has been opportunistic during the financial crisis, making a number of acquisitions of failed banking institutions since November 2008, including names like Downey Savings & Loan and PFF Bank & Trust, as well as the branch and deposit base in Nevada of failed Colonial Bank from
. Most recently, it snapped up the nine banking subsidiaries of FBOP Corp. of Oak Park, Ill. earlier this month.
Last week, U.S. Bank's Vice Chairman of consumer banking Rick Hartnack took time to discuss company's acquisition strategy with
Can you talk about how these acquisitions fit into the overall U.S. Bank picture?
One of the things that really started to jump off the page for us maybe two and a half years ago was in attractive markets, it was very obvious where we had strong branch share or distribution our performance tended to be significantly better and where we were underrepresented in distribution our performance tended to be much worse. So in a blinding flash of the obvious we said what we really need to do is in the best markets where the opportunities are the greatest, we need to really focus on getting our distribution share up to one of the leading positions. So that answers one question that we're often asked: 'Why not Florida? Why not Atlanta? Why not New York? Why not Washington D.C.?' This part of the strategy is highly focused on our existing 24-state footprint.
Within that footprint there are several markets that jumped off the page. In California, we had less than leading market share. Another place where we were underrepresented -- we were big, but not big enough -- was in Colorado. Another place where we've been underrepresented was Chicago and there are others. So that's kind of the story -- where do you want to have more branch density? Then look at the deals that will help you and then bid to try to win. Certainly we bid on more deals than we have won. There have been disappointments along the way, but some very nice deals have come together.
Given the deals you have done in California, are you finished with the state now and looking to other markets where you have a presence?
There are still holes in the California market that if a deal came along we would try to get it. But they are now deals in California that we wouldn't bother with because we're already well represented. In Chicago
there is a great deal more work to do.
The recent FBOP Corp. deal has made a great step forward, but it is very much still a long journey.
The company has said that it would not do a deal that is dilutive, can you speak to what that means for the company?
I think it's pretty safe to say that we won't do deal that causes permanent, irreparable or extreme dilution. Every deal is probably a little bit dilutive in the first month, but what you're really worried about is doing a deal that dilutes the capital position of your existing shareholders. Clearly when you're doing FDIC deals, unless you were a small bank and you did a very, very big one, there would be no reason to have to raise capital. So there's no capital dilution on the table as a result of these FDIC deals -- that's the good part of it. The other dilution that you worry is dilution of your earnings per share. There's two ways to dilute earnings per share. One is to have to issue more shares. That's not at play in these deals. The other one is by taking on a project that actually loses money so that your EPS goes down. Clearly with these deals, we've bid to avoid that.
What was attractive about these banks besides market share?
We are always looking for banks with broadly diversified group of consumers, small businesses and middle market clients. There have been many banks that have come to market that we have looked at that we never bought or never bid on that had highly concentrated customer sets, had a very narrow customer niches, and that's not what we're looking for. These were real banks -- good community or sub-regional banks -- in terms of the way it was run, the kind of clients it had, the kind of services it offered, the diversification in the small business loan portfolio, etc.
The M&A market for banks has been restricted to pretty much failed banks at this point. Any thoughts on when will we see a normalized bank M&A market?
Banks view this is as a disadvantageous time to sell themselves. The view is that earnings are unreasonably depressed, capital is unreasonably depressed,
and fear and uncertainty will tend to take away optimism in the form of buyers, so if a bank is put up for sale they're going to get a lower multiple on lower earnings than they would get in normal times. I think others would say look $1 of earnings today is just not valued the same way that $1 of earnings is valued in a more optimistic period of time. Sellers that don't have to sell, don't sell in times like this.
What is the biggest challenge for running an increasingly larger retail bank?
The growth in branches in U.S. Bank has been very sustained, very measured, very consistent. You have to realize it's been done over 20 years. As a bank that entered this fray with roughly 2,800 branches and now is close to 3,000 -- it adds complexity, but it doesn't change our organization much. It just makes our organization bigger at the edges. We kind of planned for this. This is not anywhere near the levels of complexity that
faced with their really big acquisitions. That's a complexity level just in a completely different ball park than what we're playing in.
So where are the other challenges?
The challenges are first and foremost in winning the hearts and minds of the new employees and we put an incredible amount of effort in that. We start at the headquarters because that's where all the rumors and everything else starts. We're actually face to face with headquarters employees at about 6PM on Friday night. We get them settled down. We talk very honestly and transparently about the deal.
The second challenge is to win the hearts and minds of the customers. That's every bit as hard as the employees, but if you win the employees they help you win the customers. Some of the secret sauce in this is we really minimize change early on. One of the things we preach from 6:01PM on Friday night is business as usual. ...We want people going away feeling really good about a bad situation.
That being said there has to be a time when you want to start implementing U.S. Bank products and processes.
We go through a conversion and integration and map all the products over. We're very careful with that product mapping to try to make sure that people are getting into products that are generally as good, or better than what they have. That's not always possible, but in the 6-9 months it takes to get ready to pull the trigger on the conversion, we try to win the clients confidence and that means there's less fallout when there is integration.
The other thing we work real hard on is no surprises to the client. We don't wait until integration day for them to find out that their checking account number is going to be changed. We have very specific communication that helps them come to grips with that stuff and then we do things like we buy replacement checks for them. So they can work with a new account number with limited headaches.
What will the shakeout of the U.S. commercial banking space look like?
I wouldn't want to push this off as U.S. Bank
's view, but I think it's pretty evident to us because we're in a lot of places, there still are some very weak banks out there. This process of bank failures will continue. I think the obvious outcome there will be fewer banks, but there is still going to be thousands of banks in America. It may not be 8,000, but it's not going to be four. So it's going to continue for a while.
--Written by Laurie Kulikowski in New York.