3 Questions to Optimizing Debit Card Profitability in a Deal

As the banking industry shrinks each year, CEOs often ask what they should look out for to improve profitability during and after a merger or acquisition. There is one area that is all too often overlooked: debit card profitability.

As an ever-growing source of demand deposit account revenue, debit card portfolios require detailed profit and performance analyses to optimize return. Done correctly, the efforts can be extremely fruitful. But there are a few things acquiring banks should keep an eye on when evaluating any acquisition target’s debit card profitability, to learn what is working for them and why.

Three items to consider when entering the M&A process:
1. Know thyself. To accurately gauge the impact of acquiring another bank’s cardholders, prospective buyers should first know where their own institution stands. How much is your bank netting per transaction, or per debit card outstanding? Every bank must know how much money is to be made when they issue a debit card to their customer. This concept is simple enough and is considered the basics of nearly all business, but putting it into practice can prove difficult without the proper knowledge base. Know your institution’s performance before the acquisition, as well as where your institution should to be after.

2. Dissect the income. If an analysis of interchange income reveals that your bank, as the acquirer, is making less interchange income per purchase than the acquired institution, find out why. The acquisition target may have better interchange rates because of a better network arrangement or even just better network agreement terms. This evaluation should not only apply to the networks or the foundation of interchange earning. Oftentimes, the acquired institution has done a better job of marketing and getting their cards into customers’ hands for use. Bigger does not necessarily mean better when it comes to debit card profitability. Choose the arrangement and agreement terms from either institution on electronic funds transfer (EFT) processing, PIN network and card brand that is most profitable.

3. On expenses, timing can be everything. While the acquiring bank often has better pricing on processing expenses, they don’t always — especially on EFT. Most bankers know to evaluate the acquired institution’s contracts to determine buyouts, deconversion and termination penalties and get a general glimpse at the pricing. But there is a present need for a pricing deep dive across all contracts in every single deal — especially when considering a merger of equals or an acquisition that really moves the needle.

Further, this evaluation should not stop at traditional data processing contracts, like core and EFT. It must consider card incentive agreements. Executives should study the analytics around buyout timing on both institutions’ card brands, along with the interchange network agreements. Consider the termination penalties, but also the balancing effect of positive impact, to incentive income of the acquirer’s agreements. Although the bank cannot disclose details of the acquisition, they can keep the lines of communication open with card vendors. There will be a sweet spot of timing in the profit optimization formula, and the bank will want an open rapport with their card-critical vendors.

Debit cards as a potential profit center are often overlooked in the merger and acquisition process, which tends to be geared toward share price and the details of the buyout. However, it is valuable for acquirers to review debit cards in context of the combined bank’s long-term success of the bank, not just focusing on the deposits retained and lost when it comes to income consideration.

The Consolidation Wave That Wasn’t

wave-crash.jpgThe past three years have seen bankers and industry pundits anxiously awaiting the so-called and highly anticipated wave of consolidation in the banking industry. There are many reasons why increased consolidation is expected, including sellers with less access to capital and, therefore, less opportunity to grow independent of a merger, a belief that banks must be larger to compete and absorb the cost of regulation, a lack of organic growth in existing markets, and compressed earnings.

Despite all of these reasons —some real and some perceived—the pace of consolidation has been modest, at least compared to the predictions of the past several years, begging the question: Where is all the M&A? According to the recently released Bank Director & Crowe Horwath LLP 2013 M&A survey, two of the primary barriers to buying other banks are concerns over credit quality and unrealistic pricing expectations of sellers, both of which we’ll examine in more detail.

Credit Quality Concerns

There is a direct correlation between the level of nonperforming loans and the number of deals that are realized. The following graph illustrates the pattern between nonperforming assets (NPAs)/loans and other real estate owned (OREO) and the number of deals announced in any given year. As the graph indicates, when the level of nonperforming assets is high, the number of announced deals is low.


The period most similar to that of the past several years is the early 1990s, when the savings and loan crisis occurred and the government established the Resolution Trust Corporation to resolve a number of failed institutions. Today, the level of nonperforming assets is still too high for many acquirers to accept. While the level has improved from its high in 2010, it is still higher than historical norms. Until loan quality significantly improves, buyers will find it difficult to pay the prices sellers are requiring.

Unrealistic Pricing Concerns

Pricing concerns from sellers is another frequently mentioned reason for deals not occurring. While sellers are not expecting the high levels that occurred pre-crisis, they aren’t willing to sell for a low price. The following graph illustrates the distribution of price to tangible book value achieved by sellers for the period beginning in January 2011 and going through Dec. 7, 2012.


While deal prices have improved and sellers in some regions have been able to achieve prices in excess of 200 percent price to tangible book value, the majority of the deals have closed at below 110 percent price to tangible book value, and almost 40 percent of the deals have been below 100 percent price to tangible book value. For many markets, a price to tangible book value of 140 to 150 percent would be the new “gold standard.” Until this pricing ratio average improves, though, it doesn’t seem likely that the number of deals will increase dramatically.

Looking Ahead

So where will the number of deals be in 2013? Any prediction is worth the ether it’s posted in, but all indications suggest that deal volume will continue to be steady but well below the significant levels of consolidation predicted. Through Dec. 2, 2012, the number of announced whole bank deals was at 209. During the pre-crisis years of the 2000s, the number of whole bank deals per year was approximately 225 to 250. So 2012 will finish with levels below the pre-crisis normative levels, but up from 2011. In the M&A survey, we asked respondents to provide us with their expectations as to where deal volume will be in 2013. The following chart shows that the majority of the respondents believe that deal volume will be less than 200 deals, with 80 percent estimating deal volume will be less than 225 deals in 2013.

Deal Volume Expectations for 2013









While the wave of consolidation might eventually occur, all indications, including banks’ own expectations, suggest consolidation levels likely will remain status quo for the time being.

Eight Changes To Expect in 2013

The past year saw the banking industry recover significantly from the fallout of bad loans and poor asset quality. While profitability improved, the impact of new banking regulations began to take effect, including provisions that cut debit fee income for banks above $10 billion in assets. So what is in store for 2013? Bank Director asked industry experts to answer the question: What will be the biggest change in banking in 2013? Here are their responses:

Taxes and M&A: Five Things to Think About

taxes.jpgTaxes typically are one of the largest expenses on a bank’s income statement and often represent a substantial balance sheet asset or liability. When considering a merger or acquisition of a bank or bank assets, it’s critical to review not just the target’s tax situation but the potential resulting tax situation of the acquirer. Following are five key areas to consider.

1. Can the deal be structured to achieve a better tax result?

You can buy a target’s stock or assets or, under some circumstances, buy its stock and treat the transaction as an asset purchase for tax purposes. In an asset purchase, the tax basis of the acquired assets is adjusted to the purchase price. When paying a sizeable premium, asset treatment allows a tax deduction of resulting intangibles like goodwill. In a stock transaction, the target’s tax basis in its assets carries over to the acquirer; if that basis is higher than the price to be paid, stock treatment might be better, particularly if the target has any tax loss or credit carryforwards. Carryforwards are obtained only in a stock transaction, however an acquirer’s ability to use the carryforwards (and potentially other deferred tax deductions) is limited under the “ownership change” rules of Internal Revenue Code Section 382. So carryforwards might not be as valuable as you think. (For more information on section 382 and related issues, read “Will Your Target’s Tax Attributes Survive the Acquisition?”)

2. Are you inheriting target tax liabilities?

When buying an entity’s stock you acquire its known and unknown liabilities, including its tax liabilities, even if the deal is treated as an asset purchase for tax purposes. So in a stock deal, it’s critical to confirm that the target is up to date on filing and paying all required taxes. This includes income taxes as well as backup withholding; payroll, property and use taxes; and any other taxes particular to a state or local jurisdiction. Be sure someone in your organization is investigating all these non-income taxes. Review the accuracy of all tax filings and the positions taken in returns to determine if a tax authority audit would subject you to unexpected tax, interest and penalty assessments.

3. How will the deal affect your own tax situation?

If you are issuing stock as deal consideration, you’ll want to consider whether you’ll cause yourself, not just the target, to trigger a tax ownership change. These days it’s more common for acquirers to have tax loss or credit carryforwards of their own, which make the acquirer subject to the tax ownership change rules and, potentially, their limitations. Your resulting state and local tax profile should be carefully considered, especially if the target has tax filings or business activity in states you currently do not. Will you leave acquired entities as free-standing subsidiaries or merge them into other group members? Such moves could substantially increase or decrease state and local tax expense. If you, or the target, employed any tax minimization strategies, the effect of the transaction on these strategies should be considered.

4. Will your tax administration burden increase?

Will the burden (and expense) of administering your tax-related responsibilities increase or decrease once the transaction is complete? Consider changes in the number of returns to be filed or additional data tracking and tax calculations required due to inherited or resulting tax positions. Sizeable acquisitions, in particular, can quite literally tax the capacity, skill and knowledge level of the staff currently responsible for tax matters. Factor anticipated additional costs or efficiencies into your deal analysis.

5. Have you covered all the miscellaneous bases?

Be sure the transaction agreement protects you from as many contingencies as possible. For example, if buying a single bank entity from a multibank holding company, make sure the agreement clearly states who is responsible for the target bank’s tax filings and liabilities up to and through the date of closing, particularly if pre-closing tax filings are audited and adjusted. Is it clear who is responsible for information reporting related to the acquisition year? Address responsibilities and deadlines for sharing information, wrapping up any final tax returns, and filing any deal-related tax elections or forms. If the target is an S corporation, address the unique issues that can arise. Last, consider the effect of any nondeductible transaction costs or change-in-control payments.

Taxes can be a big deal in any merger or acquisition transaction. Do your homework upfront to avoid surprises.

Strategic Mergers: An Alternative in a Challenging M&A Market

vows.jpgWith the credit crisis wounds still raw for many banks, management and directors have become more risk-averse. Organic growth has stalled at most banks, forcing bankers to seek alternative avenues to return shareholder value. Furthermore, today’s low bank valuations have precluded many institutions from exploring a sale, piquing interest in strategic mergers (i.e., stock-for-stock exchanges). These transactions can enhance shareholder value at both institutions, while creating a more saleable franchise. That said, strategic mergers are not without complications and must be structured properly with a complementary partner in order to enhance shareholder value.

What is a Strategic Merger?

Strategic mergers sometimes are labeled mergers-of-equals, although this is usually a misnomer. Rarely, if ever, do two banks merge on completely equal terms. And thinking in terms of “equality” in mergers can be counterproductive. The more appropriate question is whether shareholders would be better off on a standalone basis or with a share of a combined entity. Often strategic mergers involve institutions of differing sizes and strengths, and while the two merging banks may end up with different ownership percentages, shareholder value can still be enhanced by improving the competitive position in a market, leveraging economies of scale, increasing pro forma earnings per share (EPS) and creating a stronger combined management team. In other words, a strategic merger is a marriage in which shareholders of both banks are better off on a combined basis than by remaining independent.

Rationale for Strategic Mergers

Strategic mergers tend to work best between two healthy banks struggling with growth in the present environment. Many banks have cleaned up their balance sheets and are beginning to think about future growth prospects and exit strategies. The trouble is that today’s historically low interest rate environment, anemic loan demand, and escalating operating costs due to new regulations have made it extremely difficult for many banks to grow earnings organically. And with bank valuations in the doldrums, boards are reluctant to sell. Given these realities, the key to maximizing value three to five years down the road will be building a franchise with critical mass and a substantial and consistent earnings stream. Combining two like-minded institutions with similar goals today can create a franchise better positioned to command a more significant premium in a sale down the road.

Value Creation

Generally, strategic mergers occur between two banks within the same market, which allows for greater economies of scale and higher efficiency. Often banks with differing operating strengths will combine in strategic mergers to create a more diversified and valuable franchise. For instance, a terrific loan generator with a high loan-to-deposit ratio might combine with a bank that has a deep core deposit franchise and low cost of funds. The combined institution could realize greater spread income than either bank could achieve on its own.

Whether shareholders of an individual bank will be better off in a combined entity depends on the exchange ratio of shares that is negotiated. Many factors determine the proper exchange ratio, including EPS, tangible book value (TBV) per share, franchise and asset quality, etc.

In addition to the simple economics that make strategic mergers so attractive, they are one of the only ways in today’s environment to amass scale and improve franchise value. Generally speaking, larger institutions command higher valuations. In fact, according to SNL Financial, banks with more than $1 billion in assets sold for, on average, 251.6 percent of TBV over a 10-year period compared to 179.1 percent for banks less than $1 billion. Clearly, not all banks must reach $1 billion in assets to maximize value, but larger franchises tend to attract more interested bidders and drive up valuations.

Challenges of Strategic Mergers

Strategic mergers can be difficult to structure and both banks need to acknowledge they are entering a partnership in which goals must be aligned. Besides the exchange ratio, which can be daunting to establish, other structural challenges remain in strategic mergers, including: which bank becomes the surviving legal entity, which bank becomes the surviving brand, how many board seats each bank retains and how management is restructured. These “social” issues can derail a deal no matter how compelling the economics might be. It’s critical to discuss all these factors before walking too far down the aisle. Otherwise, that strategic partner that made so much economic sense could leave one standing alone at the altar.

For a more in-depth analysis of strategic mergers detailed in a recent Hovde Group publication, please click here.

A Checklist for Buyers and Sellers

Traditional M&A activity has started to increase in certain geographies, albeit more slowly than anticipated in some states. Due to the tough economic and regulatory climate, organic top-line growth is proving to be quite difficult. In this regard, mergers are becoming one of the more popular strategies to increase earnings with cost-saving synergies as a key driver.

Molly Curl, a bank regulatory national advisory partner at Grant Thornton LLP, lays out the key considerations in an M&A transaction for both buyers and sellers.

Factors that come into play when deciding whether to buy or sell

1. Take stock of your goals and hone your strategy going forward. Work with your key stakeholders to clearly define your organizational goals. Ask critical questions like:

  • Are we focused on being a community bank, willing to accept lower current returns?
  • Are we working toward a liquidity event for our owners?
  • Are we striving to move from a midsize bank to a large regional or national bank?

2. Make sure to consider what is attractive in a bank (or acquisition/sale) when mapping out strategy. Consider factors such as core deposits, loan portfolio, asset quality, franchise value and tangible book value.

Keys for success for sellers

1. Understand the needs of the stakeholders.

Set realistic expectations. Ensure your board and other key stakeholders understand the current M&A market, the risks and rewards, all communications from interested acquirers and views of third parties and advisers.

2. Clearly communicate the M&A process to your organization.

A clear and honest communication of the M&A process to your organization will help pave the road to a smoother and more successful transaction. This should include confidentiality agreements, a full deal information package and all related contracts.

3. Understand general transaction pricing and the mechanics.

Consider how your organization fits into the buyer’s profile, including cost of funds, deposit profile, customer base, loan quality, operating costs and growth projections.

4. Optimize your financial picture based on M&A.

  • Clean up the balance sheet to the best extent possible.
  • Understand and assess potential contingent liabilities.
  • Develop pro forma financials for interested buyers.

5. Consider your interactions with potential buyers.

  • Does the buyer’s motivation align with your organizational goals?
  • Measure and understand levels of interest—keep lines of communication open.
  • Understand the financial and operational strengths and weaknesses of potential buyers.

Keys for success for buyers

1. Tie transactions to strategy.

Review your overall business and acquisition strategy and goals, including acquisition criteria. Will the transaction help you achieve your end strategy?

2. Communicate with regulators.

It’s critical in today’s climate to keep regulators top of mind. Keep the lines of communication open and honest, such as where you want to expand. Share all aspects of your strategy.

3. Assess your systems.

Your systems must be scalable to handle the onslaught of new data and must be flexible to handle different data in different forms.

4. Have an acquisition team in place.

Designate a project manager or M&A leader to coordinate all facets of the transaction; your team must be multidisciplinary. Form a due diligence team that will be prepared to strike at a moment’s notice and set forth a communications strategy to keep your existing and soon-to-be acquired customers as well as your employees informed.

5. Identify your target “wish list.”

Consider what your organization should look like in a few years. Use this long-term vision to define your overall strategy and incorporate it into how you identify the right targets. 

6. Prioritize customers and human capital. Prioritization comes down to these three processes:

  • Stabilize continuing customer relationship and business continuity by establishing a customer management process during the transition to protect existing relationships and revenues.
  • Reduce workforce with stability and efficiency by setting performance metrics during the transition, and eliminate costs from duplicative processes and positions.
  • Integrate senior executive and key sales leaders by remaining customer and business-focused during the transition. 

Intangible Benefits of FDIC Deals

deal.jpgWhen I attend conferences or speak with investors, everybody wants to know about the financial consequences of doing an FDIC-assisted deal. My bank has done eight of those deals. To be fair, the financial advantages of buying failed banks are the driving force behind the large amounts of institutional capital that has gone almost exclusively to acquiring institutions. Tracking and reporting on progress relative to expectations will continue and it should.

What is becoming increasingly clear, even to a number cruncher like myself, are the intangible benefits that have been realized during this strategy. With many bankers starting to wonder if the opportunity to participate is over, or at least drawing to an end, maybe it’s appropriate to give some airtime to some these intangibles.

Opportunity to be on offense with the FDIC

We all understand the healthy, but defensive, give and take between bankers and regulators. In today’s environment, with so many banks on the FDIC’s problem bank list, the defensive tone is more pronounced.  These deals have allowed us to work offensively with the FDIC, to partner with them in the resolution of our industry’s problems. I am not using the term “partner” lightly here because it is exactly that kind of relationship that they want to foster with acquiring institutions.

This spirit of partnership does not mean that we escape serious oversight from the resolution and supervision departments of the FDIC. As with most successful relationships, though, the congeniality is maintained with consistent communication and a thorough understanding of each party’s goals. More face time with our primary regulator has been very good.

Opportunity to build or rebuild a workforce

Chances are your bank has made some hard decisions over the past few years that would not have been considered during the boom years immediately preceding the current economic period. Most banks, even the super-regionals, have rationalized virtually every expense line and every strategy to ensure that the timing was right and appropriate given the circumstances.

The hardest decisions bankers have had to make relate to staff reductions.  People matter in banking because this is still an industry where customer relationships count.

Not to repeat myself, but this “offensive” strategy has improved the morale of our bank, relieving some of the sting of the staffing decisions. Because of the increase in loan and deposit customers, we have been able to rehire some past employees and transition other idled employees to help manage those assets.  We have been able to build out new divisions and even hire new staff in both line and corporate functions.  And there is something real about the energy that new employees bring to a company, along with new ideas and best practices.

Opportunity to build M&A expertise

How many times have you heard in the last two or three years about the record levels of consolidation taxiing down the runway? It does seem likely to us, given the perception that banks need more operating leverage to counter all of the revenue headwinds (weak economic recovery, new regulations, etc.). The rapid improvement in operating efficiency that investors and boards want to move the needle on earnings is most easily accomplished through consolidations.

For an institution that plans on being an acquirer instead of being acquired, the FDIC deal strategy has been an excellent opportunity to build out an M&A line of business. Obvious divisions here include special assets and our data conversion team. These teams have mastered certain “transitional” functions that are vital to getting us to the next stage.

It is the cultural M&A expertise that has been fine tuned. “Ripping out” the acquired company’s culture with all due haste and replacing it with your own culture seems simple enough. Doing that and still having a team that wears your jersey with pride is more difficult. Our other teams have learned how to “sell” our cultural points (H/R systems, credit administration processes, sales culture) in such a manner that our new employees WANT to follow us.

As I mentioned at the outset of this article, the financial benefits deserve serious discussion.  But these and other intangibles will have their 15 minutes of fame someday. They will impact the bottom line in ways that are hard to quantify right now. 

Joining Forces to Capitalize a New Bank

Private equity funds are playing an increasingly vital role in recapitalizing the U.S. banking industry. A unique example of this trend occurred earlier this year when four independent PE firms joined forces to make a $160 million capital investment in Birmingham, Alabama-based AloStar Bank of Commerce, a new institution which acquired the deposits and certain assets of the failed Nexity Bank from the Federal Deposit Insurance Corp.

Advised by FBR Capital Markets Corp. and the law firm Davis Polk & Wardell LLP, AloStar successfully negotiated an 80/20 loss-sharing agreement with the FDIC on $384.2 million in assets. The four PE firms are Fortress Investment Group, Oaktree Capital Management, Stone Point Capital and Pine Brook Road Partners, and each owns approximately 24.9 percent of the company.

FBR worked closely with AloStar’s founders, Chairman and CEO Michael Gillfillan, who previously was chief credit officer and vice chairman at Wells Fargo & Co., and Executive Vice President Andrew McGhee, the former head of asset-based lending at SunTrust Banks Inc. AloStar is a banker’s bank that will use consumer and commercial deposits collected nationwide largely over the Internet to fund an asset-based lending program for small- and medium-sized businesses. Recently, FBR Capital Markets Senior Managing Director Ken Slosser talked about the deal and its importance to the industry.

What are the unique aspects of this transaction?

We believe this is the first time that four private equity firms bid on a failed bank through the resolution process and won. We also believe this is the first time that the FDIC has approved a business plan for a bank receiving assistance that will use, as a primary deposit strategy, a nationwide Internet deposit gathering system to fund asset-based lending for small businesses across the country. There have been a whole host of transactions, both assisted and unassisted, where they have not allowed Internet deposits as a primary funding strategy.

Was it hard getting four private equity firms to agree on a transaction?

It was very difficult to raise capital for Nexity without government assistance because of the level of perceived losses in its loan portfolio. Once it was decided that any transaction would need to involve an FDIC receivership action, and we started working on an assisted deal with Michael Gillfillan and Andrew McGhee at AloStar, it was very straight forward to assemble the private equity group. All four firms really worked well together evaluating the opportunity, although they each evaluated the opportunity independently and their boards approved their bids.

Was there anything else about this deal that you thought was distinctive or unusual?

The regulators, including the Federal Reserve and the Alabama Banking Department, worked very closely with the old Nexity management team and the new AloStar team for months. They were unbelievably helpful in terms of evaluating and facilitating this transaction. We felt that the regulators were partners in solving a problem and they worked with both management teams to find the lowest cost solution for a troubled bank. I really believe that was critical.  We also had an outstanding management team at AloStar that had the depth of experience to work through the deal and also had the expertise to implement the new business plan.

Why is this deal important to the rest of the industry?

It demonstrates that thoughtful and creative solutions involving private equity, when they are appropriately structured, will be well received and approved by the regulators. I think the private equity partners here were terrific and cooperative and very helpful. They put in $160 million and were thoughtful and constructive about how that was done.

Bank Stocks Rise as Loan Losses Decline

How do investors see the banking sector right now, and why are they buying bank stocks?

Most of the tone is fairly optimistic and bullish. You want to own bank stocks when you’re going through a credit recovery cycle. Mergers and acquisitions is another big theme that stimulates investor interest.

What are some of the factors that will drive bank stock valuations in 2011?

It’s early yet, but the names that are outperforming so far are those that still are seeing declines in nonperforming assets, declines in reserve levels and net interest margin improvement.

How will M&A drive stock values?

With valuations at trough levels for some decent banks, not specifically broken banks, but banks in good markets, with good deposit share, I think there is a great investment opportunity to own a basket of potential sellers.

How much M&A activity do you expect this year?

I expect considerable amount and even more in 2012 and beyond.  My outlook for the economy is still going to be low growth, especially for the banking sector.  Banks are going to have to grow through consolidation. They’re going to have to grow through collapsing the cost structure.

It’s been a couple of years since we had a strong M&A market.  Do you think investors still remember that not all acquirers are created equal and that an acquisition can destroy value if it’s not executed properly? 

We’re reminding investors about exactly your point. You want to be in a position to own the acquirers that have shown a track record of managing the capital base well, extracting earnings power, getting the costs out, and being mindful of the cultural differences within the banks.  I think this year will be a year where any M&A is almost good M&A, but a higher level of scrutiny will be placed on deals the further we get into this cycle.

How did investors react to the Dodd-Frank Act?

The elevated expense structure is probably going to prevent banks from achieving 15 percent return on equity or 1.5 percent return on assets, which they historically produced. You’re going to get volatility in the near term. Partially, that’s because we don’t really know what the profit model is going to look like for banks.

How do investors feel about the higher capital requirements for the industry?

Investors think the capital levels are too high, and they want to see these banks deploy it or leverage it as much as they can. The investment community has much more foresight and vision than the regulatory community. The regulators are looking in the rearview mirror and saying, “We need to build capital now.”  I think the investors have it right, quite frankly, and the regulators have it wrong.

In an environment like this, I thought we’d see more emphasis on efficiency.  I can remember a time, five to seven years ago, when there was a premium in your stock if you were a low-cost operator. Is this something that investors are focused on?

Banks are not very good in general about finding ways to cut the expense line when they see revenue decreasing. I would argue banks, in general, are still overstaffed. From a technological perspective, they still haven’t embraced efficiencies in processes and procedures. I think that’s a theme that’s not being talked about very much right now, but I think it will emerge as a much more important factor as we continue with low revenue growth.

Are there a couple of banks historically that have a reputation for being good low cost operators?

The one that comes to mind is (Paramus, New Jersey’s) Hudson City (Savings Bank). These guys operate at an 18 to 22 percent efficiency ratio.

Forward-Looking Statement

“With valuations at trough levels for some decent banks—not specifically broken banks—but banks in good markets, with good deposit share, I think there is a great investment opportunity to own a basket of potential sellers.”