Community Bankers' Focus for 2015? Deposits, Oil and M&A

A deep roster of community banking heavyweights gathered in New York for RBC Capital Markets' Financial Institutions Conference, and they had a lot to say about interest rates, energy prices and the future of M&A.

As the economy shows more signs of sustained recovery, loan growth took a back seat to more pressing issues.

Rather, presenters were encouraged to talk more about balance sheet performance in a rising rate environment, long-term views of consolidation and, for some, what slumping oil prices are doing to their business.

Here are American Banker's key takeaways from the community banking presenters.

Deposits Matter

Interest rates, and the renewed allure of deposits, were key topics at the conference, though that was largely by design. Every moderator made sure ask presenters about their preparations for rising rates.

Most bankers described their balance sheets as asset sensitive, and several touted having a high percentage of low-cost funding.

Core deposits make up 96% of the deposits at Columbia Banking System, with average cost of funds of 5 basis points, said Melanie Dressel, the Tacoma, Wash., company's president and chief executive. Columbia could still have 80% core funding if deposits run off, based on historic trends, she added.

Talmer Bancorp should be able to retain depositors when rates rise, said Dennis Klaeser, the Troy, Mich., company's chief financial officer. Talmer, previously named First Michigan Bancorp, has been an active buyer of failed and highly distressed banks.

"Our depositors have been through a lot of stress," Klaeser said. "Their banks failed, their brand changed, their systems changed. They got new checking, checkbooks and so forth … and they've stuck with us. So our expectation is that in a rising rate environment they'll prove to be a very valuable and sticky deposit base."

Klaeser was one of the few bankers who declined to describe his bank as being asset sensitive.

"I'd like to say I'm asset sensitive, but I'm not," Klaeser said. "We're relatively neutral. That has a lot to do with the character of the loans that we've acquired."

M&A Focus Shifts

Bankers often rely on M&A for specific purposes. For much of the postcrisis era, acquirers pursued deals to remedy anemic organic loan growth.

Future deals will likely look to address banks' needs for cheap deposits, fee income or scale in specific niches, based on comments from the conference's participants.

Deposits and niches were two key elements of Western Alliance Bancorp's recent agreement to buy Bridge Capital Holdings in San Jose, Calif. Bridge is an established technology lender that is also flush with deposits.

In fact, 69% of Bridge's deposits are demand accounts, said Dale Gibbons, Western Alliance's chief financial officer. "We think that's a good complement to our funding structure," he said.

"Enormous wealth has been generated in the Bay area, but frankly that's not all" that Bridge delivers, Gibbons added. "They have an office in Boston, for instance, so we get some geographic diversification out of it as well."

Wealth management has also become a major focus of M&A because of its reputation as a fee generator that is not capital intensive.

Clay Deutsch, chief executive of Boston Private Financial Holdings, tried to provide a reality check to bankers eager to buy wealth management firms.

Banks have to "process a lot of dirt to find a nugget," he said. It is tough to get sellers to buy into the culture of the overall organization, Deutsch said, noting that Boston Private had been dealing with such issues before his arrival.

"I want you to buy me, make me rich, but don't touch me," Deutsch said in describing many aspiring sellers. "We would not do a disconnected deal, only fully integrated ones. … That means not [going to] a lot of second meetings."

Texas Worries Overblown?

For bankers who do business in Texas, energy was an obvious topic of interest. To those presenters, the hit to their stock price doesn't reflect the realities of what's happening in Texas, or at least what is happening right now.

"If I hadn't been reading the paper or watching all the talk shows, I wouldn't even know anything was going on other than paying a cheaper price at the oil pump," said Geoff Greenwade, chief executive of Houston's Green Bancorp. "We keep reading about some of the larger energy companies with cutbacks, but to this point I haven't met anybody who's been laid off."

Green went public in August in an effort to gain a public currency to fund bigger acquisitions. The company's stock is off 23% from its debut, falling to $11.50 a share, or roughly 117% of its tangible book value and translating into a fairly weak currency for stock transactions.

Prosperity Bancshares is ready to come off its yearlong, self-imposed M&A hiatus, said David Zalman, the Houston company's chief executive. Prosperity's stock still trades at more than 2.7 times its tangible book value, even though it is down about 25% from its 52-week high.

"Contrary to popular belief … Texas has not fallen off into the Gulf of Mexico," Zalman said. For perspective, he noted that Prosperity's market cap fell by $800 million after a wave of analyst downgrades, even though the company only had $500 million in energy loans.

Bankers with energy portfolios said they expect falling oil prices to hurt their customers, though is too early to quantify the amount of pain.

"We're all expecting to see something, we just don't know what or when," said Dan Rollins, chief executive of BancorpSouth in Tupelo, Miss. East Texas and Louisiana, in particular, are starting to show signs of stress.

"We have seen some customers that have laid of some welders, where they've laid off some workers … because the number of rigs that are working is absolutely dropping," Rollins said.