Transcript
Coming up, a nice return to the Arizona desert with my man Steve Williams. We're back in the desert and back in business.
The last time we tried to record, I had just come from the dentist and could barely carry a sentence. You and Mike Maddox did an exceptional job keeping things moving while I was basically a casual observer.
It was fun. You have articulation back, though, buddy.
Thank you. It's coming back. It may not be 100%, but we're going to give this a shot. We're in the office together today. Like our good friends Chumbawamba once sang, "I get knocked down, but I get up again."
That's what we're going to do on this new episode of Plugged In. Steve and I periodically like to share what we're hearing and seeing in the course of our travels. Three or four times a year, we sit down and riff on themes we believe matter to people running, growing and changing financial institutions.
I've been coast to coast recently. I was in Southern California for a board meeting, then flew to Connecticut for another one. Horrible travel week. I'm heading to D.C. this weekend and then Chicago.
We've probably passed each other in the air. I was in Banff, Canada, a few weeks ago with fintech folks. Before that, I was in Orange County, Hershey, Huntington Beach and Boston. I'm in Scottsdale today, and we'll both be in Chicago next week.
I've got my Red Sox hat on because we're recording after the Sox beat the Yankees in game one of the wild-card playoffs. This will drop after the series, so even if the Red Sox find a way not to beat the Evil Empire, at least we got one good one under our belt.
We like getting good things under our belt. Let's talk about the themes we want to cover.
We've got some songs, like always, but really we want to talk about the things capturing our attention and imagination. We'll talk AI. Everybody's talking about it, but I think we have a different spin.
You mentioned Chicago. We're going to be with the folks at Second Curve for Tom Brown's annual event, basically Coachella for bankers. Steve is presenting, so I'm going to pick his brain for a sneak peek.
And since we're in Arizona and the weather is starting to come down a little, Acquire or Be Acquired is on the horizon at the end of January. Those words naturally lend themselves to a conversation about mergers and acquisitions, so we'll talk M&A too.
My phone alerts are buzzing with M&A announcements right now. There are a lot of conversations happening in front of and behind the curtain.
We've got a lot to cover in a short period of time. I was thinking about music on the flight over and listening to Rush. We could use Limelight or Spirit of Radio, but I think Tom Sawyer gets us cranked up.
You like Tom Sawyer?
Absolutely. I had a buddy who would drive his pickup truck to school drumming along to it on the steering wheel.
Music like that gets people excited, and there's a lot in banking getting people excited right now. Change captures our imagination because it can be unexpected and energizing.
On the AI front, we've heard presentation after presentation about possibility and potential, but there's usually a pendulum effect. Some people are starting to say, "I'm not getting the return I thought I would already." Build on that.
Gartner created the hype cycle years ago. Every new technology goes through frothy excitement, then enters what they call the trough of disillusionment before eventually moving toward productive, sustainable growth.
I think we're entering that trough with AI. We're roughly three years removed from the big public arrival of ChatGPT and large language models. The Economist has written about AI not meeting expectations. Apple has published research questioning how reasoning performance holds up as tasks become more complex. Ron Shevlin has written about how models can go sideways quickly if they're not governed well.
The way I look at it is that we got too excited out of the starting blocks. There was a similar period during the dot-com boom and bust. Amazon lost a huge percentage of its market value in those dark days, and it turned out okay after that.
We're entering the era of gritty use cases. Roll up your sleeves and do something practical.
One colleague showed us a roughly $9 billion commercial bank where the internal help desk was a major pain point. They connected a knowledge base to a large language model and cut human-touched help-desk tickets by about 50%.
Another roughly $5 billion institution is using chatbots and has doubled off-hours chats because customers can get help when employees aren't there, while reducing live-chat discussions by about half.
And we're seeing AI applied to check fraud. Even smaller community banks are reporting meaningful savings through better check-processing and fraud tools.
You add those examples up and the story is less glamorous than the hype. It's a lot of incremental wins. But over time, the cumulative effect could be significant.
That leads to a question every CEO should be asking: if you have 1,000 employees today, how many will you have five years from now?
What's interesting is I was presenting in California yesterday on what the technology stack of the future could cost. I worked with our performance team at Cornerstone to pull some benchmarks.
For an $8 billion bank, annual technology spending might land around $19 million to $22 million. At $12 billion, it can be roughly $29 million to $34 million. A $20 billion institution might be in the $44 million to $62 million range annually.
Those are big numbers. Put that over a three-year period, and a $20 billion bank can easily be talking about more than $150 million in technology spend.
People talk about AI as if it automatically saves money. There will absolutely be opportunities to reduce cost, but you also have to decide where and how you want to position the business. The strategy of what you do not want to become is just as important as what you aspire to become when you're already spending this much.
From talking to CFOs, I sense a healthy appetite to become leaner and more efficient on staffing and use technology to accelerate business objectives. But there's also a growing realization that bringing these tools in may require more spending before it creates savings.
The software might get cheaper while total expense goes up. That's part of the trough of disillusionment. AI isn't a silver bullet that automatically transforms your earnings profile.
I think CFOs feel like parents who give a high-schooler a credit card and get the bill at the end of the month wondering where all the money went. We've been waving the flag about technology-spend visibility at the C-suite level for years. It can't live only with the tech team.
On practical use cases, I was in Canada and listened to Allison Netzer, formerly CMO at Nymbus, talk about marketing and differentiation. One useful idea was building a personal tone-and-voice guide and loading it into ChatGPT.
Instead of asking the tool to write for you from scratch, you can use it as an editor and tell it to follow your established voice. That way the output still sounds like Steve Williams instead of generic corporate copy.
Those are practical use cases. They require some thought, effort and creativity, but not necessarily a huge expense, and they can create real value.
Write my term paper, but make it look a little crappy so it's real.
A B-plus paper, not the A-minus, so the teacher isn't suspicious.
Exactly. More to come. I think AI and automation will be slow and steady, up and to the right. We'll be talking about this for years.
Speaking of things that come around year after year, it's Whitesnake's Here I Go Again and back to the future with Tom Brown and the Second Curve event in Chicago.
Every year Tom pulls together an exceptional group of executives from across the country. This year he was kind enough to invite you to provide some color and context on financial services. Give people a sneak peek.
When we go into strategic planning and think back to the mini banking crisis a few years ago, liquidity still shows up in almost every strategic plan, especially at hard-charging commercial and regional banks.
One challenge I want to put in front of the room is generational change. If we look around a traditional banking conference, there are a lot of older Gen Xers and younger baby boomers. The next generation looks and behaves differently.
Ron Shevlin, Mary Wisniewski and others on our team have done a lot of work on this. Gen Z is very non-monogamous when it comes to financial providers. We used to talk about "my primary bank." They don't think that way.
Many have multiple checking accounts. Direct deposit doesn't automatically translate into deeper product relationships. A meaningful percentage hold cryptocurrency. Younger consumers are also moving substantial liquidity into brokerage and fintech platforms such as Robinhood and SoFi.
Even if you're a commercial bank, you need funding, so that behavior matters.
We're also seeing midsize banks get less leverage from their branch networks. Average deposits per branch have declined at some institutions, while the biggest banks have dramatically higher deposits per branch.
I joke that the traditional branch is like the old Pizza Hut restaurant with a jukebox, pinball machine and ashtrays. It's getting empty, but we haven't fully built the delivery model yet. We're not on DoorDash.
The digital front door and the connection between physical and digital delivery are huge. If liquidity is an existential issue, institutions need to understand how younger generations use financial services and what that means for funding.
When we're in Chicago, that Pizza Hut example is going to get people's attention.
You mentioned strategic planning. Something that struck me this summer was the focus on creating capacity for teams to deliver beyond their current workload.
There's growing appreciation that shoe leather still matters. Getting out to see clients and maintaining real relationships can't be substituted or outsourced.
If regional and community banks say they're relationship-driven, they need to create capacity so their best people can get out of routine work and spend time on high-value opportunities. I was pleased to see real examples of institutions refining how their people use time.
Think about the premium you might pay to acquire another bank. Then ask what would happen if you instead added some junior support and freed up meaningful capacity for your rainmakers and change agents. That's an important comparison.
That brings us to franchise momentum and franchise value. The M&A environment has changed dramatically. The first half of the year was quiet, and now the announcements are coming quickly.
The Synovus-Pinnacle deal kicked off a lot of conversation. Then you look at Huntington making moves, PNC expanding in Colorado and other big brands making big bets on the future.
Acquire or Be Acquired will be here at the end of January. The Killers are also opening the Phoenix Open, which we're excited about, but AOBA should be a good time too.
What I like about the current bank-on-bank deal environment is that approval timelines have shortened. That gives people more confidence that if they announce a transaction, they can actually get to closing without sitting in limbo forever.
There's a real feeling of "do it now." If you're thinking about a deal in the next 24 months, the current regulatory environment may be as favorable as you're going to get.
Did I give you a song for that? Florida Georgia Line and Luke Bryan, This Is How We Roll.
That's how these banks are going to roll. They'll say we have opportunities to grow, differentiate, spread costs over a wider base and use emerging technologies to become more client-focused.
Markets reward efficiency, and regulators continue to demand resilience. Those factors push M&A forward.
I've been thinking about what former Plugged In guests would say. Tom Michaud from KBW has made the point that banks with thin margins, uneven efficiency and weak growth stories tend to become sellers.
As we watch performance, it'll be interesting to see whether the sellers match the profiles we would have identified. More importantly, who becomes the next wave of acquirers?
Earlier in the year, I said we wouldn't see really big deals and you said we would. I think you're going to be right.
I think we'll see some big ones.
We don't want to be fortune tellers, but the conversations are changing. Think about Equity Bank in Kansas. We had Brad Elliott on earlier this year to talk about growth. He had announced several acquisitions, and since then more banks have approached Equity wanting to be part of what they've built.
Executives point to Equity as an example of building a culture and performance profile attractive enough that smaller institutions can see a better future as part of that organization.
There are other institutions in competitive markets saying they need to make hay while the sun shines. Not every conversation will become a transaction, but I'd bet we see more significant deals announced before year-end.
One key issue is talent retention. We were joking about a CEO in Colorado who, almost immediately after PNC announced its FirstBank deal, put up a LinkedIn post saying, "By the way, we're hiring in Colorado." That post got a lot of attention.
These are the things we're seeing in our travels. None of it is magic. Banking remains a highly regulated business. Compliance burdens are real. Consumer behavior is changing. Commercial expectations are shifting.
But strong franchises are in a position to be bold, place bets and move with speed and purpose. If that vision is attractive to another institution, there's room for a conversation about what a combined company could look like.
The caution is that if I'm Kevin Blair at Synovus and I'm combining organizations, I can't get mired in operational complexity and stop transforming the business. Every institution doing a deal needs one team unwinding integration complexity and another continuing to move the transformation agenda forward.
If you create three years of transformation debt because everybody is consumed by integration, you can wake up and realize you slowed your speed to market dramatically.
Steve and I will be back in the studio soon. We've got some great bank CEO guests we're calendaring now, and we'll keep getting Plugged In with standout executives across the industry.
One of my favorites is coming up.
Don't reveal it.
I won't. But there's a great CEO on the way.
I appreciate Steve Williams joining me, Al Dominick, here in Scottsdale. Thanks to everyone getting Plugged In with us. We'll do this again soon.
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