CECL Will Result in a Sizable Capital Hit for U.S. Banks


CECL-6-8-18.pngWhile a new reserve methodology is far from popular among U.S. banks, it could prepare them for the next economic downturn.

The banking industry has bemoaned the new provision largely due to its complexity. The current expected credit loss model, or CECL, will require banks to set aside reserves for lifetime expected losses on the day of loan origination, resulting in a sizable hit to capital at adoption.

S&P Global Market Intelligence has developed a scenario estimating CECL’s capital impact to the banking industry in aggregate as well as community banks — institutions with less than $10 billion in assets. The upfront reserve build that will come with CECL adoption could allow banks to better withstand a downturn, which could begin when banks adopt the methodology in 2020.

But, we don’t expect banks to take the change in stride and believe institutions will respond with higher loan prices and slower balance sheet expansion.

CECL becomes effective for many institutions in 2020 and will mark a considerable shift in practice. Banks currently set aside reserves over time, whereas the new provision requires them to substantially increase their allowance for loan losses on the date of adoption.

Given the capital hit, S&P Global Market Intelligence believes the industry’s tangible equity-to-tangible assets ratio could fall to 8.25 percent in 2020, assuming uniform adoption of CECL by all banking subsidiaries at that time. That level is 127 basis points below the projected capital if banks continue operating under the existing incurred loss model.

We expect a much more manageable capital hit for community banks, which could see their tangible-equity-to-tangible assets ratio fall to 11.13 percent in 2020, 50 basis points below the projected capital level for those institutions if they maintained the existing incurred loss model.

We assume that CECL reserves would match charge-offs over the life of loans. For the banking industry, we assumed the loan portfolio had an average life of three and half years, while assuming an average life of four and half years for community banks, based on the current loan composition of both groups of institutions.

The expected level of charge-offs stems from our longer-term outlook for credit quality. While improving sentiment among consumers and businesses should support relatively strong asset quality in 2018, credit standards should begin to slip in 2019 as banks compete more aggressively to win new business. Competition should increase because economic growth is not expected to be quite strong enough to create sufficient opportunities for banks to lever the additional capital created by tax reform.

Changes in the competitive environment could coincide with regulatory relief efforts. The Trump administration and Republican-controlled Congress have pushed to soften many rules passed in the aftermath of the credit crisis and the rolling back of regulations could invite further easing of underwriting standards. This would occur as interest rates increase, leading to a more expensive debt service and pushing some borrowers to the brink.

Even with those headwinds, community banks should once again maintain stronger credit quality than their larger counterparts. Community banks have greater exposure to real estate and while valuations have risen considerably since the depths of the credit crisis, there are reasons to believe smaller institutions’ credit quality will hold up far better through the next downturn.

The lack of a housing bubble and massive overbuilding in the residential real estate sector as well as heightened regulatory scrutiny over elevated commercial real estate lending concentrations should help prevent history from repeating itself.

The impact of CECL should also encourage banks to raise rates on newly-originated loans, particularly longer-dated real estate credits that will require a larger reserve build under the provision. We think that loan growth will be slower than it would have otherwise been as banks with thinner capital ratios hoard cash and work to rebuild their capital bases.

If the credit cycle bottoms several years after CECL’s adoption, the new accounting provision might work as intended. Banks will have set aside considerable reserves well ahead of a downturn and pull forward losses, meaning their earnings will be stronger when credit quality reaches a low point.

However, if losses peak as the industry implements the new reserving methodology, the hit to capital could prove even more severe and leave banks on weaker ground to weather a downturn.

Partners May Be Vendors, But Not All Vendors Are Partners


partnership-6-1-18.pngTechnology companies may call themselves partners to the banking industry, but for the bankers themselves, most of these firms are just vendors. There’s a big difference in that particular bit of nomenclature, and bankers participating in a roundtable discussion held in advance of the 2018 FinXTech Annual Summit, co-hosted by Bank Director and Promontory Interfinancial Network, had a lot to say about the true nature of partnerships. It’s all about the relationship.

“We want [a partner] that’s bringing insights and dialogue and teaching us, and we’re teaching them and working together on different things,” said Sara Rountree, senior vice president in charge of digital strategy at Union Bankshares Corp., headquartered in Richmond, Virginia, with $13 billion in assets. She also wants to know about the startup’s infrastructure and vision for its own future. “That tells [us] a lot about where they’re going to go, and how they can be agile and flexible in the future as well.”

While the banking industry buys products and services from a multitude of technology vendors to do things such as enhance their mobile banking product, create a more efficient back office or better comply with regulations, the bankers participating in the roundtable discussion said that partners are companies they can collaborate with. Both companies can learn from one another, and the bank feels it has more of a say in the development of services.

Banks have to put work in to determine which relationships will be an appropriate strategic and cultural fit. That starts with evaluating a potential provider’s capabilities compared to the bank’s own requirements and determining the risks of doing business with the company. “It’s really keeping focused on what you have the resources to handle and gathering enough information, and then getting the right bankers at the table” to determine what’s best for the bank, said Mark Christian, executive vice president, operations and systems at Beverly Hills, California-based PacWest Bancorp, with $24 billion in assets.

And it’s essential to meet with the potential provider’s team. “It’s making sure that company is aligned to how we’re thinking about things, not just this next step of the one product, but how are you going to evolve that and how does that align with what we’re focused on,” said Travis Engebretsen, vice president of strategy at Stuart, Florida-based Seacoast Bank, with $5.9 billion in assets.

Trusting a provider to provide direct support to the bank’s customers is another sign of a true partner, according Richard Greslick, the chief operating officer at Clearfield, Pennsylvania-based CNB Financial Corp., with $2.9 billion in assets. The bank evaluates a provider’s level of support during the vetting process. “We want to make sure they’re carrying the brand like we would,” he said.

Being a partner means that the technology company is more responsive to the bank’s needs, but it also requires more hand-holding on the part of the bank, especially if the partner is a young company that may not fully understand the regulatory constraints facing the banking industry. However, this does provide the bank with an opportunity to influence the company’s product.

The banking industry is highly reliant on established core providers, but the sizeable core providers—Fiserv, FIS and Jack Henry & Associates—serve too many customers for a bank to have a significant voice in the products each core offers and therefore, to be seen as a true partner to their clients.

The smaller core providers can be more of a partner, at least if the bank is a big-enough fish. CNB selected COCC as its new core provider almost three years ago and integrated its new core over a two-year period. The bank is COCC’s first client in Pennsylvania and one of its larger client banks, and its representatives discuss issues monthly over the phone with the bank’s department heads.

Whether a company is a partner or a vendor, the result is new technology for the bank, and the bankers interviewed at the FinXTech Annual Summit agreed that getting employees—and by extension, customers—to use the technology poses a significant challenge.

In response, Seacoast has shifted its focus from project management to change management. This isn’t just a shift in classification, according to Engebretsen. Instead of just focusing on launching the technology, the change management team also ensures that associates understand why the new technology was needed, how it will impact employees and how employees will be trained.

To put it simply, transformation is less about technology and more about people. “It has to be part of the company culture. People need to think differently,” said Rountree.

The Deregulation Promise Beginning to Bear Fruit


regulation-5-14-18.pngEd Mills, a Washington policy analyst at Raymond James, answers some of the most frequent questions swirling around the deregulation discussion working its way through Congress, the changing face of the Fed and other hot-button issues within the banking industry.

Q: You see the policy stars aligning for financials – what do you mean?
The bank deregulatory process anticipated following the 2016 election is underway. The key personnel atop the federal banking regulators are being replaced, the Board of Governors at the Federal Reserve is undergoing a near total transformation, and Congress is set to make the most significant changes to the Dodd-Frank Wall Street Reform Act since its passage. This deregulatory push, combined with the recently enacted tax changes, will likely result in increased profitability, capital return, and M&A activity for many financial services companies.

Perhaps no regulator has been more impactful on the implementation of the post-crisis regulatory infrastructure than the Federal Reserve. As six of seven seats on the board of governors change hands, this represents a sea change for bank regulation.

We are also anticipating action on a bipartisan Senate legislation to increase the threshold that determines if an institution is systemically important – or a SIFI institution – on bank holding companies from $50 billion to $250 billion, among other reforms.

Q: Can you expand on why Congress is changing these rules?
Under existing law, banks are subject to escalating levels of regulation based upon their asset size. Key thresholds include banks at $1 billion, $10 billion, $50 billion and $250 billion in assets. These asset sizes may seem like really large numbers, but are only a fraction of the $1 trillion-plus held by top banks. There have been concerns in recent years that these thresholds are too low and have held back community and regional banks from lending to small businesses, and have slowed economic growth.

Responding to these concerns, a bipartisan group in the Senate is advocating a bill that would raise the threshold for when a bank is considered systemically important and subjected to increased regulations. The hope among the bill’s advocates is that community and regional banks would see a reduction in regulatory cost, greater flexibility on business activity, increased lending, and a boost to economic growth.

The bill recently cleared the Senate on a 67-31 vote, and is now waiting for the House to pass the bill and the two chambers to then strike a deal that sends it to the president’s desk.

Q: What changes do you expect on the regulatory side with leadership transitions?
In the coming year, we expect continued changes to the stress testing process for the largest banks (Comprehensive Capital Analysis and Review, known as CCAR), greater ability for banks to increase dividends, and changes to capital, leverage and liquidity rules.

We expect the Fed will shift away from regulation to normalization of the fed funds rate. This could represent a multi-pronged win for the banking industry: normalized interest rates, expanded regulatory relief, increased business activity and lower regulatory expenses.

Another key regulator we’re watching is the CFPB (Consumer Financial Protection Bureau), which under Director Richard Cordray pursued an aggressive regulatory agenda for banks. With White House Office of Management and Budget Director Mick Mulvaney assuming interim leadership, the bureau is re-evaluating its enforcement mechanisms. Additionally, Dodd-Frank requires review of all major rules within five years of their effective dates, providing an opportunity for the Trump-appointed director to make major revisions.

Q: We often hear concerns that the rollback of financial regulations put in place to prevent a repeat of one financial crisis will lead to the next. Are we sowing the seeds of the next collapse?
There is little doubt the lack of proper regulation and enforcement played a strong role in the financial crisis. The regulatory infrastructure put in place post-crisis has undoubtedly made the banking industry sounder. Fed Chairman Jerome Powell recently testified before Congress that the deregulatory bill being considered will not impact that soundness.

Q: In your view, what kind of political developments will have effects on markets?
We are keeping our eyes on the results of the increase in trade-related actions and the November midterms. The recent announcement on tariffs raises concerns of a trade war and presents a potentially significant headwind for the economy. The market may grow nervous over a potential changeover in the House and or Senate majorities, but it could also sow optimism on the ability to see a breakthrough on other legislative priorities.

When It Comes to Fintech Partnerships, Look Before You Leap


fintech-5-12-18.pngAt the risk of oversimplification, there are essentially three categories of innovation in banking. There is a small but growing number of banks that have positioned themselves as early adopters of new technology. There are also fast followers, which are not the first banks to try a new technology but don’t lag far behind. Then there are the late adopters.

The digital economy is moving so fast that no bank today can afford to be in the final category. Being an early adopter is probably too risky for many institutions, but at the very least they need to be fast followers or risk getting left behind as the pace of the industry’s digitalization begins to accelerate.

How and when to successfully engage with a fintech company was a recurrent theme at Bank Director’s 2018 FinXTech Annual Summit, held May 10-11 at The Phoenician resort in Scottsdale, Arizona. Deciding to work with a fintech company on the development of a new consumer banking app or the automation of an internal process like small business lending is more than just another vendor relationship. Typically, these are highly collaborative partnerships where the fintech will be given at least some access to the bank’s systems and operations—and could be a risk to the bank if all does not go well.

The first piece of advice for any bank contemplating this kind of engagement is to perform a thorough due diligence of your intended partner. As highly regulated entities, banks need to make sure that any third-party service or product provider they work with have security and compliance processes in place that will satisfy the bank’s regulators. And the younger the fintech company, the less likely they have a compliance environment that most banks would (or should) be comfortable with.

Mark P. Jacobsen, president and chief executive officer at Arlington, Virginia-based Promontory Interfinancial Network, cautioned during a presentation that banks should not consider working with an early-stage fintech unless they have “an extremely experienced CIO, a very robust risk management system and access to very experienced legal talent.” It also makes sense for banks, to check a fintech’s references before finalizing its selection. “There are so many new things out there that it’s important to get that outside validation,” said Adom Greenland, senior vice president and chief operating officer at ChoiceOne Financial Services, a $622 million asset bank headquartered in Sparta, Michigan.

Cultural difference was also a recurrent theme at the Summit. Banks with a culture of innovation are more likely to be early adopters or, at the very least, fast followers. “Culture is a huge barrier to innovation,” said Bill McNulty, operating partner at Capital One Growth Ventures, a unit of Capital One Financial Corp., during a presentation on some of the common obstacles to innovation. “And culture always starts with people.”

McNulty said while he senses the urgency around innovation in banking is beginning to change, he knows of large fintech players that originally wanted to partner with banks, but have grown frustrated with the conservative culture at many institutions. “They decided it is too hard and takes too long and they would do it themselves,” he said. “If we don’t address culture, the best fintechs will do it themselves. Some of these companies will build [their own] banks.”

Bank Director announced the winners for its 2018 Annual Best of FinXTech Awards on May 10, choosing from among 10 finalists across three award categories, and while big banks were represented among the finalists—including U.S. Bancorp, Citizens Financial Corp., Pinnacle Financial Partners and USAA—two of the winners were community banks. And that fact underlines an important point when talking about innovation in banking. Small banks can play this game just as well and maybe even better than their larger peers.

Be Careful Cheering On Mick Mulvaney Too Much


CFPB-5-4-18.pngThe Consumer Financial Protection Bureau has been a thorn in the side of the banking industry since its creation by the Dodd-Frank Act of 2010. The bureau’s authority to rewrite consumer regulations impacts even those banks below the $10 billion asset threshold it doesn’t supervise directly, so we imagine that many bankers are cheering on Interim Director Mick Mulvaney while his hawkish style bears fruit, or doesn’t, depending on your perspective.

But here’s the rub: These changes are occurring in a highly charged political atmosphere in Washington, D.C. So it was in 2010, and so it is today. The CFPB (and Dodd-Frank generally) was and remains a politically divisive issue in Washington.

Mulvaney is a former Republican congressman from South Carolina, and while he may truly believe that the changes he has wrought at the bureau are in the banking industry’s best interests, it’s hard not to see them as hawkish political cannon fodder boosting up an agenda that has drawn mixed reviews. So what happens if the White House flips to the Democrats in 2020? Will a new director reverse course and undo what Mulvaney has undone? In a couple years, will we rinse and repeat this all again?

Or, considering Mulvaney is still technically in an interim role, how much would his style and decisions shift if a different, less boisterous leader were put in place?

Bankers might not like regulation—and certainly the industry is obsessively regulated—but generally they accept the rules that are in place so long as they know what they are and have confidence they don’t dramatically change overnight.

Bankers generally favor less regulation for very good reasons—it costs a lot of time and money, which could arguably be better spent improving their products, performance, or the experience for their customers and shareholders. So a bipartisan review of the CFPB’s mission and methods would probably be a good thing.

But banks also function best in stable, predictable environments. And when a regulatory body is the target of political promises and potentially sweeping reform every two years, it creates uncertainty. And uncertainty doesn’t serve this industry well.

It’s impossible to know completely what the political landscape will look like a year, two or four down the road, but banks will remain, and regulators will remain, and the relationship between the two will remain. It only makes sense to keep those relationships stable.

Regtech: Reaping the Rewards


regtech-4-24-18.pngAs it evolves, regtech is uniquely poised to save banks time and money in their compliance efforts, and has become a common topic for many in the banking industry. If you’re ready to realize the promise of regtech at your institution, here are a few key steps to take before you start parsing through providers or sending out requests for proposals.

Consider changes to your organizational structure that would place oversight of both legal and compliance transformations under one department. In Burnmark’s RegTech 2.0 report, Chee Kin Lam, the group head of legal, compliance and secretariat for DBS Bank, pointed to his authority over both legal and compliance functions and budgets as a key to the Singapore-based bank’s ability to work with regtech companies.

At first blush, a change to your bank’s internal structure seems like an extreme measure for a precursor to a technology pilot, but that perception misses the big-picture implications of implementing a new regtech solution. If a bank intends to engage meaningfully with regtech, Lam pointed out, there’s a need for an overarching framework for onboarding new technologies to make sure they “speak to each other at a legal/compliance level instead of at an individual function level—e.g. control room, trade surveillance, AML surveillance and so on.”

What’s more, legal and compliance functions are already tied closely together, and any regtech solution would likely impact both areas of the bank. Central management of these two functions can help ensure efficient regtech implementation.

Create a solid, detailed problem statement before you ever look for a solution. Lam suggests identifying the top legal and compliance risks your bank is facing, and working from there to identify pain points for your employees and customers when they interact with that risk area. One way to go about this process is to utilize design thinking, which looks at products and experiences from the point of view of the customers and employees who utilize them.

By seeking out pain points and working through the design-thinking process to find their root cause, bank leadership can identify specific, actionable areas for improvement. As tempting as it can be for an institution to attempt a total overhaul of its regulatory processes, banks should pursue modular regtech solutions to solve specific, defined problem statements instead. As Peter Lancos, CEO and co-founder of Exate Technology, points out in RegTech 2.0, “[f]ragmentation makes a regulatory strategy impossible—especially due to geographic spread and banks having separate teams set up to deal with individual regulations.”

Leverage outside expertise. The risks of implementing regtech can be daunting, so bank leaders need to use every tool in their arsenal to get deployment right. Banks should involve regulators in the conversation early on in the process of working with a regtech company. According to Jonathan Frieder of Accenture in The Growing Need for RegTech, “[r]egulators globally have continued to accept and, ultimately, to embrace regtech” making 2018 “a pivotal year.”

In addition to getting regulators on board, banks should consider enlisting outside assistance from consultants or other regulatory experts. Such experts provide assistance with assessing problem statements or potential regtech vendors. Lancos states that he feels “it is essential for banks to have regulatory expertise support to actually write the rules that go into the rules engine of regtech solutions.”

Regtech implementation is a lot more involved than an average plug-and-play fintech product. However, when a bank considers the cost efficiencies, improved compliance record and decreased customer and employee frustration, the upside of regtech can be well worth the planning it requires.

Acquire or Be Acquired Perspectives: A Bank Investor Talks M&A


acquisition-4-13-18.pngWycoff, Kirk.pngThis is the second in a five-part series that examines the bank M&A market from the perspective of five attendees at Bank Director’s Acquire or Be Acquired conference, which occurred in late January at the Arizona Biltmore resort in Phoenix.

Read the perspectives of other industry leaders:
John Asbury, president and CEO of Union Bankshares
Gary Bronstein, a partner at Kilpatrick Townsend & Stockton LLP
Eugene Ludwig, founder and CEO of Promontory Financial Group


It’s tempting to think that rising profits and higher stock valuations will spur merger and acquisition (M&A) activity in the bank industry. But that isn’t necessarily the case, says Kirk Wycoff, managing partner of Patriot Financial Partners L.P., a Philadelphia-based private equity fund that invests in banks with between $500 million and $5 billion in assets.

Wycoff characterizes the current M&A landscape as lukewarm. He gives it a grade of B. “About 4 percent of the industry consolidates every year,” he notes. “So 25 years ago, when there were 15,000 banks, there were 600 bank transactions a year. Now there are 6,000 banks, which translates into 240 transactions a year. The investment bankers always say, ‘Next year is going to be the best year ever,’ yet it’s always around 4 percent.”

There is no way to predict future transaction volumes with precision, of course, but Wycoff brings a lot of experience to bear on the issue. From 1991 to 2004, he was chairman and CEO of Progress Financial Corp., growing the Philadelphia-based bank from $280 million in assets to $1.2 billion before selling it to FleetBoston Financial Corp. After Bank of America Corp. bought FleetBoston in 2005, Wycoff founded Philadelphia-based Continental Bank. It became the fastest-growing de novo bank opened in the four years before the crisis and was sold in 2014 to Bryn Mawr Bank Corp., a $4.5 billion bank in neighboring Bryn Mawr, Pennsylvania. And since 2007, Wycoff has been a managing partner at Patriot Financial Partners.

Wycoff shared his perspective as a private equity investor on the M&A landscape with Bank Director at its latest Acquire or Be Acquired conference, held earlier this year at the Arizona Biltmore resort in Phoenix, Arizona. Wycoff’s perspective is one of five Bank Director has cultivated about the M&A landscape following the annual conference.

“I’ve been coming here for 24 years, both for the industry data that the presenters present and for the ideas on how to improve my companies,” says Wycoff. “I was a CEO the first 13 years I came here, so I used a lot of the ideas I picked up to improve the banks I was running. Since I’ve been an investor for the last 11 years we’ve been meeting our banks here, encouraging some of our banks and their boards to come here to learn about mergers and acquisitions, about concepts around accretion and dilution, about governance and the whole process of, if you need to do something strategically, how to do it right.”

Wycoff has a unique perspective on the relationship between profitability and M&A activity. The typical assumption is that higher profitability will spur transactions. It’s at the top of the cycle, after all, when buyers are flush with cash and sellers salivate at the prospect of high valuations. But Wycoff thinks there’s another way to look at this.

People should think about the value of their bank as if M&A didn’t exist,” he says. “When banks return 15 percent on equity, which they’re on their way to doing, M&A becomes a much less necessary part of the plan because at that rate you’re going to double your capital every six years.”

Given the salutary impact of last year’s tax cuts, combined with the favorable operating environment, the industry could soon find itself in this situation. “As an investor, what struck me at this year’s conference is how good things are,” says Wycoff. “We’ve been in a very, very good credit environment, the industry has tremendous amount of capital, people are very optimistic and earnings are going up because of the tax bill.”

It’s in times like these that investors and board members need to avoid being lulled into a false sense of security, says Wycoff.

“CEOs will tell boards they deserve bonuses based on more earnings from tax reform when they maybe didn’t drive deposits or customer engagement or more margin.” Wycoff’s point is that now isn’t the time to become complacent. Instead, banks should be vigilant about operating expenses.

As an investor, Wycoff is also watching the evolution of bank stock ownership. The proliferation of exchange-traded funds and robo-advisors could detach bank valuations from fundamental performance, says Wycoff. This would create arbitrage opportunities for savvy investors, but it would break the feedback loop between the market and executives running banks. “That’s difficult because you like to think as a CEO or an investor that if a company does the right things, you get rewarded in your stock price.”

Fuller coffers also raise the importance of capital allocation. Should rising profits be used to increase dividends, accelerate stock buybacks, invest in the business or a combination of the three? That’s the question, notes Wycoff. “I hope that this additional profitability, which will inevitably drive stock prices higher for the banks that are doing well, isn’t frittered away on things that don’t create long-term value for shareholders.”

Acquire or Be Acquired Perspectives: Negotiating the M&A Landscape


merger-4-6-18.pngAsbury, John.pngThis is the first article of a five-part series that examines the bank M&A market from the perspective of five attendees at Bank Director’s Acquire or Be Acquired conference, which occurred in late January at the Arizona Biltmore resort in Phoenix.

Read the perspectives of other industry leaders:
Gary Bronstein, a partner at Kilpatrick Townsend & Stockton LLP
Eugene Ludwig, founder and CEO of Promontory Financial Group
Kirk Wycoff, managing partner of Patriot Financial Partners L.P.


The number of mergers and acquisitions in the bank industry over the last two years had been on the decline. A total of 196 unassisted mergers were consummated in 2017 compared to 223 in 2016 and 264 in 2015, according to the Federal Deposit Insurance Corp. Yet, with the recent tax cut and regulatory changes this trend could soon reverse course, suggests John Asbury, president and CEO of Union Bankshares, a $13 billion asset bank based in Richmond, Virginia.

I think [M&A activity] is picking up and I firmly believe that we’re going to see more consolidation,” Asbury said at Bank Director’s Acquire or Be Acquired conference in Phoenix, Arizona, earlier this year.

Asbury, who became CEO at Union in October 2016, is executing a growth strategy that balances acquisitions and organic growth. The opportunity to gain insight into the M&A market is why Asbury and hundreds of other bank CEOs, senior executives and board members attend Acquire or Be Acquired every January in Phoenix. “The reason I come and the reason why we have others come is really just the opportunity to see what the contemporary issues are,” says Asbury. But “the networking is off the charts. I think that’s important and not to be underestimated.”

The bank industry will never return to the salad days of consolidation in the mid-1990s, right after the barriers to branch and interstate banking came down. Yet, the conditions for further consolidation remain present, given the inherent advantages of scale in a highly commoditized industry with nearly 6,000 banks and savings institutions.

The U.S. Senate recently passed legislation that could provide modest regulatory relief to banks, and a more accommodative regulatory regime will fuel this in the short run, predicts Asbury. This is particularly true for potential acquirers that sit just below $10 billion assets, as Union Bankshares did until completing its purchase of Xenith Bancshares earlier this year.

“When you go over $10 billion in assets, several things happen,” says Asbury. “The most punishing aspect of it is the Durbin Amendment of the Dodd-Frank Act. The Durbin amendment caps our debit card interchange income, literally cutting it in half. For Union, that’s about a $10 million dollar a year revenue loss.”

The other threshold to watch is the one at $50 billion in assets, says Asbury, over which banks are considered to be systemically important and must submit to an even more stringent regulatory regime. The Senate bill would raise this threshold to $250 billion. “If it’s not as punishing for a bank to be over $50 billion dollars, I think you’re going to see [banks near it] become quite active.”

Size also comes into play in a less direct way that could impact smaller banks’ approach to deal-making. For years, large banks focused on acquisitions as their principal growth strategy. But now that JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. are prohibited from making additional acquisitions, as they already exceed the 10 percent nationwide deposit cap, they have turned inward for expansion, focusing instead on organic growth.

This changes the calculus for smaller banks in two ways, says Asbury. In the first case, community banks will no longer benefit from the customer attrition that large banks experienced in the wake of mergers and acquisitions. Additionally, because big banks are turning inward and pegging their growth strategies to the quality of their products and services, especially when it comes to technology, the value proposition of community banks, which traditionally revolved around better service, will be less effective at fueling growth.

It’s no longer as easy to pick up customers that are being run out by the big banks because of M&A,” says Asbury. “That’s why you’re seeing consolidation going on in our industry among the smaller players. It’s not just the regulatory regime; it’s also the ability to be relevant. The greatest risk to this industry, banks of any size, but particularly the smaller ones, is the risk of irrelevance. You’ve got to have sufficient scale. You’ve got to have a competitive product offering.”

Asbury points to Union’s recent move to hire a head of digital strategy. “You’re unlikely to find someone in that role at a much smaller institution because they probably don’t have the resources to be able to afford the role or to be able to afford executing a strategy around digital.”

As a result, Asbury predicts that the industry will continue to see mergers of equals among banks in the $500 million to $1 billion range, creating $2 billion to $3 billion banks.

An added benefit to combining banks of that size is it creates a more attractive takeout target. “One of the questions that I was asked [as a panel member at this year’s Acquire or Be Acquired] is how small is too small. I said in general under $1 billion is hard for us to think about because there are bigger fish to fry. We don’t want to be sidelined digesting a small opportunity when there’s a more strategically important larger opportunity around.”

Union is clearly in an acquisition mode, and Asbury says that banks looking for a buyer need be realistic when it comes to price. “There’s a lot of take-out premium on some of these smaller companies,” he says. “[It’s already] embedded in their stock. So I think it’s not realistic for management of these smaller banks…to expect a further premium on top of that.”

What Leaders Say It Takes to Compete Today


strategy-4-5-18.pngIf it weren’t for the occasions when his kids need to borrow some cash, Frank Sorrentino says they’d never set foot in a bank branch.

Sorrentino, the CEO of $4.7 billion asset ConnectOne Bancorp in Union, New Jersey, was one of several senior bank executives who joked about millennials’ tech-savvy lifestyle during a roundtable session, sponsored by Promontory Interfinanical Network (a partner to thousands of banks), at Bank Director’s 2018 Acquire or Be Acquired conference. But the habits of younger consumers and the challenges they present, including how they affect the race for deposits, are among the top concerns of today’s bank leaders.

Technology is a disruptive force that has permeated the banking industry, affecting operations and decisions for directors at all levels. “Today, to me it appears that things are changing right beneath our feet,” Sorrentino says. “The speed of adoption, speed of change, is just something that’s breathtaking.”

An 800-pound gorilla NOT named Amazon
The threat posed by big banks that are competing aggressively for consumers is very real for regional and smaller community banks—though some do see bright spots.

The ability of the largest banks to chart their own courses with technology could hurt regional and community banks, especially if that technology were to become proprietary or exclusive.

“They can decide to turn up or turn down product almost at whim, and very quickly put pressure on anyone in this room in…a very negative way,” Sorrentino says. “I’m not so sure the next-generation 800-pound gorilla is going to be thinking the same way.”

Sorrentino pointed to the widespread adoption of Zelle, a peer-to-peer (P2P) payments product that is currently being offered by 58 banks and credit unions, including ConnectOne. That type of product is helpful, he says, and works as long as banks of all sizes have access to it.

But the disrupting factors of the future may be the tech giants like Amazon or could just be the direction technology is leading customers—which is to say, far away from traditional banks.

Convenience in banking has trumped much of the traditional channels, which are largely based on in-person relationships. “That same experience now has to come through those interactions over the [smart] phone,” says Chuck Shaffer, chief financial officer and head of strategy at Seacoast Bank Corp. in Stuart, Florida, which has $6 billion in assets.

“When my own children, who live in New York City, say that they went and opened up an account at Chase because that’s where they can transact their Venmo [a competing P2P service offered by PayPal] without having to pay a fee, it’s very concerning,” says David Provost, president and CEO of Chemical Financial Corp., a $20 billion-asset institution headquartered in Midland, Michigan.

Data-fueled growth strategies
Other executives have similar assessments of the competition, though some remain optimistic about the potential for growth through more conventional means and using technology for that purpose, as well.

“I think customers come to you first; [it] doesn’t mean they don’t get better offers. It doesn’t mean that you don’t have to maybe match offers that normally you might not, but I think that there is still a degree of loyalty,” says Sally Steele, chairman of the board at Community Bank Systems, a $10 billion-asset bank based in Dewitt, New York. “But on the other hand, as the Zelles of the world roll through the banking industry, we’re all going to be beneficiaries of that.”

Nearly two-thirds of directors and CEOs surveyed for Bank Director’s 2018 M&A Survey say they are planning to grow organically, rather than through acquisitions, using strategies rooted in modern technology.

Shaffer’s 90-year-old bank has been around long enough to be familiar with the days before the internet, but Seacoast has been deliberate in investment and integration of data-backed strategies, both internally and purchased. “We operate in one data platform. We built a SAS database over top of that, then built automated marketing over top of that,” he says.

This data-driven approach has generated customized service and marketing pitches tailored to any demographic group and is now yielding significant revenue. “Three years later, we’re doing over $300 million; this year we’ll do around $400 million largely because we’re making the right offer at the right moment to the right customer,” Shaffer says. “We’ve been explosive in building exponential growth in the organization.”

2018 L. William Seidman CEO Panel



Former FDIC chairman and Bank Director’s publisher, the late L. William Seidman, advocated for a strong and healthy U.S. banking market. In this panel discussion led by Bank Director CEO Al Dominick, three CEOs—Greg Carmichael of Fifth Third Bancorp, Gilles Gade of Cross River Bank and Greg Steffens of Southern Missouri Bancorp—share their views on the opportunities and threats facing banks today.

Highlights from this video:

  • Reaching Today’s Consumer
  • Front and Back-Office Technologies That Matter
  • Competitive Threats Facing the Industry
  • The Future of Community Banking