Analyst Forum Interview: Collyn Gilbert

Collyn Gilbert, a managing director at Keefe, Bruyette & Woods, first talked to Bank Director magazine at the launch of Analyst Forum two years ago when she was with Stifel Nicolaus. Stifel purchased KBW in February and she moved over to KBW, which is focused on the financial sector. She still covers small to mid-sized bank stocks and revisited in March what she said then.

We talked to you in the first quarter of 2011 for our first Analyst Forum interview. You said at the time that there was a great opportunity to own a basket of potential sellers, and that you expected considerable amounts of M&A in 2012 and beyond. How do you feel about that now?

I do think M&A is going to be a key component of the industry. Why did it not take place starting in 2012? I think what we missed was the unwillingness of management teams to pull the trigger.  In 2012, you still had good earnings growth for the sector but as we look to 2013 and 2014, earnings growth is going to slow considerably. That could be the catalyst we need to facilitate M&A. It’s a real struggle to grow earnings, especially for the small and mid-sized community banks that may be more real estate dependent and dependent on net interest margins. There is, finally, some degree of capital clarity and what the future looks like for growth. I think we’ve definitely seen a pickup in M&A. In our universe of small and mid-tier banks, we have had 11 acquisitions close in the last 12 months. It’s there. It’s not the big names like the Fifth Thirds and the BB&Ts. The median asset size for sellers has been in the couple hundred million dollar range.

What have those deals looked like?

Because they are so small, some of these [sellers] were trading at tangible book value. [Their stocks] are illiquid in nature. It allowed buyers to get decent pricing on them. You actually have seen these deals accrete book value for the buyers. We have not seen the premium M&A, where banks trading at 1.5 tangible book sell for 1.7 to 2 times tangible book. There is still a lot of bottom feeding. There are banks still challenged and management teams that are fatigued. There is no need to acquire deposits right now because there are a lot of deposits and not much growth in lending. If interest rates rise, that will be a factor to help M&A.

When we talked last, you predicted the banks that would do well would do so because of declines in non-performing assets and reserve levels and net interest margin improvement.

That was true. Now, looking at 2013, we’ve sort of exhausted that. There are some situations where banks are carrying higher-cost funding, which they can re-price lower, but materially lower deposit costs in 2013, I don’t think it’s going to happen. Margins are going to continue to come under pressure this year. I hope we start to see the trough by the end of the year but that’s tough to say.

You will see fewer banks that are able to improve their margins?

It’s virtually impossible. If they are getting better margins, how are they doing that? Are they getting riskier assets? You kind of have to wonder. Are they going farther out on the interest rate curve? You have to be a little bit cautious. {Editor’s note: The latest issue of Bank Director magazine has a story on this topic.}

Two years ago, we had a high level of capital in the industry. It’s still high. Do you see banks using this effectively?

The industry is sufficiently capitalized at this point. The small and midsized banks still follow the trends at the larger banks and keep an eye on what the regulators are saying at the larger bank level. I think that you’ve seen some [regulatory] relief there, and you’ll see more banks move to deploy capital, either in buybacks or increasing dividends. 

We talked two years ago about efficiency. What do you see banks doing with their efficiency levels now and is that a focus for investors or not?

It should be a focus [for investors]. With margins under pressure and growth being limited, these banks really need to think about their efficiency level. The past couple of years they have been cutting some of the fat. Now, we’re in a position where banks have to take a hard look at the expense level and the biggest part of that is the branch network. The one thing I don’t hear enough of from the banks I follow is: How are you rationalizing your branch networks? With consumer behavior evolving at a very rapid clip, if you’re not addressing that, you’re going to be taken to the woodshed. I’m kind of surprised banks aren’t talking about it. Banks have been so wedded to bricks and mortar through so many different cycles and technology has not been the hallmark for the banking industry at the mid-tier level. It’s going to take some time to kick in. [Waterbury, Connecticut-based] Webster Financial Corp., which we follow, is doing a good job shrinking the branch network and [expanding] mobile banking and responding to changing consumer behavior. They said they would reduce investment in branch infrastructure by 20 percent. The theme is starting to trickle down from the bigger banks. The smaller banks, their behavior lags the bigger banks by nine to 12 months.

What should small and medium sized banks do to make themselves more attractive to investors?

You have to be a lot more efficient and look at what the expense structure is. At the same time M&A needs to be an important part. No bank wants to sell. No CEO or board wants to give up their position and their compensation, or whatever the case may be. If putting two institutions together allows you to cut costs and improve returns, that is certainly beneficial to the shareholder.