Banking Trends that are Defining 2023 with Mark Kanaly from Alston & Bird

Caleb Stevens:
All righty. Well, Mark, welcome to the podcast, How Are Things Down in Midtown Atlanta?

Mark Kanaly:
Things are great. Thanks for having me, Caleb. Really appreciate being on the show.

Caleb Stevens:
Well, it’s a long time no see. I just saw you a few days ago at the Broadmoor in Colorado Springs for the GBA convention. How many conferences a year would you say you attend?

Mark Kanaly:
Gosh, I don’t know. At least it doesn’t, I would say.

Caleb Stevens:
Well, you’re probably, I think, I want to say you’re the first lawyer we’ve had on the show, first attorney we’ve had on the show just in general. And specifically, you’re an attorney that works with community banks. Tell us about your role at Austin & Bird. How long have you been working with community banks in the industry?

Mark Kanaly:
Well, that sounds like good judgment on your part in terms of your guest list. I’ve been in this space 26 years. They’re the same law firm the entire time. And I served as the head of the banking practice here at Olsen & Bird for about a decade or so. And I’m currently the head of our corporate practice.

Caleb Stevens:
So I want to get to some of the challenges that you’re seeing in the banking world today. We kind of want to talk a little bit about a talk that you gave at the GBA in a minute. But just for starters, if I kind of gave you a clean slate to say top two or three challenges that you specifically are helping banks with today, what are you working on?

Mark Kanaly:
So I’d say we’re hearing a lot on what I’ll call regulatory examination preparation. So we’ve got a lot of the banks, after sort of the dramatic first quarter, we were all focused on AOCI, net interest margin compression, the like, that pivoted to what we all saw at the bank failures first and second quarter, and both the lead up and fallout to that. What that led to a lot of speculation around, well, what are the rule changes gonna be? What rules could change? And for my part, what that really has translated to is for most of the banks we work with, nothing in the immediate term that we’re super focused on other than regulatory examinations, which is how will the CAMELS framework be applied to us from a supervisory perspective in our next exam setting? And so, we all know the touch points there, whether it’s liquidity and contingent liquidity, really do deposit concentrations. But there’s some less obvious ones which are, you know, what is your bank’s reaction been to what just happened? Or did you have a stop, look, and listen approach where you thought about risk from a holistic perspective and what new risks this might present to your enterprise? And so one of the asks we’ve gotten for some of our banks recently has been, Hey, we know you guys do a strategic plan, you know, every December or January or so, and that speaks to usually a three year timeframe has aspirations as to organic growth, M and A and the like. Really would like if you guys would take a look at that and think about tweaking that a little bit and giving that to Us as a pre-exam item so we can see what reactions you’ve had to the most recent developments And that’s a tough one The bank doesn’t want to go too far in doing that not know what the market might hold in as little as you know three six months in terms of changes We also spend a lot of time Caleb on what I’ll call capital allocation issues where For the average bank that’s out there, they’ve got some amount of capital to work with. They’d like to pay a dividend. They’d like to do share repurchases. They want to keep the regulators happy along the way with their ratios, and they want to have capital support growth. And so some of the strategic planning we’re helping with really is around the capital allocation strategy and trying to coordinate with the agencies. It’s interesting. We’ve had… different banks get different messages, depending on who the regional regulator is, as to the viability of a repurchase plan right now. Some have kind of been waved off and said, you know, we would appreciate it if you didn’t. Not given a flat no, that’s not really how that back and forth works. But others have been told, sure, yeah, go ahead. And so I think that’s one we’ve spent some time on. And the last I’ll say is notwithstanding. you know, some of the sound bites that are out there. Look, M&A discussions are very much continuing. So, you know, and your question about what are some of the challenges we’re helping our clients with, the challenge in the M&A context, of course, is relative valuation, which is the moment in time of a two times book valuation, which was appealing, the moment in time of whatever your dollar per share value is that you’d have at the board level to get the bank sold, has been replaced with a struggle now to understand relative value, which is if you take two banks, maybe they’re both public, maybe they’re both private, they’ve got to understand their value relative to one another, net of credit marks, net interest rate marks, and everything else that you have in an M&A transaction, and figure out what pro forma percentage of the bank should my shareholders own based on, you know, host of contribution considerations, whether that’s earnings, total assets, et cetera. And so it’s been a more challenging time to get M&A done. I won’t say that M&A is dead, I would say that it’s just harder to do. We’ve got some deals in progress that I would… described as mergers of peers. And I think some of those will continue, but it’s gonna be a little more challenging for some of the other merger structures you more traditionally see out there.

Caleb Stevens:
Yeah, it seems like M&A really slowed down over the past year or so. And it’ll be interesting to see where that goes. And you talk about capital allocation. One of the sayings we have around here at South State is capital flows where capital is treated well. And it sounds like that’s something you’re helping banks think through. If I’m a bank CEO, anything else that you would want yourself to be top of mind for that I may call you, any other needs, what do you kind of want to be top of mind for, hey, I got to call Mark for these things I’m facing.

Mark Kanaly:
Well, I mean, look, I’m a transactional guy, but we’ve got regulatory guys here in the shop as well. I would say that the other things we’re working on that sort of put out there, one is… There is some question about in the name of capital where we’re headed. Are banks going to need to get more capital, whether it’s to address, and I’ll use the word perceived here because we’ll see if they’re real or not, but perceived, you know, CRA concentration and credit issues. We haven’t seen that with any of our clients yet for the record, but that’s, you know, we don’t know what’s around the corner. Obviously, office is a little touchier within the CRA bucket than some of the other.

Caleb Stevens:
I lost you. Hmm. Okay, yeah, sure, no hurry.