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The tipping point

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The tipping point

Nancy Bush is a veteran bank analyst. The following does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence. Nancy Bush and NAB Research LLC distribute research through Banks Street Partners, which was an adviser to BNC Bancorp in their merger with Pinnacle Financial Partners.

I now know how my grandparents felt as they got older. My paternal grandfather was born in Sweetwater, Tenn., in 1890, and was the grandson of Confederate soldiers and a descendant of Welsh and Scots settlers who had migrated upland from South Carolina in the late 1700s. He left his log-cabin home and came to Atlanta in the early 20th century, went to France with Black Jack Pershing, married my grandmother and raised a family in the shadow of the Atlanta airport (first known as Candler Field, and remembered by my father as a racetrack with mail planes landing in the infield). Joseph Avans would send two sons to both sides of the globe to fight a war, buy a television, see a president assassinated and watch men land on the Moon before his death in late 1971.

I realized a few days ago that my life (thus far, anyway) has been similarly full of change. I was born in the Eisenhower era — only barely removed from the days of WWII — and also spent the early years of my life in the environs of Hartsfield Airport. I was sitting on my grandparents' back porch at the corner of the airport when one of the first Delta jets crashed upon takeoff, killing the flight crew and an FAA official. (Sadly, the Delta pilot killed was also a family friend.)

I've seen Atlanta grow from a large-ish Southern town to become one of the nation's growth centers (and a possible Super Bowl champion!) in large part due to its existence as a transportation hub. I've watched on television as friends died in the Twin Towers on 9/11, I've seen the inauguration of the nation's first African-American president and as the events of recent days have shown, I still ain't seen nothing yet.

Change has been a constant in my personal life, just as it has been a constant in the banking industry, that important and maddening group of companies that I have watched for nearly 35 years. When I came into the group in August 1982 — the Dow was at 800-ish at the time, as some of you may recall — the banks that still commanded the attention of the investors were the "money center" banks, a group of large companies that included some names that are now missing (most with good reason), such as Security Pacific, Bank of Boston, Mellon, Manufacturers Hanover, Bankers Trust, etc. And a number of those companies were about to take large charges to lessen their exposure to Latin American debt, which was only the first of the many hits that those companies (and their shareholders) took over the following decades to correct their habits of chronic overreach and lax credit judgment.

The large regional banks did not begin to form until the last part of the 1980s — when interstate banking became a reality — and the community banks as a group were mostly nonexistent for investment purposes at that time. As I survey the landscape now — a few "money center" banks (now called "major" banks), a large group of (mostly) well-performing large regional banks and a still-considerable number of community banks — it is tempting to think that this is the way it is going to be from here on out. But no — the strange and mercurial figure who has just assumed the presidency looks like he is also going to be a massive change agent across a number of American industries and institutions, and banking will be one of those.

There have been some interesting portents in the fourth-quarter 2016 earnings reporting season, which is now drawing to a close. First and foremost, the discussions on the calls that I have listened to were directed less at fourth-quarter earnings — which have been mostly respectable but unspectacular, at least at the regional and community level — and more about the expectations for much better trends going forward. There has been a palpable enthusiasm for what is believed to be a much better banking environment to come — higher interest rates, stronger loan growth as businesses begin to expand, a lower corporate tax rate and (the big wild card) some regulatory relief, especially at the smaller end of the banking size spectrum. I'm hopeful on all of this but cautious, especially about the growth part — that "Mexican wall" thing has the potential to put international trade seriously awry, and American growth (especially in the border states) with it.

But there was one statement during the earnings season that caught me completely off-guard, and apparently caught many others that way as well. Those were the words of BB&T Corp.'s CEO, Kelly King, who said, when asked the inevitable question about future deal activity, that he was not ready to get back into bank M&A yet, and indeed he believed that the banking industry was "at a near-term tipping point on branches" due to the "changing economics" of the banking business.

Those words coming from the CEO of what has arguably been the banking industry's most serious acquirer of branches, even in slower-growth areas such as West Virginia and Pennsylvania, signals a real change in industry direction and likely in the future metrics of large-bank deals. As Bank of America Corp. CEO Brian Moynihan has been trumpeting for a few years now, it's time to take digital and mobile banking to the next level and to rethink the value and configuration of branches, and he now seems to be gaining adherents to that view. It is becoming increasingly clear that higher rates and a steeper yield curve — and even better loan growth — will not be enough to change the realities that changing demographics and technological innovations have brought to banking, and it is pretty clear that banking will increasingly be done in a wholly different way in the years ahead.

The other big development of recent weeks has been a large deal in the community banking industry, and I regard this as a tipping point of sorts, as well. The acquisition of North Carolina-based BNC Bancorp by Nashville's strongest growth bank, Pinnacle Financial Partners Inc., marks the beginning of the growth era of mega-community banks here in the Southeast and elsewhere. The $19 billion-in-assets bank that was just created will take two high-performing banks in some of the region's highest-growth markets (although not yet in Atlanta) and make them an even more competitive force, and any large or small bank CEO who ignores this combination does so at his own peril.

There is a lot to be said for a 50% overhead ratio, 10% earnings accretion and a stock that sells in excess of 300% of tangible book value; any large-bank CEO in the region who thinks that his company is immune to the impact of this deal is in serious danger of having his lunch summarily eaten. The new Pinnacle Financial has just cracked the top-50 ranks of the banking industry, and neither I nor any industry observer that I know thinks that they will stop there. And at the same time, there are other high-performing banks in the region that will be headed in the same direction with a similar likely outcome. This is a tipping point, alright — toward high-performing banks — and I think investors will get much less patient of mediocre performance and complacent bank CEOs as a result.

Perhaps all bankers out there should be reminded of the words of the immortal Satchel Paige, arguably the best pitcher baseball has ever seen, but who was excluded from the career that he should have had by the color of his skin. (I knew about him because I lived in a baseball-mad family, and my grandfather had seen him pitch in the Negro Leagues.) Paige was also one of the game's most colorful characters, and famous for his sayings, one of which was: "Don't look back. Something might be gaining on you." (I suspect that those words had special meaning for a 6'4" black man in the Jim Crow South.)

For the likes of Kelly King, and Bill Rogers of SunTrust Banks Inc. and Tim Sloan of Wells Fargo & Co., and dozens of others, I'd say: You better look back, and you better look forward — and you better decide which side of the tipping point you're on, before it's too late.