D.A. Davidson Eyes Bank M&A Hotbed in Midwest

Seattle may have won the Super Bowl, but the city is losing one of its premier banking conferences to Denver.

D.A. Davidson & Co. will host its annual Financial Services Conference in the Mile High City on Tuesday and Wednesday. The move is part of the investment bank's effort to cover a larger swath of the country beyond its traditional Western focus. The firm has recruited advisors and analysts in recent years to help fill out its operations.

In an wide-ranging interview, Douglas Woodcock, D.A. Davidson's president of equity capital markets, discussed the reason for relocating the conference, expansion efforts and his company's M&A expectations for the rest of this year.

Here is an edited transcript.

This is the conference's 16th year, but the first to take place beyond the Pacific Northwest. Why change the venue?

Woodcock: Denver was an acknowledgement that our franchise is expanding into the Midwest. We've also got a strong fixed-income group based in Denver.

We have an investment banking team led by Stephen Nelson and Eugene Katz in Chicago and we have Ramsey Gregg in Orange County, Calif. We've got Stephen Geyen providing research coverage out of Minneapolis.

The location is more central and easier for everyone to get to. A number of the banks we cover at least have a loan office or some presence in Denver. Our hope was that it would attract more of the banks we cover and it would attract a larger base of institutional investors.

You can get a nonstop flight there from just about anywhere and it is one time zone closer to the East Coast.

Based on commitments, did the plan to get more attendees work?

We are expecting attendance to be up 25% from last year. I attribute that to a better representation of the banks we cover and more East Coast investors in attendance. Last year we had 39 banks in attendance, and this year we have 49.

What prompted the company's Midwestern expansion?

There are probably 900 banks in our older footprint if you include California, Colorado, Utah and neighboring states. But if you look at the midsection of the country — say the upper Midwest down through Texas — there are over 4,000 banks. Clearly, the opportunity set is much bigger. It was a logical extension of our footprint, and we had the opportunity to bring in Nelson and Katz in 2012. Our decisions have to be driven by strategy but the catalyst is always finding the right people.

Where has the expansion paid off?

We think the opportunity going forward is going to be M&A. That is clearly what we're seeing in our pipeline. We think Gregg, Katz and Nelson all have strong relationships and will be able to increase our presence in the markets they serve. We see it in our pipeline.

There will be some capital raises — things like initial public offerings, raises associated with M&A and some just to increase capital levels — but those are becoming few and far between.

The landscape of advisors has changed with things like Stifel Financial's purchase of KBW. Has that factored into your expansion efforts?

We compete with some very good firms and the competitive landscape is going to continue to be vigorous. That isn't going to change, even if the names have changed. Where I think it has impacted us is in the ability to hire some high quality people.

It has created enough dislocation in the ranks of investment banking that we've had the opportunity to bring in some experienced bankers with strong relationships. Nelson and Katz came from Hovde, Gregg came from KBW and Geyen came from Stifel.

With first-quarter reporting all but over, what's your take on bank performance for the rest of 2014?

Fundamentally, it is going to be a good year. I think it is unrealistic to expect the investment returns we've seen the last couple of years, but we are seeing accelerating asset growth. It varies market to market, but that is what the market was anticipating as returns ran up last year. I'm optimistic.

How about M&A?

It is going to continue to be a solid M&A year. I don't see a bubble forming. There are going to be opportunities where some banks are in a position that they can't grow significantly. There are some management teams who've postponed some decisions on alternatives because valuations constrained them.

With valuations higher, we are going to see a nice level of activity. It isn't going to go parabolic, just a continued healthy level.

Traditionally, a big piece of advising banks involved helping investors start de novos. Is that eventually going to pick back up?

It will pick up inevitably. The M&A activity is ultimately creating a vacuum. There are some talented executives who are not ready to ride off into the sunset. I don't see it yet.

We've had a couple of discussions, but the activity rate is pretty modest and frankly the process of getting approvals for a de novo is still daunting.

Do you think a lack of de novo opportunities is tempering M&A? Would there be more deals if selling executives felt confident that they could start new banks?

That might have an impact, but honestly that all gets distilled into the valuation equation. As valuations have risen, more banks are willing to sell.