Transcript
Coming up, an Arizona-inspired episode of Plugged In. I'm one of your hosts, Al Dominick, along with my man Steve Williams. Anyone who's watching knows we're out of the studio, but we're still in Scottsdale, and we're doing something a little different today in advance of Bank Director's Acquire or Be Acquired conference.
We're going to see a lot of our troublemaking clients, banks, technology companies and even a few credit unions that snuck in this year. We're excited to spend some time with them. In advance, we thought we'd surface some of the things on our minds that may or may not come up on stage but are certainly near and dear to everyone's interests.
Yeah. New president, new outlook on interest rates, good and bad. I think it's going to be one of the more active true-deal discussions in the hallways than we've had in maybe three years.
New year, new conversations, but this is an industry that still deals with a lot of challenges. When I think about regulatory uncertainty, the pressures digital adoption has created for businesses to engage with their customers in consistent and repeatable ways, and merger conversations around whether teams fit and cultures are in sync, some things aren't going to change.
Other things are changing, though. It would be easy to be myopic and focus on all the problems that have to be addressed, but we like to be optimists. It's sunny out. You can probably even hear the pool opening. I don't see anyone jumping in just yet, but I bet they will soon enough.
We're going to jump into the pool with three big things, all growth-related, because this episode of Plugged In is a growth story.
And to have a growth story, we have to have some growth-related songs. What's the first one?
Well, it's Styx, and it's all around Come Sail Away. Good song. There's the lyric, "I've got to be free, free to face the life that's ahead of me." I think that's how we're going to talk about bank M&A as we get the year started.
It strikes me that there's a lot of pressure on institutions to perform. A lot of it is technology-driven, which naturally encourages people to think about the types of organizations they need to create to be competitive with the JPMorgans, Wells Fargos and SoFis of the world. What are you thinking about bank M&A right now, given the conversations you and I have been having with various bank executives over the last six months?
I think it's going to be a big one because of the word growth. Growth is challenging in this environment. I want to do a little Rick Santelli here and give you some charts.
The first one shows the change in the yield curve. The red line was the yield curve a year ago today, and the blue line is the yield curve today. We've gone from an inverted yield curve to a steepening yield curve. With all this change, though, while we expected some margin expansion, we're not really seeing it.
Another chart tees up the discussion. This is operating revenue, net interest income plus noninterest income, in the banking industry. It says there's about a trillion dollars of revenue, and it actually went down about 2% between 2023 and 2024. How do you knock out growth when the external environment, especially net interest margin and rates, is giving you basically zero growth?
Only the entrepreneurs are going to get growth. When growth is a challenge, banks are going to want to merge. When I can't grow, I merge.
I didn't know this was a CFO-inspired Plugged In, but I would bet a lot of CFOs look at this and say, interest rates, we're talking about those things again.
Those things again. The business of banking has historically been driven by M&A activity. I think about consolidation waves people constantly address, but it's easy to talk about finding a dance partner. It's a little harder to actually get somebody to come out on the dance floor with you.
The thing I find most telling for 2025 is whether you can integrate two organizations. That's the promise some people are starting to put together, but I do worry some integration issues could be as big of a challenge as this helicopter going over us right now.
Oh, it's a SWAT team. They found us.
Look at just the last month or six weeks. You had Sandy Spring and Atlantic Union, Enterprise and Independent, Berkshire and Brookline. It's definitely happening.
Can we get what I'd call return on scale? Everybody thinks a deal will drop value to the bottom line. Every investor announcement has a very simple payback period and usually something like 30% of the acquired institution's expenses coming out. But do you lose growth in the process? How do you integrate?
The integration challenge is significant. When I think about all the different vendor relationships that have to be managed and all the expectations that have to be satisfied, it's a big tour. I bring that up because we talk to a lot of executives who say, "We've done this before, so we're pretty confident." That's great, but it's a different world now.
When I'm integrating, I've got this digital, always-on front door. We've seen issues, like M&T bringing in People's United in Connecticut. We saw a credit union have a challenge just doing a digital conversion. I would watch the confidence level because we're in a real-time, always-on customer-experience world today. I think the effort to successfully integrate has probably gone up by about 30%.
We love stats at Cornerstone, and one of the stats I've been thinking about is what's realistic when it comes to growth. If we strip out M&A as a catalyst but think about organic opportunities, ways you can improve your business over the next few years, a challenge a lot of executives should consider is whether they can find new ideas and opportunities that would put about 10% new revenue on the business.
It's kind of like the old 3M rule. In three or five years, a certain percentage of revenue should come from new products. I think that's a great challenge right now. The opportunity is in your different lines of business. Ask, do I really have an entrepreneurial growth strategy in each line of business? That could be wealth, or certain commercial niches such as medical or energy. Do I truly have a marketing plan and go-to-market strategy? Do I have a sales force? Do I have sales goals? All that good stuff.
We haven't had Tom Petty on Plugged In in a while.
You've got a song in your ear. You know I love that.
We've gone too long. We've got to get it together. We've got to get it together now. As you're talking about the integration of sales, marketing, client relationships and customer acquisition, these are familiar concepts, but it's the execution and discipline to do them.
We have great respect for Chris Nichols at SouthState. I brought my notes because I want to quote Chris. He posted on LinkedIn a few weeks ago about why banks must focus on profitability before growth. He basically said if a bank is not covering its cost of capital, it is growing itself out of business at a rate correlated to growth. It starts with strategy and ends with creating frequent value for your customer. In between, it's about having the right products, workflow and architecture.
Wow.
I thought that was a really succinct way of thinking about this. You're going to be getting on stage with some folks at Acquire or Be Acquired and talking about strategic planning. How do you take something like Chris said and layer it into what goes on at a conference like this?
In a slower-growth environment, it's not everybody chasing that next deal and pricing each other to no return. I think Chris is right. At a $10 billion bank, a basis point is about a million dollars of operating revenue, so I'm seeing a lot more focus on loan-pricing discipline and relationship-pricing discipline.
We have our friends at Citizens Business Bank out in L.A. who have the "cross-solve" relationship concept. I do think it is about growing profitably and having the analytics to find it. Most banks don't have mature enough analytics around whether growth is really generating what we used to call RAROC, risk-adjusted return on capital.
That's hugely important. That's why, instead of asset size, I'd like to quote operating revenue, my net interest income plus my noninterest income. Very few board members can quote their operating revenue. In other businesses, if I'm in groceries or software, you can. We have to bring that discipline in because it tells us whether we're really getting profitability on growth.
You talk about asset size, and I always get a little sideways when people treat asset size as if it correlates with ambition or the ability to do things. Just because you're a certain size doesn't give you an unfair advantage. A smaller organization can do incredibly great work and be very successful in utilizing the data it has.
In 2025, the whole concept of leveraging information in creative ways is going to become even more specific. I want to bring up two data points about growth. Here's my headline: funding is still constrained. Are we out of the woods because there isn't an SVB or Signature around the table with runoff? No.
First, money market mutual funds have roughly doubled in the last five years, from about $3.2 trillion to $6.6 trillion. Second, think about SoFi. It bought a very small bank in Northern California, Golden Pacific Bank. It had trouble getting the deal approved, but it finally did. SoFi started with about $132 million of deposits at the bank and closed the year at roughly $25 billion.
This is the funding competition we have from the new world of fintech. Whether that's stored value in a banking-as-a-service platform such as Chime or a true bank charter like SoFi, we're still going to see the question of how we entrepreneurially get funding and deposits. That's going to remain the constraining factor.
It would be interesting to go back in time to when SoFi had all of this come together and see what its three-year forecast was, because I'm sure it looked nothing like what they've actually accomplished. That's also a good reminder for people. You can plan out three, five or 10 years, but realistically, 18 months is where you should be trying to get your arms around.
I love you referring to Dave Brager and Citizens Business Bank. It's not cross-selling, it's cross-solving. It's a subtle difference, but that's a business doing exceptionally well on the West Coast because of that mindset: how do we help others be successful?
Unlike Chris' example, they're not looking for a 10% organic growth rate. They think you get into credit issues or underpricing if you chase that. They're aiming for modest growth plus acquisitions, but profitable growth.
And relationship growth. The third big theme coming out to the desert is all around customer acquisition and retention. I've got some music from Chicago. You remember the song Look Away? David Foster kind of made them a little cheesy, but that's not what you want your customers to do to your bank. You don't want them to look away.
Unfortunately, we've seen so many technology companies be incredibly successful by hyper-focusing on solving one pain point. As they expand market share, it puts banks in an even more precarious position. When I think about how legacy core providers continue to pose challenges, reliance on third parties and the risk that comes with it, it would be fair to throw in the towel and say this isn't the business for us. We still believe the business of banking is healthy, good and exciting.
Let's talk quickly about customer-retention and customer-acquisition strategies that you and I both think could work in the first six months of the year. In a digital world, it's not as easy as going and knocking on people's doors and delivering flyers. It ties back to data and analytics.
I think a lot of the banks that will be at AOBA grew up on the relationship-manager-driven hustle, shoe leather, shaking hands and being present. That's great. But in today's world, customer experience depends on most of these banks buying a bunch of different technologies and integrating them into a single experience. It's not like the vendors are holding their hands through it.
The vendors are becoming more fragmented at exactly the time the customer experience needs to become more integrated. What I would put on the agenda as we scale and try to get a return on scale is: do I have an IT group that can help integrate? Do I have partners? You see companies like Core10, Sandbox Banking and others trying to be that glue. You see places like WaFd Bank building product groups to do this.
M&A consolidation doesn't work unless you have a parallel path. It isn't, "I have one partner, FIS or Jack Henry." It's, how do I build this portfolio and manage it well?
This is where executives almost need a capabilities portfolio they're working on instead of saying they're an expert in one well-defined area. You've got to put yourself in the shoes of others because support that FIS or Fiserv historically may have provided could no longer be there. Don't open yourself up to that type of risk exposure. Learn, stay creative and stay curious.
Going to events is a great and easy way, in a short period of time, to meet a lot of really interesting folks. There will be techies here, too. If I'm scaling, how am I building new capabilities with that scale rather than simply getting a bigger balance sheet?
I once had the president of a $25 billion bank say, "We're $25 billion. I have the CFO and chief credit officer of a regional bank. I have the operations of a $2 billion community bank." They had rolled up a bunch of institutions very successfully, but it happened so fast without capability improvement.
Growth for the sake of growth is a recipe for potential disaster.
It is hard work because you get onto the next deal and integration, but are you actually building capabilities? Now we've got things like AI, platform automation and digital that have to be built while you're integrating these banks.
In future episodes of Plugged In, we're going to go to the flip side of this coin. We'll talk about fraud risk and some other things we're starting to make sense of that are kind of scary, but we think there are steps institutions can take to address them.
Since we're just kicking off the year, Steve and I wanted to show you that Arizona is sunny, it's wonderful and we're excited to be out here. Bring a jacket, though, because it's not as warm as some on the East Coast would hope it could be. This is Plugged In, so we're going to show you the truth of the matter and not sugarcoat it.
We'll see several thousand of you in Scottsdale soon. Looking forward to it.
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