Sunday, February 28, 2010

Wal-Mart Bank is flying under the radar.

I'm writing this post sitting in my car while my 11 year old warms up for a soccer match in Richmond, Virginia. Readers with children that participate in sports know too well of the gaps in time during weekend tournaments.

Yesterday, to kill time, we roamed the aisles of the local Wal-Mart. This store was six months old. Along the wall at the checkout lanes there was a mini storefront dubbed "The Money Center". Curious creature that I am, I strolled in for a look. From the menu of services (see photo) it was evident that Wal-Mart is making a concerted effort to bank the unbanked and recent immigrants that send money home. Bill pay, wire transfers, and stored value cards would support this notion.

I took a brief walk down the front of the store, past The Money Center, and encountered my second glimpse of Wal-Mart’s banking strategy, Woodforest National Bank (see photo). According to the bank employee that greeted me, Woodforest is Wal-Mart’s #1 retail partner, has 54 branches in Virginia Wal-Marts and over 600 nationwide. Reviewing industry data from SNL Financial, Wal-Marts had 863 bank branches that had $6.0 billion in deposits at June 30, 2009. A significant percentage of those deposits belonged to Woodforest National Bank or its sister bank, Woodforest Bank (a Federal Savings Bank). Woodforest has dozens of proposed branches in the works. Presumably most will be in Wal-Mart stores. In 2009, Woodforest reported net income of $83.1 million, on $3.1 billion of assets (Woodforest is most likely a Subchapter S Corp because it reports paying no corporate taxes).

Wal-Mart has not conceded its entry into banking. It is executing a long-term strategy to bank the unbanked, recent immigrants, and those that roam their aisles. Their strategy is so long term, we barely notice it.

Most banks do not claim recent immigrants or the unbanked as their niche. Why? They would most likely be unprofitable customer segments. That strategy may be very short sighted. How many readers could date their family roots back one or two generations, when their ancestors were immigrants with very little in terms of financial resources? Yet, our families survived, and many thrived. Banking similar customers now may be the start of a long and profitable relationship. In fact, many bankers include ethnic niches in their strategy because the markets in which they operate are teeming with recent immigrants.

However, success banking those with very little financial resources may require managing low balance deposit accounts, loans to individuals or businesses with little credit histories or collateral, and other obstacles to success such as language barriers. Therefore, in most cases, we do very little for these customer segments and are allowing Wal-Mart to serve their needs. I am not convinced we should fear Wal-Mart becoming the bank of the unbanked. But the landscape is littered with those that competed head to head with the retail giant. I think our strategy should seriously consider such a competitive threat.

Wednesday, February 24, 2010

A few servings of humble pie.

At times, we bank consultants can be a very self-confident lot. But the measure of a consultant, in my humble opinion, is a recognition of not what we know, but how much we don't know. We are, after all, a collection of our own experiences and those of our clients and prospective clients. Therefore, to ignore experiences of others because those experiences refute our previously held beliefs would render us less valuable in our chosen profession.

In that context, I would like to offer some of my pre-conceived beliefs, and how they were refuted by very smart bankers.

1. To my theory that bankers don’t have good relationships if customers will leave as a result of small price variations: You need the relationship to earn a seat at the table… Bill Sherman, Senior Lender, Carrollton Bank;

2. To my theory that banks over-invest in support functions and under-invest in branch personnel: I need to invest in quality support personnel and technologies to free up as much time as possible for my branch personnel… Tom Petro, President & CEO, Fox Chase Bank;

3. To my theory that lenders should collect their own bad loans to maintain discipline in loan underwriting: Is it a productive use of my lenders’ time to be securing municipal approvals to complete a development project or should they be out talking to customers?... Scott Gruber, head of Commercial Banking, National Penn Bank;

5. To my theory that Banks should use social media to expand their brand: Pioneers get arrows, settlers get land… John Alexander, President & CEO, Northfield Bank;

6. To my theory that not-for-profits are a fertile source for core deposits: Not-for-profits are unprofitable business for the bank because they require large charitable contributions to go along with their business... Bill Burt, President & CEO, Gateway Bank

These are merely a sampling of the humble pie I have eaten over the past twelve months. I'm confident there are more servings to come. I thank my colleagues for reminding me of all I do not know.

- Jeff

Saturday, February 20, 2010

Are your bank employees ESWS qualified?

Chris Collingsworth, an NBC sportscaster covering the Olympics, reported that Apolo Ohno trained four times a day, two hours each. Ohno, as many of you know, is a U.S. short-track speed skater. His events might take two minutes to complete. He trained eight hours a day.

Change settings. I’m in a strategic planning retreat for a community bank. Senior Management identifies the following attributes as competitive advantages:
- Superior service;
- Trusted advisor

A wise-guy consultant raises his hand and asks, “What is superior service?” Initially, blank stares. Then the branch administrator speaks up and fumbles through an answer. Same wise-guy consultant asks again, “How do you know you have superior service?” The branch administrator offers an anecdote of when a customer said nice things about the bank. No concrete answers there, the wise-guy consultant moves on to Trusted Advisor…

“What qualifies your employees to advise customers?” In my opinion, there is a gap between what senior leaders want their employees to do, and what they are capable of doing. This gap can be bridged with a training program designed to prepare your employees to be the bank you want to be, to build your brand, and execute strategy.

I was in the Navy. While there, I rode several ships and while at sea we constantly trained for war. Aside from specific job training, ships had an all encompassing training regiment teaching each enlisted sailor all facets of ship operations so they can be prepared to step into a number of roles in combat. This training culminated in the awarding of the Enlisted Surface Warfare Specialist (ESWS, pronounced EE-swas). Wearing that pin (see photo) signified you were a highly trained surface warrior… Navy elite.

So much of bank training budgets are dedicated to compliance training. Aside from this shortfall, we have not developed training programs designed to be the bank we want to be. Instead, we focus on compliance, and all other training is implemented in an ad hoc fashion.

If your bank is to be the best in service, where are the exact service standards, like those used by Ritz Carlton Hotels, and the training to achieve them? If you aspire to be a trusted advisor, what training have you implemented to advise businesses or individuals? The University of Toledo offers a Certified Business Advisor curriculum, and The American College in Bryn Mawr, PA offers the Certified Financial Planner curriculum.

I know of no banker that has either of these designations (although I am sure there are some). Yet I know plenty of banks that want to become a trusted advisor. So I ask you, do you have the training in place to elevate your employees to achieve your strategy? Are your employees ESWS qualified?

- Jeff

Wednesday, February 17, 2010

Too Much on the Dollar Menu?

I recently spoke at a NJ Bankers Association event about the things I learned this recession (see blog post regarding subject). Since writing that missive, I realized I left one out.

My company does line of business and product profitability reporting for community banks. What I have learned from performing this service is that very few products deliver the level of profits typically sought by high-performing banks. This approach to profitability has demonstrated its flaws during the current recession. As Warren Buffet once said, “you don’t know who’s swimming naked until the tide goes out”.

The accompanying chart highlights various levels of product profitability achieved by banks and thrifts that subscribe to my company’s profitability outsourcing service. I rolled up products into nine traditional product categories and then determined which product groups delivered satisfactory profitability, were merely profitable, or were unprofitable.

Of the nine product groups, banks only had one that delivered a greater than 1% pre-tax return on product portfolio, and thrifts had two (the snapshot was for 3rd quarter, 2009). Commercial real estate lending was the common profit driver for banks and thrifts.

In spite of increased provisions for loan losses, commercial real estate lending continues to drive profits in the industry. This was the case prior to the recession also, although more products were profitable. The pre-tax ROA for those peers was 0.50% for banks and 0.29% for thrifts. This highlights the flaw in a business strategy of having very few profit drivers in a bank. When one tumbles, there is no other product group or line of business to pick up the pieces.

It reminds me of the fast food dollar menu. Occasionally, I’ll go to Burger King for the best deal for a buck in the land, the double cheeseburger. I pull through the drive-thru, tender my $1.06 (got to pay the governor), and drive off. That was not the customer visit intended by the creators of the dollar menu. There is no way to make a profit on that transaction.

We as bankers must identify what is our dollar menu and the level of profits we expect to achieve for all other items. Senior leaders must hold people accountable so their line of business or product achieves or exceeds expectations. Absent measuring and holding ourselves accountable, we run the risk that our whole business may end up on the dollar menu.

- Jeff

Saturday, February 13, 2010

Ode to Bill Davis

On December 31st, a great banker retired: Bill Davis (pictured). I have known Bill for about 10 years and like him as a person very much. But also important is how much I admire his former employer, Norwood Financial (Nasdaq: NWFL) and bank, Wayne Bank. I wondered if others shared my admiration, so I searched one year of archives on American Banker for Bill's name. Zero hits.

What of other bank lumineries gaining so much attention these days? John Stumpf, CEO of Wells Fargo, had 13 hits. Jamie Dimon, CEO of JPMorgan Chase, 1,450 hits. These fellas have very little to do with the number of articles an independent industry newspaper prints about them, but it is an indication of the level of importance we place on the very large financial institutions in our country.

Of the big banks, Wells Fargo and JPMorgan Chase certainly stand out as excellent performers. In the wake of the most dramatic industry disruption since the Great Depression, Wells managed a 1% ROA in 2009, and JPMorgan managed 0.58%. Comparatively, banks across the country had a 0.17% ROA in 2009. Not too shabby Mssrs. Dimon and Stumpf.

But hold on fellas. Take a gander at the accompanying chart. It appears Mr. Davis and his community bank outdid them both in '09, and blew the cover off of the industry. Looking back to 2006, the years Mr. Stumpf assumed WFC's presidency and Mr. Dimon ascended to JPM's CEO chair, Bill Davis fared relatively well.

I used ROAA as a comparative measure. But keep in mind that JPM and WFC have high levels of fee income as a percent of operating revenue (49% and 48%, respectively, for 2009). NWFL's fee income/operating revenue was 20%. This means that JPM and WFC are generating more revenue without the need of those pesky assets, which typically inflates ROA. Even without the advantage of high levels of fee income, Bill Davis stands tall among industry giants.

My favorite Bill Davis story is the day I was summoned into one of his Board meetings to make a presentation. At the end of the presentation, I waited in the "ante-room" (those of us that present to Boards know what I'm talking about) to wait for Bill to emerge. He did, and told me that he and the Board liked what I said, but didn't like the goatee I sported on my face. Next time in front of his Board, I would have to be clean shaven. That's old-time banking!

Bill reached retirement age, and handed the keys to the bank to his successor, and moved out of the executive suite. A refreshing succession because so many bankers these days lack the humility to think that others can lead as well as them, so they sell their bank at the end of their careers.

Bill is humble, and a great banker. Our industry should salute him.


Special note: I am not making stock recommendations here. So don't call your broker to make a trade based on what I write. If you saw the performance of my stock portfolio, you would know what I mean.

Wednesday, February 10, 2010

A little game of one-on-one?

I recently met with Frank Teas, CEO of The Nashua Bank in New Hampshire to discuss strategy (See photo. Frank is actually the person on the left). During the course of the discussion, he said that his marketing plan was one-on-one marketing. I have also heard of it referred to shoe-leather or face-to-face marketing.

As many community banks realize the challenge of evolving into a price leader because of their Goliath competitors, they are returning to the way banking was done when it was personal, dating back over 100 years. This, it seems to be perceived, is their rock in David's slingshot.

It got me thinking during my long drive home from New Hampshire. If customers are brought in primarily through relationships with bank personnel, then a critical objective must be to maximize the number of front-line personnel to serve in this capacity.

For example, a commercial lender may typically manage 100 relationships and about a $50 million loan portfolio. If you want $300 million in commercial loans, you will need six lenders. If you want your lenders to manage a larger portfolio, they will typically swim upstream to do larger balances per loan, or try to have more relationships.

This has an impact. If a lender must manage more relationships, there is less time for each individual customer. If he/she manages less relationships, it may reduce profitability. If he/she swims upstream, the bank is likely to be one of several "bidders" for the customers' business, attracting price shoppers.

The answer to these interdependent questions is in your strategy... what bank do you want to be?

Once decided, the bank must find the right personnel to be the face of the institution. Personnel that will build your brand, solidify relationships, and bring customers that value relationships more than price.

What bank do you want to be? Are you ready for a game of one-on-one?

Friday, February 05, 2010

My Banking Lessons Learned this Recession

I attended a meeting the other day with a board committee of a client that is profitable and pro-active in charting their future. While others were talking, I jotted down what I thought were key lessons learned this recession for bankers. Here is what I came up with:

1. Never forget about economic cycles. When deciding on putting bonds in your portfolio or loans on your books, can the borrower survive a recession?

2. Most lenders are salespeople. They sell your bank to the customer, which is good. They also sell their loans to loan committees. Bad lenders travel like nomads to other banks once their loans go sour at yours.

3. Loans should be priced for credit and duration risk, and covenants should penalize borrowers for not providing financial statements on a timely basis. Lenders may manage 100 relationships. The least they could do is maintain up-to-date underwriting and loan files on those customers.

4. Customer loyalty is cemented in bad times. If you help a customer through tough times, they will remember it for a very, very long time. And will probably tell others.

5. Business customers want you to make it easy for them to bank with you. Constantly look at ways to improve your convenience for them. Their time is very valuable. This level of attention to detail will make it very difficult for your customers to leave you.

6. Safety and soundness exams are becoming somewhat politicized. Examiner actions may not make good business sense.

After delivering my thoughts to the Board committee, they asked if I was going to blog about them. Well, yeah!

You may agree with some, and disagree with others. Let us know your thoughts.


Wednesday, February 03, 2010

Beware of the Yutes!

In the 1992 classic movie My Cousin Vinny, Joe Pesci referred to his clients as “yutes”. Fred Gwynn, who played the judge, asked for clarification, not understanding Pesci meant “youths”. Bear with me, I have a point.

I was with a bank executive today that told me that 40% of OTS examiners had less than five years experience. Now, this was hearsay and I do not know if it is factually correct. But every time I looked into a conference room where a client had holed-up their examiners I saw a lot of young faces.

I don’t think it’s a stretch to say the banking industry is being examined by yutes!

These are heady times for banks. Some banks have booked loans to borrowers who had a low liklihood of servicing those loans in a recession. Those banks should receive diligent examiner scrutiny.

Other banks made loans to borrowers that have been customers for decades and through numerous recessions. The bankers know the borrower has character that increases the liklihood of debt repayment in a difficult period.

But on paper, the two borrowers may not look much different. Experienced examiners have a far better chance of understanding the distinction.

You may ask to give the examiners a break because they are stretched thin. You may also say that we have limited federal budgets to support teams of experienced examiners.

But the FDIC has approximately 5,000 employees and examines about 5,160 banks (see That’s almost one to one. I understand the FDIC also manages the insurance fund and has a consumer protection arm. They also perform industry analysis. But how many people does it take to perform the other functions, and should they even perform them?

Having inexperienced examiners requires regulators to standardize how banks are examined. That means there will likely be no distinction between borrowers that have the same debt service coverage ratio and loan to value, regardless of character or longevity with the bank.

It could mean the end of character lending, too.

Monday, February 01, 2010

I-Banker Will Work For Food

Bank Director Magazine had its annual "Acquire or Be Acquired" conference last week. Surprisingly, an investment banker from a regional investment banking firm opined that a flood of capital was going to enter the banking industry, triggering "hundreds of bank mergers". Well, given the chart below, his colleagues hope he is right. There is tuition to pay for the kids!

Baron Rothschild, during the financial markets panic of 1871 in Paris, was attributed to saying "buy when there is blood in the streets". Well, there is blood in the streets in banking. So this i-banker may be accurate when quoted as saying "There has never been a better time to be a buyer than right now".

Well, perhaps he is a little over excited. When there are half as many deals, there are half the transaction fees. Tough sledding for financial services investment bankers.

Do you think there is no better time to buy?