Bank Acquisitions: What Would Warren Buffett Do [Podcast]

Podcast Transcript

Dallas Wells: Welcome to another episode of the Purposeful Banker. The podcast brought to you by PrecisionLender where we discuss the big topics on the minds of today’s best bankers. I’m your host Dallas Wells, and thank you for joining us.

Today we’re talking M&A strategies, and I’m joined by Brett Werner who is the director of analytics at TS Bank in Treynor, Iowa. Brett, thank you for taking the time to talk to us today.

Brett Werner: No problem. Happy to be here.

Dallas Wells: Brett, why don’t you start by telling us a little bit about TS Bank, and what your role is there.

Brett Werner: TS Bank is about a $500 million banking group based out of Treynor, Iowa. Treynor is a town of about 900 people outside of the Omaha/Council Bluffs Metropolitan Area. A lot of us actually live in Nebraska and work here in Iowa.

My role as director of analytics is to oversee our team of analysts. Our analysts cover a wide swath of the banking group from analyzing our own bank’s balance sheets, looking at potential acquisition’s balance sheets, helping out wealth management groups with our client investment portfolios, and coordinating big data efforts across the whole bank.

Dallas Wells: That’s actually an interesting set up in that you guys have. Rather than kind of siloing it where you have credit analysts and financial analysts and separating those groups, you’ve created an analytics team that jumps across those lines a little bit and helps with all of that stuff.

Brett Werner: That’s right.

Dallas Wells: Okay, interesting. The bank recently formed a new holding company, which you called TS Contrarian Bank Shares, and it looks like there was a joint venture with the bank, which you call TS Banking Group. Right from your website in “Our Story” section, it says, “The TS Banking Group is a dedicated community banking group focused on upholding a community bank management philosophy with the purpose of acquiring community banks in the upper-Midwest.” That’s a direct quote. You all have made your strategy pretty explicit. Why this acquisition strategy? What’s the background behind saying, rather than just do this organically, “Let’s start buying some stuff.”

Brett Werner: The cold hard truth is that the banking industry as a whole is consolidating. In order to cope with all of the pressures from the economy, we’re sitting at zero interest rates still. They raised rates last December.

Dallas Wells: Barely, yup.

Brett Warner: There’s even some people out there calling for negative interest rates. We’re sitting in an environment of low profitability with increased regulation. You look at the growth of the banking industry on the whole, it’s hard to profitably grow organically anymore. We’re looking at the possibilities of acquiring more banks to increase our own scale so we can better handle these pressures from the economy and the Fed.

Dallas Wells: Really this is a conversation we have with banks fairly often where their market that they’re in is maybe growing by 5, 6% a year in some of those really healthy markets, and then they come out every year and say, “We’re going to grow 12 or 15%.”

To your point, if you’re going to do that, if you’re going to outgrow the pace of the market in general, you’re going to do one of two things. You’re either taking on some risk, you’re loosening the bounds on the risk levels, or you’re stealing business from someone else by reducing the levels of profit. A lot of times it’s a combination of both of those. If you’re after organic growth, you’re right, it’s tough to do.

I think that’s why we see so much consolidation in the industry. There’s a lot of banks you all’s size that are saying, “To really do this in a healthy way we’ve got to be bigger. Either a part of something bigger, or we’ve got to go out and buy stuff ourselves.”

Brett Warner: Mm-hmm. That’s right.

Dallas Wells: You guys have already hit the ground running with the strategy. You recently acquired a bank in North Dakota, what’s the background story on that one?

Brett Warner: We decided to implement this acquisition strategy. We started looking for acquisitions probably mid-2013 or so, is when we really decided to pursue. We’ve been working with the consultant to identify possible banks for acquisition, and they identified two banks in North Dakota up in the oil fields. That’s far, far western North Dakota and somewhat north. The first bank was the Bank of Tioga, and through our consultant is how we got in touch with them. The second bank is a small bank in Crosby, which is a town 45 minutes or an hour north. I think the closest metropolitan area to Crosby is Winnipeg, Canada.

Dallas Wells: Okay, it’s way up there.

Brett Warner: I may be wrong on that. I might have to check on that. I’m not familiar with Canadian geography.

Dallas Wells: Yeah, me neither.

Brett Warner: We acquired both of those banks in mid to late 2014. Crosby, really, we bought on 12-31 of 2014. We consolidated those together under the Bank of Tioga name.

Dallas Wells: You wrapped those two together, but you’ve left to this point, the Bank of Tioga under its own name and as its own entity, or is it a branch of TS Bank?

Brett Warner: We believe that the banks are one of the foremost promoters of their community. For us to go up to North Dakota and buy a bank, we really didn’t like the idea of changing the name and re-branding the whole bank as a TS Bank branch.

One reason for that is we very much like the emulate the investment philosophy of Warren Buffett, who’s a, for us, is a local investor, he’s out of Omaha after all. Something that Warren Buffett does when he goes in and makes an acquisition is he buys companies with great management. He says to those great managers when he buys their company, he says, “I’m not changing any of your people because you have great people. I’m not changing your name because you have a great brand recognition and a great name recognition.” We very much like that philosophy, which is why we target banks with culture that matches ours, and management that has been doing well at what they do.

In a nutshell that’s why we don’t particularly, that’s why we didn’t for this case, change the Bank of Tioga to be a TS Bank branch.

Dallas Wells: I love the idea of leaving the bank intact with local management and the same branding, and yet at the holding company level there’s still some need to manage reporting and planning and some consistency there. Does that require some integration of at least some of the systems that the banks are using?

Brett Warner: Yeah, there definitely is overlap between what we do at TS Bank and what the Bank of Tioga does. For instance, our asset liability committee, ALCO, it is one shared committee that runs the investment portfolio and risk management practices for both banks. Once per month we meet as a committee and discuss both portfolios. That stems from our philosophy of buying banks that compliment what we do well.

One thing that differentiates us, I think, is our ability to run an investment portfolio. We’ve shown over the years that our investing skills are really one of our best assets. Other banks have great marketing teams, some banks have great loan portfolios, ours is investing. That’s our competitive advantage.

When we were looking for acquisitions, we were looking for banks that would compliment our strategy, as in banks with relatively low loans to total assets, and large deposit bases. We overlaid our own investment strategy over the Bank of Tioga’s portfolio.

Dallas Wells: You guys are taking an area where a lot of banks, really they have a lot of dollars on the table or take some kind of blind risk, you guys are taking that skillset, and now there’s a big set of dollars there to make back some of the acquisition costs and realize some efficiencies that way. Instead of having to … I think the terminology the consultants would use for it is reduce redundancy, in other words, fire a whole bunch of people, you guys can make up some efficiencies in areas like that.

Brett Warner: Right. Exactly. Our main profit driver is our investment portfolio. We can really retool a couple things in an acquisition bank’s portfolio, and increase its profitability without laying off people, without closing branches, without negatively impacting the bank that we bought.

Dallas Wells: Great. With that philosophy of the combined ALCO and investment strategy and risk management at the bigger holding company level, you guys still have some systems that are independent, some management that’s independent. What kind of prep did you guys have to do to be able to manage this bigger more complex organization and the wider geography, and all the things that go with that? At you guys’ level was that more staff, more tools, what kind of prep went into that?

Brett Warner: I think that we had been prepping for something like this since before I started here five years ago.

Dallas Wells: It’s been in the works.

Brett Warner: It’s been in the works. I think in many ways you can’t fully prepare for it before you go into it. It really does come down to, at least for your first couple acquisitions, it comes down to, “Well, I think we’re making a good decision, and now we just have to pull the trigger and learn as we go.”

In terms of hard things to prepare for, we ramped up our staff in the credit risk management area because we needed people that could go into these banks to really dig deep into their loan portfolio to identify possible problems. The first thing that we did with any bank that we looked at, we’ve looked at a handful of banks, and we turned most of them down. That’s mainly because of credit quality. We ramped up our credit staff to be able to dive deeply into their loan portfolios and say, “This bank has a lot of skeletons in the closet that may not appear on the call report,” or, “This bank is clean.” That’s one key area that we had to ramp up to be ready for this.

Dallas Wells: The two big fears, I think, of any acquisition, you just touched the first one, which is credit. The other one that comes up a lot is culture issues. Is that also a part of the due diligence process, or are you guys looking into that stuff as you’re evaluating banks.

Brett Warner: Oh absolutely. One of our … I like to think that one of our other competitive advantages is our employee culture. We like to do business, obviously like most people, we do business with people that we like. That goes for acquisitions just the same. We do look for managers. We do look for bank management that is not selfish, is very community minded, really hasn’t forgotten what community banking is all about, which is giving back to the communities and supporting the communities in which we serve.

For the TS Banking Group, that is all contained in our slogan, “Ignite prosperity.” We really do look for management that has that same mindset so they can get on the same page, and row the boat together in the same direction. It’s definitely a part of our due diligence.

Josh, our CEO, personally meets with their executive management multiple times, if nothing else, just to get a feel for them personally and how they operate and how they run their bank.

Dallas Wells: Obviously you can’t go into specifics, but what is TS Bank looking for from here. Are there specific types or sizes of banks that really fit the mold and make good targets for you, and where’s this thing headed over the next couple of years.

Brett Warner: That really depends on a bank by bank basis for us. There are some small banks that we’re looking at. There are some considerably larger banks that we’re looking at. Size isn’t, and probably shouldn’t be a limiting factor. I will say that.

You might look at a bank and say, “That’s too big.” You might look at a bank and say, “That’s too small,” but if it fits the competitive advantage that you’re looking for, like for us, if we’re looking for a bank that we can retool their investment portfolio, if it’s a bank that has low loans to total assets and a large base of depositors, then we don’t necessarily care what the size is.

Dallas Wells: Brett, I think that will wrap it up for this episode. Thank you again for making the time for this, and certainly good luck with all of this going forward.

Brett Warner: Thank you very much. Thanks for the opportunity. I enjoyed it.

Dallas Wells: All right. Also a big thanks to everyone for listening. We’ll provide links to some resources in the show notes for this episode, and you can always find those at precisionlender.com/podcast. If you like what you’ve been hearing, make sure to subscribe to the feed in iTunes, Soundcloud, or Stitcher. We’d love to get ratings and feedback on any of those platforms. That’s for tuning in, until next time this has been Dallas Wells, and you’ve been listening to the Purposeful Banker.