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