Sunday, June 30, 2013

To Branch or Not To Branch: Here Is The Answer

During periods of uncertainty lies opportunity. Vernon Hill, legendary leader of the former Commerce Bank in Cherry Hill, New Jersey, took advantage of the last time bankers were contemplating the future of branching by beating them over the head with his high profile and rapidly expanding branches. Can another Commerce Bank eat our lunch this time around?

Only if you develop a decade long strategic plan that maps the decline in branch prominence. If you are a shorter term strategist, and you want to grow, then branching remains on the table because it remains high in importance when customers are asked why they bank where they do. Even if they do not frequent their local branch, they tend to bank where a branch is nearby.

But what kind of branch? The Financial Brand did a showcase piece on innovative branch designs. I don't know which one is best, if any, but do know that the answer to proper design lies in your target customers as identified by your strategy. So, the branch question, be it design, location, and staffing, should be driven by the type of customers you are targeting, as identified in your strategy. If you haven't identified your target customers in your strategy, read no further and go do it.

But for those that know who they are targeting, the branching decision should be built on analytics. Branches represent such a significant expense, and average deposit size to achieve desired profitability has gotten so large, that we can no longer decide to branch at a location that is convenient to one of your directors.

Here are what I believe to be the critical pieces of information in determining where to branch:

1. Where are your customers now? Banks often have concentrations of customers that are in towns where they have no branches. This could be a significant starting base to grow your branch. I attended a banking conference recently where the presenter said your best source of new customers are the neighbors of your existing ones. If you have a solid foundation of households within a geography, that is a great start for a successful branch. Note I'm not suggesting branching just to bank existing customers, as that would erode overall profitability. But existing customers are the seedlings for new customers. So identify where your customers are.

2. Are there enough opportunities to bank your target customers in the new market? If you specialize in banking doctors and dentists and there are paltry few in the new market, I'm lost why you would consider going there. The exception may be that your niche rests on the loan side of the business, and funding those loans evolves from a more general strategy to generate funding. But if you can't dominate your niche in a certain geography, consider going somewhere where you can.

3. Is the market growing? Household and business growth demographics are pretty easy to obtain, either through government sources or systems such as your MCIF. Deposit growth and market share, and number of branches in a market (see tables) are available via the FDIC website. Are deposits increasing? Are competitors struggling? Are average deposits per branch increasing and of sufficient size to achieve your desired level of profitability?  

4. Are bankers available to staff the branch? In nearly every strategic planning session I attend Senior Managements place great emphasis on successful strategy execution on their people. There is no substitute to having the type of staff with the greatest likelihood of successfully executing your bank's strategy in your new market. You want to fail? Put no emphasis on branch staffing. You'll fail. I guarantee it.

5. Is a reasonable site available. I'm a realist. You can set your branch up for failure if you don't find a reasonable site. The term reasonable is in the eye of the beholder, but if you are tucked in the middle of a dying strip mall, that may not bode well for your visibility and your brand. Find a location where your people can succeed.

6. Can you de-branch painlessly? This is a new question for your branch analysis. There will come a time when your contemplated branch, and other branches in your network, will be unnecessary. Customers will be accustomed to banking online and/or via mobile, advice and problem solving can happen via the phone or in-person visits to the customer, and the psychological attachment to the branch will be gone. Can you close shop without incurring significant expense? 

I don't think branching is dead. But I do think that the need for marquis, high cost branches is waning, and smaller and more tech savvy branches will emerge as the norm. I also think staff per branch will decline, but capabilities per staffer will increase. The importance of getting your next branch decision right is critical to successful execution of your strategy. Don't let your director bully you into putting one near his/her house.

How do you think branching decisions should be made?

~ Jeff

Thursday, June 20, 2013

Banks Versus Credit Unions: Much Ado About Nothing

Credit Unions don't pay taxes! They're trying to steal our business customers!

I often quote Sun Tzu from his over 2,000 year old book, The Art of War. One of my favorites: "If you know the enemy and know yourself, you need not fear the result of a hundred battles." The frequent and resource sapping waling about credit unions tells me that banks don't know their enemies, umm, competition.

Last year I attended the CUNA Government Affairs Conference (GAC). By the way, it was the trade show beyond all trade shows. Clearly credit unions put heavy resources into lobbying. So I will give banks that point. We had a booth, and my company's tagline is "helping banks perform better". We like the alliteration, and use the word "banks" in a generic way, like Kleenex.

But one would think we would hear about it from CU executives and trustees. And we did hear some quips. But one CEO opined that the rift between banks and CUs was greatly exaggerated by trade associations to keep the masses engaged. I believe her.

Why? Take my home state, Pennsylvania, for example. We do business with both banks and CUs in the state. Admittedly, mostly banks. And we hear plenty about credit unions in strategy sessions. But I pulled deposit market share data for the state, and the results are telling (see table).

Credit Unions boast a 9.5% deposit market share in the state, or $33 billion out of $345 billion total. There are 497 credit unions headquartered in PA, but 447 of them are less than $100 million in deposits (ok, shares for you CU technocrats). All PA CUs combined have the same in-state deposits as Wells Fargo, and half that of PNC. There are only two CUs in the state's top 20 in deposit market share.

Does the banking industry dedicate disproportionate strategic decision-making, marketing and lobbying resources fending off CU competition? Because when I look at the above table, it's clear where a community bank's strategic focus should be. And it shouldn't be on the Locomotive & Control Employees FCU in Erie.

What is this table telling you?

~ Jeff

Saturday, June 08, 2013

Lessons Learned: Banks that thrived during crisis grew loans slower prior to it.

The St. Louis Fed recently performed a study to uncover the characteristics of community banks that thrived during the financial crisis. Thriving banks were defined as under $10 billion in assets, and maintained a composite CAMELS 1 rating in each exam cycle from 2006-11, an impressive accomplishment. As with most government driven academic studies, there were numerous answers. But one struck me as particularly instructive.

Former legendary Fed Chairman William McChesney Martin, Jr. once quipped "I'm the fella that takes away the punch bowl just when the party is getting good." It appears that banks that had the ability to do the same during the heady lending times of 2004 - 2007 found it to be an enduring strategy (see table from Fed study).

Banks that failed during the financial crisis did so predominantly for two reasons: over-concentration, and foolishness. Both are related. Banks that thrived, however, had the discipline to stay on the sidelines while their competitors did aggressively priced, borrower friendly structured, and competitor beating loans. 

Sitting on the sidelines is difficult. Competitors have snarky smiles on their faces when they bump into you at the local Chamber meeting or industry get togethers, knowing that their pipeline is fuller than yours, and they just beat you for the latest big construction deal. If we learn anything from this study, it is that at least one member of senior management should be like William McChesney Martin.

In addition to that, here is what I think a bank should do to avoid the lending hubris that led up to the crisis:

1. Lend Consistent With Your Strategy. I've seen my share of banks that "chased assets", to keep their pipeline as full as the bank down the street. But keep to your knitting. Be known to specialize in certain asset classes and/or industries. And, unless your strategy says "do land loans out of our markets", don't do them. Come to think of it, even if your strategy says to do land loans out of your market, still don't do them. And fire your strategists.

2. But Diversify. Being great at serving specific industries is critical to developing a competitive advantage, but it doesn't mean your balance sheet should be chock full of loans to one or two industries. It just means that you strive to be great at a few things. Continue seeking quality loans in other loan categories and industries. 

3. Minimize Broker-Originated Loans. For some reason, brokers that originate loans but assume no risk of default, don't care too much if the loan goes bad. Go figure? In addition, since the broker owns the relationship, the borrower may be more apt to default on your loan because he/she barely knows you.

4. Include Clawbacks in Bonus Pools. I am not a fan of regulators running your bank. But they favor clawbacks to deter profligate risk taking in lending. This makes sense to me. Keep two pools for each lender, and senior management. One for performance today, and the other for multi-year portfolio performance. Let lenders see that bonus pool grow and plan for the backyard pool when it is released, to motivate them to bring good borrowers and well-structured transactions to the table. 

5. Build a Better Lending Function. Populate lending with a few well-connected, experienced, and respected lenders. Then build a structure that is designed to develop junior people into your lenders of the future. Start them as portfolio managers, or credit analysts, with a targeted development plan. Banks that chased "experienced" lenders all over town ended up with those that made loans at all costs to get deals done. I've seen one or two of these "cowboys" bring banks to their knees. Just like I suggest not chasing deals at all costs, don't chase "experienced lenders" at all costs. Build your own pipeline of next generation rain makers.

What should I add to this list?

~ Jeff

Saturday, June 01, 2013

Banking and Social Media. Guest Post: If Everyone Told You to Jump Off a Bridge...

By: Shannon Marsico

My sister is still in high school, and she claims she is deprived of everything.  A tactic my sister often uses with my mother when she wants something is stating how “everyone” else is doing it -everyone is going to 
the mall after school, everyone owns an iPhone, everyone is allowed to stay out past 10PM, and so on.  To teens, keeping up with their friends and looking trendy are of the utmost importance.  Their decisions are based on what’s viewed as popular rather than what works best for them as individuals.  Working in media, I have found that some companies get fixated on similar concepts.  Social media is one of today’s hottest trends and most brands are jumping on the bandwagon – If everyone is doing it, why not us?  Read more...

jfb note: The author is pretty sharp, no? The samples are particularly helpful. Enjoy!