Saturday, February 21, 2015

Breaking Branch Mediocrity

Another day, another convoluted organizational structure that includes “small business bankers” that are dispersed into the branch network to shore up branch capabilities. If not small business bankers, it’s “cash management officers”, or “business development officers”. Why add a protective wrap of additional employees around your branches?

Because branch staff are too busy with operational duties to go out into the community and pro-actively hunt for business. I’ve been to a lot of branches as I travel the land looking for opportunities for banks to improve profits. I rarely see a “busy” branch. One time I saw a line for a teller and was so amazed at the site that I snapped a photo. The bank security officer set me straight. Don’t case the joint.

If bankers were truthful to themselves, they would recognize that these branch wraps, i.e. additional employees with fancy titles, are nothing more than covering up for the perceived shortfall in branch staff skills to be the face of the bank in our communities and pro-active business developers. If you are nodding your head in agreement, read on. 

If you are irritated at the theory and are scrunching your eyebrows like you bit into a lemon, then continue to add the layers to your organizational structure and move on to an article about the “branch of the future”.

Instead of adding staff and layering the cost onto an already burdened branch network (who pays for the compliance analyst you just hired?), why don’t you get the most from the investment you already make in your branches? I have four suggestions for you to improve the abilities of these critical profit centers.

1. Hire to execute your strategy. This assumes you have a strategy that is more focused than “we’re a bank”. If your strategy is to be the number one business bank in the markets that you serve, then hire branch employees that can speak intelligently to business owners about how your bank can better serve them. If those employees are inept at balancing a teller drawer, then so be it. If your staff is highly capable at ATM replenishment but cringe at the thought of speaking to a small business owner about a sweep account, read on…

2. Develop your branch staff. In my experience, the percent of banks that have specific training curricula for branch staff that goes beyond operations and compliance is somewhere south of Pi, if Pi were a percent, and I actually knew what Pi is. But you get the picture. When I was in the military, we had a training calendar for every functional position that included on-the-job (OJT), computer based, self-taught/correspondence, and classroom training. Each sailor was responsible for matriculating through the training program when they were not forward deployed. When they completed certain stages, they received certificates and were deemed “South-East Asia qualified”, or whatever designation the training was intended to accomplish. Do we have a “Small Business Qualified” designation in your training curriculum? If you are not satisfied with branch staff abilities to execute your strategy, and have invested the time and energy into developing them without results, then perhaps you have the wrong staff.  But don’t complain about staff capabilities if you have done nothing to improve them.

3.  Provide meaningful incentives. If you have heard me speak, I bang the drum loudly about branch incentives. You want branch staff to be the tip of the spear for small business relationship acquisition but give those that succeed a 4% raise and a $500 holiday bonus while those that are not successful a 3% raise and a $400 bonus? Why are we surprised that we have to build a “wrap” of different employees around branch staff? Instead of providing incentives based on deposit balances, how about branch profitability? Imagine the behavior differences if branch managers were charged with improving their deposit spreads, fee income generation, and managing their expenses? Would you get the desperate phone call for a rate exception for a $200,000 CD for a single-service customer to “keep the money at the bank”? Doubt it, because that $200,000 would be generating far less spread than the $40,000 operating account from Joe’s Tire and Battery. Even though Joe leaves grease at your teller counter every time he comes in. Why not pay branch managers for the important position that they hold in executing your strategy? Would it be beneficial to make variable compensation a greater and more meaningful component to the overall compensation package?

4. Communicate your strategyThat is, communicate it if you actually have a strategy. Being everything banking to everyone in the markets where you have branches is not a strategy, dear reader. If your strategy is the beef stew of all strategies (i.e. throw everything into the pot), then expect to be average. Wouldn’t that make a great epithet? Here lies Jeff, he was average. But assuming you have a strategy that clearly identifies the bank you strive to become, then communicate it to your employees! Who else do you expect to execute on the strategy day to day? If your strategy is to be the number one business bank, as ranked by the regional business journal, then identify objectives to achieve it and have your employees march a straight line to get there. Maybe then your branch manager will know that you want more customers like Joe’s Tire and Battery, regardless of having to use Mr. Clean on your teller counter after he leaves.

There you have it! Four concrete steps you can take to make branches more effective at achieving your strategic objectives. Did I miss anything?

~ Jeff

Note: This post first appeared as a guest post on Deluxe Corp's Forward Banker Blog in July 2014.

Saturday, February 07, 2015

Say on Pay for Financial Institutions

Researchers at Rice University performed a study on CEO compensation, including bank CEOs, relative to average employee compensation. The study was in reaction to the media's often cited pay disparity between the CEO's of the largest institutions and their rank and file employees.

As for banks, the Dodd-Frank Act mandates that all corporations administer a non-binding shareholder vote on the compensation of its executives. For publicly traded banking institutions, the study found the mean pay ratio was 16.6x, well within the 25x bounds identified by Peter Drucker in 1977.  

Not leaving well-enough alone, I did some digging into the matter on my own, knowing that when you move up the banking food chain (i.e. asset size), the disparity, or ratio, will get larger. But most community financial institutions don't live in that world, or so I thought. 

So I searched for publicly traded financial institutions with total assets between $1 billion and $3 billion that reported their CEO's total compensation (i.e. was not "NA"). The search yielded 148 financial institutions. I then took their annualized salary and benefits expense for their last reporting period and divided by their full-time equivalent employees ("FTEs") to come up with average salary and benefits per employee, and compared to the CEO's total compensation. 

The results are in the following table:

Although not the exact methodology of the Rice study, the table indicates that publicly traded community bank CEOs are not excessively compensated.

Since I went that far, I decided to see if there was a correlation between the CEO compensation multiple and financial performance, such as Return on Average Assets (ROAA). 

I took my search of $1 billion - $3 billion financial institutions and narrowed it down to $1 billion to $1.2 billion to keep a tight range, yet yield a decent sized sample. I eliminated companies with multiple bank subsidiaries, because the granular salary plus benefits and FTE data is typically at the bank-level. Plus I had to look and calculate manually. The search resulted in 36 financial institutions. 

I separated them into quartiles based on ROAA. The results are in the below table.

Each quartile had nine financial institutions. Interestingly, the bottom quartile performer had the greatest CEO to average employee pay disparity, the highest CEO total compensation, and the highest average employee salary. But I'm not certain the message here is to not pay employees well. Perhaps the bottom performers have too many employees AND pay them well, lacking the expense discipline to elevate financial performance.

The middle quartiles are similar in total CEO compensation and average employee compensation. In fact, the top through the third quartile are intuitive in their financial performance versus compensation versus the pay multiplier. 

In my experience, there are some financial institutions that pay executives well regardless of their relative financial performance. This was the main logic behind Dodd-Frank's Say on Pay.

The answer may not be in reducing executive compensation, although some Boards should consider it based on the facts. The answer, in my opinion, is to find ways to increase the compensation of rank and file employees. If we were socialists, we would mandate it and everyone would gravitate towards the lowest common denominator in employee productivity and financial performance would plummet.

But we're capitalists. And the way to increase real compensation is to improve productivity. That means instead of needing ten people in a department with average wages, we do it with seven people and pay above average wages. 

Time and again my firm reviews departmental processes that are outdated and unnecessary, technologies that are underutilized, and managers that protect "the way we've always done it".  If executives don't assume a leadership position in removing inefficiencies and elevating real wages while improving financial performance, perhaps their compensation should be evaluated.

As technology changes, it is difficult to keep up with process change. But the cost of doing business should decline as industries and the technologies that support them become more mature. When I performed my research, even though the asset size of the financial institutions was tight, the amount of FTEs per institution varied widely. One had 130 FTEs, another had 521. And average salary plus benefits varied, with the top payer averaging $135k, and the bottom payer averaging $45k. 

The top payer, by the way, was in the bottom quartile financial performer, and the lowest payer was the last bank in the second quartile. Somewhere in between lies the answer for your financial institution.

Any thoughts on pay philosophy?

~ Jeff

Note: The below SNL Financial article by Kiah Lau Haslett alerted me to the Rice study. It may require a subscription to view:

Sunday, February 01, 2015

Stupid Bank Names

In the mid to late 1990's, my employer, First National Bank of Maryland based in Baltimore, bought Harrisburg, Pennsylvania based Dauphin Deposit Bank. They put together a transition team. I was on
that team. One of our responsibilities was coming up with a new name. After thousands of hours and millions of dollars, Allfirst was born. And hence the title for this blog post.

Are you going through a similar exercise? With Allfirst still fresh in my psyche, I occasionally throw stupid bank names at bankers contemplating a name change to increase the likelihood they won't make the same mistake. Here is what I came up with so far...

Allfirst - My poster child for stupid bank names. They didn't even include bank in their marketing materials, leaving customers and potential customers wondering, who?

Open Bank - I featured Open Bank in my annual total return top 5. Kudos for delivering value to their shareholders. As for their name... what if they are closed?

First Bank - The context of this blog post is for considering a new name. I know many of you may be named First Bank because that's the way it was 100 years ago, or your name was First Savings Bank and you dumped the Savings or First National Bank and you dumped the OCC. But there are 77 other First Banks in the country. If your brand strives for assimilation, then go with it.

Rabobank - Not a large leap to Rob A Bank.

IndyMac Bank, FSB - Sound like a burger joint to anyone else?

First Integrity Bank - This Minnesota bank failed in 2008. If you have to put integrity in your name, well... The same with Honest, Fair, or any other similar name describing behavior that should be part of the culture. The exception being Trust, since this is a distinct charter and/or service offering. I may get a call from my friends at a similarly named bank near my home on this one. But they should've given me a call before printing the letterhead.

Bank of Bird In Hand - This is an Amish focused bank. Named for the town where it is located. So they probably don't view the name with the same smirk as me. And no, for my non-Pennsylvania friends, you cannot drive from Blue Ball, through Bird In Hand, on to Intercourse, and arrive in Paradise. All Central Pennsylvania towns. But not lined up in that order. My point here is, not every town name should be on your billboard.

MutualBank - On the surface, not a bad name. And I may get an e-mail from my FMS friend, Chris Cook. But truth be told, MutualFirst Financial of Muncie, Indiana, the holding company for MutualBank, is publicly traded. It's not a mutual.

BestBank - A distinction earned, not bestowed. Same with Superior Bank, etc.

Excel Bank - A spreadsheet?

K Bank - In today's abbreviated texting and social media world, this is a bad name, K?

Innovative Bank - Through the worst banking crisis since the Great Depression, only about 5% of FDIC-insured financial institutions failed. Could being in the 5% group qualify you as innovative?

This is only a small list of banks based on my personal knowledge and some database searches. I'm sure there are more out there.

You may be surprised that I excluded some names such as the often lampooned poster child for stupid bank names, Fifth Third Bank. But it is a distinctive name, that has been around for a long, long time. I also respect some old school bank names, such as Old Second, etc. And banks with small town names that don't result in sophomoric snickers are also fine, in my opinion. Even affinity branded banks, like Red Neck Bank (actual division of a bank), have some merit.

So if you are grappling with the bank name issue, make sure that when you are presented with options as to what to call your bank, take a step back, and think. Ask somebody outside of the re-branding process. Common sense trumps a marketing study.

What other stupid bank names are out there or were out there?

~ Jeff

P.S. If I offended anyone, I apologize.