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"The margins in banking are very thin when compared to other industries. There is very little room for error.”
In this episode, Matt Gambs, a Senior Vice President at Wintrust Financial, is very familiar with the community banking realm. In this podcast, Gambs gives advice on picking advisors and investments, and how to learn from failures in your career.
In 1998, Gambs started working for the BB&T Bancshares Corp. It was the community bank that was started in 1991, had a true set of four distinct communities and during its lifespan, it grew to 450 million dollars.
In that model and timeframe, it sold shares in its community, which resulted in a significant number of shareholders and such a process required a dividend to be paid and acquired growth. Around 1998, however, the company started facing first growth issues, and as the industry changed dramatically in these years, it had two major recessions.
After a few years working for the company, in 2004 Gambs reached the CEO position and had managed to create a much more positive turn directing the company, which would result in significantly minimized regulatory issues.
The main problem BB&T faced, despite the mentioned fortunate change of direction, was that many shareholders began to age and there was no liquidity for them. The turning point, that ultimately resulted in selling was that larger blocks of stock either had deaths in their family or were beginning to contemplate retirement and there was an urge to create a market event for them.
Since there was a good consolidation in the marketplace, Gambs and his team had been able to successfully market the institution, which resulted in a significant cash offer in 2006. As the CEO of the company, he relied on a strategic planning process and had put an effort to explore the marketplace.
In that timeframe, many of the company’s competitors started selling and was he was to discover was that acquiring of community banks was beginning to be a market. Based on the example of a few, fairly robust investment banking firms in the Chicago Metro area that were soliciting at the time, he and his team decided to follow a similar path.
Since there were some unsolicited offers they had gotten, the team had to rely on finding a proper advisor, who was experienced in selling banks, that would guide them through the entire process. The selection included three candidates who were asked to do a pre-selection test with similar pricing, based on which Gambs and his corporate counsel had selected the advisor that works best for them.
Some of the proposals had fairly big numbers. Since it was a real blooming period, some banks were very construction driven and were turning the money faster, which resulted in impressive profits.
There were some real metric issues that needed to be taken into consideration, and there were combo deals that revolved around taking a lot of somebody else’s stocks. There were situations where there was trading out of completely illiquid stocks into stocks that were only mildly more liquid.
For significant stakeholders, this meant holding on to it for a long period of time.
For Gambs and his stakeholders, the focus was on a minimum stock deal, if they couldn’t have all of the cash. Through that process, they contemplated merging with some other institutions that were on a slightly different market if there were some synergies there emerging and throughout the process they could consult investment bankers on whether or not the merger was a good option.
Another idea that was part of the contemplation process, the one that kept coming back up to the top, was the idea of an outright sale. However, investment bankers weren’t the only source they relied on, as their law firm was able to provide a nice counterbalance when it comes to advising.
The main challenge they faced was not to bite on the first deal since there were four legitimate buyers interested in the company very early on. The second round was focused on understanding loans and structure and included two candidates.
One of the candidates was out of state and in the process of buying another company at the same time, which slowed down the process of evaluating that candidate and it was a capital firm that did bank-roll ups and had built a fund.
The other candidate was materially better and is a bank organization Gambs works for today. These were two different types of buyers, where one was more metrics-driven, while the other was focused on the market and community banks. And while one option was better from an employee perspective, the other was more beneficial for shareholders, which was ultimately the final choice.
The company was sold to Castle Creek Capital. The deal was north of a hundred million dollar cash and there were no restrictions whatsoever. There was a merger between BB&T Bank shares corp and Bloomingdale Bank Trust into unity with another acquisition that was made earlier that year, which ultimately formed a company called First Chicago Bank Corp, which subsequently failed.
Because it was the first deal Matt had done, it was his first experience where he was trying to work all channels that were not interconnected. Ultimately, what was eye-opening was the realization of how long getting regulatory approval can take.
Once the newness and excitement of a new deal wear off, what is left is the necessity to change and adapt to new circumstances. Failing to focus on this next phase, in this case, resulted in employee issues, shareholder issues, and board issues.
Matt highlights that, because banks project credibility, strength, and comfort, it is a frequent occurrence that wealthy people who have earned respect and experience in other areas that are not related to banking, show interest in buying banks. Therefore, engaging in banking without prior knowledge can lead to financial losses for those people.
Although banking is a highly regulated business and a specific entity that is in a way its own living thing, it is hard for shareholders to separate their interests and money from the idea of the institution. The amount of work and effort that goes into regulations can be immensely challenging, but this is something that is easily overlooked. There is an element of personal liability that’s been taken on when buying a regulated institution.
Gambs believes it is very challenging to look at starting or owning a boutique community bank in a metroplex any longer. CME banks play a vital role in small towns across America, and when these are owned by families or groups of people, the focus is not only on deposits, credit programs or the initial driver of profit.
Mostly, the focus is on growth, the stability of capital and a reasonable return of the capital. However, on their road to get near the desired return for their investment, many owners fail to foresee how much economies are required for that to happen.
The big banks and the regional banks can do operations compliance at a much larger scale and are those who are able to attract and pay for the talent to maintain a margin effectively.
The nature of banking is such that there is very little room for errors and therefore margins can be very thin, which takes inexperienced owners by surprise. When being part of an industry in general macro-economic environment that isn't growing at a large pace, the only way to grow business is to ultimately take it away from someone else, and this is generally driven on price.
The contract he had related to this new entity required him to stay on position, but it was due to massive changes that naturally happened and were made by the firm that bought BB&T that Gambs had realized it was time to move in a different direction.
This resulted in him leaving his position shortly after his agreement was concluded. His main goal was to find a bank that had challenges or problems he could help be solved, preferably a small bank, in opposition to those that either had everything running smoothly or were dealing with problems that were immensely hard to fix.
The new opportunity that caught Matt’s attention was a public company that was previously made private, and it was the bank that wasn’t running as smoothly as owners desired it to. It’s were relatively inexperienced with banking and had bought a very old, small franchise in the city that they needed help with. This is when Matt joined their team as a consultant into the bank, afterward he became the holding company person.
During a one-year time frame, he and the team he worked with had succeeded to make wholesale management changes and important structural changes, which ultimately led to him becoming a CEO and the president of the bank, a position he held from 2008 till 2013 when it was sold.
Matt’s main goal was to add more franchise value to Diamond, and having a single shareholder environment made the process of increasing this value a lot easier. Thanks to a shareholder who had injected capital early on, they were able to create more stability and shrink the bank. However, unfortunately after the crash, there were some challenges emerging and the regulatory environment began to pose a real problem for Gamb’s and the bank’s owner.
As a result, they had to go through significant draconian processes, which ultimately led a decision to sell and avoid such climate. The attempt to sell was a long process and it was backed up by an investment banker’s advice and due diligence. Many had expected the sell to be a failure, but Gambs, led by previous experience with Bloomingdale had taken most of the work on himself. As a result, they had plenty of lookers and some real asset buyers who were interested in purchase.
After a year and a half, the focus had shifted onto answering the question - What can Gambs and his people sell the bank for? Over time, they had gone from trying to maximize the value to simply trying to limit liability. Gamb’s had discussions with Wintrust, who had viewed the offer early on but had some concerns that were a roadblock to actually purchasing the bank.
As a result of the shrinking balance sheet, working out loans and selling what needed to be sold, eventually, there was enough value in the franchise for the deal to be put together that was north of zero. From Matt’s perspective, this deal was a successful failure.
Wintrust has been an acquirer who has a built-in in-house process, and they don’t hire investment bankers as they have their own.
They have both outside and inside counsel, and because they are publically traded company there are a lot more mechanical elements taking place, which calls for a longer period of waiting. After the deal was set, they have kept a lot of employees from Diamond Bank.
Diamond Bank was disintegrated and its assets dispersed amongst multiple charters and the acquiring that took place was a complete integration. Wintrust has a matrix, a great reputation, strong capital, and a great team.
Although maybe not the highest price, they can promise a close, which is important. It is a profitable institution with a highly effective management team and ultimately, while not the richest deal, the assets that were purchased did perform.
One of the biggest pieces of advice Matt gives is not to overly rely on professionals who are hired to help with the sale, as advisers and bankers can at times be focused on getting a deal done without having the company’s best interest always guiding them in the process.
That being said, it is important to stay aligned with the team and the company’s interests from the begining till the end. Speaking from the perspective of a CEO, it is important to see shareholders and their perspective as a priority when making a deal.
Finding the best deal takes time and requires patience, as there are plenty of variables influencing the process, and this is why time is needed to get warranties, reps, and the deal structure in order.
There are positive and negative sides to both running a bank that’s based on single ownership and the bank that has multiple owners.
In the first case, the greatest benefit lies in easy, two-way communication with one person, as there are not many shareholder relationships that need managing. In the second case, when there are a few shareholders, there is a need for managing these director relationships. There is a need to evaluate different opinions and the regulatory element, the institutional element correlates directly with time management.
When working with one owner, there is less space for creativity as there is only one vision to be followed and executed. For that reason, Gambs prefers working in the public ownership space where there are more shareholders and stakeholders which can be more intellectually stimulating and diverse.
He recalls landing money based on other bank participation loans, especially in the time period from 2001 to 2007 and labels such behavior as the craziest point in his career.
This behavior, without internal expertise on it brings in a lot of risk and concentration of capital; it is the overconfidence that all deals are the same. There was a trend on the market to give big loans for building large homes or buying yachts, but there were no inspections that would check what stands behind these loans.
