Exclusive: An Interview with Brian Moynihan


bank-of-america-2-14-19.pngBank Director’s writers and editors talk with the best bankers in the United States to inform the stories we publish on BankDirector.com and in Bank Director magazine. But these conversations often go deeper and extend beyond the subject matter of those stories, leaving a lot of immensely valuable information on the cutting room floor, so to speak.

With this in mind, we are making available—exclusively to our members—the unabridged transcripts of these conversations. It is our belief that the insights found within them can help bankers gain knowledge and improve their own institutions.

For the cover story in the fourth quarter 2018 issue of Bank Director magazine, Executive Editor John Maxfield interviewed Brian Moynihan, CEO of Bank of America Corp., at the bank’s New York City offices.

While the story focused on how Moynihan, who has led Bank of America since 2010, transformed the bank’s culture and performance, the conversation also delved into his views on growth, risk management and other topics of interest to bank leaders.

In this lengthy interview, which has been lightly edited for clarity and brevity, Moynihan shares:

  • The sources of his philosophy on banking
  • The principles that inform Bank of America’s revamped growth philosophy
  • How history informs his view of the future
  • Lessons learned from the financial crisis
  • How Bank of America deepens relationships with existing customers
  • Why operating leverage helps the bank better manage risk

Larry De Rita, Bank of America’s senior vice president of corporate communications, is also quoted in the transcript.

download.png Download transcript for the full exclusive interview

Two Traditional Strategies to Supercharge a Bank’s Growth


strategy-10-26-18.pngBankers 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.

You’ll Never Guess Where BB&T Gets Its Big Ideas


strategy-10-19-18.pngIt is well worth any banker’s time to read the vision, mission and purpose statements of BB&T, the eighth biggest commercial bank in the United States.

They will sound at first like similar statements from any other bank, but what makes BB&T’s unique is the inspiration behind them.

They weren’t drawn up with the help of consultants or survey data; they are grounded instead in the writings of philosophers—classical thinkers as well as modern proponents of capitalism.

“The philosophers that influenced me the most are Aristotle, Thomas Aquinas, John Locke, and Ayn Rand,” writes John Allison, the chairman and CEO of BB&T from 1989 to 2008, in his 2014 book, The Leadership Crisis and the Free Market Cure.

BB&T has published an entire pamphlet outlining its culture, encapsulated in its vision, mission and purpose statements, which reduce to one key objective: “Our ultimate purpose is to create superior long-term economic rewards for our shareholders.”

The $223-billion bank based in Winston-Salem, North Carolina, doesn’t just talk the talk; it walks the walk. It ranks in the 98th percentile among publicly traded banks in terms of the total amount of shareholder value it has created during its time as a public entity.

Yet, there’s a nuance to BB&T’s philosophy on creating value that’s easy to overlook. It doesn’t talk about “maximizing” long-term economic rewards for shareholders; it talks instead about “optimizing” those rewards.

Why the difference?

As Allison writes in his book:

When free market economists and finance theorists refer to maximizing shareholders’ returns, they imply a long-term context. In the real world, maximizing tends to be a short-term concept. BB&T’s mission also focuses on ‘creating a safe and sound investment,’ The goal with this wording is to communicate to potential purchasers of the company’s stock that we are in the game for the long-term and will not take inordinate risk even if that risk could maximize short-term returns.

In no industry is a long-term view more important than banking. Banks, as a group, use more leverage than companies in any other industry, typically borrowing $10 for every $1 worth of capital.

This is by design, of course, as a principal purpose of banking is to leverage society’s capital to fuel economic growth—a point Bank of America’s chairman and CEO, Brian Moynihan, made in a recent interview with Bank Director:

[B]anks came up to help people borrow money, which helps economies grow faster. If you’re constrained to only your equity, you only have so much money to spend. But if you borrow against it, now you can spend more. That’s the magic of leverage in terms of accelerating progress.

But there is a downside to all that leverage—it makes banks vulnerable to economic cycles, explaining why more than 17,000 banks have failed since the Civil War.

Bankers are prone to the same impulses that, at the top of a cycle, cause real estate developers to break ground on skyscrapers, retailers to over-invest in inventory and technology entrepreneurs to believe that traditional rules of economics no longer apply.

The difference is that, thanks to leverage, there’s less margin for error in banking than there is in other industries. A mere 10 percent decline in the value of a typical bank’s assets will render it insolvent.

This is one reason BB&T chose the words of its mission statement so carefully in terms of “optimizing” as opposed to “maximizing” shareholder value.

Another reason is that shareholders aren’t a bank’s only constituency—there are also clients, employees and communities. A bank that doesn’t tend to all four is like a table with only three legs.

It’s by optimizing returns among multiple constituencies, in other words, that a bank can maximize the returns to anyone of them. And if a bank does that through multiple cycles, the outcome is even better.

The net result at BB&T, writes Allison, is that “we operate our business in a long-term context by adding value to our clients, employees, and communities and in that context create superior rewards for shareholders.”

In short, while Aristotle, Thomas Aquinas, John Locke and Ayn Rand may seem like an unlikely source for inspiration in banking, if BB&T’s success is any indication, it’s safe to say they were onto something.

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 Are the Ingredients of an Extraordinary Bank?


strategy-1-30-18.pngHow do you run an extraordinary bank? If there was a common theme on the second day of Bank Director’s Acquire or Be Acquired conference in Phoenix, Arizona, it was a focus on the secret sauce that enables certain banks to outperform the rest of the industry.

One of the day’s first sessions dug into the stories behind a group of emerging regional banking champions—public banks, where at least 15 percent of their total assets comes from acquisitions made over the past five years. The efficiency ratios of these banks are lower than their peers, meaning that they spend a smaller share of net revenue on operating expenses. These banks are also more profitable, reporting higher returns on assets. Not coincidentally, analysts expect these banks to grow their earnings per share at a faster pace than other banks in the years ahead.

The emerging regional champions benefit from economies of scale, which is reflected in higher stock valuations. If you look at all major public banks nationwide within different asset ranges, there is a consistent increase in the future price-to-earnings ratio as you step up in size. The average ratio for banks with less than $5 billion in assets is 12.9 times future earnings, according to S&P Global Market Intelligence. That increases to 13.4 for banks between $5 billion and $10 billion in assets and 14.4 for banks with between $50 billion and $100 billion.

The one exception to this trend is the country’s biggest banks, noted Scott Anderson and Joe Berry of Keefe, Bruyette & Woods. The forward price-to-earnings ratio drops to 12.7 for banks with between $100 billion and $250 billion in assets, and it falls to 12.4 for banks above $250 billion. It is not hard to understand why this is the case, given that the current regulatory framework imposes heavier compliance and capital burdens on the biggest banks. Just as importantly, JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. each exceed the statutory limit of 10 percent of domestic deposits, which precludes any more acquisitions by these historically acquisitive institutions as part of a growth strategy.

But even though a bigger size still offers benefits to regional banks, it should not be seen as an end in itself. This is not a return to the 1990s, in other words, when the driving force in the industry was bigger is better. “We have never grown our bank just to reach a certain size,” explained David Zalman, chairman and CEO of Prosperity Bancshares, which is based in Houston, Texas and has grown from $335 million in assets two decades ago to $23 billion today. “Our focus has instead always been on increasing our earnings per share.”

Zalman underscored this point by explaining that Prosperity has built its bank on three principles: asset quality, efficiency and deposits. “We believe core deposits are more important than loans” when it comes to identifying banks to buy, he explained. Two other core qualities Zalman looks for in potential acquisition targets are large inside ownership stakes by executives at the acquisition target as well as a cultural match. “When you do a deal, you need to get in deep, get to know the culture and the people and figure out if they want to do the deal. Don’t just negotiate with the CEO,” said Zalman.

This theme was echoed by John Asbury, the CEO of Richmond, Virginia-based Union Bankshares Corp., which has grown from $2.3 billion in assets to $12.2 billion over the past decade. “You have to be careful about mergers of equals,” Asbury says, pointing to the cultural issues that can arise when putting together similarly sized banks. “Culture is the key.”

“Really getting to know a company before you buy it is critical,” agreed Robert Sarver, chairman and CEO of Western Alliance Bancorp., a $20.3 billion bank based in Phoenix, Arizona that has posted organic annual growth of between $1.5 billion and $3 billion in total assets in each of the past three years. “Determining if it will be the right fit is more important than the numbers. You have to have total transparency about what everyone is getting into. There can’t be expectations that are off base.”

Similar themes came up later in the day in a breakout session on the characteristics of top-performing community banks, presided over by Bill Walton, a partner at the law firm Dixon Hughes Goodman LLP, and Tom Broughton, CEO of ServisFirst Banchshares, a $7.1 billion bank based in Birmingham, Alabama. The session revolved around Dixon Hughes Goodman’s recent study of 22 CEOs of high-performing community banks with between approximately $400 million and $7 billion in assets. Relative to their peers, the banks in the study tend to be twice as profitable, experience meaningfully lower loan losses and have efficiency ratios that are 20 percent below similarly sized banks.

These top-performing community banks did not conform to a single archetype, falling instead into three different buckets. Some are full-service community banks delivering a range of financial products and services to consumers and businesses. Others are focused on building and maintaining deep and profitable relationships with small to middle-market businesses. The final group focused on niches in their respective markets, giving them pricing power stemming from a paucity of competition.

Despite these differences, the one thing that all of these top-performing community banks share is an intense focus on talent. “Top-performing community banks are built on top-performing people,” said Walton. “These people are in empowered and accountable situations grounded in decentralized decision-making.” To this end, while all of these banks are efficient operators, they don’t cut corners when it comes to compensation. In fact, just the opposite is true. Compensation at the top-performing community banks tends to be above-market, noted Walton, probably as a consequence of the experience of their bankers.

“It really does come down to the talent,” said Walton. “Both who they are, how they’re trained, how they’re compensated and how they’re managed.”

A Witness to M&A History


merger-1-28-18.pngWhen Bank Director hosted its first Acquire or Be Acquired conference in 1994, there were 12,604 banks and thrifts in the U.S., according to the Federal Deposit Insurance Corp. As of the third quarter of 2017, which is the FDIC’s most recent tally, there were 5,737 banks and thrifts—a 54.5 percent decrease. That is a stunning reduction in the number of depository institutions over this period of nearly two and a half decades, and the Acquire or Be Acquired conference has been a witness—and a chronicler—of it all.

This year’s event will kick off on Sunday, January 28 at the Arizona Biltmore Resort in Phoenix. By my count, I have attended 18 of these conferences, and the things we have discussed while we were there have changed over time and are always a reflection of the times. In the early 2000s, when the U.S. economy was strong and big banks were still in the game, we focused on the dealmakers who were building banking empires and taught the fundamentals of putting together a successful M&A transaction. During the depths of the financial crisis, when there wasn’t much M&A activity going on as many banks were more focused on shoring up their shaky balance sheets, and some were taking money from the Treasury Department’s Troubled Asset Relief Program, we talked a lot about strategies for raising capital. And since the few transactions during that period tended to be government-assisted deals with the FDIC, we offered advice on how to do those successfully.

More recently, as the industry’s financial health has returned, capital levels have improved and there are no longer many broken banks to buy, we have focused on the mechanics of buying and selling healthy banks. For many banks today, M&A has once again become the centerpiece of their strategic growth plans. However, we have also expanded the conference’s focus in recent years by adding general sessions and workshops on a broad array of topics including financial technology, lending, data, interest rates and deposits. The decision to buy or sell a bank is rarely made on the strength of the deal price alone, but is driven by these and other critical business considerations. We have tried to account for that broader perspective.

An issue that has been an underpinning to Acquire or Be Acquired from its very beginning has been the banking industry’s consolidation, a trend that dates back to at least the early 1980s. Last year there were 261 healthy bank acquisitions, according to S&P Global Market Intelligence, compared to 240 in 2016 and 278 in 2015. The outlook for 2018 is good, based on the rise in bank stock valuations following the enactment of a tax reform law that drastically cuts the corporate tax rate. With a stronger currency in the form of a higher stock price, acquirers should have an easier time putting together deals that are attractive to their own shareholders. It’s a fool’s game to predict the number of transactions in any given year (and a game that I have played, foolishly and without much success, in years past), but I would expect to see deal volume this year somewhere in that 240 to 278 range, which has come to represent a normalized bank M&A market in recent years.

Whatever the deal count in 2018 turns out to be, the banking industry’s consolidation rolls on, and the Acquire or Be Acquired conference will continue to be a witness to history.

The M&A Limitations of Privately-Held Banks


More than half of bank executives and directors responding the Bank Director’s 2018 Bank M&A Survey see an environment that’s more favorable to deal activity, but those at privately-held institutions—which comprise 52 percent of survey respondents—are slightly more likely to see a less favorable environment for deals, and significantly more likely to expect limitations in their ability to attract an acquisition partner and complete the transaction.

In the survey, 30 percent of respondents from private banks say their bank has acquired or merged with another institution within the past three years, compared to 53 percent of respondents from publicly traded institutions. Respondents from private banks—which, it should be noted, also tend to be smaller institutions—are also less likely to believe that their bank will acquire another institution in 2018, with 47 percent of private bank respondents saying their institutions are somewhat or very likely to acquire another bank within the next year, compared to 61 percent of public bank respondents.

Rising bank valuations are largely to blame for dampened enthusiasm on the part of private banks that would like to consider acquisitions as a growth strategy, but feel excluded from the M&A market. Higher valuations mean two things. Potential sellers have higher price expectations, according to 84 percent of survey respondents. And public buyers—whose currency now holds more value in a favorable market—could have an edge in making a deal. Half of private bank respondents say that rising bank valuations have made it more difficult for the institution to compete for or attract acquisition targets, compared to 36 percent of respondents from public banks looking to acquire.

manda-bank-valuations-chart.png

For the most part, private buyers “have to do an all-cash deal,” says Rick Childs, a partner at Crowe Horwath LLP, which sponsored the 2018 Bank M&A Survey. Banks under $1 billion in assets have some flexibility in leveraging their holding company to lessen the impact on the bank’s capital ratios in such a transaction, as a small bank holding company can use debt to fund up to 75 percent of the purchase price. “I can borrow fairly easily in today’s environment at the holding company, then fuse it down into the bank and make the capital ratios acceptable, and be able to use those cash funds,” says Childs. “But it does mean that there’s an upper limit on how much [the bank] can pay because of the goodwill impact, and that I think is having a detrimental impact on [privately-held] institutions.”

Thirty-five percent of private bank respondents say they would favor an all-cash transaction if their bank were to make an acquisition, compared to 5 percent of public respondents. More than half of private bank respondents would want to structure a transaction as a combination of cash and stock—despite these banks’ stocks being thinly traded at best and relatively illiquid. Equity in the transaction “potentially adds to the pool of available shareholders who might want to buy stock back and produce a more liquid market,” says Childs. While some sellers may prefer to take stock in a deal to defer taxes until the stock can be sold, shareholders still want to know that they will be able to take that stock and cash out if desired. Private buyers that want to issue stock in the transaction should have a plan for that stock to become more liquid within a relatively short period of time, says Childs. Remember, boards have a fiduciary duty to represent their owners’ best interests. If another bank is willing to offer a deal that provides more liquidity, that’s going to be of more interest to most sellers.

manda-transaction-chart.png

For a private bank, offering a cash deal has its benefits, despite limiting the size of the target the bank can acquire. Just 39 percent of private bank directors and executives responding to the survey say they would agree to an all-stock or majority-stock transaction if the board and management team sold the bank, compared to 63 percent of public bank respondents. “For some sellers, that’s actually easier to understand, because it gives you ultimate liquidity and takes some of the decision-making anxiety out of the seller’s hands” in terms of how long the seller should hold onto the stock and how it fits within that person’s portfolio, says Childs. The tax repercussions are immediate, but the seller is also paying today’s tax rates, versus an unknown future rate that could be higher.

That’s not to say that private banks won’t make deals in 2018. Some will, of course, buy other banks. But other types of transactions could pique the interest of private institutions and be particularly advantageous. Branch deals allow banks to cherry-pick the markets they want to enter and pick up deposits at a better price, says Childs. Thirty-nine percent of respondents from privately-held banks say their institution is likely to buy a branch in 2018, compared to 30 percent of public bank respondents.

acquisition-chart.PNG

Private banks are also more inclined to acquire nondepository lines of business, as indicated by 30 percent of survey respondents from private banks, compared to 20 percent from publicly traded institutions. Acquiring wealth management firms and specialty lending shops are of particular interest to private banks, according to Childs. Both allow the institution to expand its services to customers and generate fee income without going too far afield of the bank’s primary strategic focus.

Both branch and nondepository business line acquisitions carry fewer due diligence and integration burdens as well.

Potential regulatory reform on the horizon could make the deal environment even more competitive, says Childs. Bank boards and management teams that worried about the impact of the regulatory burden on the sustainability of their bank may feel that the viability of their institution as an independent entity is suddenly more certain. “That likely lowers the pool of institutions that feel like they have to sell,” says Childs. And most bank executives and directors indicate that they want to remain independent—in this year’s survey, just 18 percent of respondents say they’re open to selling, with another 4 percent indicating their institution is considering a sale or in an agreement with another bank, and 1 percent actively seeking an acquirer.

The 2018 Bank M&A Survey gathered responses from 189 directors and executives of U.S. banks to examine the M&A landscape, M&A strategies and the economic, regulatory and legislative climate. The survey was conducted in September and October of 2017, and was sponsored by Crowe Horwath LLP. Click here to view the full results of the survey.

A New Approach for Bank M&A


merger-8-31-17.pngThe post-recession world has created a series of new challenges for community banks, including declining margins, rising loan-to-deposit ratios and loan concentration issues. The economic climate has made it nearly impossible for banks to work through these issues through traditional means such as organic growth.

And despite what most analysts say, community banks will not find earnings relief when interest rates rise. They will instead find more trouble. Different factors influence the rate of recovery after an interest rate trough, including its duration and depth. Deposit volume and rates, existing loan portfolio half-lives, and the expected economic environment and its impact on loan demand must also be weighed.

Community bank balance sheets have been poisoned by loans that were issued in the last decade, and it will take years—not quarters, as in the past—for a normalization period to change this dynamic. Community bank CEOs and boards have limited strategic options to separate themselves from the pack and maximize relative shareholder value.

Normal organic growth will not give community banks sufficient flexibility to adjust the asset portfolio, with the potential rising costs and declining availability of deposits compounding the problem.

The only way management can substantially restructure their asset and liability base is through acquisitions. However, these M&A deals have to be structured to compliment the bank’s asset and liability strengths and weaknesses, using the proper analytics to evaluate the impact on the bank’s existing capital structure. Loan mix, portfolio maturities, fixed versus floating distribution and concentrations are just some of the factors that have to be taken into consideration in valuing both acquirer and target assets.

Properly analyzed and structured M&A transactions can be a very powerful tool in helping community banks overcome their profitability issues and other limitations. But many community banks are making mistakes when it comes to M&A.

Here are six basic rules that should be followed:

  1. Don’t pay attention to investment bankers spouting multiples-of-book suggestions for how much a bank is worth. These change based on expected market conditions, with multiples declining in strong expected operating markets and increasing in difficult pro forma market environments. Furthermore, every bank for sale has a different value proposition for each individual buyer. This value proposition is a function of how the target’s unique asset and liability mix strengthens and weakens the acquirer’s unique asset and liability mix, as well as its eventual pro forma profitability.
  2. Don’t focus your pre-due diligence analysis on traditional financial and operating accounting statements and extrapolated financials derived from these statements. Traditional financial statements are accounting translations of raw bank data that meet certain required reporting guidelines. While they might be an excellent summary of monthly, quarterly or annual performance, they lack the critical vintage information embedded in different layers of loans that directly affect their pro forma risk, return and maturity schedules.
  3. Don’t wait for deals to be delivered to your doorstep, generally in the form of auctions. The probability of finding the right deal and winning the auction at a reasonable price is extremely low. The time resources that are committed to these unsuccessful and questionable bids can be easily spent in more productive directions. Instead, take a proactive approach that evaluates all banks within the acquirer’s desired geographic footprint, which can be far less time-consuming and far more effective in identifying the ideal target consistent with the bank’s own operating performance and financial strength.
  4. Do evaluate every acquisition against the baseline of equivalent organic growth and its impact on shareholder value. Without this baseline, even a reasonably accurate estimate of impact on shareholder value is a time-wasting exercise in number crunching. Comparing the value of transactions of different sizes can only be done consistently against an equivalent organic growth baseline.
  5. Do compartmentalize the value proposition of a target into the value of loans, value of deposits, value of existing excess/deficit capital and so on. Some of these value propositions are directly incremental to the purchase value, such as loan portfolios with their inherent pro forma yields and maturities; others indirectly contribute to value by eliminating operating constraints such as low loan-to-deposit ratios and high commercial real estate concentrations. Categories that contribute to value by eliminating operating constraints have to be evaluated in the context of the bank’s strategic plan and its ability to capitalize on these reduced constraints.
  6. Do focus on regulatory capital adequacy, both pre-and post-acquisition, to ensure that there are no unpleasant surprises as the target is consolidated into the acquirer’s operations. A fairly meaningful portion of the purchase price can be affected negatively or positively by the target’s existing capitalization.

When It Comes to Core Conversions, Look Before You Leap


core-conversion-7-13-17.pngChanging your bank’s core technology provider is one of the most important decisions that a bank board and management team can make, and even when things go smoothly it can be the source of great disruption. The undertaking can be particularly challenging for small banks that are already resource constrained since the conversion requires that all of the bank’s data be transferred from one vendor’s system to another’s, and even for a small institution that can add up to a lot of bits and bytes. Also, changing to another vendor’s core technology platform typically means adopting several of its ancillary products like branch teller and online and mobile banking systems, which further complicates the conversion process.

“It isn’t something to be taken lightly,” Quintin Sykes, a managing director at Scottsdale, Arizona-based consulting firm Cornerstone Advisors, says of the decision to switch core providers. “It is not something that should be driven by a single executive or the IT team or the operations team. Everybody has got to be on board as to why that change is occurring and what the benefits are…”

The Bank of Bennington, a $400 million asset mutual bank located in Bennington, Vermont, recently switched its core technology platform from Fiserv to Fidelity National Information Services, or FIS. President and Chief Executive Officer James Brown says that even successful conversions put an enormous strain on a bank’s staff.

“It’s not fun,” says Brown. “I have the advantage of having gone through two previous conversions in my career, one that was horrendous and one that was just horrible. [The core providers have] gotten better at it, but there’s no way to avoid the pain. There are going to be hiccups, things that no matter how you prepare are going to impact customers. There’s this turmoil, if you will, once you flip the switch, where everybody is trying to figure out how to do things and put out fires, but I will say [the conversation to FIS], in terms of how bad it could have been, was not bad at all.”

But even that conversion, while it went more smoothly than Brown’s previous experiences, put a lot of stress on the bank’s 60 employees. “There was a lot of overtime and a lot of management working different jobs to make sure our customers were taken care of,” he says.

Banks typically change their core providers for a couple of different reasons. If the bank has been executing an aggressive growth strategy, either organically or through an acquisition plan, it may simply have outgrown its current system. A lot of core providers can handle growth, particularly in the retail side of the bank, so that’s not usually the problem, Sykes says. Instead, the growth issue often comes down to the breadth of the bank’s product line and whether staying with its current core provider will allow it to expand its product set. When banks embark on a growth strategy, they don’t always consider whether their core data system can expand accordingly. “Usually they’re unable or just haven’t looked far enough ahead to realize they need it before they do,” Sykes explains. “The pain has set in by the time they reach a decision that they need to explore [switching to a new] core.”

Banks will also switch their core providers over price, especially of they have been with the same vendor through consecutive contracts and didn’t negotiate a lower price at renewal. “If any banker says price doesn’t have an impact on their decision, they’re not being honest,” says Stephen Heckard, a senior consultant at Louisville, Kentucky-based ProBank Austin.

Although the major core providers would no doubt argue differently, Heckard—who sold core systems for Fiserv for 12 years before becoming a consultant—says that each vendor has a platform that should meet any institution’s needs, and the deciding factor can be the difference in their respective cultures. And this speaks to a third common reason why banks will leave their core provider: unresolved service issues that leave the bank’s management team frustrated, angry and wanting to make a change.

“The smaller the bank, the more important the relationship is,” says Heckard. “When I talk about relationships, I’m also talking about emotions. They get played up in this. For a community bank of $500 million in assets, quite often if the vendor has stopped performing, there’s an emotional impact on the staff. And if the vendor is not servicing the customer’s needs in a holistic manner, and the relationship begins to degrade, then I do feel that eventually the technology that’s in place, while it may be solid, begins to break.”

Heckard says that core providers should understand their clients’ strategic objectives and business plans and be able to provide them with a roadmap on how their products and services can support their needs. “I don’t see that happening near enough,” he says. And if the service issues go unresolved long enough, the client may begin pulling back from the provider, almost like a disillusioned spouse in a failing marriage. “They may not be as actively attending user groups, national conferences and so forth,” Heckard says. “They don’t take advantage of all the training that’s available, so they become part of the problem too.”

Brown says that when Bank of Bennington’s service contract was coming up on its expiration date, his management team started working with Heckard to evaluate possible alternatives. “We needed to implement some technology upgrades,” he says. “We felt we were behind the curve. Something as simple as mobile banking, we didn’t have yet.” The management team ultimately chose FIS, with Brown citing customer service and cybersecurity as principal factors in the decision. The decision was less clear cut when it came to the actual technology, since each of the systems under consideration had their strengths and weaknesses. “I’m sure [the vendors] wouldn’t like to hear this but in a lot of ways a core is a core,” Brown says.

Heckard, who managed the request for proposal (RFP) process for Bennington, says that bank management teams should ask themselves three questions when choosing a new core provider. “The first one would be, have you exhausted every opportunity to remain with the present vendor?” he says. As a general rule, Heckard always includes the incumbent provider in the RFP process, and sometimes having the contract put out to bid can help resolve long-standing customer service issues. The second question would be, why was the new vendor selected? And the third question would be, how will the conversion restrict our activities over the next 18 months? For example, if the bank is considering an acquisition, or is pursuing an organic growth strategy, to what extent will the conversion interfere with those initiatives?

Heckard also covers the conversion process in every RFP “so that by the time the bank’s selection committee reads that document they know what’s ahead of them, they know the training requirements…they understand the impact on the bank.”

And sometimes a bank will decide at the 11th hour that a core conversion would place too much stain on its staff, and it ends up staying with its incumbent provider. Heckard recalls one bank that he worked with recently decided at the last moment not to switch, even though another vendor had put a very attractive financial offer on the table. “The president of the holding company told me, ‘Steve, we can’t do it. It’s just too much of an impact on our bank. We’ve got a main office remodel going on,’ and he went through about four other items,” Heckard says. “I thought, all of these were present before you started this. But sometimes they don’t realize that until they get involved in the process and understand the impact on their staff.”

SizeUp: Friend or Foe


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Making smart decisions at every stage of growth is a critical—and often difficult—process for many small businesses. While larger companies have the money and resources to utilize big data and analytics tools to gain insight into their performance, customers and competition, small businesses are often left guessing and must rely on incomplete information (or gut instinct) to make key decisions like whether to expand into a new location or introduce new products.

That’s where fintech business intelligence startup SizeUp is stepping in. SizeUp partners with traditional banks to offer big data and business intelligence tools to small business customers to engage (and retain) them over the long run. Business owners who want to know such things as the most under-served areas of their markets when they are considering where to expand can use SizeUp to make the best possible decisions.

SizeUp already partners with big banks like Wells Fargo & Co., but long term will it be a friend or foe to legacy institutions? Let’s dive in and find out.

THE GOOD
SizeUp was initially chosen as one of 30 finalists in the TechCrunch Disrupt startup pitch competition in 2016, out of more than 12,000 applicants. TechCrunch Disrupt is Silicon Valley’s leading startup and technology conference, and the Disrupt startup pitch contest is widely considered to be the most competitive in the tech world. One of the important benefits that banks derive from working with SizeUp is that it increases the breadth of services they can offer their small business clients. Wells Fargo’s Competitive Intelligence Tool (powered by SizeUp), for example, helps businesses manage and grow their companies by analyzing performance against competitors, mapping out customer opportunities and finding the best places to advertise in the future. Providing this level of intelligence about local markets, along with a competitive scorecard analysis, can also be used to decide the best areas for potential expansion.

And as successful small businesses scale, SizeUp’s platform is designed to enable banks to anticipate which financial products their clients are likely to need in the next stage of growth.

“SizeUp enables banks to introduce their products and services at each key decision making moment in a business’ life,” says SizeUp CEO Anatalio Ubalde. “So for example, a small business loan during launch, and a line of credit as they grow.”

Big banks quickly realized the value that SizeUp’s platform brings to the table, with institutions like Deutsche Bank and Credit Suisse investing early on in SizeUp’s development through programs like the Plug and Play Fintech Accelerator. Headquartered in France, Plug and Play is a large international fintech venture capital firm and accelerator, and a partner with BNP Paribas, France’s second largest bank. SizeUp has even partnered with the U.S. Small Business Administration to help entrepreneurs and business owners assess how they stack up with the competition and map out potential vendors and suppliers.

THE BAD
It’s hard to find a whole lot of negatives with SizeUp’s platform and partnership model. If there’s one drawback, it’s the sheer volume of data points and information that is available on the platform. SizeUp draws from hundreds of public and private data sources, so the platform might be slightly overwhelming for small business owners who are not particularly tech savvy. That being said, banks are in a good position to aid their small business clients onboard to the platform and accelerate the learning curve.

OUR VERDICT: FRIEND
At the end of the day, SizeUp is a friend to banks and legacy financial institutions of all sizes. Bringing this level of sophisticated big data and business intelligence to their small business clients is only serving to help them grow and succeed, which should ultimately result in increased small business account retention. And as these companies grow, banks can be ready to upsell and cross-sell additional products and services that focus on specific stages of development along the way. SizeUp also provides an engaging product and interface that business owners can use for a variety of purposes, from plotting out an advertising campaign to gaining an in-depth understanding of how they stack up against the competition at any given time.

Big data and sophisticated business intelligence is something that most small business thought was only for companies with large technology budgets, but SizeUp is in the process of changing all that. And in addition to helping small businesses make better decisions during each phase of their growth, the firm is helping banks engage (and retain) those customers over the long haul.