Strong Board. Strong Bank

Quickly:

  • A bank’s CEO, Chairman and board of directors face a number of challenges in today’s ever competitive, highly regulated and rapidly evolving financial services industry.

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech

ATLANTA — Complex regulations, technological innovations and a highly competitive environment that leaves little room for error have placed unprecedented demands on the time and talents of bank boards.  Still, no one I’m with today seems interested in pity or sympathy.  To wit, I’m in Atlanta, at the Ritz-Carlton Buckhead, as we host Bank Director’s annual Bank Board Training Forum.  With us are 200+ men and women committed to strengthening their bank’s performance by enhancing the skills and abilities of their boards.

I’m buoyed by their collective optimism, especially having surfaced myriad governance issues, compliance challenges, audit responsibilities, risk concerns and areas of potential liability. What follows are five takeaways from presentations made today that are growth, risk or team-oriented.

  1. When it comes to growing one’s bank, an acquisition of another institution certainly helps a buyer achieve operating scale efficiencies, which in turn increases its valuation.
  2. In addition to traditional M&A as a driver of growth, we are seeing more partnerships with (and outright acquisitions of) non-banks in order to enhance non-interest income and the expansion of net interest margins.
  3. Personally, I appreciated Jim McAlpin (a partner at the law firm of Bryan Cave) for elaborating on the phrase “Strong Governance Culture.” As he explained, the regulatory community takes this to mean a well developed system of internal oversight and a board culture focused on risk management.
  4. When it comes to risk, financial institutions face a quite a few. Indeed, Eve Rogers, a Partner at Crowe Horwath, touched on cybersecurity, economic factors, regulatory changes, shrinking margins and fee restrictions. As she made clear, proactively identifying, mitigating, and, in some cases, capitalizing on these risks provides a distinct advantage to the banks here with us.
  5. In terms of compensation, a good checklist for all banks includes (a) the bank’s compensation philosophy, (b) specific details for how to incorporate a performance plan against a strategic plan and (c) details around how one’s compensation peer group was formed — and when was it last updated.

Tomorrow morning, I share some new ideas for approaching technology in terms of growth and efficiency given the digital distribution of financial goods and services.  As I noted from the stage, we’re seeing some banks, rather than hire from the ground up, take a plug-and-play approach for partnering (or acquiring) FinTech companies. While I certainly intend to talk about the culture and team aspects of technology tomorrow, my focus goes to how and where machine learning, RegTech, payments, white labeling opportunities and core providers allow financial institutions to present a cutting-edge looks and feels to its customers under the bank’s brand.  (*If you’re interested, click here.)

Three Observations From Bank Director’s 2015 Acquire or Be Acquired Conference (Monday)

News and notes from the second day of Bank Director’s annual Acquire or Be Acquired conference.

Key Takeaway

My biggest takeaway from the second full day of Acquire or Be Acquired (#AOBA15 via @bankdirector): instead of asking why take the risk of doing a deal or why take the risk of creating a high performing bank, a better question might be can you be relevant if you don’t?

Trending Topics

To start the day, I polled the audience — using an automated response system — on a number of non-M&A topics.  Of note, the majority of attendees believe the greatest organic loan growth opportunity is in commercial real estate.  Likewise, the majority of people voted for cash management services to businesses when asked what provides them with the greatest fee-growth opportunities.  Anecdotally, the issues I took note of where, in no particular order:

  • The expansive views of the regulators continue to frustrate bankers;
  • Where stock will be issued in a merger, an auction may not only be not required, but can be counterproductive from maximizing value to shareholders — hence the reasons why negotiated sales processes are gaining in popularity;
  • Key regulatory obstacles remain centered on compliance -‒ for buyers and sellers alike (e.g. BSA, consumer and increasingly, CRA);
  • There have been 28 transformational mergers — one bank acquiring another that is over 25% of its size — since 2013. These are merger of like-sized companies (yes, we are getting away from the term MOE). The market likes these deals — stocks in these deals have out-performed the market.

Picked Up Pieces

A really full day here in Scottsdale, AZ with quite a few spirited discussions/debates.  Here are some of the more salient points I made note of throughout the program:

  • The only thing worse than a flat yield curve is an inverted one.
  • If stocks do well after a deal, means you have the runway to do more deals in the future.
  • When it comes to buying another institution, keep in mind just because somebody has the money doesn’t mean they are going to spend the money.
  • Per Bill Hickey at Sandler O’Neill, capital markets are “open for business” given the lower rate environment and attractive yields/costs for both issuers and investors alike.
  • Without big bank M&A, community groups now review and protest transactions by much smaller banks.
  • A fundamental truth: as you grow, compliance & regulatory expectations grow with you.

More to come from The Phoenician and Acquire or Be Acquired tomorrow morning.

Seeking Size and Scale

With Wednesday’s announcement that BB&T has a deal in place to acquire Susquehanna Bancshares in a $2.5 billion deal, I felt inspired to focus on the mergers & acquisitions space today.  You see, if 2013 was the year of the merger-of-equals (MOEs), it seems that 2014 has become the year of “seeking size and scale.”

As I’ve shared in past posts, 2013 was characterized by a series of well-structured mergers which produced a dramatic improvement in shareholder reaction to bank M&A.  For example, Umpqua & Sterling,  United Financial Bancorp & Rockville Financial and Bank of Houston & Independent Bank.  Over the past few weeks, we’ve seen some pretty interesting transactions announced that are not MOEs; specifically, Sterling Bancorp buying Hudson Valley Holding in New York, Banner picking up AmericanWest Bank in the Pacific Northwest and the afore-mentioned BB&T deal.

Don’t Be Fooled, Size Matters

As evidenced by the Sterling and Banner acquisitions, the desire for scale and efficiencies is prompting certain institutions to expand.  While regulatory costs and concerns have been cited in previous years as deterents to a transaction, isn’t it interesting that both of these deals position the acquiring institution near the $10Bn threshold (*important as crossing this asset threshold invites new levels of scrutiny and expense).  But like John Thain suggested earlier this year, “the key is being big enough so that you can support all of the costs of regulation.”  Still, comments made by Richard Davis, chairman and chief executive of U.S. Bancorp, about the BB&T agreement should temper some enthusiasm about the biggest players jumping in to the M&A space a la the $185 Bn-in-size BB&T. “This is not a deal you’d ever see us do,” he said at conference in New York hosted by Bank of America Merrill Lynch, adding “it’s both out-of-market and it’s fairly expensive.”

I’m Serious, It Matters?!?

Earlier this year, Deloitte published The Top Ten Issues for Bank M&A.  In light of the BB&T deal, it is worth revisiting.  To open, the authors opine “size matters when it comes to regulatory constraints on the banking sector: The bigger the players, the more restrictions on banking activities, including M&A. Banks with less than $10 billion in total assets face the least restriction, while the very largest Systemically Important Financial Institutions (SIFIs) experience the highest level of constraints. Among the major regulatory actions that are expected to hold considerable sway over bank M&A in 2014 are the Volcker Rule, Basel III capital requirements, global liquidity rules, stress testing, and anti-money laundering (AML) and Bank Secrecy Act (BSA) compliance laws.”

Who I’m Taking to Buy a Lottery Ticket

Finally, a tip of the hat to Frank Cicero, the Global Head of Financial Institutions Group at
Jefferies. He reminded me on Wednesday that every prediction he made in a piece he wrote for BankDirector.com at the beginning of the year has come to pass…fewer MOE’s, bigger premiums, regional banks returning to bank M&A.  Personally, I’m wondering if he wants to walk into the lotto store with me this weekend?

Aloha Friday!

Let’s Talk Compensation

This Sunday, I fly to Chicago for Bank Director’s annual Bank Executive & Board Compensation Conference.  As I prepare to head towards the city that splits its allegiance between the Cubs & WhiteSox, my thoughts move from baseball — congratulations to the new World Series champion San Francisco Giants — to the people, products and performances of various financial institutions.  As I will be blogging and tweeting from our annual event, I thought to use today’s post to tee-up what you can expect on AboutThatRatio.com next Monday, Tuesday and Wednesday.

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Since the demise of AIG, Bear Sterns and Lehman Brothers in 2008, take a minute and think about how many significant changes have occurred throughout the entire financial community.  From new capital requirements to greater scrutiny on executive compensation, these “Dodd-Frank” years remind me of the aftermath of Sarbanes-Oxley’s introduction in the early 2000s in as much as board members continue to wrestle with the ‘what ifs’ and ‘how comes’ of the regulatory environment.

While much of the action taken by nearly every institutions a few years ago can best be described as reactionary and defensive, it strikes me that there are quite a few banks transforming their operating models to stay both relevant and competitive today.   For this reason, I am excited for our team to host several hundred bank executives and outside directors focused on the creation of sustainable long-term value for shareholders next week.  In terms of posts:

  • Monday’s looks at the recruitment, development and compensation of a bank’s most essential talent — both within a bank and on its board.
  • On Tuesday, the “main day” of our conference, I will share the trending topics from the day.  Last year, I wrote how board members and executives continued to struggle with measuring executive performance and retaining key talent.
 At the same time, I made note that many felt the environment in which banks operate in demands productivity, proficiency with technology and the ability to sell.  So I’ll juxtapose last year’s findings with this year’s themes.
  • Wednesday’s piece will be a bit simpler, a 90 second video I’ll have filmed from the conference.

Next Friday’s column?  More of a behind-the-scenes picture recap of the conference as I recently did for Bank Director’s “anniversary.”  Throughout, you can keep track of various conversations on Twitter by following @BankDirector and me, @AlDominick and/or by using #BDComp14.

Happy Halloween!

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