The Way Forward for Banking: Interview with Walter Moeling

2014 Banking Outlook Conference: Challenge, Opportunity, Risk

Donna Fay: Welcome to the 2014 Banking Outlook Conference at the Federal Reserve Bank of Atlanta. My name is Donna Fay, and with me today is Walter Moeling, who is senior counsel at Bryan Cave. Walt, welcome and thank you so much for being with us today.

Walter Moeling: My pleasure.

Fay: Walt, how would you characterize the environment for community banks over the next 12 to 18 months, in terms of the speed of change, loan growth, earnings growth, things like that?

Moeling: I think I'd have to say a state of transition from defense to offense. For the past five years, more or less, it's all been about how do we survive and get out of this. So banks are now emerging, many of them still have the same strategic plan they had in 2006, and it's totally irrelevant to what they're doing. They've made it through, and the real question is, what do we do now?

Any bank that grows significantly faster than its own market economy is obviously adding risk, because they are either paying up more than they should for people, or they've cut their lending standards, or they've cut the returns they expect to make. It doesn't work.

So growth is going to be low to moderate. But if you're not growing substantially—you're not opening new branches, you're not hiring new people—and you should really be in a good position to go in and take a hard look at your overall operating costs. If you can bring those down, you should have cleaner loans, less volatility, and the net result should be a more stable income flow that lets a community bank start paying dividends again.

When I first started in the business (too many years ago), banks were mainly dividend stocks. Walt Wriston of Citicorp promoted back as far as 1970—growth, growth—and we went that way until by 2006, it was all about how fast can we grow, how quickly. It's going back more to profitability. And with that increase in profitability and the increased ability accordingly in a more stable environment to pay dividends, shareholders should be happier and bankers should be able to serve their communities better. I only hope I'm right, but I think I am.

Fay: In terms of that and having said that, you know, shareholder happiness and strategic planning, there have been some conversations in the press about mergers and acquisitions, potential for M&A activity among community regional banks. What are your thoughts about that? What should we be expecting?

Moeling: There's a ton of discussion on that, and obviously, we're seeing greater activity, but it's not a flood. I think what's really important there, traditionally banks' strategic planning is really focused on a single concept—buy, sell, or hold. Today it's really hold, maybe buy, or sell, because for most banks, the real strategy is going to be hold. Either because they're not ready to be a seller, they're not clean enough; they couldn't sell if they wanted to, or maybe because that's really what they want to do.

A buy strategy requires a lot of internal planning and work. It really has to be a line of business. You've got to be in the business of buying banks. You've got to have a team that's ready for due diligence and to do those integration things that have to be done well to be successful. Having said that, a recent Crowe Chizek [Crowe Horwath] survey suggested, of 200 community bankers, [it] suggested that half of them anticipated being a buyer. That's kind of interesting because if you projected that to the community bank world of 6,000 banks, and half of them wanted to be buyers, that would be 3,000 acquisitions. We only do about 250 a year, so there're going to be an awful lot of very disappointed buyer-oriented banks.

But whether or not to sell a community bank is a much more personal decision for the people involved and how they relate to the community. And that's the gap between those projecting a flood and what's probably really going to happen, in my view.

Fay: How about in the de novo space, any thoughts on that?

Moeling: De novos are fun; they're fascinating. We've had one de novo in the last five years. It's the longest drought in the history of keeping track.

We had gotten to the stage where, as one senior non-Fed regulator told me once, "We're a free market regulatory, if people have enough money to get a charter and can find a banker, who is the regulator to second-guess whether or not they ought to have a charter." I think that attitude has passed, appropriately. To where, you've really got to go back throughout most of my career, the test for de novo was real simple—you had convenience and needs that had to be demonstrated. You had to have a showing that there's a reason to do this new bank charter, because it's a rare thing. That got very commonplace; it's going back to [being] very rare. Convenience and needs, I think, are once again alive.

Fay: Let me ask you this regarding a bank business model or so. We are seeing or hearing more that in an effort to do expense control strategies that banks are looking to combine back-office operations as a means to help with that. What are your thoughts in terms of that as far as the implications for operational risks, legal and reputation risk?

Moeling: In some ways your question answers your question, because there are significant issues of control, and as you listen to the speakers today over and over you will hear phrases like "vendor risk," "third-party risk." With a joint operation, however, you've got like-minded people looking at it, and that can be overcome. If what I said about hold is correct in the context of not everybody's going to be able to hold, and one of the real headwinds is going to be back-office expense, technology, compliance, what not—the idea of some joint operations really make sense. But we've got to make sure the regulators are as comfortable with it as the bankers, and that will take some proving. The first few out are going to have to be done very, very well, and if they are then they should be a real benefit for the banks.

Fay: Thank you so much, Walt, for sharing your insight with us.

Moeling: My pleasure to be here, thank you very much.