Sunday, December 29, 2013

Bankers: What Is Your High Definition Destination?

Future Picture: "A high-definition picture that shows in great detail the future as you want it to be." Future Picture and its definition are from James D. Murphy's ("Murph") 2006 tome, Flawless Execution. I liked it so much, I e-mailed Murph at his consulting firm, Afterburner, for permission to quote from it.

Murph and his colleague, Will Duke, called me back. Since the 2006 book, their thought process has evolved. They created a more versatile version of Future Picture, one that can be applied to multiple industries with greater precision. They termed it High Definition Destination ("HDD") in their as-yet to be released book, Courage to Execute

In an excerpt of the book, HDD is described as follows:

" A HDD should be so described as to provide a beacon-like objective that drives the entire organization forward.  It should be clear and simple, yet high-definition."

In other words, Future Picture, and it's successor HDD, describe in vivid detail the organization you want to be. So vivid, in fact, that all levels of the organization know it, understand it, and can describe it in less than five minutes. 

I discussed with Will and Murph our industry's vision problem. Many if not most of our banks date back many generations, in simpler times when we had one branch that did all things banking to an entire town. Competition was limited and sometimes non-existent. So our vision started as something like this... Schmidlap National Bank. We're a bank. To the town of Schmidlap. 

Now things are more complex. We are in dozens if not hundreds of communities. Our products sometimes number in the hundreds. We compete with financial institutions that are located within those communities and outside of them. We don't just compete with banks, but also with credit unions (and vice versa), insurance companies, brokerage companies, virtual banks, and non-bank financial intermediaries. 

Yet our vision has evolved to something like this: Schmidlap National Bank. We're a bank. But not just in Schmidlap.

Don't believe me? Take this vision statement from an anonymous bank that I found randomly looking through bank vision statements on the web:

"Our vision is for [bank name] to build value by employing those human, financial and technological resources which will enable and insure its expansion, prosperity, and reputation for superior quality, performance and value returned to the communities, customers, team members and investors it serves."

How about that for a High Definition Destination? There's gotta be a yadda yadda yadda in there somewhere. Does this vision statement read like yours? Even a little bit? Does your vision provide that vivid picture where all employees know your HDD and make decisions and develop tactics to achieve it?

As Murph told me on the phone call, general vision gets general execution. Executing to achieve some general HDD promotes wasted effort. And minimizing wasted effort is critical to flawless execution.

So tell me, how specific is your vision? Do you have an HDD?

~ Jeff

Sunday, December 22, 2013

Banking's Total Return Top 5: 2013 Edition

For the past two years I searched for the Top 5 financial institutions in five-year total return to shareholders because I grew weary of the "get big or get out" mentality of many bankers and industry pundits. If their platitudes about scale and all that goes with it are correct, then the largest FIs should logically demonstrate better shareholder returns. Right?

Not so over the three years I have been keeping track.

My method was to search for the best banks based on total return to shareholders over the past five years... capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered for those FIs that trade over 1,000 shares per day. This, naturally, eliminated many of the smaller, illiquid FIs.

For comparison purposes, here are last year's top five, as measured during December, 2012:

#1.  BofI Holdings, Inc.
#2.  Bank of the Ozarks, Inc.
#3.  Access National Corporation
#4.  Hingham Institution for Savings
#5.  Texas Capital Bancshares, Inc.

This year's list is in the table below:

BofI Holdings celebrates its third year on this august list. Congratulations to them. A summary of the banks, their strategies, and links to their website are below. 

#1. BofI Holdings Inc. (Nasdaq: BOFI)

BofI Holdings Inc. and its subsidiary BofI Federal Bank aspire to be the most innovative branchless bank in the United States providing products and services superior to their competitors, branch-based or otherwise. In its latest investor presentation, BofI claims that its business model is more profitable because its costs are lower. It supports the claim by highlighting its efficiency ratio compared to peer banks (38.7% versus 68.5%, respectively) and its operating expenses as a percent of average assets compared to peer banks (1.66% versus 3.09%, respectively).So, as a branchless bank, BofI has leveraged its significantly lower operating expenses into profit. That profit led to the top spot in five year total return to shareholders, three years running. Well done!

Continuing the theme of niche banks, Marlin is a direct lender providing financing to business so they can acquire new equipment and technology while preserving capital. Since 1997 Marlin has extended $3 billion in financing to small and mid-sized companies acquiring computer software and hardware, telecommunications, medical equipment, and other office equipment. I considered excluding Marlin from my rankings because it started as a straight finance company. But why exclude niche players? Especially if I believe community banks must increasingly be known for some niche to differentiate. I first became aware of Marlin at the Utah Bankers Association Executive Development Program, where a Marlin Business Bank officer was attending. Marlin Business Bank was chartered in 2008 so Marlin could fund its various financing activities. The Bank sports a year-to-date ROA of 2.90% and ROE of 19.6%. Not too shabby.

One of the largest bank holding companies in the Atlanta area, you would first think that Fidelity Southern is the first plain vanilla community bank in the Top 5. But you would be wrong. How often have we seen banks pursue fee-based line of business strategies to augment their spread business but have failed miserably at running these businesses profitably? I know I have seen it more often than not. But Fidelity Southern's fee income to total revenue is between 50%-60%! Nearly half of the fee income comes from their mortgage banking business, boasting over 300 employees throughout the southeast, and ranking 2nd in the Atlanta MSA in purchased home volume. But their spread business is unique also. Over 50% of the loan portfolio is indirect auto, with originations coming from Tennessee to Florida.  Indirect auto portfolios, as many of you know, performed well during the past recessionary period. And Fidelity Southern shareholders have benefited. The bank achieved a year-to-date ROA of 1.24% and ROE of 14.16%. And earned a spot in the JFB Top 5 with a 517% five-year total return. Well done! 

#4. Eagle Bancorp, Inc. (Nasdaq: EGBN)

EagleBank, founded in 1998, is a traditional community-based business bank, serving the metro Washington DC market. The Company has posted 19 consecutive quarters of increased net income at September 30... a consistent financial performer. It had a 4.31% net interest margin and a 52% efficiency ratio for the third quarter. Commercial real estate and commercial and industrial loans make up 74% of its loan portfolio. Loans are funded 86% with core deposits, allowing the bank to maintain a superior net interest margin. Another key to the bank's strong efficiency ratio is average deposits per branch. At September 30, the bank had $3 billion in deposits with only 18 branches, for an average of $166 million per branch. Eagle is run by Ron Paul, a highly respected real estate investor/developer. Interesting how so many high performing financial institutions have CEOs from other industries. I salute Eagle's 463% five-year total return to their shareholders.

#5. Bancorp, Inc. (Nasdaq: TBBK)

Founded in 2000, The Bancorp creates customized banks for affinity partners in the healthcare, payments, and institutional banking industry. According to its third quarter investor presentation, the bank's greatest revenue comes from pre-paid cards (35% of revenue), followed by revenues from a traditional community bank (22% of revenues) that manages $1.4 billion of the $4 billion asset balance sheet. The branchless community bank operates in the Wilmington-Philadelphia market. Yet another niche bank for our Top 5. The strategy delivered a year-to-date ROA of 0.59% and ROE of 6.89%, and a 453% five-year total return to shareholders. Congratulations! 

There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $4 billion in total assets. Bank of America... not here. Jamie Dimon, ditto. PNC, sports a Steelers-like record. But, congratulations to all of the above that developed a specific strategy and is clearly executing well. Your shareholders have been rewarded!

Are you noticing themes that led to these banks' performance?

~ Jeff

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. FINRA makes people take a test to ensure they know what they are doing before recommending securities. I'm sure that strategy works well.

Sunday, December 15, 2013

Five Ideas on How to Consolidate a Bank Branch

Fellow blogger Jim Marous asked me what I thought were hot stove issues for banking in 2014. Top of my list, branch consolidation.

During the second quarter 2013, bank branches generated a relatively low 2.04% total revenue as a percent of average deposits. Average deposits per branch were approximately $53 million. This is according to my firm's profitability measurement peer group. Total revenue includes asset spread from branch-originated loans, liability spread from deposits, and fee income. 

So let's do some math: 2.04% x $53 million = $1.1 million. On the surface, this looks good for a branch that might cost $600 thousand per year in operating expenses. But hold on. What about paying for that army of operations, IT, compliance, finance, and executives back there at home office? According to my firm's profitability peer report, support/overhead centers cost branches approximately 0.99% of deposits. In the case of the $53 million branch, that's $525 thousand per year. Where are the profits now?

The cold hard truth resulting from the math is that branches have to be larger to deliver meaningful profits. Many if not most financial institutions are looking hard at smaller branches in smaller markets to consolidate and create a bigger branch that can deliver better results.

But what should you do to minimize customer attrition and negative perceptions if you decide to consolidate a branch? I have a few ideas.

1. Personnel - It all starts with your people. If you are consolidating a branch into another in the next town over, select your best people to run the consolidated branch, ideally with residents from each community. And by best, I don't mean longest tenured. By best, I mean those that have the greatest potential to execute on your strategy. 

2. Communicate with community leaders - One of the most often cited reason for leaving a struggling branch open is the perception closing it would have with the community. I suggest sending a bank executive, with your current/prospective market/branch manager to sit down with key community leaders to communicate your decision process, identify how you will continue to benefit the community although you won't have a brick and mortar facility, and ask how your financial institution can continue to play a meaningful role in helping community leaders execute their long-term plans. Then take those ideas discussed and execute on them.

3. Be charitable - I am an advocate of giving branch/market managers a charitable budget for small ticket giving such as to the local little league, scout troop, etc. I also believe that financial institutions should focus their charitable dollars and time around few causes so they can have the maximum impact. Look for an opportunity to support a cause important to the residents of the community where you are consolidating the branch, either through dollars or time, and ideally both. 

4. Be social and be local - Here is an idea that will have your compliance officer spinning... have locally run social media accounts that focus communication with people in very small geographies. That's right, I'm proposing having a Schmidlap National Bank Morris County New Jersey Twitter account @schmidlapnbmorris. By being local, following local residents, promoting local causes, and highlighting local events, your bank will be followed back by locals that find value in what you are communicating. And don't forget to add personality to the account. Nobody likes to follow a bland Twitter account that tweets the daily CD rate. If you closed the Parsippany branch, you could keep Parsippany residents better engaged by being the go-to source for super-local news, events, and causes.

5. Lend, lend, lend! - In the months before and after a branch consolidation ensure that your business development folks focus dedicate resources to finding business in the affected community. Make sure to actively communicate your continued commitment with signage such as "Another project financed by Schmidlap National Bank".

Those are my ideas. What are yours?

~ Jeff