The Venue: The Phoenician, Scottsdale, Arizona. With the miserable winter most of the country has been experiencing, what could be better than a conference in Scottsdale in January. ’Nuf said.
The Schedule: The two-and-a-half day conference felt about right length-wise, but I gotta say the 8:00 a.m. kickoff on a Sunday morning was a bit of a fog after my prior night’s festivities. Really?! Sunday?! Aren’t we supposed to be deep in prayer or reflective thought on the “day of rest?”
The Garb: Despite the exhortations in the conference guide that attendees should be in resort casual, it never ceases to amaze me that bankers still take themselves so seriously. Seventy-seven degrees at one of the most gorgeous resorts in the Southwest and I would estimate more than half the male attendees (female attendees were hard to come by overall) were in suits. In fact, it was almost impossible to find someone not in a suit or sport jacket. I can understand wearing a suit to project an air of importance to a customer, but to each other? Spoiler Alert: All the attendees are in on the game. What we do is really not that self-important; we borrow money from businesses and consumers and lend it back to them.
Attendees: Not to overgeneralize, but there must have been a 3-for-1 coupon for doughy white males (that own suits). There were a handful of female executives, but they were few and far between and most I encountered were directors, not bank management. While poking fun at attendee diversity, I have to admit I am guessing that for worse (not “for better or worse”), the attendee list is a snapshot that is fairly reflective of who sits in bank board rooms and holds the CEO or CFO spot at most community and mid-size banks. Bankers, it’s time to think about a bit more diversity, with the board room being a good place to start.
Food: I have come to the firm conclusion that attending conferences leads to the aforementioned “doughiness” that afflicts many bank execs. Breakfast. Post-breakfast break with snack. Lunch. Post-lunch break with snack. Cocktail party with hors d’oeuvres. Dinner on your own. How is one to get by eating only six times a day?
Where’s Waldo? While the conference is called “Acquire or be Acquired,” my suggestion to the good folks at Bank Director would be to shorten the name to “Acquire.” While the cool AOBA acronym would be lost, the new name would more accurately reflect the mindset of the attendees. In all the years Cornerstone Advisors has been doing merger integration work, for every acquire-er, there has been a corresponding acquire-ee. In my wanderings for the two and a half days, the “ee’s” were harder to find than a Hindu linebacker.
Bigger is better. While this was a bank conference and not a Tupperware party, this theme rang loud and clear for the better part of three days. Granted, many of the presenters are i-bankers who make their living by doing deals so they have vested interest in encouraging the attendees to merge their banks. I do wish, however, that some presenter had pined that there is still a place for mid-size banks that grow organically and have deep roots in the communities they serve.
$5 billion is the new floor. Presenters stated that the high costs of just keeping the doors open (regulatory compliance, technology investments, branches, etc.) were going to continue to drive consolidation in the market and that the threshold to be competitive is quickly creeping up to the $5 billion in assets mark. The $5 – $50 billion banks will have the best currency and will be the most active acquirers. Frankly, this is one where I think the prognosticators were spot on. Between banks and credit unions, we certainly don’t need 13,000+ institutions to serve our basic banking needs. And I do think the most active deals will be in the $5 – $50 billion space. There are so few banks with more than $50 billion in assets that the mega banks at the top of the asset heap don’t have any targets to go after that would make a material difference.
If you are in the Midwest, pack it up and call it a day. Outside of some bright spots in Chicago and certain Texas markets, all of the growth is occurring on the coasts, and that’s where most of the larger deals are happening. Rural markets are in a freefall, and banking in the Midwest was portrayed as a zero-sum game of house-to-house combat. Having quite a few Midwest clients, Cornerstone does see our banks looking at the demographic shift of people and businesses to the metro markets and the coasts. Bank CEOs are gleeful that the big banks are pulling out of their rural markets at the same time they scratch their heads and wonder why.
The most profitable franchises in the industry are $2.5 to $5 billion. Because of the exhortations that bigger is better and $5B is the new $1B, I was surprised to see this, but the data bore it out.
Pricing expectations are coming down to earth. Boards and management have a more realistic expectation than in earlier cycles (e.g., two times book is a multiple practically all banks would take). Investors want a three-year break even to tangible book value dilution, but interestingly about 40% of deals hit this target. I would agree that price expectations are finally rightsizing and there was LOTS of data showing how many deals get done at or below book. Of course, that’s not to say I don’t sit in front of plenty of boards/management teams at strategic planning sessions that don’t think they are as deserving as City National of the 2.6x tangible book that RBC is paying.
All deals are good deals. I really liked the frank advice Frank Sorrentino, chairman and CEO of ConnectOne Bank, gave to the audience: “All models bankers put together say it’s a great deal… and it might be for someone… but not necessarily your bank.” He then went on to add, “The most important deal you do is the one you don’t.” Jack Kopnisky, president and CEO of Sterling National Bank, followed this with a gem: “A good deal dies three times.” Their points are good ones. The investment banks make money when a deal is done, so approach each overture, each model, and each projection with a healthy degree of skepticism.
Technology and payments contracts can have a major impact on a merger and potentially squirrel a deal. Banks that are positioning themselves to be sold need to pay particular attention to the big dollar contracts they sign with technology and payments providers. I can’t tell you how many stories I have heard from i-bankers of deals heading south because of punitive liquidated damage/early termination clauses. These fees can quickly climb to seven figures. On the flip side, on sizeable mergers the combined volumes can easily lead to seven figures of savings with the vendors. The problem: i-bankers don’t understand this world and what a bank should be paying.
Many mergers of equals never meet expectations. At the end of the day, too many senior managers stick around, and discipline is poor in attacking efficiencies. As one of the presenters put it: “You can’t do an MOE and keep all the employees.”
Being a mid-size bank is the best place to be! Okay, I admit it. This was my takeaway after attending the conference. But I truly believe it. Banks in that $1 – $50 billion sweet spot have the best of both worlds. They are the best places to work, so they should be attracting the best bankers. No big bank politics BS and no little bank “I wear 10 hats and can’t get anything done.” The mid-size banks can offer practically all of the products and services of big banks but still retain their customer intimacy and community involvement. Relationships actually mean something. And, most importantly, they are big enough to stick around for the next 20 years without being a Goliath.
All in all I am a conference naysayer, but I have to admit that Bank Director does a really nice job with this one. The attendees are all directors or very senior people at their banks. The content overall is quite good with some limited exceptions (the closing all-attendee session called “The Butterfly Effect of Technology on Banks Today” had people headed for their box lunches by 10:50 a.m.). And the folks at Bank Director are super personable and great hosts – good southern roots is my guess. Maybe I’ll see y’all there next year.
All for now.
A special thanks to Steve Williams for his contributions to this article.
Seven figures is a big number. Why wait until the moment of truth to discover whether you are carrying numbers like that in the “plus” or “minus” column?
Cornerstone Advisors negotiates vendor contracts for a living. We know what a bank should be paying.
Whether you are considering a merger or just wondering if you’re getting the best price and terms from your vendors, we should talk.