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  • NYCB’s new leaders face skeptical shareholders in wake of turmoil

    NYCB’s new leaders face skeptical shareholders in wake of turmoil

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    Joseph Otting, New York Community Bancorp’s recently installed CEO, described a March 6 capital raise of $1.05 billion as the best decision for investors. “If the capital raise was not ready to go specifically that afternoon, the chances of the company surviving would have been at a peril,” he told shareholders.

    Bloomberg

    New York Community Bancorp’s new executive management team had to answer this week to shareholders whose investments in the beleaguered company have lost substantial value.

    Shareholders approved all but one of the company proposals presented Wednesday at the bank’s annual meeting, including a resolution okaying the $1.05 billion capital infusion in March that may have shielded New York Community from more dire circumstances.

    But questions from shareholders, none of whom were identified during the meeting, suggested at least some discontent in the wake of the capital influx, which significantly diluted their existing position in the Long Island-based company.

    One shareholder wanted to know why investors should sign off on the additional capital, which came from an investment group led by former Trump administration Treasury Secretary Steven Mnuchin. Although the capital infusion was announced March 6 and closed six days later, New York Community was required to obtain shareholder approval to finalize the deal because of the amount of stock it plans to issue.

    “If the capital raise was not ready to go specifically that afternoon, the chances of the company surviving would have been at a peril,” CEO Joseph Otting told shareholders during the meeting. “As we look back today, it was the right decision for the company, it was the right decision for the investors, and collectively we will work very hard to reestablish the value of this company going forward.”

    New York Community’s annual meeting, which took place virtually, was open only to shareholders, though a recording was later made public. It was the firm’s first annual meeting with its new management team.

    The new corporate leaders include Otting, who served alongside Mnuchin in the Trump administration and took over as the company’s president and CEO on April 1. Earlier this week, Otting succeeded Sandro DiNello as chairman of the board.

    New York Community is the parent company of Flagstar Bank. It acquired Troy, Michigan-based Flagstar Bancorp in late 2022 as part of a strategy to diversify its loan portfolio.

    Wednesday’s meeting offered a chance for investors to hear more about how executives are trying to move the $112.9 billion-asset company forward after severe challenges this year, which have been driven primarily by bad loans in its commercial real estate portfolio. So far this year, the company’s stock price has plummeted by 70%, its leadership team has been almost entirely overhauled and it has warned of ongoing pain as it roots out troubled multifamily and office loans.

    Shareholders approved the proposal related to the capital infusion, as well as seven other company proposals included in its latest proxy statement. They rejected one company proposal and one shareholder proposal, both of which aimed to eliminate supermajority voting requirements. 

    The vote counts have not yet been released.

    A proposal that would allow the bank’s board to enact a reverse stock split of issued and outstanding common stock by a ratio of 1-for-3 was among those that received majority shareholder support. A reverse stock split is a strategy that banks can put in play when their shares are trading at low figures, and they want the prices to look higher.

    According to New York Community’s proxy statement, the company expects its tangible book value per share this year to be $6.05 to $6.10, reflecting shareholder dilution of nearly 40%. The company has said that tangible book value per share could rise to somewhere between $7 and $7.25 by 2026.

    The dilution is painful, but it’s another reminder that “capital is exorbitantly expensive” when a bank needs to raise it, wrote Jeff Davis, managing director of Mercer Capital’s financial institutions group, in an analysis of the capital raise.

    He also noted that the company’s shares are trading at about half of their book value, an indication that investors are skeptical that $1.05 billion will be enough to cover potential loan losses or New York Community’s weaker earnings going forward.

    On Wednesday, one New York Community shareholder wanted to know if the bank could enact a policy that would protect existing shareholders’ investments in the event of a reverse stock split. In the company’s proxy statement, the board said that doing so “should increase the per share price of the common stock and make the bid price of the common stock more attractive to a broader group of institutional and retail investors.”

    Otting did not commit to any such policy Wednesday, but he did say that it was “unfortunate, the situation that we found the company in when we arrived” and that the management team “appreciates the impact” that the company’s challenges have had on longtime shareholders.

    “Myself and the new executive management team and the board really are here to enhance the value to all shareholders, and that is our mission ahead,” Otting said. “We really want to build a strong regional bank that serves the needs of commercial real estate customers, commercial and corporate banking customers, specialized industries and consumers.”

    Another shareholder wanted to know more about the steps New York Community is taking to make sure it has adequate reserves to handle future loan losses. About 45% of the firm’s loan portfolio is made up of multifamily loans, which are under pressure due to a combination of higher interest rates and a 2019 law in New York that’s hampered landlords’ ability to raise rents.

    About 4% of the book is made up of office loans, which are also facing challenges as companies reduce their office spaces in the post-pandemic shift to hybrid- and remote-work environments. 

    Craig Gifford, who took over as chief financial officer in mid-April, said the company continues to comb through both of those loan categories, moving from the largest loans to smaller ones. Preliminary results from those reviews are in line with the loan-loss reserves reported in the first quarter, as well as the potential for incremental reserves throughout the year, Gifford said.

    Meanwhile, the company is planning to add more new faces to its executive ranks. It is hiring a new chief credit officer and someone to run its commercial and private banking unit, Otting said. 

    New York Community does not plan to hire a new chief operating officer, following the departure of Julie Signorille-Browne last month. Otting said Signorille-Browne’s duties have been divided up among other executives.

    The company’s head of human resources and its head of technology will now report to Otting, while Gifford will oversee operations and facilities as well as procurement duties, Otting said.

    Polo Rocha and Catherine Leffert contributed to this story.

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    Allissa Kline

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  • U.S. Bancorp splits new president’s former duties between two executives

    U.S. Bancorp splits new president’s former duties between two executives

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    U.S. Bancorp in Minneapolis has promoted two longtime executives into expanded roles leading two areas of the company’s wealth, corporate, commercial and institutional banking division. Stephen Philipson and Felicia La Forgia will continue to report to U.S. Bancorp President Gunjan Kedia, the company said.

    JHVEPhoto – stock.adobe.com

    One month after U.S. Bancorp promoted Gunjan Kedia to the role of company president, the Minneapolis-based firm has split her former day-to-day responsibilities between two longtime executives.

    Stephen Philipson is now leading all of the product businesses within U.S. Bancorp’s wealth, corporate, commercial and institutional banking division, the company said in a press release. Meanwhile, Felicia La Forgia will oversee a newly created unit within the same division called the Institutional Client Group, which will focus on distributing resources to institutional clients.

    Kedia had been running the wealth, corporate, commercial and institutional banking division for a little more than a year when she was promoted last month to president, a role that potentially sets her up to succeed CEO Andy Cecere. While Cecere has given no indication that he’s ready to retire, both he and his most immediate predecessor held the role of president before they became CEO.

    Philipson, who joined U.S. Bancorp 15 years ago, most recently oversaw the global markets and specialized finance segment within the wealth, corporate, commercial and institutional banking unit. He joined the bank in 2009 as the deputy head of high grade fixed income after having worked at Wells Fargo, Wachovia Securities and Morgan Stanley, according to his LinkedIn profile.

    He will continue to sit on U.S. Bancorp’s 16-member managing committee, the company said.

    La Forgia, who has been with U.S. Bancorp since 2008, was most recently the head of corporate banking at U.S. Bank, the banking subsidiary of U.S. Bancorp. She was also group head of the bank’s oil and gas, retail and apparel and utilities businesses, the company said.

    La Forgia previously worked at WestLB, the German bank that was broken up in 2012, and Bank of New York Mellon, her LinkedIn profile shows. In 2020, she was part of a group of U.S. Bancorp women executives that was named one of American Banker’s Most Powerful Women in Banking teams.

    In a profile published by U.S. Bancorp in 2021, La Forgia called banking “a people business.“

    “We want to be the go-to bank, the one clients know they can rely on to solve problems they didn’t even know they had and help them reach goals they couldn’t have imagined possible,” she said in the article.

    Both Philipson and La Forgia will continue to report directly to Kedia. As president, in addition to overseeing wealth, corporate, commercial and institutional banking, Kedia also oversees U.S. Bancorp’s other two business lines: payment services and consumer and business banking.

    Philipson is “known for his deep product knowledge and offering innovative solutions,” and in his new role will elevate “relationship channels into a stronger and more cohesive unit,” Kedia said.

    And La Forgia “will drive consistency and excellence in regional and sector coverage across all our corporate, commercial and institutional clients,” Kedia said.

    The wealth, corporate, commercial and institutional banking division contributes 37% of U.S. Bancorp’s total net revenue, the same percentage as consumer and business banking, according to a presentation that U.S. Bancorp prepared for a conference last month.

    The division covers a broad list of segments, including wealth management, asset management, capital markets, global fund services, corporate banking, commercial banking and commercial real estate.

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    Allissa Kline

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  • Eagle in Maryland gains ‘flexibility’ to raise capital after loss

    Eagle in Maryland gains ‘flexibility’ to raise capital after loss

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    Earlier this month, Eagle Bancorp in Bethesda, Maryland, filed a shelf registration statement that would allow it to raise up to $150 million.

    Eagle Bancorp in Bethesda, Maryland, set the table to raise money after a bruising first-quarter loss and a steep credit provision linked to an office property in downtown Washington, D.C.

    The $11.6 billion-asset Eagle this month filed a shelf registration statement with the Securities and Exchange Commission for the offering of up to $150 million. It enables the company to increase debt and issue common or preferred stock at any point over the next three years.

    Eagle Chief Financial Officer Eric Newell described the move in an interview “as good corporate housekeeping” that “gives us flexibility” — as opposed to a sign the company needs to raise capital.

    He said that, should the company raise money, it would likely be done through a debt or preferred stock offering. Newell also noted that Eagle has subordinated debt maturing in September, and the shelf registration allows the company “to be opportunistic” as it considers refinancing that obligation.

    Eagle recorded a $35.2 million provision for credit losses in the first quarter on an office property in Washington whose value was reappraised at about half of its prior value.  

    Commercial real estate makes up more than 60% of the bank’s loans. Urban office CRE, in particular, is under pressure across the industry as landlords grapple with higher vacancy rates amid enduring remote work trends.

    Eagle’s shares traded between $19 and $20 intraday Thursday, down more than 30% from the start of the year. 

    Though Newell described Eagle’s recent credit quality challenges as manageable and its core earnings power as strong, the registration does give the company options to raise money should it need to offset more credit issues in its CRE portfolio.

    Newell said federal government work forces that pepper the capital city’s downtown have been affected by remote work. But he emphasized that the bank’s CRE book is spread across various sectors and markets, including the D.C. suburbs. He said the first quarter office hit was not indicative of systemic issues in the bank’s loan book.

    “Not every office property is downtown, and not every CRE credit is an office loan,” Newell said.

    Michael Jamesson, a principal at the bank consulting firm Jamesson Associates, said lenders are increasingly scrutinizing their CRE portfolios and charge-offs are accumulating. But, he said, banks for the most part are reporting “one-off or two-off” loan problems and ensuring investors that the isolated challenges are not thought to mark the beginning of broader and rapid credit quality deterioration.

    “Now, banks always say that, but the data seems to validate the story for now,” Jamesson said. “At this juncture, it looks like we’ll get through this with some scars, yes, but not many fatal wounds.”

    Provisions for expected credit losses across all U.S. banks declined in the first quarter to $21.1 billion from $24.4 billion the prior quarter, according to S&P Global Market Intelligence data. The decline came as net charge-offs held essentially flat at $20.3 billion. First-quarter provisions as a percentage of charge-offs fell to 104% from 121% the previous quarter, suggesting banks on the whole see improving conditions ahead, according to S&P Global.

    “I’m sure we’ll see more signs of stress at points this year, and some banks will have more problems than others,” Jamesson said. “I don’t see a calamity in waiting.”

    In its SEC filing earlier this month, Eagle said if it decides to raise all or some of the $150 million, it could use the money to refinance debt — its debt maturing in the fall totals about $70 million — or it could use the funds to bolster capital, pay dividends or buy back shares.

    For the first quarter, the company reported net charge-offs of $21.4 million, up from $11.9 million the previous quarter. Nonperforming assets of $92.3 million equated to 0.79% of total assets, up from 0.57%.

    Capital levels were lower than in 2023, but all measures exceeded regulatory requirements. Eagle described its capital positions as “strong.”

    At the close of the first quarter, the common equity ratio, tangible common equity ratio, and common equity Tier 1 capital to risk-weighted assets ratio were 10.85%, 10.03%, and 13.80%, respectively.

    Eagle reported a net loss of $338,000 for the first quarter, compared to net income of $20.2 million for the fourth quarter of 2023.

    However, the bank’s pre-provision net revenue of $38.3 million for the first quarter was nearly even with the prior quarter’s $38.8 million.

    “We earn really well,” Newell said. He said that, once the bank works past the recent credit set-back, this could be evident in future quarters.

    As far as downtown Washington office properties, Newell said some areas of the federal government have proven slow to bring workers back to offices full time. But he said Eagle is bullish on the nation’s capital because the long-term trajectory of the federal government is one defined by substantial growth. The District of Columbia’s economy, by extension, is likely to expand in tandem.

    Of the capital’s ties to federal spending, Newell said, “we believe it is still a differentiator in a positive way.”

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  • Ohio banks say ‘Howdy’ to commercial loan opportunities in Texas

    Ohio banks say ‘Howdy’ to commercial loan opportunities in Texas

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    For years, both Fifth Third and Huntington have been eyeing growth opportunities outside of their home bases in the Midwest.

    Bloomberg

    Higher-for-longer interest rates are dampening commercial loan demand at regional banks, but Texas expansions are helping two midsize lenders, Fifth Third Bancorp and Huntington Bancshares , to lasso middle-market clients.

    The Ohio-based banks are seeing more stability from business clients in the Lone Star State than in some other parts of their footprints, Fifth Third and Huntington leaders said Friday on first-quarter earnings calls. Fifth Third has been building a middle-market banking operation in major metro areas of Texas for the last five years, and Huntington recently tapped a Texas market president in Dallas to cultivate its local commercial business.

    While the Southeast, including the Carolinas and Florida, has been core to both banks’ growth plans, lending in the land where everything’s bigger has been helping them offset the negative impacts of economic uncertainty at a time when the near-term interest rate outlook remains unknown.

    Texas, Florida and North Carolina have all consistently seen a rise in gross domestic product, population and company relocations in the last five years, priming them for financial institutions’ expansion plans.

    “Texas has been a really nice story for us,” Fifth Third CEO Tim Spence said on the bank’s earnings call. “It’s a really nice complement to the strong commercial banking team that we built out in California a few years back, in terms of expanding the middle-market footprint. So we expect to see growth in that area.”

    The $214.5-billion Fifth Third first planted a flag in Texas more than a decade ago with an energy vertical, and it began augmenting its middle-market business in earnest in 2019, focusing on Houston and Dallas. The company now employs some 175 folks in the state, with a concentration in commercial and industrial loans, Spence said.

    Huntington’s operation in Texas is much newer and smaller. The $193.5 billion-asset bank unveiled its Texas expansion plans in February, but it’s already seeing results in the form of both loans on the books and a burgeoning pipeline for future credits.

    Huntington Chairman and CEO Steve Steinour recently visited Dallas, where the Columbus, Ohio-based bank planted its initial Texas office.

    “I really like our new colleagues,” who are led by market president Clint Bryant, Steinour said Friday in an interview. He added that the Texas economy is “booming.”

    Huntington is eyeing a gradual statewide expansion as it solidifies its footing. Its business plan calls for serving Texas middle-market clients with revenues under $1 billion.

    Huntington announced in October that it would enter 2024 in expansion mode. Since then, it has launched an expansion into the Carolinas and established verticals in fund finance, healthcare and Native American banking.

    Texas is the most recent initiative, but Huntington may not be done. The company is open to adding new bankers and capabilities, Steinour said Friday on a conference call with analysts.

    To date, the new markets and verticals have produced a loan pipeline “approaching $2 billion,” as well as a sizable deposit portfolio, Chief Financial Officer Zach Wasserman said on the conference call. “The early traction has been really positive,” he said.

    Huntington reports loan growth, higher funding costs

    Huntington announced quarterly net income totaling $419 million Friday, a 30% year-over-year decline that it attributed to higher funding costs. On the plus side, Huntington reported solid year-over-year growth in loans and deposits, and executives said that they expect both trends to continue throughout 2024.

    The bank reiterated previously stated guidance calling for full-year 2024 deposit growth in the 2% to 4% range, with Wasserman suggesting the end result would be nearer the top end.

    In a similar vein, Steinour labeled Huntington’s commercial loan pipeline “very robust,” adding that it grew each month during the quarter ending March 31. The company’s 2024 guidance targets loan growth in the 3% to 5% range.

    Approximately 40% of the first-quarter loan and deposit growth that Huntington reported originated in its new markets and verticals, according to Wasserman.

    Investors appeared to view Huntington’s results in a positive light. Shares closed up about 1% at $13.28 Friday.

    Fifth Third beats estimates

    While Fifth Third’s end-of-period loan balances were down 1% from the prior quarter to $117 billion, middle-market loan demand in Texas, along with longer-term geographic priorities like Tennessee, the Carolinas, Kentucky and Indiana was a bright spot, Spence said.

    Overall, the bank brought in $480 million of net income in the first quarter, down 2% sequentially. The bank beat analysts’ estimates on net interest income, expenses and fees. Its stock price was up 6% Friday, to $36.25.

    Piper Sandler analysts wrote in a note that most investors expected Fifth Third to soften its 2024 performance expectations, but by maintaining its guidance and logging a “better-than-expected” first-quarter performance, the bank’s earnings report “looks like a win.”

    Fifth Third Chief Financial Officer Bryan Preston said on the call that the Cincinnati-based bank expects its full-year average total loans to be down 2% from 2023, but that commercial and consumer balances should increase in low-single-digit percentage points by the end of the fourth quarter.

    Spence added that any loan growth will likely be driven by taking market share. Fifth Third’s middle-market clients aren’t pessimistic per se, but they also aren’t leaning forward on merger-and-acquisition or inventory-building opportunities, he said.

    “The places where we are expecting to see growth in the second half of the year are the places where we made investments to be able to do it,” Spence said.

    In 2023, Fifth Third’s middle-market loan production was split 50-50 between its Midwest markets, including Chicago, and other parts of the country. The latter geographies include the Southeast markets, plus Texas and California.

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    Catherine Leffert

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  • This bank governance reform idea failed before. Will now be different?

    This bank governance reform idea failed before. Will now be different?

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    Jamie Dimon is chairman and CEO at JPMorgan Chase, while David Solomon holds those same two roles at Goldman Sachs, as does Brian Moynihan at Bank of America. Shareholders at all three banks will vote soon on whether to split the responsibilities between two people.

    Bloomberg

    The debate over splitting the chairman and CEO roles at banks is back.

    Shareholders at JPMorgan Chase , Bank of America and Goldman Sachs will vote soon on whether those banks’ chief executives should also chair their boards. Big banks have mostly fended off those pushes in the past, and they’re arguing now that the addition of lead independent directors who fulfill chairman-like duties provide an effective check on CEOs.

    Backers of the split say that’s not enough. Much like the U.S. government, corporate leaders need to have proper checks and balances, said Paul Chesser, director of the corporate integrity project at the conservative-leaning National Legal and Policy Center. The group has put the issue up for a vote at Goldman Sachs.

    “If it’s a chairman and a CEO, there really is no counter to them unless there’s some real egregious conduct going on,” Chesser said.

    The proxy advisory firms Glass Lewis and Institutional Shareholder Services are backing the shareholder proposals at Bank of America and Goldman Sachs. Their recommendations aren’t yet available for the vote at JPMorgan Chase, where Chairman and CEO Jamie Dimon this week criticized the “constant battle” over the issue and decried the “undue influence” of proxy advisers, noting that Glass Lewis and ISS are owned by foreign companies.

    “There is no evidence this makes a company better off,” Dimon wrote in his annual letter to shareholders.

    Some researchers who study the issue say Dimon has a point. Studies have shown “quite consistently” that there’s no correlation between splitting the chairman-CEO role and a company’s financial performance, said Ryan Krause, a professor at Texas Christian University’s business school.

    There is, however, some evidence that companies with a separate chairman are less prone to instances of wrongdoing, Krause said.

    That issue proved salient in 2016, when a series of consumer abuse scandals unfurled at Wells Fargo, which was led at the time by Chairman and CEO John Stumpf. Stumpf would soon be out, and the bank would split the chairman and CEO roles.

    Many large U.S. banks still have joint chairman and CEO positions. Citigroup is a notable exception, as is the auto lender Ally Financial.

    But more companies are shifting toward splitting the roles, with 59% of S&P 500 company boards reporting that they had a separate chair and CEO last year, according to the executive search firm Spencer Stuart. That’s up from 45% a decade ago and from just 16% in 1998, the firm said in an annual report on board trends.

    In the banking industry, support for splitting the chairman and CEO jobs has ebbed and flowed at different times.

    Cincinnati-based Fifth Third Bancorp stripped the chairman title from then-CEO Kevin Kabat in 2010, amid fallout from the 2008 financial crisis. But eight years later, the bank gave the chairman job to then-CEO Greg Carmichael, pointing to improvements in profitability and technology during his tenure as chief executive.

    Bank of America shareholders also split the CEO and chairman roles after the financial crisis, which meant that Brian Moynihan was simply the CEO when he was hired in 2010. By 2015, Bank of America’s board decided to bestow him the chairman title. Since then, BofA investors have shot down proposals to split the roles in 2017, 2018 and 2023.

    The question will come up again at the bank’s annual shareholder meeting on April 24.

    John Chevedden, a BofA shareholder who’s putting the issue up for a vote, said in his proposal there’s “clearly a need for a change” due to the company’s lagging stock price. Bank of America and other large companies’ complexities “increasingly demand that 2 persons fill the 2 most important jobs in the company.” The proposal says that the change could be phased in the next time there’s a new CEO.

    The bank’s board is recommending that shareholders vote against the proposal, saying that its current structure provides “robust and effective independent board oversight.” That setup includes a strong lead independent director — former Pepsi executive Lionel Nowell — who regularly meets with other independent directors, Moynihan, shareholders and regulators.

    The board at JPMorgan Chase, which is facing a similar vote at its May 21 meeting, also pointed to the “strong, effective counterbalance” provided by its lead independent director, former NBCUniversal Chairman Stephen Burke. In recommending that shareholders oppose the push to split the duties, the board noted a lack of “empirical evidence demonstrating a significant relationship” between a separate chairman and CEO and strong company performance.

    “With Mr. Dimon serving as both Chairman and CEO, the Firm has delivered ROTCE that has consistently and substantially outperformed” its peers, the bank’s board wrote, referring to return on tangible common equity, which is a common measure of shareholder returns.

    Goldman Sachs’ board also pushed back on the idea. It said that its lead director is active, setting the agenda for meetings, focusing on the effectiveness of the board, being a liaison for independent directors and management and repeatedly meeting with shareholders and regulators.

    “We are committed to independent leadership on our board,” the Wall Street bank stated, adding that it has repeatedly disclosed it would “not hesitate to appoint an independent chair” if its governance committee decided that step was necessary.

    Goldman also argued that the combined role has provided for “strong and effective leadership” from Chairman and CEO David Solomon, particularly during turbulent times in the economy and the regulatory environment.

    Walter Gontarek, a visiting fellow at the UK’s Cranfield University who has studied the corporate governance reform proposal at U.S. banks, said that combining the two roles can offer “handsome benefits as firms can navigate fast moving developments.”

    Gontarek found in a recent paper that firms with a dual chairman and CEO can take on greater risk, but that linkage broke down when companies were subject to heightened regulatory supervision.

    “The so-called agency costs of CEO duality can be mitigated when regulatory reach is greater,” said Gontarek, a former banker who is CEO and chair of the London-based business lender Channel Capital Advisors.

    Bank regulators in Europe generally don’t permit the industry to combine the CEO and chair roles.

    “The next few years will tell us if the U.S. market moves towards the European model in discouraging CEO and chair combinations or reverses course,” Gontarek said.

    One relevant factor is that big banks’ investors are from all over the world, and combined chairman-CEOs are almost “unheard of’ in parts of Europe, said Courteney Keatinge, senior director of ESG research at the proxy advisory firm Glass Lewis.

    Keatinge, whose firm is recommending that shareholders vote for the chairman-CEO split at Bank of America and Goldman Sachs, acknowledged that academic research on the issue is mixed. But she said a more independent board led by a separate chair is “more likely to ask the tough questions” and challenge management when needed.

    “We really want as much independence as possible on the board because it ensures that shareholders’ interests are being served,” Keatinge said.

    Krause, the Texas Christian University professor, said there are several trade-offs involved, pointing to potentially faster decision-making by a chairman-CEO but also the potentially increased ability to challenge CEOs if the two roles are split.

    Ultimately the issue comes down to what board chairs and CEOs are “doing with their power,” the type of social dynamics that are harder to capture in academic research, Krause said.

    “It really matters who chairs the board, and by ‘who’ I don’t just mean, ‘Are they the CEO or not?’” Krause said. “I mean the person, the values, the governing priorities that they bring to that role, and that’s very difficult to measure.”

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    Polo Rocha

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  • Goldman closes GreenSky sale, and Synovus sees an edge

    Goldman closes GreenSky sale, and Synovus sees an edge

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    Goldman Sachs signage is displayed at the company's booth on the floor of the New York Stock Exchange.

    Goldman Sachs announced it would sell GreenSky last fall as part of its efforts to shrink its consumer business.

    Goldman Sachs has completed its sale of the home improvement lending platform GreenSky, just two years after the financial giant bought the tech company with hopes of expanding its consumer finance business.

    Sixth Street, KKR and Bayview Asset Management were part of the consortium of investors that bought Atlanta-based GreenSky for an undisclosed price, completing a deal that was initially announced last fall. The niche home remodeling space remains hot for financial services, as total dollars going into home improvement projects remains elevated from pre-pandemic levels, according to a report from the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University.

    GreenSky CEO Tim Kaliban said in a news release Friday that the institutional investors will bring “funding, scale and continuity” to the tech company, which also plans to deepen its long-term partnership with Synovus Financial. Sixth Street, which has more than $75 billion of assets under management, led the investor consortium and plans to help GreenSky “deepen its focus on helping grow the businesses it serves,” Michael Muscolino, co-founder and partner at Sixth Street, said in the release.

    “Our investor consortium looks forward to providing the GreenSky team with the resources it needs to continue innovating and delivering industry-leading and easy-to-use solutions for its merchant network and their customers,” Muscolino said.

    GreenSky was first tucked under the Goldman umbrella in 2022 for a reported $1.7 billion price tag, but the New York-based megabank has rapidly scaled back its consumer business after it said it grew too quickly and unsustainably. 

    GreenSky offers point-of-sale technology to connect home improvement contractors with consumers to make loans. The loans are housed through bank partners, like Synovus, which is building on its existing relationship with GreenSky.

    Synovus CEO Kevin Blair said on the company’s earnings call in January that he expected a “sizable increase in income” from the GreenSky relationship, projecting between $20 million and $30 million in revenue per quarter through fee income. The bank reeled in $51 million in total noninterest revenue in the fourth quarter.

    Last month, Synovus also created a chief third-party payments officer to oversee merchant services and sponsorships, tapping Jonathan O’Connor for the role.

    Since its founding in 2006, GreenSky has grown its network to more than 10,000 merchants, and has facilitated more than $50 billion of commerce through nearly 6 million consumers, the company said.

    Homeowner renovation and maintenance spending peaked last year, hitting $481 billion, after growing at a rapid clip since 2020, according to Harvard’s housing studies center. At the start of the home improvement heyday, banks began making moves to buy into the space. Truist Financial acquired and expanded its own point-of-sale home improvement platform in 2021. Regions Financial made a similar purchase around the same time. 

    Even last month, Synchrony Financial announced that it had agreed to buy Ally Financial’s point-of-sale financing business and $2.2 billion of loans, focused on home improvement and health care.

    While total home improvement spend has started marginally decreasing, the Harvard group still expects folks to put around $450 billion into home projects this year. Prior to 2021, that number had been hovering around $300 billion.

    “Home remodeling will continue to suffer this year from a perfect storm of high prices, elevated interest rates, and weak home sales,” said Carlos Martín, project director of the Remodeling Futures Program at the Joint Center for Housing Studies, in a prepared statement.

    Still, Abbe Will, associate project director of the group, said in the report that recent improvements in homebuilding and mortgage rates signal that the rate of spending will pick back up by the end of 2024. 

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    Catherine Leffert

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  • Truist keeps downsizing with deal to sell asset-management business

    Truist keeps downsizing with deal to sell asset-management business

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    Truist Bank Branches Ahead Of Earnings Figures
    Truist is selling Sterling Capital Management, which had $76 billion of assets under management at the end of December. The buyer, Guardian Capital Group, said that Sterling Capital will operate as a standalone entity and continue to be led by its current management team.

    Scott McIntyre/Bloomberg

    Truist Financial intends to sell an asset-management subsidiary, marking the latest step in the superregional bank’s effort to realign and simplify its operations.

    Charlotte, North Carolina-based Truist confirmed Friday that it has reached an agreement to sell Sterling Capital Management to Guardian Capital Group in Toronto for $70 million, plus future payout incentives.

    The deal’s announcement came one day after a media report that Truist was close to offloading its larger insurance brokerage business. The sale of Truist Insurance Holdings has long been rumored.

    Sterling Capital, which had $76 billion of assets under management at the end of December, will operate as a standalone entity and continue to be led by its current management team, Guardian said in a press release. The deal is expected to close in the second quarter.

    “This path forward is a win-win-win for Sterling Capital, Guardian, and Truist,” Sterling Capital CEO Scott Haenni said in the release.

    “It allows Sterling Capital to grow as an independently-managed investment management firm poised for continued long-term growth under Guardian’s strategic oversight,” Haenni said. He added that Sterling Capital will “partner with Truist on shared relationships and opportunities.”

    Truist has been in reorganization mode for several months as it seeks to become a simpler, more profitable company.

    As part of a $750 million cost-cutting program announced last fall, the company has reduced its workforce by 4%, consolidated several business lines and created a single enterprise-wide payments group. It has also shrunk the size of its board of directors and expanded its executive management team, and it plans to close 4% of its branches in March.

    Truist is also remixing its balance sheet. Last summer, it sold a $5 billion student loan portfolio.

    In response to a request for comment about the sale of Sterling Capital, which Truist inherited from predecessor BB&T Corp., a Truist spokesperson said in an email Friday that the company “regularly assesses opportunities … and makes adjustments to [its] business in order to invest in areas of growth.”

    Sterling Capital was founded in 1970 as Nisbet and renamed Sterling Capital Management in 2001, according to its website. BB&T, which merged with SunTrust Banks in 2019 to form Truist, acquired a majority equity ownership stake in 2005, the website said.

    Questions still linger about if and when the $540 billion-asset Truist will sell all or part of its 80% stake in Truist Insurance Holdings. 

    On Thursday, the industry publication Insurance Insider reported that Truist was nearing a deal to sell the unit to Stone Point Capital, a private equity firm in Greenwich, Connecticut, and Clayton Dubilier & Rice, a private investment firm in New York City.

    Stone Point acquired 20% of Truist’s insurance business in the spring of 2023 — one of several deals last year where banks offloaded their insurance units amid skyrocketing insurance valuations and banks’ need to shrink their balance sheets.

    A Truist spokesperson declined Friday to comment on the report that the company is nearing the sale of its insurance brokerage unit.

    One analyst noted Friday that the sale of Sterling Capital is much smaller than a potential sale of Truist Insurance Holdings.

    “Today’s transaction seems a bit like a sideshow in comparison to that transaction, which could reportedly be valued around $15 billion,” Scott Siefers, an analyst at Piper Sandler, wrote in a research note.

    Truist executives have said several times that the company’s 80% stake in Truist Insurance Holdings offers flexibility to generate more capital.

    During the company’s fourth-quarter earnings call last month, CEO Bill Rogers said: “We’ve said clearly that we’re always evaluating alternatives, and we’re going to do the best thing for the insurance business and the best thing for Truist going forward.

    “As it relates to any specific timing … I don’t think I should really comment,” he added.

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  • Bank of America takes temporary $1.6B hit over use of short-lived rate

    Bank of America takes temporary $1.6B hit over use of short-lived rate

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    BofA CEO Says Bank Will Devote More Capital To Trading
    Bank of America said Monday that it will need to “de-designate” interest-rate swaps and reclassify how it accounts for them. Though the bank will take a noncash, pretax charge of $1.6 billion in the fourth quarter, it expects to regain that money as interest income over time.

    Christopher Goodney/Bloomberg

    Bank of America’s support for a short-lived interest rate index from Bloomberg L.P. will lead the bank to take a $1.6 billion hit in its earnings report on Friday, though it will earn that money back over time.

    BofA was perhaps the leading backer of Bloomberg’s Short Term Bank Yield Index, or BSBY, rate, which was designed to play a major role in replacing the once-ubiquitous London Interbank Offered Rate. Libor was used in loans across the world before a rate-rigging scandal caused its demise. Bloomberg had foreseen a window in which it could come up with its own benchmark for banks to use in loans.

    But regulators were either skeptical of BSBY or openly combative about its adoption. After the rate failed to gain much traction in the banking industry, Bloomberg said in November that it would permanently discontinue BSBY this year.

    The rate’s demise is triggering an accounting shift at Charlotte, North Carolina-based BofA, since derivatives transactions the bank entered to hedge its exposure to BSBY no longer qualify for special treatment under accounting rules.

    In a securities filing Monday, the $3.15 trillion-asset bank said it will need to “de-designate” those interest-rate swaps and reclassify how it accounts for them. BofA is taking a noncash, pretax charge of $1.6 billion in the fourth quarter due to that change. But the bank also said it expects to regain that $1.6 billion as interest income over time, with much of that occurring by the end of 2026.

    The one-time charge will also cause a decline of eight basis points in the company’s common equity tier 1 ratio, Bank of America said.

    Analysts described the change as a nonissue, even if it makes the bank’s quarterly earnings somewhat noisier than BofA might like. The bank reported $7.8 billion in earnings during the third quarter, so a $1.6 billion hit in the fourth quarter is not insignificant.

    Jason Goldberg, a bank analyst at Barclays, said in an email that the change is “much more of an accounting nuisance” than anything. He noted that BofA will earn $1.6 billion over the next few years as it makes up the one-time charge.

    Piper Sandler analyst Scott Siefers wrote in a note to clients that the “one-time accounting change” will “introduce some noise” into Bank of America’s quarterly earnings but will not have much impact beyond that.

    Other banks that used BSBY in loans may also have to make moves to clean up from the index’s discontinuation. But few, if any, banks likely used BSBY as much as Bank of America, which made loans to several publicly traded companies that referred to the benchmark, according to securities filings that provide details of those loans.

    The key feature that made BSBY attractive was that it was credit-sensitive. Like Libor, it moved up when financing conditions were tighter, which meant the interest payments banks received from borrowers reflected any stresses in real time. 

    By contrast, the Secured Overnight Financing Rate, which has replaced Libor in the United States, is seen as “risk-free” since it’s based on some of the safest transactions in the world. SOFR moves very little in times of financial stress, which bankers say does not reflect the fact that it’s more expensive for them to fund their operations when markets are tighter. 

    Bank of America, along with several regional banks, had participated in a series of virtual workshops in 2020 and 2021 that regulators set up to discuss the role of credit-sensitive rate options.

    After those meetings, banking regulators said they were open to banks using non-SOFR rates as long as they understood and planned for any risks. But Securities and Exchange Commission Chairman Gary Gensler was openly critical of BSBY, which observers say contributed to its demise.

    The developers of Ameribor, another credit-sensitive rate that some community banks have favored, said after Bloomberg decided to shut BSBY that their plans haven’t changed.

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  • HSBC takes aim at Revolut and Wise

    HSBC takes aim at Revolut and Wise

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    HSBC
    HSBC is adding a new app to attract non-bank customers to cross-border payments.

    Hollie Adams/Bloomberg

    As the digital payment companies that offer cross-border payments are stacking on financial services to steal business from banks, HSBC is countering by adding a money-transfer app that could serve as a way to enroll new consumers.

    HSBC on Tuesday announced Zing, a transfer app that will launch in the coming days in the U.K., with a wider rollout coming later. Zing is designed for users who do not have an HSBC account, enabling it to use the same approach as fintechs that are building “super apps,” or using enrollment in payment accounts as a way to sell broader financial services. 

    The launch of Zing places HSBC in a market that banks have largely conceded to companies like Revolut and Wise. But as these nonbanks add more traditional banking and payment services, large banks are more inclined to compete with them — both to defend their existing businesses and to find new audiences.

    “Cross-border is going to be a major battleground in payments in the next few years as economies strengthen and the globalization of commerce continues,” said Thad Peterson, a strategic advisor for Datos Insights. “HSBC’s solution is a ‘shot across the bow’ for players who want to compete for international transaction volume.”

    Zing will be available on Apple’s App Store and the Google Play platform. Users will be able to store up to 10 currencies in digital wallets with locked-in rates to make payments in local currencies. Consumers can use more than 30 currencies to make international payments using a combination of local and Swift payments. 

    Zing is part of the global HSBC Group, but it is not a bank. It is licensed as an e-money institution by the Financial Conduct Authority. Zing funds are not deposits and as such are not insured by the Financial Services Compensation Scheme, the U.K.’s version of the Federal Deposit Insurance Corp. Anyone aged 18 or older can apply for the Zing card and app. HSBC already offers a fee-free multi-currency service to retail and wealth clients through its Global Markets product line, whereas Zing is meant to attract new users.

    “A critical element is that Zing is open to non-HSBC customers, although they will obviously try to get you to sign up for their debit card,” said Aaron McPherson, principal at AFM Consulting. “It is a crowded space, but definitely room for another competitor. I just think the group of banks that could do something like this is fairly small; maybe Citi and a few others. Most would probably want to partner.”

    The Zing launch follows several other moves at HSBC to expand its digital payments capabilities and to extend access to broader demographics. The bank recently invested $16 million in digital identity firm Yoti, which could help the bank streamline digital ID as a way to enroll new users and authenticate digital payments. HSBC also invested $10 million in Nova Credit, a firm that transfers credit bureau information between countries, making it easier for the bank to offer credit to immigrants. 

    HSBC did not provide an executive’s comment by deadline. In a release, James Allan, founder and CEO of Zing, said:  “Now is the time for a new kind of international payments solution; one that combines cutting-edge innovation with the support of a global bank.”

    International payments represent a huge and fast-growing market. Cross-border payments volume is expected to expand from $190 trillion in 2023 to $290 trillion in 2030, according to Statista. 

    There are a number of companies that offer cross-border payments. Wise has added partners with payment companies in different countries to make it easier for users to make payments in local currencies. Revolut, which has its roots as a mobile payment company, has added dozens of financial services over the past few years as it attempts to build a financial super app. Ripple has used the technology that supports the XRP token to offer cross-border payments for years, and recently rebranded its cross-border payments unit to address Ripple’s attempts to build international networks for digital cross-border payment processing. 

    There are also traditional transfer services such as Western Union and MoneyGram that are adding partnerships and expanding their use of automation to expand their international payment businesses. 

    It can be challenging for traditional banks to offer digital cross-border payments, according to analysts. FX and cross-border remittance have long been markets that banks have been willing to cede to others, but as companies like Wise and Revolut have attached more banking-style features, especially cards, it’s clear that banks are taking notice, said Aaron Press, research director for worldwide payment strategies at IDC Insights.

    “Banks have a potential advantage if they can gain traction, which is far from guaranteed, as they won’t have to share revenue with partners, which should improve margins,” Press said.

    Banks have struggled to match the FX pricing that the specialist startups offer, according to Gareth Lodge, a senior analyst for payments at Celent. “It’s not that they can’t, but more that they don’t necessarily want to,” he said.

    There are several reasons for this. Banks may not have a risk appetite, fear the service may cannibalize their own higher margin transactions, or they may avoid the product because the smaller transaction size is not commercially attractive, Lodge said. 

    Getting into new lines of business can be a double-edged sword for banks, Press said. “There’s a risk that the different investment needs, revenue models and margin expectations will be at odds with the bank’s traditional metrics, which can cause challenges.”

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  • Blue Ridge Bank begins offboarding at least a dozen fintech partners

    Blue Ridge Bank begins offboarding at least a dozen fintech partners

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    Blue Ridge Bank, based in Charlottesville, Virginia, and founded in the shadow of the Blue Ridge Mountains, has been reworking its banking-as-a-service strategy since the Office of the Comptroller of the Currency hit it with an enforcement action last year.

    Catherine Leffert/ American Banker

    Blue Ridge Bank has begun offboarding at least a dozen fintech partners, with more separations to come, after its once fast-growing banking-as-a-service business put the bank in regulatory hot water last year.

    The Virginia-based bank said Thursday in an investor presentation that it planned to reduce its nearly 50 BaaS relationships to a “limited number” with a commercial focus or “strong consumer traction” and that it will roll off the rest in the next year. 

    Blue Ridge has been recalibrating its BaaS strategy since the Office of the Comptroller of the Currency flagged the bank for its weak anti-money-laundering controls in a public agreement last August. CEO Billy Beale, who took the reins this summer, told American Banker last month that the $3.3-billion-asset bank had jumped into the business “up to its clavicles.”

    “There’s still a lot of just blocking and tackling that we’ve got to do to get the bank to work the way it’s supposed to,” Beale said in the interview. 

    Beale added in the October interview that achieving profitability in BaaS was difficult due to the related compliance costs. The business currently produces up $721 million of deposits, about one-quarter of the bank’s total deposits, and $50 million of loans. Blue Ridge noted in its recent presentation that it would curb partnerships with fintechs that had high account volume or low deposit volume per account to “reduce significant compliance oversight.” 

    The bank will continue providing lending and deposit services to fintechs, including partners like Unit, Upgrade and Flex. 

    Blue Ridge added in the presentation that it was still working to bring its fintech policies and procedures in line with the OCC’s enforcement action but has “developed a strategic road map” for BaaS business. The bank also incurred $7.3 million in remediation costs year to date.

    BaaS has been facing increasing regulatory pressure for the past year, but Blue Ridge’s enforcement action was a watershed moment for the sector. Since then, another BaaS powerhouse, Cross River Bank, has entered a consent order with the Federal Deposit Insurance Corp.

    “There’s still a lot of just blocking and tackling that we’ve got to do to get the bank to work the way it’s supposed to,” Beale said in the October interview. 

    Blue Ridge announced at the end of last month that it lost $41.4 million in the third quarter, in part driven by a goodwill impairment charge from its stock price’s drop. The bank’s stock has fallen more than 75% year to date, down to $2.97.

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  • Capital One seeks dismissal of lawsuit brought by disgruntled savers

    Capital One seeks dismissal of lawsuit brought by disgruntled savers

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    Capital One sign at Tysons Headquarters office building. Capital One Financial Corporation is an American bank holding company.
    Capital One is seeking the dismissal of a lawsuit filed by customers who received relatively low interest rates on their savings accounts. In a recent court filing, the bank said that the lawsuit tries to use state law in a way that would significantly interfere with its federally granted ability to receive deposits.

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    Capital One Financial wants a federal judge to dismiss a lawsuit filed by customers who received relatively paltry interest on their savings accounts and alleged that they were misled into assuming that they were earning higher rates.

    In a court filing Thursday, Capital One noted that the annual percentage yield on its “Savings 360” account was disclosed to its customers in monthly statements. The McLean, Virginia-based company also pointed to contractual language stating that it had the right to change interest rates at any time at its own discretion.

    Capital One argued that the plaintiffs are seeking the creation of a legal obligation that would require any bank that offers a new product to provide that product to existing customers who are enrolled in a different product.

    “Plaintiffs’ request is legally unsupported, could have far-reaching and untenable consequences if granted by this Court, and should be rejected outright,” Capital One argued in its motion.

    The lawsuit, which Capital One disclosed in a securities filing earlier this month, was filed by customers who initially opened accounts at ING Direct USA. After Capital One bought ING Direct in 2012, customers’ savings accounts became 360 Savings accounts.

    The conduct at issue in the suit began in 2019, when Capital One started offering an account called “360 Performance Savings.” As of last month, 360 Performance Savings customers were receiving 4.30%, while 360 Savings customers were getting 0.30%, according to the complaint.

    The lawsuit acknowledged that Capital One has the right to change the interest rates it pays. But the plaintiffs argued that the bank exercised its discretion unfairly, and that 360 Savings customers who went to the Capital One website and saw prominent ads for high rates on 360 Performance Savings accounts could be deceived into thinking that they were getting those rates.

    Gregory Mishkin, a longtime Capital One savings account holder who lives in the Atlanta area, learned about the lawsuit last week from an American Banker article. The article led him to discover that he, too, has been receiving low returns, rather than the much more competitive rate advertised by Capital One for the 360 Performance Savings account, he said.

    “I nearly threw up,” Mishkin said in an interview. “If I had any idea that they were playing these games, I’d just set up another account.”

    Since the Federal Reserve began hiking interest rates last year, certain other online banks have also required existing savings account holders to establish new accounts in order to receive the best possible rate.

    In its court filing last week, Capital One made a series of legal arguments in support of its claim that the suit should be thrown out.

    Among those arguments is the idea that the plaintiffs are seeking to use state law in a way that would significantly interfere with Capital One’s ability to receive deposits, which is a federally granted power.

    The lawsuit, which is seeking class-action status, alleges that Capital One violated certain state laws in Illinois, Virginia, Massachusetts and Pennsylvania that deal with consumer protection and deceptive business practices.

    Capital One also noted that the plaintiffs did not point to any contractual provision that required the bank to notify 360 Savings customers about the creation of, or the existence of, the 360 Performance Savings account.

    “Nor do they allege any facts showing that Capital One did anything to prevent them from learning about, or switching to, the Performance Savings account,” the bank wrote in its motion to dismiss the lawsuit. “On the contrary, they allege that Capital One advertised the Performance Savings account on its website …”

    In their lawsuit, the plaintiffs said that between 2013 and 2019, Capital One advertised the 360 Savings account as a “high-interest” account, and that it later used similar language to describe the 360 Performance Savings account.

    Capital One, in its filings last week, noted that the plaintiffs did not allege that Capital One promised to pay any specific rate. The bank wrote that the description of its accounts as offering “high” interest “is too vague and subjective to be an actionable misrepresentation.”

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  • As capital regulations loom, M&T continues pause on share buybacks

    As capital regulations loom, M&T continues pause on share buybacks

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    Despite some criticism, M&T in Buffalo is continuing its cautious capital strategy, extending a pause on share buybacks until economic conditions strengthen, CFO Daryl Bible said Wednesday.,

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    Concerns over a cooling economy and potential uptick in charge-offs prompted M&T Bank in Buffalo to extend the hold on share buybacks it announced earlier this year to keep more capital on hand, Chief Financial Officer Daryl Bible said Wednesday on a conference call.

    While Bible, the former Truist Financial CFO who joined M&T in December, acknowledged the $209.1 billion-asset M&T is holding excess capital, an unpredictable economy paired with the desire to meet clients’ credit demands requires a more guarded approach to share buybacks, he said.  “I think we’re just trying to be cautious,” Bible said. “When the economy gets a little bit more comfortable, we will consider repurchases there.”

    Bible’s comments come as the financial services industry gears up to fight proposed regulations linked to the Basel III regulatory framework that bankers fear could result in increased capital requirements on banks with at least $100 billion in assets. 

    When Bible discussed the  buyback pause in July, following completion of its Federal Reserve stress test, M&T was reporting a common-equity-tier-1 capital ratio of 10.59%. At Sept. 30, the same ratio had crept up to 10.94%.

    “The capital isn’t going anywhere,” Bible said. “We just want to continue to make sure that we’re strong and can grow and serve our customers right now.”

    Fitch Ratings reaffirmed its “A” rating on M&T’s debt securities last week, due in large part to expectations that the company would continue to hold capital at similar levels. The buyback pause “increases capital resiliency under a severely adverse economic scenario and is a key support of today’s rating affirmation,” Fitch stated in an Oct. 12 press release. 

    The strategy is not without critics. Brent Erensel, an analyst who covers M&T for Portales Partners in New York, said on the conference call that the bank would need to generate double-digit returns on new loans to equal the impact of buybacks. “So, the question I guess is at what point will the corporate-finance math drive you to resume buybacks,” Erensel said. 

    M&T reported third-quarter earnings totaling $690 million Wednesday, up 6.6% year-over-year.  Average deposits increased 2% on a linked-quarter basis to $162.7 billion, though heightened competition drove funding costs higher, leading to a 12-basis-point linked-contraction in the net interest margin from the prior-quarter result. M&T’s net interest margin stood at 3.79% on Sept. 30. 

    Growing deposits remains a top priority, but making additional headway will likely prove challenging as Bible predicted “continued intense competition for deposits in the face of industry-wide outflows.”

    Third-quarter credit quality numbers were solid for M&T.  Net charge-offs of $96 million amounted to an annualized 29 basis points of average total loans, down sharply from the 38 basis points the company reported in its second-quarter results. M&T reported a third-quarter provision  for credit losses of $150 million. That was  in line with the June 30 level despite improved credit-quality metrics — nonaccrual loans declined along with net charge-offs. Bible cited “softness” in commercial real estate valuations, as well as a “gut feeling” charge-offs would jump in the fourth quarter for the decision to continue stockpiling reserves. Taking a provision well in excess of net charge-offs boosted M&T’s allowance for credit losses to $2.1 billion, or 1.55% of total loans, an amount Bible termed adequate. 

    “We feel really on top of” what’s going on,” Bible said. “I think we are actively looking at any credit that could have any issues whatsoever.” M&T, however, is likely to disclose that criticized assets reached the mid-to-high-single digits in the third quarter 10-Q report it expects to file with the Securities and Exchange Commission “in the next few weeks,” Bible said.

    That finding “takes some of the shine off the better than expected charge-off and non-accrual” numbers M&T reported, Autonomous Research Analyst Brian Foran wrote Wednesday in a research note.  

    Amid growing worries industry-wide about charge-offs, M&T recently moved to expand its risk management and commercial underwriting toolbox, agreeing to begin using OakNorth’s credit intelligence technology. M&T joins a growing list of U.S. banks that have turned to the London-based fintech. OakNorth’s client list includes the $557 billion-asset PNC Financial Services Group in Pittsburgh, the $207.3 billion-asset Fifth Third Bancorp in Cincinnati and the $48 billion-asset Old National Bancorp in Evansville, Indiana. 

    Rishi Khosla
    London-based Fintech OakNorth recently added M&T to its list of clients. Rishi Khosla, CEO of OakNorth said its pipeline of potential U.S. clients remains strong.

    Alex Rumford

    OakNorth also operates a bank that has lent approximately $12 billion to British businesses during its eight years in business with charge-offs in the 12 to 14 basis-points range, CEO and cofounder Rishi Khosla said in an interview. 

    According to Khosla, OakNorth’s credit intelligence software is designed to provide lenders with a forward look at the  financial prospects of borrowers with annual revenues of $3 million to $4 million and above. It’s a function that could grow in importance if the economy continues slowing. “Clearly the economic environment is not a straight line,” Khosla said. “There’s a significant amount of headwinds…The cost of borowing is much higher than it was 18 months ago.”

    OakNorth’s pipeline of potential U.S. clients is still strong, Khosla said, giving him hopes the company will be able to soon announce additional new partners. “The strongest feedback we’re receiving is do [clients] continue renewing and do they continue wanting to embed what we’re doing within their processes,” Khosla said. “We’re winning on those accounts.” 

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  • More sale-leasebacks predicted for banks after Atlantic Union deal

    More sale-leasebacks predicted for banks after Atlantic Union deal

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    An Atlantic Union branch in Fredericksburg, Virginia. The $20.6 billion-asset company recently struck a deal to sell and lease back 25 of its 109 branches. Atlantic Union put the proceeds to work restructuring its securities portfolio.

    Atlantic Union Bankshares recently sold 25 branches and leased them back from the buyer, then used the proceeds to restructure its securities portfolio. It’s a class of transaction that could become more attractive for banks seeking capital in a protracted high-interest-rate environment, according to experts. 

    The Richmond, Virginia-based Atlantic Union closed its sale-leaseback deal last month, netting about $22 million after taxes. At the same time, the $20.6 billion-asset Atlantic Union disclosed the sale of approximately $228 million in available-for-sale securities, adding that the after-tax loss of $27.7 million connected to the securities sale was largely offset by the sale-leaseback gain. 

    “The sale-leaseback of these properties was driven by our ongoing assessment of our balance sheet and enables us to turn a fixed asset into an earning asset,” Beth Shivak, Atlantic Union senior vice president and head of corporate communications wrote in an email to American Banker. “The gains for the transaction are being used to help reposition our balance sheet for a higher-for-longer rate environment.”

    Tyler Swann, managing director, investments at W.P. Carey in New York, said sale-leaseback is seeing growing interest from companies “across the board, in all sorts of industries,” as rising rates have rendered capital scarce and more expensive. Indeed, once a management team gains a comfort level with the idea of selling its real estate, “then it’s purely a question of what’s my cheapest source of capital,” Swann said. “Is it to have capital tied up in my real estate … or can I take the money and redeploy it more efficiently in my business?”

    “I have to imagine for a business as interest rate sensitive as banking, rising rates have to make you reevaluate what your sources of capital are,” added Swann, whose firm wasn’t involved in the Atlantic Union deal.

    David Bishop, an analyst who covers Atlantic Union for Hovde, also predicted an uptick in sale-leaseback deals involving banks.  “We think we will see more banks pursue strategies … to unlock embedded equity and reposition balance sheets for a higher-for-longer environment,” Bishop wrote Sept. 28 in a research note. Bishop stated he viewed Atlantic Union’s course as “positive,” predicting the overall result would be slightly accretive to 2024 full-year earnings. Bishop boosted his earnings-per-share estimate for 2024 by 5 cents, to $3.30, reiterating his outperform rating. 

    In a market forecast published at the beginning of 2023, New York-based Blue Owl Capital, which purchased the Atlantic Union branches, reported $3.1 billion of real estate acquisitions in 2020, followed by $5.1 billion in 2021. The volume of acquisitions surpassed $7.1 billion in 2022. As the pace of business has quickened, Blue Owl’s sale-leaseback revenue has increased correspondingly. Through the first six months of 2023, sale-leaseback revenue totaled $56.4 million, up 55% year over year, according to Blue Owl’s most recent 10-Q report filed with the Securities and Exchange Commission.  

    As part of the deal with Blue Owl, Atlantic Union, which operates a total of 109 branches, agreed to lease the locations it sold for 17 years. First-year rent will total approximately $2.9 million after taxes, according to a current events report Atlantic Union filed with the SEC on Sept. 21. “We like these locations and have no plans to close,” Shivak wrote in the email. 

    Once a sale-leaseback deal is consummated, little or nothing connected to a property’s operation changes, Swann said. 

    New renters “typically exercise the same level of control over real estate after a sale-leaseback as they did as owners,” Swann said. “Generally speaking, the tenant is going to be responsible for everything, just like they would have been if they owned the building,” Swann said. “Essentially, the [new] landlord’s only interaction is providing the capital upfront and collecting the rent check once a month.”

    For Swann, the biggest precondition that needs to be satisfied before he considers a sale-leaseback deal is ensuring sellers are certain about their strategies. In the case of banks, “you’re making a commitment to your branches,” Swann said. “You have to really know you want to be in those buildings and paying rent for the long term.”

    W.P. Carey has historically focused on industrial sale-leaseback transactions but has done a growing amount of retail business in recent years, according to Swann. 

    Atlantic Union’s deal came five months after the $46.9 billion-asset Pinnacle Financial Partners in Nashville, Tennessee, executed a sale-leaseback deal with Oak Street Capital Partners, a Blue Owl subsidiary. Pinnacle agreed to sell and lease back 49 properties, netting $85.7 million before taxes. Like Atlantic Union, Pinnacle used proceeds from the sale-leaseback to restructure its securities portfolio, selling $166 million of securities for a net loss of $9.2 million.

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  • Wells Fargo-SEC settlement on advisory fees underscores M&A challenges

    Wells Fargo-SEC settlement on advisory fees underscores M&A challenges

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    Wells Fargo overcharged nearly 11,000 accounts about $26.8 million in advisory fees from 2002 to 2022, the SEC said. The problem was said to have begun at Wachovia before Wells Fargo bought it in 2008 and was not caught until a decade after the acquisition.

    Cooper Neill/Bloomberg

    Wells Fargo is paying a $35 million fine and nearly $40 million in restitution to settle Securities and Exchange Commission allegations that its investment advice arm overcharged customers for years. 

    The company overcharged nearly 11,000 accounts about $26.8 million in advisory fees over the years, the SEC said in a news release Friday. The overcharging occurred from 2002 to 2022 and is partly connected with its crisis-era acquisition of Wachovia Corp., according to an SEC order outlining the settlement.

    Wachovia and AG Edwards, an investment firm that Wachovia had acquired just before the crisis, gave certain customers discounts to their standard advisory fees — yet they sometimes failed to enter the discounts into Wachovia billing systems.

    Wells Fargo did not catch the discrepancies for years after the acquisition, the SEC said, and its advisors continued to offer discounts that weren’t reflected in customer billing. The company learned about the issue in 2018 after Connecticut banking regulators asked about it, prompting a review at Wells Fargo that uncovered nearly 11,000 accounts nationwide were overcharged.

    “Today’s enforcement action underscores the need for firms growing their businesses through acquisition to ensure that their growth does not come at the expense of client protection,” Gurbir S. Grewal, director of the SEC’s enforcement division, said in the release.

    The Wachovia acquisition was far from ideal. It was part of the shotgun marriages of banks during 2008, as troubled mortgage portfolios at Wachovia and elsewhere helped bring the global financial system to its knees.

    But the deal helped massively extend Wells Fargo’s reach and brought Wachovia’s expansive advisor network to the San Francisco bank. 

    Wells Fargo didn’t have much time to do due diligence on the deal during 2008, noted John Gebauer, chief regulatory officer at the risk advisory firm Comply. “But they had plenty of time after that transaction to run a smooth integration and to review what they bought,” Gebauer said. 

    The order highlights the importance of conducting extensive compliance checks on billing and other issues as the advisor industry continues going through a wave of consolidation, Gebauer added.

    The process that advisors at Wells Fargo and its acquired firms used to offer discounts on preset fees for certain clients stopped in 2014. But some customers who opened up accounts before 2014 continued to be overcharged until last December, the SEC said.

    In a statement, the company — which did not admit or deny the SEC charges — said it was pleased to resolve the issue.

    “The process that caused this issue was corrected nearly a decade ago,” the company said. “And, as noted in the settlement documents, Wells Fargo Advisors conducted a thorough review of accounts and has fully reimbursed affected customers.”

    Wells Fargo has reimbursed affected customers more than $26 million from the fees it overcharged and $13 million in interest, the SEC said.

    The order said that staff had to manually input agreed-upon discounts to a new customer account setup tool, which “did not automatically populate” those one-off discounts. That was then transferred to a legacy Wachovia billing system that the order said is still in use today.

    While Wells Fargo advisors could review the finalized information for discrepancies, the company “did not have policies or procedures” that required them to review and confirm the accuracy of charges, the SEC order said. 

    The company did have a quality control process in place from 2009 to 2014 aimed at flagging discrepancies — but it was only for accounts with more than $250,000 when they were opened, the SEC order said.

    The quality control process spread to smaller accounts starting in 2014, but the company did not do a historical lookback to examine past discrepancies, the SEC said.

    In Connecticut, where banking regulators first flagged the issue, Wells Fargo found that it overcharged 145 out of more than 57,000 accounts. Most of those dated back to the AG Edwards and Wachovia days.

    Last year, Wells Fargo began using a tech-enabled process to identify errors for roughly 2.2 million accounts across the country. In all, the bank found it overcharged 10,800 other accounts.

    The fine is one of a number of penalties the $1.9 trillion-asset company has paid in recent years, some much larger ones tied to consumer-abuse scandals. 

    Last December, the Consumer Financial Protection Bureau fined Wells Fargo $1.7 billion for shortcomings in auto loan, mortgage and deposit products. The company also agreed to pay $1 billion to shareholders in May to settle claims that its past leaders were overly optimistic on how quickly it would solve its outstanding issues with regulators.

    CEO Charlie Scharf, who joined the company in late 2019, has said overhauling the company’s risk and control framework remains Wells Fargo’s “top priority and will remain so.” 

    Dan Shaw contributed to this article.

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    Polo Rocha

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  • Regions Financial says possible capital hike would be manageable

    Regions Financial says possible capital hike would be manageable

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    “It’s not something that is pretty easy to overcome,” Regions CFO David Turner says of possible upcoming capital requirements tied to the Basel III endgame. “We don’t think it’s necessary, but we don’t get to make the rules. We just have to adapt and overcome.”

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    Regions Financial says that it is planning for an increase in regulatory capital requirements and would be able to manage new regulations for risk-weighted assets, but it also said that raising the capital threshold is unnecessary.

    David Turner, chief financial officer of the $156 billion-asset bank, told analysts Friday during the company’s second-quarter earnings presentation that Regions was expecting effective minimum capital standards to rise, and is preparing for a 6% risk-weighted asset requirement for banks over $100 billion of assets.

    “Maybe there’s some tailoring,” Turner said, but based on a 6% threshold, Regions would need to raise an “incremental” $5 billion of debt. The potential capital requirement would create an “all-in cost” for Regions of around $35 million or a “bottom-line hit” of 60 to 70 basis points, he said.

    “It’s not something that is pretty easy to overcome,” Turner told analysts. “We don’t think it’s necessary, but we don’t get to make the rules. We just have to adapt and overcome.”

    The potential changes Turner was referencing could be part of a Federal Reserve proposal expected next week related to the final implementation of the Basel III international regulatory framework, also known as the Basel III endgame. The Fed has scheduled an open meeting to discuss it Thursday.

    A series of bank failures that began earlier this year with the collapse of Silicon Valley Bank in March has prompted regulatory discussion led by the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.

    Policymakers and banking industry officials have debated back and forth about whether and by how much existing rules should be toughened to better insulate regional banks in particular from financial or economic shocks.

    Key issues of the debate have circled around raising certain capital requirements to include banks with assets of $100 billion or more and whether additional regulation would increase the cost of capital at traditional banks and tilt market activity toward less-regulated nonbank lenders.

    The Birmingham, Alabama, bank will be able to “overcome whatever it is that we have to [meet]” if regulators enact new capital requirements, Turner said during Friday’s earnings call.

    “We think the Fed’s going to give us all the time to adapt to whatever those changes are going to be without any major disruption,” Turner said.

    Regions was among the hardest-hit regional lenders amid sudden deposit runoffs and other volatility that slammed the sector earlier this year. At the end of the first quarter, Regions reported a 2.5% decline in deposits since the end of last year and a 9% drop from the first quarter of 2022.

    The bank’s total deposits declined further in the second quarter — to $127 billion — but at a slower pace. Deposits at June 30 were 1% lower than on March 31 and 8% lower than in mid-2022.

    An analyst’s question to Regions about its exposure to office-related commercial real estate assets highlighted ongoing concerns about underlying risks that could be present throughout the banking industry.

    The bank holds a $1.7 billion office portfolio, which consists of “well-secured” single-tenant assets with 82% considered investment-grade, Regions CEO John Turner told analysts.

    He said that the bank’s multi-tenant office assets are based mostly in Sun Belt states and are “well diversified geographically.”

    Regions reported net income of $581 million at the end of the second quarter, which was a 5% decline from the first quarter and flat compared with the same period last year. Net interest income fell by 2.5% during the second quarter to $1.4 billion but increased by 25% compared with the year-earlier period.

    Noninterest income climbed by 8% to $576 million during the second quarter but declined by 10% compared with the second quarter of 2022. Regions cited gains in its capital markets and credit card businesses that were offset by declines in other categories which include service charges on deposit accounts.

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    Jordan Stutts

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