Transcript
On deck, a new episode of Cornerstone Advisors Plugged In. This one is with the CEO of WesBanco, someone who I have to think will be cheering “War Eagle” this college football season when Auburn gets back on the field. I’m going to start this one off with a proper Auburn shoutout.
Are you trying out for the cheerleading team? That was awesome.
War Eagle back to you as well. We’re hoping for a good football season this year.
Steve, the beauty of having worked in Nashville, Tennessee, for 13 or 14 years alongside some great SEC fans is that I know how passionate the Auburn Tigers fan base is. There’s no way I was going to bring Jeff Jackson on without giving him a proper shoutout.
Jeff is an Auburn undergrad and, at Thanksgiving, probably doesn’t sit with a lot of Crimson Tide folks.
Not many do.
Not to offend any of our Alabama friends, I played golf with Jeff earlier this year at Bank Director’s Acquire or Be Acquired Conference. I want to give everyone a warning: if this man ever asks you to play golf, be careful. He can hit the ball a long way, and if you’re playing a skins match, you might lose some money to him.
Full disclosure out of the way, we’ve got a good golfer on the pod with us today in addition to a banker who is part of one of the big headlines in our industry right now. Jeff, great to have you here.
Thanks for having me. I’m excited about talking about banking and all the good things going on with WesBanco and the industry.
We’ve got a lot of good stuff going on. In the spirit of rolling down the fairway and taking some tracks off the shelf, I have five songs to keep our conversation moving. Ideally, they’ll be timely, relevant and keep things upbeat. We’ve got David Bowie, Aerosmith, Bachman-Turner Overdrive, the Doobie Brothers, and Tom Petty and the Heartbreakers to keep things spicy on this episode of Plugged In.
That playlist has a classic-rock, Southeast-plus-Midwest kind of vibe, which is great for the deal Jeff is going to talk about today.
I had to get the classics in here because we’re going to be touching on some classic banking themes over the next 20 minutes or so. I’m up in New England at the moment, Jeff is in the Midwest, and Steve is out in Arizona, so we’ve got the country covered.
Steve and I have done a lot of strategic planning over the summer. Our team at Cornerstone has been gathering some interesting insight into where the industry might be moving, but we wanted to go to the source and talk to Jeff about what he’s thinking and seeing.
Typically I ask the first question, but since Steve Williams is a big David Bowie fan, I thought I’d give him the opportunity to kick things off with an existential question.
Give me the song first.
Steve, come on. You’re not checking your set list. We’re doing “Changes” by David Bowie.
There’s been a lot more use of the word “existential” lately, Jeff, about what looms for community and regional banks. A lot of it relates to growth. When investors are on the line with you and your CFO, what’s the growth strategy, especially as it relates to funding, liquidity and that good old deposit franchise? What’s your take on growth as it relates to the lifeblood of a financial institution, deposits and core deposits?
It’s a great question. All banks are dealing with it today. It’s still very competitive, and part of it is interest-rate related.
At WesBanco, we’ve been fortunate in growing deposits. We were up pretty well this year, and I feel like the back half of the year is going to be just as good. That’s focused on relationships, but it also comes from having a core retail franchise. We have more than 190 branches today, and we’ve really leveraged those branches to build relationships.
In the past, we were more loan-focused because we were very flush with deposits prior to the SVB banking crisis last year. We’ve shifted toward more relationship building, and we’ve seen very nice deposit growth because of our retail footprint and some of the changes we’ve made.
We’ve also built strong digital products. If you’re going to be a strong deposit gatherer, you need great digital and mobile products that customers want. We rolled out a new WesBanco One account with a lot of features that we provide for free. It has early paycheck access, a cash overdraft product, credit scoring and a great mobile app. We’re adding about 9,000 accounts a month and seeing nice pickup there.
On the commercial side, we’ve been aggressive about going after the full relationship. Our loan-to-deposit ratio is around 90%, so we can still do a lot of lending, which also brings in treasury-management business and deposits.
The economy and banking evolve. Two years ago, we couldn’t get rid of deposits. You had banks running deposits off. Going into the crisis in March 2023, the back half of 2022 had people trying to get their costs down. We weren’t one of them, but I think we’ll see another shift.
When I look at a lot of bank balance sheets today, many banks have very high loan-to-deposit ratios. They may say high 90s, but if you take out brokered deposits, they’re easily over 100%. Some of that is caused by the Fed pulling money out of the system. Some also comes from banks that do a lot of commercial real estate lending.
A lot of banks, including ourselves, were getting heavy payoffs into the permanent market, including CMBS. When rates increased, many real estate developers stopped signing up for 30-year money at 7% or 8%. They’re waiting for those rates to come down before they move into the permanent market. In the meantime, those loans continue to sit on bank balance sheets.
That’s one reason you see high loan-to-deposit ratios putting pressure on deposits. You have all these banks competing for deposits at higher rates, which hurts net interest margin.
I don’t know what exact interest rate will trigger the change, but when rates come down to a level that makes more transactions move into the permanent market, I think some of this deposit pressure will ease. You’ll see banks start moving below 100% loan-to-deposit ratios. We’re already well below that. At that point, deposit pricing should start to adjust.
All these community banks that can’t lend because they’re fighting for deposits at 5% or 6% will see the landscape change. Is that the end of next year or the following year? I don’t know. I think commercial real estate balances will drop, and you’d hope that’s replaced by new volume or a pickup in mortgage activity if rates drop. That’s how I eventually see this playing out, with deposit competition waning as loan balances come down.
Good point. That’s the organic-deposit-growth side. A lot of folks have also been waiting for rates to be the match that sparks more M&A.
Jeff used the word “evolve,” and I think “evolve and grow” is a theme I’ve started to pick up on in my travels. Since I’m up in New England, I’ve got to go with Boston’s own Aerosmith and “Sweet Emotion.”
Last year, nobody knew if bank M&A was going to come back. We’ve seen a few notable transactions announced since the start of the year and a few more recently. Full disclosure, we’re not talking here about WesBanco’s proposed merger with Premier. That merger doesn’t have regulatory or shareholder approval yet, although there is information in the public domain.
We’ve got the CEO of WesBanco sitting here, someone who has been in the M&A game for a while and understands that staying competitive and relevant sometimes allows you to find an attractive, complementary dance partner.
We wanted to ask about your outlook on the 2025 M&A market. Where do you see things potentially speeding up, or conversely pulling back?
A quick footnote for listeners. This is an approximately $18 billion organization combining with Premier to create a company of roughly $27 billion. This is a very high-profile deal in the market right now.
We talk about growing all the time. I think anybody who is part of a company wants to be part of a growing organization.
We’re very excited about the Premier acquisition. They have a lot of great things, including their culture, footprint, leadership and the type of business they do. Those things made it very attractive for us. We announced the acquisition at the end of July, we’re going through regulatory approval now, and we’re targeting a close in the first quarter next year if everything comes together.
Talking about M&A in general, I think activity will only pick up. You could almost say it’s like interest rates two years ago. They could only go up, and I think M&A activity can only pick up from here.
In the landscape we look at, there are a lot more sellers than buyers. If you’re a buyer, it’s a great time to be looking. There are multiple reasons for that.
Bank valuations are still somewhat depressed. You could say there’s upside, especially if rates start to decline and we see net-interest-margin expansion.
There are also several factors that make banks more likely to become sellers. The age of the CEO matters. The age of the board matters. Are they up against a regulatory hurdle, whether that’s $10 billion or $100 billion? Do they have funding pressure? Loan-to-deposit ratios are driving some banks to consider selling when they might not have in the past.
Some banks that didn’t think they were sellers a year ago are now looking at the road ahead and saying, “If I have to keep raising deposits to grow and get back to where I was at the end of 2022, that could take three or four years.”
Then they can look at a partner and say, “I can join a great company like WesBanco, trade their currency for mine, and have more running room, a nice dividend, a strong leadership team and a franchise that can move forward.” You can be better together as one.
I think M&A will continue to increase, especially among banks that can buy. If you’re a seller, you may need to move quickly to find the right partner because a lot of buyers are already working on deals or have announced deals.
Another piece of our deal is that it’s highly accretive to earnings. Some of that comes from interest-rate marks. One thing people may not think about is the value created when an acquisition marks loans to market.
Say a bank put 30-year mortgages on its books at 3% or 3.5%. Everybody loved that at the time, but banks don’t love having those assets on their balance sheets today because deposit costs may now be above 3% or 3.5%, and those mortgages pull down net interest margin.
In an acquisition, those loans are marked to market. Those 3% or 3.5% mortgages can come onto my books at an effective yield closer to current market rates, perhaps 6.5% or 7%. They’re long-term assets that borrowers are unlikely to pay off because they have such low mortgage rates.
That’s one of the factors you don’t always think about when you’re discussing the financial and economic side of M&A.
It’s almost the new deposit premium. The purchase-accounting benefit can carry for several years after close.
Very much so.
As you guys are talking about the combined size of the two organizations, it also creates new opportunities. With that size, you can spread costs over a larger base. Historically, people have talked about size and scale being important as we continue to push the digital evolution within financial services.
I want to pivot off M&A and talk fintech for a moment. Jeff, if you look at your bio, you spent about 15 years at IBM. If I took that Big Blue experience and put it on the table, I’m sure you’d have some interesting observations. We’ll cue up Bachman-Turner Overdrive and “Let It Ride.”
When it comes to fintech, as friendly as certain companies are, others can be potentially threatening. How do you see the fintech space impacting your core commercial business?
We see a lot of fintechs more as partners, especially when it comes to commercial banking.
Part of our acquisition gives us bigger scale and invites new investors, but it also gives us the ability to look at better technologies and expand our technology base.
From a fintech perspective, specifically in commercial banking, I want to highlight the word relationship. Fintech can be very good, especially in the consumer space where there may not be as much relationship depth. I’m not sure it will ever replace the face-to-face relationship in commercial banking.
There are products we can leverage. One example is Numerated. They were heroes during the PPP and SBA lending period. We used them, and I know they have other products we’re looking at. That’s one fintech that was a great partner to the banking industry and helped get money out during COVID.
Digital signatures are another example. DocuSign and similar tools are useful partners, especially in the commercial space. Obviously, in the consumer space, there are fintechs that are competitors.
FIS has several platforms and AI capabilities that we’re leveraging. During COVID, we upgraded our core system, which allowed us to expand our APIs and do more business with certain fintechs. FIS also has its Greenhouse program, which brings fintechs and banks together. They can help validate some of those companies as well.
Technology is always going to change. We always need to be at least at table stakes. Most banks are not going to be cutting edge. We’re not JPMorgan Chase or Bank of America, where we can spend billions on technology.
The nice thing is that we don’t have to because there are fast followers, vendors and software companies that can bring equivalent capabilities to banks of our size and smaller institutions.
Listening to Jeff talk about 190 branches and relationship banking, I think some people at Chime or SoFi might say that’s yesterday’s world. But Jeff, it sounds like with a digital strategy and technology strategy, you think you can continue to compete in consumer banking with branches complemented by digital. Is that fair?
Absolutely. Branch transactions continue to drop because people do more on their phones. The flip side is that if you ask people how they chose their bank, the location of a branch is still important. They like seeing the sign. They like knowing it’s there.
With some digital platforms, you can’t walk in and talk to somebody if you have a problem. Managing money is important to everyone, and people like the security of knowing they can walk in, see someone face to face, and get a problem fixed.
That’s one of the key themes that emerges in conversations like this. Technology is a great tool, but unless you have the right teams, those tools only go so far.
My fourth big question is inspired by the Doobie Brothers and “Listen to the Music.” Describe the WesBanco model for developing your next generation of talent and leadership. If Steve and I were on your board and challenged you for a few proof points that you’re preparing the next generation of leaders, what would you show us?
That is a great question, and it’s something we talk about all the time. Any organization goes through ups and downs and evolves, but to me it all comes back to leadership. Everything hinges on the leadership of that organization.
We’re able to attract a lot of people and retain them. We retained 98.4% of our employees last year, which is one of the strongest rates in the industry. I focus on making sure we’re a very employee-friendly place to work. Newsweek named us one of the best places to work in America. We were one of only 27 banks out of thousands to receive that recognition.
Every day I think about how I can make employees’ lives easier, make them more successful, make our company easier to do business with, reward top employees and give them a great career path.
I want people to say, “This is what my future looks like at WesBanco. I don’t want to leave. I know I’ll be taken care of, I can trust the company, and I’m proud of where I work.”
We have coaching workshops and a major leadership challenge program where we do a lot of leadership training. We also have DEI symposiums and ERG groups, and I speak at those programs.
We’re also very big on succession planning. We present succession plans to the board for probably the top 50 to 75 positions in the company. We push leaders to create development plans with employees so people can ask, “What will it take for me to reach the next level? What about two levels above? Who do I need to talk to? What skills do I need to gain?”
A recent example came under unfortunate circumstances. Our head of HR passed away suddenly in June. We were ready. Kim Griffith, who replaced that person, had been with us for 20 years. She had always been in that next-person-up circle and had been gaining broad experience across the company.
When the opportunity arose, we were able to put her in the role. It’s worked out very well. She brought the group together, we’ve had no attrition because of the transition, and she’s blossomed as a leader.
It takes preparation, but it also takes communication. You have to talk with top employees and tell them, “Here’s your future. This is what it looks like. These are the things we stand for.”
We also renewed our mission, vision and pledge. I presented that to about 200 leaders and then to the whole company earlier this year. It says, in effect, “Here’s our mission, here’s our vision, and here’s the set of foundational things we’re all agreeing to build upon.”
Leadership needs to communicate that the company is about its people, taking care of them and making sure the company thrives. We focus on those things all the time.
We’ve had great success recruiting teams, whether it’s Chattanooga, my hometown, Nashville or Indianapolis. One way I judge how WesBanco is doing is to look at our second-quarter results. We grew loans in Ohio, Tennessee, Maryland and Kentucky, four different markets with very different competitors. Yet we grew in all four. That tells me our brand, culture and go-to-market approach work regardless of market.
Jeff, I appreciated spending time with you and some of your leadership team earlier this year. You model the behavior you care about, and it’s embraced by the people who can pay it forward. As you describe your leadership style, it’s a good reminder that you can’t overcommunicate, whether externally with the people you serve or internally with the people you expect to deliver every day.
One comment. Jeff talked about more sellers than buyers. It’s kind of like all the rock bands out there on their last tour because they’re approaching 80. There’s a demographic cliff coming in banking.
I think the next seller asking, “Whose paper do I want to grow with?” is going to ask whether the buyer has a talent engine.
That feels new in banking. The organizations that keep growing and increasing shareholder value will be the ones that have really figured out the talent side. What you’re putting in place has real teeth.
I agree. You and your leadership team also have to be relatable and easy to talk to. I’m always out talking to employees at every level, going on sales calls, and asking what’s wrong and how we can fix it.
I’ve only been here two years, but I can tell several stories about hearing something was a problem, saying, “Let’s fix it,” and getting it fixed quickly. That doesn’t happen in a lot of places. Things can take too much time or never get fixed.
My question is always, “How do we make ourselves better every day?” If you follow that mantra, talk to people, and they see action, it brings people closer and makes them feel good about where they work.
One thing I applaud, Jeff, is that you’ve been there two years and sound like you almost founded the bank with your passion for it. It must have been exciting to come there.
It’s a great, exciting place with a great culture. I’m very fortunate to be here and to move it forward from my predecessor, who did a fantastic job as well.
I’ve worked at different banks, and you compete against different institutions. You can ask, “What’s the best thing I can take from these different banks and how they’ve done things?” Taking the best ideas and trying to implement them is a good formula for success.
Going back to our deal, we’re very excited. Seeing the market write-ups and new price targets on our company validates a lot of what we saw when we went through the Premier acquisition process. I couldn’t be more thrilled about how things are going at WesBanco.
This has been a great conversation. Steve and I both appreciate you doing this. I have to tease you a little bit as we wrap up because we started with college football and you acknowledged being an Auburn fan.
You also mentioned different markets you serve, including Maryland. I went to Maryland for business school, and I watched the Terps beat Auburn in a bowl game this past year, so that’s the last time I can twist the knife with an Auburn fan.
You’re serving markets with die-hard loyalists. To paraphrase Tom Petty, they’re “running down a dream” every time a new college season comes around. They think it’s their year. How do you keep that good vibe going in a business as diverse as yours, where you’ve got Ohio State fans, Auburn fans and everyone in between?
Unfortunately, Auburn hasn’t been that great lately, so we’re not a big threat. I’m sure if I were an Alabama fan, I’d run into more issues.
I’m taking my daughter to Michigan next week. She’s going to Michigan.
Congratulations.
Thank you. Great school. You also saw my West Virginia cup. I’ve kind of adopted them, being at a West Virginia-based bank. And then there’s Ohio State.
I love college football. It’s my number-one sport. I also like pro football. I grew up a Steelers fan. Growing up in Chattanooga, Tennessee, we didn’t have a pro team, so I became a Steelers fan. I even had a homemade Terry Bradshaw jersey with the iron-on number 12. People used to call my dad “Mr. Bradshaw,” and he never understood why.
I love sports and college football. I hope Auburn will be better. I think Ohio State is going to be great. With West Virginia, I keep saying the schedule should be easier now that Oklahoma and Texas went to the SEC. It should be a great year with the 12-team playoff.
We’re back. When this episode drops, we’ll be a few days out from the college season getting started, so we’re going to have a lot of fun, maybe almost as much fun as we have geeking out on the business of banking.
On behalf of Steve Williams and the entire Cornerstone team, thanks to Jeff Jackson for getting plugged in with all of us at Cornerstone Advisors. It’s been a lot of fun.
Thank you for having me. It’s been a great time, and I look forward to seeing you guys soon.
Sounds great. Thanks.
Thank you.
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