, median deal price is on the rise.  One caveat: pricing has a strong correlation to both the size & location of a seller + the size of the potential buyer.
  • Growing banks must seize upon opportunities based on future needs, not just present needs
  • At the same time, more investors are taking a “what have you done for me lately” approach and emphasizing nearer-term results. Further, activist investors are becoming more prominent and driving some of this action.
  • Capturing efficiencies continues to be one of the most compelling forces driving industry consolidation.
  • When people tell you that size doesn’t matter, realize that banks with less than $500 million in assets have had the lowest return on equity for 11 out of the past 12 quarters (per SNL). Expect even more sellers to emerge from this part of the industry.
  • As the regulatory environment becomes increasingly difficult to maneuver, it is safe to anticipate an increase in merger activity — mostly for banks with less than $50 billion of assets.
  • As evidenced by Huntington Bancshares announcing today that it would buy FirstMerit Corporation in a deal worth $3.4 billion in stock and cash, mergers are a viable option for growth among the larger regionals.  While we don’t have the same kinds of national consolidators buying up banks like they once did, deals like this one, KeyCorp announcing it would buy First Niagara Financial Group and New York Community Bancorp that it would buy Astoria Financial at least opens the possibilities of larger players getting back in the merger game.

Whether you are coming to the conference or just interested in following the conversations, I invite you to follow me on Twitter via @AlDominick and/or @BankDirector — and search & follow #AOBA16 to see what is being shared with and by 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.

Guest Post: Variety is the Spice of Life

As promised, a special guest author for this Friday’s column: Bank Director magazine’s Managing Editor, Naomi Snyder.  Having shared my key takeaways from our annual Bank Audit & Risk Committees conference on Wednesday and Thursday, I invited Naomi to share her post-conference thoughts on my blog.  So this morning’s title is as much about truth in advertising as it is an invitation to learn what my friend and colleague deemed timely and relevant.

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At Al’s request, I’m going to step in and give a quick recap of Bank Director’s Audit and Risk Committees Conference in Chicago this week.  As you can tell from this picture, nearly 300 people attended our conference at The Palmer House hotel and they got a lot of frightening news about risks for their financial institutions, including cyber risk, interest rate risk, compliance and reputation risk in the age of social media.  I’m going to address three of those points today.

Interest Rate Risk

Many banks are extending credit at a fixed rate of interest for longer terms in an effort to compete and generate much-needed returns. This will be a problem for some of them when interest rates rise and low cost deposits start fleeing for higher rates elsewhere. You could assume the liability/asset equation will equal out, but will it? Steve Hovde, the president and CEO of the investment bank Hovde Group in Chicago, is worried about a bubble forming, saying he has seen credit unions offer 10- or 15-year fixed rate loans at 3.25 percent interest. “I’m seeing borrowers get better deals with good credit quality than they have ever gotten in history,” he says.

Reputation Risk

In an age of social media, anyone can and does tweet or post on Facebook any complaint against your bank. Cyber attacks, such as the one that befell Target Corp., can be devastating and cost the CEO his or her job. Rhonda Barnat, managing director of The Abernathy MacGregor Group Inc., says it’s important not to cater to TV news, such as telling a reporter that your employee’s laptop was stolen at a McDonald’s with sensitive customer information, prompting a visit by the camera crew to the McDonald’s. Not disclosing how many customer records were stolen could keep you off the front page. Focus on the people who matter most: your customers and investors and possibly, your regulators. They want to know how you are going to fix the problem that impacts them.

Compliance Risk

Regulators are increasingly breathing down the necks of bank directors, wanting evidence the board is actively engaged and challenging management. The official minutes need to reflect this demand, without necessarily going overboard with 25 pages of detailed discussion, for example. Local regulators are increasingly deferring questions to Washington, D.C., where they can get stuck in limbo. When regulators do give guidance, it is often only verbal and can cross the line into making business decisions for the bank, says Robert Fleetwood, a partner at Barack Ferrazzano in Chicago. In such an environment, it’s important to have good relations with your regulators and to keep them informed.

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About Naomi: Prior to joining our team, she spent 13 years as a business reporter for newspapers in South Carolina, Texas and Tennessee. Most recently, she was a reporter for The Tennessean, Nashville’s daily newspaper. She also was a correspondent for USA Today. Naomi has a bachelor’s degree from the University of Michigan and a master’s degree in Journalism from the University of Illinois.  To follow her wit and wisdom on Twitter, follow @naomisnyder.

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!

Since You Can’t Own a Car Dealership

As my colleague Jack Milligan writes in our 2nd quarter issue of Bank Director magazine, just because a bank can’t own a car dealership doesn’t mean there isn’t “enormous flexibility in determining a bank’s strategy.” Curious what this means? Read on.

2Q14

A Sneak Peek at the Core Revenue Champs

Each year, Bank Director magazine looks at all U.S. banks and thrifts to identify the strongest growth banks. We rank the top performers across four separate categories: core deposits, core noninterest income, net loans and leases and the most important, core revenue. Since the magazine mails today, I thought to offer a sneak peek of the results:

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What I find interesting about the top two banks on this very strong list: both Customers Bank and EverBank Financial designed their business models around technology from their very beginnings.

Find Your Balance

As I read through an advance copy of the issue, it strikes me that many business areas that historically provided revenue growth are simply not growing fast enough to overcome new capital and regulatory requirements.  In this light, you can understand why many say times couldn’t be more challenging for growth in community or regional banking. The corollary to this? Balancing organic and external growth is a key focus area for bank management and boards.

Increasingly, I hear that growth-focused banks are considering (or implementing) strategies that create revenue growth from both net interest income and fee based revenue business lines — think government guaranteed lending, asset based lending, leasing, trust and wealth management services. Clearly, as interest margins and loan volumes remain subject to compression and intense competition, the “optimization” of fee-based revenue is becoming pivotal in enhancing shareholder value.

‘Sup Big Easy

True, a number of banks seek to extend their footprint and franchise value through acquisition. Yet, many more aspire to build the bank internally.  Some show organic growth as they build their base of core deposits and expand their customer relationships; others leverage product innovation or focus on their branch network. I bring these approaches up in advance of next week’s Growth Conference at the Ritz-Carlton, New Orleans. We designed this event to showcase strategies, structures, processes and technologies that a bank’s CEO and board might consider to fuel their own growth.

Unlike trade shows and other events, we limit participation to a financial institution’s key officers and directors to ensure those joining us are not just committed to distinguishing their performance and reputation, but also are appropriate peers to share time and ideas with. From companies like StrategyCorps, Ignite Sales and VerifyValid to PwC, Fiserv and IBM, we have a tremendous roster of companies joining us in Louisiana to share “what’s working” at the myriad banks they support. As I’ve done for our other events (e.g. the sister conference to Growth, Acquire or Be Acquired), I’ll be posting a number of pieces next week from the Crescent City and invite you to follow along on Twitter via @aldominick, @bankdirector and using #BDGrow14.

Aloha Friday!

FI Tip Sheet: You Can Hang Your Hat On It

It’s been a while since I last called Dallas home; still, the white shirts & gray shorts of St. Mark’s proved a welcome and familiar site during a trip to the Texas city earlier this week.  A flashback to my freshman year of high school?  Absolutely.  Dare I reminisce before diving into today’s post with a few random fun facts.  Heck yeah.  Did you know Dallas lies in a large prairie running through the center of the United States?  Ok, anyone who has visited know it is fairly flat… but did you know it is one of the largest cities in the world not located on a navigable river?  Yes, this is a city where I learned about Coke floats, Suburbans and sayings like “if I say a hen dips Skoal, you can look under her wing for the can.”  Curious how I’m going to relate my time in Big D to the banking space?  Read on.

Roping it in
Roping it in

What Happened to Citi’s Hutzpah?

Even with wifi-enabled planes, I still find travel by air the best way to work uninterrupted.  The luxury of my iPhone laying silent this week?  A chance to catch up on various blogs and articles like those authored by Jack Milligan.  The editor of Bank Director magazine, he took a look at how large U.S. banks, specifically Citigroup, are being dogged by intense regulatory scrutiny and have the challenge of preparing for much stricter capital standards in coming years. By noting Citigroup was the only bank of the six largest U.S. banks to flunk the latest round of stress tests, he sets up his must-read “Where Has the Go-Go Bank Gone?”  In his view, cutting expenses and selling off non-core business units doesn’t seem like a bold enough plan for the behemoth.  Per Jack, “maybe what this Citi needs is a little of the old Citi’s hutzpah.”

Pay Attention to Your Sales Process

On Wednesday, I made it to Preston Road and St. Mark’s School of Texas for a few minutes in large part because of Ignite Sales (the company’s offices are a few miles away from the all-boy school where my parents enrolled my brother and me when my father took a job with the then-6th largest bank in the country, Bank One).  As I talked with Ignite’s CEO, Mitchell Orlowsky, he made clear that non-bank competitors are eating away at banks’ customer base, in part because banks have paid little attention to the sales process. As he shared earlier this month, “banking has never had to focus on a comprehensive sales process. Because of healthy margins from loans and fees, banks have historically shied away from proven sales methods found in other industries. However, now that the market has become competitive, the lack of sales infrastructure hurts.”

A Silver Lining

Mitchell shared how more progressive banks have begun to hire experienced sales management from other industries that bring the expertise needed to change this culture.  I thought about this approach as I dug into a Raymond James report on the outlook for the spring (“Banking Industry Overview“) on my flight home to D.C.  In their view, first quarter 2014 results are “likely be highlighted by continued improvement in credit quality, a pickup in commercial loan growth, net interest margin (NIM) stabilization, and improved profitability.  However, these positives will likely be mitigated by weak year-over-year comparisons for market-related revenue, sluggish balance sheet growth, and a continued decline in mortgage banking activity.”  Of particular note: they expect the M&A discussion to gain prominence given the pickup in deal activity and “outperformanceof stronger acquirers who have recently announced transactions” along with the following catalysts:

  • The modest pace of economic recovery
  • Increased regulation
  • Protracted low rate environment
  • Higher capital requirements
  • Aging management teams/boards

I continue to hear that M&A activity will remain largely relegated to smaller deals for banks with assets of $1 billion or less — and this report certainly reinforced this view.

Aloha Friday!

FI Tip Sheet: First Quarter Favorites

As I come off of a great week in Chicago and Bank Director’s annual Chairman/CEO Peer Exchange, today’s post takes a look back at the first three months of the year.  Yes, certain discussions during this time focused on tepid loan growth, higher capital requirements and expense pressures & higher regulatory costs hitting banks today.  Nonetheless, many more conversations focused on growth, innovation and “what’s working.”  So, to wrap up this week, three points from the past ninety days that inspired me.

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Some of Banking’s Best

To kick off the year, I put together a two-part series on some of the top CEOs in our industry.  Inspired by my coach and an article entitled the “Best CEOs of 2013” that ran on Yahoo Finance, I reached out to a number of colleagues that work for professional services firms to ask their thoughts on the top CEOs at financial institutions — along with why they hold them in such regard.  Part one shared various thoughts on some of the best CEOs in the business today — broken down into three categories: the “biggest banks” with $50Bn+ in assets, those with more than $5Bn but less than $50Bn and finally, those in the $1Bn to $5Bn size range.  Part two built on that piece, highlighting three exceptional CEOs that lead publicly traded banks before shifting to the thoughts and opinions of two very talented colleagues.

Eat or Be Eaten

As the President of Bank Director, I’m lucky to lead one of the industry’s biggest (and dare I say best?) M&A conferences: Acquire or Be Acquired.  Let me first offer up big time props to my many talented colleagues for everything they did to make this year’s the biggest and best yet!  One of the cool new things I did at the Arizona Biltmore this year?  Film a 90 second or less video each evening that summarized the day’s salient points.  As much as I shared big takeaways in written form on this site (e.g. what if I told you that by December 31, 2018, we’d witness a 25% decline in the number of institutions between $500mm and $1Bn), I’m proud of these two videos from the desert that relayed what caught my eyes and attention on two of the three conference days.

 

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The Innovator’s Dilemma

In my role, I find myself talking with Chairmen and CEOs about their strategic plans.  This year, quite a few shared their thoughts for leveraging financial technology to strengthen and/or differentiate their bank.  In a piece I shared at the end of February, I cited Clayton Christensen’s “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.”  His book inspired that Friday’s FI Tip Sheet title – and first point.  If you’re not familiar with his work, the Harvard professor writes about two types of technologies: sustaining and disruptive. Sustaining technologies are those that improve product performance. As he sees it, these are technologies that most large companies are familiar with; technologies that involve improving a product that has an established role in the market.

Most large companies are adept at turning sustaining technology challenges into achievements.  However, large companies have problems dealing with disruptive technologies — an observation that, in my view, does not bode well for many traditionally established banks.  While risk is inherent to banks of all sizes, taking chances on emerging technologies continues to challenge many officers and directors… a theme I anticipate covering in greater detail over the next 90 days.

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Whether this is your first time or 78th time reading About That Ratio, let me say thank you for doing so.  It is a real treat to share, each Friday, three short stories about what I’m hearing, learning and talking about as I travel around the country.  Being that I meet with so many interesting people — be it a bank’s CEO,  board members or executives at professional services firms and product companies — I find it tremendously rewarding to share anecdotes and insights that might interest others.  As always, Aloha Friday!

FI Tip Sheet: Great Bank CEOs (part 2)

“You know who’s good” might be one of my favorite conversation starters… be it talking football or baseball, banking or business, it always interests me to hear who others consider leaders in a particular field or discipline.  As the country’s economic recession gives way to recovery and many more banks return to profitability, quite a few executives have success stories to share.  This week’s tip sheet builds on last week’s post by highlighting three exceptional CEOs that lead publicly traded banks before shifting to the thoughts and opinions of two very talented colleagues.

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(1) In case you missed it, last week’s tip sheet looked at some of the best CEOs in the business today — broken down into three categories: the “biggest banks” with $50Bn+ in assets, those with more than $5Bn but less than $50Bn and finally, those in the $1Bn to $5Bn size range.  After I posted the piece, I thought about a number of bankers that could have been included in the $5 to $50Bn summary.  For example, Joe DePaolo, the president & CEO of Manhattan-based Signature Bank, a $19.7-billion asset, NASDAQ-listed financial institution.  He’s led the bank’s growth, from a mere $50 million in assets at its founding in 2001 to close to $20 billion today.

Likewise, Jim Herbert’s work to build First Republic Bank (the bank he founded in 1985 and is listed on the NYSE) deserves praise and recognition.  I shared my thoughts on Jim’s bank after meeting him last year.  For those in the know, First Republic is one of this country’s great banks. Not only is it solely focused on organic growth, it’s also focused solely on private banking. While my conversation with Jim was off-the-record, I left his office convinced its the smarts within, not the size of, a bank that will separate the have’s from the have-nots in the years ahead. Clearly, as new regulations and slim profit margins challenge the banking industry, the skills and backgrounds of the employees who work in banking must change too.

Finally, the co-head of Sandler O’Neill’s Investment Banking group, Bill Hickey, praised Vince Delie – the President & Chief Executive Officer of the 11.7Bn, NYSE-listed FNB Corproration.  According to Bill, Vince “has led FNB through four acquisitions in the last three years and three capital raise transactions… FNB continues to deliver above market returns and has been rewarded with a currency that trades at 245% of Tangible Book Value.”

(2) Before joining out team a few years ago, Bank Director Magazine’s Managing Editor, Naomi Snyder, spent 13 years as a business reporter for newspapers in South Carolina, Texas and Tennessee.  Based on this background, and her current responsibilities, I asked for her thoughts on the qualities and characteristics of a successful bank CEO.  In her words, “some of the CEOs of great banks seem to have leadership qualities without being bullies. I don’t think they hire a bunch of “yes” people who will agree with them as the ship is sinking. They don’t have charismatic personalities at the expense of honesty and ethics.”  She noted that in multiple performance rankings in Bank Director magazine, these banks show some consistent themes. “Great banks differentiate themselves from the competition. They often don’t compete on price but on quality of service, and there is no way to do that without hiring a superior staff and motivating employees to do their best.”

(3) To put some color and context to Naomi’s thoughts, I asked Jack Milligan, the Editor of Bank Director magazine, to share his thoughts on three community bank CEOs that are doing some impressive things.  The qualifier?  Keep ’em “local” — he is in Charlottesville, I’m in D.C. — and close to $1Bn size.  Fortunately for me, Jack accepted my challenge and suggested I take a look at Fairfax, VA-based First Virginia Community Bank (FVC).  Led by Chairman & CEO David Pijor, FVC was “a November 2007 de novo that has grown to $422 million in assets as of December 2013.  Pijor, a veteran of the NOVA banking market, raised $23 million in a little over eight weeks and had the bank up and running in just 11 months.  Granted, this was prior to the subprime mortgage crisis and “Great Depression,” and Pijor has had the advantage of being in one of the strongest banking markets in the country, but the bank’s loans, deposits and capital over the past 7+ years have been impressive all the same. Pijor also did a small acquisition in late 2012 that enabled FVC to expand into neighboring Arlington County. I would expect to see big things out of this little bank.”

Next, he pointed me towards Citizens & Northern Corp., a financial institution based in Wellsboro, PA and led by their Chairman & CEO, Chuck Updegraff.  As Jack shared, “C&N is situated in North Central Pennsylvania, not exactly a banking growth market although the local economy has received a bit of a lift from natural gas exploration in the Marcellus Shale Region. This is just a very well-run bank that makes the most of what its market has to offer, and Updegraff deserves credit for running a very tight ship.  C&N has a little over $1.3 billion in assets and was the top ranked $1-$5 billion bank on Bank Director’s 2012 Bank Performance Scorecard and the 2nd ranked bank in 2013.”

Finally, Jack lauded National Bankshares Inc., an organization that counts James Rakes as its Chairman & CEO.  Per Jack: “if you’ve ever been to Blacksburg, VA – the home of Virginia Tech University and a neighbor of nearby Radford University in Christiansburg – you know that it’s a beehive of activity nestled in the mountains and forests of Southwestern Virginia. At just slightly over $1 billion in assets,National Bankshares is another well-managed bank that takes full advantage of everything its market has to offer – in its case a relatively strong local economy that benefits from having two vibrant universities. Virginia Tech is the 2nd largest public college in the state and is a major research institution. National was the 3rd ranked bank in the $1-$5 billion category in the 2012 Bank Performance Scorecard, and placed 6th in 2013.”

Now, I will tease Jack that he could have talked about a number of fine community banks in the Washington, D.C. area (for example, the Bank of Georgetown, which has grown considerably under the leadership of Mike Fitzgerald, their Chairman, President & CEO).  Nonetheless, his is a good look at those institutions that may not have national brand recognition, but are strong and stable pieces of their local communities.

Aloha Friday!

Dass de Thing

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

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

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

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

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

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

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

Aloha Friday!!

Its Aloha Friday

Cherry blossoms in DC
An example of organic growth in Chevy Chase D.C.

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

  • While M&A offers immediate growth to the acquirer, I’m hearing that “stocking the bank for talent” is a real long-term challenge. While a bank’s CEO and Chairman must work even more closely to drive bottom line performance while enhancing shareholder value, I left Chicago convinced this team must more aggressively identify — and groom — the next generation of bank leadership. Without the big banks providing management training like they once did (an unintended pipeline of talent for community banks), its time to get creative. For example, while most at our event appreciate the need to get mobile, few community banks have the senior strategist on hand to do so right now. While that opens the door to outside advisors to support an institution, it does present longer term dangers as customers expect access to their banks sans branch or ATM use.
  • Keeping on the tech-to-grow theme, I read an interesting “big data,” bank-specific piece by McKinsey on my way home to D.C.  Personally, I’ve been interested in the various tools and tactics banks employ to analyze their massive amounts of data to detect/prevent fraud, devise customer loyalty plans and proactively approach consumers. This overview, complete with video, touch on these points and show how some are using big data and analytics to sharpen risk assessment and drive revenue.

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

The Strategy to Sell

earplugs at the Four Seasons in Chicago
Needed for the wind here in Chicago… not our speakers

Each year, Bank Director hosts a two day “peer exchange” for CEOs and Chairmen of financial institutions from across the U.S.  This year’s event, held in Chicago at the Four Seasons, kicked off this morning with a spirited presentation by Cathy Nash, the former President & CEO of Citizens Republic Bancorp and Jim Wolohan, the former Chairman of the bank.  I spent some time talking with Cathy and Jim before their presentation; what follows are the highlights of their talk on re-building, and subsequently selling, a bank.

In 2012, there were 230 acquisitions of healthy banks totaling $13.6 billion.  Yes, this equates to more takeovers than the year before, but they were generally smaller in size. While the largest transaction was the $3.8 billion buyout of Hudson City by M&T, the Akron, Ohio-based FirstMerit acquisition of Flint, Michigan’s Citizens Republic garnered quite a lot of attention.

When the deal was announced last September, it was as a stock-for-stock exchange worth $912 million at the time of the announcement (*to put this in perspective, last week’s acquisition of Provident New York by Sterling Bancorp came in at $344 million).  The price to Citizens’ tangible book value at the time of the announcement was 130% — and the combined entity will have roughly $24 billion in assets across five Midwestern states, 415 branches and more than 5,000 employees.

Against this backdrop, we asked this dynamic duo to share their experiences with their peers, starting with how a CEO works with the board to create a successful strategic plan.  According to Cathy, you need to come to the table with options.  Jim elaborated on her point, sharing the bank’s board explored organic growth, a partnership or outright sale of the bank and a combination of organic growth coupled with M&A under Cathy’s leadership.  Both executives knew the bank needed to return to sustainable quarterly profitability; when neither felt they could match their peers’ median returns in an appropriate time frame, a decision started to come into focus.  If they couldn’t deliver more than the cost of capital to their shareholders, exploring a sale had to take the lead. 

The two also explained how to know when it’s time to pare back your offerings to your customers.  According to Jim, shrinking the bank’s asset size once Cathy took the reins from $14 billion to just under $10 billion made sense thanks to rules and regulations like the Durbin amendment found in Dodd-Frank. In Michigan, as the economy soured, the soft and hard costs of growth made the decision slightly easier to bear.  But their focus on the long-term return on equity and investment drove much of their strategy to get ahead by going small(er).

Thanks to Cathy and Jim for opening up.  The decision to buy another bank often takes center stage at events like these, and their honesty in addressing both their struggles and excitement certainly set the tone for today’s program.

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More to come this afternoon; specifically, an update on the state of the financial industry specific to the 43 institutions (21 of which are public) joining us at this year’s Bank Chairman/CEO Peer Exchange.