State of the Banking Industry
James C. Mabry IV
Managing Director
May 30, 2013
General Information and Limitations
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(“Stifel Financial”) and, unless otherwise indicated, information presented herein with respect to the experience of KBW also includes transactions
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regarding KBW and Stifel also includes transactions effected and matters conducted by the Capital Markets Division of Legg Mason Wood Walker, Inc.
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15, 2013, Stifel Financial, the parent company of Stifel, entered into an Agreement to acquire Knight Capital Group’s Institutional Fixed Income
Brokerage unit, subject to customary closing conditions and regulatory approvals. All transaction announcements included herein appear as a matter of
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2
Table of Contents
Section
Tab
700 Years in 70 Seconds
1
Current Banking Environment
2
Washington: the Good, the Bad, the Ugly
3
Tomorrow’s Newspaper, Delivered Today
4
3
700 Years in 70 Seconds
Founders of Banking
Giovanni Di’ Medici
5
The One Who Started It All
•
Banking activities have been around for centuries
– Deposits originally consisted of cattle, grain, crops and precious metals
•
Modern-day banking started in Medieval Italy
– The most famous Italian bank was Medici Bank, founded by Giovanni Di’ Medici in 1397
– Built lavish branches as far north as London
– Enjoyed distinction as main banker for the Pope
6
Founders of Banking
J.P. Morgan
7
Founders of Banking
Hugh McColl
8
Founders of Banking
Ben Bernanke
9
Founders of Banking
Jamie Dimon
10
Founders of Banking
Barney Frank
11
Founders of Banking
Sheila Bair
12
Founders of Banking
Carl Chaney
13
Banks Through Recent History
15,000
1985
June 10th Supreme Court
Ruling on Interstate Banking
Number of Banks
12,000
1994
Riegle-Neal Interstate Banking
and Branching Efficiency Act
9,000
6,000
1933
• Glass–Steagall Act
• FDIC Formed
1999
Glass–Steagall
Repealed
3,000
2007
Recent Crisis
0
1934
Source: FDIC
1947
1960
1973
1986
1999
2012
14
From the Market Peak to Current
120
Sep. 14–17, 2008
• BoA announces plans to acquire ML
at 70% equity premium
• Lehman Bros files for Chapter 11
• Initial AIG Bailout
Sep. 13, 2012
Fed Announces
QE3
100
Apr. 9, 2010
Eurozone Relief Rally
DJIA: 11,000
80
Index
Mar. 1, 2013
Sequester is
Implemented
Mar. 13, 2012
Positive Stress
Test Results
60
40
20
Mar. 14, 2008
Bear Stearns
Fails
Oct. 14, 2008
Announcement
of TARP
May 11, 2012
JPM loses $2bn due to
poor ‘hedging’ strategy
Quantitative Easing
QE2
January 1, 2013
U.S. avoids
fiscal cliff
QE3
0
KBW Bank: (30%)
Source: SNL Financial
Data as of 5/28/13
KBW Bank Index (BKX) includes 24 geographically diverse stocks representing national money center banks and leading regional institutions
15
The Future of the Bank Branch
•
The pace of bank branch openings has slowed dramatically
– Driven by the industry’s push to cut costs
•
Only 5 states saw a net increase in the number of branches over the past 12 months
Most Active Branch Builders in Q1 ‘13
Net Branch Openings (1)
Net Openings
∆
JPMorgan Chase
18
↑
Huntington Bancshares
12
↑
5
↑
Company
Toronto-Dominion
Most Active Branch Consolidators in Q1 ‘13
Net Openings
∆
Bank of America
-59
↓
BNP Paribas
-35
↓
PNC Financial Services
-19
↓
Company
(1)
Source: SNL Financial
Represents the number of net openings and closings from April 1, 2012 to March 31, 2013
16
Back to the Future: Banking Edition
Apple Store or Bank Branch?
Coffee Shop or Bank Branch?
FNB (Johannesburg, South Africa)
Commonwealth Bank (Brisbane, Australia)
Mobile Devices: The Banks of the Future
17
Current Banking Environment
Current Banking Environment
• The largest banks dominate the competitive landscape
• The banking industry has experienced unprecedented change in recent years
• Valuations have come up as profitability has returned to the banking sector
• Strong 2013 equity markets have driven capital markets performance
• Level of FDIC failures have slowed—will whole bank M&A return?
• More regulatory uncertainty for all banks
19
The Banking Landscape
Distribution of Banks
Distribution of Assets ($bn)
158
466
2%
7%
$856 $443
5% 2% $929
5%
635
10%
158 banks
nationwide account
for 88% of assets
$16,268
88%
5,269
81%
< $500 mm
Source: SNL Financial; data as of 3/31/13
$500 mm - $1.0 bn
$1.0 bn - $5.0 bn
> $5.0 bn
20
Thriving Banks by Region – According to the Fed
Percentage of Thriving Banks in Each State
Source: Federal Reserve Bank of St. Louis
Community banks defined as U.S. banks with less than $10.0 billion in assets
Thriving community banks defined as banks that maintained a composite CAMELS rating of 1 from 2006 to year end 2011
21
KBW Research Outlook for Banks
•
Earnings Outlook is
Challenging Due to
NIM Compression
– EPS growth is only estimated to be 7% in 2013 and 5% in 2014
– 90% of banks are expected to have a decrease in NIM this year
•
Loan Growth
May Be Difficult
to Achieve
Loan growth will remain challenging
– Low loan growth and competitive pricing
•
Focus Will Shift to
Expense Initiatives
Difficult earnings environment expected to persist due to NIM compression
Expense initiatives will be increasingly focused upon
– Expense management is critical
– Branch rationalizations could be a meaningful catalyst for 2013 EPS
Source: KBW Research, “Initial 1Q13 Trends Continue: KBW Bank Earnings Wrap-Up, v3”. Published 4/26/2013
22
The Good News
Credit is Yesterday’s Headline
Profitability is Up
4.0%
1.20%
3.3%
3.0%
2.9%
2.7%
2.2%
2.0%
0.99%
1.02%
2012
Q1 '13
0.91%
0.80%
0.78%
2.1%
0.63%
1.5%
0.46%
0.40%
1.0%
0.0%
0.00%
2008
2009
2010
2011
2012
Q1 '13
2008
KRX Median NPAs/ Loans & REO (%)
2010
2011
KRX Median Core ROAA (%)
Capital Levels are Strong
9.0%
2009
Investors Like Bank Stocks Again
8.7%
8.5%
8.7%
130.0
8.1%
100.0
8.0%
7.4%
70.0
7.0%
6.6%
40.0
6.0%
2008
2009
2010
2011
2012
KRX Median Tang Common Equity/ Tang Assets (%)
Q1 '13
12/31/07
12/31/08
12/31/09
S&P 500
12/31/10
12/31/11
12/31/12
KBW Regional Bank
Source: SNL Financial
Financial data as of 3/31/13; pricing data as of 5/10/13
The KBW Regional Bank Index (KRX) is a composition of 50 regionally diversified mid & small-cap banking institutions in the U.S. and is calculated using an equal-weighted method
23
The Bad News
Credit Levers are Pulled
Growth Outlook is Modest
50%
50.0%
40%
40.0%
30.0%
30%
20.0%
Median =
5.9%
20%
10.0%
10%
0%
(10.0%)
2010
2011
2012
EPS Growth
2013E
2014E
SNV
FMBI
IBKC
FMER
BPFH
CATY
BRKL
PACW
PNFP
BXS
ONB
CVBF
WTFC
UBSI
SUSQ
HBHC
PRK
EWBC
UMPQ
CBU
WBS
TRMK
WABC
STBA
BOKF
0.0%
8 banks with Negative
EPS Outlook
KRX '13-'14 EPS Growth (%)
Pre-Tax, Pre-Provision Growth
Median
Profitability is Still at Depressed Levels
ROAA (%)
ROATCE (%)
21.0%
1.5%
1.3%
1.0%
1.0%
14.0%
0.5%
7.0%
0.0%
0.0%
2000-2007 KRX
Median
2012 KRX Median
18.4%
11.6%
2000-2007 KRX
Median
2012 KRX Median
Source: SNL Financial
Financial data as of 3/31/13
The KBW Regional Bank Index (KRX) is a composition of 50 regionally diversified mid & small-cap banking institutions in the U.S. and is calculated using an equal-weighted method
24
Net Interest Margin Pressure Continues
4.50%
4.36%
4.38%
4.28%
4.25%
4.20%
4.22%
4.18%
4.06%
4.05%
4.00% 4.01%
4.01%
4.00%
3.90%
3.82% 3.81%
3.78%
3.75%
3.75%
3.71%
3.63%
3.60%
3.50%
1996
(1)
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: SNL Financial, KBW Research
Financial data represents median values for all regulated depositories
Source: KBW Research, “Initial 1Q13 Trends Continue: KBW Bank Earnings Wrap-Up, v3”. Published 4/26/13
2006
2007
2008
2009
2010
2011
2012
2013E(1)
25
Emphasis on Cost Control Will Continue
Efficiency Ratio (FTE)
75%
72.0%
69.4%
70%
70.7% 70.5% 70.5%
67.5%
65%
61.2%
60.0%
61.5%
62.4% 62.6%
64.0%
64.8% 65.1% 64.7%
66.0%
63.1%
60%
55%
50%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Noninterest Expense / Average Assets
3.10%
3.06%
3.05%
3.02% 3.02%
3.02% 3.01%
3.00%
2.98%
3.00%
2.95%
2.97%
2.94% 2.94% 2.95% 2.94% 2.95%
2.94%
2.91% 2.91%
2.89%
2.90%
2.85%
2.80%
1996
1997
1998
1999
2000
2001
Source: SNL Financial
Financial data represents median values for all regulated depositories
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
26
Valuation Drivers
Recent Market Performance
2012 – 2013 YTD
Performance Through Cycle (Since 12/31/07)
20.0%
60.0%
16.2%
56.6%
13.1%
0.0%
40.0%
32.0%
(20.0%)
26.1%
27.5%
DJIA
KRX
20.0%
(16.9%)
(30.4%)
(40.0%)
DJIA
S&P 500
KRX
BKX
0.0%
S&P 500
BKX
The Largest have
clearly outperformed
Source: SNL Financial
Pricing data as of 5/28/13
The KBW Regional Bank Index (KRX) is a composition of 50 regionally diversified mid & small-cap banking institutions in the U.S. and is calculated using an equal-weighted method
The KBW Bank Index (BKX) is a capitalization-weighted index composed of 24 geographically diverse stocks representing national money center banks and leading regional institutions
28
Valuation Increase by Region
Median Price to Tangible Book Value (%)
150%
March 9, 2009
The Southeast has
seen the greatest
increase in
valuation since
market lows
May 21, 2013
140%
125%
126%
124%
117%
116%
112%
109%
100%
85%
75%
79%
73%
71%
71%
50%
Valuation
Increase
(%)
Midwest
West
Mid-Atlantic
Southeast
Southwest
Northeast
58%
47%
59%
74%
15%
65%
Source: SNL Financial
Pricing data as of 5/20/13
Note: March 9, 2009 represents the market low of the 2007-2009 recession
Includes all major-exchange traded banks and thrifts nationwide; excludes merger targets
29
Shift in Valuation from Book to Earnings
Price / Tangible Book Value (%)
350%
301%
Price / 2014 Consensus EPS Estimate (x)
Middle 50% Range
Lower:
124%
Upper:
191%
42.0x
300%
36.0x
250%
30.0x
200%
24.0x
150%
18.0x
100%
87%
35.8x
12.0x
50%
6.0x
0%
0.0x
Source: SNL Financial
Pricing data as of 5/15/13
Includes all major exchange traded banks and thrifts headquartered in the Southeast with assets between $1.0 billion and $10.0 billion
Excludes merger targets and banks without 2014 consensus estimates
Middle 50% Range M
Lower:
12.5x
Upper:
15.1x
10.2x
30
Asset Size Drives Valuation
Price to Tangible Book Value vs. Asset Size
175.0%
150
Price / Tangible Book Value (%)
161.6%
# of Banks
120
139.2%
125.0%
90
# of Banks
Price / Tangible Book Value (%)
150.0%
115.6%
100.0%
60
92.2%
75.0%
30
50.0%
< $1.0 bn
$1.0 bn - $2.0 bn
$2.0 bn - $5.0 bn
Asset Size
Source: SNL Financial
Pricing data as of 5/28/13
Includes all major exchange traded banks headquartered nationwide with assets less than $10.0 billion; excludes merger targets
$5.0 bn - $10.0 bn
31
Capital Markets Environment
Current Capital Markets Environment
2013 Sector Performance
LTM Equity Capital Markets Volume
$40.0
Health Care
22.8%
21.3%
Financials
21.0%
Consumer Staples
20.1%
Industrials
16.6%
Utilities
15.7%
Telecom
14.4%
Inf ormation Technology
10.5%
$34.9
$35.0
Equity Capital Markets Volume ($bn)
Consumer Discretionary
Non-Financials
Financials
$30.0
$25.0
$20.0
$16.9
$16.6
$15.1
$15.0
$12.4
$25.6
$12.3
$10.9
$10.7
$10.6
$9.0
$10.0
$6.7
Energy
10.2%
Materials
9.6%
5.0%
Source: KBW Equity Capital Markets
Data as of 5/17/13
10.0%
15.0%
20.0%
$9.5
$7.7
$0.4
$0.0
0.0%
$4.8
$5.0
$3.5
$1.4
$1.2
$1.4
$4.3
$4.0
$2.3
$3.3
25.0%
33
Capital Markets Environment for Banks
Investor Themes
2009 - 2012
•
Follow-on Offering Volume
100
Fortify balance sheet
– Fill credit holes
$100
83
80
$80
60
$60
– Redeem TARP
•
Dry powder for offense
51
Current
•
40
$40
Acquisition finance
25
20
•
Private Equity sell-downs
•
Re-emergence of the IPO market
20
$20
3
0
•
$0
2009
2010
2011
2012
2013 YTD
P / PF TBV: 1.10x
1.10x
1.25x
1.25x
1.38x
Non-common solutions
Number of deals
Source: SNL Financial and Dealogic
Proceeds ($bn)
34
M&A Environment
Key Drivers for Increased Consolidation
• Revenue headwinds for the industry
• Slow / low growth economic environment
• Regulatory/compliance requirements
• Legacy asset quality problems
• Overcapacity
• Management and board fatigue
• Limited access to capital markets
• Possible constraints:
– Purchase accounting / classified asset ratios
– Classified / Capital Ratio
– Bid-ask spread
36
Consolidation Trends Among U.S. Depository Institutions
Asset Range
16,000
< $100 million
$100 - $250 million
$250 million - $1 billion
$1 - $10 billion
Institutions
12,000
> $10 billion
8,000
4,000
0
Source: SNL Financial as of 12/31/12
37
Recent M&A Trends
Whole Bank M&A Since 2000
Nationwide
Southeast
Nationwide
300
70
60
250
50
200
40
150
30
100
20
50
10
0
Southeast
350
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
YTD
FDIC-Assisted Acquisitions since 2000
Nationwide
Southeast
Nationwide
150
60
50
120
40
90
30
60
20
30
10
0
Southeast
180
0
2000
Source: SNL Financial
Data as of 5/15/13
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
YTD
38
Will These Banks Fail?
Bank A
Headquarters:
Assets:
Branches:
NPAs / Loans + OREO:
Texas Ratio:
Bank B
St. Louis, MO
$73.6 mm
1
22.09 %
262
Headquarters:
Assets ($mm):
Branches:
NPAs / Loans + OREO:
Texas Ratio:
Bank C
Baltimore, MD
$465.2 mm
5
60.65 %
655
Headquarters:
Miami, FL
Assets ($mm):
$1,143.4 mm
Branches:
NPAs / Loans + OREO:
Texas Ratio:
25
25.71 %
312
TCE / TA:
5.85 %
TCE / TA:
6.42 %
TCE / TA:
4.37 %
Leverage Ratio:
5.76
Leverage Ratio:
6.42
Leverage Ratio:
4.33
Will this bank fail?
Source: SNL Financial
Data bank level as of 3/31/13
Will this bank fail?
Will this bank fail?
39
M&A Trends by Region
Comparison of Recent Pricing Multiples: 2010-2011 vs. 2012-2013 YTD
Change in
Exit
Multiples
(20.1%)
(1.2%)
3.9%
2.9%
17.8%
16.4%
Median Deal Value / Tangible Book Value (%)
160.0
145.2%
140.0
130.6% 129.1%
124.3%
120.0
119.6%
116.1%
116.0%
109.6%
112.8%
98.6%
100.0
92.2%
79.2%
80.0
60.0
Northeast
Southwest
Mid Atlantic
2010-2011
Midwest
West
Southeast
2012-2013 YTD
Source: SNL Financial
Data as of 5/15/13
Includes all whole bank & thrift transactions announced nationwide since 12/31/09 with disclosed deal values
40
Buyers’ Capacity to Pay is Improving
Change
> $20 bn
128.6%
Total Assets
$5.0 bn - $20 bn
135.8%
$2.5 bn - $5.0 bn
$1.0 bn - $2.5 bn
$500 mm - $1.0 bn
126.4%
87.5%
Today
32.7%
> $20 bn
11.4%
28.9%
153.6%
$2.5 bn - $5.0 bn
$1.0 bn - $2.5 bn
$500 mm - $1.0 bn
92.1%
161.3%
$5.0 bn - $20 bn
17.8%
Total Assets
12/31/11
137.8%
116.4%
93.8%
1.8%
< $500 mm
< $500 mm
71.0%
87.3%
16.4%
0.0%
50.0% 100.0% 150.0% 200.0%
Price / TBV (%)
Source: SNL Financial
Pricing data as of 5/9/13
Includes all major exchange traded bank and thrifts headquartered in the United States
0.0%
50.0% 100.0% 150.0% 200.0%
Price / TBV (%)
41
What Matters to a Buyer?
Asking the Right Questions
Location, Location,
Location
•
Is the target’s geography attractive?
Core Bank Attributes
•
How attractive is the target’s mix of loans and deposits?
Size Matters
•
Size of the target – will this acquisition “move the needle”?
Credit Management
•
How aggressive has the target been in managing credit?
Management
•
Is the target perceived to be healthy and well-managed?
Product & Service Line
Diversification
•
Are there any unique business lines or products that the target offers?
42
What Matters to a Seller?
Asking the Right Questions
Price
•
Who can offer the highest price? Will there be future price appreciation?
Liquidity
•
Does the buyer have a liquid currency that will allow shareholders to trade?
Board / Management
Representation
•
Will there be board / management representation in the combined company?
Consideration
•
What is the consideration mix (stock / cash)? Will the deal be tax-free?
Employees
•
How will our employees be treated? Will there be severance packages?
Double Dip Potential
•
Is there potential to benefit from multiple “take-out” premiums if our buyer
decides to sell in the future?
43
Case Study: Transformational M&A Transaction
Pro Forma Footprint and Highlights
Acquisition Highlights: SCBT Financial Corporation – First Financial Holdings Inc.
Buyer:
Ticker:
Headquarters:
Assets:
NASDAQ: SCBT
Columbia, SC
$5.1
Seller:
Ticker:
Headquarters:
Assets:
NASDAQ: FFCH
Charleston, SC
$3.2
Pro Forma Highlights
Assets:
Loans:
Deposits:
Core Deposits:
Employees:
Branches:
$8.3
6.1
6.9
4.9
2,170
148
SCBT
FFCH
Dollars in billions
Source: SNL Financial
Data as of 3/31/13
Pro forma figures exclude purchase accounting adjustments
45
Transaction Assumptions
Deal Value
•
Deal value of $302.5 million; 10.9% market premium; 130% of TBV
•
$65.0 million of Legacy TARP preferred equity to be rolled over at close
•
SCBT and FFCH consensus estimates through 2014; grown at median long
term growth rates of 8.0% and 10.0%, respectively, per FactSet
•
Purchase accounting adjustments
Earnings
–
–
–
Purchase Accounting
Marks
•
30.0% cost savings of FFCH’s projected 2014 noninterest expense of
$128.5 million, per FactSet
•
Equal to 1.50% of FFCH’s transaction accounts of $1,697.1 million as of
3/31/13
•
Amortized using an accelerated method (SYD) over 10 years
•
Merger-related charges equal to $30.0 million after-tax
Cost Savings
Core Deposit
Intangibles
Mark to projected gross loan portfolio of (5.3%) or $132.4 million
Mark to OREO of (30%) or $4.9 million
Mark to FHLB of $26.4 million based upon estimated prepayment penalty
Merger Charges
46
Summary of Purchase Accounting Adjustments
Purchase Accounting / Goodwill Calculation
Fully Diluted Deal Value
Preferred Equity
Total Purchase Price
FFCH Tangible Equity (Includes Pref.)
After-tax Merger Charges (Seller)
Dollars in millions
$302
65
$367
310
(15)
Pre-tax FMV Adjustments:
Gross Loan Mark
OREO
FHLB
Allowance for Loan Losses
Core Deposit Intangible
($132)
(5)
(36)
47
25
Net FMV Adjustments:
Net FMV Adjustment
Deferred Tax Asset/(Liability)
(101)
35
After-Tax FMV Adjustments:
(65)
Fair Value of Net Assets Acquired
Goodwill
229
138
Total Purchase Price =
Common + Preferred
Consideration
Purchase Accounting
Adjustments
Goodwill = Purchase
Price Less Net Assets
Acquired
47
Book Value Impact
Pro Forma Book Value Impact
Tangible Book Value per Share ($)
$45.00
$40.00
2.25 Year Earnback
$35.00
$30.00
$25.00
$20.00
Today
8.6% Initial Dilution
Close 12/31/13
2014
2015
Standalone
Note: Accretion analysis is the hypothetical impact given the assumptions on page 46, per KBW
2016
2017
2018
Pro Forma
48
Earnings Impact
Pro Forma Earnings Impact
20.5% accretion
21.4% accretion
22.5% accretion
$6.00
23.6% accretion
$5.50
$5.13
18.6% accretion
$4.79
$5.00
$4.57
$4.48
$4.23
$3.98
EPS ($)
$4.00
$3.92
$3.63
$3.36
$3.00
$2.00
$1.00
$0.00
2014
2015
2016
Standalone
2017
2018
Pro Forma
Initial accretion limited due to phase-in of cost savings
Projected earnings based on 2014 FactSet EPS estimates and grown at median long term growth rate, per FactSet
Accretion analysis is the hypothetical impact given the assumptions on page 46, per KBW
49
Market Reaction
Price Performance since Transaction Announcement
SCBT: 18.0%
$50.94
120.0
Current
Absolute:
Relative (1):
115.0
110.0
18.0%
12.5%
Day After Announcement
KRX: 5.4%
Absolute:
Relative
(1)
Curren
Day After Annou
1.3%
:
2.7%
105.0
100.0
$43.18
95.0
(1)
Source: SNL Financial; pricing data as of 5/28/13
Relative to the KRX
50
Washington: the Good, the Bad, the Ugly
The Good, the Bad, The Ugly
Washington / Regulatory Actions
GOOD
•
The U.S. Treasury is getting out of TARP
BAD
•
Confusing capital requirements surrounding Basel III
UGLY
•
Regulatory guidelines are distracting banks from core competencies
52
The Good: Treasury’s Exit from TARP
• Treasury first invested $204.9 billion in 707 institutions and has earned back $216.7 billion to date
• In early March 2012, Treasury indicated that it intended to exit the TARP program
• To date, Treasury has conducted 15 Dutch auctions involving 121 TARP institutions
• The Treasury currently has outstanding CPP investments of approximately $6.1 billion in 168 banks
– Approximately 1/3 of outstanding CPP is held by 2 financial institutions: SNV and BPOP
Source: U.S. Treasury, KBW Research: “KBW TARP Tracker – 102nd Edition”
53
The Good: Treasury’s Exit from TARP (Continued)
Status of the 707 TARP Banks
Other
(Losses,
Conversion,
Partial)
48
Public
7%
Auction
121
17%
Full
Repayments
205
29%
Outstanding TARP Investments
The Treasury currently has outstanding CPP investments of
approximately $6.1 billion in 168 banks
Outstanding
168
24%
100%
$1.0 bn
75%
SBLF
137
19%
$0.9 bn
2 banks (SNV and
BPOP) account for
31% of Outstanding
TARP Investments
SNV
50%
$4.2 bn
25%
BPOP
Other
CDCI
28
4%
0%
Outstanding TARP
Source: U.S. Treasury, KBW Research: “KBW TARP Tracker – 102nd Edition”
54
The Bad: Basel III
•
Many banks are still struggling to understand
the implications of pending Basel III
regulations
•
Rules have been postponed indefinitely so
banks are finding it difficult to prepare for the
new rules
•
Additional buffers have been created as part
of the regulation which are confusing and
difficult to apply in practice
55
The Evolution of Basel
BASEL I
• First Basel Accord in 1988
• Strengthened the stability of
the international banking
system
• Introduced risk-based capital
• Classified assets into 5
categories, carrying various
risk weights of 0% to 100%
• U.S. banks currently operate
under Basel I
BASEL II
• Never adopted by U.S.
Regulators before the
Financial Crisis
BASEL III
• Response to the 2007-2008
Financial Crisis
• Reduced risks by making
capital more sensitive to risk
• Most recent revision to
international capital
standards
• Risk weightings applied to
more narrow categories of
assets
• Focus on increasing equity
capital requirements for all
banks
• Banks could opt for an
“internal ratings based” (IRB)
approach
• Expected to result in larger
buffers for losses
Source: The Federal Reserve Bank of Richmond, Economic Brief: “Basel III and the Continuing Evolution of Bank Capital Regulation”
• Implementation has been
delayed indefinitely
56
“Well-Capitalized” Basel Standards
Regulatory
Capital Ratio
Proposed
Basel III
Capital Conservation
Buffer
Base
5.0 %
Prompt Corrective Action
"Well-Capitalized"
Total
Well-Capitalized under PCA
+
0.0 %
5.0 %
5.0 %
Common Equity Tier 1 risk-based capital 4.5
+
2.5
7.0
6.5
Tier 1 risk-based capital
6.0
+
2.5
8.5
8.0
Total risk-based capital
8.0
+
2.5
10.5
10.0
Leverage Ratio
Implications of Falling below “Well-Capitalized”
•
Dividend restrictions
– Includes restrictions on preferred
dividend payments
•
Management Compensation
•
Share repurchase limitations
Source: SNL Financial
Capital Conservation Buffer will be phased-in from 2016-2019
57
Basel III Implications & Reactions
Potential Responses to Increased Capital Requirements & Risk-weightings
Reduce
Issue New
Equity
Lending
Activities /
Alter Lending
Composition
Increase
Pricing /
Rates on
Loans
Liquidate
Specific
Assets
Find a
Partner
… But Basel Isn’t Fully Implemented For Years
• Basel III implementation has been delayed indefinitely
• Banks already have started thinking about Basel III
• The loans banks make today will be on the books
when regulatory capital changes begin to phase-in
58
Who is More Affected by Basel III?
Case 1: Money Centers and SIFI’s
• More deductions for Tier 1 Capital
– Greater variance in assets
• Larger firms must implement wider and more
complex systems changes
• Basel III was aimed to reduce the risk of large
“megabanks” not community banks
Source: SNL Financial
Case 2: Community Banks
• Limited access to capital
• Fewer resources than large banks
• Writing mortgages will be more complicated
for banks with small staffs
• Larger banks have had more time to prepare
for new capital requirements
– Big banks have been off-loading non-core
businesses since the financial crisis
59
Community Banks Respond to Basel III
Responses to Basel III NPR
Banks
Responses
16,000
15,000
14,000
12,000
10,000
8,000
6,658
6,000
4,200
4,000
2,000
600
0
Banks Insured by Institutions that
Banks
the FDIC
Submitted
Represented on
Comment Letters ICBA's Petition
•
Source: SNL Financial, FDIC, American Banker
Signatures on
ICBA's Petition
The Independent Community Bankers of America created a
petition that called for an exemption for smaller institutions
60
Feedback on Basel III
Thomas B. Michaud
President & CEO
Keefe, Bruyette & Woods
“We recommend that certain
aspects of the Basel Ill
framework should not be
imposed on banking institutions
with assets below $10 billion
[…] The expense burden related
to Basel Ill could reduce
community bank profitability and
hinder lending capacity at a time
when credit is needed to finance
a needed business
expansion in the U.S.”
Senator Al Franken
Minnesota (D)
Source: SNL Financial, FDIC, American Banker
“Regulators should also
consider the portfolios
of community banks
compared to large
banks […] Additionally,
community banks
around the country are
considerably smaller
and would find
compliance more
difficult than those
banks with larger
staffs.”
“Basel III relies on a set of
subjective, simplifying
assumptions to align a firm's
capital and risk profiles. Even
high levels of capital cannot
save a firm from bad
management or save an
industry from the cumulative
effects of excessive risk
taking.”
Thomas M. Hoenig
Director
FDIC
“This would be
punitive for my
bank and we would
be forced to
increase the cost of
the credit to
customers. It does
not help a
community bank
like mine.”
W. David Lacy
CEO, Community Bank &
Trust (Waco, TX)
61
The Ugly: Regulatory Changes are Consuming Management Attention
100 senior executives were surveyed in 2012 and 2013 regarding initiatives which take
management time and attention away from core banking activities
Initiatives Consuming Management Attention
0%
5%
10%
25%
30%
35%
40%
18%
10%
Improving Risk Management Processes
7%
9%
Improving Operating Processes
19%
8%
Mergers & Acquisitions
12%
3%
13%
2013
Source: American Banker, KPMG
Note: Only select initiatives shown
* Includes new product development, pricing strategies and geographic expansion
20%
35%
Navigating Changes in the Regulatory Environment
Making Investments in Organic Growth *
15%
2012
62
Tomorrow’s Newspaper, Delivered Today
October 23, 2014
Tomorrow’s Newspaper
October 23, 2014
financialgazette.com
The Financial Gazette
FDIC Slashes its Resolutions Department
FDIC-Assisted Closures Diminish with Only 2 Bank Failures Year to Date
Washington, DC – Early this
morning the Board of Directors of
the FDIC announced a significant
downsizing of its resolutions
department.
Since 2011, only 85 banks and
thrifts have been seized by the
FDIC compared to 92 in 2011 and
157 in 2010. The lack of failures
coupled with continued federal
spending cuts has directly led to
the reduction of the resolutions
department
FDIC Failures Slow: Chairman of the Federal Deposit
Insurance Corporation, Martin Gruenberg, explores the
banking industry and the lessening role of FDIC resolutions to
insure its stability
that banks will be able to outlast
the economic downturn and work
through their problems without
“hitting the chopping block.”
He also reiterated that not all
banks have gotten past the issues
started in 2008. 542 banks still
remain on the problem bank list;
however, the FDIC will only seize
banks and thrifts if they fall well
below
the
“well-capitalized”
threshold.
Going
forward,
Gruenberg
As the economy continues to predicts there will be 1-5 failures a
improve and the banking industry year.
strengthens, Gruenberg believes
Continued on page 3
65
Where Have the FDIC-Assisted Acquisitions Gone?
FDIC failures continue to diminish and will return to mid 2000’s levels by 2014
FDIC Failures
180
157
160
140
140
120
92
100
80
51
60
32
40
20
?
2
0
2009
Source: FDIC
Note: red box represents YTD annualized figures
2010
2011
2012
2013
2014
66
January 15, 2015
Tomorrow’s Newspaper
January 15, 2015
financialgazette.com
The Financial Gazette
Bank of America Closes 2,000 Branches
Efficiency Efforts Continue to Develop in the Current Low-Rate Environment; Stock Responds Positively
Charlotte, NC – Bank of America
Corporation
announced
this
morning the implementation of a
efficiency initiative which will
close over 2,000 branches and lay
off roughly 20,000 employees.
Branch closures: Bank of America Corporation Chief Executive
Officer, Brian Moynihan, defends the rationale behind the significant
branch closings and cost savings initiative
Chief Executive Officer, Bryan
Moynihan, stated, “Staying afloat
in today’s difficult banking
environment can only be achieved
by adapting to the current times.
Today over 50% of checks are
deposited via some sort of smart
phone or widget. That being said,
we decided to cut expenses in the
most effective way: closing
branches.”
Investors seem to agree with
Moynihan’s thesis as the stock has
increased nearly 5% in 3 days.
Several rumors have circled the
banking sector regarding other big
banks
implementing
similar
strategies. Do not be surprised if
the biggest 15 to 20 banks initiate
a mass branch closure in the
upcoming months.
68
Bank of America Closures: Is it Worth the Hassle?
General Assumptions:
– Assumes Bank of America closes 2,000 branches, or 36.9% of their branch network
– Assumes 10 employees work at each branch
– Assumes the following operating costs per branch:
o
Salaries & Benefits (20%) = $450,000
o
Rent & Utilities = $55,000
o
Total Expenses per Branch = $505,000
– Total Expense Savings = 2,000 branches x $505,000 / branch = $1,010 million
Impact to Earnings (1)
Branch Expense Assumptions
$12,000
Rent &
Utilities
$55,000
11%
Salaries &
Benefits
$450,000
89%
$11,500
$11,096
($ in millions)
•
$11,000
$10,500
$10,440
$10,000
$9,500
$9,000
2013 BAC Net Income
Estimate
(1)
Assumes 35% tax rate, or after-tax expense savings of $656.5 million
2013 Pro Forma BAC Net
Income
69
March 14, 2016
Tomorrow’s Newspaper
March 14, 2016
financialgazette.com
The Financial Gazette
WFC, Last of “Too Big to Fail” Banks, Shutters Branches
Wells Fargo Initiates Plan to Close Nearly 3,000 Branches; Chipotle Seen as Big Winner
San Francisco, CA – After a year
of continuous branch downsizing
and expense cut initiatives, Wells
Fargo Corporation announced it
too will shutter several thousand
branches in the upcoming years to
improve efficiencies. This plan
expects to cut 3,000 branches and
30,000 employees.
Branch shutters continue: Wells Fargo Corporation Chief
Executive Officer, John Stumpf, follows the lead of other
national banking institutions in discontinuing a large portion of
their branch network
To many, this was a long time
coming. 19 of the largest 20 banks
had already initiated massive
branch
reduction
measures,
leaving Wells Fargo as the last
man standing.
Now that over 16,000 branches
have been closed by the largest
banks nationwide, one may ask,
“What has become of these former
bank branches?” Fast food and
take-out restaurants, such as
Chipotle Mexican Grill, have been
assuming these locations to
develop their network. Chipotle’s
Chief Executive Officer, Steve
Ells, exclaims, “These bank
closures have been the best thing
for the fast food industry since the
digital cash register.
Branch
locations tend to be in the most
appealing areas of each region,
making them commonly seen and
visited destinations.” Chipotle has
nearly doubled in size since Bank
of America announced their
branch closures in January 2015
and has developed a drive-thru
system.
71
Effects of a Mass Branch Closure
Branch Distribution Pre-Shutter
Branch Distribution Post-Shutter
21,900
26%
37,836
38%
Assumes top 20
banks & thrifts close
~40% of total
branches
61,221
62%
61,221
74%
Total Branches: 99,057
Top 20 banks nationwide
(1)
Source: SNL Financial
Includes all top-tier consolidated banks and thrifts headquartered nationwide; excludes merger targets
Total Branches: 83,121
Banks outside the top 20
72
Unexpected Party Benefits From Branch Closures
Future of Bank Branches
Drive-thru
73
Chipotle’s Stock Hits 600!
•
Assumes Chipotle increases current store count from 1,458 to 2,458, or a 69% increase
•
Assumes earnings and stock price move in tandem
Chipotle’s Stock Price
$700.00
$626.33
$600.00
$500.00
$400.00
$370.61
$300.00
$200.00
$100.00
$0.00
5/28/13
3/14/16
74