Corporate Valuation, Investment Management

February 8, 2016

Can Getting into Wealth Management Save Community Banking?

An AOBA Conference Followup

Last week, Brooks Hamner and I spoke at Bank Director’s Acquire or Be Acquired Conference in Scottsdale about how banks can build value through their trust and wealth management businesses. Our session got a great response, probably because we were some of the only speakers offering the banking community some hope. Most of the sessions at AOBA this year were, on balance, fairly gloomy. Between a yield curve that is entirely inhospitable to net interest margins and technology that threatens to denude the value of expensive branch networks, session after session seemed targeted at one message to bankers: sell.

Just before AOBA began, RM Sotheby’s held one of its annual collector car auctions at the same resort, and conference attendees could wander outside between sessions and watch the Sotheby’s auction “winners” load their precious iron onto car carriers to ship them home. I was reflecting on one of the more pessimistic conference sessions while watching a late 60s Aston Martin being loaded onto a truck, and it reminded me of a project I worked on early in my career.

James Bond and the Future History of Banking

About fifteen years ago, I was sitting in the boardroom at David Brown Group in Huddersfield, England, while the management team eulogized what was once one of the greatest industrial companies in the U.K. The boardroom still felt like the British seat of power it had once been, with a massive Scottish oak conference table and oil paintings of successive generations of David Browns (some of them knighted) looming from the walls. Next door was a vast factory that had, at its peak around World War II, employed 40,000 workers building tractors and heavy industrial equipment. The company was so successful that Sir David Brown was able to indulge one of his hobbies, buying Aston Martin in 1947 and investing in it heavily to return England to competitiveness in auto racing. It’s because of David Brown that many Aston Martins still carry the “DB” series badges (one current model is a DB9) even though David Brown sold Aston Martin in 1972. The automaker was never profitable, but Brown had accomplished his goal anyway: Aston Martin was a prominent name in racing in the 1950s and 60s, and even James Bond favored the marque (much to the chagrin of Bentley and Jaguar).

The David Brown Group I consulted with wasn’t even a shadow of its former self: technological change and a global recession got the best of the company in the 1960s, and after a series of damaging restructurings and neglectful owners, all that was left was a niche manufacturer with about 200 employees, operating as a mostly-forgotten unit of an American conglomerate.

Fifty years from now, we may look back on the threat to banking today as being as severe as what David Brown faced in the 1960s. Banks won’t fix this by getting into sports car racing, but one opportunity is wealth management. It’s no secret that many banks treat their trust departments like an afterthought. We estimate that maybe a third of bank trust franchises are profitable, and the excuses for hanging onto an underperforming trust department are pretty similar bank to bank:

  1. Trust complements other lines of business by maintaining major relationships.
  2. There’s no easy solution as to whom to sell trust to or how to unwind it.
  3. Trust is staffed by loyal and long term employees of the bank whom management wants to support.
But trust, if ignored, can become an earnings-dilutive cauldron of liability. Legacy relationships maintained by trust can become abusive of the time and attention of trust staff. And long term employees, while loyal in one sense, can become more focused on self-preservation than supporting their institution. Those are just the problems trust departments can face in good times.

Are Trust Franchises an Asset or a Liability?

If net interest margins were headed up and returns on equity were solid, unprofitable and possibly risky trust operations would be easier to ignore. The reality today, of course, is very different. Banking is in a race to rationalize operations, and from talking with community bankers from across the country at the AOBA conference, it sounds like a lot of bankers are looking for ways to either get out of trust or to refocus on the business to make it a viable (if not vital) part of their business. It won’t surprise you to hear that we suggest the latter approach.

A seemingly obvious solution is to acquire existing wealth management companies to bulk-up and supplement trust. Greater scale brings better expertise to customers, and margins to the bank. For over-capitalized banks trying to boost ROE, acquiring a wealth management firm is an opportunity to invest some equity for a high returning asset (swapping some “E” for more “R”). AUM-based fees are largely uncorrelated from the credit cycle, and wealth management customers have different decision cycles than, say, commercial loan clients. Trust and wealth management (we look at these interchangeably because both are revenue streams supported by client assets) don’t require large ongoing capital commitments, and the costs of these operations are largely embedded in staffing. On the surface, it seems like a perfect way for many community banks to diversify their financials and grow despite a tough environment for banking.

As for the seller’s perspective, the RIA industry is facing a physical cliff, with more practicing series-7 registered reps over the age of 70 than under the age of 30. Many, if not most, of the 11,000 RIAs in the U.S. have inadequate ownership/leadership transition plans and will ultimately have to sell to a more established institution with experience in growing talent for senior roles. Many RIAs are not suitable acquisition candidates for banks, but many are.

So why aren’t banks rushing to buy RIAs? It’s risky to make sweeping generalizations, but based on our experience there are two obstacles banks must overcome to acquire an RIA: culture clash and balance sheet dilution. Both are inevitable, but both are also manageable. More on that next week.

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March 2026 | Capital Allocation: The Strategic Decision in a Slower Growth Environment
Bank Watch: March 2026

Capital Allocation: The Strategic Decision in a Slower Growth Environment

Following several years of balance sheet volatility and margin pressure, the operating environment for banks improved in 2025 as most posted higher earnings on expanded net interest margins. The outlook for 2026, at least prior to the outbreak of the U.S./Israel-Iran war, reflects(ed) a relatively stable operating environment.Stability, however, introduces a different challenge. Loan growth has moderated across much of the industry, and the benefit from asset repricing has largely been realized. In this environment, earnings growth is less dependent on external tailwinds and more dependent on internal discipline. As a result, capital allocation has moved to the center of strategic decision-making.The Expanding Capital Allocation ToolkitCapital allocation discussions are often framed around dividends and, to a lesser extent, share repurchases. In practice, the range of capital deployment decisions is broader and more interconnected. Banks today are balancing:Organic balance sheet growthTechnology and infrastructure investmentDividendsShare repurchasesM&ABalance sheet repositioningRetained capital for flexibilityEach alternative carries different implications for risk, return, and long-term franchise value.Organic growth often is the preferred use for internally generated capital when the risk-adjusted returns exceed the cost of equity. However, competitive loan pricing and a tough environment to grow low cost deposits have narrowed spreads, reducing the margin for error. Similarly, technology investments may improve efficiency over time but require upfront capital with uncertain timing of returns.Returns, Valuation, and Market DisciplinePublic market valuations provide a useful lens for evaluating capital allocation decisions. As shown in Figure 1(on the next page), banks that generate higher returns on tangible common equity (ROTCE) tend to command higher price-to-tangible book value multiples. This can also be expressed algebraically, at least on paper, whereby P/E x ROTCE = P/TBV, while P/Es reflect investor assessments about growth and risk.This relationship reflects a straightforward principle: capital should be deployed where it earns returns in excess of the cost of equity. When internal opportunities meet that threshold, reinvestment should be appropriate. When returns are below the threshold, returning capital to shareholders through special dividends or repurchases may create greater per-share value.Share repurchases, in particular, can be an effective tool when executed below intrinsic value and when capital levels remain sufficient to support strategic flexibility. However, repurchases that do not improve per-share metrics or are offset by dilution from other sources may have limited impact.Figure 1: Publicly Traded Banks with Assets $1 to $5 BillionBalance Sheet Repositioning as Capital AllocationIn some cases, capital allocation decisions are embedded within the balance sheet itself. One example is securities portfolio repositioning.Many banks continue to hold securities originated during the low-rate environment of 2020 and 2021. While unrealized losses associated with these portfolios have moderated, the yield on these assets often remains well below current market rates.Repositioning the portfolio, by realizing losses and reinvesting at higher yields, represents a tradeoff between near-term capital impact and longer-term earnings improvement. In effect, this decision can be evaluated similarly to other capital deployment alternatives, with management weighing the upfront reduction in Tier 1 Capital against the expected lift to net interest income and returns over time.As with M&A, the concept of an “earnback period” can be applied. Institutions that approach repositioning with a clear understanding of the payback dynamics are better positioned to evaluate whether the strategy enhances long-term shareholder value. We offer the caveat that institutions who evaluate restructuring transactions should compare the expected return from realizing losses (i.e., reducing regulatory capital) with instead holding the securities and repurchasing shares. If the bank’s shares are sufficiently cheap, then it could make sense to continue to hold the underwater bonds until the shares rise sufficiently.M&A and Capital FlexibilityM&A remains a viable capital deployment option, particularly for institutions seeking scale or improved operating efficiency. However, transaction activity continues to be constrained by pricing discipline, tangible book value dilution, and investor expectations around earnback periods.Public market valuations ultimately serve as a governor on deal pricing, reinforcing the importance of aligning capital deployment decisions with shareholder return expectations.Conclusion: Discipline Drives OutcomesIn a slower growth environment, capital allocation is not a secondary consideration; it is a core driver of performance. While banks cannot control market multiples, they can control how capital is deployed across competing opportunities.Institutions that consistently allocate capital with a clear focus on risk-adjusted returns, strategic alignment, and per-share value creation are more likely to generate sustainable growth in earnings and tangible book value. In the current environment, disciplined execution may prove more valuable than more aggressive but less certain alternatives.
Evaluating Buyer Fit in Today’s RIA M&A Market
Evaluating Buyer Fit in Today’s RIA M&A Market
Buyer selection in the RIA M&A market is increasingly about fit, not just valuation. Strategy alignment, leadership depth, organic growth quality, and post-close integration all play a major role in determining whether a transaction creates lasting value.
From Great to Good? Koenigsegg, Ackman, and the Question of Going Public
From Great to Good? Koenigsegg, Ackman, and the Question of Going Public
As we’ve written many times in this blog, there is a puzzling disparity between the pricing of publicly traded investment management businesses and the valuations of RIA consolidators. This disparity raises many questions worth pondering – one of which is whether (or not) sponsor-backed consolidation models will ultimately be able to achieve liquidity via an IPO.

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