Bankers would be excused for thinking right now that everything has changed in the industry and nothing is the same—that all of the old rules of banking should be thrown out, replaced by digital strategies catering to the next generation of customers.
There is some truth to this, of course, given how quickly customers have taken to depositing money and checking their account balances on their smartphones. Yet, banks should nevertheless think twice before throwing the proverbial baby out with the bathwater.
This is especially true when it comes to growth strategies.
Make no mistake about it, digital banking channels are thriving. At PNC Financial Services Group, two-thirds of customers are primarily digital, up from roughly a third of customers five years ago. And a quarter of sales at Bank of America Corp., the nation’s second biggest bank by assets, now come by way of its digital channels.
Yet, just because digital banking is transforming the way customers access financial products doesn’t logically mean that the old rules of banking no longer apply.
In a recent conversation with Bank Director, Tim Spence, the head of consumer banking at Fifth Third Bancorp, observed that digital channels are still not as effective as traditional mergers and acquisitions when it comes to moving into a new geographic market.
If a bank wants to grow at an accelerated rate, in other words, it shouldn’t cast aside the traditional method of doing so. This is why it’s valuable to continue learning from those who have safely and rapidly built banks over the past 30 years—as the barriers to interstate banking came down.
One approach is to wait for a downturn in the credit cycle to make acquisitions.
This strategy has been used repeatedly by $117 billion asset M&T Bank Corp., based in Buffalo, New York. In the most recent cycle, it acquired the largest independent bank in New Jersey, Hudson City Bancorp, as well as one of the nation’s preeminent trust businesses, Wilmington Trust—both at meaningful discounts to their book values.
Great Southern Bancorp, a $4.6 billion asset bank based in Springfield, Missouri, followed a similar strategy in the wake of the financial crisis. Through four FDIC-assisted transactions between 2009 and 2012, Great Southern transformed from a community bank based in southwestern Missouri into a regional bank operating in multiple states along the Mississippi and Missouri Rivers.
A second approach that has proven to be effective is to buy healthy banks in good times and then accelerate their growth.
Bank One did this to grow from the third largest bank in Columbus, Ohio, into the sixth largest bank in the country, at which point it was acquired by JPMorgan Chase & Co.
Its former chief executive officer, John B. McCoy, pioneered what he called the uncommon partnership: a non-confrontational, Warren Buffett-type approach to buying banks, where the acquired bank’s managers remain on board.
Another bank that has applied this acquisition philosophy is Glacier Bancorp, an $11.8 billion asset bank headquartered in Kalispell, Montana. Starting in 1987 under former CEO Michael “Mick” Blodnick, Glacier bought more than two dozen banks throughout the Rocky Mountain region.
Importantly, however, it wasn’t the assets acquired in the deals that helped Glacier grow from $700 million to $9.5 billion in assets in the 18 years Blodnick ran the bank. Rather, it was the subsequent growth of those banks post-acquisition that accounted for the majority of this ascent.
Glacier’s success in this regard boiled down to its model.
Today, it operates more than a dozen banks in cities and towns throughout the West as divisions of the holding company. These banks have retained their original names—First Security Bank, Big Sky Western Bank and Mountain West Bank, among others—as well as a significant amount of autonomy to make decisions locally.
Approaching acquisitions in this way has reduced the customer attrition that tends to follow a traditional acquisition and rebranding. At the same time, because these banks are now within a much larger organization, they have larger lending limits and access to new, often more profitable deposit products, allowing them to expand both sides of their balance sheets.
In short, while it’s true that the financial services industry is changing as a result of the proliferation of digital distribution channels, it isn’t true that these changes render the traditional growth strategies that have worked so well over the years obsolete.