Insights from Bank Director’s 2024 Acquire or Be Acquired Conference

This year’s annual Bank Director Acquire or Be Acquired conference was well-represented by banks across the nation. Attendee banks ranged from small family-owned community banks to large public institutions. As in past years, this conference kicks off a weeklong investment banker financial institution connection effort.

The 2024 conference themes focused mainly on: (1) the impact of our current economic cycle and the fallout from the 2023 liquidity crisis (2) the efforts and best practices to get a bank acquisition or combination done amidst regulatory delays and (3) education for banks on the increasing deposit flow to non-traditional institutions and how to retain deposits with relationships and bolt-on deposit products.

The “original” economy

Debate continued at this conference on whether we are in an “original” economic cycle, or whether we are currently in a modified historical point in a standard economic cycle. Economic indicators and multiple federal reserve interest rate hikes, unheard of since the 1980s, continue to cause uncertainty in the lending and investment markets and squeeze net interest margin. Conference sessions focused on how to find alternative sources of new profit for banks, as well as how to retain existing deposit and lending relationships, and expand deposits into new untapped markets, such as cannabis banking. Investment bankers from KBW presented on the recent valuation of US banks, as well as their firm’s predictions for the future interest rate environment. They predicted federal rate cuts as soon as the second half of 2024 and questioned why the movement in the recent past has been in 25 basis point increments.

Multiple session leaders voiced their opinions that the 2023 bank failures were isolated incidences due to specific institution or leadership factors, and that risk is behind us. The bank market continues its consolidation path to look for scale opportunities.

Profit and capital

Capital preservation and generation were a heavy focus also at the conference. Bank balance sheet recovery is coming quickly and is already being represented in Q4 2023 financial reporting. Ideas were presented including divestiture of appreciated assets, minimization of the impact of disposal of debt instruments and securities with built-in losses and bringing in external investors. The best relationship banks continue to grow organically, mitigated with excellent hedging strategies, and they increase profit levels despite the current economic and industry conditions.

While institutions focus on capital preservation, the commercial credit market has not declined to the extent predicted for traditional banks. Speakers noted that most of the biggest city commercial real estate credit risk lies outside of traditional financial institutions. The allowance for loan losses on bank balance sheets have only trended upward slightly in 2023, and uncertainty exists on the timing and extent of the peak of credit losses. Many banks also acknowledged that there still exists a profit limitation on new loan growth due to the inflated cost of expansion of deposit base.

Politics and pending legislation

Proposed legislation affecting banks with potential new congressional candidates in 2024, and seasoned legislators, remained a hot topic. Several pieces of legislation are threatening banks. Those include the “Durbin 2.0 Act,” a retailer favored effort to remove the transactional fees associated with credit card transactions, and thus remove credit card rewards for consumers, and Basel III End Game- proposed increased regulatory capital requirements for institutions over $100B in size. Several sessions addressed that the stock market continues to punish bank stocks approaching and overtaking the $100B asset mark for the significant increase in administrative burden and cost of regulation. Eventually the scale of the bank overcomes the increased cost and market valuations return to expected industry valuation averages. Conference speakers addressed the effectiveness of the proposals.

The digital asset era

The conference focus has shifted the potential integration and merger of digital asset companies into traditional bank operations, to a recognition of the existing market service providers in that area, and how to complement it. Although it was recognized by expert presenters that several digital asset companies are currently awaiting regulatory approval to purchase financial institutions, the lack of immediate action by the regulators in this area and the market solidification of the historical digital assets players has reduced the concern in this area to purely a deposit retention strategy.

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The future of consolidation

2023 bank transaction activity was the lowest in 30 years due to increased regulatory scrutiny, decreased profitability and asset valuations resulting in a decline in pricing, and uncertainly surrounding the few bank failures. As the uncertainty in the economy and the volatility of bank profits decrease, it was the view of many speakers that the regulatory scrutiny and delays in transaction approval will return to “normal” levels. A noted trend that is expected to continue will be credit union acquisition of for-profit banks due to the taxation differential, but the goal for profitable banks will be scale through combination. In summary, Acquire or Be Acquired industry experts are optimistic about stock valuation, profits, and the ability to execute operational and combination strategy in 2024.