Transcript
Coming up, an episode that Bananarama might appreciate. It’s a “Cruel Summer.” It is summertime in Scottsdale, Arizona, where my man Steve Williams is hanging out with me, Al Dominick, to talk about a business that is certainly not boring. We’re talking banking again on Plugged In.
Nice to see you, Steve.
Nice to see you, Al. It’s summertime. We’re starting to hit our strategic planning meetings, talking to boards and executives and looking at midyear performance, so we’re going to riff a little today.
That’s really what we envisioned in the early days of Plugged In: surface the key concepts we’re hearing on the road so people can get a little smarter, maybe a little faster.
In the interest of getting smarter faster, I’ve been reading a new book called Loonshots, about nurturing crazy ideas that can win wars, cure diseases and transform industries. Our industry is certainly going through some interesting transformation.
There was an interesting MIT study on using AI and large language models that suggested overreliance can reduce original cognitive effort, critical thinking and creativity. That issue has come up in a lot of my meetings this spring and summer.
How does an organization transform around AI? If a meaningful portion of future work is done by agents rather than carbon-based life forms, what does that look like?
I think the bigger question is where the creative and critical-thinking component lives. How do we avoid creating commodity knowledge workers and instead build people who bring something an agent can’t do? That has come up more than I expected.
I learned this firsthand in Santa Barbara this morning because, for about the eighth time, an Uber driver picked me up and called me “AI.” My full name is Alfred and I go by Al, but apparently the critical thinking has gone completely out the window.
It actually connects to a theme I wanted to pick up with you. You and I live parallel lives, spending a lot of time with boards and executive teams. What’s interesting is the contrast between the beginning of the year and now.
Our What’s Going On in Banking research showed a lot of optimism and enthusiasm for the year ahead. That’s been replaced by cautious optimism and more pragmatism.
Earlier this year, stablecoins were on my bingo card, and obviously they’ve become a major issue. On the AI front, we started with generative AI and now we’re talking about agentic AI. On the merger front, people thought things were going to get simpler. Approval timelines have shortened, but we haven’t seen the number of deals many expected.
Based on S&P Global Market Intelligence data, the current pace could put us around 134 bank deals announced this year. Yet while my Uber driver was picking me up in Santa Barbara, I was reading about another transaction taking Glacier Bancorp into Texas through its acquisition of Guaranty Bancshares in an all-stock deal of roughly $476 million.
That followed First Financial Bancorp in Ohio announcing another in-state deal with Westfield Bancorp, worth roughly $325 million in cash and stock. Maybe the M&A optimism from earlier in the year is starting to come home to roost.
A couple of things are happening. Early in the year, at Acquire or Be Acquired, we talked about how many sellers were out there, but their price expectations were a bit like my wife looking at Zillow and deciding what our house is worth.
Then Liberation Day created volatility and rates moved up. The 10-year Treasury yield was high, which affects how quickly bond portfolios heal. Time is helping, and rates have stabilized somewhat. Oil prices have come down. Conditions aren’t painless, but they aren’t as difficult as they were in April.
That volatility made people wonder whether it was really the time to do a deal. Now you’re starting to see the regulatory floodgates open. My short answer is that some of the smaller deals, where sellers have been holding out, are going to start moving.
The wildcard is whether we’ll see transformative regional-bank deals. I’d probably bet against it right now.
I’d bet for it.
You think so?
Gentleman’s agreement. We’ll revisit it in December. I could see some regional banks above $25 billion, maybe even banks in the hundreds of billions, making a bold move and jumping higher above that $100 billion asset threshold.
The bond math still matters. Volatility has been one of my least favorite words from the first half of the year.
I was with a bank board in Texas last week talking about what it takes to be a buyer rather than a seller. If you strip it down to back-of-the-napkin math, banks with strong return on assets and return on equity put themselves in a much better position to be buyers.
Net interest margin matters, but strong ROA and ROE give you more strategic flexibility.
That’s important for directors to understand because they’re not always immersed in the industry jargon we are. CEOs need to help boards understand the critical issues that will confront the organization over the next several years.
That’s one reason I brought up stablecoins. In the last few days, since JPMorgan announced its plans around the movement of money, we’ve seen other major players follow suit.
It’s getting people to ask how stablecoins could affect regional and community banks. What are you thinking?
Once again, everybody wants to be a bank. If banking is supposedly so boring and trades at a low multiple, why does everybody want to do it? Because they want to peel off the valuable parts of banking, and payments is clearly one of them.
The regulatory pendulum has swung faster than I’ve seen in my career. Walmart, Amazon and others are discussing this. Ron Shevlin, who is very knowledgeable in this area, believes consumers will use these tools.
I don’t think stablecoins put banks out of business, make banks irrelevant or put Visa and Mastercard out of business. If I’m traveling somewhere and need to dispute a payment, I’m going to value the legal and operating infrastructure that has been built into the global payments system.
But stablecoins, like challenger banks, stored-value products and other innovations we’ve seen over the last 20 years, could bleed more value out of the banking value chain and make long-term funding more difficult.
If I were a bank executive, I would absolutely be talking to the board about the potential threat to interchange and funding. It won’t happen overnight, but it raises strategic questions.
How specialized does our business become? What scale do we need? Where do we participate in the ecosystem rather than simply watching it emerge?
You can put it into simple terms. Are we going to be an issuer? A custodian? Where exactly do we play?
That lets the CEO and CFO frame the bank’s payment strategy and role in the broader movement of money.
Boards hear about shiny objects and naturally want to understand them. Executive teams need to be able to say, “This is a risk. This is a challenge. It may present opportunity, but there’s complexity here,” and then explain it succinctly.
I was talking with Gene Ludwig a few months ago, a former Comptroller of the Currency and former Plugged In guest, about stablecoins. He reminded me that if you can’t explain something as though you’re talking to a third grader, you probably don’t understand it well enough.
That is also a caution against getting overexcited. We talked this way about blockchain, Bitcoin, DeFi, generative AI and even the metaverse. Remember JPMorgan’s branch in the metaverse? We get excited.
Stablecoins may become meaningful, but the change is likely to play out over a long period of time.
That said, there’s an enormous amount of private-equity dry powder in the market. Fintech and technology companies want to move further into banking and payments, and the regulatory environment is signaling that the doors are more open for business.
Those entrepreneurs may move through the regulatory system faster than traditional banks do. Follow the money and watch them as competitive threats.
We’re going to see interesting companies formed with private-equity and venture backing around what’s newly allowed or encouraged, including acquisitions of small banks, specialty-bank strategies and new charter approaches.
We are living in interesting times.
One thing worth remembering is that fundamentals and performance never go out of style. Plenty of companies are built digital-first and have new capabilities, but if they can’t execute, they’ll become another shiny object people eventually stop talking about.
Banks can use their risk stance to their advantage. A CFO recently told me, “If you drive a really fast car, you want to make sure the brakes are in exceptional condition.”
That’s a useful mental model. I want to drive the sports car fast, but only if I know the brakes work when I hit a turn.
High-performing banks have calibrated their risk stance so they can pursue opportunities responsibly. Banking is a business that requires risk-taking. The question is how good your brakes are.
I don’t want stablecoins to drown out fundamental strategic work. We had the same thing with blockchain and banking as a service. These are long-tail developments.
What is staring banks in the face right now is how to drive performance in new ways.
Have you clearly defined your target markets? Do you have a real go-to-market growth plan? Are you using data effectively? Have you exhausted opportunities in platform automation and digital self-service?
Only about 7% of bank executives in our annual survey said they have a very effective data strategy. We don’t need to jump straight to stablecoins if we haven’t solved how we’re using our own data.
That’s the same point I keep making when people talk about commercially available AI tools. Yes, they’re important, and you should consider how they can contribute to business outcomes. But if your data strategy and governance aren’t mature, your attention may be in the wrong place.
It makes me think of our friend Chip Reeves, who joined us on a recent episode and talked about having the right to win and knowing which court you’re going to play on.
Chip is a former college basketball player. He was talking about JPMorgan entering MidWestOne’s markets and essentially said they aren’t going to try to beat JPMorgan at every game. They’re going to compete on the court where their team is equipped to win.
There are things you don’t want to do, and being comfortable saying that matters. In strategic planning and board conversations, some of the healthiest discussions are around what you don’t want to do or don’t want to become.
If people spent more time on that, they’d probably surface some interesting ideas. Really challenge your assumptions about growth. Where is it going to come from?
There’s going to be more specialization and niche banking, but I’m surprised how few institutions look three years out and say, “Here’s where growth will come from, here’s why we have the right to win, and here are the assumptions we’ll hold people accountable to.”
I do want to touch on technology and scaling smart. I recently saw an analysis suggesting computer science has become a much tougher degree market because Microsoft, Amazon, Google and other major technology companies are pulling back on programmer hiring as agents take on more work.
That creates an opportunity for banks. There are talented computer-science graduates who may not get the quarter-million-dollar job they once imagined at a big technology company, but could come into banking, earn a strong living and help accelerate the dirty-fingernails technology work our industry needs.
I’m also seeing younger professionals using AI hands-on for a wide range of tasks. How did they get there? They started playing with it.
A lot of managers don’t have hands-on skills, and the age of AI is going to reward hands-on knowledge workers.
If I’m a head of talent or a CEO, I’m asking where our people are today and how we attract professionals who are smart, curious and willing to work directly with these tools.
You’re warming my heart as somebody who had a rough time with object-oriented programming and failed computer-science classes as a freshman many years ago. Maybe that degree I was chasing wasn’t the right one for me after all.
Steve and I always enjoy sharing the things we’re finding interesting. If you enjoyed the conversation, give us feedback and follow along on our social channels. Steve has been posting thoughtful material on LinkedIn, as have colleagues like Ron Shevlin.
As always, thanks for getting Plugged In with Cornerstone Advisors.
We’ll see how the year goes. More M&A activity, much more application of AI, and we’re going to put on sunscreen because the temperatures in Scottsdale will keep rising just like the temperature in banking.
Good getting caught up. See you out on the road.
Sounds good. Thanks.
Enjoying Plugged In?
Subscribe on your favorite platform