A survival guide for small regionals

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Midsize banks are feeling the heat, but they don’t seem to be sweating it just yet.

Big banks are using pricey, heavily marketed mobile apps and other technology to rake in deposits. Large regionals are launching their own digital platforms, and could get bigger if the BB&T-SunTrust merger is completed and paves the way for more deals like it.

But the heads of midsize banks, that asset class between $20 billion and $50 billion, were upbeat in the outlooks for the coming months that they offered as part of third-quarter results. BankUnited, BOK Financial, Fulton Financial and others said they are counting on a combination of selective M&A, lending in specialty areas they know well, aggressive recruitment of commercial lenders and other strategies to stimulate revenue growth.

However, to succeed, they have to be selective in the types of banks or nonbank firms they buy, where they buy and how much they spend. And they must be careful not to stick their necks out too far in granting credit and about which loan officers to hire, the CEOs said.

Part of the answer lies in picking talented people and chasing solid customer segments overlooked by the larger banks, they said. But even they admit that many of these things are easier said than done.

Here is an overview of the philosophies and strategies four small regionals say they will use to survive amid intense competition, margin pressures created by lower interest rates and the political uncertainty that will increase as the 2020 elections edge closer.

BankUnited: An alphabet soup strategy

BankUnited in Miami Lakes, Fla., plans to rely on a mix of C&I, M&A and … QSR.

The $33 billion-asset bank is focusing on growth in new markets, especially in metro Atlanta, where it recently recruited a commercial lending team. President and CEO Rajinder Singh said on a conference call Wednesday that that new team will focus on adding commercial and industrial loans and deposits.

BankUnited had been eyeing this market for a while and is one of many banks hoping to capitalize on disruption caused by the merger between BB&T and SunTrust Banks. Singh said that another key factor was finding the right team of lenders.

“When the right team comes along, you move on it,” he said. “And we found the right team, and we acted on it. We think over the next two to three years, this will be a nice piece of business.”

He added that BankUnited is eyeing other selective expansions. Singh said the bank has been talking to teams of lenders in northern New Jersey but has not found the right fit yet.

“That hasn't yet panned out, but we're looking over there, too,” he said.

Carving out lending specialties — such as the bank’s $600 million franchise portfolio — can be lucrative, also, but they are not immune from economic pitfalls.

The majority of that portfolio, about 68%, is in quick-service restaurants, and another 28% is in fitness franchises.

“We feel very good about fitness industry,” Singh said. “The trends are very, very solid and no issues over there.”

However, fast food is facing some margin pressures from rising labor costs and shifting consumer preferences. For example, delivery service is becoming more important to those businesses, and delivery often does not offer higher-margin items like desserts and certain drinks, Singh offered. Despite those trends, he said that those restaurant clients were still “very, very solid.”

M&A still makes sense for a bank aiming to scale up, but that route comes with challenges as well, Singh said.

“The biggest hurdle [is] that everybody's stock prices are depressed,” he said, adding that most banks would rather buy back stock to bolster shares than make a deal.

Singh said that acquirers’ stock has suffered after “the vast majority of deals” made in the last three to four years and that mergers of equals have unique challenges. He also predicted that bank M&A could slow as the 2020 election approaches.

“M&A has always been a difficult game, and I think it will continue to remain so,” Singh said. “To the extent deals aren't announced by April or May of next year, I think there will be even less deals after that in the second half of the year.”

BOK Financial: What big banks missed

Niche acquisitions may be the ticket for BOK in Tulsa, Okla. — or part of it.

The $43.1 billion-asset bank says it will look to the wealth management business and its streamlined mortgage department for a leg up over larger banks in the search of revenue growth.

It has acquired midsize wealth advisory shops in recent years to complement its expansion into markets like Dallas and Denver. Valuations on these businesses have flattened, which could make for good buying opportunities. And if interest rates remain low, clients will need help finding yield, giving new life to stock pickers and other advisers. This combination could spell further acquisitions for BOK.

BOK's chief executive, Steven Bradshaw, said that during times like these, larger banks are looking for scale and can sometimes leave higher-margin businesses up for grabs.

“The $20 million to $50 million net worth market really values advice, and they are willing to compensate you,” he said in an interview Wednesday. “That’s a sector that’s being left open for smaller organizations to do it.”

Meanwhile, BOK has spent the past two years scaling back its mortgage business to focus on refinancing loans its servicing department already handles and taking in leads from account holders who visit its branches. For instance, the bank exited the correspondent lending business in 2016 and has scaled back its "consumer direct" channel that focused mostly on purchase mortgages to buy homes. This has kept a lid on costs while the revenue from refinancings came in, pushing the mortgage business' gain-on-sale margin to 1.51% at the end of the third quarter, up from 1.21% a year earlier.

"It was fortunate timing," Bradshaw said. "I’m not going to suggest our crystal ball is better than anyone else's."

BOK is open to other ways to find new sources of revenue and expand within its fast-growing, newer markets like Phoenix, Denver, Dallas and Houston, but for now it will be selective with any whole-bank deals.

“It’s a small group of potential acquisitions that would meet our criteria,” Bradshaw said.

Fulton Financial: Freer to pursue M&A

Dealmaking is on the mind of management at Fulton Financial in Lancaster, Pa., too.

The $21.5 billion-asset bank hasn't bought a bank since February 2006, but it has been the subject of M&A speculation since May, when it was freed from the last of multiple Bank Secrecy Act regulatory orders. The company had been dealing with BSA-related issues since July 2014.

Fulton had also been the subject of a lengthy fair-lending investigation by the Justice Department. That probe ended this month with the government deciding against taking action against the company.

The end of the scrutiny “facilitates growth moving forward,” Chairman and CEO E. Philip Wenger said on the company’s conference call with analysts about third-quarter results.

While noting Fulton “would like to start off with a smaller one,” Wenger said it would consider suitors as large as $8 billion of assets and as small as $500 million. Mark McCollom, Fulton's chief financial officer, said it would also accept a tangible-book-value earn-back period of as long as five years if the right large deal presented itself.

Wenger reiterated earlier guidance that Fulton is interested in what "fill-in” deals that would add scale in its existing markets.

“We see opportunities within the footprint,” Wenger said. “I don’t know that I would say we see a lot right now, but there are some opportunities. We’re going to take a look when it’s appropriate.”

Wenger declined to discuss specific markets the company might be favoring, adding opportunities for fill-in deals “exist in every state we’re in.”

Fulton expanded in the Baltimore and Philadelphia markets earlier this year, opening new branches in both cities. The company is adding commercial lenders, too — 11 in Philadelphia and three in Baltimore, Wenger said.

Wintrust: Market new acquisitions like crazy

Wintrust Financial in Rosemont, Ill., endured a 25-basis-point hit to its net interest margins during the third quarter, as yields on loans and loans held for sale dropped. Ed Wehmer, president and CEO of the $34.9 billion-asset company, blamed much of the problem on assets tied to Libor, which declined 38 basis points in the quarter, and sought to assure analysts and investors that it is on the right path.

The company has been adding branches across the Chicagoland area, especially in the suburbs where it has acquired much smaller banks. The plan is to keep that going to bring in low-cost deposits.

"Our marketing is paying off," Wehmer said during his company's earnings call on Oct. 17. "We started marketing heavily in those markets. These smaller banks never really had the capital to go out and market."

Wintrust remains will keep shopping for acquisitions and seize on opportunities where it believes it can drive business growth to offset margin pressure. "We're not at a loss for future acquisition opportunities," he said on the call. "As our pipelines remain full, we are consistently asserting the value of these opportunities in all areas of our business."

Wehmer also said Wintrust would continue to capitalize on demand for mortgage refinancing while rates are low.

“When rates fall, our mortgages take off,” he said, helping the company generate additional fee income. “We have every expectation of a continued strong mortgage market.”

Wintrust’s third-quarter mortgage banking revenue increased 36% to $50.9 million from the second quarter. The percentage of origination volume from refis rose to 52% from 37% in that span.

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