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March 5, 2012 by Steve Williams Steve Williams

Goldilocks and the Just Right Mid-Size Banks



There once was a hedge fund manager
named Goldilocks who stumbled upon the banking industry in 2012, looking for profitable investments.


120305bWhen Goldilocks begin pouring through investment opportunities, she came upon the large national banks and quickly hit the escape button on her Bloomberg screen. “Oh now, those banks are TOO BIG,” the young stock picker said. “They are complex, have wounded consumer brands and are the target of regulatory overload.” As she realized that these banks were semi-nationalized and partially run by the regulators today, Goldilocks moved on to find better opportunities.

120305cShe stumbled upon the small, local community banks: good customer service providers and chock-full of bankers with integrity. It looked interesting, but then young Goldilocks made an awful face. “Oh my, they were SO dependent on commercial real estate and construction lending. Revenue growth will be SO hard,” she lamented. Goldilocks found that the small banks didn’t really have much of a retail or mortgage business, and therefore lacked non-interest income. “I just don’t see them having the scale to afford all the compliance and technology that’s needed in banking,” Goldilocks decided and clicked back to her stock ticker search screen.

120305dAs Goldilocks was about to turn off her iPad, she saw something out of the corner of her eye: the mid-size banks. She began to analyze the banks with $1 billion to $10 billion in assets and noticed something that made her move her arms with glee. She noticed they had enough size to lower their efficiency ratios to a respectable level. They had local market brands that seemed to play well against the big banks, and they fell under that magic $10 billion number where stifling regulations like Durbin interchange price caps, Consumer Financial Protection Bureau direct oversight and new stress tests kick in. She saw loan quality improving and capital levels solid in this segment. “These banks are JUST RIGHT!” she beamed, and began executing trade orders through the night.

– – – – – – – – –

Is this just a fairytale? Actually, as we begin a solid banking recovery in 2012, there is chatter around the hypothesis that mid-size banks represent a new “sweet spot” in the industry. Last year, American Banker ran an article indicating that M&A activity would replenish and grow the number of mid-size banks in the country. Today, there are 550 mid-size banks and thrifts representing $1.5 trillion in assets, and the number of institutions is likely to grow as the smaller end of the industry consolidates.

Last week, The Wall Street Journal ran a piece about how some banks are working to manage under the $10 billion asset level for as long as they can. 

Many stock analysts seem to be saying they like this part of the industry in terms of valuation, prospective upside and the takeout price potential in the long term. Even colorful industry analyst Chris Whalen recently announced his intent to start an investment fund with Tangent Capital Partners that will be focused on small and mid-cap banks.

FULL DISCLOSURE: Please don’t read this article as an indication that Cornerstone Advisors or I think only $1 billion – $10 billion banks are worth their salt. Small players that develop specific business niches can thrive in the future, and a group of “new regionals” between $10 billion and $100 billion will also gain share and do well as the industry’s most active consolidators. There are also nearly 800 credit unions with more than $250 million in assets that will actively work to gain a hunt in the game and play to the same advantages as mid-size banks.

At the same time, this next era of banking will present a golden opportunity for mid-size institutions that should not be underestimated. Like in eras before, these institutions will attract more banking talent from the frustrated ranks of larger banks, and they will attract the attention of certain private equity investors like Wilbur Ross and Stephen Gordon seeking to participate in the next round of upside.

While there is truly a unique opportunity for mid-size banks, there are plenty of macro forces at work that will make shareholder value creation a challenge. The winners in the mid-size space will not depend on macro conditions to help them, but rather will focus on creating the most dynamic and progressive organizations in the financial industry. This will not be another rendition of “round up the good ol’ boys and we’ll blow out the big commercial real estate loans.” Mid-size banks that generate real investor interest will be more diversified and more edgy in how they deliver services. The true winners in this new sweet spot will focus on five key strategies to ensure value is created.

Strategy 1 – Develop a more systematic retail strategy
Mid-size banks have often made retail an afterthought as commercial lenders and finance people ran the bank. In the next era, these banks will go hard after the opportunity to steal market share from larger banks, but it won’t be via the tired old “Proactive Sales Culture” playbook. Instead, smart mid-size institutions will excel at grassroots and Web/mobile marketing, and they will become more outbound focused in business development. The winners will also stress hardcore product knowledge and certification much more than typical bank cultures.

Strategy 2 – Build sustainable pillars of non-interest income
Mid-size banks that ultimately trade at the best multiples generate at least 30% of their revenue from non-interest income. Managing retail payments revenue with discipline will be important, and we even may see more banks of this size reenter the credit card market. Yet over and above core banking income, the best players will create sizable revenue stream in areas such as mortgage banking, wealth management and insurance. The key here is not to try everything but build some deep niches in a few key areas.

Strategy 3 – Create real commercial ‘trusted advisors’
For years, bankers have talked about building broad-based commercial bankers who are knowledgeable not only in loans, but also treasury, investment, insurance and capital markets products. The truth is that this hasn’t happened because CEOs and the heads of commercial business lines have not demanded it. The mid-size banks that will truly move beyond another round of tight-margin commercial real estate lending will focus their bankers on growing relationship profitability within their commercial books of business – period! And to grow this more meaningful number, they will need the profitability systems and corresponding incentive plans. Banks in the past talked the game of trusted advisor to businesses and instead delivered commercial real estate originators. It’s time to change the playbook.

Strategy 4 – Learn and execute fast on new delivery channels
Our industry is recovering just as we have entered what Apple’s Steve Jobs called the “post PC” era, where smart phones and tablets will dominate information delivery. Here’s the bottom line: mid-size banks should leapfrog to embrace the mobile/tablet paradigm a lot faster than they adopted the Web platform. If mid-size banks are too late to the game with mobile innovations, they will undermine their ability to gain share from the large banks. This is an area where executive management needs to be more aggressive with the pocketbook.

Strategy 5 – Make management discipline more than lip service
A final thought: the mid-size banks in the current era risk growing their organizations faster than they will grow their management capabilities and depth. Executives would be well served to get much more hard-hitting on what is often viewed as the “soft” side of management development. It still amazes the team at Cornerstone how many six-figure managers in our industry come to work every day without clear measurable goals, a short-list of strategic priorities and relentless pursuit of executing projects on time. In fact, mediocre project execution in undisciplined cultures is the biggest threat to mid-size banks looking to enjoy the great upside that awaits them in the competitive environment today.

120305eOur industry history is full of mid-size institutions that leveraged the advantages of being big enough for scale and small enough for agility. Players like WestamericaFrostSVB FinancialCity National  and Hancock are banks that outperformed the market and become so successful as mid-size banks that they are now growing more into the new regional players. It will be a blast to see who among the new breed of mid-size banks will step up with creativity and discipline to be the new best practice success stories in the middle. If you’re a mid-size bank with a success story, the team at Gonzo would love to hear from you! Send us an email.


The Just-Right Consultants for Mid-Size Banks

Cornerstone Advisors has been assisting mid-size banks develop best-practice strategies for more than a decade.

These are just some of the ways we can partner with you to help your institution reduce costs, increase revenue and stay competitive:

Email us today for more information.


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2 Responses to “Goldilocks and the Just Right Mid-Size Banks”

  1. Ralph Cumbee says:


    I think you hit the nail on the head with the five strategies. I also think they apply to CUs too!

    Ralph Cumbee,
    Solarity CU

    • Ralph, thanks. I agree with your assessment and mentioned in the article that credit unions will be pursuing a similar sweet-spot to mid-sized banks. Best of luck to you all after the ground-breaking merger.

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