Sunday, December 28, 2014

Year End Message to Community Financial Institutions

Thank you, my readers, for taking the time to read Jeff For Banks. I appreciate all of you.

If you were curious why I enjoy working with community financial institutions, below is my weak attempt at explaining myself. Hey, I recorded while on vacation, so there's that!

But the over-riding message is: Let's go get the big boys in 2015!

Happy New Year everyone!

In case you can't watch directly from my blog, here is the YouTube link:

Thursday, December 18, 2014

Banking's Total Return Top 5: 2014 Edition

For the past three 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 as of December, 2013:

#1.  BofI Holdings, Inc.
#2.  Marlin Business Services Corp.
#3.  Fidelity Southern Corp.
#4.  Eagle Bancorp, Inc.
#5.  Bancorp, Inc.

This year's list is in the table below:

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

#1. Open Bank (OTCQB: OPBK)

Open Bank commenced operations in 2005 as First Standard Bank in the Koreatown section of Los Angeles. They are built as a relationship bank serving the Korean community in LA and surrounding areas. It is a significant SBA 7(a) lender, ranking in the top 100 (#54) in the country in that category, ahead of much larger financial institutions like Bank of America. Year to date through September 30th, Open Bank had $4.5 million gain on sale of loans, representing 24% of its total revenue for that period. The lion's share of their growth, profitability, and capital have come since their re-branding to Open Bank in 2010. In June, the bank raised an additional $30 million of common equity, positioning it to continue its strong growth.

#2. BofI Holding, 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 is in the top 2% of UBPR peers, and its operating expenses as a percent of average assets are in the top 12% of peer banks. 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!


BNCCORP, Inc., through its subsidiary BNC National Bank, offers community banking and wealth management services in Arizona, Minnesota, and North Dakota from 14 locations. It also conducts mortgage banking from 12 offices in Illinois, Kansas, Nebraska, Missouri, Minnesota, Arizona, and North Dakota. BNC suffered significant credit woes during 2008-09 which led to material losses in '09-10, and the decline in their tangible book value to $5.09/share at the end of 2010. Growth, supported by the oil boom in North Dakota's Bakken formation, and a robust mortgage refinance business resulted in a tangible book value per share at September 30th of $17.18... a significant recovery and turnaround story that landed BNC in our top 5 for the first time.

Western Alliance, through its subsidiary Western Alliance Bank, provides comprehensive business banking and related financial services, operating full service banking divisions in local markets as Alliance Bank of Arizona, Bank of Nevada, First Independent Bank, and Torrey Pines Bank. It also has a national platform of specialized finance units in homeowners' associations, public finance, resort finance, and warehouse lending. Its diversified and primarily commercial loan portfolio and a loan/deposit ratio of 91% resulted in a year to date net interest margin of 4.41%. This margin plus a 2.07% operating expense ratio resulted in a YTD efficiency ratio of 47%. That type of financial performance plus picking yourself up from credit problems leads to top 5 total returns for your shareholders. Well done!

#5. Mercantile Bank Corporation (Nasdaq: MBWM)

In June, Mercantile Bank and Firstbank Corporation closed on a merger of equals to form the fourth largest Michigan-based bank by deposit market share. Firstbank traced its roots back to the 1800's, while Mercantile was founded in 1997. As part of the transaction, Mercantile shareholders received a $2/share special dividend prior to closing, shaving off of tangible book value. But the total return story is similar to others on the list. Mercantile suffered through its share of credit snafus, losing a collective $70 million 2008-10, only to recover and negotiate a franchise changing merger of equals. Best of luck on the integration and congratulations for landing on the JFB top 5 total return to shareholders list! 

There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $10 billion in total assets. No SIFI banks on the list. What about that economies of scale crowd? Hmm.

The flavor of this year's winners is recovery, with the exception of our consistent top performer, BofI. 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.

Tuesday, December 09, 2014

Why Does Kim Kardashian Kick Your Bank's A**?

I have never heard Kim Kardashian speak. I never watched her show. I don't know the family story. I can't name family members beyond Bruce Jenner. Until today, I never searched on her name.

But I know who she is. I know she's pretty. I have heard her claim to fame is an online sex video. I have seen her butt. But not in person. I saw it on a prime time news program. That's right, her derier was featured on a prime time news story.

How has this person turned nothing into significant brand recognition and revenue stream?

By typing Kim Kardashian, and adding her as a label, I just significantly increased this blog post's SEO, or search engine optimization. According to Yahoo, she was the  sixth most popular search during the year. There were no banks in the top 10. If I add her picture, which I am contemplating doing, I would increase my traffic. This is known as "click bait". Put a pretty girl next to any post... be it about fishing or the Victoria's Secret fashion show, and you'll get more clicks, so they tell me.

In fact, when I searched (via Bing) "Washington Trust Bank", a $4.7 billion in asset community bank based in Spokane and founded in 1902, I had 74,900 hits. I did the same for "Wells Fargo" and got 3.4 million hits. Kim Kardashian: 4.3 million hits.

Strategy teams perform a Situation Analysis prior to developing bank strategy, surveying reams of facts to get an accurate assessment of their operating environment. One particular part of a US bank's environment, sadly, is that we are celebrity obsessed. You want to follow Will and Kate, our crack news coverage has you covered. Wonder how far along Iran is in their nuclear program? Good luck.

This became apparent to me when I was speaking to a Washington state banker about his most famous customer, Sig Hansen, the captain of the F/V Northwestern, a crab fishing vessel. Yes, I hot linked to a crab fishing vessel. They have a website, and a pretty nifty one too. How could this be? Because Sig and the Northwestern are front and center on Discovery Channel's Dangerous Catch. Click over to their website and you can buy the coffee Sig drinks. Clearly, Sig's celebrity has aided the cash flow ups and downs typical of a fishing vessel.

How can banks respond to our celebrity obsessed culture? I don't think it is by hiring a celebrity to pitch your bank. Society has grown accustomed to this, and I'm not convinced it moves the needle much. Honda recognized this by enlisting Stretch Armstrong as spokesman for its line of cars this holiday season.

But perhaps we can make a celebrity or two out of our senior executives. For example, I live in Central Pennsylvania, where a credit union uses its CEO in all of its advertisements, billboards, etc. Forget the fact that he wears tights and a cape in most ads. No, seriously, I'm trying to forget that fact. But you get my point. This credit union has made a celebrity out of their CEO, and he is widely recognized in the community.

If done properly, this strategy could leave you exposed to the new celebrity departing the bank, or demanding higher compensation due to their new found status. There are ways to mitigate this risk. Progressive Insurance did so with Flo.

Do you think turning key employees into celebrities would help execute your strategy?

~ Jeff

P.S. I went with Sig Hansen's photo. Not as pretty as Kim.

Friday, November 28, 2014

Bankers: You spend like drunken sailors.

As a former sailor, I take offense to the post title. As if I spent my family's food money on alcohol while on shore leave. I only spent my food money.

But the phrase is synonymous with spending money without direction or regard to consequence. And sometimes, we bankers fall into the trap of not considering our operating expenses as strategic investments.

On December 8th I am speaking at the Northwest Bank Executives conference in Seattle. My topic: Ten Things Banks Should Do, But Generally Don't. One of the ten is "not considering operating expenses as strategic investments".

As an example, let's take an average $1 billion in assets financial institution. The below table was drawn from a peer group analysis my firm performed for a client. Dollar amounts are annual averages for each expense category of 13 financial institutions with an average asset size of $1.0 billion. 

At a time when so many banks are challenged to grow revenues, marketing expenditures represent 2.1% of all operating expenses. And that includes professional services, such as consultants that have little to do with winning the next customer.

Strategically, this hypothetical bank spends $30.4 million per year. Now let's assume you had this thirty mil to execute a strategy to build your bank for a sustainable future. Whatever that strategy may entail, could you not find the resources to fund it?

But we are often bound by legacy. We have seven people in Deposit Ops, and need a new piece of technology or another person and therefore must increase our budget by 7%. Three percent increase in Loan Servicing, and another 5% in IT, etc. etc. etc.

What if you blew up your budget and started constructing an infrastructure, footprint, and employee base hyper-focused on executing your strategy? Instead of 20 branches staffed with six transaction processing pro's each, you need only 16 branches, strategically located, with four higher paid relationship building go-getters per branch. 

This hypothetical bank spends $1.2 million/year, or 4% of total operating expenses, on data processing (not including personnel). Can we allocate that sizable chunk into core and ancillary systems specifically designed to serve our core customers, as per our strategy, in a superior fashion to the financial institutions that spend wide and far to satisfy every constituency? Perhaps we should recognize the importance of the digital distribution system and appoint the appropriate executive to be its champion. 

As McKinsey director Somesh Khanna states in an interview titled "The Bank of the Future" on who should drive the digital strategy in a bank...

"I actually think that it’s less dependent on the role. It’s much more dependent on the person. If the person is someone that is able to visualize a future, get the organization rallying around a bunch of different objectives, and inspire people to actually pursue that path, it’s their real leadership capabilities that’ll come to bear to pull off digital agendas."

So you build your digital strategy around such a person, allocating an appropriate slice of the budget pie to develop your bank of the future for the benefit of your constituencies. Or is our digital strategy champion hyper-focused on installing ATMs that are ADA compliant?

I am not proposing an academic exercise. I am proposing considering every dollar you spend as an investment. And you should invest in your strategy, not your legacy. 

Can we shake our budget mentality, and view our operating expenses as investments into the bank we want to become? I hope so.

~ Jeff

Wednesday, November 19, 2014

Why are start up businesses not creating jobs?

I posed this question to a Fed economist today. Her answer: lack of capital.

The above chart is from a Federal Reserve Bank of San Francisco Economic Letter: Slow Business Start-ups and the Job Recovery published in July.

But in strategic planning retreats that I moderate, community financial institutions insist that they lend to small businesses. In fact, when I recently spoke to a group of New York bankers, I opined that community FIs would lend to small businesses only if they have three years of operating profit and a building as collateral. Some took offense.

The chart above, taken from a Harvard Business School Working Paper: The State of Small Business Lending written by a former SBA Administrator and also published in July, shows that only 34% of small businesses use a regional or community bank as their primary financial institution. The second chart shows the primary sources of capital. Yes, a loan is the most often cited. But trade credit and credit cards also weigh in heavily.

The above chart, taken from the same HBS working paper, shows the use of proceeds of small business credit. Given a community FIs lending proclivities, one would assume that small businesses borrow to finance a building. But no, the primary use of proceeds is for cash flow. Real estate structuring is pretty low on the list.

I discuss this disparity between how bankers perceive they contribute to small business capital formation, and why businesses need capital. In March 2010, I wrote about the decline in business lending among community financial institutions in a blog post titled: Have we checked out of business banking?

So we limit small business lending to those businesses with three years of operating profit and have real estate as collateral. Not exactly lending into the industries that are projected to grow, such as service firms and professional/technical practices. These businesses are commonly located in an office building that they do not own. 

Another challenge is the number of businesses that do not borrow. According to the HBS working paper, only 40% of small businesses apply for credit. Out of the forty percent, 43% did not receive the credit they requested (see chart). 

So let's extrapolate... eleven percent of small businesses borrow for real estate structuring and another 13% for debt restructuring. But only 40% of small businesses borrow. So 40% of 23% is 9.2%. But only 43% get approved for the amount of loan they requested. So about 4% borrow for real estate or debt restructuring and get the credit they requested. But only 34% of small businesses bank with regional and community banks. 

So for 1.35% of small businesses, community FIs stand ready to lend!

Of course, I exaggerate, because many small business loans used for cash flow, inventory, etc. are collateralized by a commercial or residential building and financed by community FIs. But I think our participation in small business funding is far smaller than we claim.

So if we want our communities to thrive now and into the future, small business formation and growth will be critical. Lack of capital is always a top of the list constraint to small business success.

Are we participating in this critical segment of our economy?

~ Jeff

Sunday, November 09, 2014

Ever test the theory that acquiring banks is good? I did.

Every strategic planning retreat has its own flavor. This one particular retreat included a parade of investment bankers conveying the virtues of deal making while the audience of senior bank executives and board members nodded their heads in unison and solidarity.

One question that was unasked was whether it is better to seek acquisitions or go it alone. The conventional wisdom being that doing deals is better than not doing deals. I didn't know the answer, and figured asking an investment banker the question would be like asking a Beverly Hills plastic surgeon if it was better to do a little nip-and-tuck or let nature have its way. (Disclosure: I am also an investment banker, but don't like to admit it at cocktail parties. I am not a plastic surgeon.)

So I went to the spreadsheets. It always comes down to the spreadsheets. The operative question was does doing deals result in better financial performance and total return than not doing deals?

First I had to create some criteria to control for some variables that impact total return and financial performance greatly, such as bank size and asset quality. So I chose publicly traded financial institutions between $1 billion and $20 billion in total assets, with non-performing assets to assets of less than 2%.

I then divided the group into two, deal makers and non deal makers. Deal makers did two or more merger deals for whole institutions since 2010. Non deal makers did one or no deals. There were 46 deal makers and 173 non deal makers. A decent sample, in my opinion.

Their Return on Average Assets and Average Equity performance, at the average, were as follows from 2011 to present.

Deal makers had a better ROA year-to-date: 0.96% versus 0.90% for the non deal makers. But non deal makers had a better ROE: 8.57% versus 8.47% for the deal makers. This may be why you hear so many deal makers talk about return on tangible equity (ROTE) in their earnings conference calls. Better to ignore that goodwill they keep building on their balance sheets as a result of paying premiums for selling financial institutions. Because for ROE, it looks like non deal makers take the brass ring.

And what about three-year total return? Deal makers delivered 73.97% to their shareholders. Non deal makers did better... 75.56% on average.

Does your FI pursue acquisitions? If so, have you tested the conventional wisdom that doing deals is better than going it alone?

~ Jeff

Friday, October 24, 2014

Guest Post: Third Quarter Economic Commentary by Dorothy Jaworski

The Bond Guru Switches Teams
The surprise of September was the abrupt departure of the Bond Guru, Bill Gross, from PIMCO, the company that he helped found forty years ago.  Shock went through the bond markets, especially at
PIMCO, who found out about Gross’ exit along with the rest of us.  Between the September 26th surprise announcement and October 2nd, investors pulled nearly $24 billion from PIMCO funds and ETFs.  There is no way to know exactly how much money will ultimately move and land with Bill at Janus Capital, his new home.  And he doesn’t even have to stray far from the beautiful beaches and leisurely lifestyle of Newport Beach, California, because Denver-based Janus is opening an office in Newport Beach, California.  How about that?

She’s Getting Better at Press Conferences, But
The Federal Reserve has let the talk of rising interest rates hang over the markets like a fog.  We have seen several restless Fed governors, who keep dissenting to the Fed’s statements on policy to keep rates low for a “considerable time.”   Many in the markets thought that the Fed would drop these words from the September statement because they act like a promise to the markets, but the Fed retained them.  Following the meeting, Janet Yellen gave her press conference.  She was repeatedly asked about the words and their meaning and she kept saying over and over again that the Fed’s moves are “data dependent.”  She was not very convincing.  She could have said that returning to “normal” is taking longer than expected and the market projections that rates will rise in the middle of 2015 is about as good as any right now.  Markets build in assumptions for short term rates and this impacts long term rates, of course along with inflationary expectations.  She could have used some coaching to reassure investors.

Growth and Inflation
One would have to question a Fed that would raise rates when the US economy is the only one of the four largest world economies that is displaying any growth, albeit at a very slow 2%.  China, Japan, and Europe are all struggling.  Remember that we are five years in this recovery and we are only managing 2.2% average growth, compared to 4.6% after the prior ten economic recoveries.  Inflation is falling along with many commodity prices (except for gas prices, but I digress).  In China, consumer price inflation is -2.0%, in Europe, it is +1.0%, and here in the US, it is +1.7%.  It would not be unprecedented for the Fed to raise rates with falling inflation, as happened in 1994, but it would be unusual and fairly shocking.

Geopolitical tensions abound in the Russia-Ukraine conflict, Syria, Iraq and a US led group of allies fighting against the evil that is ISIS, and the Israel-Palestinian fighting.  The threat of the spread of Ebola is increasing tensions as well.  This is not an environment that screams for rates to rise; reality may be quite the contrary.

The Unemployment Rate
Much of the fear of Fed tightening springs from the decline in the unemployment rate to the Fed’s “goal.”  For the month of September, the unemployment rate fell to 5.9%, within the NAIRU band quoted by Fed Chair Yellen in her press conference.  NAIRU, or the non-accelerating inflation rate of unemployment, is the unemployment rate below which inflation will rise.  Oh, Phillips curvers, where have you been?

I have a couple comments when I look at the drop in the unemployment rate over the past two years.  First, the drop has been caused more by workers dropping out of the labor force than from job creation.  Job growth has established itself at an average above 200,000 per month, which is fairly good, but well below the pace of other recoveries when the economy was so much smaller.  The labor force participation rate has dropped to 62.7%, the lowest since 1978.  It is not just retirees lowering the rate, but it is young people, too.  Those Not in the Labor Force now total 92.6 million, which is a record.  Many of the jobs created are lower level or part-time, so wages are not rising dramatically.  I cannot believe that productivity will benefit from the structural shifts that we are seeing in employment and I believe we will continue to see sub-par growth in GDP.  I saw this quote on Bloomberg in September and it resonates:  “The economy always appears stronger if you ignore the weakness.”

Speaking of productivity, we are in the midst of another period where we will pour trillions of dollars of our precious earnings into protecting our computer systems and networks from the scourge of hacking.  I have listed this as a risk to the economy in the past but I didn’t realize the extent to which cybercrime would reach new heights.  The evidence was revealed by JP Morgan in the first week of October.  Hackers got into their bank systems and stole names, addresses, and email addresses (but supposedly not account data) of 76 million households and 7 million businesses.  No system is sacred anymore.   Witness the Acme announcement of a major hack at their stores recently.  We are just getting over Home Depot’s admission of 60 million credit and debit card numbers being stolen over the course of months, eclipsing Target’s data breach.  So, nothing is sacred online.  The complete waste of time and money is an ever-increasing drag on GDP.  Add this to the purported estimates of regulatory costs of $1.86 trillion on our economy, and 2% growth seems like a gift.

Our Bank’s Senior Vice President of Deposit Operations and Information Technology, Karen Shinn, knows all too well the risk and costs of these breaches to banks.  She works continuously with our vendors and has implemented fraud detection tools to protect our customers’ debit cards.  But customers can work closely with the Bank, too, by being vigilant about their personal information and by notifying us right away about any unusual activity.  Hacking prevention and network protection expenses will continue to filter into the costs of every company.  Maybe this will be the inflation that the Fed and ECB so desperately desire.

Last Word
Dr. Charles Plosser, President of the Philadelphia Federal Reserve, recently announced his retirement as of March, 2015.  Thank you for all that you have done for our Philadelphia region over your years here!

Thanks for reading!  10/09/14

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 First Federal of Bucks County since November, 2004. She is the author of Just Another Good Soldier, 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.

Friday, October 10, 2014

vBlog: How to break down organizational silos in financial institutions

There are a number of challenges that nearly every financial institution faces, in my experience. Regulatory over-reach, check. Compliance woes. Got it. Branch under-utilization. Ditto. 

One such omnipresent challenge is how to blow up thick-walled organizational silos to serve the customer well over several banking and neo-banking disciplines. The below video highlights some of my ideas on how bankers can break down barriers to win more of their customers' business.

What are your ideas?

~ Jeff

Note: Here is the YouTube link of the above video in case you can't view it in the Blogger application.

Saturday, October 04, 2014

Disruptive technology will not kill banks

So said John Authers in a recent Financial Times article. And I believe him. Bankers have been killing banks for decades. We do it by dismissing change. We do it by implementing "me too" or business as usual strategies in a changing world. We do it by accepting mediocrity. We do it by relying on the payments system or the difficulty in switching banks to retain customers. We engage in hubris.

We don't need no stinking disruptors to do it for us! 

But wait! There may be something to disruptors pillaging bank customers. I remember the days soon after leaving the military in the 1990's that banks were hesitant to enter investment sales for fear of disintermediation of their deposits. Now the amount of money in US registered investment companies exceeds that in FDIC insured banks. Was Vanguard a disruptor?

The branch is king, and if you don't have one in a market, you will not succeed there. But wait, ING Direct grew to $92 billion in assets until ING Group divested it to Capital One. Do you think your bank customers had an Orange account? Was ING Direct a disruptor?

Simple sold to BBVA, touting 120,000 accounts. Were any of them your potential customers? Lending Club funded $5 billion in loans since its founding in 2007. How many loans did you fund in that time? And Quicken Loans... don't they appear at the top of mortgage and home equity rankings? No worries, I bet they're somebody else's customers.

Everywhere we turn we have disruptors pilfering our business. The other day I was in a strategy discussion formulating the tasks to execute strategy. The cash management specialist wanted to advance the product set so corporate customers could use their own interface with the banking core system instead of using the bank's online banking tool. Aside from the cyber security of it, let's think of the implications from a corporate accounting system that wants to interact directly with the bank's core.

Is that testimony to banks not keeping pace with corporate needs? How long before those corporate accounting system providers strike a deal with some regional or national bank to provide seamless views to corporate customers? No worries, probably not your customers.

We are allowing our potential future customer base to be so narrow as to almost guarantee our extinction. 

I don't want to be the doom and gloom guy. Just trying to jolt my readers into action.

As Auther says, banks still provide access to the payment system. Banks remain centers of communities and the number one source for capital for small business. They remain trusted by customers.

But it won't last forever. And it may not last for long. So let's disrupt ourselves!

~ Jeff

Thursday, September 25, 2014

Grow Your Own Business Bankers

Commercial loan growth is difficult to come by these days. Some is a result of anemic economic growth and an uncertain business climate. These factors are beyond a banker's control. But what is within your control is the number and quality of business bankers deployed into your bank's markets.

Nearly two years ago I wrote a job description for a business banker based on what I heard from bankers on the qualities they value most from people occupying this position. How rare is it to find an exact match between people and expectations? Do your business bankers build well-rounded relationships, or bring you deals? Do they bring value to the customer relationship with expertise in cash flow management, inventory financing, and liquidity needs? If so, can they consistently bring loans that are priced appropriately for the risk, or do they need to shave rates or terms to get deals done?

The answers to these difficult questions makes me wonder why we keep relying on "experienced lenders" to move our institution forward. Perhaps populating our ranks with long-tenured lenders married to price-driven deal making is holding us back from becoming the institution we strive to become.

Maybe there is another way. When bankers comment that they can't find experienced lenders to add to their staff, I frequently ask what they are doing to grow their own business bankers. What is your answer to that question? Show me the curriculum you have in place to turn the recent hire into the business banker you envision?

There are plenty of high quality training opportunities out there. Both the American Bankers' Association and Risk Management Association have formal training to teach bankers the skills needed to become the business bankers of the future. Beyond formal training, is a plan, a process if you will, to create bankers capable of flawlessly executing your bank's strategy and give you a competitive advantage. How can you achieve a competitive advantage by developing business bankers to your exacting standards? Because so few are doing it.

Brokerage firms and insurance companies troll college campuses for their next "big producer". Most
recruits flame out because they see themselves as the "Wolf of Wall Street", only to find out that they make little money and get little respect from customers and coworkers at the outset. The "eat what you kill" variable compensation structures don't pay back the student loans, in most cases.

Banks, conversely, hire with the majority of employee earnings coming in the form of salary. This is a key differentiator to bring your next rising star on board from the college ranks. Entry level professional positions could include the assistant branch manager or branch manager, which was my entry point. Or it could be a credit analyst or portfolio manager. A continuous plan to populate these ranks with recent college graduates with great attitudes and a willingness to learn will breath fresh life into your institution and provide a solid base to build business bankers into the future.

But you need a plan, and have to execute it. If not, good luck on your hunt for experienced lenders.

Do you have a development plan to build business bankers?

~ Jeff

Note: This post first appeared as a guest post for Sageworks in March.

Saturday, September 06, 2014

Banker Quotes As Told To Me v8

I learn a lot from bankers and industry experts as I visit their offices, speak to them on the phone or at industry events. Occasionally they will offer an insight that I think my Twitter followers would find interesting. Since I estimate my Twitter community only reads a fraction of their tweet stream, and so many of my blog readers do not follow Twitter, below are selected quotes that I tweeted since version 7.

Note that if the quotes exceeded 140 characters, I would have abbreviated or substituted some words to make them fit. So if you are a CPA and want to count, a few of the quotes may exceed the 140 here, but not on Twitter. I quote people anonymously to protect the innocent.

1.  Bank CFO: The amount of money I hear over $10B banks spend prepping for CFPB exams is ridiculous.

Soon we will forget that the CFPB was established so that bankers don't take advantage of borrowers that lacked common sense. It is morphing into what many were predicting, a bureaucratic black hole that will provide no societal benefit, just cost.

2.  Bank CEO: Regulatory risk weights are BS. It takes me three years to foreclose on a house. I could repossess a car in a week.

States think they are protecting borrowers by making it difficult for lenders to foreclose on the homes of borrowers that stop paying their mortgage. Who pays the increased cost? Think about it.

3. Bank CFO: Our commercial line of credit utilization rate is in the low 40% range.

One of the reasons that loan growth is not robust in an economic recovery.

4. Bank head of HR: Lack of writing skills is an epidemic. How do these people get degrees?

I double checked my grammar on this post. No guarantees though.

5. Bank retail exec: Customers interact with our website more than they interact with all of our branches combined.

My marketing friends know this. But what to do about it?

6. Bank retail exec: Customer retention in our closed branches was somewhere in the 90's.

If you could keep 90% of your customers when you close a branch, I wonder what math justifies keeping the expense? Perhaps if the branch is growing in a vibrant market, it would make sense. But in a mature market with little branch growth? Hmmm.

7. Bank CEO: Lending has forever changed when the borrower took the position "yeah I borrowed the money but it's not my fault."

People speak of going bankrupt in casual conversation. It used to be embarrassing. When walking away from debts, somebody does pay. 

8. Bank chief risk officer: We want to do the right thing (re mortgages), but with more than 1,600 pages of regs, we're not sure what right is.

The complexity in the mortgage market was primarily driven by Uncle Sam. Uncle Sam is sending in the CFPB to fix it. Wonder how that will turn out?

9. Bank Chairman: There are no sacred cows except for the sacred cows.

Does self-interest slow down progress in community FIs?

10. Bank CEO: Moving forward, it's not business as usual, but business as planned.

So long as the plan works towards a competitive advantage.

11. Bank CEO: Your speech was good. Your wife is hot.

Was that faint praise for my speech?

12.  Me to bank exec: What do you do that you wish you didn't have to do? Exec: Talk to consultants. #ouch

It's the only way to end up in my blog.

13. Bank CEO: The more our bankers know how to run a bank, the more successful they will be because they understand the decisions made.

Communicating strategy through the ranks... what a great concept!

14. Bank director: A customer should have confidence that the banker sitting across the desk from them can get things done for them.

Are your bankers empowered to get things done for the customer? Or does a "no mistakes" unwritten policy make them call around the organization to make decisions?

15. Bank compliance officer to me: New lending regs have almost crippled us.

Didn't see that coming.

16. Bank CEO: Bigger isn't better. Better is better.

This CEO clearly needs to drink the investment bankers' Kool Aid.

17.  Me to bank director: I was so bad at picking bank stocks that my wife made me clear them through her. Director: And you're advising us?

Fair point.

What are you hearing out there?

~ Jeff

Friday, August 22, 2014

Four Ideas on Bank Retail Investment Sales

Bank Investment Consultant magazine recently published the results of a bank/credit union investment sales benchmarking report from Kehrer Bielan Research and Consulting. The report, as cited in the article, (via @CUInsight) stated credit union investment revenues equated to $360 per million in share deposits, and that number was 21% greater than in banks, implying bank reps achieve $298 per million in deposits.

So if an investment rep covered $500 million in a credit union, he/she achieved $180,000 in gross production. A bank investment rep would achieve $148,750 for the same coverage. However, the article also stated that credit union reps produce less in gross production than bank reps, implying that bank reps cover more deposits. 

Bank investment sales is treated as an inconsequential line of business in most financial institutions, in my experience. My firm measures line of business and product profitability for dozens of community financial institutions, and hardly any of them make real money in retail investment sales, if they make any money at all. The most profitable program that we measure, on a pre-tax profit as percent of revenue basis, is one that is totally outsourced. The rep is a full-fledged employee of the third party broker-dealer, and the bank incurs little expense from it. It also receives little revenue. But it's profitable! Little is the operative word here.

Why does this line of business languish in our financial institutions? I think the answer comes back to attitude and execution. Because it can't be because our customers don't demand it. At the end of 2013, US registered investment companies managed $17.1 trillion in assets, while bank assets in all FDIC insured financial institutions was $14.7 trillion for the same period.

Here are a few ideas on how to turn this significant opportunity into a meaningful profit contributor to your financial institution:

Grow your own reps. So often we associate success with this LOB by plucking a higher producing rep from a brokerage firm because we want his/her book and to get profitable quickly. Why would a high producing rep join a bank that has limited products and lower payouts? Most won't although bank leads may be enticing. But, let's face it, as a brand for investment sales, most banks don't or can't achieve the panache of having Merrill Lynch on your business card. So grow your own reps. Pluck them from your ranks of junior professionals such as branch managers, credit analysts, marketing analysts, and perhaps, directly out of college.

Build a real program. A rep should be assigned a specific cluster of branches in an area that makes geographic sense. Each branch employee should be treated as a Center of Influence (COI) for that rep to source business. Each rep should develop a regimented calling program that includes internal bank customers, COI's, community outreach, and new relationship development. The Marketing Department should be tasked with assisting the rep along the way by mining data, developing mailing lists, coordinating educational events, etc. As the rep gets more experienced, he/she should expand internal COI's to include commercial lenders, who would tend to have leads to bigger fish with more sophisticated financial needs. As one senior lender once told me, "we're not going to refer our customers to some 25 year old that doesn't know squat and won't be here next year."

Customers are bank customers. Disintermediation was the dirty word that relegated bank investment sales to the bench. Better to let Charles Schwab take our customer money than to let an internal bank employee, right? Because that is what happened. And by the way, Charles Schwab has a $100 billion in assets bank. That's right, you read billion.

Another reason banks are reticent to move this LOB forward is because the business has traditionally been closely tied to the rep. If the rep leaves, then so go the customers. So build a program where multiple employees serve the customer and are part of a well-oiled system that exposes the customer to numerous employees.

Part of such a program should include Personal Financial Management (PFM) tools. I remain confounded why, in such a digital age, I must build my family's balance sheet annually in Excel. There are tools, and many banks have them, that essentially allow customers to view their entire financial picture on one platform... PFM. A successful retail investment sales program would set customers up, and train them, on using a PFM tool that allows them to view their entire financial picture. The more your customers use your PFM tool, the stickier they become to your institution.

Also, create an environment that is collegial and collaborative, making for an overall more pleasant experience for the rep as opposed to the "eat or be eaten" world of brokerage. Why would the right rep want to go to Acme Brokerage to cold call, do their own work, pay for their office, source their own leads, and have a sales manager shout expletives at him/her because he/she didn't meet their monthly production goal? But if they do choose that path, you have built the environment to make it very difficult for customers to want to leave your bank.

Build better reps. The days of graduating college and do no further learning are done. To be a licensed investment representative, you must minimally acquire your continuing education (CE) credits. That will not distinguish your reps from peers, because all must do it. There are professional certifications, such as Certified Financial Planner (CFP), that can distinguish your rep from others.

Sure, a rep can achieve the CFP certification and then bolt to a competitor. But you can protect yourself when making a large investment such as CFP by paying for it in the form of a forgivable loan. If the rep leaves before the forgivable period, then the amount expended immediately becomes a loan to that person.

And don't limit your rep development plan to financial matters. Money is very personal to people, and human skills are essential. Sometimes, the highest producing reps are so focused on driving revenue, they transform into a boiler-room broker. Remember, they are bankers. With that title comes trust, security, and integrity. Don't turn them into Gordon Gekko.

Getting back to profitability... it is reasonable to expect a retail investment sales program to generate $360,000 in revenue for every $1 billion in deposits. Further, based on our experience measuring profitability and the profitability of public retail brokerage firms, that this line of business could achieve pre-tax profit margins of 30%, dropping $108,000 in profits to your FI's bottom line. That is profit that requires little equity, and no balance sheet assets. Calculate that ROA or ROE!

What do you think is lacking in bank / credit union retail investment sales programs?

~ Jeff

Saturday, August 16, 2014

vBlog: Bankers... What's Your Criteria for Your CEO Search?

Bankers and Credit Union executives and Board members, be careful when limiting your choices for your next leaders. Because you might get what you asked for.

What traits and experience do you think equates to success?

~ Jeff

YouTube link in case you can't view on your device...

Wednesday, August 13, 2014

The Law of Large Numbers for Banks and Credit Unions

While a colleague and I sat patiently waiting for our flight, we were discussing an upcoming strategic planning session with a client. He asked what I thought were their chances of success. I thought their future was bright, but pointed to a couple of headwinds working against them. One of them was the law of large numbers.

The law of large numbers in banking requires ever more asset generation as the bank becomes larger to sustain growth. If a bank is publicly held and management tells their investors they shoot for 10% growth, the number gets harder to achieve as the bank grows larger.

This was true of our client, where I estimated they needed between $1.5 billion and $2.0 billion of new loan production to grow their balance sheet 10%. We have many clients that haven’t achieved that total loan size in their 100 year history.

Some banks have done it. One such bank that consistently stunned competitors and analysts with hefty growth was the former Commerce Bank of Cherry Hill, NJ. They did it through rapid branching, buying business in new markets particularly from municipalities, and their reputation (self-proclaimed) as America’s Most Convenient Bank. Their CEO was not as much concerned with top tier financial performance, quarter over quarter, so long as the bank was investing in the growth engine.

Many of us do not have that luxury. So how do we get 10% growth, or deliver double-digit total return to shareholders, as we get larger? Some do it through acquisition. Acquisition criteria gets looser as the bank gets larger and the need to “feed the beast” grows.

But could there be another way? It may be difficult because while the bank was growing, the CEO was touting the growth strategy to constituencies. So changing strategic course calls for strategic leadership.

As it gets more difficult to grow, and as potential acquisition targets decline, could it be time to turn this growth engine into a cash cow? It’s the natural evolution of business. If you’re management team is ideal for your current size and not much larger, and your markets are not yielding sufficient growth, why not maximize profits and reward shareholders, not in the form of robust capital appreciation, but in dividends? Mutuals and credit unions could reward depositors in the form of a special dividend. What a great benefit to bank with you!

The accompanying table shows banks that are growing slowly, yet have superior financial performance and a strong total return to shareholders, delivered in great part by a greater than 4% dividend yield.

Perhaps the bottom two are restrained more by their markets than the law of large numbers. I particularly wanted to throw in the sub $200 million in asset bank to show bankers that it can and is being done at this size. But I ask you, what is wrong with this strategy? If the answer relates to taxes, I’m not sure you’re getting my point.

And my point is this: staking your success to a growth strategy that your management team cannot deliver and your markets cannot support requires you to make acquisitions to deliver the total return demanded by your shareholders. Following this strategy will result in poorer acquisitions, diminished ability to manage a sprawling franchise, and ultimate erosion of franchise value.

Think Sovereign Bank. Do you want to join them?

What’s your number?

~ 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.

Saturday, August 02, 2014

Dear Mr./Ms. Bank Regulator

My firm will occasionally provide feedback on correspondence to our clients' regulators. Today we did just that. Our advice: don't come off as combative. Since hitting send on that e-mail, I reflected on how a half Italian, half Irish firebrand like myself became so melancholy. 

Truth is, I haven't. I thought about what we should have said to the regulator, versus the sweet words I was encouraging our client to use. I mentioned to him that we should keep two versions of the letter: one that we will send crafted to get our intended result, and one that says what we mean. Below is a sample letter to your regulator, saying it like you mean it.

August 2, 2014

Mr. John Whatshisname
Examiner In Charge
Bank Regulatory Body
1 Bureaucrat Way, NW
Washington, DC 20429

Mr. Whatshisname,

Below is our response to the Matters Requiring Attention ("MRA") that were included in your most recent examination report on Schmidlap National Bank ("Schmidlap"). 

Although our Tier 1 leverage ratio is greater than 10%, you criticized us for our stress scenarios contained in our capital plan. You opined they lacked analytic rigor. Aside from the clear lack of analytic rigor you exercised to come to this conclusion, it is important to remind you that estimating future negative events that impact our capital is guesswork. We like our guesses better than yours, and our spreadsheets are bigger than yours. So, no, we are not re-doing our capital plan.

Our level of investor commercial real estate is trending closer to your guidance levels. We get that. What you suggest we do is create greater diversity in our loan portfolio. We have a lot of small restaurants in our markets that can pledge pizza ovens as collateral. We are now training our lenders on pizza oven market valuations and setting a pizza oven loan to value limit in our loan policy. We will be dispatching lenders to pizza shops up and down our valley in the coming months. Mangia!

In the management section, you had two items for us: our succession plan and strategic risk. If I win the lottery, Frank will take my slot. If Frank gets hit by a beer truck, Jane is up to the task. If Mary goes buh-bye, Alex will step in. There's our succession plan. The Board is a little more difficult, because getting local luminaries to get paid twenty five grand a year to put up with your bullsh*t is difficult. We're working on it.

In terms of strategic risk by the recent new products and delivery channels we have added, we will need further definition from you on "strategic risk". When sending your clarifying statement, also send your resume containing the qualifications you possess to dictate product and delivery channel strategies. Also, please clarify the definitions contained within CAMELS, because we didn't think the S meant strategic. If our memory serves correctly, and the S does not stand for strategic, then we don't give a rats a** what you think about our products and delivery channels.

We recognize that there are so many laws and regulations that apply to banks that you can couch any criticism you have for us under some law, such as the Truth in Lending Act. It reminds me of high school geometry, when the teacher asked me to solve for a triangle, I would say "CPCT", knowing it could be so. So you can say, "I don't like this checking account... BSA/AML", and I would have to enlist regulatory attorneys to investigate the matter only to come to the conclusion that "you can't fight Uncle Sam".

That, Mr. Whatshisname, is the definition of tyranny. And Schmidlap is not gonna take it.

Warm Regards,
Schmidlap National Bank

Sunday, July 27, 2014

Guest Post: Second Quarter Economic Review by Dorothy Jaworski

Summer’s Here
We are all thankful that summer has arrived!  Heat and humidity!  And no one complains!  After the brutally cold and stormy winter, stuck in the perpetual polar vortex, no one dares to complain.

Our winter mood was brutally apparent in the GDP report that was released for the first quarter of 2014.
Actually the report comes out three times with a preliminary report, a revision, and a final report.  The Bureau of Economic Analysis, or “BEA,” a part of the Commerce Department provided their preliminary peak at 1Q GDP at the end of April.  GDP was reported at -.1%, they said.  Hey, great!  That winter wasn’t so bad after all…The second release at the end of May came in at -1.0%.  Wait!  That winter was bad.  Business just didn’t replenish inventories…Then came the shocking final report at the end of June showing -2.9%!  Wait!  The economy was so bad, the weather was so bad, consumers did not spend…

This is supposed to be an economic recovery.  In fact, it is now five years old.  And we get a terrible quarter like that?  What is going on here?  I will tell you that the change from -1.0% to -2.9% by the BEA was the largest downward revision since this GDP methodology was developed in 1976.  And do some math- if GDP grows at 3% (by some miracle) for the rest of 2014, GDP will average 1.5% for the year!  Plenty of excuses accompanied the final report, but I am not completely buying them.  I sum up the revisions by the BEA with a thought from Mike Flynn (06/30/14):  “If you torture economic statistics long enough, they will confess to anything.”

What’s Really Going On
I am still of the view that our economy will continue its growth path at 2% to 2.5%, well under its normal recovery speed and well below its potential.  Numerous regulations burdening all industries and higher capital requirements for the banking industry will weigh down growth.  Investors’ Business Daily has estimated the annual cost of regulation at $1.86 trillion.  Just think about that number as it relates to $17 trillion in annual GDP.  Consumer spending tanked in 1Q14, but should rebound in 2Q14.  Remember the spike in electricity prices in January and February?  That put consumers in a bad spending mood.  Gas prices began a slow climb in 1Q14 and the increases have not yet abated.  Gas prices have passed $3.70 per gallon and are up 12% year-to-date.  I’m outraged, aren’t you?

Having just read an article on Bloomberg that the US has now surpassed Saudi Arabia and Russia with average daily output of 11 million barrels of oil in 1Q14, I would have thought that the concepts of supply and demand were still alive.  Due to the fracking boom (extracting energy from shale rock by using high pressure liquid to split rocks and release oil or gas) has made the US competitive in the energy industry again and there is little impact to reduce our prices?  That leaves me outraged!  Will we approach our all time high gas prices of $4.11 per gallon from July, 2008 and $3.99 in May, 2011 soon?  At both of those times, consumers reached a tipping point where spending fell on most discretionary goods as a result.

Recent employment reports have been increasingly positive, showing the potential for GDP improvement. The June report showed that 288,000 jobs were created.  The unemployment rate fell to 6.1% in June from 7.5% one year earlier.  Many of the jobs being created are low paying ones or are part-time.  The proportion of part-time jobs to total jobs is now at 19% compared to 17% in 2008.  People dropping out of the labor force have certainly contributed to a falling unemployment rate; Those Not in the Labor Force rose again in June to a record 92.1 million.  The labor force participation rate is still at a 30 year low at 62.8%. These two statistics speak volumes- we are losing the productivity of a great number of persons, probably very experienced ones.

To know if interest rates will rise soon, or sooner than the market expects, my advice would be to watch the Yellen Dashboard on employment and pay attention to whether the measures are improving over pre-crisis ones.  The markets expect the first short term rate increase in mid-2015 and this is built into the futures markets.  The Fed has already indicated that they will be ending the QE program by the fall of 2014.  It is my view that the program initially worked, but in 2013, the Fed lost credibility with it and had to begin to unwind it.  And, as always, watch inflation, too.  It is still tame and at or below Fed targets.

The Economy
Yes, our economy is resilient, but five years into a recovery, growth of about 2% is well under our potential. Since the recovery began in June, 2009, real GDP has averaged +2.2%.  In the ten previous recessions, real GDP averaged +4.6%.  I do think we will continue to grow around 2%.  Hiring is up, albeit with lots of part-time jobs.  Average hourly earnings are up to $24.45, which is an increase of 2% in the past year. Consumer spending may not be much higher than 2% as borrowing to supplement spending is not as prevalent as it was before the 2008 crisis.  Technology is advancing and aiding productivity growth.  Stock markets are reaching new highs with the Dow Jones average at 17,000 and the S&P 500 approaching 2,000, with a PE ratio of 15.7 times.

We would love to grow exports but Europe and Asia’s economies are fairly weak.  I may have to personally go to Europe and investigate!  The European Central Bank, or “ECB,” just lowered rates again and this time tested negative interest rates, at -.10%, on bank reserve deposits.  Speaking of other parts of the world, the unrest and fighting in Iraq, Syria, Israel, and over in the Ukraine make for a very uncertain world indeed.  In the US, children and immigrants from South America are flooding through our borders in huge unmanageable numbers.  Uncertainty is often the enemy of economic growth.

As always, take heed of the roadblocks to higher growth (the Fed calls them headwinds) - high gas prices, regulatory burden, weak world economies, low income growth, uncertainty, and bad pothole repair!  Stay tuned!

Thanks for reading and Happy Summer!  DJ 07/09/14

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 First Federal of Bucks County since November, 2004. She is the author of Just Another Good Soldier, 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.

Monday, July 21, 2014

Will Bigger Lead to a More Efficient Bank?

A friendly competitor of ours, Anita Newcomb, spoke about strategic planning and economies of scale in banking at the recent Maryland Bankers Association annual convention. She led attendees through the increasing regulatory burden and the need for some level of scale to remain competitive.

This got me thinking, if Anita's premise is correct, that bigger is necessary to compete, then what is bigger? And what has changed since before the dawn of Dodd-Frank? So I went to the numbers. As I have often said, it always comes down to a spreadsheet.

I searched for all banks and thrifts that have existed since at least 2007. Any institution that had "NA" in their efficiency ratio for either 2007 or year to date (YTD) 2014 I eliminated. So the sample size was fairly large, nearly all financial institutions in existence today. I then parsed them into seven asset size categories, and compared their efficiency ratios in 2007 and today. The result is the below tables.

For both periods, the lowest efficiency ratios come from the $20B - $100B asset class. In 2007, this asset class had 60% of their members achieve an efficiency ratio lower than 55%. That number has shrunk from 60% to 30% YTD, a dramatic fall from glory. Yet the asset class retains the honor of the highest percent of banks that achieve the under 55% honor.

All asset classes suffered declines in the percent that have efficiency ratios lower than 55%. In 2007, however, you can see the steep dropoff in efficiency between the $500MM - $1B and the $1B - $5B classes. In 2014, the dropoff moved upstream to the larger banks, with 24% of the $5B - $10B banks achieving < 55%, and the $1B - $5B asset class only having 15% under 55%.

So, at least statistically, it appears as though it is becoming more difficult for banks with less than $5B in assets to achieve superior efficiency.  But it is difficult for everybody, not just the under $5B class.

One of my working theories regarding the "you must be bigger" argument was that the number of smaller institutions that achieve superior efficiency is shrinking. So the anecdotes about how this small bank or that small bank do it (achieve superior efficiency) are declining. But the anecdotes about all banks achieving superior efficiency are also in decline, according to the statistics.

Even though only 11% of banks with less than $500MM in assets achieve a sub 55% efficiency ratio, it still represents the greatest amount of banks that achieve the feat. So, if you are sitting around your Board table or in senior management meetings lamenting about rising costs relating to regulation and technology, perhaps instead of calling your investment banker, you should ask how the 11% of small financial institutions do it.

It's a legitimate question, right?

~ Jeff