The changing nature of bank ownership is creating more work — and opportunity — for chief financial officers.
Since the financial crisis, individual investors largely have been replaced by institutional and private-equity investors as the primary owners of many bank stocks. And, unlike retail shareholders, these investors are more demanding of regular face time with decision makers like CFOs, who better be prepared to answer questions not just about balance sheets and income statements, but also underwriting standards, loan concentrations and accounting methods.
"Investors are much more sophisticated as to their understanding of bank operations," said Harold Carpenter, CFO of the $8.7 billion-asset Pinnacle Financial Group in Nashville, Tenn.
"The CFO has to have a much deeper understanding of the bank's business model and be able to communicate the key metrics that make the franchise more valuable compared to other banks," Carpenter added.
Though investor relations takes up less of a CFO's time than tasks such as compliance and interest rate management, it is increasing in importance. Nearly one-fifth of all CFOs who participated in an American Banker survey this spring said that investor relations is a higher priority now than it was a year ago.
Not that CFOs are complaining. While they may be logging longer hours responding to shareholder pressure, they see those interactions as an opportunity to shape perceptions of the bank and help drive value. Historically, that's been the chief executive's job.
"Interacting with investors and potential investors in meetings gives me a chance to explain our achievements and opportunities," said John Michel, CFO at the $2.6 billion-asset First Foundation in Irvine, Calif.
It's no accident that CFO duties have been expanded as more private-equity and institutional money has entered the sector. Those investors are typically more hands on than individuals as they look to maximize returns and identify the right time to exit an investment, and they need CFOs' input to help make those decisions.
"There's a heightened sense of concern and attention being paid to shareholder value," said Larry Sorensen, CFO at the $5.3 billion-asset Washington Trust Bank in Spokane, Wash. "Pre-crisis, there was a terrific run-up in bank stock valuations and people were rewarded in the marketplace. That just hasn't happened today, and financial performance hasn't recovered to what it was."
Demands on CFOs also increase as banks get larger, said Clint Stein, the CFO at Columbia Banking System in Tacoma, Wash. The $8.9 billion-asset Columbia has grown significantly since the crisis, largely through acquisitions, and that has attracted more shareholder interest.
"We do spend considerably more time on investor relations than we did pre-crisis, mostly as a result of our increases in market cap and percentage of institutional ownership," Stein said.
Institutional ownership has swelled at banks of all sizes in recent years. At Columbia, institutions now own 89% of Columbia's outstanding shares, up from 57.6% in 2007, and at Pinnacle, institutions now control 67.6% of the outstanding shares, versus 26.1% at the end of 2007.
Institutional investors also tend to pay closer attention to events in other industries that can influence financial results and shareholder returns. Before recently resigning as CFO at the $69 billion-asset Comerica in Dallas, Karen Parkhill said she fielded many questions from investors about the effect of low energy prices on the company's loan portfolio.
"I believe investors are much more in tune with the details today, with a deeper understanding of oil and gas, and its impacts, for example," she said in an interview in March. "Investors are even more knowledgeable about the intricacies of our business, I believe, which is a good thing."
Matthew Johnson, the CFO at the $1.7 billion-asset WashingtonFirst Bankshares in Reston, Va., agreed.
"Investors' views have not changed, so much as the volume and depth of their questions," Johnson said.
"In the past, questions focused on areas such as margins, efficiency and fee income," he said. "Now questions are more focused on things like CRE concentrations and underwriting criteria for acquisition, development and construction loans."
Carpenter said Pinnacle's investors are apt to ask him to walk them through matters such as purchase accounting, loan-loss reserve assessments and the regulatory impact on earnings.
"They dig into the finer points," he said.
Still, CFOs largely embrace the notion of working with investors, with some characterizing such interactions as the best part of their jobs. CFOs recognize that if shareholders aren't comfortable with them, then they will likely invest their money elsewhere.
"Investors are choosing management teams that are good operators capable of delivering growth through the business cycle," Carpenter said.