Highlights and lowlights from banking in 2018

ByKristin Broughton, Kevin Wack, Andy Peters, Paul Davis, Laura Alix, John Reosti, Hilary Burns

December 25, 2018 10:00 PM

It was a year to remember for women executives at SunTrust and Amex’s new CEO, and one to forget for Wells Fargo and investors in bank stocks.

SunTrust packs the C-suite with women

For years, women executives have called for more gender diversity in the industry’s highest ranks — and there are signs that CEOs and boards are finally listening.

SunTrust Banks in Atlanta, for example, had four openings in the C-suite this year due to executive retirements, and Chairman and CEO Bill Rogers filled three of them with women.

In January, SunTrust named Ellen Fitzsimmons (pictured, left) as general counsel, succeeding Raymond Fortin. The following month, it promoted Allison Dukes (center), previously its head of commercial banking, to chief financial officer, succeeding Aleem Gillani. More recently, in November, the bank said that consumer banking executive Ellen Koebler (right) will take over as chief risk officer when Jerome Lienhard retires at the end of the year.

For those keeping score, that means that come Jan. 1, four of the nine members of SunTrust’s executive council will be women.

Women are making big moves elsewhere as well, especially in the legal departments of big banks. JPMorgan Chase, Goldman Sachs, TD Bank and M&T Bank are among the large banks whose general counsels are now women.

Of course, when it comes to elevating women to the corner office, banks clearly have more work to do. There are more than 130 bank holding companies in the U.S. with at least $10 billion of assets, and only three, KeyCorp’s Beth Mooney, CIT Group’s Ellen Alemany and Bank of the West’s Nandita Bakhshi are led by women. A fourth will join their ranks when Kelly Coffey, the head of JPMorgan Chase’s private bank, takes over as CEO of the $49 billion-asset City National Bank in Los Angeles in February.

Then again, CEOs are often groomed elsewhere in C-suite, in deputy-level roles. Looking at the progress made by banks like SunTrust, it’s clear that some of the industry’s biggest banks are taking important steps in the right direction.

Wells Fargo's woes continue

Hope Hardison, Chief Administrative Officer at Wells Fargo.

It’s been more than two years since Wells Fargo’s phony-account-opening scandal burst into public view, and people are still losing their jobs.

In late October, the bank put two of its top executives, Chief Administrative Officer Hope Hardison and Chief Auditor David Julian, on administrative leave and removed them from the operating committee.

A few weeks later, The Wall Street Journal reported that Wells had fired dozens of regional managers who were initially spared when the bank let go 5,200 employees for creating some 3.5 million fake accounts to meet sales goals and collect bonus pay.

The moves appear to have been made to satisfy regulators — especially the Office of the Comptroller of the Currency, which had previously let misconduct slide but now looks to be turning up the heat.

According to a report from Bloomberg, both Hardison (pictured) and Julian had received so-called 15-day letters from the OCC before Wells took action. Those letters are typically a precursor to regulatory orders, such as fines or permanent bans from the industry.

Hardison, in particular, had faced scrutiny for her treatment of Wells employees who blew the whistle. The company’s board found in a 2017 report that she was aware of sales problems dating back to 2010.

It is noteworthy, too, that retail banking chief Mary Mack briefed OCC officials about the firings of the regional managers who oversaw the branches where much of the misconduct took place.

And it’s not just officials at the OCC who are frustrated with efforts by management to improve oversight and risk management. The Federal Reserve has barred Wells from growing its assets beyond $1.95 trillion until it is satisfied that Wells has put in place controls that will prevent further abuse of consumers. Reuters reported in early December that the Fed has rejected Wells’ latest plan.

Big payday for MB Financial

Fifth Third in Cincinnati ended a decadelong hiatus from whole-bank acquisitions when it agreed in May to buy the $20 billion-asset MB Financial in Chicago for $4.6 billion.

The deal, once it closes in the first quarter, would be the largest by dollar volume in the country in more than two years and, at 276% of MB’s tangible book value, will provide a hefty payday for MB shareholders and CEO Mitch Feiger.

Feiger, who has run MB Financial since 1999, is set to become chairman and CEO of Fifth Third’s Chicago region. He will receive $15 million in compensation, including nearly $6 million in cash, when the deal closes.

The payoff justified a series of moves by Feiger (pictured), who guided his bank through a merger of equals in 2001 and the purchase of Taylor Capital in 2013, to build MB into one of the Chicago area’s most prominent commercial lenders.

For Fifth Third investors, the jury is still out. Fifth Third’s shares are down by more than 20% since the deal was announced as investors have questioned the plans for cost cutting and are frustrated that it could take as long as seven years for Fifth Third to earn back the expected dilution to its tangible book value.

Still, it was a bold move that will give the company a significantly larger presence in one of the nation’s most dynamic markets. Fifth Third will have the No. 4 market share in the Chicago metropolitan statistical area, or 6.5% of total deposits, once the deal closes. It currently ranks No. 10, with less than 3% of the market’s deposits.

Rough year for bank stocks

Gordon Smith, CEO of consumer and community banking at JPMorgan Chase

This year has been a tough one for the stock market as a whole, but bank shares have been particularly hard hit.

The KBW Nasdaq Bank Index, which tracks the stocks of money center, regional and community banks, has plunged 23% since the beginning of 2018. The S&P 500, by comparison, had fallen 12.5% as of midday Monday.

That’s a remarkable reversal from the prior year, when bank stocks soared as investors eagerly awaited the benefits of the corporate tax cuts, as well as a rollback of post-crisis financial rules.

More recently, though, worries of a looming economic slowdown have weighed on the industry — worries that have been exacerbated by the ongoing, anemic demand for business loans.

Expectations for higher deposit costs on the horizon have also contributed to the industry’s slide. And broader economic worries, including trade tensions with China, have also been a factor.

What’s notable, though, is just how disconnected the slump in stock prices is from the industry’s underlying performance. Profits are surging across the industry, as banks continue to reap the benefit of higher interest rates and lower taxes.

Meanwhile, credit quality — a factor that can do serious damage to profitability — looks mostly good, despite concerns about niche areas such as auto lending and commercial real estate.

In recent weeks, bank executives, including JPMorgan Chase Co-President and Co-Chief Operating Officer Gordon Smith, have warned against the prospect that investors’ collective worries about an economic downturn could create a “self-fulfilling prophecy,” causing a decline in business confidence that ultimately pushes the country into a recession. Smith (pictured) is also CEO of JPMorgan’s consumer and community bank.

So where are bank stocks headed in 2019? Your guess is as good as ours.

U.S. business drives profits of Canadian banks

It has been an equally difficult year for the stocks of Canada’s banks, but companies such as Toronto-Dominion Bank, Royal Bank of Canada and Bank of Montreal can take comfort in the fact that their U.S. operations are meeting — and perhaps even exceeding — expectations.

That was especially true for Toronto-Dominion. Its TD Bank unit actually outperformed its Canadian counterpart in the fourth quarter, and total earnings from all of its U.S. businesses —including its stake in the brokerage TD Ameritrade — increased 38% year over year to $855 million.

The Royal Bank of Canada reported strong growth in its U.S. capital markets business and at its City National Bank in Los Angeles, which it bought in 2015. City National is housed in RBC’s wealth management segment, and RBC said in November that strong volume growth at City National was a big reason net income from wealth management climbed 23% in 2018 from a year earlier to nearly $2.3 billion. (RBC’s fiscal year ended Oct. 31.)

Meanwhile, Bank of Montreal said that U.S. personal and commercial business, including BMO Harris Bank in Chicago, grew 33% to $285 million in its fiscal fourth quarter when compared with the same period in 2017.

CEO Darryl White has said previously that he expects U.S. growth to outpace Canadian growth. He has cited consumer lending and mortgage lending, particularly jumbo mortgages in the Midwest, as areas of growth for the $119 billion-asset BMO Harris.

Canadian Imperial Bank of Commerce said its U.S. earnings climbed 22% to $98.6 million in the fourth quarter. Its U.S. businesses, including PrivateBank in Chicago, accounted for roughly 10% of CIBC’s earnings in 2018. CIBC has a goal to increase that to 17% of total earnings by 2020, but executives have said they expect to hit that target ahead of schedule.

Growth has been tougher to come by in Canada, where regulators recently tightened mortgage qualification rules to prevent the housing market from overheating. Though each of those banks has pursued its own distinct strategy for growth in the U.S., all have benefited from rising interest rates and lower corporate income taxes.

Abrupt departures for two CEOs

Two CEOs credited with building once-local community banks into regional powerhouses abruptly resigned in the same week in November.

On Nov. 26, Berkshire Hills Bancorp in Boston announced that its longtime CEO, Michael Daly, had resigned, effective immediately. A day later, the $7.4 billion-asset Opus Bank in Irvine, Calif., said that it is parting ways with its founder and CEO, Stephen Gordon.

Daly (pictured, left) took over as Berkshire Hills’ CEO in 2002, when it had just over $1 billion of assets. Sixteen years and nine acquisitions later, Berkshire Hills has more than $12 billion of assets and nearly 120 branches in six states. Daly further raised the company’s profile earlier this year when he relocated the holding company’s corporate headquarters from Pittsfield, Mass., to Boston.

Berkshire Hills did not disclose why Daly, 56, resigned so suddenly, but following the announcement, Piper Jaffray analysts revealed in a research note that they had received a letter in October from anonymous Berkshire employees claiming that the workplace culture under Daly was “toxic.” Anonymous reviews on Glassdoor.com said that turnover was high because Berkshire Hills’ management was “demanding” and “demeaning” and several employees commented that senior executives cared only about acquisitions and did little to foster an employee-friendly culture.

Richard Marotta, who was president of Berkshire Hills’ bank unit, Berkshire Bank, has succeeded Daly.

Like Daly, Gordon (pictured, right) had been the public face of his bank for many years. In 2010, he led a $460 million recapitalization of Bay Cities National Bank, renamed it Opus and quickly set about building the tiny community bank into West Coast force through acquisitions and expansion into new business lines, such as technology and health care lending.

The strategy worked well for many years, but the aggressive growth eventually caught up to the bank as loans began to sour. Opus lost money in the second half of 2018, and though it has returned to profitability, its performance has been uneven at best.

In a press release announcing Gordon’s departure, Opus director Mark Schaffer said that Opus needs a new leader who “will help restore growth momentum to the bank.”

Paul Greig, Opus' chairman, was named interim CEO. Greig, who will continue leading Opus’ board, was chairman, president and CEO at FirstMerit in Akron, Ohio, when it sold to Huntington Bancshares.

Opus has hired the executive search firm Korn Ferry to help it find a new CEO.

Auspicious start at Amex

The American Express Co. logo is displayed in a shop window in New York, U.S., on Monday, April 15, 2013. American Express Co., the biggest U.S. credit-card issuer by purchases, named Edward P. Gilligan to become its president, effective immediately. Photographer: Scott Eells/Bloomberg

Scott Eells/Bloomberg

It was a successful first year at the helm for Stephen Squeri, a longtime American Express executive who took over from retiring CEO Kenneth Chenault in February.

The company’s earnings per share grew by at least 25% in each of the first three quarters, as both loans and spending on Amex cards climbed at a rapid clip.

Growth was particularly strong in the business card segment, and Squeri has indicated that he sees opportunities to drive additional growth by updating the value propositions offered to companies that use those cards. In October, American Express launched a new small-business card that is cobranded with the retail giant Amazon.

Amex also won an important and long-running court case in 2018, as the U.S. Supreme Court ruled that provisions in the company’s contracts with retailers do not violate antitrust laws. The contracts essentially bar merchants that accept Amex cards from steering consumers to pay with rival products that charge lower fees.

As of mid-December, the New York-based company’s stock price was up 7.6% during 2018, compared with a 17% decline in the KBW Nasdaq Bank Index, which serves as a benchmark for the sector.

One negative development in 2018 was the disclosure that Amex’s foreign exchange international payments business received subpoenas from the Department of Justice. The firm has said that it does not believe the matter will have a material adverse impact on its results.

LendingClub: Still stumbling

LendingClub is still trying to regain the momentum it lost in 2016 when founder and CEO Renaud Laplanche left in the midst of a corporate governance scandal.

In September, the San Francisco-based online lender finalized a settlement deal with the Securities and Exchange Commission that resolved a long-running probe of Laplanche-era conduct. But the firm’s financial performance continued to languish.

LendingClub reported net losses totaling $115 million during the first three quarters of 2018. The firm has said that it expects to lose another $9 million to $14 million in the fourth quarter.

The company’s share price, already hurt by the fallout from the 2016 scandal, plunged by an additional 33% between the start of the year and late December.

LendingClub also seemed to be caught off guard by a lawsuit filed in April by the Federal Trade Commission. The lawsuit alleged that LendingClub deceived prospective borrowers with claims that its loans did not carry hidden fees, since customers were often charged origination fees of $1,000 or more.

LendingClub has called the FTC’s allegations unwarranted, and CEO Scott Sanborn (pictured) said in October that the company is engaging constructively with the agency. But company officials have not given public indications that they expect the lawsuit to be resolved soon.

SIFI threshold is raised, M&A follows

A few select institutions of a certain asset size only needed Congress to remove a certain barrier to get their M&A engines running.

That barrier, of course, was the $50 billion-asset threshold at which a bank was considered to be systemically important financial institution, or SIFI. The threshold was raised to $250 billion in the regulatory relief legislation that Congress passed and President Trump signed into law in May.

Midtier banks with $30 billion or $40 billion of assets were loath to cross that line, as doing so would have triggered additional regulatory requirements such as stricter capital requirements and tougher stress testing.

Once the cap was raised, however, some midtiers got busy.

In what was one of the year’s biggest deals, the $32 billion-asset Synovus Financial in Columbus, Ga., announced in July that it would buy the $12 billion-asset in FCB Financial Holdings in Weston, Fla., for $2.9 billion. The deal, once it closes early next year, would roughly quadruple Synovus’ deposits in the Sunshine State.

A few weeks earlier, the $44 billion-asset People’s United Financial in Bridgeport, Conn., announced that it was acquiring the $4 billion-asset Farmington Bank in Connecticut, and CEO Jack Barnes (pictured) has said since that he has no plans to stop there.

“I think there are similar types of deals across our footprint where we can identify acquisitions that would have similar characteristics,” Barnes said during an Oct. 18 conference call. “We’ll certainly be pursuing those conversations and looking to be opportunistic about it.”

Bank OZK’s credibility problem

Bank OZK in Little Rock, Ark., has been one of the industry’s most consistently profitable banks for years, but it hit a rough patch in the second half of this year.

Third-quarter earnings at the $22 billion-asset Bank OZK fell far short of earnings estimates, as the bank charged off two commercial real estate credits that it had previously classified as substandard.

Even after charging off $45.5 million of loans, Bank OZK’s charge-offs to total loans stood at a very manageable 0.43% at the end of the third quarter. Still, the sudden decline in credit quality in its previously pristine commercial real estate portfolio spooked investors, and the stock — which closed at $36.43 per share the day before third-quarter earnings were announced — has yet to recover. Shares were trading at $21.60 on Dec. 24.

Stephen Scouten, an analyst at Sandler O’Neill, said that Bank OZK has some work to do to win back the trust of investors. In the past, the bank has been criticized for being too heavily concentrated in commercial real estate, but CEO George Gleason (pictured) has always defended its business model and the strength and quality of Bank OZK’s underwriting.

The company has traded on those assurances for years, and it seemed to have a point. With the exception of a brief surge during the financial crisis, charge-offs were virtually nonexistent until recently.

Last quarter’s earnings miss, however, is testing investors’ faith in the company, Scouten said.

“Whatever credibility they had [with investors] is gone,” he said. “I don’t know if that’s fair, but it’s going to take some time to earn it back.”