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.

Follow Friday Fun

Well what do you know.  On Wednesday, D.C.’s “snowquester” came in like a lion and left, sadly, like a lamb.  So what do we have to hang our hat on this week?  Well, the Federal Reserve did release its stress test results for the country’s largest banks yesterday afternoon.  Interesting enough to make today’s week-in-review?  Take a read through these three stories that I read/watched/heard to find out.

Flying into Boston's Logan
An early approach into Boston’s Logan airport
  • While I wasn’t in my hometown of Boston, MA to hear this first hand, I have it on good authority that a number of the bankers presenting at KBW’s regional bank conference two weeks ago spoke on our country’s rapid move towards energy independence — and on the real economic growth they are seeing in their regions as a result.  If you’re interested, this equity research note (FSW Energy and the Regional Banks), authored by Keefe’s Fred Cannon, is definitely worth a read.
  • Juxtaposing energy needs with banking services reminded me of a “debate” between three bank analysts, including Fred, that centered on comparing banks to utility companies.  Building off those perspectives, I found myself talking with John Eggemeyer (the co-Founder & Managing Principal @ Castle Creek Capital) last Friday afternoon about this very thing.  While it didn’t make it into last week’s post, his hypothesis that the financial community bares all the characteristics of a mature industry sent me searching for white papers I worked on while in business school.  John saved me some of the trouble by reminding me that banking follows a historic pattern of other mature industries (e.g. dealing with excess capacity; which, as a consequence, leads to fierce competition for business).  My big takeaway from our conversation: price, not customer service, proves the ultimate differentiator. 
  • Finally, as John and I talked about what bankers might learn based on the commoditization of businesses, I couldn’t help but think about M&A and organic growth.   This leads me to my third point.  The Washington Business Journal recently recognized the top 5 D.C.-area banks based on total return on assets.  In the piece, authored by Bryant Ruiz Switzky, the area’s 37 local banks posted a median annual profit of $3.5 million in 2012. That’s up 44% from 2011.  Yes, many rankings like this focus on growth in terms of ROA; personally, I’m also keen to look at earnings growth.  Nonetheless, some strong banks on this list… with many more making some real strides here in our Nation’s Capital.

As a bonus, a tip of the cap to an American Banker piece on the hows and whys BankUnited’s private-equity backers are giving up a big chunk of their stakes in the $12.2 billion-asset bank.  While a subscription is required to read yesterday’s “BankUnited to Strengthen M&A Buying Power After Stock Offering,” I think its worth considering the short and longer-term views on what reduced private-equity interest might mean to a bank like this one.

Aloha Friday to all!

Go west young man?

Yup, that's me moderating a point-counterpoint session on bank M&A
*That’s me on the far left moderating a point-counterpoint at our annual M&A conference

As I head west (to Los Angeles for a few days of meetings), I started to re-read a few recent M&A outlooks for 2013.  Admittedly, I have a pretty long collection of white papers, analyst reports and opinion pieces in my Dropbox thank to our recently wrapped up Acquire or Be Acquired conference.  As I dig through the various projections, it strikes me that capital, liquidity and credit have improved at many U.S. banks since I rejoined the financial community in September of 2010.

Now, I draw no parallel to my return and this improvement — but do take comfort in hearing so many bank executives and board members voice more and more optimism about their months ahead.  That said, when I look back at 2012, I think few would contest that it was a year plagued with limited loan growth & intense margin pressure.

I share this as I think about the factors that will spark more M&A deals in 2013 than 2012. Fortuitously for today’s piece, I have some “inside” knowledge to share.  You see, with more than 700+ joining us at the Phoenician at the end of January, I had the chance to moderate a panel composed of two attorneys and two investment bankers.  I asked each to take a stance — pro or con — on the following statements before opening things up to the audience (of bank CEOs, CFOs, Chairmen and board members from 275 community banks).  What did we find?

  • 68% responded that 2013 will be the best year for bank M&A since the financial crisis of 2008.
  • It was a near dead heat (52% taking the con) that pricing for a well performing bank less than $1 billion will not exceed 1.25X tangible book or less.
  • 58% voted that the primary obstacle to doing a deal will be unrealistic price expectations of sellers.
  • 60% voted that banks that are thinking of selling would be better off waiting until 2014 when valuations will be higher that they are likely to be in 2013.

Not surprisingly, a strong and vocal 72% disagreed with the idea that banks need to be a minimum of $1 billion in asset size to be competitive in today’s market.  While certain economies of scale tip in favor of those above our industry’s magic number, I have to agree with the majority on this one.  Yes, compliance costs continue to escalate — and regulatory burdens, well, don’t get me started…

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For more on this three-day conference, I encourage you to read “A Postcard from AOBA 2013.”  Penned by our editor, Jack Milligan, his gift with the written word writes circles around my amateur efforts.