Banks Have to Grow to be Competitive

As I reflect on my time at Bank Director’s Growing the Bank conference, I can’t shake the fact that many banks across the United States continue to struggle to grow their deposits and/or expand asset bases.  What follows is a piece authored by Tim Melvin, a gifted writer who joined us at the Four Seasons outside of Dallas.  Tim specializes in value investing and has written numerous articles in various publications on the subject of value investing, the stock market and the world around us.  With his permission, I’m sharing his perspectives on our event.

I just returned from the Bank Director 2016 Growing The Bank Conference in Dallas and I have to say it was one of the more interesting meetings I’ve attended this year. This conference covered everything from the 30,000 foot view of the rapidly changing banking industry to the nuts and bolts of day-to-day stuff and I came away with an even deeper appreciation of the industry and the opportunity.

The threats and potential posed by what are commonly known as Fintech companies was heavily featured during the two-day event. Nobody is quite sure if they’re friend or foe yet and there was a lot of wary circling like a road weary cowboy and an unsure Indian trying to decide to break bread together or lock hands on throats. Mobile and cybersecurity were also topics on everyone’s minds, as both are going to play an enormous role in deciding if a bank grows or withers away to obscurity.

Closer Look At Fintech

The Fintech discussion was perhaps one of the most interesting of the meeting. While banks may see some of the Fintech lenders like LendingClub (NYSE: LC), Sindeo and On Deck Capital (NYSE:ODNK) are seen as a real threat to traditional lenders, I think we will find that it’s not as big a threat as we might currently think.

The first time we have a credit hiccup or recession, these lenders will find out just how important to success a core deposit-based funding source can be. When markets dry up in the bad times, investors aren’t going to as easy a source of funds as they are in the current benign and yield starved markets. I think what’s far more likely to happen is the technology that allows for high-speed decision making, easier underwriting and razor focused marketing will end up being sold to the banks to improve their offering.

As Steven Hovde of the Hovde Group warned the crowd in Dallas, “Fintech and banks are going to end up marrying up. It’s the only way you are both going to survive. If you think you can do it on your own, you are sadly, sadly mistaken.”

Naomi Snyder, the editor at Bank Director, put a little differently when she wrote an article for the magazines website following the conference: “The tech companies have something many banks lack: innovative products and simple, customer-friendly digital solutions for a changing world. Meanwhile, the banks have some things many of the tech companies lack: actual customers and a more stable funding base.”

Although the fast-moving high tech kids of Fintech and the stuffy old bankers may at first appear to be as mismatched, as James Carville and Mary Matalin may need to find a partnership that has worked out as well as theirs has. They may not initially like each other but they need each other.

Mobile Banking

I think Dave Defazio of Strategycorps scared a lot of community bankers when he talked about the future of mobile banking in his session. He pointed out the tremendous lead that the bigger banks have in this space and the competition from apps like Apple Pay, Venmo and other apps that, to be honest, I’ve never even heard of before but are increasingly popular for managing finances and making payments among the millennial set. For folks who think the ATM and drive-up window are newfangled innovations the world of mobile banking is a bit frightening. What makes it even more frightening is that if you don’t compete well in the mobile space, you won’t retain the next generation of customer. They expect everything to be done on the fly and right now using mobile devices.

The millennial customer is just different. The use their mobile device to pay for their Starbucks (NASDAQ: SBUX), pay their share of the bar tab, watch movies, read books, pay bills and manage their finances. Apparently you can even use an app to collect your boarding pass, as I found out after running out of the bar after the first day to get to the business center and print out my boarding pass exactly 24 hours before takeoff. When I returned and expressed my disappointment at getting a B slotting on Southwest (NYSE: LUV) I was told that I should just get the app to avoid this in the future.

I didn’t even know there was an airplane app, but now I can count myself among the airplane app aristocracy thank to my slightly younger and far more tech savvy friends at Bank Director.

I caught up with Defazio on Tuesday morning and we chatted a bit more about the challenges and opportunities of mobile banking. He told me over coffee, “Banks are not just competing against other banks’ mobile apps, but instead against the very best apps on the planet, apps like Uber to Amazon (NASDAQ: AMZN) to Waze. Customer expectations are very high, and banks must make it their mission to have an app that people can’t live without. Community banks must do a better job of responding to changes in customer behaviors and expectations. The big banks have raced out to a big lead. The time is now for banks to go beyond transactions and do a better job of connecting with their customers’ mobile lifestyles. In particular, I’m seeing the big banks add mobile tools that assist people with their shopping tasks. They know that helping people save a dollar is just as good as helping them make a dollar of interest.”

I chatted with several bankers and the discussion of mobile frankly scares many of them. One banker said if this is the future of banking, then community banking is just dead. I think he overstated the case, but community banks are going to have to aggressively look for partners like Strategycorps to build and offer a much better mobile experience. Those that can’t, or don’t want to, should consider hanging out the for sale sign right away as they simply won’t be competitive in the future. They can probably get a better multiple in a deal now than in a few years when deposits are bleeding out to more mobile sensitive banks at a rapid rate.

Steven Hovde gave a talk on the search for efficiency in the industry. Hovde is an investment banker serving community banks, a majority owner of several smaller banks and is part owner of a real estate development company that borrows from banks so he sees all sides of the industry. He pointed out that the more efficient a bank is the higher then returns on assets and the higher valuation of the institutions stock. Both of these make for happier shareholders. He said the best way to gain efficiency in the banking industry today is to grow the size of the bank.

Right now, we have historically low net interest margins, growing regulatory costs and a huge need to spend money on technology, especially in mobile and cyber security. GDP growth is slow and there are no real signs that it will improve dramatically anytime soon. The loan markets are increasingly competitive and the regulators are focusing on the one area where community banks had an edge, commercial real estate. It really is a “grow or die” world and the majority of banks need to get to $1 billion in assets to quit operating in survival mode and the $5 billion level to thrive in the current economy.

The best way to grow remain via mergers and acquisitions. Hovde told us, “As the regulatory environment becomes increasingly difficult to maneuver for smaller banks, we expect deal activity for smaller institutions to continue as they search for greater efficiencies.” While this is not necessarily great news for bankers running smaller banks, it’s good news for me as bank stock investor and I continue to seek out and buy smaller publicly traded banks.

That’s A Wrap

The Growing the Bank Conference is more of a nuts and bolts, but I walked away with two overriding insights. First banks must look to partner with or even buy the innovative aggressive fintech companies. They cannot compete with them without disastrous consequences so they must partner with them. For their part, most of the fintech competitors need the banks and their large customer base and deposit funding. It may be a shotgun wedding in some cases, but nuptials will be needed for both to survive and thrive.

My second takeaway is that although it sounds like a slogan, “Grow or Die” is a real thing. To thrive in today’s difficult markets, banks need to grow to at least that $5 billion asset level. With the exception of a few niche small town and rural banks the $1 billion asset level is really needed just to be a viable competitor. The best way to grow in a slow growth economy is to buy smaller banks or engage in a merger of equals that increases returns for the ban, as well as shareholders. All of this is good news for us as small bank investors.

The Trade of the decade in community bank stock rolls on.

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To read more of Tim’s work on Benzinga, click here and to follow Tim on Twitter, his handle is @timmelvin.

Banking on Millennials?

I’m in Newport Beach, California where I just presented at Moss Adams’ 15th annual Community Banking conference.  In tandem with Bank Director’s Publisher, Kelsey Weaver, we focused our remarks on the intersection of fintech companies with traditional banks — and how partnerships potentially position community banks to better serve millennials.

By Al Dominick // @aldominick

In our recent “talent-focused” digital issue of Bank Director magazine, we reminded readers that “as baby boomers retire and Generation X enters middle age, it’s not surprising that top executives and boards are turning an eye more aggressively toward seeding their banks for the future. But, when it comes to recruiting and retaining younger people, banks have a bit of a public relations problem.”  This opinion formed the early foundation for today’s presentation — one that allowed Kelsey and me to share our thoughts on how and where bankers might invest in a generation consisting of 75 million Americans.  Without re-creating our hour-long remarks, here are three of the points I hope stood out to attendees:

  • Loyalty < Price. In classic economic terms, banking is a mature industry (that is, an industry in which price carries the day over any other offering).  Interestingly, many community banks tout their interests and ability to compete with larger institutions based on their customer service models.  However, the expectations of consumers (be it individual or business) have changed to reflect an “always-on, always available” mindset that does not line up with how many community banks operate.
  • You’re not alone.  I mentioned the San Francisco 49ers were recently featured in the Wall Street Journal — not for football purposes; rather, to show how the franchise has taken steps to better engage with their millennial employee base. As I shared, the team’s challenge to “relate to a generation — generally described as 18-to-34-year-olds — that has been raised on smartphones and instant information” parallels that of most banks in the U.S.  I promised attendees I’d post the link to the piece I wrote that features the Journal’s report… Promise fulfilled.
  • There are Friendly Fintech looking for you. Competition comes in many shapes and forms and I believe that banks are acting too slowly when it comes to digital transformations and offerings. Yes, there are truly disruptive fintech companies that have zero interest in aligning with traditional financial institutions.  However, there are quite a few that have built platforms that engage with consumers (both individual and business) that want to support banks as part of a mutually beneficial relationship.  In our presentation, one of the key pieces is a look at who is friendly to banks in the fintech space (juxtaposed with those that are obviously competitive).  If you’re interested, here is a link to the PDF version: Moss Adams 2015 presentation by Bank Director.

Separate from our presentation, let me encourage readers interested in building customer loyalty to check out the work of James Kane.  He opened the conference yesterday morning by presenting “The Loyalty Switch: How to Make Anyone Loyal to You, Your Team, and Your Bank.”  A smart speaker with an even smarter message.  Finally, thanks to our friends at Moss Adams for inviting our participation and the audience of CEOs, CFOs, Controllers, Internal Auditors, and Audit Committee Members from banks here on the west coast.  A privilege to share our perspectives with all of you this afternoon.

Quick Guide: 2015 Growth Strategy Survey (Bank-specific)

Recently, Business Insider and the Wall Street Journal picked up Bank Director’s 2015 Growth Strategy Survey.  The research project reveals how many financial institutions continue to recognize growth in traditional areas — most notably, loans to businesses and commercial real estate — while struggling to attract a decidedly untraditional digital generation.  So in case you missed it, today’s piece highlights key findings from this annual research project. 

By Al Dominick // @aldominick

Over the weekend, our friends at the Wall Street Journal ran a very telling story about the efforts being made by the San Francisco 49ers to better engage with their millennial employee base.  Clearly, the NFL franchise’s challenge to “relate to a generation — generally described as 18-to-34-year-olds — that has been raised on smartphones and instant information” parallels that of most banks in the U.S.  In addition to being a fascinating behind-the-scenes look at what’s happening out in Santa Clara, it also sparked today’s post.

You see, as a 38-year old who runs a great privately-held company that employs quite a few folks under the age of 30, I have to admit that I am tiring of the broad strokes being used to describe millennials’ needs and ambitions.  However, I will admit to being surprised to learn that there are approximately 75 million people in the U.S. under the age of 34.  This is a huge number, especially when you hear that every day, for the next 15 years, 10,000 people will turn 65 (h/t to the CEO of Boston’s Chamber of Commerce for making me aware of this reality).

Surprisingly, 60% of the executives and board members that responded to Bank Director’s 2015 Growth Strategy Survey say their bank might not have the right products, services and delivery methods to serve the vast majority of this demographic.  While I haven’t run this by our very talented Director of Research (*hello Emily McCormick), to me, this shows that the relationships that community bankers nurtured for decades will be increasingly of less value with this emergingly-influential generation who have grown up in a digital world and who, stereotypically, value the speed with which it operates.

As the Wall Street Journal shared when reporting on our research results, “banks have watched less regulated finance companies ranging from mortgage lenders to private-equity firms encroach on many of their main businesses.  But ask an executive or board member at a bank what nonbank company they most fear, and they’re likely to name the world’s biggest technology company, Apple Inc.”  So what were our key findings?  Glad you asked…

Three key findings (click this title link to access the full report):

  1. Apple is the nonbank competitor respondents worry about most, at 40%  — just 18% of respondents indicate their bank offers Apple Pay.
  2. Bank mobile apps may not keep pace with nonbank competitors. Features such as peer-to-peer payments, indicated by 28% of respondents, or merchant discounts and deals, 9%, are less commonly offered within a traditional bank’s mobile channel. 49% of respondents indicate their bank offers personal financial management tools.
  3. Despite the rise of P2P lenders like Lending Club and Prosper in the consumer lending space, just 35% of respondents express concern that these startup companies will syphon loans from traditional banks.

Instead of millennials, banks have been finding most of their growth in loans to businesses and commercial real estate.  Yes, 75% of respondents want to understand how technology can make their bank more efficient… and 72% want to know how technology can improve the customer experience.  But I find it telling that today, loan growth remains the primary driver of profitability for the majority of responding banks.  In fact, 85% of respondents see opportunities to grow through commercial real estate loans.  As we found, executives and board members also expect to grow through commercial & industrial (C&I) lending, for 56%, and residential mortgages, at 45%.  So for those looking to predict the future of banking, I think findings like these are quite telling.  Indeed, it would appear what’s worked in the past may be what to bet on for the future.

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The 2015 Growth Strategy Survey, sponsored by technology firm CDW, reveals how bankers perceive the opportunities and challenges in today’s marketplace, and technology’s role in strategic growth. The survey was completed by 168 chief executive officers, independent directors and senior executives of U.S. banks with more than $250 million in assets in May, June and July of this year.  Ironically, last year’s survey found that credit unions, not Apple, were the “non-bank” competitor that banks were most worried about.  In fact, can you believe that Apple didn’t even make the cut?  My, how quickly times can change.

Main Areas of Focus for a Bank’s Audit and Risk Committees

What’s top-of-mind for a bank’s Audit and Risk committee members?  Let’s start with cyber security…

By Al Dominick // @aldominick

There are many challenges that bank boards & executives must address, and these two videos (one by our editor, Jack Milligan; the other, by me) briefly review current issues that demand attention + emerging ones that we took note of at this week’s Bank Audit & Risk Committees Conference at the JW Marriott in Chicago.

*For more on the risks facing banks today, take a look at this report from our conference (#BDAudit15).

Be Skeptical, Diligent and Courageous

While much of Nashville took a snow day, I had the pleasure of spending time with bankers from across the country (who beat this morning’s storm) at the historic Hermitage Hotel for Bank Director’s annual Bank Board Training Forum.  Admittedly, I sometimes take for granted that a board of directors is responsible for monitoring financial performance, management’s performance, compliance issues and risk management.  A program like the one we’ve put together reinforces that the strategic side of running a business really requires a well-functioning, informed and courageous board of directors and men and women who are not afraid to be skeptical, diligent and courageous. So who’s with us in Music City? The demographics are as follows:

Training-Demographic-slide

Key takeaways

A number of presentations noted that financial institutions face a number of risks.  These range from economic factors to regulatory changes, shrinking margins to fee restrictions.  Knowing the extraordinary need for information about our increasingly complex industry, these takeaways stood out in terms of growing an institution:

  • Bank profits have increased significantly post-crisis as problem assets continue to decline.
  • A “combine-and-grow” mindset has driven an uptick in strategic mergers.
  • Efficiency and productivity are both key elements in positioning a bank to grow.
  • One specific common denominator among organic growth banks is a robust and diverse lending platform along with a proven credit culture and process.

When it comes to corporate governance (a term that refers to the structures & processes for the direction and control of a company) and the role of the board, I noticed that bank boards are increasingly independent and active.  In addition, it became clear that as technology changes, proactive input from directors has become even more important.  Finally, in terms of audit committee issues, it bears repeating that audit committee members are required to understand a broad range of highly technical financial, audit and risk management issues.  I was surprised to hear that a typical pitfall of the audit committee is not addressing complex accounting issues… which aligns with the point that board members need to know banking — “not just your bank.”

Now, even if we get more snow & ice, the lights will be on again tomorrow here in Nashville where we continue to cover board-specific issues.  I’ll be checking back in after we wrap up the program and invite you to connect via twitter (@aldominick) or via LinkedIn.

Bank Director’s 2015 Acquire or Be Acquired Conference Primer

On Sunday, January 25, we kick off Bank Director’s 21st annual “Acquire or Be Acquired” Conference (@bankdirector and #AOBA15) at the luxurious Phoenician resort in Scottsdale, Arizona.  I am so very excited to be a part of this three day event — and am supremely proud of our team that is gearing up to host more than 800 men and women.  With so many smart, talented and experienced speakers on the agenda, let me share a primer on a few terms and topics that will come up.  In addition, you will find several links to recent research studies that will be cited before I share one example of the type of issues being both presented and addressed at “AOBA.”

Colorful Language

Just as M&A is a colorful — and complex — issue, so too are the words, terms and considerations used by attorneys, investment bankers and consultants in management meetings, in the boardroom or at the negotiating table.  Here are three terms I thought to both share and define in advance of AOBA (ay-o-bah):

  • Triangular merger: This happens when the acquirer creates a holding company to acquire the target and both the acquirer and the target become subsidiaries of the holding company.
  • Cost of capital: You could say this is the cost to a company of its capital, but another way to look at it simply is this: the minimum return you need to generate for your investors, both shareholders and debt holders. This is what it costs you to operate and pay them back for their investment.
  • Fixed exchange ratio: This is the fixed amount for which the seller exchanges its shares for the acquirer’s shares. If the buyer’s stock price falls significantly post-announcement, that could mean the seller is getting significantly less value.

Again, these are but three of the many terms one can expect to hear when it comes to structuring, pricing and negotiating a bank merger or acquisition.

Research Reports

Throughout the year, our team asks officers and directors of financial institutions to share their thoughts on board-specific issues — like growth and more specifically, mergers & acquisitions.  Allow me to share an overview on these two research reports along with links to the full results:

Of note: 84% of the officers and board members who responded to this Growth Strategy Survey, sponsored by the technology firm CDW, say that today’s highly competitive environment is their institutions’ greatest challenge when it comes to organic growth — a challenge further exacerbated by the increasing number of challengers from outside the industry primed to steal business from traditional banks.

Of note: There’s no shortage of financial institutions seeking an acquisition in 2015, but fewer banks plan to sell than last year, according to the bank CEOs, senior officers and board members who completed Bank Director’s 2015 Bank M&A Survey, sponsored by Crowe Horwath LLP.

Valuing a Bank

Understanding what one’s bank is really worth today is hugely important.  Whether buying, selling or simply growing organically, a bank needs metrics in place to know and grow its valuation.  On BankDirector.com this past October, I shared why earnings are becoming more important than tangible book value (Why Book Value Isn’t the Only Way to Measure a Bank). Clearly, a bank that generates greater returns to shareholders is more valuable; thus, the emphasis on earnings and returns rather than book value.  Yes, investors and buyers will always use book value as a way to measure the worth of banks. Still, I anticipate conversations at the conference that builds on the idea that as the market improves and more acquisitions are announced, we should expect to see more attention to earnings and price-to-earnings as a way to value banks.

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Please feel free to comment on today’s piece below or share a thought via Twitter (I’m @aldominick).  More to come from the “much-warmer-than-Washingon DC” Arizona desert and Acquire or Be Acquired in the days to come.

Trending at #BDComp14

This January, at Acquire or Be Acquired, I wrote that most successful banks have a clear understanding and focus of their market, strengths and opportunities.  So one big takeaway that builds on this idea from our annual Bank Executive & Board Compensation conference (#BDComp14 via @BankDirector): it is time for a bank’s compensation committee and HR officer to reassess their viability of their performance plans and incentive programs.

Today’s agenda covered a lot of ground; namely, how economic, technological and demographic trends are reshaping the financial community. With nearly 300 attendees with us in Chicago, I heard a lot of interesting comments and questions made throughout the day. Three that stood out to me from our “on-the-record” presentations:

  • The Fed’s policies are forcing banks to ask tough questions: When will rates rise? Should I make fixed rate loans in the 4% range? How will this play out? How does it affect my stock value? (Steve Hovde, the CEO of the Hovde Group)
  • It is not what you do for people that they remember; it is how you make them feel. (Scott Dueser, the Chairman & CEO of First Financial Bankshares)
  • When it comes to Dodd-Frank, I thought we’d be through it all, but its still going full force (Susan O’Donnell, a Partner at Meridian Compensation Partners)

Trending topics
Overall, the issues I took note of were, in no particular order: loan growth is now paramount to profitability; with cybersecurity risks growing, protection is becoming more and more costly (especially in terms of time & resources); standardized loan products are reducing competitive advantages of community banks (naturally impacting compensation plan participants); if compensation plans are overly complicated, step back and ask if your are trying to solve for something else; culture and performance is what it’s all about.

More to come from Chicago tomorrow…

The Bank Audit & Risk Committees Conference – Day One Wrap Up

Fundamentally, risk oversight is a responsibility of the board.  One big takeaway from yesterday’s Bank Audit and Risk Committees conference (#BDAudit14 via @bankdirector): the regulatory framework has changed considerably over the past 12 to 18 months — with less focus being placed on things like asset quality and more on operational risks and new product offerings.  To this end, I get the sense officers and directors cannot always wait for the Federal Reserve or other agencies to release guidance to get a sense of the potential impact on their institution.

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Frank Gehry’s Chicago masterpiece

Trending Topics

Overall, the issues I took note of were, in no particular order: (a) when it comes to formulating a risk appetite, no one size fits all; (b) a bank’s CEO and/or Chairman should establish a formal, ongoing training program for independent directors that provides training on complex products, services, lines of business and risks that have a significant impact on the institution; (c) bank examiners are increasingly asking more probing questions regarding new products and services & third-party vendor risk; (d) the DOJ’s “Operation Chokepoint” use of the banking system to identify fraud and criminal activity in certain areas perceived as high risk was mentioned in three different general sessions; and (e) cyber security is the hot topic.

A Two and a Half Minute Recap

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To comment on this piece, click on the green circle with the white plus (+) sign on the bottom right. More from the Palmer House in Chicago, IL later today on twitter (@aldominick) and again tomorrow on this site.

Three Thoughts on Banks and Risk

I’m heading out to Chicago and Bank Director’s annual Bank Audit & Risk Committees Conference.  The agenda — focused on accounting, risk and regulatory issues — aligns with the information needs of a Chairman of the Board, Audit and/or Risk Committee Chair and Members, Internal Auditors, Chief Financial Officers and Chief Risk Officers.  Before I welcome some 300 attendees (representing over 150 financial institutions from 39 states) to the Palmer House, I thought to share three things that would keep me up at night if I traded roles with our attendees.

The Bean

(1) The Risk of New Competition

For bank executives and board members, competition takes many forms.  Not only are banks burdened with regulation, capital requirements and stress testing, they now have the added pressure of competition from non-financial institutions.  Companies such as Paypal, as well as traditional consumer brands such as Walmart, are aggressively chipping away at the bank’s customer base and threatening many financial institutions’ core business — a fact made clear by Jamie Dimon, the CEO of JPMorgan Chase, at a shareholder meeting this February.

“You’d be an idiot not to think that the Googles and Apples  .  .  .  they all want to eat our lunch.  I mean, every single one of them.  And they’re going to try.”

To this end, I find myself agreeing with Accenture’s Steve Culp, Accenture’s senior managing director of Finance & Risk Services, when he writes “banks need to keep developing their risk capabilities, skills and talents, and align these skills with their agenda around future growth. If they don’t align their growth agenda with their risk capabilities—building a safe path toward growth opportunities—they will miss out on those growth opportunities.”  While I plan on diving much deeper into this topic following the conference, I definitely welcome feedback on the issue below.

(2) The Risk to A Reputation

While the Dodd-Frank Act requires publicly traded banks with more than $10 billion in assets to establish separate risk committees of the board, and banks over $50 billion to additionally hire chief risk officers, I’m seeing smaller banks proactively following suit.  Such additions, however, does not absolve directors and senior managers of financial institutions from preparing for the worst… which is easier said then done.   In some ways, a bank’s reputation is a hard-to-quantify risk.  Anyone can post negative comments online about an institution’s products, services or staff, but one only needs to look at Target’s financial performance post-cyber hack to realize that revenue and reputation goes hand-in-hand.

(3) The Risk of Cyber Criminals

Speaking of Target, earlier this year, Bank Director and FIS collaborated on a risk survey to pinpoint struggles and concerns within the boardrooms of financial institutions.  As we found, tying risk management to a strategic plan and measuring its impact on the organization proves difficult for many institutions, although those that have tried to measure their risk management program’s impact report a positive effect on financial performance.  What jumps out at me in the results of this research are the concerns over cyber and operational security.  Clearly, the number of “bad actors” who want to penetrate the bank’s defenses has increased exponentially, their tools have become remarkably sophisticated, and they learn quickly.  I read an interesting piece by an attorney at Dechert (sorry, registration required) that shows the analytical framework for cyber security is very similar to what most directors have focused on in their successful business careers: people, process and technology.  But theory is one thing, putting into practice a plan to protect your assets, entirely different.

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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!

Time To Sell The Bank?

From the the appeal of spreading into new geographies to the attractiveness of acquiring exceptional talent to drive new sources of revenue, the need and desire to grow exists at virtually every financial institution. For those pursuing another bank, a merger or acquisition (M&A) provides an avenue to drive earnings while improving operating leverage, efficiency and scale. I have written about M&A from a potential buyers point-of-view (e.g. Acquire or Be Acquired – Sunday Recap); today’s piece flips the script and highlights three issues that may precipitate a sale.

Compliance Costs

Banks are facing some very significant challenges in the years ahead — and not just from consolidation.  As KPMG shared in its An Industry At a Pivot Point, “the costs and time stresses created by the regulatory environment are not going away, and will continue to affect four areas for banks: strategy and business models, interactions with customers and client assets, data and reporting structures, and governance and risk capabilities.”  Certainly, the sharply increased cost of regulatory compliance might lead some to seek a buyer; others will respond by trying to get bigger through acquisitions so they can spread the costs over a wider base.

Capital Concerns

Some banks will have to raise capital just to meet the Basel III requirements, while others will have to raise capital to do an acquisition or support their organic growth. The required levels are so much higher now that banks will have to manage their capital much more closely than they did before.  (*If you’re looking for a central resource for the many ongoing regulatory changes that are reshaping bank capital and prudential requirements in the United States, take a look at Davis Polk’s excellent Capital and Prudential Standards Blog.)

Earnings Pressure

As the attractiveness of branch networks and deposit franchises dwindles, lack of top-line growth will lead to further industry consolidation. With little overall changes in our economy, in-market mergers between banks with significant overlap in branches and operations offer tremendous cost-saving opportunities when done skillfully.

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To comment on this piece, click on the green circle with the white plus sign on the bottom right. Aloha Friday!

Let the Good Times Roll

Checking in from a rain-soaked Reagan National airport, where I think I see the plane I’ll take down to New Orleans taxiing towards its gate.  Yes, it’s “Growth Week” at Bank Director, and I’m heading to the Crescent City to host bank CEOs, Chairmen and board members keen to focus on big picture business issues surrounding growth (not necessarily associated with mergers and acquisitions) and profitability.

New Orleans

A Deep Dive

I realize the phrase “let the good times roll” is most frequently heard during Mardi Gras celebrations in New Orleans; I’m using it to tee up Bank Director’s Growth Conference that kicks off tomorrow morning at the Ritz-Carlton.  Once the lights come up, I’ll be interested to hear:

  • How growth is driving pricing;
  • Why efficiency & productivity are both key elements in positioning a bank to grow; and
  • If “overcapacity” in the US banking industry offers opportunities.

I’m particularly excited for our opening session with Thomas Brown, CEO, Second Curve Capital.  We’ve asked him to help us “set the table” for the next two days of conversations with an outlook for banks across the country by reviewing the current capital market and operating conditions, thereby providing financial context to the next two days’ presentations.  If I don’t cover his remarks in my post tomorrow, you can bet our editor, Jack Milligan, will on his must-read blog The Bank Spot.

A Look Back

Much of last year’s conversation revolved around technology and the need to adapt to a changing marketplace, as well as the importance of creating a unique niche in a competitive landscape dominated by the biggest banks.  Many of our bank speakers at the conference had a more nuanced view of technological change. Richard Hill, the chief retail banking officer for the $19-billion asset Hancock Holding Co. in Baton Rouge, Louisiana, said when he got into banking in the 1970s, the prediction was that checks would go away and branch banking would go away. That clearly didn’t happen, or at least not at the accelerated pace that many predicted. The problem for his bank and for many others is that profits are getting squeezed with low interest rates, and the bank needs to make investments that expand revenue. As he said, “a great challenge we have is figuring all this out.”

Take Our Your Crystal Balls

Let me wrap up by sharing a 2 minute video our team compiled on the “future” of banking.  We played it at our Acquire or Be Acquired conference in January and the perspectives of KPMG’s national banking leader, the CEO of Congressional Bank, etc. are worth a watch and listen.

Laissez les bons temps rouler!

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.