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.

What Is Your Bank Worth

I’m at a 1909 Neoclassical landmark in San Francisco for Bank Director’s “Valuing the Bank” program.  Setting up shop in the beautiful Ritz-Carlton on Nob Hill is a real treat, as is welcoming a number of bank CEOs, chairmen, CFOs and outside directors to the Bay Area.  Let me share a few of my takeaways from yesterday’s conversations and tee up what’s ahead this morning.

The Ritz-Carlton San Francisco
The Ritz-Carlton San Francisco

What Drives Value Creation

To open the day, we reviewed the operating environment in terms of “what drives value creation.”  Beginning with a presentations made by the Hovde Group and Moss Adams, we touched on issues like margin compression, deposit funding, efficiency improvements and business model expansion in the context of the current environment.  One interesting, M&A-specific fact from this session: the market for high-performing banks is at a 5-year high.  Consider the number of deals greater than $25 million in deal value that were priced above 150% of tangible book value: in the last 4 quarters: 44… for the prior 18 quarters: 45.

Understanding Risk in the Context of Determining a Bank’s Worth

I made note that credit unions have seen loans grow 9.8% this past year; far quicker than the 4.9% growth at banks (h/t Hovde Group).  So as much as I’ve recently harped on non-bank competition from players like Apple and PayPal, a stark reminder that banks also need to find a way to compete with lower rates offered by credit unions to reverse this trend of losing loans.  Back to the M&A side of things, it was suggested that to maximize value, potential sellers should consider selling less profitable/smaller/rural branches.

Today’s Agenda

This morning, we will look at corporate governance and talent-specific opportunities to strengthen one’s institution.  After a series of peer exchanges, I am excited to tackle the idea that banks are sold more than they are bought.  Indeed, our final session of this program pairs David Brooks, the Chairman & CEO of  the NASDAQ-listed Independent Bank Group and Jim Stein, Vice Chairman & Houston Region CEO, Independent Bank.  Jim was the CEO at Bank of Houston and sold that bank to David’s, and together, will talk with me about how that deal was struck.

Aloha Friday!

Bank Mergers and Acquisitions

Before I head out to California to speak at Moss Adams’ annual Community Banking conference, a look at the principal growth strategy for banks: mergers and acquisitions.

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Over the last few years, bank advisers have made the case that consolidation should increase due to significant regulatory burdens, lack of growth in existing markets and aging boards and management teams that are “fatigued” and ready to exit our industry.  So as I see prices to acquire a bank on the rise, it is interesting to note that demand for a deal hasn’t slowed.  According to Raymond James, there were 136 acquisitions announced in the 1st half of the year versus 115 announced in the first half of 2013.  Moreover, total deal value is reported at $6.1 billion versus $4.6 billion in the first half of 2013.

Taking this a step further… While activity in the first quarter of 2014 was only slightly ahead of prior years, the second quarter saw a dramatic increase — 74 deals were announced, which is the highest of any quarter since the credit crisis of 2008.  According to this piece by Crowe Horwath (Will 2014 Be the Year of M&A?), annualized, the total number of announced transactions will exceed 260, which is on par with many of the pre-crisis years of the 2000s.

When is a “Deal Done Right?”

As competition to acquire attractive banks increases, so too does the short and long-term risks incurred by the board of an acquiring institution to find the right fits.  In many ways, the answer to “what makes a good buy” depends on the acquiring board’s intent.  For those looking to consolidate operations, efficiencies should provide immediate benefit and remain sustainable over time.  If the transaction dilutes tangible book value, investors expect that earn back within three to five years. However, some boards may want to transform their business (for instance, a private bank selling to a public bank) and those boards should consider more than just the immediate liquidity afforded shareholders and consider certain cultural issues that might swing a deal from OK to excellent.

My Thoughts on CIT’s Acquisition of OneWest

No two deals are alike — and as the structure of certain deals becomes more complex, bank executives and boards need to prepare for the unexpected.  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. So as I consider this summer’s CIT deal for OneWest, I see a real shift happening in the environment for M&A.  I see larger regional banks becoming more active in traditional bank M&A following successful rounds of regulatory stress testing and capital reviews.  Also, it appears that buyers are increasingly eyeing deposits, not just assets.  This may be to prepare for an increase in loan demand and a need to position themselves for rising interest rates.

A “Delay of Game” Warning

While M&A activity levels are picking up in the bank space, the amount of time from announcement of acquisition to the closing of the deal has widened significantly in some cases.  As noted by Raymond James earlier this week, “this has been particularly notable for acquirers with assets greater than $10 billion where there have been notable delays in several instances given the greater regulatory scrutiny for banks above this threshold. M&T’s pending acquisition of Hudson City was originally expected to close in 2Q13, and through August 18, 2014, was 722 days from the original announcement on August 27, 2012. This case stands out as a prime example of issues surrounding Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) compliance. A more recent example is the delay in the expected closing of BancorpSouth’s two pending acquisitions (Ouachita Bancshares and Central Community Corporation) that have both been pushed out due to similar issues.”

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When it comes to bank M&A, I sometimes feel like everyone has an opinion.  I’d be interested in your thoughts and welcome your feedback.  To leave a comment on this post, simply click on the white plus sign (within the grey circle at the bottom of this page).  I invite you to follow me on Twitter (@aldominick) where you can publicly or privately share your thoughts with me too.

Aloha Friday!

A Pop Quiz on the Future of Banking

I was not planning on a sixth consecutive column focused on non-bank competition; however, as I prepare to present at Moss Adams’ 14th Annual Community Banking conference in Huntington Beach, California on August 26, a “bonus” post on this topic.  As you will see, today’s piece builds on the premise that many community bank leaders have real opportunities to expand what banking means to individual and business customers by offering services that go beyond a traditional business model. So to wrap up this week, sharpen your pencils for this pop quiz.

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Are WE the generation that has learned how to live without a bank?
So much has been written about millenials learning to live without a bank… but ask yourself: have you learned how to live without your bank?  If you could not direct deposit your paycheck, do you have ready alternatives?  I thought so.  Financing for your house? Your business?  I am simply pointing out the inconvenient truth that it is not just the wet-behind-the-ears customers that might already know how to live without a bank.  That said, just because many have learned to live “without” a traditional banking relationship doesn’t mean most want to.  I will let a thought from Diebold support this thought, but before I do, have to ask:

Who’s getting that Kabbage?

As a platform for online merchants to borrow working capital, Kabbage fills a small business lending gap that I have to imagine many community banks should desire (h/t Mitchell Orlowsky @ Ignite Sales).  As I learned this week, Kabbage works with small businesses that are unable to obtain credit from traditional sources. According to TechCrunch, “the startup has closed a $270 million credit facility from Guggenheim Securities, the investment banking and capital markets division of Guggenheim Partners. Atlanta, Georgia-based Kabbage will use the funds to build out its financing business both in the U.S. and beyond. This is one of the largest credit facilities ever issued to a small business lender, and possibly the biggest in the online lending space.” Since opening for business almost three years ago, Kabbage has advanced more than $250 million to small businesses, the company says   Just another example of competition facing many business-oriented banks today.

If Diebold can change, why can’t you?
From the outside looking in, one can make the case that the last truly disruptive technology for banks was the ATM. And when you think ATMs, Diebold has to be top-of-mind.  So when the technology company acknowledges the following, why can’t more banks course correct and be where people are going (and not where they might appear to be)?

The retail financial services industry is in the midst of an epic change and will soon look very different than it did just a few years ago. Consumers are changing what they want out of their banks. Our research proves that consumers want additional convenience to access their bank anytime, anywhere, anyhow, all while maintaining a personal connection with their bank.

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Regardless of how you did on this pop quiz, please feel free to leave a comment below by clicking on the white plus sign (within the grey circle at the bottom of this page).  I invite you to follow me on Twitter (@aldominick) where you can publicly or privately share your thoughts with me.

Aloha Friday!

Know thy customer

The Park Hyatt Washington
The Park Hyatt Washington

Earlier this week, I spent a night at one of my favorite DC hotel’s, the Park Hyatt Washington.  As I checked in (and later, out) I paid close attention to their customer service efforts — and by extension, my customer experience.  Off-the-charts positive from start to end.  So as I wrap up this week’s travel (DC, Nashville and St. Louis to be exact), I thought to share three customer-focused thoughts from the last few days.

(1) I wrote about Brett King leading up to our annual Growth Conference.  He’s a best-selling author who, in this video “The Battle for the Bank Account: And Why the Banks Will Probably Lose,” explores the end-game in the emergence of the mobile wallet and what it means for the “humble” bank account. How does this apply to the experience a consumer may have with their bank?  Simply, when one can get a salary paid directly onto a phone, when your iTunes account doubles as a prepaid debit card and when you can use Facebook to send money – its fair to wonder will there be any need for traditional retail banking in the future?  A longer video than we normally post to BankDirector.com but one certainly worth a watch.

(2) Today’s American Banker shares a recent study from Market Rates Insight.  Their work found that customers want products like identity theft alerts and mobile bill pay from their banks. As the publication summarizes, many community banks are unable or unwilling to offer those products.  So community banks may be leaving money on the table due to an inability or an unwillingness to offer a number of coveted financial products.  One wonders how much financial flexibility these institutions have in terms of new investments relative to the heavy compliance costs burdening such banks?  However, if smaller banks cannot compete on price, can they really expect to maintain a loyal customer base without fulfilling “basic” customer expectations?

(3) A I head towards the mighty Mississippi this morning, I took note of another report, this one by assurance, consulting and tax firm Moss Adams.  Western bank CEOs and their direct-report executives should expect average salary increases in the 3% to 5% range during 2013, according to a survey run by the firm.  Also, the industry as a whole should expect a nearly 50% reduction compared to 2012 in the number of institutions that continue to subject their executive officers to a salary freeze.  The firm also found compensation strategies continue to favor incentive-based compensation over salaries in order to place a greater emphasis on variable costs for the retention of key executive officers.  So if a key to great customer service includes a consistency of communication and direction from key leaders, this report bodes well for executives meriting a salary increase. 

Aloha Friday!