Gerry Cuddy, president and CEO of Beneficial Bancorp in Philadelphia, considers himself a realist.
By his own admission, Cuddy’s speeches are often sobering for his colleagues to hear, particularly in times of economic growth, pristine credit quality and consistently strong earnings.
“When I go to conferences, I am always the least optimistic guy,” Cuddy said in an interview. “People boo me off stages.”
So there might be some element of surprise on Wednesday night when Cuddy delivers the banker keynote at this year’s c
Cuddy will look back at the decade since the financial crisis and tell attendees that community banks are in far better shape now than they have ever been. Capital levels are strong and, believe it or not, industry threats could provide opportunities for smaller institutions, he will say.
Cuddy, whose $5.7 billion-asset company recently
“If you think you have risk buttoned up, a good brand with good people who are local and making decisions, you probably feel infinitely better today about your long-term prospects than you did as recently as three years ago,” he said.
Here is an edited transcript of the conversation with Cuddy.
What is the theme of your speech?
GERRY CUDDY: This is the 10th anniversary … of having gone through the crisis, so some of my speech will look back at that. Looking at banks with [assets of] $100 million to [about $15 billion], everybody for the most part is on really sound footing right now. By virtue of a crisis that we didn’t participate in, other than maybe credit quality, we’ve all probably been the beneficiaries of importing a lot of sophisticated tools that didn’t exist before in community banking. I think everyone has bought into the belief that if something is being done at a bank larger than mine, from a regulatory perspective, I probably better do it just to be prepared.
When we talk to smaller banks in our market … they are looking at interest rate shock and sensitivity. They’re looking at enhanced credit metrics and measurements. They have realigned their balance sheets accordingly, and everybody has sound capital levels.
Overall, most of the basic risk elements have been removed, and what we have left is existential stuff — all stuff outside of our walls. If that thesis is correct, and given there is a fair amount of economic uncertainty and less regulatory uncertainty, everything that is a threat is also an opportunity.
If you set event risk and economic calamity aside, what you’re looking at for community banks is that we should all get back to the basic themes. People need to know we’re local, they can trust us and this isn’t just a banking relationship. It is a business relationship. Our advice impacts us because we live here with you. Leverage skills and contacts at the board level, with the highest standards of governance, and reinvest in brand. It is about: What do you stand for, and who do you do business with?
You said that some risks are now opportunities. Can you explain that?
One opportunity is local decision-making compared to big banks. On the loan side, decisioning and efficiency with decisioning, has narrowed the box. So the narrative of a small business will probably get lost at a larger institution. And honestly, I’m not sure if they really want that business. I think we have a distinct competitive advantage, not just to capture small business, but we have better retention opportunities than we had prior to the financial crisis.
Technology is more than an equalizer. I’m looking at smaller banks that have developed alliances with fintech partners, either exclusively or through something like what SoFi has done with community banks. A larger bank is probably doing that in-house and is probably beholden to an infrastructure. We have a bit more maneuverability.
Beneficial just agreed to be sold. What are your thoughts on other banks selling?
We’re consolidating for a multitude of reasons, but part of it is that we’re a converted thrift that is three years past its [federal limit on being sold] and had a lot of capital that we simply were not able to deploy in this environment.
Our circumstances are unique. The banks we were talking to as recently as 18 months ago that were under a billion dollars that we were looking to partner with … I feel a lot better about their viability as independent entities now. Boards, in some cases, have shifted and kind of gotten the wind back into their sails.
Sometimes I’m asked to go in and talk to boards of smaller banks. When I go in and look at the comprehensive nature of their boards’ book [of business] they are much better than they were five years ago. If you think you have risk buttoned up, a good brand with good people who are local and making decisions, you probably feel infinitely better today about your long-term prospects than you did as recently as three years ago.
Will a rising rate environment create more sellers?
I think consolidation is going to be asset driven. We think things are positively cooling off in our market. Not that things overheat in Philadelphia. That doesn’t happen. But we’re seeing somewhat less loan demand and we’re coming to the natural conclusion of a number of large infrastructure projects. If loan demand goes down, absolutely it will be an asset-driven march where the best providers will have the most options to partner with people if they don’t think they can get the growth and the shareholder returns.
Another trigger is more thematic. There are other great markets, like Boston or Atlanta, where there are simply too many providers. There are 111 providers in the 13 counties we serve. I don’t think that is twice as many as we need, but I do believe that there are people who are going to struggle with scale, infrastructure and expense versus opportunity in the future. For them, it might make more sense to combine with so-and-so down the street.
I think we’ll see more deals like ours where one bank doesn’t dwarf the other. They may be the same size and have to work through social issues. We’ve all absorbed the new cost structure. Can we scale through that and get the economies from it?
The WSFS-Beneficial deal is unique, given the buyer’s plan to use cost savings to make tech upgrades. Investors have seemed skeptical. Any thoughts?
Maybe people are still studying the transaction, and I’m hopeful the stock price will reflect a better understanding of it as the team gets out and meets more shareholders and analysts.
Any thoughts the direction of the economy and things banks should be mindful of?
When I go to conferences, I am always the least optimistic guy. People boo me off stages. But I’d like to think of myself as pragmatic. I am critically concerned about the levels of debt. I particularly worry about consumer debt. Student loans, auto loans and credit cards have all creeped back over a trillion dollars. I worry about local municipal debt. The amount of debt that is out there, from a sustainability standpoint, in a rising rate environment is a concern.
I wouldn’t be surprised if things positively slow down in mid-2019 — a sort of catch-your-breath phase in the cycle.
Nobody will ever convince me that you can structure to escape a credit quality cycle. Still, I think that, as an industry, we are so much better prepared for the more meaningful, but understandable, cycle on the credit side. I think community banks are prepared for that.
Best of luck with the WSFS merger.
It is a little bittersweet, but we’ve know those guys for a long time. We’ve been competing in the same market, and we’re excited toward moving to combine as quickly as possible.
