Tuesday, February 23, 2021

Twitter Reacts to M&T / Peoples United Bank Deal

The headlines for subject deal, which dealmakers hope beyond all hope starts a robust bank M&A frenzy, were like the following:

(you can click on articles and tweets to enlarge)

Conversely, here are what some Twitter users thought of the deal, which starts with a factual tweet from yours truly. Keep in mind most tweets were from investors, not other stakeholders.

Any other reactions?

~ Jeff

Wednesday, February 17, 2021

Is Your Contemplated Bank Merger Anti-Competitive?

Yesterday at the ABA's virtual Conference for Community Bankers (CCB), Federal Reserve Governor Michelle Bowman gave a speech, My Perspective on Bank Regulation and Supervision. In that speech, she briefly commented on the FRB's review of merger applications from an anti-trust standpoint. She said:

"Technological developments and financial market evolution are quickly escalating competition in the banking industry, and our approach to analyzing the competitive effects of mergers and acquisitions needs to keep pace. The Board's framework for banking antitrust analysis hasn't changed substantially over the past couple of decades. I believe we should consider revisions to that framework that would better reflect the competition that smaller banks face in an industry quickly being transformed by technology and non-bank financial companies. As part of this effort, we have engaged in conversations and received feedback from community banks about the Board's competitive analysis framework and its impact on their business strategies and long-term growth plans. We are in the process of reviewing our approach, and we are specifically considering the unique market dynamics faced by small community banks in rural and underserved areas." 

The Fed's FAQs on their approach in analyzing the competitive effects of a merger say the following:

On the initial evaluation of the competitive effects of a combination: 

The competitive analysis of banking acquisitions begins with an initial screen based on market shares and market concentration for the local banking markets in which the parties to a transaction have overlapping operations. Market shares for a local banking market are based on the deposits of depository institutions in the market. The Herfindahl-Hirschman Index (HHI) is the usual measure of market concentration and is calculated as the sum of squared market shares in a local banking market. For these initial calculations, the deposits of all institutions with a commercial bank charter receive 100 percent weight and the deposits of all institutions with a thrift charter (i.e. savings banks and savings and loan institutions) receive 50 percent weight in computing market shares. This weighting indicates that the Fed doesn't think thrifts offer a full retail banking suite of products and/or they are concerned about the anti-competitive effects for in-market commercial banking. Although readers know that many thrifts pursue business banking strategies. And to a lesser degree, credit unions. Which are not part of the HHI calculation.

The Board delegates merger approval to individual Reserve Banks unless, among other reasons (i) the merger or acquisition would raise the HHI by 200 points or more to a level of 1,800 or higher in any local banking market in which the parties to a transaction have overlapping operations, or (ii) the merger or acquisition would increase the post-transaction market share for the acquiring firm to more than 35%. If these are triggered, off to Washington the merger application goes.

On how the Fed defines geographic markets:

No hard and fast rule. Many geographic markets follow Metropolitan Statistical Area (MSA) definitions or rural county lines, but some markets comprise multiple MSAs/counties or parts of MSAs/ counties, reflecting that economic activity does not always track political boundaries. Up-to-date geographic market definitions are available at the St. Louis' Fed CASSIDI database or from the relevant Reserve Bank. Banks can dispute the definition of a geographic market relevant to their application by proposing an alternative market definition and providing evidence supporting the alternative. Such evidence should focus on retail banking customers' substitution behavior (emphasis mine) or on the economic integration of the relevant economic areas for the proposed geographic market definition. 

This runs contrary to the deposit weighting of 100% for commercial banks and 50% for thrifts. Why discount thrifts, and not even count credit unions if the true concern is retail customers' ability to substitute?

And what about branchless banks? This gets to the crux of Governor Bowman's comments, in my opinion. Why do we not count virtual banks such as USAA, Discover, and Ally, or neo banks such as Chime (Stride Bank or The Bancorp Bank)? 

What I would suggest to regulators in contemplating change is to have FDIC and NCUA insured financial institutions report deposits by geography, such as Zip code, and break it down further between business and consumer. Let that be the new Summary of Deposits from which the anti-competitive effects of a merger is calculated. If you continue to weight deposits by institution type, determine first what anti-competitive risk we are trying to mitigate. Are we concerned more about business banking than retail banking? Then perhaps business deposits get 100% weighted in the HHI calculation and retail deposits get something less than that. Or, alternatively, perhaps Americans value a bank with a physical presence in the market, and therefore financial institutions with a physical presence get 100% weighted versus something less for institutions with no in-market presence. But the bank/thrift weighting scheme currently in effect does not reflect reality.

So in terms of how competitive analysis is now performed, I agree with Governor Bowman's comments. Change is coming. And welcome.

~ Jeff

Saturday, January 30, 2021

How Can Community Financial Institutions Improve? Project Management.

In this video blog, I discuss my thoughts on community financial institutions upping their project management game. In summary:

There are two types of projects: support function projects where you try to improve the gears within the bank, and customer experience projects (CX) where you meet the demands or emerging demands of your most valuable customer cohorts.

First, be selective in the projects you undertake. The ones that create the greatest value in terms of reducing resources needed to run the bank, or improve your most valuable customers' experiences.

Here are the high level steps:

1. If a CX project, determine your most valuable customer cohorts by lifetime value. Why undertake a project for customer segments that are unprofitable?

2.  Select a project team that includes executive sponsorship, mid-level leadership, do'ers (after selection), and vendors (after selection). Use a "many hands make light work" approach. Because it's true. And many hands make quick work.

3.  Evaluate and select the vendor based on their solution, support, and potential longevity. Don't be saddled by your rigid vendor management practices to eliminate promising vendors.

4.  Set deadlines. Not six months out. Think PPP fast. We did it then, we can build on that. Make sure you keep the vendor fully engaged in the process, like they promised in your contract.

5.  Maintain accountabilities. Even after flipping the "on" switch. 

The Jimmy McHugh's tour is a bonus!

Here is the actual link in case you can't click on the video:


Thursday, January 14, 2021

The Death of the Community Bank

In June of 2008 I gave a speech titled "The Death of the Community Bank" and in that speech I made predictions. Recently I was cleaning out my files and I ran into the hard copy slide deck that accompanied the speech. 

If I ignore where I was wrong then I am as guilty of willy-nilly prognostications that I sometimes think industry pundits engage in. So, below is a list of predictions I made and if I was right or wrong, or somewhere in between.

Prediction: The General Bank will become extinct. Much like the General Store fell victim to the supermarket and the lumber yard fell victim to Home Depot, I predicted the community bank that did not pick targeted customer niches or develop product expertise will meet it's doom. The anecdote I used was how the Stephen's Island Wren was rendered extinct by a lightkeeper's house cat. That might be an exaggeration, as many feral cats feasted on the flightless bird as well. Much like competitors nip at community banks' customers. 

Result: Mixed. A mid-2020 survey performed by Cornerstone Advisors showed that 51% of retail customers that opened a new bank account within the last three months did so at a large, national bank. Eighteen percent of that group opened an account at a digital bank. Two percent opened an account at a community bank. When I made that speech in 2008, there were approximately 8,500 FDIC-insured financial institutions and today that is around 5,000, a 40% decline. However, last year's top 5 total return to shareholders post had two traditional community banks on that august list. So there are community banks that bring discernable value to their shareholders and other constituencies. They can have the operating discipline and service to their constituencies to earn their right to remain independent. And I had ING Direct as an example of who might be the lightkeeper's cat to the community bank. A bank that was purchased and is now, well, extinct.

Prediction: Community Banks with < $10 billion in total assets will continue to lose market share. Here was my chart to support the prediction...

It was a pretty alarming slide. 

Result: I was right. I ran the numbers again. Banks and savings banks with greater than $10 billion in total assets control 86% of all FDIC-insured assets and 85% of deposits for the most recent quarter. The days of getting in the ring and slugging it out for market share with other community banks are done. Strategies cannot ignore big banks any longer.

Prediction: Banks with < $500 million in total assets must have superior net interest margins (NIMs) to deliver financial performance. Here is the slide that accompanied the prediction...

Result: Mixed. Banks with less than $500 million in total assets delivered a 3.82% NIM at the median for 2019, while banks above that size was 3.67%. So smaller institutions continue to enjoy a NIM advantage, but not to the extent they did in 2007. And the ROA for <$500MM banks was 1.08% versus 1.22% for the rest in 2019. I used 2019 because of the NIM compression caused by PPP loans and the outsized impact that had on smaller institutions. And I did not filter for Sub S banks, so the ROA difference was probably greater. Having said that, the ROA difference was only 14 basis points. With a narrow advantage on NIM, size is a factor to drive down costs to elevate the performance of smaller banks to that of larger banks.

Prediction: Community banks must solve for the profitability of fee-based lines of business to generate superior results. Here is the slide I used to support the contention...

Result: Mixed. If I put a column in the above chart for third quarter 2019 fee based products profit contribution was -6%. This is from my firm's profitability outsourcing service, which is mostly community banks. In a low rate environment, deposits are less valuable and therefore less profitable. In terms of fees, community banks have not solved for making this a contributing element to their profit picture, yet they remain profitable. Imagine if they did operate fee-based lines of business profitably. That would be an ROA/ROE accelerator. 

Prediction: Senior management will migrate to being strategists, coaches, and leaders rather than tacticians. Here is the slide I used on how leadership should spend their time courtesy of The Breakthrough Company by Keith McFarland.

Result: I was wrong. Although I do not have statistics, only observation. I often hear the "day job" comment regarding strategy execution. In my view, senior managers spend their time more like the first line supervisors in the slide above rather than how the then CEO of Chico's suggest they should spend their time. Could this be a factor in how slow we've moved in adapting to customer needs? Are we spending more time solving for tactical issues rather than moving us closer to our aspirational future?

How do you spend your time?

But the big mea culpa is in the title of this post. As I write, community bankers across the country are helping struggling small businesses with PPP loans, much like they did in the spring to quickly distribute this critically needed funding jolt. In the words of FDIC Chair Jelena McWilliams, community banks were the economic first responders during the pandemic. So in terms of the Death of the Community Bank, I WAS WRONG.

And thankfully so. Let's work together to keep me wrong.

~ Jeff