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.