Over the past decade, regional champions have emerged as strong performers in today’s banking environment, entering new markets and gaining market share through acquisitions. In this panel discussion led by Scott Anderson and Joe Berry of Keefe Bruyette & Woods, John Asbury of Union Bankshares, Robert Sarver of Western Alliance Bancorp. and David Zalman of Prosperity Bancshares share their views on strategic growth opportunities in the marketplace, and why culture and talent reign supreme in M&A.
Investors need to stay focused on long-term performance and strategy in 2018. So says Larry Fink, the chief executive of BlackRock, the world’s largest asset manager with $6.3 trillion in assets under management, in a recent and well-circulated letter. “Companies must be able to describe their strategy for long-term growth,” says Fink. “A central reason for the risk of activism—and wasteful proxy fights—is that companies have not been explicit enough about their long-term strategies.”
Focusing on long-term success isn’t controversial, but Fink’s letter underlines the fact that proxy advisors and investment management firms are more frequently looking at broader issues—gender diversity and equality, and other cultural and environment risks—that can serve as indicators of long-term performance.
Board composition will continue to be a growing issue. BlackRock, along with State Street Global Advisors, the asset management subsidiary of State Street Corp., both actively vote against directors where boards lack a female member. “[Institutional investors] are tired of excuses,” says Rusty O’Kelley, global leader of the board consulting and effectiveness practice at Russell Reynolds Associates. “Regional banks [in particular] need to take a very close look at board quality and composition.” Fink, in his letter, said that diverse boards are more attuned to identifying opportunities for growth, and less likely to overlook threats to the business as they’re less prone to groupthink.
The use of board matrices, which help boards examine director expertise, and disclosure within the proxy statement about the use of these matrices, are increasingly common, according to O’Kelley. The varied skill sets found on the board should link to the bank’s overall strategy, and that should be communicated to shareholders. Expertise in cybersecurity is increasingly desired, but that doesn’t necessarily mean the board should seek to add a dedicated cybersecurity expert. “Institutional investors view cybersecurity as a risk the entire board should be paying attention to,” says O’Kelley. “They want all directors to be knowledgeable.”
Some investors are pursuing gender equality outside of the boardroom. On February 5, 2018, Bank of New York Mellon Corp. disclosed the pay gap between men and women—the fourth bank to do so in less than a month, following Citigroup, Bank of America Corp. and Wells Fargo & Co. “Investors are demanding gender pay equity on Wall Street, and we have no intention of easing up,” said Natasha Lamb, managing partner at the investment firm Arjuna Capital, in a release commenting on BNY Mellon’s gender pay disclosure. These banks, along with JPMorgan Chase & Co., Mastercard and American Express, rejected Arjuna’s proposals last year to disclose the pay gap between male and female employees, along with policies and goals to address any gap in compensation.
A domino effect can occur with these types of issues. “[Activist investors will] move on to the next bank,” says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.
Shareholders are aware that cultural risks can damage an organization. This includes bad behavior by employees—Wells Fargo’s account opening scandal, for example—as well as an organization’s approach to sexual harassment and assault, an issue that has received considerable attention recently due to the “Me Too” movement. “Shareholders are very focused on whether or not boards and management teams are doing a sufficient job in trying to understand what the tone is throughout the organization, understand what the corporate culture is,” says Paul DeNicola, managing director at PwC’s Governance Insights Center. Metrics such as employee turnover or the level of internal complaints can be used to analyze the organization’s culture, and companies should have a crisis management plan and employee training program in place. Boards are more frequently engaging with employees also, adds DeNicola.
Investors are keenly aware of environmental risks following a year that witnessed a record-setting loss estimate of $306 billion due to natural disasters, according to the National Oceanic and Atmospheric Administration. Institutional investors expect boards to consider the business risk related to environmental change, says O’Kelley, particularly if the bank is at greater risk due to, for example, a high level of real estate loans in coastal areas.
Finally, investors will be looking at how organizations use the expected windfall from tax reform. “What will you do with the increased after-tax cash flow, and how will you use it to create long-term value?” said Fink in his letter. It’s an opportunity for companies to communicate with shareholders regarding how additional earnings will be distributed to shareholders and employees, and investments made to improve the business.
In an appearance on CNBC’s “Squawk Box,” Fink explained that BlackRock votes with the companies it invests in 91 percent of the time due to the engagement that occurs before the proxy statement is released. Fink’s preference is that engagement occurs throughout the year—not just during proxy season—to produce better long-term results for the company’s investors.
Engaging with shareholders—and listening to their concerns—can help companies succeed in a serious proxy battle. “If you have good relations with your investors, you’re apt to, in a contest, fair a bit better,” says Elson.
These days, companies as diverse as Lowe’s and Blue Cross are touting a shiny new innovation lab—and banks are no different. These special divisions, designed to incubate new ideas and technologies, are on the rise. According to a report from the website Innovation Management, the number of innovation labs jumped 66 percent in a 15-month period from July 2015 through October 2016. But even though some banks like to think of themselves as technology companies, does it really make sense for them to build standalone innovation teams?
Bank innovation labs are unlikely to replicate the secret sauce found in many successful startup companies because they are artificially engineered environments that cannot recreate the parameters that allow the most successful technologies to thrive. As described by Anderee Berengian, CEO of Cie Digital Labs, in-house innovation labs are missing three key ingredients:
A passionate leader: Apple had Steve Jobs, Facebook has Mark Zuckerberg and Amazon has Jeff Bezos. The most successful technology companies in the world have one thing in common: a passionate, obsessive founder. Bank innovation labs miss out on this key ingredient. Even if they’re able to hire a technical wunderkind to run the lab, they simply can’t have that kind of passion. Part of this is because of a lack of ownership. Part of this is that labs are rarely, if ever, founded to pursue a specific idea or product. Bank labs are conjured up to digitize the company, explore new products or pursue any myriad of equally vague directives. These directives do not inspire and, without a visionary founder to lead the way, labs flounder about trying to build something that will meet undefined and unmeasurable objectives.
Room to fail: Banks expect a reasonable ROI when they make a large investment. As Berengian described, “[p]icture Thomas Edison trying 5,000 light bulb filaments before settling on tungsten . . . [t]he reality is, most profit-focused companies would stop after 500 tries. Edison would then go start his own company.” Many of the “innovations” banks expect to come out of labs will not immediately add to the bottom line, or may be difficult to measure in any meaningful capacity for that matter.
Constraints: Bank innovation labs also lack the constraints that force startups to either succeed or burn out. Bank innovation teams have security. So what if they don’t make that iteration deadline? It’s not like they need to ensure another funding round. Without clear objectives and high stakes, it’s hard to push an innovation lab to the lengths necessary to be truly groundbreaking.
Banks are, by nature, the direct opposite of startups; so why are they striving to artificially recreate that environment? That’s not to say that banks are incapable of invention—quite the opposite. To meet the demands of the digital world, banks don’t need innovation labs. They simply need to harness the creativity and ingenuity their teams already possess.
We know that innovation works best when it’s engrained as a corporate cultural value (see the book “Driving Growth Through Innovation,” by Robert Tucker). Too often, responsibility for innovation is limited by organizational silos that relegate the task (typically seen as merely one of many check marks on a CEO’s to-do list) to a small pocket of individuals. Technological advancement shouldn’t be a pet project for an executive team, or a nebulous directive for an innovation lab. It should be a goal that’s shared by every employee—from the retail teller to the CEO—so that ideas can flow freely from those that have a good handle on the way the bank actually works.
Instead of investing in new innovation labs, banks should strive to encourage organic innovation by fostering a culture that prizes critical thinking and new ideas. For example, USAA stays on the cutting edge of technology by utilizing the ideas of its 30,000 employees through events, challenges and its “ideas platform,” which allows any bank employee to post and vote on new ideas. Over 1,000 employee ideas were implemented in 2017. (For more on USAA, read the article “Crowdsourcing Innovation” in the May 2017 issue of Bank Director digital magazine.)
That’s not to say that remaking a bank’s culture is easy. Cultivating culture is hard, especially at a large institution, and can be even more difficult than creating an in-house innovation lab. However, the rewards of culture shift can be more far reaching and long lasting than a lab because new talent—especially tech talent—wants to work in an open, inclusive environment that encourages collaboration.
Innovation is not new; it’s something humans inherently do when faced with a problem. To truly innovate, banks don’t need new office facilities or new branches on their organizational chart (and, really, who needs more of those?) Instead, they need to embrace the natural creativity in their organizations and harness ideas to create specific solutions to real issues.
Warning: This is NOT another article about how tax reform may or may not affect your bank.
Disappointed? We can still talk tax! Instead, let’s talk about tax incentive and reduction programs that positively affect financial institutions and fintech businesses, and will go unscathed by tax reform.
Domestic innovation, quality jobs and capital investment are beneficial to the economy. To promote these economic benefits, the U.S. government financially supports and entices companies to engage in certain behaviors in exchange for tax credits, deductions and tax abatements. The behaviors that policy makers want to encourage include:
Developing new software and technology;
Creating and maintaining jobs in the U.S.;
And investing in facilities and other capital.
Tax and incentive programs are available to companies planning to incorporate any of the above into a growth strategy, and will offset the cost of such investments by reducing cash taxes and the effective tax rate.
A diverse menu of tax programs—many of which are regionally specific—are designed to incent corporate behavior. The below examples highlight a few of these programs.
How does it work? Companies claim an annual tax credit based on the cost of the technology development and process enhancements, regardless of whether the development was outsourced or in-house. The rate of return ranges between 5 and 8 percent of the cost, and there is an increased benefit when the company simultaneously claims a state credit.
If you thought this credit was only for product developers and scientific research companies, you are not alone. Financial institutions and other financial service providers reliant upon software platforms and web-based programs underutilize this tax planning opportunity.
Historically, the guidance as to how the RTC applied to financial service technology was murky, and as a result, financial institutions often opted not to apply the credit due to the inherent audit risk. But in 2016, Department of the Treasury regulations finally caught up to include such activities as eligible for the RTC. Companies that have invested in technology focused on financial modeling and enterprise tools, data security mechanisms, and modules developed to provide improved services may want to strategically reevaluate this credit.
Jobs & Investment Location Incentives Speak with any state or local economic development group, and they will tell you that job creation and capital investment are top priorities to fuel economic growth. To meet this goal, each state has its own menu of programs designed to incent companies to create and maintain jobs, and invest in facilities and capital.
Recall the huge incentive packages recently lobbed to Amazon in hopes of landing its second headquarters, which promises 50,000 jobs and massive real estate development in the community that Amazon ultimately chooses. Although the Amazon project is truly a white whale for most states, development groups regularly put together similar packages, and the value offered is reflective of the anticipated impact of the project.
How do these incentives work? Companies lock in location incentives prior to engaging in development. The threshold for discussion is generally 20 or more jobs, coupled with capital investment. The program names differ in each state, but the gist is the same. If a company embarks on a strategy to build new facilities or improve current facilities, create jobs, or even maintain its current headcount—which could be relocated elsewhere—the state is motivated to support companies to ensure that growth stays within the state.
The jobs and investment incentives generally take the form of income or withholding tax reductions, refundable tax credits, property tax abatements and even cash grants. Although these incentives often seem like a black box, obtaining financial packages for proposed growth is quite likely. Leverage is gained through strategic discussions prior to initiating the project.
Investments made to improve processes, services and technology, or to add quality jobs and invest in your business’ facilities often give rise to direct and indirect tax savings. Our taxing systems will continue to reward such behaviors. The key to maximizing savings is strategically matching the behavior with the relevant program.
Bank mergers and acquisition (M&A) announcements are no longer a rarity, with more deal announcements coming every month. But for every successful transaction, another 10 transactions have died or stalled. And sometimes these are the deals that can be most educational for community bankers who want to get into the M&A market. For instance, the following five issues are hampering many would-be deals:
1. Many banks have organically grown themselves out of the M&A market due to concentration issues. One of the most overlooked consequences of aggressive organic growth in a low-rate environment is now becoming clear. Most high-growth banks focused on commercial real estate loans (particularly in urban and suburban markets) have maxed out their concentration levels relative to capital, based on regulatory thresholds. In these cases, regulators will hold pending deals hostage unless the acquiring bank agrees to inject more capital. It’s been reported that New York Community Bank’s failed acquisition of Astoria Financial is an example of high concentrations of real estate loans undoing a deal. One thing that helps: Meet with regulators far earlier in the deal process to check their temperature.
2. Buyer beware: the mortgage banks are coming to market. There are many small banks that depend too heavily on their mortgage business to drive earnings. In some cases, the core bank would not even be profitable without its mortgage arm. As a result of the historically low and prolonged rate environment, mortgage companies have been doing well, particularly with refinancings booming in 2011 and 2012, and home purchases picking up in the years since. However, now that we are transitioning to a new environment with rising interest rates, the situation may change.
Most executives and investors in banks with mortgage companies understand this and are looking to exit. The problem is they want their banks to be valued on their recent earnings. But a buyer is not buying a bank’s recent earnings, it is buying its future earnings. In a rising rate environment, refinancing can dry up, and home purchases won’t be able to make up the difference. Smaller banks with mortgage operations tend to be more heavily skewed toward refinancing than other banks, making them even more vulnerable. As a result, their valuations can be grossly overstated, if these issues are not recognized. When negotiating with such a bank, focus on what percentage of a small bank’s business is refinancing versus home purchases, and what percentage of the cost structure is fixed versus variable. Mortgage bankers also are often cut from a different cloth than commercial bankers, so cultural fit should be scrutinized.
3. A deal that appears to be expensive from a price-to-tangible book value perspective is not as expensive as it appears. Most bank acquisitions are structured as a stock purchase of the holding company’s equity. However, in the vast majority of cases, the only true asset acquired is the subsidiary bank. But there is a big difference between the target holding company’s capital structure and the subsidiary’s capital structure, which too many acquirers are ignoring. Acquisitive banks need to educate their investors on the value of such things as inexpensive trust-preferred securities (TruPS) and debt that may be on the holding company’s books. By assuming TruPS and debt, you are essentially purchasing bank capital at tangible book value. Banks must find hidden value by analyzing in detail the differing capital structures between a target’s parent company and its bank subsidiary.
4. Acquiring a bank with equity can introduce control issues. One problem associated with using equity as a currency for the buyer is the selling bank’s shareholders could own a meaningful percentage of the equity in the buyer. This is far less of an issue if the selling bank’s shares are widely held. However, many community banks, particularly on the small side, are controlled by a single shareholder or family. As a result, this single shareholder could become the largest shareholder in the buyer after the deal, especially if he or she is receiving a significant portion of the purchase consideration in stock. The normal playbook is for this shareholder to agree to certain restrictions related to voting, selling of shares in the open market, and other restrictions.
5. Look for more creative transactions that solve problems. Many banks are struggling with financial issues such as concentration issues, high loan-to-deposit ratios and a compressing net interest margin. Acquisition targets that alleviate these problems may not make immediate sense from a strategic perspective. The targets may not be geographically perfect, perhaps they aren’t adjacent to the acquirer’s footprint, or maybe they’re unattractive from a macroeconomic perspective. However, for the reasons previously mentioned, these targets may actually have premium value to the acquirer. It goes without saying that the acquiring bank’s management must come up with an operational plan to manage execution risk, but these outside-the-box deals often create the most value and lead to cutting-edge strategies that fetch higher premiums from investors in the long term.
To survive, a plant at a minimum needs soil, sunlight and water.
Plants that grow better than others have usually received fertilizer on a regular basis. Think of the vegetable garden that produces bushels of produce throughout the summer.
Farms that produce commercial volumes utilize all of these resources, but they also have someone directing strategy based on a big-picture view including weather forecasts, equipment maintenance needs, field reports on pests, research on future risks to the crop, etc.
Banks, too, can subsist on the basics: good staff, products that meet the market’s current needs and essential data about the customer or operations. These financial institutions may be able to get by without analyzing the tons of data in their systems. Other banks may “fertilize” their growth by analyzing some of their data to shape product development or efficiency processes.
However, even at these institutions, a common factor stunting growth is disconnectedness between analysts, teams and departments when it comes to day-to-day operational or regulatory information. Just as the data is siloed, so is the insight and communication, making it challenging to provide either top-down or bottom-up strategy reviews. When people from multiple departments try to piece together data from multiple systems, it can be nearly impossible to glean actionable insight for outpacing current and future competitors. This quandary is magnified at top management levels, where executives must balance strategic objectives and pressures without a data-driven big picture.
Indeed, bank CEOs, directors, chief information officers and chief technology officers responding to Bank Director’s 2016 Technology Survey recently overwhelmingly indicated their institutions are plagued by the inability to effectively use data.
Financial institutions using data over the life of a loan are better able to manage and direct the big picture, shaping institutional strategy for superior growth. They can help determine not only where the institution has been making money, but also where it can expect to make money, how it can maximize profits and how it can minimize risk.
For example, at an ill-equipped institution, loan pricing decisions may be based only on competitive information. While comparability of terms is important to borrowers, it can also lead the institution into a disadvantageous relationship—one that could lose money for the institution. However, at an institution using a life-of-loan system, the loan officer would have an accurate measure of risk and overall profitability of the relationship, providing the loan officer with a range of acceptable terms that still ensure the bank meets its targets. When decisions aren’t made in a vacuum or from a single lender’s spreadsheet, the bank benefits from better decisions, and when better decisions happen across the commercial portfolio, the institution wins.
In addition to pricing, an integrated solution streamlines and automates much of the:
loan origination process
loan administration and
portfolio risk management.
Connecting the data throughout the entire loan process allows bankers, underwriters and risk management professionals to communicate better and more efficiently. These systems also tend to unify employees with diverse skills into a more cohesive unit while building in a layer of awareness and appreciation for the full life of the loan.
All of this enables the financial institution to make better lending decisions based on relationship profitability and strategic goals, and it makes it easier for management to make informed decisions that ensure outperformance—even in an environment where interest rates and loan demand remain low and compliance risks are high.
In short, an integrated solution addresses the three greatest business concerns cited in Bank Director’s Technology Survey: regulatory compliance, becoming more efficient and competition from other banks.
The intersection of insight provided through an integrated solution not only creates more opportunity to develop an effective strategy, it can also guide the strategy. It gives bank management the ability to pivot, and the knowledge of where best to pivot to, so that the institution can focus its investments, development and sales efforts on the right areas for growth. In this way, the financial institution can flourish, rather than simply survive.
What happens when a small community bank becomes the focus of a grassroots movement? How does the bank sustain and develop the welcome—but unexpected—growth?
In an early July radio interview, Michael Render—better known as Killer Mike, a hip-hop artist who has spoken frequently in support of moving dollars to local black banks—was asked how communities could respond amid frustration that charges were dropped against officers in the Baltimore Police Department. They had been accused in the April 2015 death of Freddie Gray. “You can go to your bank tomorrow and you can say ‘Until you as a corporation start to speak on our behalf, I want all my money. And I’m taking all my money to Citizens Trust,'” said Render. Based in Atlanta, $404 million asset Citizens Trust Bank gained 8,000 new accounts in a five-day period following Render’s plea.
“The community reached a point of frustration,” says Michael Grant, president at the National Bankers Association, a trade association for minority and women-owned banks in Washington, D.C. “It’s time for the African American community to pull together, to look inward and say ‘wait a second. What can we do to strengthen ourselves economically? What can we do to lift ourselves up?’”
The Bank Black movement dates back decades, with roots in the civil rights movement, but recent support is tied to concerns raised by Black Lives Matter. It encourages African Americans to move money into black-owned banks, which in turn support urban communities. There are 24 black-owned depository institutions, according to the Federal Deposit Insurance Corp.
Moving money to black-owned banks, and supporting black businesses, is seen as a positive way to empower local communities. “If we can support these institutions en masse, then these institutions will have a greater capital base, and these institutions will then be able to provide more financing to businesses, to people who need mortgages, to help build wealth,” says Blondel Pinnock, chief lending officer at Carver Federal Savings Bank, a $743 million asset black-managed, publicly traded bank which gained $3.9 million in deposits in July.
OneUnited Bank, which has five branches in low and moderate-income communities in Boston, Miami and Los Angeles, has stepped up its promotional efforts in response to the recent attention to the Bank Black movement. Online visitors are encouraged to take the #BankBlack Challenge by opening a $100 savings account and challenging friends to do the same. The bank has also hosted events in Miami and Los Angeles. OneUnited drives both its online and in-person efforts through the bank’s Facebook, Twitter and Instagram channels.
“A lot of banks are, to some degree, questioning the value of [social media], but it actually can drive traffic into your branch, as well as online traffic, so we’re seeing that it’s worth the investment,” says Teri Williams, president of the Boston-headquartered bank, which has $622 million assets.
In early August, OneUnited reported via social media that the bank had gained $10 million in deposits in July. This windfall in accounts taxed bank staff. “We’re opening up 1,000 accounts a day. We used to open 10 or 20 accounts a day,” says Williams. Tablets within the branch allowed customers to sign up for an account online, with staff available for assistance. But despite increasing staff, customers still experienced long lines in branches.
Williams says OneUnited will continue to use social media and hold events to sustain growth driven by the Bank Black movement. The bank is also adding a call center in Miami, in addition to a current call center in Los Angeles, to handle the increased volume.
Can banks like OneUnited continue this level of growth? There’s always the risk that customers won’t like the technology that small banks provide, especially if they are coming from a large bank. “The proof is in what you do next, and how you sustain it,” says Chris Lorence, executive vice president and chief marketing officer at the Independent Community Bankers of America (ICBA). A well-planned marketing campaign is critical to gaining and retaining customers in the long run, even when tied to a social movement. Banks will also want to create a deeper, stickier relationship with new customers through other products and services. “Were you prepared organizationally to take the next step?”
To every rule there is an exception—or in this case, 10 of them.
Conventional wisdom says that revenue growth at commercial banks and thrifts in the current environment is challenged by continued downward pressure on net interest margins as the competition for loans remains fierce. But there is a group of banks that are thriving in today’s banking market despite the competitive pressures facing the industry. Working with Atlanta-based Bank Intelligence Solutions, a Fiserv subsidiary that collects and analyzes performance data on depository institutions, Bank Director identified 10 banks and thrifts that exhibited strong top line growth over a five quarter period ending March 31. Bank Intelligence Solutions CEO Kevin Tweddle admits that the industry’s growth performance over that period of time has not exactly been stellar. “These aren’t numbers that jump off the page,” says Tweddle. “It’s a really tough environment.” Still, these companies have been able to rise above the environment and post strong performances—which are all the more impressive given the economic headwinds that most banks have to deal with. The ranking includes public and private institutions over $1 billion in assets.
The issue of growth will be addressed at Bank Director’s Growing the Bank conference, which is scheduled for May 23-24 in Dallas. Included on the agenda are sessions on how to grow your business through smart branching decisions, collaboration, partnerships and acquisitions.
The conference attendees could also learn a thing or two from the 10 banks on our ranking, where the order was determined by their compound average growth rate in revenues over the five linked quarters. The top ranked bank—Sioux Falls, South Dakota-based MetaBank—led the pack with a growth rate of 19.3 percent over that period. The $3 billion asset bank is well diversified across multiple business lines, although lending still accounts for a significant part of its growth and profitability. MetaBank operates from 10 branches in Iowa and South Dakota, and reported 22 percent loan growth in its most recent fiscal year, which concluded September 30, 2015.The bank also saw 10 percent loan growth in the first two quarters of its 2016 fiscal year, which ran through March 31. Loan growth was particularly strong in commercial and agricultural sectors, although MetaBank also benefited from its December 2014 acquisition of AFS/IBEX, then the seventh largest U.S. insurance premium finance company. This unit makes loans to commercial businesses to fund their property/casualty insurance premiums, and it grew at an annualized rate of 52 percent between the date of acquisition and Meta’s fiscal year end in September of last year. MetaBank’s is also one of the country’s largest prepaid card issuers in the country, and in fiscal year 2015, that business grew its deposits by 25 percent and fees by 16 percent.
MetaBank also has a significant tax related business following its September 2015 purchase of Refund Advantage, which provides tax refund transfer software to electronic return originators (EROs) and their customers. An ERO is a tax preparer who has been authorized by Internal Revenue Service to submit tax returns to the IRS in an electronic format, and MetaBank earned significant software usage fees during its second quarter which ended March 31. Although the prepaid card and tax related operations are run as separate businesses from the retail bank, they are included in MetaBank’s overall results for reporting purposes.
The third ranked bank on our growth list, San Diego-based BofI Federal Bank, is a digital bank that operates nationwide through online and mobile platforms. The bank’s compound average growth rate through the five-quarter period was 11.93 percent. Of late, BofI has been seeing considerable growth in jumbo single family loans, small balance commercial real estate and commercial and industrial loans. It has also benefited from its August 2015 acquisition of H&R Block Bank, which provided BofI with 257,000 new deposit accounts and the opportunity to cross-sell its products to that bank’s customers.
Growing revenues in the current economic environment is a challenge even for most of the banks on this list, although their performance shows that strong growth can be achieved. One thing that MetaBank and BofI have in common is a degree of specialization—agricultural loans and prepaid debit cards for MetaBank, jumbo mortgage loans for BofI. And if there’s one secret to cracking the revenue growth code, it might be having a niche that differentiates your bank from the rest of the pack.
The Top 10 Banks for Growth
Academy Bank, N.A.
BofI Federal Bank
Sterling Bank and Trust FSB
Beverly Bank & Trust, N.A.
First Foundation Bank
Franklin Synergy Bank
TD Bank USA N.A.
Source: Bank Intelligence Solutions and bank call reports * CAGR based on revenue for bank for five trailing quarters through March 31, 2016 ** MetaBank’s results include significant fee income from card and tax service related activities that are reported as part of its results.
Mergers and acquisitions are exciting: they make the news, they show a position of strength to competitors, and most deals promise benefits for customers, employees and shareholders. Transactions have the same kind of excitement one might experience when buying a car. And like buying the car, that new car smell, or in this case, the allure of growth and synergies, can wear off quickly once you realize all of the work required to successfully integrate two institutions. Worse still is the feeling you have bought a lemon. There are, however, strategies that banks can employ before an integration to make sure they are getting a good deal.
Ensure You Have the Right, Experienced Resources There is a reason that most professional services firms have an M&A practice: mergers and acquisitions are hard. In the middle market, it is even more important to look at current staff or partners that can support integration and bring the much needed experience to the table. No other industry is as complex as banking in terms of converting systems and processes. Banks require a unique set of skills to navigate the complexities of core systems, online banking, debit/credit cards, treasury management and lending.
Conduct an Operational and Technical Assessment of Your Target Looking at the operational and technical complexities before a deal is made will improve the chances of a successful integration. Assess the scalability and interoperability of your technology and process landscape (as well as the target’s landscape) so that you can identify risks to the integration early and put together a mitigation plan quickly. All too often, middle market transactions focus only on diligence conducted by bankers, lawyers and accountants. Operational and technology diligence are de-prioritized.
Knowing how much car you can afford before even thinking about a deal puts you ahead of other bidders in terms of understanding how a target will fit into your garage. An operational and technical assessment provides the opportunity to understand and potentially implement systems, processes and products that will create a scalable and flexible operating model.
Evaluate Third Party Relationships Understanding how your service providers can flex (or not) is critical to understanding the level of effort and cost of integration, along with the risks that need to be mitigated. Do your vendors have dedicated conversion teams? Are you the largest client of your core provider? Is there information available from your peers on the pros and cons of particular solutions in terms of integration? What are the service areas that could be improved through an acquisition?
Know Your Customer Don’t forget the customer. Most transactions are driven by the desire to grow an institution’s customer base. But, in the frenzy of bringing two institutions together, customers often take a backseat to other integration priorities. Reacting to problems once customers start to leave is too late—the damage is already done. You will continue to hemorrhage customers while you course correct. Consider how well you know your customers before a deal is on the table. Do you have a way to make sure the customer’s voice is heard? Mapping the customer impact during diligence will prepare you to monitor (and hopefully improve) customer experience through the integration.
During integration, avoid focusing solely on cost synergies at the expense of customer experiences that could undermine revenue objectives. Whatever the changes, make sure communications to customers are clear, regular and transparent. You can never over communicate change to customers. Lastly, don’t assume that postponing changes is always best for customers. In many cases, making changes early and communicating them effectively will offer the most seamless customer experience across all channels (branches, digital, etc.).
Never Underestimate the Importance of Culture It’s easy to sweep culture under the rug and consider it too soft and fuzzy for due diligence and integration. Many find it hard to put concrete metrics and plans around culture. Generational changes continue to change the way companies recruit, retain and operate—and that’s forcing companies to rethink their priorities in order to avoid costly turnover.
Having tools in place to implement change management is a best practice. This starts with knowing what your own cultural identity and management style is and what that means in terms of potential deals. If you’re into sports cars, don’t look at SUVs. By having your own cultural assessment up front, you can start analyzing cultural differences earlier in the process.
Assess Your M&A Readiness Before You Buy If you want to successfully retain customers and key employees while achieving financial synergies, take the time to kick your own tires before looking at a new deal. An internal M&A readiness assessment is not only valuable if you are a buyer, but as a potential seller as well. An assessment will identify both deficiencies and differentiators in your operating model that a potential buyer will notice during due diligence. This knowledge gives you better negotiating power and can put you in the driver’s seat.
Traditional banks, which are typically run by baby boomers and older Gen X’ers, are still trying to figure out the next big generation of consumers.
Sixty percent of bank CEOs and directors responding to Bank Director’s 2015 Growth Strategy Survey, which was sponsored by the Vernon Hills, Illinois-based technology firm CDW, indicate that their bank may not be ready to serve millennials, which this year surpassed baby boomers as the largest segment of the population, according to the U.S. Census Bureau. As digital use increases among an increasingly younger customer base, truly understanding and planning for the digital needs and wants of consumers seems to continue to elude bank boards: Seventy percent of bank directors admit that they don’t even use their own bank’s mobile channel.
Bank Director contacted chief executive officers, chairmen, independent directors and senior executives of U.S. banks with more than $250 million in assets, to examine industry trends regarding growth, profitability and technology. Responses were collected online and through the mail in May, June and July, from 168 bankers and board members.
Instead of millennials, banks have been finding most of their growth in loans to businesses and commercial real estate, which is their primary focus today. Loan volume was the primary driver of profitability over the past 12 months for the institutions of 88 percent of respondents, and the majority, at 82 percent, expect organic loan originations to drive future growth at their institutions over the next year. Eighty-five percent see opportunities for growth in commercial real estate lending, and 56 percent in commercial & industrial (C&I) lending. Total loans and leases for the nation’s banks grew 5.4 percent year over year, to $8.4 trillion in the first quarter 2015, according to the Federal Deposit Insurance Corp.
Despite the rise of nonbank competitors like Lending Club and Prosper in the consumer lending space, just 35 percent of respondents express concern that these startup companies will syphon loans from traditional banks. Just 6 percent see an opportunity to partner with these firms, and even fewer, 1 percent, currently partner with P2P lenders to expand their bank’s portfolio. Few respondents—13 percent—see consumer lending as a leading avenue for loan growth.
Other key findings:
Forty percent of respondents worry about potential competition from Apple. Just 18 percent indicate their bank offers Apple Pay, with 63 percent adding that they “don’t think our bank is ready” to offer the feature to their customers.
More boards are putting technology on their agendas. Forty-five percent indicate their board discusses technology at every board meeting, up 50 percent since last year’s survey. Almost half of respondents say their board has at least one member with a technology background or expertise.
More than three-quarters indicate plans to invest more in technology within their bank’s branch network.
More than 80 percent of respondents indicate that their bank’s mobile offering includes bill pay, remote deposit capture and account history. Less common are features such as peer-to-peer payments, 28 percent, or merchant discounts and deals, 9 percent, which are increasingly offered by nonbank competitors.
For 76 percent of respondents, regulatory compliance causes the greatest concern relative to the growth and profitability of their institutions, and 64 percent say the high cost of regulatory compliance had a negative impact on their bank’s profitability over the past 12 months. Low interest rates, for 70 percent, were also a key impediment to profitability.