Investors,of course, are drawn to banks with achievable growth plans in prosperous markets,ones that are complemented by strong risk management practices and cost-efficientoperations.
But,more than anything else, what gets investors comfortable enough to check off theboxes on that list and put their money into a bank is a proven, talented managementteam.
"Weinvest in management," John Eggemeyer, founder and managing principal of CastleCreek Capital, said this week during a bank conference hosted by Hovde Group inScottsdale, Ariz.
MartinFriedman, co-founder and managing member of FJ Capital Management LLC, echoed thatsentiment. "It always starts with the management teams," he said at theconference.
Friedmanand Eggemeyer agreed that investors want regular communication with bank executives— the frequency depends on the size and complexity of the bank — and reasonablelevels of transparency. Each is key to understanding a bank, they say, and investorsneed that understanding to commit substantial sums over the multiyear time framesthat many banks need.
Investorsneed to know not just what the bank's growth trajectory is, but what risks managementis comfortable taking as it expands and how well such risks are aligned with regulators'expectations and shareholders' interests, Joseph Stieven, chairman and CEO of StievenCapital Advisors, said at the conference.
"Thecharacter and the ethics of the management team are so important," Stievensaid.
As such,he said, experience is vital. And an executive team's experience successfully managingthrough challenging cycles such as the last recession and the recovery from it aremost telling.
"Toughmarkets are where you separate pros from amateurs," Stieven said, noting thatthe same applies to bank investors. Investors who were able to identify winningbanks during the depths of the downturn bolstered their reputations. Recessions,he said, "crystallize who's good."
Stievensaid that, along those lines, the recovery has opened the door for ongoing M&Aactivity. While he is not fixated on whether a bank might be a buyer or a seller,he does want to know that embedded in a bank's culture is the belief that when legitimateM&A opportunities arise — to buy or sell — it is a management team's obligationto investigate possibilities and make a genuine call on whether a deal would bethe best route for shareholders.
"It'spart of the business now — whether you are buying or selling," Stieven said.
Friedmanconcurred. He noted that regulatory burden, steadily amplified in the aftermathof the last recession, "will continue to increase, not only in money but intime."
Morecommunity banks are coming to this realization and are looking to either sell toa larger player or make acquisitions to beef up their own bases and create largerfoundations over which to spread out costs. Banks that can use their size to betterabsorb expenses are more efficient and tend to generate better bottom lines forshareholders.
"Youhave scale, you have more profitability," Friedman said.
Whetherit is on the M&A front or any other, Hovde's co-head of research, Joseph Fenech,said analysts and investors want bank management teams to convey their plans ineasy-to-understand terms and to stick to the plans they lay out for the Street.
"Welike management that does what it says it will do," Fenech said.
Analysts,he said, tend to grow dubious about banks that are not able to spell out their storiesin simple terms and that instead use complex models, often riddled with subjectiveinputs, to make their cases to the Street.
"Youcan make a model say whatever you want it to say," Fenech said. On the otherhand, clear and consistent messaging helps analysts and investors not only trulyunderstand a bank but, in their own interests as well as the bank's, make a well-informeddecision on whether to invest. And that starts with confident management teams,he said.
Eggemeyer,a former banker, said, "The best investments you make are in the highest-performingcompanies," and in his experience, such companies have one unifying trait:Strong leadership.
Stievensummed it up this way: "The management team is the bottom-line factor."