Takeaways from Commerce Street Capital’s Banking Conference

Insight and ideas come from many sources; today’s reflect my day at Commerce Street Capital’s 14th annual Bank Conference at the Four Seasons Resort and Club Dallas (home of the Byron Nelson golf tournament — hence today’s picture).

Commerce Street chose “The Sky’s the Limit” as this year’s theme — so I will play off of the investment banking firm’s message and keep my takeaways at a 30,000 foot level:

  • Dory Wiley, the President & CEO at Commerce Street Holdings, opined that while community banks have great insight into local economies, the elephant in the room that will help or hurt financial institutions are macro-level U.S. economic issues… which are in turn influenced by world issues.  As he shared, indications are 2016 will be volatile based upon weakness in the U.S & world economy and various issues of world political instability.
  • The stock market’s volatility traces to global and political events, which, in combination with slow earnings growth, puts the year’s return at potentially just 3% to 5%.  But for bank stocks, Dory and his team see the potential to outperform the market due to current earnings trends.
  • Sticking with the stock market, when it comes to bank IPOs, I’m hearing that bank offerings could open up gradually with rising rates and proven earnings growth.
  • In terms of earning trends, an interesting reminder that the Southwest has outpaced and continues to outpace the rest of the U.S. consistently in terms of ROAA and ROAE.
  • C.K. Lee, Managing Director at Commerce Street Capital, noted that the number of months between the past four U.S. recessions averages out to 95 months. 81 months have passed since the Great Recession and credit crisis, with GDP Growth Rate showing “signs of resistance.”
  • Specific to bank M&A, 2015 accumulated $26.6B in deal value compared to $18.8B in 2014. So far, 2016 has seen $6.6B in announcements.
  • When it comes to proverbial ‘Merger of Equal’ opportunities, the numbers typically make sense — but when it comes to social issues, there is always a struggle.  Still, these types of deals (regardless of what you call it) can solve for strategy and succession.

Finally, the idea that pricing is often a deal-breaker in bank M&A came up in several presentations.  As you can see in this short video of Dory Wiley that recently ran on BankDirector.com, while pricing likely won’t rise in 2016, some banks will be better positioned for the best price and, more importantly, the best deal.

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Al Dominick is the President & CEO of Bank Director, a privately held media & publishing company designed around strategically important business issues that a CEO, executive and/or board member(s) need to know — and be prepared to address. An information resource to the financial community since 1991, the company publishes Bank Director magazine every month, host major industry conferences like “Acquire or Be Acquired,” conducts board-level research, provides board education & training programs, runs BankDirector.com… and recently launched FinXTech.  

FI Tip Sheet: Some of Banking’s Best CEOs

Last month on Yahoo Finance, Sydney Finkelstein, professor of management and an associate dean at Dartmouth’s Tuck School of Business, produced a list of the Best CEOs of 2013, one that includes Jeff Bezos of Amazon, Pony Ma of Tencent,  John Idol of Michael Kors, Reed Hastings of Netflix and Akio Toyoda of Toyota.  Inspired by his picks, 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.  What follows in this morning’s tip sheet are myriad 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.

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(1) Top CEOs at financial institutions over $50Bn

The names and logos of institutions over $50Bn — think M&T with some $83Bn in assets, KeyCorps with $90Bn, PNC with $305Bn and US Bancorp with $353Bn — are familiar to most.  Leading these massive organizations are some tremendously talented individuals; for example, John Stumpf, the CEO at Wells Fargo.  Multiple people shared their respect for his leadership of the fourth largest bank in the U.S. (by assets) and the largest bank by market capitalization.  According to Fred Cannon, the Director of Research at Keefe, Bruyette & Woods, John “has created and maintains a unified culture around one brand, (one) that demonstrates strength and stability.  Wells is exhibit #1 in the case for large banks not being bad.”

Similarly, U.S. Bancorp’s Richard Davis garnered near universal respect, with PwC’s Josh Carter remarking “Richard has continued to steer US bank through stormy seas, continuing to stay the course running into the downturn, taking advantage of their position of relative strength, weathering the National Foreclosure issues and managing to avoid being considered part of ‘Wall Street’ even though US Bank is one of the 6 largest banks in the U.S.”

Finally, Steve Steinour, the CEO at Huntington Bancshares, inspired several people to comment on his work at the $56Bn institution.  Case-in-point, Bill Hickey, the co-Head of the Investment Banking Group at Sandler O’Neill, pointed out that since taking the helm in 2009, Steve has led a “remarkable turnaround… Huntington is now a top performer and is positioned to be the dominant regional bank in the Midwest.”

(2) Top CEOs at financial institutions between $5Bn and $50Bn

For banks between $5Bn and $50Bn, Greg Becker at Silicon Valley Bank garnered quite a few votes.  Headquartered in Santa Clara, California, I think they are one of the most innovative banks out there — and several people marveled that it has only grown and diversified under Greg’s leadership.  According to Josh Carter, “what they’re doing is a good example of how a bank can diversify their lending approach while maintaining a prudent credit culture.”  This echoes what Fred Cannon shared with me; specifically, that the $23Bn NASDAQ-listed institution is “the premier growth bank with a differentiated product.”  

Fred also cited the leadership of David Zalman, the Chairman & Chief Executive Officer at Prosperity Bancshares Inc., a $16 billion Houston, Texas-based regional financial holding company listed on the NYSE.  According to Fred, David demonstrates how to grow and integrate through acquisitions that is a model for other bank acquirors.  C.K. Lee, Managing Director for Investment Banking at Commerce Street Capital, elaborated on David’s successes, noting their development “from a small bank outside Houston to one of the most disciplined and practiced acquirers in the country and more than $20 billion in assets. The stock has performed consistently well for investors and the acquired bank shareholders – and now they are looking for additional growth outside Texas.”

Keeping things in the Lone Star state, C.K. also mentioned Dick Evans at Frost Bank.  In C.K.’s words, “this is a bank that stayed true to its Texas roots, maintained a conservative lending philosophy, executed well on targeted acquisitions and a created distinctive brand and culture. As Texas grew into an economic powerhouse, Frost grew with it and Mr. Evans was integral to that success.”

Finally, Nashville’s Terry Turner, the CEO of Pinnacle Financial Partners, drew Bill Hickey’s praise, as he “continues to successfully take market share from the larger regional competitors in Nashville and Knoxville primarily as the result of attracting and retaining high quality bankers. Financial performance has been impressive and as a result, continues to trade at 18x forward earnings and 2.4x tangible book value.”

(3) Top CEOs at financial institutions from $1Bn to $5Bn

For CEOs at banks from $1Bn to $5Bn, men like Rusty Cloutier of MidSouth Bank (“a banker’s banker”), David Brooks of Independent Bank Group (“had a breakout year in 2013”) and Leon Holschbach from Midland States Bancorp (“they’ve not only grown the bank but added significant presence in fee-income businesses like trust/wealth management and merchant processing”) drew praise.  So too did Jorge Gonzalez at City National Bank of Florida.  According to PwC’s Josh Carter, Jorge took over a smaller bank in 2007 “with significant deposit concentrations, large exposures to South Florida Real Estate, weathered a pretty nasty turn in the economy and portfolio value and emerged with a much stronger bank, diversified loan portfolio and retained key relationships.  Jorge has also managed to maintained an exceptional service culture, with a significant efficiency level and has combined relationship driven sales to grow the bank.  Jorge has also diversified the product mix and is one of the few smaller banks that can really deliver on the small bank feel with big bank capabilities.”

In addition, Banner Bank’s CEO, Mark Grescovich, won points for his work at the commercial bank headquartered in Walla Walla, Washington.  Mark became CEO in August 2010 (prior to joining the bank, Mark was the EVP and Chief Corporate Banking Officer for the $24Bn, Ohio-based standout FirstMerit). In Fred Cannon’s words, the transformation “is truly exceptional and Mark accomplished this by encouraging and utilizing a talented team of bankers from legacy Banner.”

Finally, Ashton Ryan at First NBC in New Orleans is one I’ve been told to watch.  Indeed, C.K. Lee shared how “Ryan capitalized on the turmoil in New Orleans banking to turn in strong organic growth, with targeted acquisitions along the way. The bank is recently public and has been rewarded by the market with a strong currency to go with its strong balance sheet and earnings.”

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In addition to the list above, I have been very impressed by Peter Benoist at Enterprise Bank in St. Louis, look up to Michael Shepherd, the Chairman and Chief Executive Officer for Bank of the West and BancWest Corporation and respect the vision of Frank Sorrentino at ConnectOne.  This is by no means a comprehensive list, and I realize there are many, many more leaders who deserve praise and recognition.  Click the “+” button on the bottom right of this page to comment on this piece and let me know who else might be recognized for their leadership prowess.

Aloha Friday!

Quality never goes out of style

Wait... there was something going on other than the Stanley Cup finals this week?
Wait… there was something going on other than the Stanley Cup finals this week?

Today’s title, inspired by my uncle who founded and continues to run Computech, a very successful technology firm here in the D.C. area, is both simple and profound.  I believe the three points shared below reflect the same spirit of craftsmanship and professionalism he built his firm on.  Working smarter, building better, doing it right the first time… themes I picked up this week and thought to share below.  And yes, #LetsGoBruins!

(1) One of the work questions most frequently asked of me at conference cocktail parties and in social settings concerns the future of banks. So the fact that the St. Louis Fed published a study that examines banks that thrived during the recent financial crisis proved irresistible.  After all, “those who cannot remember the past are condemned to repeat it.”  I’ve alluded to this research in a previous post; for me, it is interesting to note that some of the most profitable banks, in the short-term, are not necessarily the best banks.  Instead, the so-called “best banks,” in my opinion, get creative in offering new products. They watch closely what is working for other banks in and out of their own market. They watch what products and services are being brought to market by vendors to our industry.  This survey, in a broad sense, backs this up.

(2) In the St. Louis Fed’s survey, the authors conclude that there is a strong future for well-run community banks.  In their estimation, banks that prosper will be the ones with strong commitments to maintaining risk control standards in all economic environment.  This aligns neatly with most discussions about a board’s role and responsibilities. Indeed, one of the critical functions of any bank’s board of directors is the regular assessment of their activities and those of the bank’s management in terms of driving value. As C.K. Lee from Commerce Street Capital explains, this may be defined as value for shareholders, value for the community and the perception of strength among the bank’s customers and regulators. Over the last few months on BankDirector.com, he’s explored the concept of tangible book value (TBV) and its relationship with bank valuation. He also looked at internal steps, such as promoting efficiency and growing loans, which boards could take to drive more revenue to the bottom line and drive bank value.  The “final installment” of his series is up — and if you are interested in two additional factors that drive value in both earnings production and market perception, a good read.

(3) Over the last few weeks, I have shared my take on a few issues near and dear to audit committee members.  These committee members have direct responsibility to oversee the integrity of a company’s financial statements and to hire, compensate and oversee the bank’s external auditor.  So on the heels of Deloitte’s trouble with New York’s Department of Financial Services comes this week’s final point.  In case you missed it, the state’s regulator cracked down on Deloitte’s financial-consulting business, essentially banning them from consulting with state-regulated banks for the next year.  Big enough news that the American Banker opined “it will send waves through its bank customers, competitors and federal regulators.  Banks will have to scrutinize their relationships with consultants, brace for the possibility of a wave of regulation of consulting practices and have backup plans in case a key advisor ever receives a punishment like the one New York state dealt Deloitte.”  As many begin to re-examine the relationships they have with outside vendors, here is a helpful evaluation assessment tool offered by the Center for Audit Quality, a nonpartisan, nonprofit group based here in Washington, D.C.  While specific to an audit committees needs, the sample questions highlight some of the more important areas for consideration.  As with CK Lee’s articles on building value, this form is worth a look if you’re considering the strength of your vendor relationships.

Aloha Friday!