Veteran banking attorney examines future via past

Talking to banking attorney Walter Moeling about an organization that forbade talk about mergers and acquisitions—because it may make folks unhappy—leads to his gentle scoff: “There’s nobody involved in banking who is not interested in mergers.”

And then, in typical Moeling fashion, a short point brings him to a story. Walt Moeling always has a story—nearly always with a point or moral for the listener to let sink in.

“I was called upon to do a board session, a strategic planning meeting. I told the CEO I was going to talk about mergers. ‘Oh, you don’t need to do that,’ he told me. ‘My board isn’t interested in mergers.’

“I told the CEO, ‘If I’m going to talk about strategy, I’m going to talk about M&A. You can’t plan a strategy without knowing where you are heading.’”

So the day of the strategic planning meeting arrives, and off the bat, Moeling tells the gathered directors that he is going to discuss mergers.

“I like to call it the buy, sell, or hold discussion,” he explains.

Everyone froze, Moeling recounts. He decided to speak plainly.

“Now, I know you folks sitting in this room do, in fact, talk about this regularly. In fact, that’s what usually goes on out in the parking lot after the board meeting, right?”

It was then that a board member gasped and turned to a fellow director: “Joe! Did you tell Walt about that discussion we had last week?”

Moeling is a man who laughs, and he guffawed right there in the boardroom.

The president, who truly believed that his directors never talked about mergers, turned white.

“No, Joe didn’t tell on you,” said Moeling. “I just knew it was going on because you fellows are directors, and directors are interested in mergers.”

M&A: always on the table

Moeling tells the story to make a point—not just for a laugh. No organization should kid itself that M&A isn’t on the table. The bank that does so risks a very expensive surprise. Moeling believes boards should discuss the matter at least annually. If they don’t, he predicts, the decision to sell will come “right after you’ve just signed that five-year IT contract that is going to cost a couple of million bucks to terminate.”

And this leads to a story about a de novo client bank back around 2006. Moeling brought up M&A. “In an outraged voice, one director says, ‘This is our first official board meeting. We can’t talk about selling!’”

Moeling told the director even a brand new bank had to have the talk. The director humphed, “I plan to leave my shares to my grandchildren, and I don’t plan to pass away anytime soon.”

Moeling smiles and says, “So the director next to this fellow pipes up and says, ‘Well, I thought we organized this bank so we could sell it in three years.’” Moeling went around the boardroom table. “Expectations ranged from ‘three years or as soon as we can get three times book’ to ‘Never!’”

Walt Moeling, now senior counsel at Bryan Cave LLP in Atlanta, is winding up his career of close to 50 years as a banking attorney.

Moeling has worked with an industry that went from the days of rigid rules on pricing and the beginnings of consumer protection laws to Glass-Steagall repeal to Dodd-Frank and the Consumer Financial Protection Bureau to President Trump.

Moeling credits his knack for storytelling to growing up southern.

“Everything in the South is a parable, a biblical story, a morality tale,” Moeling explains. “People remember stories. When you are trying to explain a nuance to a banker or director, a story is less confrontational. It lets the listener make their own judgment—much more effective than dry facts.”

He also can tell a joke on himself. For example, when the financial crisis began to hit Georgia in 2007, people asked Moeling how long area banks would be hurting. “I can look back and say that I was very consistent with my response,” he says. “I said it would be a two-year problem. And I said that continuously from 2008 to sometime in 2013.” He laughs and adds, “of course, that was what everybody hoped.”

Q1. How has community banking M&A evolved in your time? Where is it heading?

A. Today, the bigger banks are relatively much bigger—there’s that increasing concentration of industry assets. But in the mid-’70s, early ’80s, two things occurred that began the consolidation.

In 1970, Walter Wriston [then head of Citicorp] said there was no reason banks can’t produce 15% a year—be growth companies. That became the buzz.

I am firmly convinced that we have proven he was wrong, because few banks have maintained a consistent history of compound earnings growth of 15% a year—at least not without taking too many risks and ending up in pretty bad trouble, if they don’t either fail or get bailed out.

But back then, the buzz was that banks could be growth stocks. Size makes that happen. The other point from that period was the recognition of the illiquidity of the small bank in the small community. This indicated that there would be opportunities in consolidation.

For a time, a small bank almost anywhere could probably find a buyer. That’s less true today. Our population has concentrated in urban areas. Unless you have a vibrant small town, you’ll have difficulty doing anything. You’ll just slowly liquidate.

However, in an awful lot of ways, the recent election was an urban versus rural affair. Small towns, by and large, have not been doing well. Where they are, typically, a local bank has made that difference. You can drive into small towns and tell whether there’s an aggressive, active bank there.

One of the many aspects of this recent, strange election is the desire to reconstitute small towns. Many of the voters thought they were hearing that message. And you’ll have a commensurate demand for banks to bank those small towns.

This will be fascinating to watch. Some fabulous banks make very good money staying home and making sure industry grows—even if it’s foreign industry coming in. Those incoming manufacturing jobs change the whole tenor of a community. But if your bank is not in an aggressively growing community, you are not going to have buyers.

Back in 1980, the prediction was that the industry would shrink to 3,000-5,000 max. It’s 2017, and, you know, we’re still not there. Community banks can still do well, and regionals are growing up and doing fine. Megabanks: That’s a whole different world where I have much less exposure.

Q2. At the beginning of the Great Recession, we had a chat about the early interest of private equity in community banking. The regulators had just started to facilitate that. How has that evolved?

A. Private equity has become an important element of the community banking sector. It’s penetrated fairly deeply. PE is now seen in banks of $1 billion or less. This is intelligent money—these people know their way around. Not every investment they make is a home run, but they’ve done very well.

Their involvement will continue, so long as they are making some money. I’m talking about PE firms like Castle Creek that know how to run banks.

There were some firms that flew in too lightly, didn’t have much experience, and spread around a lot of money in the late 2000s. They are probably not as happy with the investments they made because they thought the crisis was only going to be a two-year problem.

Q3. How has the industry’s relationship with regulators evolved?

A. There have been some bad eggs, but most regulators I have dealt with, including during the crisis, were pretty straight shooters trying to do their best.

Very early in my career, I was hired to help FDIC close a failed bank, and I found the process fascinating. I came to respect the regulators I was working with. The experience taught me something I constantly remind my clients about. Regulators are people, too. I’ve had a fair number of clients who didn’t believe that, but it’s so.

Being people, regulators are subject to human biases. So if you don’t treat them right, it can bring out a bad attitude, such as when you put examiners in a basement and give them cold coffee.

What bankers don’t understand is that in 2009, a major change took place nationwide. Washington reasserted control over all of the regulatory agencies’ district and regional offices. Almost all of the leading supervisors in the key positions were retired or replaced, or they retired on their own. Washington acted as if the troubles were the local examiners’ fault, and sent people in to go out and straighten things out.

The truth is we had been in a residential construction boom and a construction loan boom. We had had a national policy that said if a house had four walls and a roof, it would be financed. If anyone had tried to stop this lending in 2005, Washington would have gone nuts.

And there was a ton of small-time fraud—mostly in special programs for first-time homebuyers. We learned of one guy who bought five houses that way, signing five affidavits that he intended to live in that house. His mortgage banker had coached him: “You might live there someday, so it’s okay to say that.”

But my point is the local examiners took the brunt, they had new bosses, and they toughened up.

Yet those outsiders coming in were intelligent people, and until they came down to places like here, in Atlanta, they’d only seen things from a Washington perspective.

I got to know a senior regional executive I’ll call “Fred.” He’d been here about 15 months when I saw him in January 2010 in our elevator lobby. I asked him how he was doing.

“Walt,” he said, “this has been the most wretched year of my life. These aren’t bad people. They didn’t really make that many bad mistakes. This was a much bigger problem. But we’ve still got to call the loans as we see them. And the loans are still bad. And so the banks are still closing.”

And then he said, “Walt, I don’t want to ever have another year like 2009. But 2010 will probably be that bad, too.”

Getting back to your question: Over 48 years, I have had regulatory disappointments. I’ve had problems that should have been resolved, but weren’t. I’ve had clients who felt they were being singled out. But if I had kept a scorecard, it would have come to: Regulators 90, Bankers 10.

Q4. It’s still early days, but what do you think of the new administration thus far?

A. We are now in the strangest transition I have ever seen. If I were a regulator, I would not have a clue what to do. There are laws that I should be enforcing. But I’ve got a new administration saying it is going to get rid of all those laws.

Now, this is me personally speaking, Walt Moeling: A banking system with integrity and viability is essential to economic well-being, whether it be a small town or an entire country. An unregulated banking system is not a good system. We need regulation and supervision.

Does it have to be petty and picky? No. Does it have to be detailed in disclosures and whatnot? No.

The biggest change I’ve seen in my career is the most damaging. For most of my career, bank regulation, going back to the Depression, was a function of safety and soundness. But as compliance issues became bigger, it was a different matter and not one I think regulators had ever really been trained to handle.

Coming out of Dodd-Frank, we had a whole new series of laws and jurisdictions on consumer matters, and a system was created that ignored all the precedent from the Federal Trade Commission. Compliance has devolved into taking scalps and doing “gotcha!”

Now, I’ve never been a fan of caveat emptor. [“Let the buyer beware.”] I see some disgusting stuff out there in the market.

The concept of something like the Consumer Financial Protection Bureau at one level isn’t bad. But it’s gone way overboard. As a consequence, I think it’s going to be almost neutered.

They could have taken a more substantive approach—achieved pretty much the same results—and yet, not done it in a way that just drove everybody nuts.

Q5. Everyone seems to be excited about innovation today. Regulators even want to take part, though some see that as an oxymoron. Is bank innovation moving to a new level?

A. We’ve always seen innovation in banking. Ironically, most of it came at the local level and in the lower size range. I helped get some of the internet-only banks started. One of the best was Netbank. It made money consistently—not a lot because it was learning. But then owners grew impatient about asset growth and converted it into a mortgage company. It didn’t last long because it got caught up in the mortgage crisis.

More innovation is coming. I don’t think regulators will hold it back, nor do I think the Comptroller’s Office will hand out fintech charters willy-nilly.

I am also a skeptic. Back when I was helping early internet banks get started—22, 23 years ago—they believed branches would be gone by now. Well, they’re not all gone. Consumers want all forms of access.

I am a great believer that no one thing will change the world. My grandkids love the latest apps, and they’ve got the time and energy to handle all that. Once they age and have families, will they still have the time for trying out all the latest things?

Do we need bitcoins? Not my generation. At my age, I’m just proud I can handle my computer.

Q6. How have you seen the emphasis on capital evolve?

A. There’s never been a study demonstrating that capital is the real issue in bank failures. More capital is better, up to a point. But profitability is the key, and this goes back to my earlier point about striving for something like 15% compound growth versus something more rational and less risky. If you are going for 15%, you ought to have significantly more capital than if your target is 10%.

The catch is capital requires a return, and it is harder and harder to find a return. Trying to get the extra 2% or 3% margin to show in your core financial statement is probably the worst thing in banking.

Really good bankers know that losses take place on the fringe.

Q7. What’s a key lesson you’ve learned in 48-plus years in banking?

To me, the potential earnings power of a good community bank is never sufficiently recognized. And the value of that bank to its community is the corollary of that.

With apologies to Gordon Gekko [the ruthless stockbroker, played by Michael Douglas, from the 1987 Oliver Stone movie Wall Street], greed is a terrible thing. If you look at the power of compounding, you can invest your money in a bank that earns a steady 9% or 10% and celebrate over time.

But I’m just pontificating. Anyone who takes financial advice from a lawyer deserves what he gets.

This article originally appeared in the February-March Banking Exchange magazine.

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