In an industry marked by challenges including stagnant stock prices, falling revenue, low interest rates, accounting rule changes and climbing regulatory costs, many banks have found ways to succeed and grow. Moving into 2012, there are opportunities for strong, well-capitalized banks to flourish.
Many banks made the best of the economic downturn. Those strong banks took the economic challenges in stride and now are prepared to pursue organic opportunities. An investment in human capital provides an avenue for growth, as banking is still heavily reliant on relationships. With the struggles of some weaker banks, growth-seeking banks have a chance to recruit from a pool of outstanding employee talent. These new employees can bring outstanding skills and customers with them, offering significant opportunities for institutions willing to invest in human assets.
In addition to relationship growth opportunities, well-capitalized banks have an opportunity to pursue intelligent loan growth. Measured risk-taking in the current credit environment may be preferable to taking on interest-rate risk. Although measured, the economic rebound is starting to take hold in several economic sectors, in some cases driving increased loan demand. Health care continues to be steady, while manufacturing is recovering in some areas and high commodity prices continue to support farm sector growth. Increased loan demand creates prospects for strong banks, which have both the financial capacity and liquidity to thoughtfully pursue these opportunities.
Economic challenges also presented an opportunity for many banks to pursue cost-cutting measures. By re-evaluating their cost structure and challenging employees to find expense reductions, these banks moved to leaner operating structures. Although there is strong potential for cost increases under the new regulatory environment, a calculated approach to cost containment and a commitment to leaner operations should provide opportunities to maintain margins and grow net income.
While fee revenues have been decreasing at many banks, well-capitalized institutions have the small luxury of taking a calculated approach to replacing that income. This can save strong banks from the miscalculations experienced by banks that have sought to replace lost income through reputation-damaging new fees and tactics. Over time, strong banks have historically been able to identify valued services and construct appropriate fee structures for those products without driving away prized customers or damaging their reputation.
New Service Lines & Product Offerings
As banks look to diversify their revenue stream, new service lines may present opportunities to reach new customers. Investing in new service lines is an opportunity especially suited to well-capitalized banks. Success in add-on service offerings such as wealth management and insurance can require upfront investment and long-term commitment. Although not without risks and challenges, new services added with careful consideration can add to a bank’s value and revenue in the long run.
Banks also may look to add new products to bolster revenue and retain profitable customers. Here are some examples:
- Umpqua Bank, an $11.8 billion asset Oregon-based community bank, offers GreenStreet, a loan product focused on energy-efficiency improvements or solar or wind energy. GreenStreet loans allow up to 100 percent financing for approved expenses, fixed interest rates and terms up to 300 months. In addition, Umpqua Bank has developed MainStreet Lending, a program offering designated funds for working capital, business expansion, leasehold improvements and equipment purchases ranging from $10,000 to $100,000 for small businesses that do not qualify for a loan under the bank’s standard loan process.
- Bank of Hawaii, a $13.1 billion asset bank based in Hawaii, offers Fraud Protection Plus, a package of services designed to help prevent, detect and resolve fraud-related issues.
- Arvest Bank, a $12.5 billion asset Arkansas-based bank, offers equipment financing with up to 100 percent financing available for commercial vehicles, medical equipment, office furniture, industrial equipment and more. The program allows for multiple types of financing, including capital leases, tax leases, terminal rental adjustment clause leases and municipal leases.
Although there are no quick fixes to boosting and diversifying revenue, new service lines and product offerings present strong banks an opportunity to capitalize on their capital base.
Due to the challenges facing some banks, well-capitalized banks have an opportunity to grow loan portfolios by obtaining groups of loans through loan carve-outs. Banks needing to bolster capital levels or shrink assets and pay off high-cost liabilities may be willing to allow another bank to cherry-pick some of their better loans in return for quick cash. Carve-out agreements can allow banks to strategically deploy and utilize excess liquidity. Success in this arena often requires forward-thinking and proactive leadership, as these deals may not come neatly prepackaged. However, carve-outs may present opportunities to deploy excess liquidity while growing loan portfolios with the types of loans desired by management.
In addition, banks with strong capital levels may be willing to clean up problem assets on their balance sheet by selling problem loans and loan portfolios. In certain parts of the country, there has been demand for these types of carve-outs. In October 2011, First Financial Holdings Inc., a $3.2 billion asset Charleston, South Carolina, company, booked a $20 million gain on a $200 million nonperforming loan portfolio after selling the assets for 40 cents on the dollar. The bank had originally expected to receive 20 cents on the dollar for the portfolio. As regulators push some banks to clean up their balance sheets, there may be opportunities for both buyers and sellers to gain from a carefully considered transaction.
Federal Deposit Insurance Corporation (FDIC)-assisted transactions continue to present attractive and lower-risk expansion opportunities when available. However, the failure rate of banks has begun to slow and the loss-share arrangement terms offered by the FDIC have started to tighten. These two factors diminish the potential for an expansion-minded bank to find a strategically beneficial FDIC-assisted transaction.
In an environment where even robust bank franchises are commanding only modest sale premiums, strong banks have an opportunity to make meaningful, strategic acquisitions without recording significant amounts of goodwill. In a low-growth period, whole bank and branch acquisitions may provide banks a chance to infill and solidify market penetration while spreading overhead and regulatory costs. Strategic acquisitions of smaller institutions and branch deals can present significant opportunities and may be preferable to holding out hope for one perfect, transformative deal that may never come to fruition. Through a series of small, easier-to-digest deals, an initially strong bank may find it has transformed itself into a large, formidable franchise with market depth, operating breadth and economies of scale.
San Francisco, California-based Wells Fargo built a $1.3 trillion asset behemoth through organic growth and acquisitions, many of them relatively small. As an example, in 1999, Wells Fargo made 13 acquisitions totaling $2.4 billion, or approximately 1 percent of the bank’s total assets. The largest of the 13 acquisitions Wells Fargo made that year was the $779 million asset Brownsville, Texas-based Mercantile Financial Enterprises. Through organic growth and other numerous small acquisitions in the Texas market, Wells Fargo is now the fourth-largest bank in Texas with over $51.2 billion in assets at September 30, 2011.
Although there are still challenges ahead, there also are significant opportunities for healthy banks. Evaluating those options against a bank’s specific strengths and needs will be critically important for bank leadership. However, for those leaders and institutions willing to move boldly forward, 2012 can be a year of great opportunity.