M&A, hiring, credit quality: What's on minds of midsize bank execs

February 3, 2020 9:00 PM

Leaders of smaller regional banks are both optimistic and apprehensive about the future, and those mixed emotions were on display during fourth-quarter earnings calls.

Lower rates are pinching net interest margins and loan growth is slowing. Competition, from banks and nonbanks, is intensifying, and some lenders reported higher loan-loss provisions that reflected their exposure in certain loan categories.

Columbia Banking System is paying close attention to one of its markets after the closing of a Boeing plant. Cadence Bancorp. and Texas Capital Bancshares, for instance, are looking at ways to reduce their exposure to leveraged loans, while Umpqua Holdings is continuing to shutter branches in an effort to become more efficient. The energy sector also remains an area to watch in coming months.

Other banks discussed their plans to expand in 2020. Sterling Bancorp touted the progress it is making with its digital bank, while New York Community Bancorp said it is still committed to finding the perfect bank acquisition. More bankers across the Southeast are talking about their interest in hiring lenders in the wake of several large mergers.

Here's what leaders of several banks with $10 billion to $60 billion of assets had to say about the year ahead.

Bracing for Boeing fallout

Executives at Columbia Banking System in Tacoma, Wash., said they are watching for any fallout after the closing of a Boeing factory in nearby Renton.

The plant was shut down after the airplane manufacturer grounded all of its 737 Max jets following two fatal crashes. Boeing has estimated that the costs of grounding the jet would exceed $18 billion.

Boeing continues to buy parts from local suppliers, Andrew McDonald, Columbia’s chief credit officer, said during the $14 billion-asset company’s quarterly earnings call.

Still, the closing could have a domino effect in the local market. Boeing moved many employees to other facilities, and McDonald said it is likely local businesses such as restaurants and dry cleaners will feel the pain.

That is causing some anxiety at a number of banks that operate in the region. Columbia’s total exposure to the Boeing plant and its surrounding market is $75 million to $80 million, McDonald estimated.

Taking advantage of M&A disruption

Add Hancock Whitney in Gulfport, Miss., to the list of banks looking to take advantage of disruption caused by large Southeastern bank mergers.

The $30.6 billion-asset company plans to ramp up hiring in 2020 to capitalize on the BB&T-SunTrust merger that closed in December, as well as the pending combination of First Horizon National and Iberiabank.

Last year, Hancock bought MidSouth Bancorp in Lafayette, La., where Iberiabank is based.

Hancock will increase hiring “to take advantage of what probably is the most sweeping market disruption we've had from” Texas to Florida, John Hairston, the company’s president and CEO, told analysts.

“We believe this is a good year to invest aggressively and play offensive ball,” he added.

Showing restraint in commercial lending

Ameris Bancorp in Atlanta is taking a more cautious approach to lending in 2020.

The $18 billion-asset company reported strong loan growth in 2019. Excluding its purchase of Fidelity Southern, which closed in the third quarter, total loans rose by 9% from a year earlier.

But 2020 will be a year of selective lending, CEO Palmer Proctor Jr. said during his company’s quarterly call.

Expect loan growth at Ameris to moderate to about 7% as the credit cycle progresses and as competitive pressures continue to intensify.

“We do operate in a very competitive market and will not compromise asset quality for the sake of growth,” Proctor said. “You will see Ameris continue to become more active but not more aggressive.”

Scaling back leveraged loan exposure

Federal regulars warned on Friday that credit risk tied to leveraged lending remains elevated. Lenders have fewer protections and credit risk management practices to monitor and control risk have not been tested.

Cadence Bancorp. in Houston is one of the banks dealing with leveraged loans. The $18 billion-asset company reported that credit quality deteriorated for the third straight quarter, prompting management to focus even more on reducing risk.

Cadence significantly scaled back exposure to leveraged loans and the restaurant industry, Chairman and CEO Paul Murphy Jr. said during the company’s earnings call.

“Every time we look at a credit that has higher leverage, we are scrubbing it extra hard,” Murphy said. “We're either working in a way to strengthen the structure [of loan terms] or we're asking them to refinance and find a different lender.”

Keeping close tabs on energy loans

Energy loans continue to cause headaches for some lenders.

Texas Capital Bancshares in Dallas reported that nonaccrual loans nearly tripled at the end of 2019 from a quarter earlier. Energy credits and leveraged loans were largely to blame, executives of the $32.5 billion-asset company said.

“We continue to be focused on crisp management of the problem credits … to minimize downside impact and are actively monitoring all portfolios in light of macroeconomic factors,” Julie Anderson, Texas Capital’s chief financial officer, said during the company’s earnings call.

Texas Capital agreed last year to merge with the $15 billion-asset Independent Bank Group in McKinney, Texas.

Independent’s executives downplayed Texas Capital’s credit issues during their quarterly call.

"We feel like we've got a good handle on what that exposure is and where it's going," David Brooks, Independent’s chairman, president and CEO, told analysts.

Boosting deposits through digital channels

A new digital banking effort helped Sterling Bancorp in Montebello, N.Y., boost deposits in the fourth quarter.

Total deposits increased by 5.7% in the fourth quarter from a year earlier, to $22.4 billion. Online CDs totaled $78 million at Dec. 31, while online savings accounts totaled $421 million.

Executives at the $30.6 billion-asset company said they expect digital deposits will represent 5% to 7% of total deposits by the end of 2020, ranging from $1 billion to $1.25 billion.

“We realize and are cognizant of the fact that deposits are going to be higher cost, and that they're going to be more rate-sensitive,” President and Chief Financial Officer Luis Massiani said during Sterling’s earnings call.

“But in a low-rate environment, or a generally benign rate environment, we feel very good that it is a very efficient way to generate funding," Massiani added.

New York Community: Still eyeing deals

Joseph Ficalora remains confident that New York Community Bancorp will find the perfect merger partner.

Ficalora, the Melville, N.Y., company’s chairman and CEO, told analysts to expect an announcement. At the same time, he said he is feeling no pressure, particularly since lawmakers raised the threshold for becoming a systemically important financial institution.

“We are at actively in discussions in the marketplace with a variety of people to accomplish the goals that we have articulated,” Ficalora said during the $54 billion-asset company’s fourth-quarter earnings call.

“We've made it very clear that we have the ability and have the desire to grow by acquisition and create value for shareholders,” he added. “There is going to be a transaction on the horizon that will be exactly in-line with the kinds of things that we've done in the past.”

Ficalora has made similar statements in recent years. He came close to reeling in a deal, but New York Community and Astoria Financial called off merger plans in 2016 after regulatory foot-dragging. Astoria ended up merging with Sterling Bancorp.

Umpqua: Still shuttering branches

Umpqua Holdings in Portland, Ore., will continue to close branches.

The $29 billion-asset company has been shutting branches down as part of a profitability improvement plan it announced in 2017. To date, it has closed two-thirds of the 100 branches on its list.

Umpqua has been balancing cuts with investments in technology and lending. Management highlighted 61 employees it hired on last year in its corporate and commercial banking, along with global payments and deposits segments.

“The investment there is in our high-growth markets from Seattle down to San Diego,” Tory Nixon, Umpqua’s chief banking officer, said during its earnings call. “We've been very strategic and thoughtful in where we're putting people.”