Sunday, August 04, 2019

How To Do Product Management Without Product Profitability

Quick answer: I don't know.

I posited this question on Twitter because product management has come up during various financial institution strategic planning sessions. I also don't know of many new banking products since I've been in the business. See my post on that subject here from nearly two years ago.

But product management is a function that is performed, at some level and degree, in most financial institutions. Even if they have no title Product Manager. But if you don't measure product profitability, I'm not certain what financial institutions are managing to.

The video below discusses how Product Managers can use profitability information to improve the profitability of products and ultimately their institution.

How do you do Product Management?

~ Jeff

Thursday, August 01, 2019

Guest Post: Financial Markets and Economic Commentary by Dorothy Jaworski

Financial Markets & Economic Update- Third Quarter, 2019

Summer is upon us and I cannot wait to get to the beach for vacation.  What an amazing ride it’s been this year for bonds!  Interest rates continued their steep decline into the second quarter.  Longer-term interest rates are down more than a full 1.00% since their highs last November.  GDP was +3.1% in the first quarter of this year, but many are projecting growth of less than 2.0% for the second quarter.  Housing looks weaker, with much lower year-over-year increases in prices and volatility in new and existing home sales.  Business confidence and manufacturing fell during the second quarter, mostly the result of trade wars.  China reported growth of +6.2% in the second quarter, which was the lowest there since 1992.  All of this led to interest rates falling month after month in 2019. 

Although business confidence fell from the uncertainty, stock markets were reaching new record highs on many of indices.  One exception was small cap stocks, which did not fare as well as larger companies, due to the Fed raising rates.  Consumers are benefiting as the unemployment rate is at 3.7% in June, wage growth is at +3.0%, and job openings are plentiful; there are openings of 7.4 million, which is over 1.4 million higher than the number of unemployed persons.  The Federal Reserve has expressed concern, through Chairman Powell, that inflation has not met Fed targets of 2.0% and is at risk of falling.  Core PCE has only exceeded 2.0% in eight of the forty-one quarters since 2009.  The Fed may lower interest rates to give inflation a boost.  Think about that for a minute…

Leading Indicators & Yield Curves

The index of leading economic indicators, which forecasts growth six to nine months from now, has stabilized in the past few months, after a very weak series late in 2018.  The “LEI” was unchanged in May, after rising by +.1% in April, +.2% in March, and +.2% in February.  We should continue to have slow GDP growth later in 2019, based on this indicator.

The leading inflation indicator, or ECRI future inflation gauge, has been falling on a year-over-year basis and is forecasting low inflation six to nine months from now.  The “FIG” has been dropping all year, with year-over-year changes in June of -3.6%, May -3.7%, April of -2.2%, and March -2.6%.  Fed Chairman Powell, you are right.  The forecast for inflation is that it will be weak.  Slow growth, low inflation, it sounds like a broken record…

One of the best leading indicators for the economy, surprisingly, is the Treasury yield curve.  Steep, or positive, yield curves predict economic growth and higher interest rates.  Inverted curves indicate slow growth, or recession, to come along with lower interest rates.  Flat yield curves show stable rates.  We are between the flat and inverted yield curve now, based on different sections of the curve.  The 5-year to 2-year and 10-year to 3-month yield spreads are now at 0%; the latter was inverted by .20% one month ago.  The 10-year to 2-year spread is at .26%; this is usually the first spread to invert, yet it remains positive.  Today, the yield curve is telling us that growth is coming under pressure but it is not forecasting recession at this time.

The yield curve can remain flat or inverted for very long periods of time.  For example, the inverted curves that preceded the two recessions since 2000 remained that way for over a year (average of 13 months) before steepening.  The spreads of the 10-year to 2-year and 10-year to 3-month also have a long lead time before signals of a downturn are seen.  The 10-year to 2-year spread inversion precedes a decline in the LEI by 9 to 12 months.  Both spread inversions precede recession by 13 months (as in 2000 for the 2001 recession) to 26 months (as in 2006 for the 2008-2009 recession).   By the time recession begins, the curve will be steepening again.  Historically, the Fed has been slow to cut rates after the curve inverts, but Fed Chairman Powell indicated a willingness to cut rates sooner rather than later.  This can prolong the recovery and postpone a recession.  It may also be an acknowledgement that the last rate increase at the end of 2018 was too much or that the neutral rate was much lower than they believed.  (Thanks to a Zero Hedge article for these timeframes).

A New Record

OMG, we made it!  Economic growth continues this month, marking 121 consecutive months of growth, setting a new US record for expansion.  We just beat out the March, 1991 to March, 2001 record of 120 months, making this the longest expansion since 1854.  But we did so with growth that was unusually slow compared to the prior record.  Since June, 2009, GDP has risen a cumulative +25%, compared to +42.6% from 1991 to 2001.  Job growth was slower as well, with jobs having risen +12% since 2009, slower than the rate of +17% from 1991 to 2001.  (Thanks to a CNBC article for these statistics).

The Outlook

I am sticking to my forecast of real GDP growth of +2.0% to +2.5% this year, following +2.9% in 2018 and +3.1% in the first quarter of 2019.  Although the economy is looking a little bit tired, I believe that consumers will continue to spend, with retail sales rising, albeit with some volatility.  Job growth should continue and increasing wages and falling gas prices will encourage consumer spending.  Inventories should not contribute as much to growth as they did in the first quarter, so a ratcheting down to the level that we have experienced since 2011 of +2.2% is a conservative projection.  I am assuming that businesses rise out of their pessimism, manufacturing and housing pick up, and that some kind of trade deal with China gets completed.  And government spending will continue at high levels.  Inflation should remain below the Fed’s target of 2% and this will keep longer-term rates low.

Speaking of high government spending reminds me that the biggest issue in this current economic recovery has been the high amount of debt at all levels- government, business, and consumer.  As I have written before, high debt levels put a cap on GDP growth, with low inflation and low interest rates.  High debt keeps the velocity of money low (still at 1.46), which weighs on GDP.   Just ask Dr. Lacy Hunt.  By the way, we will be seeing him at a seminar during August!

Recession is likely 13 to 26 months away.  We are in a prolonged period of low interest rates and have been since 2009.  The Fed tried for three full years to break us out of the pattern but they did not ultimately succeed.  We fell right back to equilibrium, as we always do.  We are in for a period of low interest rates, until recession is behind us.  If rates rise in the interim, these higher rates cannot last.  The Fed will ease, but it is a guessing game as to when.  Some say they will ease later this month.  That’s fine and they will probably follow it with another cut later this year.   

There’s nothing to worry about, right?  Nothing that a few days on the beach cannot solve…

Enjoy the summer!  Thanks for reading!  DJ 07/16/19

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with Penn Community Bank and its predecessor since November, 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Tuesday, July 23, 2019

Why Did Oritani Sell For No Premium?

On June 25th, Oritani Financial Corp (ORIT) common stock closed at $16.21 per share. The next day they announced they were selling to Valley National Corp. for $16.29 per share. Virtually no premium. And less than ORIT traded one year ago. Why?

I was not part of the discussions regarding the transaction, and am not an advisor to either bank. I have no inside information to share. Only some observations and opinions. 

ORIT has historically been a high performing financial institution in a highly concentrated deposit market. For the calendar first quarter 2019 they had a 1.22% ROA, which was down from 1.31% in fiscal 2018 (ORIT is on a different fiscal year). Their efficiency ratio... fuggetaboutit! Thirty six percent for the quarter ended 3/31. 

So why did they receive 138% of book value, and 14x earnings when nearby (5 miles between headquarters) Stewardship Financial Corp. (SSFN) announced their sale to Columbia Financial (MHC) for 167% of book value, 17x earnings, and a whopping 77% premium. This transaction was also announced in June. ORIT is 4x the asset size of SSFN.

There are many factors that go into pricing merger transactions. Cost savings opportunities, attractiveness of markets, niches or specialties, seller's capitalization, buyers' stock valuations, etc. And in fact, ORIT was relatively highly capitalized compared to SSFN, with a leverage ratio of 12.92% versus 9.48%. That plays a role in price/book merger pricing. But ORIT consistently outperformed SSFN in financial performance. Yet received a lower valuation.

Bank Brand Value

You may recall I wrote about the value of brand in a post entitled: Bank Brand Value: Calculated! And I am very familiar with financial institutions in the Mid-Atlantic. So I suspected a key factor leading to the no-premium deal between ORIT and Valley might be related to ORIT's brand value. 

So I did the calculation described in the linked post (see table).

I searched for regional peers with total assets between $1 billion and $10 billion. I then filtered for loan peers that had multi-family and commercial real estate loans greater than 60%. ORIT's was 92%. These are highly competitive, transactional loans. And in the New York metropolitan area, are significantly originated by loan brokers and bid on by banks.

Even though I searched for peers with high levels of these types of loans, ORIT earned seven basis points less than peer in Yield on Loans minus NPAs/Assets, negatively impacting bank brand value (BBV). 

For deposits, I searched in the same region and size as loan peers, but controlled for banks that had total time deposits as a percent of deposits greater than 30%. ORIT's was 42%. The Cost of Interest Bearing Liabilities was the same as the deposit peer group. So it did not add or subtract from BBV.

So, although I filtered for financial institutions with a similar balance sheet composition, ORIT had an inferior Yield on Loans minus NPAs/Assets, and equivalent Cost of Interest Bearing Liabilities.

Leading me to the opinion that, among other factors, ORIT received no premium because it had a negative BBV.

Why do you think the bank received no premium?

~ Jeff

Monday, July 08, 2019

Bankers: If We're Serious About Helping Clients, What About These Two Products?

With all of the automation of financial products, one would think managing finances would be simple. Much more so than when our grandparents saved for the coal delivery in an envelope in the night stand.

My focus today is on consumer banking. Which is becoming more challenging for the community financial institution due to heavy competition from money center and super-regional banks, credit unions, and fintech firms. Do we cede the field? Hand Wells Fargo our sword, as it were?

I don't think community financial institutions can fund themselves solely from their commercial customers. They struggle serving deposit-only or loan-lite small businesses because commercial lenders have no interest and branch skills have not been elevated to create the confidence needed to have business banking conversations. If a commercial lender has 20% in compensating balances in his/ her portfolio, that would be a win.

But what about the funding for the other 80%?

No, I think community financial institutions should develop a solid strategy for retail banking. As my industry colleague Ron Shevlin aptly pointed out in his 2015 book, Smarter Bank, money management will be more important than money movement. Actually, since it was written four years ago, I might be as bold to say that it IS more important. 

This reminds me of a scene from Date Night with Steve Carell and Tina Fey. Steve played an accountant, and informed a couple that they would be receiving a nice tax refund. To which he suggested opening a Roth IRA. Not interested. They were going on vacation. The world needs more boring advisors like Steve in Date Night. Should your institution be the bore? To help your customers make better financial decisions?

If you believe yes, how is your financial institution equipped to handle such a business model? Not just in employee capabilities, but in products?

A 2018 Harvard Business Review article emphasized a growing financial problem among our retail customers: they are not prepared for retirement. HBR proposed what to do about it. But I ask my readers, what do you intend to do about it?

As HBR puts it:

"Ultimately, the shift from defined benefit pension plans to employee-directed defined contribution 401(k)s is the major driver of the impending retirement crisis. Beginning in the 1980s, this move helped companies reduce their retirement liabilities and better meet their quarterly financial targets, but put an unmanageable burden on employees."

Helping our customers manage this burden requires a change in strategy, from one of "more products per customer", to "promoting our customers' financial well being." If your financial institution is embarking on delivering the latter strategy to your customers, I think there are product gaps. Two come to mind.

Much Maligned Products

The below products are much maligned due to high reputation risk, outsized fees, and are difficult to deliver due to high maintenance costs or regulatory/licensing requirements. But to help our retail customers navigate retirement, they are legitimate options that need a trusted person to deliver, be that an advisor or banker. 


Many financial institutions "sell" annuities. But many advisors say this product is not worth it. Sales loads and ongoing fees are too costly compared to alternatives. And I agree. Vanguard was known as the low-fee producer, and they are transitioning account administration of their annuity products to Trans America. And I must admit, finding a legitimate website for objective comparison is difficult because annuity providers clog searches with pitches. And they sponsor websites that might appear objective.

Which screams for somebody to be on the side of the customer.

An annuity, properly constructed, can help your retail customers reduce the risk of running out of money in retirement. Much like a defined benefit plan does. A deferred annuity, or an immediate annuity, can be structured to provide fixed payments as long as the buyer lives. And to protect the buyer from pre-mature death and losing their savings, an insurance rider can be applied to reduce that risk.

It doesn't seem like this should be something that has a 2% annual expense ratio and a 6% sales load. Especially since your customers can pay no sales load and a 25 basis points fee for a robo advisor or an index fund. The costs are too great to overcome. 

This is an opportunity for a consortium of financial institutions, perhaps through their national trade associations, to develop products such as an annuity that protects community financial institution retail customers from running out of money in retirement. Without hyper-feeing the customer in the interim. 

The offloading of retirement risk from employers to employees scream for it. Why would banks sit on the sideline of such an important financial goal?

Reverse Mortgages

Or as the federal Department of Housing and Urban Development calls them, Home Equity Conversion Mortgages (HECM). There's an acronym for everything. Here's another product that requires some savvy web surfing to look up legitimate sources of information that is outside the product pushers purview. Imagine being a retired utility worker that is concerned about running out of money? No wonder they turn to Magnum P.I. and The Fonz for financial advice.

This one is close to home because I described it to my mom to alleviate her concerns about outliving her money. She owns her home outright. As many seniors or near-retirees do. A reverse mortgage is a legitimate product almost totally avoided by financial institutions due to reputation risk. Imagine the scenario, mom takes reverse mortgage but fails to tell her children. She passes and nobody keeps up with the payments. The bank forecloses. Geraldo is called in. Adult children on TV in tears. Holding grandchildren that thought the house was going to pay for school and give them a leg up on life. Sad.

This is not an unsolvable risk. It may, and likely does, require financial institutions to look beyond the mandatory disclosures. Because as I hear it, heirs not knowing about the loans are a big problem. Couldn't we solve for this and other risks and maintain our position as our retail customers' advocate?

A reverse mortgage requires little organizational effort in today's technology world. The loan origination resources wouldn't be materially different than a home equity loan. Loan maintenance would be even less. We already track that borrowers pay their real estate taxes on regular mortgages. The biggest difference will be at the end of the loan, where the full balance is due when the owner sells the house or passes away. And that effort and risk can be priced into the loan, without gouging.

But if we do have a retirement crisis, a reverse mortgage can be part of the solution.

Product Promoter or Retail Customer Advocate

Helping retail customers prepare for and navigate retirement can be a strategic objective of your institution. It is particularly important as so many Baby Boomers are taking their gold watch every day. Many if not most are ill-prepared for what is next. Becoming their advocate can be the best advertisement for attracting younger retail customers to your bank.

Because there are a lot of hucksters out there. Pushing Product.

~ Jeff

Monday, July 01, 2019

Is It Customer Loyalty That You Seek?

Why are customers loyal to your financial institution? I hear many reasons in strategic planning sessions:

1. Our people. They are loyal to their lender, branch manager, etc.
2. Our service. We have the best service!
3. Our products. We have a really cool checking product.
4. Our location. We're right in town.

Aside from the difficulty in proving each of the above, the underlying assumption is: "loyalty is good". And I ran the math on that assumption in my firm's most recent newsletter. Which hasn't come out yet as I type this. Because it is in editing and review. By a person that is on vacation. So I apologize that the link is to my company's newsletter page and not the specific newsletter.

But let's run with the assumption, "loyalty is good". How do you build it?

Recently, at the Financial Managers' Society FMS Forum, I heard James Kane speak. James is one of the most quoted and profiled authorities on loyalty. He also graduated from Notre Dame. I didn't, but I'm a lifetime Fighting Irish fan. And he grew up in Scranton. As did I. More so than Joe Biden, who claimed to grow up in Scranton but left before he was a teenager. Jimmy (which is what he would've been called if he grew up in Scranton) and I did the full tour until college.

On his website, Kane writes: "Anyone who has heard me speak knows the importance I put on understanding the things people truly care about to find some common connection. The easiest way to do that is to share first. Let people know what you care about and allow them to discover the similarities you may share with them, whether it is interests, hobbies, favorite products, artists, foods, sports teams, places you have been, or places you hope to visit one day." He left a brand palette as follows:

Do your people employ this method to increase customer loyalty? Do they frequently communicate their favorite things and know their most profitable customers' favorite things?

Kane led his speech with the things he likes, has done, or would like to do in rapid fire format. By the time he finished he likely had something in common with 90% of the audience. In fact, I spoke to him afterwards about being from Scranton. As did another audience member.

In keeping with Kane's method, here is my brand palette:

I live in Pennsylvania near Amish country although I am not Amish. It would be too difficult to come and visit you. I am married to my high school sweetheart, also from Scranton. Also Italian-American. Which means we can turn up the volume, and the people in Amish country think we argue frequently. Sorry. Just talking enthusiastically. 

I have two daughters, one out in California and the other in college. The one in CA thinks I recovered from being stupid but the college student still thinks I am. We have a dog that sometimes gets a bit more attention than me and we spend more money on her than me. 

I am more concerned about where a car was made than how people will think of me driving it. I don't like spending money on cars because you are trading a liquid, appreciating asset (cash) for an illiquid, depreciating one. I drive a truck and take a little bit of pleasure pulling up to financial institution clients in a vehicle not typically driven by a consultant. 

I like coffee but I can't tell the difference between good coffee and bad, so I would opt for cheap or free coffee. Where's your break room? Same with wine. Except I wouldn't expect that in your break room. I love this local brewery and winery revolution and when I travel I am always looking for a place to sample the local fare. 

I listen to podcasts on long rides. I can't be too salesy to plug for our podcast but I regularly listen to The Purposeful Banker, ABA Banking Journal Podcast, Dan Carlin's Hardcore History, NPR Up First, Stuff You Missed in History Class, and my favorite... Freakonomics.

Sports: Yankees, Rams, Sixers, Capitals, Union, and Notre Dame football.

So there ya go. Would knowing this about me help us make a better, and longer lasting connection. To have a common bond to build a relationship?

What Jimmy Kane says makes sense. So perhaps this should be part of your bankers' arsenal in developing customer relationships that lead to long term loyalty.

~ Jeff

Saturday, June 01, 2019

Bankers: Is It Worth Buying Checking Accounts

At least somebody noticed. Noticed that I might be a valuable checking account customer. Aside from credit cards, I don't get much attention from bankers or financial advisors. Maybe the "do not call" list is more effective than I thought?

So when I opened my mailbox and received the bribe, I was interested. Interested to see how much a bank was willing to pay for my business. The answer: $300 (see picture). Thanks Santander! Or should I say, gracias! I should note that Santander has a branch in my town. Courtesy of their Sovereign Bank bailout, ummm… acquisition.

I've heard opinions on whether a community bank should buy checking accounts. Sure, the big banks seem to be on the bandwagon. Jeff For Banks readers likely get these offers. One bank controller opens accounts for all offers and gladly takes the cash. A community bank head of consumer lending recently told me he did the same with a Key Bank offer. Five hundred bucks! Key Bank values him more than mi banco values me.

Is It Worth It?

If you're a regular reader, you know me. And my philosophy that it all comes down to a spreadsheet. So I ran the numbers to see if offering me trescientos dolares was worth it to Santander. Below are the results.

The analysis is assumption driven. For example, I assumed that the annual marginal cost of my checking account to Santander was $100, which included items fees and per account fees charged by their items processor and core processor. A guess, of course. But one based on my experience and my own checking volume.

I also assumed the credit for funds, which is also the spread for a non-interest bearing account, which this offer was for, was the same spread as for all community banks that subscribe to my firm's profitability outsourcing service. The spread of 2.52%, taken from an FHLB yield curve, would be the equivalent of 5.75 years duration based on FHLB Boston's spot rates at the time of printing.

Sorry for the technical stuff, but my finance readers would want to know.

And 5.75 years seems like a reasonable duration for such an account. In other words, the bank thinks they can keep that account for that amount of time. Also, I used the average balance per account for my firm's profitability clients. You can calculate your own bank's average balance for similar accounts.

So, Is It Worth It?!

The above spreadsheet would indicate yes. But wait!

It does not include the cost of the campaign. And that cost must be spread over the number of accounts opened. So, if the campaign went to 50,000 households, with a 2% success rate, that would equate to 1,000 net new accounts. And I'd like my marketing friends to chip in, but 2% seems a stretch. 

If the campaign cost $50,000, and you opened 1,000 accounts, then it cost $50 in incremental cost per account. Still worth it. But if you solicited 10,000 households, and experienced a 1% success rate, you would only open 100 accounts. If that campaign, which sounds more realistic for a community bank, cost $25,000, then it would cost $250 per account, erasing the present value of all profits.

This is why, in my opinion, you see large banks doing larger campaigns to generate economies of scale in terms of fixed acquisition costs (cost of the campaign). And it is much less common in community banks, which do not enjoy the benefits of scale of campaign.

So, my answer is... it depends. But it is all about the math.

Does my math work for you?

~ Jeff

Friday, May 24, 2019

Memorial Day: Black Hawk Down

On October 3, 1993, the U.S. launched a raid to find forces of Somali warlord General Mohammed Farah Aideed, who had been ordering attacks on U.N. forces assigned there for humanitarian missions. Things went badly.

Black Hawk Down

That raid, initially the kind soldiers train for routinely, erupted into a crisis when militiamen downed two Black Hawk helicopters using rocket propelled grenades. The 15-hour battle that ensued, after raids were turned into a rescue mission, left 18 Americans dead and 73 injured. 

It also left shocking images of American soldiers dragged through the streets of Mogadishu so seared into our memories.

The 15-hour rescue operation was chronicled in the book Black Hawk Down by Mark Bowden and the subsequent movie of the same name. 

MSG Gary Gordon and SFC Randy Shughart

Dispatched via another Black Hawk to provide reconnaissance and cover fire until ground forces could extract troops, they found a downed Black Hawk and its crew in peril, with militia closing in rapidly, and no ground troops in site.

Despite this, Gordon and Shughart demanded to be inserted on the ground. Their commanders only permitted the insertion if they did so voluntarily. They did.

They were inserted a football field south of the crash equipped with only their sniper rifles and pistols. While under intense small arms fire, they fought their way through a dense maze of shanties and shacks to reach the critically injured downed aircraft crew. 

They pulled the pilot and other crew members from the wreckage, and established a perimeter which placed them in a highly tenuous position. They fought until their ammunition was depleted. At that time, they surrendered one of their remaining loaded weapons to the pilot, and continued the fight.

Until they were out of ammunition. And were fatally wounded by the enemy. Their selfless actions saved the pilot's life. And earned them a posthumous Medal of Honor.

Memorial Day

I ask that you reflect on MSG Gordon and SFC Shughart, and all of your fellow Americans that gave their last full measure so you can enjoy the freedoms our country so often takes for granted.

Happy Memorial Day!

~ Jeff

Thursday, May 09, 2019

The Real Benefit of Intelligent Automation

Fifty percent. That was the odds I gave myself when calling my health insurance firm regarding changing my date of birth. Fifty percent chance I could get this done in one phone call and a reasonable period of time.

Isn't that sad?

It did take 15 minutes to get the relatively simple task done. Making me wonder: shouldn't this be easier?

And easier is what me and my colleagues hunt for when we do process improvement projects at community financial institutions. Because there are a lot of complex, manual, outdated things happening in the bowels of your institution. Believe me.

In comes artificial intelligence, robotic process automation, chatbots. Mostly buzzwords to bankers. But it's growing on them. I recently attended a state bankers' convention where Fabio Sant'Anna of SRM delivered an interesting presentation on Intelligent Automation (see slides). 

One important slide was to distinguish some buzzwords and acronyms. RPA, or Robotic Process Automation, is a script or "bot" that executes repetitive tasks that are currently done by humans. Artificial Intelligence is the ability of a program to analyze data. To actually solve business problems. 

I'm sure readers can think of several use cases for their institutions. Balancing your card providers daily report to your core system? If it requires a checklist, you can automate it. Performing CIP diligence? Online banks already use automated processes. 

Think of the saved hours!

But let me tell you the real benefit of Intelligent Automation. The ability to deliver community banking services in the manner desired by your customers.

It's no secret that customers want more from their bankers. Efficient and accurate transaction processing is passé. Customers already voted with their smart phones and laptops on where they like to execute transactions.

But bankers have changed at a slower pace than customer demands. Much slower.

Take branch staffing for example. Survey after survey indicates that customers want branch bankers to help them solve more complicated problems, apply for loans, and assist them with financial tools that are available. Can your branch bankers do it? 

I'm skeptical, based on my experience. We still have efficient and accurate transaction processors. We skinnied branch staffing to achieve cost savings and improve profits. But we haven't translated less staff into more capable staff. Same skill set. Less people.

If you look at the support center expenses branches must absorb for operations, technology, compliance, etc. you would think that support functions also skinnied their ranks. Oh contraire. 

In 2013, when the median branch deposit size in our profitability outsourcing service peer group was $47.9 million, support center expenses were 1.12% of branch deposit balances. In 2018, when the median branch deposit size was $62.2 million, support center expenses were 1.02%. 

So you may think, "See! It went down! Economies of Scale!" 

But wait! In 2013, each branch had to absorb $536,000 of support center expenses per year. In 2018, each branch absorbed $632,000, an annual increase of 3.3%. Support functions got bigger!

And that, my readers, is why branches (and in most cases, lending functions) have been so slow to transform their capabilities to meet the modern customers' needs. We reduced branch staff to offset declining net interest margins and boost profitability. And we never reduced back office staff to invest in the collective abilities of branch staff.

Automating back office processes to reduce the resources needed to execute them can transform our workplace into what customers demand.

How long can we wait?

~ Jeff

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This article relates to my firm's Profit and Process Improvement and Strategic Management services. Click on the links to learn more.

Saturday, April 27, 2019

Guest Post: Financial Markets and Economic Update by Dorothy Jaworski

Never Satisfied

The markets never seem to be satisfied.  The Federal Reserve recently took heed of market and economic messages, ending its tightening campaign and beginning its “patience” campaign.  The yield curve had begun to invert in early March, 2019 in response to economic slowdown fears and a flight to quality began where demand for US Treasury bonds increased, pushing longer-term rates down.  I along with countless other managers and investors were finally happy.  Chairman Jerome Powell listened and stopped raising short-term rates.  The markets have always thought that the Fed tightens to keep an overheating economy and inflation in check, neither of which we have right now.  The Fed also announced that they would end the sales/runoff of their bond portfolio, affectionately known as “QT,” or quantitative tightening.  The markets hardly seemed satisfied with these two moves as they began building in rate cuts.  Rate cuts?  Who said anything about rate cuts?

But, what if rates are already too high?  The economy is slowing, as seen in the auto, housing, manufacturing, and retail sectors.  I’ve been watching the balance of the economic data releases shift to “weaker” over the past two months.  Growth around the world is slowing, too.  Every major economy, including the United States, European Union, China, Japan, Australia and New Zealand, and Great Britain (with Brexit issues), is dealing with weaker growth. 

Unemployment and Inflation

The Fed has to follow their dual mandate, which is to maximize employment and maintain price stability.  The Fed kept raising short-term interest rates because they felt unemployment under 4% was too low and would cause inflation (the traditional Phillips curve theory).  Yes, unemployment is low.  In fact, job openings are over 7.1 million and exceed unemployed persons of 6.2 million.  This has been the case for about the past twelve months.  The Fed worried that wage pressures would escalate because of skills gaps.  Yet, wages increases have been modest and did not contribute to higher inflation.   Consumer spending has weakened recently but is expected to resume its modest pace for the year.  High debt levels- consumer, business, and government- continue to weigh on growth, which should be between 2.0% and 2.5% this year.

Inflation remains well behaved, except for the March producer price index data release, which showed an increase of a surprising +.6% for the month.  Oil and gasoline price increases have caused this; oil has risen from $45 to $64 per barrel this year alone.  Before inflation bugs panic, one release does not make a trend.  Leading inflation gauges show a declining year-over-year pace of inflation.  The TIPS spread, or the difference between the 10-year Treasury and the 10-year Treasury inflation-protected yields, has fallen in recent months and is currently at 1.95%.  The weaker economy is keeping inflation in check.  And gold prices rose this year into February and March, but have fallen back to equal year-end 2018 levels today. 

Jamie Dimon

It is a not-so-well-kept secret that I admire Jamie Dimon, CEO of JPM Chase, and have followed his career since the late 1990s.  I admire his business savvy, his wealth of knowledge about the economy and the financial markets, his ability to deal with crisis, and his dedication to making people’s lives better through JP Morgan Chase Bank community initiatives.  His annual shareholder letter, like Warren Buffett’s, is a must-read for investors.  He touches so many subjects and isn’t afraid to criticize government policies that are holding our economy back.  Dimon believes that we will see weak GDP growth this year.  He warns that we could soon see poor liquidity and declining investor sentiment that will add to market volatility.

A Win for the Ages!

Did you have an opportunity to watch the Masters and witness Tiger Woods win his fifth green jacket?  He played the final round methodically, strategically, and did not let developments affect his play.  He watched others take the lead and then lose it…to him.  Once in the lead, he played to win.  He showed us that he can win despite the many setbacks he has endured, especially the physical ones of the past few years.  To me and to millions of supporting fans, Tiger’s win was one for the ages!  I will not forget that day!

The Outlook

I formulated my estimates for 2019 early this year and haven’t seen a reason to change them.  I estimated that real GDP growth would be between 2.0% to 2.5% for the year, which is at a slower pace than the +2.9% in 2018, but about equal to the average growth since 2011.  I had assumed that the Fed would not raise rates again.  The impact of the tax cuts has faded.  Interest rates have stabilized at lower levels, after falling dramatically since December, and the yield curve is relatively flat, with only 13 basis points between the three-month and 10-year Treasury yields.  The Federal Reserve made it clear that they would remain patient in assessing the economy and that they would not be raising short-term interest rates this year.  They recognize that growth is slowing here at home and around the world.  They stated that they did not want to cause an inverted yield curve and they meant it, as they realize that inverted curves are recession precursors.  I always believed that Chairman Powell would read the markets correctly and do the right thing.  He knows that market volatility has risen, the data has been weaker, and liquidity is reduced as M2 growth declines.  M2 growth is today at 4%, which is nearly one-half of what it was three years ago.  Yes, M2 matters.

Our current economic recovery is fast approaching a longevity record; growth through July, 2019 would set the new record at 121 months, surpassing the 1991 to 2011 recovery.  Unemployment is low at 3.8% in March, 2019 and inflation, as reflected in core personal consumption expenditures, was +1.8% in the fourth quarter of 2018.  I don’t expect much change in either of these measures.  Consumer spending has been weak in recent months, but as job growth continues at a steady pace, we should be able to see GDP growth of 2% or more.  However, don’t count on the usual spending boost from personal tax refunds as they are down by over $6 billion from this time last year.  And remember that the Fed stopped raising rates, so that should aid growth. 

While the guessing game has already begun about when the Fed will ease or lower rates, I think growth will be steady (if you call the low 2%s steady) enough to keep the Fed on the sidelines.  The markets seem to enjoy guessing what the future holds, especially when it comes to Fed policy.  I’m not playing the game right now although I mentioned earlier that I think short-term rates might be too high…

I finish writing this with a heavy heart.  I am watching video of Cathedrale Notre-Dame de Paris on fire.   Prayers and thanks for reading!  04/15/19

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with Penn Community Bank and its predecessor since November, 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Tuesday, April 09, 2019

Bank Brand Value: Calculated!

I ask and ask and ask: what does brand get you?

Does it get you pricing power, shorter sales cycles, better employees, more loyal customers? Or does it get you increased expenses without measurable results?

Forbes calculated brand value in their "World's Most Valuable Brands" by taking anything that a company achieves over an 8% return on equity. Many people pay close attention to the ranking. Although I find the calculation to be arbitrary. What if the company is more capital intensive, and has to carry more capital than other companies? So the ROE is lower. Or what if a company is excellent at expense control? Driving ROE higher, but hardly due to its brand.

No, I do not like Forbes' calculation. It particularly doesn't work well for financial institutions. Which is probably why the first bank on their list is ranked 43rd. And it's Wells Fargo! Didn't help out Tim Sloan.

Bank Brand Value ("BBV")

So how would I calculate a financial institution's brand value? When I speak, I use great brand images such as Starbucks, JW Marriott, and Mercedes Benz. Why do these brands command higher price points than Dunkin, Best Western, and Kia?

Price points. A superior brand usually would command superior price points. And we can measure this by looking at a financial institution's cost of interest bearing deposits, and yield on loans, compared to other regional players that have similar balance sheets. Spread is usually 80%-85% of a community bank's revenues. An inferior or non-existent brand likely grows deposits and loans via decisions made in pricing committee.


Fortunately, we have good data via Call Reports to make the calculation. And I propose the BBV method so you can calculate and track your BBV.

The first step is to select regional financial institutions with a similar size, in the below case $1 billion - $10 billion in total assets. I selected a bank in this group, First Bank of Nashville, Tennessee, because I was recently there. I then searched for banks with a similar loan composition to First Bank; fifty-to sixty percent commercial and commercial real estate loans to total loans. I netted yield on loans by their npa's/loans so those banks with riskier loan books are discounted. Banks that achieve a better than median yield on loans after netting npa's/loans, with a similar loan book in a similar region, likely do so because they are perceived to deliver better value to customers. i.e. brand. And First Bank passes this test, achieving 78 basis points over the loan peer median.

I then ran a second peer group for cost of interest bearing deposits. I kept it regional, and the same asset size range. And used less than 30% funded with time deposits, as First Bank was funded 27% with CDs. I could not use transaction accounts because of financial institutions' reclassing transaction accounts to savings/ money market accounts to reduce their Fed requirement. 

Anything under the median cost of interest bearing deposits, I attributed to brand. This didn't work out so well for First Bank, as their cost of interest bearing deposits was 37 basis points greater than deposit peer median. 

And then I added those two numbers together, giving a pre-tax brand value, and then tax effecting it and calculate as a percent of net income. If the bank is publicly traded, as First Bank is (Ticker: FBK), you can then calculate the BBV percent of net income as the percent of market capitalization to get an aggregate brand value. If not a publicly traded bank, you can calculate the BBV contribution to net income and multiply by a peer p/e multiple to get your aggregate BBV.

My suggestion is that you trend your BBV, looking to continuously improve. In First Bank's case, I would look to maintain my loan BBV advantage, and continuously improve my deposit one. 

Imagine continuous improvement of BBV as a strategic planning SMART goal?

See the table. Calculate your own BBV. How did you fare?

~ Jeff