Finding themselves stymied by low interest rates and a hyper-competitive business loan market, growth has become the Holy Grail for a great many banks today. There are essentially two strategies that banks can employ to grow their top lines. One is the tried-and-true acquisition method, where banks essentially buy their growth. Over the past several decades vast banking empires in the United States have been built this way, including, but by no means limited to, the country’s two largest banks—JPMorgan Chase & Co. and Bank of America Corp. But acquisitions are not without their risk. A poorly conceived, over-priced and badly executed acquisition can so thoroughly damage a bank’s stock price (not to mention its reputation) that it can take years for it to recover and for the bank to rebuild its credibility with the investor community.
Organic growth is the second growth strategy, and while it is not without its risk—growing too fast in a volatile asset class can lead to significant concentration problems later on—many analysts and investors seem to appreciate a good organic growth story. Three very different growth stories were presented at Bank Director’s 2015 Bank Board Growth & Innovation Conference Tuesday by Bryce Rowe, a senior research analyst at Robert W. Baird & Co.
The first bank that Rowe profiled was $6 billion asset Pinnacle Financial Partners in Nashville, which was founded in 2000. Pinnacle has benefited from two trends over the last two and a half decades, beginning with the impressive growth of the Nashville metro area. Nashville’s economy has grown impressively over this period of time and Pinnacle, which focuses on businesses and their owners and employees, as well as affluent consumers, has benefited handsomely from that growth. The 1990s and early 2000s were also a time of considerable consolidation in many U.S. banking markets, including Nashville, and Pinnacle also benefitted from the service disruptions that many of the market’s big mergers created. By emphasizing service, Pinnacle has been able to beat many larger banks at their own game. Since its inception, Pinnacle has grown its loan portfolio at a compounded annualized growth rate of 53 percent. Investors have rewarded the bank’s stock with a strong valuation, which currently trades around 285 percent of its tangible book value. After a long hiatus, Pinnacle recently returned to the acquisition market with two announced deals for banks in the Chattanooga and Memphis markets. Acquisitions that Pinnacle made in 2006 and 2007 accelerated its penetration of the Nashville market, but also increased its exposure to the commercial real estate market—and credit issues during the recession. Historically, Pinnacle has placed more emphasis on organic growth than growth through acquisitions.
The second bank that Rowe looked at was County Bancorp in Manitowoc, Wisconsin. This $770 million asset institution is heavily focused on agricultural and business banking in the dairy state. County benefits in part from a lack of other lenders in its space. Its primary competitors in most of its markets are the Farm Credit System and BMO Harris, the U.S. subsidiary of Canadian-based Bank of Montreal. County also benefits from specialization, since it knows the agricultural business so well and has a deep appreciation for how that sector performs over time. In fact, County uses a “boots to driveway” philosophy where it currently employs 10 ag lenders who actually grew up on dairy farms. County has been able to achieve strong and consistent loan growth since its inception in 1996 without sacrificing profitability, achieving a pre-provision return on assets (PPROA) of 1.89 percent in 2014.
The final bank in Rowe’s growth trilogy provides something of a cautionary tale. Tristate Capital, a $2.8 billion asset specialized bank lender that focuses on middle market commercial lending from a regional office network, has been able to generate an impressive 45 percent compounded annualized rate for loans since its inception in 2007, but its concentration in the highly competitive commercial loan market–where profit margins tend to be much thinner than in other loan categories—have reduced its profitability. The Pittsburgh-based bank’s price-to-tangible book value was 117 percent in 2014 compared to a peer median of 142 percent. In an effort to improve its profitability, Tristate has pulled back somewhat from the commercial loan market and placed greater emphasis on higher margin private banking loans that it sources via a network of financial intermediaries. The moral to Tristate’s story is that while growth is important, the investor community also wants profitability—which means the two must be kept in balance.