Saturday, March 29, 2014

Bankers: Is your strategy the same as your competitor?

It is annual report season, meaning publicly traded financial institutions are finalizing their 2013 numbers and submitting their 10k's to the Securities and Exchange Commission (SEC). In preparation for meetings, I frequently read 10k's. If you haven't read a 10k, it will win no literary awards, especially for originality.

This was abundantly clear while I was reading a 10k and forgot the bank. Don't believe me? Give it a try. Two sections of the 10k I scroll to is the "Business" section and the "Business Strategy" section. This, one would think, would give me a feel of the bank's differentiation strategy, it's perceived competitive advantage, if you will. 

Well don't get too excited. More often than not these sections affirm my belief that most financial institutions follow a "me too" strategy. To exemplify, here are three Texas bank's "Business" and "Business Strategy" sections to their most recently filed 10k. I picked Texas because of their perceived independent streak. Independent? Read on...

T Bancshares, Inc. (OTCQB: TBNC)

"The Bank is a full-service commercial bank offering a broad range of commercial and consumer banking services to small- to medium-sized businesses, single-family residential and commercial contractors and consumers. Lending services include commercial loans to small to medium-sized businesses and professional concerns as well as consumers. The Bank offers a wide range of deposit services including demand deposits, regular savings accounts, money market accounts, individual retirement accounts, and certificates of deposit with fixed rates and a range of maturity options. The Bank also offers wealth management and trust services. These services are provided through a variety of delivery systems including automated teller machines, private banking, telephone banking and Internet banking.

We believe we can effectively compete as a community bank in our market area and the niche markets we serve. We focus our marketing efforts in three areas. We serve our local geographic market which is the Dallas - Fort Worth metropolitan area. We serve the dental and other health professional industries through a centralized loan and deposit platform that operates out of our main office in Dallas, Texas and serves clients in 30 states. Since the fourth quarter, 2012, we have expanded to serve the small business community by offering loans guaranteed by the Small Business Administration as well as the U.S. Department of Agriculture. We are registered in Colorado and Oregon as a lender and our employees maintain home offices in those states from which we originate and underwrite those loans. We anticipate that these loans will also be originated nationwide.

We offer a broad range of commercial and consumer banking services primarily to small to medium-sized businesses and their employees. Because our of technological capabilities, including worldwide free ATM withdrawals, sophisticated on-line banking capabilities, electronic funds transfer capabilities, and economical remote deposit solutions, we believe we can be the primary bank for most customers no matter where they are located. We believe that meeting the needs of our customers and making their banking experience more efficient leads to increased customer loyalty. In addition to our traditional banking services, we offer trust services to individuals and benefit plans.

We are able to utilize relatively low cost deposits provided by our trust activities to fund additional loan growth. The amount of deposits available to us while maintaining full FDIC insurance protection for our trust customers has consistently exceeded $30 million for the last three years. We anticipate the trust custodial deposits to be relatively low cost and comparable to the rate we pay non-trust customers on money market account balances.

The Bank’s goals are as follows:
sustain profitability;
maintain controlled growth by focusing on increasing our loan and deposit market share by providing personalized customer service;
closely manage yields on earning assets and rates on interest-bearing liabilities;
continue focusing on noninterest income opportunities including our trust business;
maintain our positive working relationship with our regulators;
control noninterest expenses; and,
maintain strong asset quality."

Texas Capital Bancshares, Inc. (Nasdaq: TCBI)

"We serve the needs of commercial businesses and successful professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national clientele of commercial borrowers. We are primarily a secured lender, with our greatest concentration of loans in Texas. We have benefitted from the Texas economy since our inception, producing strong loan growth and favorable loss experience amidst the challenging environment for banking nationally.

Drawing on the business and community ties of our management and their banking experience, our strategy is to continue building an independent bank that focuses primarily on middle market business customers and successful professionals and entrepreneurs in each of the five major metropolitan markets of Texas. To achieve this, we seek to implement the following strategies:

  •Targeting middle market business and successful professionals and entrepreneurs;
  •Growing our loan and deposit base in our existing markets by hiring additional experienced Texas bankers;
  •Continuing our emphasis on credit policy to maintain credit quality consistent with long-term objectives;
  •Leveraging our existing infrastructure to support a larger volume of business;
  •Maintaining stringent internal approval processes for capital and operating expenses;
  •Continuing our extensive use of outsourcing to provide cost-effective operational support with service levels consistent with large-bank operations; and
  •Extending our reach within our target markets of Austin, Dallas, Fort Worth, Houston and San Antonio through service innovation and service excellence."

Prosperity Bancshares, Inc. (NYSE: PB)

"Prosperity Bancshares, Inc.®, a Texas corporation (the “Company”), was formed in 1983 as a vehicle to acquire the former Allied Bank in Edna, Texas which was chartered in 1949 as The First National Bank of Edna and is now known as Prosperity Bank. The Company is a registered financial holding company that derives substantially all of its revenues and income from the operation of its bank subsidiary, Prosperity Bank® (“Prosperity Bank®” or the “Bank”). The Bank provides a wide array of financial products and services to small and medium-sized businesses and consumers. As of December 31, 2013, the Bank operated 238 full service banking locations; 63 in the Houston area, including The Woodlands; 26 in the South Texas area, including Corpus Christi and Victoria; 35 in the Dallas/Fort Worth area; 22 in the East Texas area; 36 in the Central Texas area, including Austin and San Antonio; 34 in the West Texas area, including Lubbock, Midland-Odessa and Abilene; 16 in the Bryan/College Station area and 6 in the Central Oklahoma area. The Company’s headquarters are located at Prosperity Bank Plaza, 4295 San Felipe in Houston, Texas and its telephone number is (713) 693-9300. The Company’s website address is

The Company’s market consists of the communities served by its banking centers. The diverse nature of the economies in each local market served by the Company provides the Company with a varied customer base and allows the Company to spread its lending risk throughout a number of different industries including professional service firms and their principals, manufacturing, tourism, recreation, petrochemicals, farming and ranching. The Company’s market areas outside of Houston, Dallas, Corpus Christi, San Antonio, Austin and Central Oklahoma are dominated by either small community banks or branches of large regional banks. Management believes that the Company, as one of the few mid-sized financial institutions that combines responsive community banking with the sophistication of a regional bank holding company, has a competitive advantage in its market areas and excellent growth opportunities through acquisitions, including acquisitions of failed financial institutions, new banking center locations and additional business development.

Operating under a community banking philosophy, the Company seeks to develop broad customer relationships based on service and convenience while maintaining its conservative approach to lending and sound asset quality. The Company has grown through a combination of internal growth, the acquisition of community banks and branches of banks and the opening of new banking centers. Utilizing a low cost of funds and employing stringent cost controls, the Company has been profitable in every year of its existence, including the periods of adverse economic conditions in Texas.

The Company’s main objective is to increase deposits and loans internally, as well as through additional expansion opportunities and acquisitions, while maintaining efficiency, individualized customer service and maximizing profitability. To achieve this objective, the Company has employed the following strategic goals:

Continue Community Banking Emphasis. The Company intends to continue operating as a community banking organization focused on meeting the specific needs of consumers and small and medium-sized businesses in its market areas. The Company provides a high degree of responsiveness combined with a wide variety of banking products and services. The Company staffs its banking centers with experienced bankers with lending expertise in the specific industries found in the given community, and gives them authority to make certain pricing and credit decisions, avoiding the bureaucratic structure of larger banks.

Expand Market Share Through Internal Growth and a Disciplined Acquisition Strategy. The Company intends to continue seeking opportunities, both inside and outside its existing markets, to expand either by acquiring existing banks or branches of banks, including FDIC assisted purchases, or by establishing new banking centers. All of the Company’s acquisitions have been accretive to earnings within 12 months after acquisition date and generally have supplied the Company with relatively low-cost deposits which have been used to fund the Company’s lending and investing activities. However, the Company makes no guarantee that future acquisitions, if any, will be accretive to earnings within any particular time period. Factors used by the Company to evaluate expansion opportunities include (i) the similarity in management and operating philosophies, (ii) whether the acquisition will be accretive to earnings and enhance shareholder value, (iii) the ability to improve the efficiency ratio through economies of scale, (iv) whether the acquisition will strategically expand the Company’s geographic footprint, and (v) the opportunity to enhance the Company’s market presence in existing market areas.

Increase Loan Volume and Diversify Loan Portfolio. While maintaining its conservative approach to lending, the Company has emphasized both new and existing loan products, focusing on managing its commercial real estate and commercial loan portfolios. The Company’s loan portfolio increased $2.60 billion during 2013 of which approximately $2.30 billion represents the remaining balance as of December 31, 2013 of three acquisitions completed during the year. During the one year period from December 31, 2012 to December 31, 2013, the Company’s commercial and industrial loans increased from $771.1 million to $1.28 billion, or 66.0%, and represented 14.9% and 16.5% of the total portfolio, respectively for the same period. Commercial real estate (including multifamily residential) increased from $1.99 billion to $2.75 billion, or 38.3%, and represented 38.5% and 35.2% of the total portfolio, as of December 31, 2012 and 2013, respectively. In addition, the Company targets professional service firms, including legal and medical practices, for both loans secured by owner-occupied premises and personal loans to their principals.

Maintain Sound Asset Quality. The Company continues to maintain the sound asset quality that has been representative of its historical loan portfolio. As the Company continues to diversify and increase its lending activities and acquire loans in acquisitions, it may face higher risks of nonpayment and increased risks in the event of continued economic downturns. The Company intends to continue to employ the strict underwriting guidelines and comprehensive loan review process that have contributed to its low incidence of nonperforming assets and its minimal charge-offs in relation to its size.

Continue Focus on Efficiency. The Company plans to maintain its stringent cost control practices and policies. The Company has invested significantly in the infrastructure required to centralize many of its critical operations, such as data processing and loan processing. For its banking centers, which the Company operates as independent profit centers, the Company supplies complete support in the areas of loan review, internal audit, compliance and training. Management believes that this centralized infrastructure can accommodate additional growth while enabling the Company to minimize operational costs through economies of scale."

To be fair, I was impressed with T Bancshares' niche (note it is by far the smallest of the three). But if you can cut and paste these sections into your 10k, replacing geographies and bank names with yours, do we really need your bank?

~ Jeff

Tuesday, March 25, 2014

Infographic: How Much Revenue Do Your Bank Branches Generate?

Much has been said about the challenge in making branches profitable. But what has been measured? The below graphic, taken from my employer's database of hundreds of branches, highlights how challenging it is to generate spread in our historically low interest rate environment. The stability of the trend signifies how long the Federal Reserve has kept interest rates low. As a point of reference, during the second quarter of 2006, Bank Peers had a Net Liability Spread of 2.33% and Fee Income of 0.60% for a total of 2.93%, and Thrift Peers had 2.07% and 0.27%, respectively, for a total of 2.34%. 

Multiply the below percentages by your branch size to estimate how much spread plus deposit fee income your branches generate. 

Net Liability Spread is calculated using co-terminous funds transfer pricing. Meaning that deposits receive a "credit" for a market instrument, such as a Federal Home Loan Bank borrowing, of similar duration to the deposit base. Fee income is actual income stated as a percent of average deposits.

Saturday, March 15, 2014

Bankers Tell Me Their Top Industry Game Changers

This week I did my annual tour of the West, teaching Bank Profitability in the Executive Development Program for the Washington, Oregon, and Utah Bankers' Associations. As part of the day-long curriculum, we discuss industry trends. And since I have dozens of next generation leaders in the class, I ask them, what is the next game-changing trend in our industry?

I make them write down the answer prior to going around the room seeking insights so we avoid group think. Their responses, however, were surprisingly cohesive. They were:

1.  Consumer Preferences: The pace that bank customers were adopting new delivery channels and non-traditional financial intermediaries was both concerning and exciting to the students. Banking is not known for being on the cutting edge. And if I had a classroom full of "existing executives" instead of "future executives", my guess is I would not hear this as a game changer. So to hear young talent say they are nervous and excited about it was music to my ears.

2.  Technology Delivery Channels: This goes hand-in-glove with Consumer Preferences, because consumers continue to choose to bank via their device, whatever that device may be. But there was a recognition that customers that tend to carry higher balances continue to demand a nearby branch. And as bankers we know that balances generate most of our revenues. So the transition period, and how we execute on it, are critical to our individual banks' success.

3.  Regulations: Here is where I think future and existing executives would agree. Because I hear this from existing executives all of the time. Look at how regulators impact mortgage financing. They have turned what could be a simple loan with low switching costs into something incredibly complex, with high switching costs, and an invitation for nefarious characters to participate in the business. History is rife with good intentions gone bad. But our regulatory scheme is so wrapped up in their bureaucracy that they are not smart enough or care enough to recognize it. And it will impact our banks and our customers far into the future.

4.  Loss of the Payment System: Here is a crutch that we used to keep customers in the banking system. But disruptors such as Square, pre-loaded cards, and possibly Bitcoin is making it less critical to have a banking account. Could our industry afford to have a greater percentage of our population outside of the banking system?

5.  Societal Mores: This was an interesting observation. Students were concerned about the demonization of financial institutions for collecting on loans when customers stopped making their payments. We reminisced about the days that if our parents or grandparents took a loan (if they took a loan), promising to pay it back, they paid it back unless there was no more blood in the stone. Today, bankruptcy is a business decision. As one banker once told me, "when did bankruptcy stop being embarrassing?". Indeed, when did it?

Special thanks to the talented bankers in Washington, Oregon, and Utah. When I am most cynical about the future of our industry, I think of the faces that were in front of me that will lead us forward.

What do you think are industry game changing trends?

~ Jeff

Saturday, March 08, 2014

Guest Post: Three Commercial Credit Analysis Best Practices by Chuck Nwokocha

As financial institutions’ commercial credit portfolios have expanded in recent quarters, regulators have increasingly warned against growing so quickly that risk management standards and processes fall behind.

Indeed, credit risk is expected to remain a top examiner focus in the coming months, given the low-yield environment and pressure on financial institutions.

Given the attention to commercial lending and related risks, financial institutions should consider three best practices for commercial credit analysis, which is the foundation of managing commercial credit risk:

1. Develop a thorough understanding of the borrower or counterparty.

2. Establish and monitor credit concentrations at a micro and macro level.

3. Ensure adequate documentation is obtained for ongoing credit-risk monitoring.

These best practices relate to recurring problems in credit-risk management that supervisors have called out as the direct or indirect cause of most major banking problems. “Severe credit losses in a banking system usually reflect simultaneous problems in several areas, such as concentrations, failures of due diligence and inadequate monitoring,” according to The Basel Committee on Banking Supervision’s “Principles for the Management of Credit Risk.” 

Develop a thorough understanding of the borrower or counterparty.

A key part of analyzing a credit application is having enough information to understand the borrower or counterparty thoroughly. Many banks, however, find this task complicated by time constraints and the financial interdependence of a business owner and the business: personal assets are often pledged against the debt of the business, and business and guarantor financial assets are typically intermingled. A thorough understanding of the borrower’s financial condition requires a careful review of income statement and balance sheet information for both the guarantor and the business. For this reason, it is important for credit and lending departments to have standards for when and how to conduct a global cash flow analysis.

Reviewing a borrower’s industry and the borrower’s financial performance relative to industry peers can also help develop a thorough understanding of the applicant. Industry benchmarking provides a more accurate picture of trends and related risks in a particular industry, and the peer comparisons add context to reviews of the borrower’s financial statements and forecasts.

Establish and monitor credit concentrations at a micro and macro level.

Banks of all sizes are being asked by regulators to evaluate their loan portfolios under various potential scenarios in order to anticipate and plan for adverse situations that might otherwise put the institution at risk. But even earlier in the lending process, banks and credit unions can manage credit risk by establishing and monitoring credit concentrations. Credit limits at both the individual borrower level and the industry level can help to contain exposure. A common source of major credit problems, according to the Basel Committee’s guide on credit risk, is when “banks identify ‘hot’ and rapidly growing industries and use overly optimistic assumptions about an industry’s future prospects, especially asset appreciation and the potential to earn above-average fees and/or spreads.”

Establishing and monitoring credit concentrations can help the bank or credit union take risk-mitigating steps, such as closely monitoring industry data, pricing for the added risk or using loan participations to reduce exposure to a particular sector.

Ensure adequate documentation is obtained for ongoing credit-risk monitoring.

A recurring problem among troubled banks has been the failure of banks and credit unions to monitor borrowers or collateral values, and often, this issue stems from failing to obtain periodic financial statement information or real estate appraisals during the credit analysis process. A financial institution can hardly evaluate the quality of its loan portfolio or the adequacy of its collateral or allowance for loan losses and reserves without accurate, timely information on areas appraisals and financial statements. Strong credit policies will outline the information and documents needed for loan approvals, for changing terms of previously approved loans and for renewing credit. But it’s important to put those policies into practice and to develop ways to track exceptions and to monitor updated documentation requirements.

Chuck Nwokocha leads the Advisory and Bank Consulting team at Sageworks, focusing in Credit Analysis, Risk Rating, Stress Testing, and Allowance for Loan and Lease Losses (ALLL). Chuck is a graduate of Harvard University, with a B.A. in Psychology with a focus in Organizations and Economics.

Monday, March 03, 2014

Banker Quotes: As Told to Me v7

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 about 10% of their tweet stream, and so many of my blog readers do not follow Twitter, below are selected quotes that I tweeted since version 6.

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 CEO: There was a time when everyone got a 3% raise no matter how well they did. I call them the union years.

It's difficult to motivate our people if we reward the average to below-average the same way as top performers. I also don't see a material difference between a 3% and a 4% raise. Do you?

2. Bank Director: Sales complaining about infrastructure is crap. Sales people have the tools. They don't have the disposition.

Sometimes reasons for not meeting expectations are excuses. Wisdom is knowing the difference between an obstacle and an excuse.

3. Bank CEO: If you throw a number out to our Board they'll swarm to it like piranha!

This is one reason why strategic plan projections look less like stretch goals and more like budgets. But if the bank places a present value on their strategic plan projections, should they be afraid of the answer?

4. Bank CFO to me: I believe the 30-year mortgage is unhedgeable.

What has the Federal Government done to the residential mortgage loan? They turned it into something imminently more complex than it needs to be from the borrowers perspective. And very difficult for bankers to put on their books. Without Uncle Sam's interference, I think a five-year, 30-year amortizing loan would be the norm, and everyone would understand it, and the cost to lend and therefore the cost to the borrower would be much lower.

5. Credit Union CEO: We're starting to rethink the centralized call center approach.

One reason often cited by customers for using branches is to solve problems. But phone calls to banks/ credit unions typically go to a centralized call center while branch lobbies are empty, denying the branch person of a sales opportunity.

6. Bank Exec: Any FI has access to their customer data. The real successful ones know how to analyze it and act on it.

Just be able to identify single service customers, have alerts for customer events such as large deposits (other than for compliance reasons), run queries for all customers by product type by Zip code... you know, common sense stuff that helps go-getters go and get.

7. Bank Exec to me: We talk to a lot of other bankers and nobody seems happy with their core processor.

How much of the market does Fiserv, FIS, and Jack Henry own?

8. Bank director to me: Advertising sells the first car, service sells the rest.

Guess what industry this director hails from?

9. Bank CFO: The FDIC is on a rising rate binge.

Examiners tend to have a theme when they come for their regular exam. This time around, the theme appears to be interest rate risk.

10. Bank CEO: We can't control who comes in our branches.

Then may I suggest downsizing branches, eliminating Marketing expense, and removing business development activities from job descriptions?

11. Me to bank retail head: Why bank with you? What is your value proposition? Banker: Stability.

That's the first time I heard this as a differentiator. But I believe it can be, especially if the bank across the street changed signs several times over the last decade, or there has been a high profile local bank failure.

12. Bank CEO on his future strategy: A few locations and tons of digital.

If your bank has few locations, embarking on an aggressive branching strategy doesn't seem to make sense, given rapidly changing customer delivery channel preferences.

13. Bank Director: We have to be careful cutting staff in branches, because with the lack of customers the branch might look too empty.

I can't make this stuff up.

14. Bank CEO: Jeff, I'm hoping for a boring banking environment before I retire.

To which my daughter, @shannonmarsico tweeted back to me: I thought boring banking environment was a given.

What are bankers telling you?

~ Jeff