Tuesday, December 29, 2015

SIFI Bank Ticked Me Off and What Are You Going To Do About It Mr./Ms. Community Banker?

There are many professions where incentive compensation is a big part of overall compensation. My profession is one of them. So I have occasionally been the grateful recipient of an incentive paycheck. An actual check. Yesterday was such a day, and I dutifully went to my bank to deposit it.

There was a teller line. When my turn arrived, I made my deposit. The teller, likely prompted by her terminal with an anti-money laundering inquiry, awkwardly asked if I was expecting the check. Being an industry consultant, I expected such a question. If I was not in the industry, I may have found it intrusive.

The teller was very nice. She informed me that there likely would be a hold on the funds for a short amount of time. I also knew this to be the case, as the bank waited for the funds to clear. I told her I expected the hold. She wasn't sure of the hold time, and said it would be on the receipt. Bank policy, baked into their teller system. When it printed, she informed me the funds would be available 13 days from today. Thirteen days. Let that sink in a bit.

The smile left my face. She knew it, and apologized, saying it was bank policy. I said that the bank would have collected those funds way before 13 days. This was a futile conversation to have with the teller. So we exchanged pleasantries and I left the branch. 

In my car, I began to think of the money I would have to move to compensate for this inconvenience. I had year-end tax planning, charitable contributions, and an upcoming holiday trip to fund. Then the nerve was struck.

Those that know me, know I have a long fuse. And for SIFI Bank (Systemically "Important" Financial Institution), the fuse expired. Why was I making accommodations to account for money that SIFI Bank would soon have, but would not let me have? IT'S MY $#*%!^@$! MONEY!

I marched back in and asked to speak with the manager, who seemed a little nervous because the teller informed her why I was there. The manager explained to me that sometimes these checks bounce. Anger level, up a notch. 

I have an idea how long it takes SIFI to collect those funds. The check was either imaged immediately at the teller station or would be imaged a little later in the day in the branch. The courier no longer picks up the check, takes it to a central location that takes it to the Fed for clearing, later to be sent to the introducing bank for remittance to SIFI. The image goes out that night, and the funds are plunked at SIFI immediately or the next day. 

The typical bank customer would not know the details of check clearing and might accept the branch manager's answer. Unfortunately for her, I knew the money would be at SIFI in one or two days. A business model based on the ignorance of your customers should not be sustainable!

I can imagine the SIFI meeting in the treasurer's office on the 14th floor in [Insert City Name Here, but far from my hometown]. Treasurer: What's our float on hold funds? Assistant: $22 billion today, and it has been steady the past month. Treasurer: Great! Let's put that money to use so we can help make our budget! Special thanks to the Compliance folks on the 12th floor for this little gift of long-term holds! (Note to SIFI: This is a hypothetical discussion typed in jest. Do not alert the attorney's on the 8th floor. Thank you.)

All because, what, Compliance determined that there might be a regulatory risk on large check deposits after the money was collected? Customers might be funding El Chapo's getaway!? But in terms of using hold funds to juice earnings... it hasn't worked well for this SIFI because their 10-year compound annual growth rate for earnings and dividends per share was -1.6% and -4.4% respectively. Those are negative numbers, folks. But it could be enough to earn the CEO Banker of the Year!

These rules that are hatched by bureaucrats and implemented over large geographies are the very reason community banks should be beating the crap out of my bank and other SIFI banks. The hold period was on the teller receipt! I doubt there is anybody in Pennsylvania, where my branch is located, that weighed in on that decision.

A community bank COO once told me that he left a large bank because he began to feel like he was being asked to do things to his customers instead of for them. Today folks, I felt like SIFI Bank did something to me.

But alas. Community banks continue to be market-share challenged against my and other SIFIs. Why?

Seriously. Why?

~ Jeff

Note: Lest you wonder why a community financial institution consultant banks with a SIFI bank... It wasn't my choice. My community bank was acquired by it. But once the dust settles, it will be my choice! And folks, it is now six days (three business days) past when I made the deposit and the funds are not yet available to me and the branch manager that promised to look into it has not called.

Saturday, December 19, 2015

Banking's Total Return Top 5: 2015 Edition

For the past four years I searched for the Top 5 financial institutions in five-year total return to shareholders because I grew weary of the persistent "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 four 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. I chose five years because banks that focus on year over year returns tend to cut strategic investments come budget time, which hurts their market position, earnings power, and future relevance than those that make those investments.

Total return includes two components: 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. I also filtered for anomalies that result from recent mutual-to-stock conversions and penny stocks. 

Before we begin and for comparison purposes, here are last year's top five, as measured in December, 2014:

#1.  Open Bank (OTCQB: OPBK)
#2.  BofI Holdings, Inc. (Nasdaq: BOFI)
#4.  Western Alliance Bancorporation (NYSE: WAL)
#5.  Mercantile Bank Corporation (Nasdaq: MBWM)

This year's list is in the table below:

BNCCORP celebrates its second straight year on this august list. Congratulations to them. A summary of the banks, their stories, and links to their website are below. 

#1. Independent Bank Corporation (Nasdaq: IBCP)

Independent Bank dates back to 1864 as the First National Bank of Iona. It's size today, at $2.4 billion in assets, is smaller than it was a decade ago. You might be able to see where this story is going. The bank was hammered with credit problems during the financial crisis, as Michigan's economy was hit pretty hard. Between 2008-11, the bank lost over $200 million, and its equity base was cut in half. But management went to work. Selling branches, shrinking the balance sheet, raising equity, and working out bad loans.  At the height of its problems in 2011 over 9% of its assets were bad loans. Today that number is cut in half, and the equity has more than doubled. Those investors that jumped onboard at the end of 2010 were well rewarded. Their total return was greater than 1,000%. You read it right.

#2. Fentura Financial, Inc. (OTCQX: FETM)

In 2006, Fentura Financial, the holding company for the creatively named State Bank, had over $620 million in total assets, $51 million in total equity, an 0.85% ROA, and a book value per share of $24.08. Then the financial crisis hit. And yes, another Michigan bank. By 2011, total assets were cut in half, total equity was $14.7 million and book value per share was $6.27 after amassing $36.5 million of red ink 2007-11. Since those dire times, the bank has picked itself up, growing assets to $434 million and total equity to $30.8 million. Their year-to-date ROA was 0.95% and ROE was 13.3%. Not bad for a bank that was circling the toilet bowl. Investors that got in the stock at the end of 2010 were rewarded with an 862% total return. What a ride!


BNCCORP, Inc., through its subsidiary BNC National Bank, offers community banking and wealth management services in Arizona, Minnesota, and North Dakota from 16 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 $20.09... a significant recovery and turnaround story that landed BNC in our top 5 for the second straight year.

#4. Carolina Bank Holdings, Inc. (Nasdaq: CLBH)

Carolina Bank opened its doors in 1996 under the name Carolina Savings Bank. With nearly $690 million in total assets and eight branches, it is led by the same person since its founding, Bob Braswell. Like the other banks in the Top 5, Carolina took a little on the chin during the financial crisis, suffering small to moderate losses in 2009-10. But these were minor setbacks compared to others, and their financial performance is better than ever, recording a year-to-date ROA of 0.92% and ROE of 10.72%. Not bad for a bank that is less than $1 billion in assets. Citigroup, by comparison, had a 0.77% ROA and a 6.63% ROE for the same period. And they have $1.8 trillion in total assets. Trillion with a "T".

#5. Coastal Banking Company, Inc. (OTCQX: CBCO)

Coastal is the $439 million in assets holding company of CBC National Bank, headquartered in Fernandina Beach, Florida. Which is interesting because Coastal is headquartered in Beaufort, South Carolina. But I digress. The Company's residential mortgage division, headquartered in Atlanta, has lending offices in Arizona, Florida, Georgia, Maryland, Michigan, Indiana, Illinois and Ohio. If I haven't confused you enough, they have an SBA division that originates loans in the Jacksonville, Ft. Myers, Tampa, and Vero Beach Florida markets, as well as Greensboro, NC and Beaufort. This crew gets around. Since mortgages were a great business to be in during the financial crisis *insert sarcasm*, they too suffered meaningful losses. But to get on the jfb Top 5, you have to execute a near perfect recovery. It looks like Coastal did so, and now sports a 1.18% ROA and a 14.83% ROE, delivering a 410% five-year total return to their shareholders. Well done!

Here's how total return looks for you chart geeks, with the lower red, and flat line being the S&P 500 Bank Index.

There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $2.4 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, as in last year, is recovery, with the possible exception of Carolina Bank, which held up well during the recession. 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.

Saturday, December 12, 2015

Where are The FinTech Darlings Now?

FinTech, FinTech, FinTech! That's all I'm hearing. We must be moments away from downloading a gamified banking app via our Google Glass, paying in Bitcoins using Apple Pay!

It's like global warming. We all know there is something to it.  But look back five years to see what the doomsayers were predicting and you'll have a healthy dose of skepticism about their predictions today.

And so I'm skeptical of the FinTech'ers. You know who you are. A banker told me yesterday that if I wanted headlines in American Banker, put FinTech in my copy. So far I'm up to five mentions. And I've used gamified, Google Glass (so passe), Apple Pay, and the piece de resistance, Bitcoin. Perhaps I should have mentioned blockchain. There. I did it.

Bank examiner focus moves in waves. Aside from interest rate risk, vendor management is high on the list. If a bank deems a vendor critical to its operation, it must analyze the vendor's financial statements to be confident in its viability. Firms started in the dorm room that have no employees, just an eager volunteer, no revenue, and no capital need not apply. There are frictions to having access to peoples' money in the United States. And I suspect elsewhere. So FinTech (six) firms need capital and revenues to grab a foothold in the financial services market. 

If looking for a FinTech (seven) partner, follow your vendor management procedures. Will this firm be around in five years? Legit question.

So I went to the Finovate 2010 Best of Show to see where these firms are now. I thought you would be interested.

Robo Advisors are another buzzword. For SEO, I'm killing it with this post. But among robo advisors, Betterment is emerging as the top FinTech (eight) startup, having opened it's virtual doors in 2008. With more than $3 billion in assets under management (AUM), it recently surpassed rival Wealthfront. But hold on, a recent article on Betterment's accomplishment mentions at the end that traditional fund company Vanguard's hybrid robo advisor offering, Personal Advisor Services, has over $17 billion in AUM.

Fear not Betterment! Analysts are predicting the robo advising market will grow to $489 billion by 2020. That's a pretty specific number, isn't it? Analysts must be clairvoyant.


BillShrink originally launched as a cost-cutting engine for consumers. It helped users save money across verticals including cell phones, credit cards, cable bills, and savings accounts. It later pivoted into the personalized offers and loyalty rewards space, renaming itself Truaxis.

Two years after being lauded as Finovate's best of show, it sold itself to MasterCard in 2012. Can't blame the FinTech'ers (nine) for wanting to make a buck.


I can only quote from their website:

"Bundle was founded in 2009 with the mission to help people make more informed choices with their money through data insight. In the subsequent three years, we created a collection of content and tools that reached millions of people.

'We were excited in late 2012 to join Capital One, a company with a shared passion for changing the world through data. Through that partnership we are now able to scale our vision and impact millions more people. Bundle's team seeded the NYC office of Capital One Labs, and we have been busy over the past year creating new data products to help Capital One customers.

'We have decided to retire Bundle.com to shift our full attention to Capital One initiatives in service of our mission to Change Banking For Good. Thank you to all of our users over these years who helped to make our community and products a success."

What I read: We sold to a bank.

Dynamics is a Pittsburgh firm founded in 2007 established to solve point of sale (POS) software fragmentation between credit and debit. They establish the "Chip & Choice", a battery powered card that has multiple EMV chips. Users can press the appropriate button on the card so the POS reader processes the transaction according to user choice.

Based on recent press, it looks like Dynamics is morphing into a card fraud protection company, expanding its computer in a card tech to protect us from card scammers. It received $70 million in capital a year ago. Not sure if their technology is out there and they're earning their keep, but they have a lot of money to burn.


oFlows was started in 2009, named Finovate best of show in 2010, launched its product in 2011, and sold to Andera that same year. That's quite a run. The CEO got a plum job at Andera, Chief Product Officer. Andera sold to Bottomline in 2014. Lots of business cards.

oFlows designed a paperless mobile platform customizable to run the bank/company rules, make offers, fill out forms, get them signed, and manage all supporting documentation such as disclosures. It used iPads, Android tablets, and smartphones as its platform.

PayNearMe is a technology that allows underbanked, low income, or those that don't trust banks, to pay their bills in cash at convenient locations like 7-Eleven stores. It recently partnered with nonprofit microlender Grameen America to let its borrowers repay their debts in cash at 7,800 7-Eleven stores nationwide.  Near me, users of Philly's bike share program can also pay in cash at 7-Elevens and Family Dollar Stores.

According to the PayNearMe website, 28% of US households use alternative financial services, including remote cash payments. We intuitively know that there is a large and growing cohort of US households that don't trust financial institutions. PayNearMe focuses on serving these underbanked households.  

SecureKey's mission is to build highly scalable, trusted identity networks that enable organizations to quickly and easily deliver high-value online secure services to millions of consumers.

The Toronto-based company allows Americans and Canadians to use their existing banking credentials to access government websites, which are typically used less frequently. The company also supplies the technology for the US governments connect.gov project. In February, the company announced another equity round of $19 million. 

There's the "where are they now" look at Finovate's 2010 Best of Show winners. Some are doing well, others cashed in their chips. 

My point, and I do have one, is to not partake in the hubris that seems to be greeting every FinTech (ten) startup that issues a press release. Focus your tech investments and partnerships on where you perceive your customers are going. Because following the FinTech (eleven!) crowd's newest darling can cost you time, money, and your independence.

If you want something that lasts, let me suggest the Army-Navy football rivalry, which started on November 9, 1890. I didn't transpose the numbers in the year. What does this have to do with FinTech? Nothing. But the game is about to start!!

Go Navy! Beat Army!

~ Jeff

Tuesday, December 01, 2015

How About Profits in the Branch of the Future?

“[Sample] Bank has reinvented banking with the opening of the [Branch of the Future]. To experience the future of banking today, simply step across the threshold.” So went the 2012 press release announcing the opening of the next generation of the bank branch.

At June 30, 2014, that branch had $23 million in total deposits, down $1 million from one year ago. The branch of the future concept was not enough to inspire customers to open accounts in droves while sipping coffee and surfing the net.

Branch demand and utilization by customers is changing rapidly, and there is no shortage of opinions on the look and feel of the branch of the future. I recently read an article about Poland’s mBank that is designing kiosk and light branches to complement their traditional branch network (see photo). 

The smaller branch concept gets significant play in professional publications. But let’s not forget that we have past experiences with a “light branch”; namely the declining in-store branches. These branches were notorious for being low-balance transaction-oriented branches that did not enjoy great success.

From first-hand experience training in an in-store branch, I found it difficult to attract higher balance and small business customers, significant contributors to branch balances and therefore profits. This highlights an important banking concept: revenues are mostly driven off of balances, not activity. 

mBank’s light branch depicted above is located in a mall. Malls are experiencing difficulty in the United States, as millennials opt for smaller, urban environments to shop. And the rest of us are increasingly buying online. So putting a light branch in a mall that is being vacated by Macy’s may not be a winning strategy if your bank’s objective is to increase visibility through strategically located, yet smaller branches. 

All talk of visibility and foot traffic aside, the measure of branch success should be profits. In the chart below, derived from The Kafafian Group’s (TKG) peer database of hundreds of community bank branches, we see that the revenue generated from deposit spreads, asset spreads (typically consumer loans), and fees (typically deposit fees) as a percent of branch deposits averaged 2.08% for commercial banks and 1.88% for thrifts during 2014. This is down from 4.17% for banks and 2.51% for thrifts in 2006. So if your “light branch” has $23 million in average deposits, as our “branch of the future” example above does, then it generates $478,400 in annual revenue, on average. Not very inspiring. 

Since 2006, community banks have recognized the need for greater balances in branches to improve profitability. See the next chart for average branch deposit size trend from the TKG database. Interestingly, the average branch deposit size for thrifts declined. This phenomenon is largely attributable to the 2008 recession and the ensuing drop in loan demand which allowed thrifts to run off their high rate CDs. But since that drop-off, the increase in average branch deposits can be attributed to: 1) deposit growth without the commensurate growth in branches, and 2) pruning branch networks without significant deposit attrition.
Branch deposit growth combined with reviews of transaction activity to reduce branch personnel has buttressed the decline in deposit spreads and fees, and branch profitability. But not to the point of the profits enjoyed by branches in 2006, which was approximately 2.73%, compared to 0.86% in 2014. These pre-tax profit ratios are a percent of average branch deposits, and excludes indirect branch operating expense such as Deposit Operations and IT, and overhead such as Executive and Finance. Not only are branches not supporting the army of support aligned behind them, they are barely supporting themselves. 

I have written and spoken about accountability for branch profitability. Accountability gets a bad wrap. It can convey pressure, discipline, and failure. Applied correctly, accountability could promote focused effort, rewards (financial and non-financial), and triumph. 

Imagine holding branch managers accountable for increasing deposit and loan spreads, and generating direct pre-tax profits. Those that rank as top tier performers receive meaningful incentive compensation and recognition. Branch administrators charged with the profitability of the branch network won’t fear pulling the plug on profit laggards, because they are dragging down the profits of the whole. Who cares if a director drives by the unprofitable branch every day? 

Branch of the future discussions would focus less on design and “gut” feel, and more on profit potential and profit drivers such as demographics, visibility, personnel, deposit growth, the experiences of other profitable branches in your network, and how this aligns with bank strategy. Not how many Keurig cups were consumed last month. 

It is possible to view branch profitability in market clusters, if the cohesiveness of a community spans multiple towns. One branch may be a laggard, but its presence is critical to the success of the whole. 

It is also possible to build large branches that are successful. If a large, marquis-like branch costs $700,000 per year to run, yet has $80 million in deposits with our aforementioned revenues as a percent of deposits of 2.08%, isn’t it better than our branch of the future mentioned above that has $23 million? 

Using profitability as your measuring stick likely will eliminate rationalization to keep underperforming branches open. I hear arguments about poor performing branches being critical to a market area. To which I would ask the logical question, “what market area”? Let’s compare to other market area profits. Does the rationalization hold water? 

Constant evaluation of branching, a little growth here, a little pruning there, will be essential to effective deployment of your bank’s limited resources available to remain relevant. To keep your best performing branches and to motivate your best performing people, branch profitability can be an effective tool to make the right decisions in our rapidly changing industry.

~ Jeff

Note: The above article first appeared in the March-April 2015 edition of paBanker Magazine, a publication of the Pennsylvania Bankers Association.

Saturday, November 21, 2015

Bankers: Five Ideas to Create a Learning Organization

To get into the holiday spirit, I recently read a short story by William John Locke titled The Story of Three Wise Men. A story of three academics drawn to a country cabin where they delivered a baby to a dying woman. In the book, the author wrote the wise men "had grown old in unhappy and profitless wisdom". In other words, their experiments and theories benefited nobody, as they were all recluses.

I witness lots of wisdom when I interact with bankers. And I wonder, how do we avoid it being "profitless wisdom"?

My answer: create a learning organization. Here are 5 ideas on how to do so.

1. Hire for attitude, reward for effort and results.

So often we look for those with experience. Be careful what we ask for. Because with experience comes entrenched ideas, old habits, and know-it-all ism. There are benefits to experience, as the new employee will be productive quicker. But they are bringing their past culture with them. Instead, consider hiring someone eager and hungry to learn. Someone that is positive and others like to work next to. Someone that will be a builder of your learning culture, not a breaker. 

2. Have a baseline training curriculum.

Do you have a training curriculum by functional position that gives employees the tools to succeed? Based on my experience, I doubt it. You probably have compliance and operations training, because it's required by regulators and needed for employees to function. But do you match the rest of your training, if there is a rest, to your strategy and the job description? Training should start with an orientation program that shows employees the culture you are creating, how to function within it and nurture it, and what your bank's "way" is... i.e. how to answer phones, interact with employees, solve problems, etc. Beyond orientation, do you enroll budding credit analysts in Credit Admin school? Do you use a "test bank" to build a disciplined OJT program so your employees can be proficient at getting things done? 

3. Teach supervisors to supervise.

Banking is a hot-bed for the Peter Principle, advancing good performing employees into positions where they are not equipped to succeed. Does a great wire clerk make for a top notch Deposit Operations supervisor? Supervision and leadership skills to maximize employee performance and job satisfaction are learned skills. So teach them how to coach, reward, discipline, evaluate, and teach. Poor management and supervision is the greatest hurdle to building a learning organization.

4. Allow mistakes.

The amount of effort I have witnessed to avoid audit findings, regulator scrutiny, or supervisor retribution is monumental. Not that I mind this because bankers hire my firm to look at the resulting onerous processes to ask "why are you doing that?".  This no mistakes culture kills experimentation that can lead to significant improvements in how we get things done. An organization that treats mistakes as a lesson learned rather than an opportunity to write someone up is well on its way to becoming a learning organization.

5. Pass on the knowledge.

What good is the wisdom garnered from years of experience if it remains trapped within the mind of the experienced? Create a process to pass on knowledge. For example, perhaps the wire transfer clerk questions a cumbersome process to identity check a customer. The learning organization supervisor encourages employees to identify and solve for cumbersome processes, so the clerk interfaces with the wire transfer software firm to discuss alternatives. She makes a recommendation that looks favorable to the supervisor and compliance. Boom! The bank implements it, and the clerk drafts a "Knowledge Bomb" memo to her co-workers that changed the process for the better. The supervisor publicly acknowledges the accomplishment, and notifies the bank CEO about the clerk's initiative. The CEO publicly acknowledges the clerk in the company newsletter. Per the "allow mistakes" above, if regulators review the process next exam cycle and don't like it, make a modification that works for them and is efficient. But don't use the criticism as an opportunity to embarrass the clerk that designed the process. It would be a lesson learned.

What other ideas do you have for creating a learning organization?

~ Jeff

Further reading:

Harvard Business Review: Building a Learning Organization (1993)

Lynda.com: Create a Culture of Learning in 6 Steps

Saturday, November 07, 2015

The Niche Bank

Me to a community banker: Why don't you offer more options than real estate secured lending to help fund early stage businesses? Banker: Because that's not community banking.

I've been in this business over 20 years and still don't know the definition of community banking.

What I hear most often is that community banks take deposits from people and businesses in their community and lend it to people and businesses in that same community. This formula seems to espouse being able to at least adequately serve most banking needs in a particular geography. In other words, be a General Bank.

I've got news for you. If General Bank is what we are offering, then we don't need 6,000 of us roaming the countryside. Sure, when physical locations in every town was critical to be the community bank within that town, and state and federal laws limited branching and therefore competition, then we could make a go of it with the 15,000 banks and thrifts we had in 1990.

Since this is no longer the case, we have to rethink the General Bank business model. The decline from 15,000 to 6,000 tells me we haven't come up with an answer to "why bank with us?".

In comes the niche bank, that tends to have the answer for a particular segment.

I teach at the Utah Bankers' Association Executive Development Program. You want niche banks, go to Salt Lake City.

One such bank is EnerBank USA, owned by Michigan utility CMS Energy. This bank has been in the news recently, as its CEO, Louise Kelly, was featured in American Banker's recent 25 Most Powerful Women in Finance issue. Interestingly, Kelly started what would end up being EnerBank at Baltimore's First National Bank of Maryland (now M&T Bank), a former employer of mine in the mid 1990's. First National divested the unit because it didn't fit their definition of "community banking". Ironically, First National also divested my unit (Hopper Soliday & Co.), which is the pre-cursor to our current community bank consulting firm, The Kafafian Group, Inc. So we were both castaways.

Look what she has done since!

EnerBank, according to their website, is a highly specialized bank founded in 2002 that provides unsecured home improvement loans through strategic business partners and home improvement contractors throughout the United States. Strategic partners include manufacturers, distributors, franchisors, and major retailers of home improvement remodeling and energy saving products and services. The bank provides private label loan programs for strategic partners, which in turn makes those programs available to their networks of dealers.

EnerBank has portals on their website for their contractors and sponsors, as well as retail borrowers. The bank is funded almost 100% with brokered CDs. You read it right: 100%. 

Hmm, you might be thinking: Unsecured home improvement lending, funded by volatile time deposits. Seems risky. I would agree. But EnerBank represents about 5% of CMS's earnings, so regulators may find comfort that EnerBank's holding company, unlike most bank holding companies, has significant wherewithal to be a source of strength for the bank.

How has EnerBank done since it opened its doors in 2002? The first chart shows its growth trajectory over the past 10 years.
I know plenty of banks with 100 year histories that are nowhere near this bank's size. So if your bank wants to implement a growth strategy, would you be satisfied achieving EnerBank's results?

What about profits, you say? Well the accompanying two charts show the bank's ROA and ROE trend over the past ten years compared to an industry index. It is important to note that this includes the 2007-08 financial crisis where many banks suffered through poor credits and incurred losses. EnerBank did not, although they do unsecured lending.

In fact, they had no non-performing loans in 2007-08. Non-performing loans to total loans peaked at 22 basis points in 2012 and now stand at 9 basis points. That's 0.22% and 0.09%. Net charge-offs peaked at 2.19% of total loans in 2009. Before thinking "a-ha!", their yield on loans in 2009 was 12.19%. By my math, that's 10% to the good.

Let me be clear, I am not proposing that 6,000 community banks select a niche that drives 100% of the loan portfolio that is funded 100% with hot money. It does not seem like prudent risk management to do so. EnerBank is likely given a pass by regulators because of its relative size compared to the parent, and therefore the ability for the parent to absorb losses, should the bank incur them. Which they have not, even through the worst recession since the Great Depression. This tells me that they are very good at their chosen niche.

But wouldn't it also be prudent to develop a business plan that delivers the returns charted above? I frequently hear community bankers discuss delivering returns to shareholders. Perhaps being known for a few things would distinguish your bank from the thousands of others that continue to do fundamentally the same thing. Because the numbers indicate that General Bank is a failing strategy.

What are your thoughts on niche banking?

~ Jeff

Friday, October 30, 2015

Bank Decor

Sitting in a team meeting, I blurted out: I don't like the branch decor! As soon as the words came out of my lips I wanted them back. Why? I had nothing but my opinion to support my assertion.

Last week I moderated a strategic planning retreat in a swanky conference room. Wood trim, high def TV projection, high-back leather chairs. The discussion moved to branding, not one of my strong suits as a finance and strategy wonk. I brought attention to the decor of the room. Mandatory disclosure, the owner of the facility/bank director said the building was an albatross. So don't get me wrong, I'm not saying build a monstrosity. My suggestion is that branding goes far beyond your color palate, logo, and advertising.  

Branding is how you answer your phone, speed to the closing table, employee attire, and yes the appearance of your offices and buildings. How do you want your customers to feel about doing business with you? If you want them to feel as though you don't waste a nickel on things like soft colors in offices or power washing the branch, then perhaps a miserly appearance is consistent with your brand.

Look at the accompanying pictures. What does each one say to you? Do you see my point?

Don't get me wrong, there are banks that pride themselves in keeping costs so low that you better entertain customers at the local diner versus Ruth's Chris Steak House. For these banks, the top office comes with a sense of pride that shareholder money is prudently spent.

So are the owners of the bottom office spendthrifts? Not necessarily. A long time ago, I was trained as a branch manager in a supermarket branch. That was trial by fire, let me tell you. One thing I learned during that period, other than to hunt for customers in the "organic" aisle because more affluent people hung there, was that people generally don't like to discuss serious financial matters in a supermarket, no matter how distinct the in-store branch was designed. Sure, they liked to perform transactions. It was very convenient. But do things like talk about a loan or business cash flow management? Where's your closest "real branch", thank you very much. Will your target customers feel the same about the top pictured office?

This is why the favorite wood finish of a Trust Department is mahogany. Not a scientific study, mind you, but within the margin of error of a presidential election poll. The reason that Trust Department decor is so posh is because of how they want customers to "feel" when they come into the office. The Department wants to portray success, distinction, and conservatism. 

Trust Department decor may not be ideal for other segments, like farmers. Sure farmers may be high net worth too, but they get their hands dirty when they go to work and may not view kindly a work space that doesn't look like there's much work getting done. Much less the potential that the bank relationship manager recently had a manicure.

My point is this: There should be alignment between strategy, employees, technology, and yes, the physical plant. What do you want to portray to your customers and prospects about your bank without saying a word to them? 

Because our offices and buildings are saying it to them. Whether we like it or not.

~ Jeff

Wednesday, October 21, 2015

Different Paths to Superior Bank Profits

I frequently moderate strategic planning retreats. A recent discussion surrounding bank peer groups was very interesting. I have written and spoken about using peer groups constructively versus striving for "above average". This discussion related to the different paths superior performing banks took to achieve their notable profits.

There were many more than three banks in the peers we reviewed. But the three banks highlighted in the table below achieved superior results. So the board and management team wanted more discussion on what their numbers were telling us.

Bank 1's superior profits start with their yield on loans, complemented by their loan to deposit ratio, which resulted in a very good net interest margin in spite of their relatively high cost of funds. This is a typical profile of what I term an "asset driven" bank. It leads with the loan, solving for funding as it fills its pipeline. This usually results in a relatively higher cost of funds, as the quickest way to line up funding tends to be rate. I also suspect that this bank, absent seeing more data, might have had a one-time event such as recapturing some profits from the loan loss reserve. Because it's profits, at 1.51% return on average assets, seems high based on its other ratios, even though it sports a great yield on loans.

Bank 2 has a relatively low loan to deposit ratio which impacts its NIM, even though it has a solid yield on loans. They just have fewer loans relative to their balance sheet than Bank 1. And we know that the bond portfolio delivers smaller yields than loans. Rather, this bank achieves superior profits by an impressive efficiency ratio. This ratio measures how much in operating expense it takes a financial institution to generate a dollar of revenue. So the lower the better. In Bank 2's case, it takes 52 cents to generate that dollar. Since they don't generate significant fee income or have the NIM of Bank 1, we can assume this bank is cheap. As I often say, they can squeeze a nickel through the eye of a needle.

Bank 3 does have a +90% loan to deposit ratio, yet has the lowest net interest margin of the lot. The reason for their low NIM is their yield on loans. I suspect this bank prices aggressively to get loan deals. What this bank does considerably better than most, is in their Cost of Funds. In other words, it generates low-cost, core deposits. In fact, it's percent of CD's to total deposits was 14%.  I often comment that low cost of funds banks, or high core deposit funded banks, receive favorable stock trading multiples because they have built something that is difficult to replicate. This bank currently trades at 195% of book value. A significant premium to market, even though their earnings multiple is in line with the market. The bank is a strong earner.

It is important to note how strong earning banks achieve their results. Because when setting strategy, you have to chart how the strategy leads to profits. If you intend to generate superior results by creating a difficult to replicate core funded bank, it would be good to set sail with that course in mind. 

Because without identifying your destination, no wind is favorable.

~ Jeff 

Saturday, October 03, 2015

Former Pennsylvania Secretary of Banking Lays Down Ideas on How to Love Your Regulator

Glenn Moyer, the former Secretary of the Pennsylvania Department of Banking and Securities (pictured), spoke at a banking industry event this past week. His subject: How to love your regulator. Glenn is a senior advisor to my firm and I suggested the topic. He rolled with it.

Regulator relations is a pressure point in our industry. Some of the more common complaints include regulatory guidance that seems to change with the breeze, and community banks being treated like “too big to fail” (TBTF). So Glenn’s comments were timely. And since he was the immediate past Secretary, and a former bank CEO, his comments were insightful. 

Here are four of his talking points that hit home.

1.  Never ask your regulator “What would you like me to do?"

This indicates to your regulator that you are out of ideas. That your management team is out of ideas. That perhaps you had no ideas to begin with. From my perspective, I would worry that the regulator would answer you. Glenn’s experience aside, how many other regulators have run a bank?

2.  Communicate your strategic direction to your examiner in charge (EIC). And include his or her boss in the conversation.

This is particularly true if you are charting a path that is different than in the past, or is somewhat unique. Regulators do not like to be surprised. Imagine an examiner coming into the next exam to find that you suddenly entered into reverse mortgage lending and the portfolio has grown faster than all others. That might inspire a higher zoom magnifying glass to see “what else” you have been up to.

3.  A repeat MRA (Matters Requiring Attention) is never good.

In my practice we occasionally hear bankers lament that they have been unfairly treated by their examiners on relatively minor issues. When we peel back the onion to uncover why the regulatory scrutiny on small potatoes, we find MRA’s that were contained in past exams. So examiners asked that the bank clean something up, and later come back to find out the bank did nothing to clean it up. Why would we be surprised by a reduction in our CAMELS?

4.  Document the collegial tension between independent directors and senior management.

This goes against the grain of boards that like to demonstrate unity and therefore have unanimous votes. Voting aside, regulators like a board that challenges management's strategic decisions. Particularly decisions that increase the bank's risk profile. Board minutes are an interesting animal. Actually, having read volumes of board minutes, I may have overstated "interesting". But if there is healthy debate about the bank entering a new line of business such as reverse mortgages, include the highlights of the debate in the minutes. Don't just state "Director Smith moves to approve entering the reverse mortgage business. Director Jones seconds. Vote is unanimous." Don't give the impression that your board is a rubber stamp. Because regulators rely on your board to protect the safety and soundness of your bank. I think I read that somewhere in a Director Roles and Responsibilities pamphlet.

What do you say about how to build a great rapport with your regulator?

~ Jeff

Saturday, September 26, 2015

Compete With Yourself

Our daughter worked from our kitchen table this past week because the Pope was visiting Philly and her firm advised her to get out of town. I worked from home one day, so we got a chance to go up to the local college, workout, and beat back the age monster together (see picture).

She was a college athlete (softball). And she said it was more difficult to workout as an adult because there were no goals and you didn't get the quick gratification of seeing success on the field. Instead, she said, she found success competing with herself. Doing more crunches than her last workout, putting an extra 10 pounds into her lifts. 

This got me thinking about a speech I heard by George Brett, the legendary third baseman for the Kansas City Royals. George said he had a problem with today's baseball player: lack of hustle. He told the story of how he would compete with himself when he grounded out, seeing how far he got down the line before the ball hit the first baseman's mitt. Same with fly balls. How far could he get to second before the outfielder made the catch. Imagine that with today's player who is more likely focused on his stats compared to others.

But wait! Isn't that exactly what we do in banking?

The most ubiquitous culprit is the Uniform Bank Performance Report (UPBR). Not sure if there is an equivalent in the credit union world. If so, let me know. But every quarter senior executives pour over the UBPR to see how they did against similar financial institutions. How similar? Asset size. So if an ethnic, SBA-focused financial institution is the same size as a rural, ag-focused bank. Boom! On the same UBPR.

Differences in business models aside, are we satisfied comparing ourselves to other financial institutions? Five years ago I wrote on this topic in a post titled The Folly of Peer Groups.  I suggested comparing yourself to institutions that are like you, and institutions that you aspire to be like. But today I'm suggesting going further.

Compete with yourself. Continuous improvement. Asking yourself each morning how to be better at the end of the day than you are at the beginning of the day. That if you fail at something, don't count it as failure but as a lesson learned. And share your lesson learned with colleagues so they can benefit from your experience. 

You lead by example. It must have been difficult for a Kansas City Royal to trot to first base on a ground out when the star player hustled so he can be three steps away from the bag when thrown out instead of four. That type of leadership impacts a culture that doesn't show up on a UPBR. But it will.

I don't think the greatest companies or the greatest leaders run peer groups to make sure they are better than average. Side note: Wouldn't that make a great epithet on your tombstone? "Here lies Jeff. He was better than average." Not really.

When I coached lacrosse, I had pre-season meetings with parents. In those talks, I set parent expectations. One was that I don't compare players to the player next to them. Parents fall into traps thinking that as long as their child played better than the one next to them, their spot was assured. But what if the less talented girl hit 95% of her potential? Being one of the best on the team and only hitting 60% of your potential is not a win.

And we should stop treating it like one.

~ Jeff

Sunday, September 13, 2015

My Fantasy Banking Team

Last weekend, a bunch of friends got together for our annual Fantasy Football (FFL) draft. My first pick: Tom Brady (8th overall). I'm feeling pretty good about it since he threw four touchdown passes in week one.

But it got me thinking about who would be my picks if I were assembling a fantasy banking team. So I thought I would give it a shot.

First, I needed to decide positions needed. The owner... Chairman. The quarterback... CEO. The running back... Chief Retail Officer. The wide receiver... Chief Loan Officer. The kicker... Chief Information Officer. And defense/special teams... CFO.

The Owner/Chairman

Criteria: I looked to Bank Director Magazine's annual scorecard for my pick. I used the $1-$5 billion in assets category, and limited my pick to a non-executive chairman, because an executive chairman can influence excellence from the CEO role regardless of holding the Chairman position. No, I wanted a top notch Chairman/Owner of my team that worked his/her magic with the gavel alone.

Selection: Chan Martin, CommunityOne Bancorp (NASDAQ: COB).

Chan was a former Bank of America senior executive, serving as the Corporate Treasurer, Enterprise Risk, and various other functions during his career. He retired in 2008 from BofA, but they thought so much of him they brought him back to assist with the Merrill Lynch integration.

He joined COB's board in 2009 after its $310 million recapitalization which was needed from a disastrous slew of losses incurred starting in 2008 as a result of awful credit decisions, leading to a 21% NPA/Asset ratio peak in 2010. Chan came as part of the recap, and rose to Chairman in 2014. Since his joining the Board, the bank has stabilized, returned to profitability, recaptured it's deferred tax asset, and NPAs/Assets have declined to less than 3%. Yeah, Chan can own my team.

The Quarterback/CEO

Criteria: I am an aficionado of long-term total return. So when selecting my quarterback, I want the guy/girl that has the best three-year total return. I had to eliminate penny stocks, low-trading stocks, and merger targets.

Selection: Greg Garrabrants, BofI Holding, Inc, (NASDAQ: BOFI)

Greg has been in charge of the Bank since 2007. Prior to BofI, he was an investment banker, management consultant, and attorney to the banking industry. Imagine that. What has he delivered to his team? A 367% three-year total return to shareholders, when the industry averaged 60%, according to the SNL Bank & Thrift Index. He can QB my team.

The Running Back/Chief Retail Officer

Criteria: I sifted through banks with the best cost of funds and cost of interest bearing liabilities. Building a low-cost core deposit base is arguably the most difficult task in banking, and it creates significant value to the publicly traded bank because it is difficult to replicate.

Selection: Mitch Englert, EVP of Community Banking, Capital City Bank Group, Inc. (NASDAQ: CCBG)

When you dig deep into the organizational structure beyond the folks you see at investor presentations, you find people like Mitch, who started his career at Capital City in Tallahassee, FL as a part-time teller. What has he accomplished? Thirty-four percent of Capital City's deposits are non-interest bearing. A mere 9% are time deposits. Cost of funds: 9 basis points. Let that sink in a bit. I'll give Mitch the ball.

The Wide Receiver/Chief Lending Officer

Criteria: I searched for banks with the best yield on loans coupled with excellent asset quality as represented by NPAs/Assets. I focused on traditional community banks and did not consider high yield type banks such as credit card banks. But I also wanted to find a community bank that focused on lending to the businesses of today, and not solely the owners of the buildings these businesses reside. They "received" their funds, and lent it into their communities.

Selection: Monty Rogers, EVP and Chief Lending Officer, Security Bank

Is there any doubt that the leader of my receiving corp would be a Texan? Security Bank in Midland, Texas lends to business, period. Their loan portfolio is 47% C&I loans... i.e. true business loans. None of this "we support businesses so long as they have real estate collateral". Sure, Monty does real estate lending too, representing 50% of the loan portfolio. But last week I was at a bank whose loan portfolio had 94% real estate loans. What has Monty delivered to Security Bank? A 6.94% yield on loans combined with a 31 basis points NPA/Asset ratio. Go ahead Monty, spike the ball!

The Kicker/Chief Information Officer

Criteria: If you believe, as I do, that more people interact with your Bank via technology channels than all other channels combined, then you need a solid CIO on your fantasy team. There are no financial metrics to rank your CIO's for the fantasy draft. 

Selection: Robert Landstein, EVP and CIO and Chris Tremont (pictured), EVP of Virtual Banking, Radius Bank

Ok, I hedged. Call this one my first add/drop of the year. In my league, that cost 10 bucks. But Radius Bank in Massachusetts, the former First Trade Union Bank, is forming the type of FinTech partnerships necessary to drive community bank relevance into the future. Read more about their initiative in an American Banker Bank Technology News article here. Welcome to the team Bob and Chris!

Defense/Special Teams/CFO

Criteria: I want a strong balance sheet manager in the CFO role. The rumblings of Fed Funds rate hikes are strong, and a rate hike this year, perhaps this month, seems likely. So I wanted a solid one-year GAP, so the bank and therefore my team doesn't get pummeled in a rising rate environment. I also wanted a solid liquidity ratio, so the bank doesn't have to reprice rapidly to maintain liquidity. Lastly, if they can do that with an enviable yield on securities, then you're on the squad!

Selection: Greg Hollier, CFO, Gulf Coast Bank and Trust Company

My "Girl with the Dragon Tattoo" investigation could not dig up much on Greg from a personal standpoint. But let me tell you this... the Bank has a 1.98% ROA, and a 22% ROE. Its liquidity ratio is 28% and only 3% of its securities are pledged. Cumulative one year repricing GAP/Assets= (5.56%). Oh, and the yield on securities is 3.22%. I think he is doing work managing the $1.3 billion balance sheet. You?

There's my team. I think it's a winner, not just for this season, but to lead our industry into the future.

Who is on your banker fantasy team?

~ Jeff

Monday, September 07, 2015

A Labor Day Analysis of American Banker's Best Banks To Work For

American Banker recently published their annual Top 50 Banks to Work For compendium. I am proud to say that a few of the winners are clients. Why the pride? My firm does not specialize in happiness. We specialize in strategy and profitability. So why would I care if clients were lauded for bringing job satisfaction to their employees?

It's all about perspective. During strategy sessions I am sometimes dismayed at some banks that make shareholder returns the fulcrum of their strategy. Shouldn't the very existence of our bank be nobler? We are all working our way through life. And most of us want our neighbors, coworkers, family and friends that navigate life beside us to do so with peace and happiness. We have far more customers than shareholders. And how we run our bank has a much more direct impact on employees' lives than shareholders' lives.

On this Labor Day, I put to you that a strategy focused on customers and employees satisfaction is a better undertaking than solely focusing on shareholders. Shareholder returns is the scorecard that shows us how we are doing in serving customers and employees, and whether we deserve to remain independent to execute our strategy.

I often invoke the term "right to remain independent". Put simply, a bank should deliver financial performance and total return equal to or better than would-be acquirers, so it is presumably better for shareholders to hold your bank's stock. 

The banks in American Banker's list ranged in asset size from $220 million to $19 billion and the number of full-time equivalent employees ranged from 51 to over 2,200. To say the least, the banks were wide and varied in size, charter, strategy, and geography. So comparing them to an index peer group is difficult. 

But I did it anyway. Below are some financial condition and performance metrics of the Top 50 compared to SNL's Bank & Thrift index banks.
It appears that a focus on employee satisfaction has not adversely impacted financial performance. In fact, we have found that there is generally a positive correlation between bank size and financial performance, and the SNL Bank & Thrift index banks are undoubtedly bigger than the average sized bank in the Top 50, which was $2.2 billion in assets. The SNL Index includes all major exchange (NYSE, NYSE MKT, NASDAQ) banks and thrifts. No limited trading markets or private companies, where smaller banks tend to be. So the relatively smaller Top 50 delivered very similar financial performance than the larger index banks.

The American Banker list highlighted what was perceived as the major benefits of working for the Top 50. I carefully sifted through their list to identify common themes that were valued by employees. The results of my analysis are below.

I was not surprised by some, such as free employee meals. Feed someone to make them happy. Makes sense. It did surprise me that gym and/or health initiatives topped the list. Perhaps, with continued digitization of bank processes and transactions, banks need less real estate than they have and it makes sense to put that space to good use for a healthy lifestyle employee perk. 

Some of the most mentioned benefits cost little to nothing, such as executives communicating with employees and vice versa, and flexible scheduling. Others do cost money, such as generous benefits, incentive compensation, and career development. But these hard costs did not result in lower financial performance, according to the first table. Perhaps one can conclude that a great place to work attracts more capable employees that can more effectively and efficiently serve customers even though the cost structure of the bank may be higher.

Would you rather build a bank with a slightly higher cost structure and very satisfied employees that delivers a similar return to banks with leaner cost structures and a greater proportion of curmudgeons? 

What do you think?

~ Jeff

Link to American Banker Top 50 Banks to Work For

Saturday, August 22, 2015

Banks Are Far From Amazon

If you haven't read the New York Times article on Amazon working conditions, you should. By trying to create a meritocracy, the unintended consequence included nothing more than petty zinging and flaming. The kind you see on social media. Except at least Amazonians do it to your face, but in a public setting. My response to reading the article is in my tweet below.

Jeff Bezos refutes the characterization of Amazon in the article as a soulless, dystopian workplace, stating it's not the Amazon he knows. Possibly true. Using anecdotes to make your entire case is lazy. What is the company turnover rate? How much overtime do they dish out? Because the article indicates nights and weekends are the norm. A little facts supported by anecdotes would have been more effective, and in keeping with journalistic standards. Not that I'm an expert on journalistic standards, but when a blogger like myself comments on lack of facts from the Old Gray Lady, journalism in the USA is in trouble.

While reading the Amazon article, I thought to banking. How far from a meritocracy we have become. In some financial institutions, the inertia reminds me more of a government agency than a shareholder owned company. One bank chairman said that when he wants to get something strategic done quickly in his company it takes two weeks. In banking, it takes two years.

Regulation counts as a progress inhibitor. Especially since the financial crisis. Bankers are wary of charting a different path for fear of how regulators would react. Plain vanilla business models receive the most favorable examiner reactions. Veer off the norm, scrutiny is sure to follow.

Internal to our banks is the inertia that comes from compartmental-ism, mediocrity, and old-school leadership. While there is not much we can do about regulatory attitudes towards moving our industry forward, there is plenty to do about our business models.  Here are a few suggestions to create a greater meritocracy that rewards moving the bank forward while minimizing the unintended consequences that Amazon is likely dealing with.

1. Create incentive systems with meaningful and transparent awards for achievement. I have spoken and written on this subject often. Use incentives as a positive means to reward behaviors positive to your institution. At Amazon and in many other meritocracies, incentive systems are wielded like sledge hammers to drive underachievers into the ground. Instead, lift achievers up. Persistent underachievers will self select out or be shown the door.

2. Fire people. When an executive tells me about the issues they are having with a subordinate that is hurting the bank, I always ask if the subordinate is an employee at will. Why? Because you can fire them! As one banker told me, there is nothing more motivating than a strategic firing. If an employee is not putting forth the effort, has a bad attitude, or simply doesn't care or works against where you want the bank to go, FIRE THEM! The remaining employees will take note.

3. Build a collaboration culture. Some banks have tried this and it morphed into a crazy number of meetings. But you must forge forward with the pre-eminent question being "how should this be"? Usually the answer is obvious. Get the people you need to move an initiative forward into a room and don't leave until you work it out. You don't need standing meetings for this. Be bent on taking action once the talking is done.

4. Promote learning from failure. Do not penalize failure. This is true if a bank employee is working to innovate and move the institution forward, but the initiative fails. I often hear about bank employees getting "written up" (an audit comment, examiner comment, or supervisor action) for trying a process that may not have worked or unknowingly violated an esoteric rule. Wrist slaps are for employees that ignore supervisory directives, or knowingly violate policy. Not for trying something that doesn't work out. That's called innovation.

What do you recommend for creating a meritocracy without pounding your people into the pavement?

~ Jeff