Banks Haven't Succeeded in Making Succession Plans

 | Feb 24, 2017 | 12:00 PM EST
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I spent the first part of the week at the American Bankers Association (ABA) National Community Bank Conference here in Orlando. This is a more hands-on nuts-and-bolts of daily banking as opposed to the investment and M&A conferences I usually attend, but since it was about a 10-minute drive from the house, I decided to go this year. I am enough of a geek to enjoy the meeting and discussions about banking, and I came away with a few insights that can help us make some money as well.

My first observation was that bankers are getting older. The average age of a bank CEO is over 60 and the average board member is over 70. I conducted a little experiment by walking around checking name badges on Monday, and I found that almost everyone at the conference who was clearly under 60 was a vendor or ABA staff member. This is important as the current crop of bank leaders are nearing retirement and succession planning has become critical. Community banks without a firm succession plan will have one choice when the current executives retire or pass away, and that is to sell the bank.

The problem with succession planning is that the next generation is Generation X, composed of those who are 35 to 50 years old right now. Most of them entered their career during the first boom of the real estate markets 15 years ago, and many of those who entered banking left it when things went bust. The current talent pool is not deep and what comes after them is even worse.

Millennials have almost no interest in banking at the community bank level. They want jobs that offer some purpose or engage their passions. Many of them also have an enormous amount of student debt, so they need a job that allows them to pay down their loans and still eat. The traditional path of branch banker to management to the C-suite is not seen as an attractive option. It doesn't pay enough, and in their lifetime they have seen bankers try to blow up the world, and they have a somewhat jaded view of the profession.

Some banks just never got around to doing succession planning. Others just cannot find the talent to replace the current leadership. Whatever the reason, the age of the executive team and board at publicly traded community banks is becoming a bigger factor to consider when buying small-bank stocks. Spending some time investigating the smaller banks in your area and patiently buying up shares of those with older executive teams and board members should pay off as they sell to fund their retirement or just because they cannot replace themselves.

The other big takeaway is that cybersecurity is becoming a huge concern for most community bankers, as the world becomes more digital and more mobile hackers and criminals have more access points into a bank. With financial technology becoming a bigger part of the banking world, the potential to enter the bank system by hacking also becomes a real concern. You have to worry about not just your security but the security of pretty much everyone you do business with. It is a daunting task.

It is also an expensive one. It is an expense that is never going to get smaller or go away. Each time one problem is solved, the bad guys figure out another scheme that is even more sophisticated and hard to stop. I think the costs of technology and cybersecurity protection will eventually eclipse regulatory costs as the leading reason smaller banks need to sell. If you hear of a small bank in your area getting hacked, I would buy any weakness in the stock that results, as the reputational damage is going to lead to M&A discussions. 

Cybersecurity companies are still pretty richly valued, and so far only Unisys (UIS) has found its way into my portfolio, but I promise you the next time you turn on the TV and the anchors have that green-around-the-gills, "the world is ending" look, I will be busily buying these stocks as panicky investors go into sell-everything mode. There will be 100-to-1 winners out of this group.

One speaker told the bankers that cybersecurity insurance was no longer an option. You have to buy it. The leaders right now in the market are AIG (AIG) and Chubb (CB) , but it is a small part of their overall business so far. One of my tasks this weekend, while I enjoy listening to live baseball again, will be to look for any smaller niche insurance companies that may be able to specialize in and gain for this market.

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