Market Overview

Skinny Tigers, Long Flights, And Talented Armadillos

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Skinny Tigers, Long Flights, And Talented Armadillos

I didn’t get a Thursday piece out last week as I was busy prepping for my trip to Phoenix and the Bank Directors Acquire or be Acquired Conference. This is easily my favorite conference each year as more than 1000 bankers, investment bankers, and FinTech types gather in the desert to talk banking. The mood this year was incredibly upbeat as bankers are looking forward to reduced regulatory requirements, lower taxes, higher interest rates and a stronger economy. I am not sure they will get it all as quickly as they would like, but mentioning that to the bankers was a lot like trying to nab a steak from a skinny Tiger.

I confirmed again on this year’s trip that my backside is not built for flights much over 4 hours. Airlines are maximizing profit by squeezing as many folks on each flight as they possibly can, and that makes for uncomfortable flying. Of course, I am old enough to remember when you were served an entire meal on a flight and could sit back and enjoy a cigarette after the meal. Times have changed, and while I appreciate the profit motive, my skinny butt does not enjoy spending the long voyage on the "economic" seats. .

Back to the conference, there was a great deal of optimism about deal activity this year. The Trump Bump has lifted valuations, and that helps deal activity in two ways. First, those banks who are interested in acquiring now have a much stronger currency to use to get deals done. Second, smaller banks that have resisted selling because they could not get the price they wanted are now a lot closer to a price they can be comfortable accepting. There are a lot of tired bankers out there, and they have wanted out for some time. The average bank executive is over 60, and the average board member is over 70, and after eight tough years, they are ready to call it today and work on their golf game or sit under the palm trees with umbrella drinks.

The figure tossed around the most was that 4 to 5 percent of community banks would be acquired this year, which would work out to between 240 and 300 deals in 2017. We have already seen one deal in our portfolio as it was announced that Royal Bancshares of Pennsylvania (RBAA) was being taken over on the second day of the conference. I expect to see a lot more before we close the books on 2017.

The best session for my money was the Investors panel of Tom Brown CEO at Second Curve Capital, John Eggemeyer Founder and Managing Partner at Castle Creek Capital, Richard Hunt President & CEO at Consumer Bankers Association and Josh Siegel Chairman and CEO at StoneCastle Partners, LLC. These guys weren’t just bullish, they were wildly so. They did agree that most of the deal activity will once again be among the smaller banks with less than $1 billion in assets. But they felt the larger banks would see enormous benefits from the improving outlook for banks.

Their only concerns seemed to be management that did something stupid or failed to keep up with technology. Using FinTech to improve profits as well as attract and retain customers was seen as critical by nearly all the panelists. The tide is just turning so there are not any excesses in the system, credit is solid, and the road is clear for banks to have an extended run. These are very smart investors with decades of experience investing in community banks so when they are bullish, perhaps we should pay attention

This is also the year that banks and FinTechs did a Tracey–Hepburn and quit quarreling long enough to realize they were madly in love. FinTech has realized that they are not going to replace banks without actually becoming banks themselves, and banks have come to understand that the nerdy kids in board shorts with broken glasses and a laptop with enough power to run a mission to Mars can make them more efficient and more profitable. The talk has shifted from protecting themselves from FinTech to how to best partner with them for fun and profit. There is even growing chatter from banks about just taking over a FinTech company that has the technology they want to use to run their banks.

I rarely use the word diversity. I am a free market type with an unwavering belief in the power of the meritocracy. The job should fall to the best person regardless of race, genitalia, dating preference, or species. If a gay Hispanic armadillo is best for the job at hand, that’s where the job should go. However, each year when I go to this event I come away with the distinct impression that the executive suite community banks have a serious diversity issue. There isn't any. Almost the entire audience was white, male, middle-aged or older. Given that John Eggemeyer of Castle Creek pointed out that banking does suffer from a dearth of management, and the industry struggles to attract talent, it seems silly to me to limit membership in the club. If I were at the ABA or ICBA (Independent Community Bankers Association), a key mission would be working with universities around the nation to attract women and minorities to the banking industry. The sector needs to begin looking more like the market, and right now we are a long way from that being true.

We are only 16 days away from pitchers and catchers reporting to camp here in Florida and out in Arizona. Out long national nightmare will, at last, be over and baseball will be back in America. We can turn our weary eyes away from politics and once again focus on the things that matter in life, like the fate of the Orioles young pitching staff and the Cubs chances to repeat. The focus will shift from Trump to Trout, and we all will be better for it.

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