The Intersection of Leadership and Profitability

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

Quickly

  • Key takeaways from one of my favorite summer banking events, Crowe Horwath’s Bank Leadership and Profitability Improvement Conference.

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This morning, on the first of my two flights from Washington National to Monterey, California, I learned that Walmart customers might soon be able to get installment loans for big-ticket items through Affirm, a San Francisco-based FinTech I first wrote about in 2014 (For Banks, the Sky IS Falling).  Per the Wall Street Journal, the companies reportedly are nearing an agreement on a pilot program.  This potential partnership caught my eye as I prepared for today and tomorrow’s conference.  Indeed, relationships like these make clear that when it comes to growth and efficiency, the digital distribution of financial goods and services is a significant issue for the banking industry.

This idea took further shape when I walked into the conference center at the Inn at Spanish Bay.  Immediately upon entering the room, I found John Epperson, a partner at Crowe and Jay Tuli, senior vice president retail banking and residential lending at Leader Bank, sharing their opinions on partnership strategies involving banks and FinTechs.  From the stage, they touched on increasing net interest margins via improved pricing strategies on commercial loans, approaches to streamline mortgage application processes, ideas to reduce staff counts for loan administration processes and how to improve customer experiences through online rent payment solutions.

Their perspectives lined up with those we recently shared on BankDirector.com.  To wit, “many banks have realized advantages of bank-FinTech partnerships, including access to assets and customers.  Since most community banks serve discreet markets, even a relatively simple loan purchase arrangement can unlock new customer relationships and diversify geographic concentrations of credit.  Further, a FinTech partnership can help a bank serve its legacy customers; for instance, by enabling the bank to offer small dollar loans to commercial customers that the bank might not otherwise be able to efficiently originate on its own.”

Of all the difficult issues that bank leadership must deal with, I am inclined to place technology at the top of the list.  Banks have long been reliant on technology to run their operations, but in recent years, technology has become a primary driver of retail and small business banking strategy.  John and Jay simply reinforced this belief.

In addition to their thoughts on collaboration, this afternoon’s sessions focused on ‘Liquidity and Balance Sheet Management,’ ‘Fiscal Policy During Regulatory Uncertainty’ and ‘Managing Your Brand in a Digital World.’  While I took note of a number of issues, three points really stood out:

  • Yes, banks can make money while managing decreasing margins and a flat yield curve.
  • Asset growth without earnings growth is a concern for many because of loan pricing.
  • How a CFO sets a target(s) for interest rate risk may start with an “it depends” type response — but gets nuanced quickly thereafter.

Finally, I’m not holding my breath on the industry receiving regulatory relief any time soon.  I get the sense many here aren’t either.  But it would be nice to see some business people brought in to run various agencies and I’m looking forward to the perspectives of tomorrow’s first guest speaker, Congressman John Ratcliffe.

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My thanks to Crowe Horwath, Stifel, Keefe Bruyette & Woods + Luse Gorman for putting together this year’s Bank Leadership and Profitability Improvement Conference at The Inn at Spanish Bay in Pebble Beach, California.  I’ll check in with additional takeaways based on tomorrow’s presentations.

What Makes M&T A Great Community Bank?

A few months ago, the Wall Street Journal ran a story about M&T Bank appearing “to be just another big regional lender — but that doesn’t account for its CEO.”  Their piece coincided with our editorial team’s preliminary analysis of this strong financial institution.  We wondered: what’s behind M&T’s consistent success, why and how does M&T work like a community bank — and how is M&T playing a unique role reshaping public schools in Buffalo, New York?  These questions form the basis for Bank Director Magazine’s current cover story.  Authored by our Editor-in-Chief Jack Milligan, what follows is an account of how this upstate New York bank grew by making “quality loans to worthy borrowers” while following the lead of its dynamic Chief Executive..
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Any bank that exceeds $50 billion in assets carries the regulatory designation of being a Systemically Important Financial Institution, or SIFI. As such, they are subject to stricter supervision by the Federal Reserve than smaller banks receive, including higher capital requirements and mandatory stress testing. A community bank is an amorphous concept that means different things to different people, but certain characteristics are implied in the common understanding: It usually has a strong business focus and makes most of its money from lending, it has deep roots in the community because that is where its customers are located, and it is small. “Small” within this context is also imprecise. Certainly any institution that meets that definition under $1 billion would be considered a community bank, although many institutions over that threshold level would make the same claim.

But what about a Buffalo, New York-based $123 billion asset bank that operates in eight states and the District of Columbia?

M&T Bank Corp., the top ranked bank in Bank Director’s 2017 Bank Performance Scorecard for the $50 billion and above asset category, lives in both worlds.  M&T is the country’s 18th largest commercial bank and must adhere to all the requirements of a SIFI. But it also has deep roots in the communities it serves—as deep as most smaller banks. M&T not only meets the consumer and business banking needs of those communities, but also spends time and money trying to make them better places to live.

In this, M&T reflects the interests and values of its 83-year-old chairman and chief executive officer, Robert G. Wilmers, who has run the bank since 1983 when it had just $2 billion in assets. Wilmers believes deeply in the importance of strong local communities, if his 2016 letter to M&T’s shareholders is any guide. In the letter, Wilmers expressed concern about the health and well being of middle-class families and small-business owners who form the foundation of M&T’s customer base. The culprits that Wilmers identified are a monetary policy that has kept interest rates low, and excessive regulation. Low rates have benefited the wealthy more than middle-class families, who tend to be savers rather than investors. And M&T’s customer research has found that while small companies could benefit from borrowing at today’s low rates, many business owners are reluctant to expand in what they feel is an overregulated environment.

“Policies designed to benefit the majority have perversely only benefited a few,” he wrote. “The impacts of these decisions … are real,” Wilmers added. “In particular, the middle class and small businesses are losing ground. So, too, are their communities.”

M&T has a relatively straightforward business model compared to other institutions its size. M&T focuses its lending on consumers and small- and middle-sized businesses, and also provides wealth management and fiduciary services through its Wilmington Trust subsidiary to individuals and corporations. It doesn’t have a capital markets operation or wide array of specialty lending businesses, so it has some of the business model characteristics of a community bank, if not the size.

As is common with many Scorecard winners, M&T’s performance was marked by its balance. It did not place first in any of the five metrics that make up the Scorecard—return on average assets, return on average equity, the ratio of tangible common equity to tangible capital, nonperforming assets as a percentage of loans and other real estate owned, and net charge offs as a percentage of average loans. Its best scores were fifth place finishes for return on assets and net charge offs out of 22 banks in the $50 billion and above category. Scorecard winners tend to be those banks that do well on all of the metrics rather than dominating one or two.

The bank reported net income for 2016 of $1.32 billion, a 22 percent increase over 2015. Although fee income growth was essentially flat in a year-over-year comparison, loan growth was strong in 2016, with commercial and industrial credits growing 11 percent and commercial real estate loans 15 percent for the year. Residential real estate loans actually declined 14 percent last year as the bank let many of the jumbo mortgages that came with its 2015 acquisition of Hudson City Bancorp run off. M&T also shed nearly $2.6 billion in interest-bearing deposits it acquired with Hudson City, a thrift that relied on certificates of deposit for most of its funding. This 34 percent decline in high-cost liabilities, combined with its strong loan growth, resulted in a 22 percent rise in the bank’s net interest income for the year. M&T’s efficiency ratio dropped from 58.0 percent in 2015 to 56.1 last year, and this improvement also helped boost its profitability.

Over the long term, M&T has been a good performer in terms of asset quality and their earnings profile … and they tend to do well among large bank peers,” says Rita Sahu, a credit research analyst who covers M&T for Moody’s Investors Service. Sahu points out that M&T’s expenses were higher in 2014 and 2015 because of some charges related to the Hudson City purchase, and also because the bank had to spend heavily to strengthen its Bank Secrecy Act compliance infrastructure before the Fed would approve the Hudson City acquisition. Putting those issues behind it also helped boost the bank’s profitability last year.

M&T has attracted a strong following among institutional investors who value its predictability. The bank hasn’t posted a quarterly loss going back to 1976, and also had the lowest percentage of credit losses among money center and superregional banks during the financial crisis. Investors especially appreciate how much the bank’s stock price has, well, appreciated. Frank Schiraldi, an equity analyst at Sandler O’Neill + Partners who covers M&T, says the stock’s total return since June 1997 is 747 percent. This performance easily beats both the S&P 500 and SNL Mid Cap U.S. Bank Index for total return. M&T’s own investor presentation points out that just 23 of the 100 largest U.S. banks that were operating in 1983 when Wilmers took over are still around today. Among those, M&T ranks number one in stock price appreciation, with a compound average growth rate of 15 percent. “That’s pretty special,” Schiraldi says.

An important contributor to M&T’s performance last year was the acquisition of Hudson City, which closed in November 2015. Headquartered in Paramus, New Jersey, Hudson City operated on a traditional thrift model with its reliance on high- cost time deposits to fund a home loan origination platform that was heavily focused on jumbo mortgages, a product that M&T did not offer. So why did M&T do the deal? “If you looked at our distribution network prior to Hudson City, it was like a bagel and New Jersey was the hole,” explains Vice Chairman Rich Gold. “We had it surrounded, but we had nothing in New Jersey. This strategically filled a hole and now when you look at our distribution we’re covered from New York all the way down to Richmond, Virginia.”

While Hudson City was important for its geography, there were certain things it didn’t offer. As a traditional thrift, it had only a small percentage of core deposits and little in the way of business or consumer loans. “Our challenge now is to make something more out of the franchise than what it was,” says Gold. That transformation is underway, and it’s a process that M&T is very practiced at. Hudson City was M&T’s 23rd acquisition of either branches or whole institutions since 1987, and many of those deals involved thrifts. Gold says that successfully introducing a bank culture to a thrift takes time, and is facilitated by taking experienced M&T managers and seeding them throughout the old thrift franchise. “They understand the drill,” he says. “They understand what needs to be done. They understand the cultural complexion of [M&T] and are able to not only represent that but teach it.”

Announced in August 2012, the Hudson City deal would take over three years to close because of deficiencies the Fed found in M&T’s risk management infrastructure, particularly its BSA and anti-money laundering compliance efforts. The acquisition of Hudson City was going to substantially increase M&T’s asset size, and the Fed required that the bank strengthen its risk management program accordingly. “We probably did outgrow our infrastructure,” says Gold. “That’s shame on us. We missed that cue and we shouldn’t have, and I think we all recognize that and readily admit that.” M&T would eventually invest hundreds of millions of dollars building out an enterprise risk management infrastructure, including BSA and anti-money laundering compliance, an effort that was led by Gold.

And yet for all that, Hudson City has still turned out to be a good acquisition for M&T, even if it took much longer for the benefits to surface than anyone there expected. “It was still accretive from an earnings standpoint and from a tangible book value standpoint, so financially it was still a very good deal,” says Schiraldi. The Hudson City deal could also turn out to be a big driver of M&T’s growth over the next couple of years as the bank continues to build out the New Jersey franchise.

The bank made a $30 million tax-deductible cash contribution to the M&T Charitable Foundation in the fourth quarter of last year, which reduced its net income by $18 million, or 12 cents of diluted earnings per common share. For all of 2016, the M&T Charitable Foundation contributed $28 million to more than 3,600 not-for-profit organizations across its footprint, and its employees contributed over 234,000 volunteer hours.

Of course, many banks support community activities with their time and money. But few bank CEOs have stated their commitment quite so publicly as Wilmers has, and one undertaking in particular reflects both his values and interests—as do many things at the bank. With an undergraduate degree from Harvard College and an MBA from Harvard Graduate School of Business Administration, Wilmers has put his stamp on the bank during the 34 years that he has run it. Its relatively simple business model of checking accounts, loans and investment management advice fits comfortably with Wilmers’ description of the role that banks are supposed to play. “Banks are there to take care of people’s surplus liquidity, and help them buy a car and build a house and manage a business,” he said in an interview. “Part of that is making sure that things go well in the community, and that’s sort of like being for Mother’s Day.”

Wilmers is not the easiest interview for a journalist. He is polite and courteous, but has a tendency to reply to most questions with a brief answer or a deflection. An hour spent with him is to experience a fox hunt from the perspective of the hound. But Wilmers’ commitment to community—and particularly education—is real. He gives full voice to both in his 2016 shareholders letter, with roughly half of its 34 pages devoted to those concerns. (He also spent a lot of time complaining about bank regulation.) But when asked whether the American Dream, as it is embodied in middle-class families and small-business owners, is beginning to fray, Wilmers had this to say: “[Thirty years ago], 70 percent of the work force didn’t have a high school degree. Thirty years from now, 70 percent of the work force will need more than a college degree, in a time when arguably our educational system is getting worse, not better. That’s a big, big problem.”

And it’s a problem that M&T has spent its own time and money on. In 1993, the bank took over School 68, a poorly performing public school in the northeast section of Buffalo, an inner city neighborhood where, today, 33 percent of the residents live below the poverty line, and the unemployment rate is nearly 12 percent. School 68 was converted to a not-for-profit charter school in 2004 and renamed the Westminster Community Charter School, and today it teaches 550 students in kindergarten through the eighth grade. M&T has invested $16.6 million in the school to date, which includes a significant renovation to the building, and it manages all of the school’s operations. “Bob’s whole goal with Westminster was to see if he could change student academic outcomes and students’ lives and [their] families’ lives,” says Pamela Hokanson, president and senior director of schools for Buffalo Promise Neighborhood (BPN), an umbrella organization that oversees the school. As a charter school, Westminster receives about 60 percent of its funding from the State of New York. M&T and the Annie Casey Foundation provide the balance of the funding.

Walking through the facility with Hokanson and Principal Rob Ross on an afternoon in late May of this year, the halls were full of the joyful noise of children who seemed very happy to be there. Tuition is free and the school has a 95 percent attendance rate, the highest of any school in the City of Buffalo, according to Ross. “Of course, social ills creep in every now and then, but our goal is that the students’ experience in school should be safe, it should be positive, and we want them to walk away thinking of something they did today, whether it was the book they read or how they solved a problem with classmates as they were working through math or science,” Ross says.

In 2011, M&T was awarded a five-year, $6 million grant by the U.S. Department of Education to establish BPN, which M&T matched and Hokanson was then able to use as leverage to raise an additional $18 million from other organizations. The Buffalo Promise program now includes two additional schools, one of them an early learning center that was built in 2013 and acts as a feeder to Westminster. M&T contributed $3.5 million toward its construction. The bank also spent approximately $1.5 million renovating homes in the BPN footprint in 2014 and 2015.

M&T’s financial support is vital to BPN in other ways as well. Hokanson is actually an employee of the bank—her bank title is administrative vice president—but she is just one of eight bank employees who work for BPN. Sixteen other BPN employees are funded through an Annie Casey Grant and the M&T Charitable Foundation.

It is doubtful that M&T makes much, if any, money off of the nearly 12,000 residents who live in the BPN community. But it is a community that Wilmers and M&T have invested heavily in nonetheless. And there are children at Westminster whose lives are being changed as a result. Some years back, BPN created a scholarship program, also funded by M&T, that pays the tuition for its best students to attend the top private high schools in Buffalo. There are currently 30 students in the program. In May, the school hosted a dinner that was attended by all of the previous scholarship winners, plus the new class. Ross smiled when he talked about “seeing the dining hall filled with grandmas, and moms and dads and realizing that every one of those kids—yes, they got a scholarship—but they were working really hard not just to keep the scholarship but excel.”

Trying to make lives better. By anyone’s definition, that’s the work of a community bank.

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Our Bank Performance Scorecard is a ranking of the 300 largest U.S. banks, broken into three asset size categories. For a full explanation of the Scorecard and all of the rankings, click here.

Size & Scale: The King and Queen of Bank M&A?

Earlier this week, I shared my perspectives on bank M&A with the Wall Street Journal.  What follows builds off the piece that ran in Tuesday’s print edition, highlighting key findings from Bank Director’s annual Bank M&A Survey.

By Al Dominick // @aldominick

At a time when J.P. Morgan is getting smaller, the pressure is on for smaller banks to get bigger.  As KPMG recently shared with BankDirector.com, there was a 25% increase in bank deals in the U.S. in 2014, compared to 2013, and there is a good possibility that the number of deals in 2015 will exceed that of 2014.  One reason for this: a larger institution can spread costs (such as investments and regulatory burdens) across a larger customer and revenue base.

Not surprisingly, 67% of executives and board members responding to Bank Director’s 2016 Bank M&A Survey say they see a need to gain more scale if they are going to be able to survive in a highly competitive industry going forward.  As our director of research, Emily McCormick, shared, “many of these respondents (62%) also see a more favorable climate for bank deals, hinting at a more active market for 2016 as banks seek size and scale through strategies that combine organic growth with the acquisitions of smaller banks.”

While the majority of bank executives and boards surveyed feel a need to grow, respondents don’t agree on the size banks need to be in order to compete today.  A slim majority, 32%, identified $1 billion in assets as the right size… interesting, but not surprising, when you consider that 89% of commercial banks and savings institutions are under $1 billion in assets, according to the FDIC (*personally, I’m of the opinion that $5Bn is the new $1Bn, but that’s a topic for another day).  On to the key findings from this year’s research:

  • Two-thirds report their bank intends to participate in some sort of acquisition over the next 12 months, whether it’s a healthy bank (51%), a branch (20%), a nondepository line of business (14%), a loan portfolio (6%) and/or a financial technology firm (a scant 2%).
  • Respondents indicate that credit culture, at 32%, and retaining key talent that aligns with the buyer’s culture, at 31%, are the most difficult aspects of the post-merger integration process.
  • More institutions are using social media channels to communicate with customers after the close of the deal. 55% of respondents who purchased a bank in 2014 or 2015 used social media, compared to 42% of 2011-2013 deals and just 14% of 2008-2010 deals (*FWIW, Facebook, at 26%, is the most popular channel for respondents).
  • Fifty-six percent of respondents have walked away from a deal in the past three years.  Of the respondents who indicate they declined to buy, 60% cite deal price while 46% blame the credit quality of the target institution.
  • Why do banks sell? Of the executives and board members associated with banks sold from 2012 to 2015, 55% say they sold because shareholders wanted to cash out.  Despite concerns that regulatory costs are causing banks to sell, just 27% cite this burden as a primary motivator.

The full survey results are now available online at BankDirector.com, and will be featured in the 1st quarter, 2016 issue of Bank Director magazine.  In addition, for those executives interested in connecting with many of the key decision makers driving the deals mentioned above, our annual Acquire or Be Acquired Conference will be held at the Arizona Biltmore from January 31 through February 2.

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Our 2016 Bank M&A Survey, sponsored by Crowe Horwath LLP, examines current attitudes and challenges regarding bank M&A, and what drives banks to buy and sell. The survey was completed in September 2015 by 260 chief executive officers, independent directors and senior executives of U.S. banks, and former executives and directors of banks that have been acquired from 2012-2015.

Is Walmart the Next Big Bank

Part four of a five piece series on emerging threats to banks from non-financial companies. To read parts one through three, click on “For Banks, the Sky IS Falling,” “PayPal is Eating Your Bank’s Lunch” and “The Bank of Facebook.”

At the risk of crashing through an open door, did you know that the retail juggernaut Wal-Mart Stores Inc. launched Bluebird in partnership with American Express late in 2012 so users can direct deposit their paychecks, make bill payments, withdraw cash from ATMs and write checks?  Yes, customers also have access to mobile banking, which includes features like remote deposit capture and person-to-person (P2P) payments.  So does this position Wal-Mart as the next SIFI (*no disrespect to CIT following their announced acquisition of OneWest in a $3.4Bn stock & cash deal earlier this week)?

Walmart bank logo.001

Cue Robin Thicke

According to Wal-Mart, 95% of Americans live within 15 miles of one of its stores.  So I think its fair to say that Wal-Mart continues to blur lines between banking and shopping as it added yet another financial service to its stores across the country.  Indeed, the retailer announced this spring that customers can transfer money to and from any of its 4,000 stores in the U.S. and Puerto Rico.  As this article in Forbes highlighted, low income workers who don’t have traditional bank accounts are turning to prepaid cards and alternatives to checking accounts.  Banks like JPMorgan Chase and Wells Fargo are trying to fill that gap with prepaid and reload able cards — something Wal-Mart has been offering for years.

Where Is That Achilles Heel?

Unlike online competitors to a bank, Wal-Mart enjoys huge brand recognition and an established customer base that feels comfortable walking into their local “branch.”  In fact, banks that already operate inside Walmarts reap among the highest fees from customers of any banks in the nation, according to a WSJ analysis.  But the very demographic the retail company serves — one that expects and demands rock-bottom pricing — may not favor a “B of W.”

Indeed, banking at Wal-Mart is a lot more expensive than shopping there.  As noted by in the WSJ, most U.S. banks earn the bulk of income through lending.  Among the 6,766 banks in the Journal’s examination, “just 15 had fee income higher than loan income — including the five top banks operating at Wal-Mart.”  Would the company really want to race to the bottom in terms of pricing its financial products (ones that would not be federally insured) and compete with its own tenants?

If At First You Don’t Succeed…

It is worth noting that Wal-Mart has tried to get into banking since the late 1990s.  It was thwarted in attempts to buy a savings-and-loan in Oklahoma and a bank in California — and later dropped a bid for its own banking charter in 2007.  While I’m not suggesting the new logo depicted above is anything more than a simple rendering by yours truly, it wouldn’t surprise me if the company explored even more creative ways to compete with financial institutions in the future.

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To comment on this piece, please click the white plus sign in the bottom right gray circle on this page or share your thoughts with me via Twitter (I’m @aldominick).  Next up, how crowdsourcing sites like Kiva and Kickstarter allow customers to bypass their bank to get funding for a business idea.

Good is the Enemy of Great

Jim Collins once wrote “good is the enemy of great,” opining that the vast majority of companies “never become great, precisely because the vast majority become quite good – and that is their main problem.”  I have heard many use the title of today’s piece to explain the unexpected; most recently, while talking with a friend about Jurgen Klinsmann’s decision to exclude Landon Donovan from his 23-man World Cup roster (hence today’s picture c/o USA Today).  While I’ll steer clear of any soccer talk until the U.S. takes the field against Ghana in a few weeks, Collins’ statement sparked the three thoughts I share today. Indeed, being “just good” will not cut it in our highly competitive financial industry.

usatsi_7848706_168380427_lowres Let’s Be Real — Times Remain Tough

In yesterday’s Wall Street Journal, Robin Sidel and Andrew Johnson began their “Big Profit Engines for Banks Falter” with a simple truth: “it is becoming tougher and tougher being a U.S. bank.  Squeezed by stricter regulations, a sputtering economy and anemic markets, financial institutions are finding profits hard to come by on both Main Street and Wall Street.”  Now, the U.S. financial sector and many bank stocks have “staged a dramatic recovery from the depths of the financial crisis;” as the authors point out, “historically low-interest rates aren’t low enough to spur more mortgage business and are damping market volatility, eating into banks’ trading profits.”  While I’ve written about the significant challenges facing most financial institutions – e.g. tepid loan growth, margin compression, higher capital requirements and expense pressure & higher regulatory costs — the article provides a somber reminder of today’s banking reality.

Still, for Banks Seeking Fresh Capital, the IPO Window is Open

Given how low-interest rates continue to eat into bank profits, its not surprising to hear how “opportunistic banks capable of growing loans through acquisition or market expansion” are attracting investor interest and going public.  To wit, our friends at the Hovde Group note that seven banks have filed for initial public offerings (IPOs) already this year, putting 2014 on pace to become the most active year for bank IPOs in a decade.  Based on the current market appetite for growth, “access to capital is becoming a larger consideration for management and boards, especially if it gives them a public currency with which to acquire and expand.”  If you’re interested in the factors fueling this increase in IPO activity, their “Revival of the Bank IPO” is worth a read.

Mobile Capabilities Have Become Table Stakes

I’m on the record for really disliking the word “omnichannel.”  So I smiled a big smile while reading through a new Deloitte Center for Financial Services report (Mobile Financial Services: Raising the Bar on Customer Engagement) that emphasizes the need for banks to focus more on a “post-channel” world rather than the omnichannel concept.  As their report says, this vision is “where channel distinctions are less important and improving customer experience becomes the supreme goal, no matter where or how customer interactions occur, whether at a branch, an ATM, online, or via a mobile device.”  As mobile is increasingly becoming the primary method of interaction with financial institutions, the information shared is both intuitive and impactful.

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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!

Bank Director in the Wall Street Journal

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As the sun shines down on Washington, D.C., some “light” Saturday morning reading on the Wall Street Journal’s Risk + Compliance Journal this morning:

Banks with a separate board-level risk committee report a higher median return on assets and return on equity compared to banks that govern risk within a combined audit/risk committee or within the audit committee, according to the Risk Practices Survey from Bank Director and banking and payments technology company FIS. The survey found smaller banks are adopting risk practices required only of much larger companies, and that almost all banks with more than $1 billion in assets now have a chief risk officer and 63% govern risk within a separate risk committee of the board.

To read the full piece on recent surveys and reports dealing with risk and compliance issues, click here.

A grown up swinging town

San Francisco, CA

I spent the last few days in San Francisco meeting with various companies (think BlackRock, Fortress, Raymond James, Pillsbury, Manatt Phelps, etc.).  Those conversations caught me up on various trends impacting banks on our west coast. As I do each Friday, what follows are three things I heard, read and learned this week — with a big nod towards the bear republic.  Oh yes, thanks to old blue eyes for inspiring today’s title.  Sinatra certainly knew what he was talking about when it came to the bay area.

(1) Every bank has a story, and the old Farmers National Gold Bank (aka the Bank of the West) certainly has a rich one.  Begun in 1874, it was one of just ten banks nationwide authorized to issue paper currency backed by gold reserves.  Long a favorite of mine thanks to an academic / St Louis connection with their CEO, I had the opportunity to sit down with one of their board members on Tuesday and hear more about the $60Bn+ subsidiary of BNP Paribas.  As I reflect on that conversation, it strikes me that the bank’s growth reflects smart credit underwriting, a diversified loan portfolio and careful risk management. Yes, there have been strategic acquisitions (for example, United California Bank in ‘02, Community First Bank in Fargo in ’04 and Commercial Federal Bank in Omaha in ’05); however, their growth has been more organic of late — fitting for a “community bank” that has grown to more than 700 branch banking and commercial office locations in 19 Western and Midwestern states.  While their geographic footprint continues to grow, take a look at their social media presence. In my opinion, it’s one of the best in the banking space.

(2) From Bank of the West to US Bancorp, First Republic to BofA, bank branches dominate the streets of San Francisco.  As competition for business intensifies, I thought back to an article written by Robin Sidel (Regulatory Move Inhibits Bank Deals) that ran in last week’s Wall Street Journal.  I’m a big fan of her writing, and found myself re-reading her piece on a move by regulators “that put the biggest bank merger of 2012 on ice (and) is sending a chill through midsize financial institutions.”  Her story focuses on M&T, the nation’s 16th-largest bank (and like Bank of the West, operates more than 700 branches) and its $3.8 billion purchase of Hudson City Bancorp.  According to Robin, the deal that was announced last August is on hold after the Federal Reserve raised concerns about M&T’s anti-money-laundering program.  The fallout? Since the Fed’s decision, CEOs of other regional banks “have shelved internal discussions about potential transactions.”  For those interested in bank M&A, this article comes highly recommended.

(3) So if certain deals aren’t going to be considered (let alone closed), it naturally begs the question about how how and where banks can add new customers and increase “share of wallet” to improve profitability.  I brought this up in a conversation with Microsoft on Wednesday and found myself nodding in agreement that financial institutions should “audit their customer knowledge capabilities” to provide an optimal experience.  “Customer centricity” is a big focus for the tech giant, and it is interesting to consider how things like marketing, credit management and compliance might benefit from a well-designed strategy for managing customer knowledge.  I know some smaller banks are doing this (Avenue Bank in Nashville comes to mind) and I’m curious to hear how others might be taking advantage of tools and techniques to out-smart the BofA’s of the world.  If you know of some interesting stories, please feel free to weigh in below.

Aloha Friday!

Financially Focused Friday Fun

1st stop at the Ferry Building in SF
Always my 1st stop at the Ferry Building in SF

What does my favorite, favorite, favorite purveyor of coffee have to do with banking (and payments)? I’ll do my best to connect the dots in this week’s financially focused Friday post. If you missed the last few week’s, take a spin on our way back machine, aka the search button on left.

As I do every Friday, what follows are three stories that I read/watched/heard this week. While tempted to open with a longer mention of seagulls, social media and white smoke, let me see if a picture really is worth a thousand words. This one succinctly captures the feelings that many community bankers have shared with regards to the last few year’s worth of new government regulation and scrutiny. It also sets up the first of this week’s three points:

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  • The WSJ ran an interesting piece entitled Small Banks in U.S. Hit by Rising Insurance Costs earlier this week. The premise: thousands of small U.S. banks “are feeling a financial pinch from the government’s efforts to punish executives and directors of banks that collapsed during the height of the financial crisis.” While I promise not to dwell on insurance costs or D+O liability issues today, Robin Sidel’s coverage (which I think originated at our M&A conference in January?) echoes what I’ve heard from bank executives. Namely, “the insurance squeeze is the latest headache for community banks that are still grappling with fallout from the financial crisis. Low interest rates, new regulations and tepid loan demand are pressuring profit. Many small banks would like to get out of the jam by selling themselves but can’t find buyers.”

Truth be told, I’m a bit talked out about bank M&A this week, so I won’t go down that path for point number two. Organic growth proves far more interesting — as its currently far more elusive:

  • On the same day I sat down with the founder and CEO of the Bank of Georgetown (who I think is doing a heckuva job building his bank), I had the chance to catch up with John Cantarella, President, Digital, News & Sports Group at Time Inc. Both talked about how banks are growing/changing; albeit, in much different terms. While Bank of Georgetown continues to build through commercial lending, let me share some thoughts inspired by John. In full disclosure, he recently sat down with our Chairman and agreed to speak to bank CEOs, board members and C-level execs our Growth conference in New Orleans. Subsequently, John and I talked about the focus of his presentation, “Standing Out in a Digital World,” and how he might introduce disruptive technologies and the companies bringing them to market (e.g. Simple and Square). If you’re not familiar with Square, its considered one of the hottest companies in the mobile payments space. When I hopped on their site to dig deeper, I saw that Blue Bottle Coffee Co. recently adopted Square for its point-of-sale. You should DM our Associate Publisher to find out how long she thinks it took for me to add this to today’s piece. So consider this my nod to both companies, our conference and this DC community bank. All interesting stories that really should have their own posts. Hmmm…. next week?

Finally, I do take comfort knowing a pendulum can swing only so far. While strictly my opinion, I believe too many folks within the various regulatory bodies focused on financial institutions (not hedge funds, not multi-national financial services organizations) are missing huge opportunities to contribute to — and communicate with — the banks they oversee. While I get off my soapbox, let me conclude with my third and final point from this week:

  • I saw the Comptroller of the Currency discussed community bank supervision at the Independent Community Bankers of America Annual Convention yesterday. I’m not in Las Vegas nor attending their event, so I simply hope the OCC’s lawyers didn’t totally overhaul his remarks. There are a lot of very real questions/concerns I know bankers would like addressed (e.g. Basel III, the tax benefits credit unions enjoy compared to community banks, etc.). If you were there and care to share, I’d be interested in any feedback/insight…

Aloha Friday to all!

In the spirit of a Friday Follow

In the spirit of Twitter’s #FridayFollow, here are three stories related to the financial community that I read/watched/heard this week:

(#1) If you were at Bank Director’s 19th annual Acquire or Be Acquired conference last month, you heard that declining net interest margins, loan growth and regulatory challenges are the top concerns for banking leaders. In the following video, Grant Thornton’s Nichole Jordan discusses these concerns and provides insight into what bank executives and members of a board might do about them.

 

(#2) While I live in Washington D.C., our company considers Nashville home. In the shadows of Union Station, Avenue Bank maintains its oh-so-cool headquarters. I met with our “neighbor’s” President & COO yesterday afternoon and wound up talking about quite a few things. SEC sports, the upcoming Masters, branding (that’s their hummingbird below) and gasp(!), even a bit of banking.

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When I asked if he’d read this cover story in Wednesday’s Wall Street Journal (“Business Loans Flood the Market“) about more banks competing for lending opportunities, he said he hadn’t. But, he did have good reason: he’d been talking about that very thing in Knoxville (at UT’s business school) the night before. While a subscription is required, the story lays out how banks are putting “their liquidity to work, but added competition puts pressure on rates and elevates risk.”

(#3) Finally, I receive a number of insightful research reports and newsletters. One of the better ones, IMHO, comes from Clark Street Capital. Each week, the Chicago-based firm shares its perspectives on banking, real estate, and the debt and loan sale markets. Worth a sign up.