Sunday, May 29, 2016

Just a Soldier

Memorial Day weighs heavy on me. Because I do not know what I would do if asked to stare down the barrel of the gun of my enemy.

My greatest danger in service to my country was navigating mined waters while on the USS Caron (DD-970) during Operation Desert Storm. I had supreme confidence that my shipmates knew where the mines were, and avoided them. So hitting the rack in my berthing located at the waterline on our destroyer gave me little concern.

But what of those soldiers standing in the front of the infantry line during the Revolutionary War, or those that were at the front of the landing craft when the door dropped on Omaha Beach? They knew. They knew that death was possible, even probable. They stared down the barrel of their enemy knowing they could be near to drawing their last breath. How would we be?

It is not as common as in the past to know death may well be imminent. During earlier wars, battles were fought differently, warriors were not as educated, and faith in God was powerful. If death was imminent, please God take me into your kingdom.

We've moved away from our beliefs because we think we know more, are more educated, enlightened, if you will. So facing down the barrel of our enemy means we are facing an uncertain, or non-existent future, in our minds. So, perhaps, it is more frightening to be that brave soldier, sailor, Marine or airman. 

So what would we do if asked to stair down the barrel of the enemy?

I don't know. And may never know. But I know in Arlington, in France, and in un-marked graves and battlefields all over the earth, lay young Americans that were asked and heeded the call for the freedom of countrymen they would never meet, and other countries they knew little of.

I remember them. And pray that I could muster the bravery that they did, giving their last full measure of devotion. For me. And you.

~ Jeff

Note: Want to read a story of such a soldier? Read banker Dorothy Jaworski's book, Just Another Good Soldier about her uncle, Pfc Stephen Jaworski who gave his last full measure of devotion during the WWII battle to cross the Moselle River.

Saturday, May 21, 2016

Should Bankers Pursue an Asset Driven or Core Funded Strategy?

My firm is 15 years old. And approximately every five years, we performed an analysis to determine how the stock market rewards financial institutions for different strategies. In particular, does the market reward banks that drive net interest margin through a high yield on earning assets, or a low cost of funds?

The first two times we did this, the low cost of funds banks won, hands down. So I assumed that this is the way it was, and therefore is the way it will be. But we recently revisited the analysis for an "asset-driven" client... i.e. one that focuses on loan production, and backfills with funding as they figure out how to pay for the loan pipeline. This strategy typically leads to a higher cost of funds as the bank turns to higher rate deposits, brokered deposits, or FHLB borrowings because it's quicker than winning deposit relationships.

The following charts show the results. Sorry for column overrun but wanted to make them bigger and I have no idea how to do that other than blowing them up. I digress. Fortunately, I have two daughters and am very familiar with being told I'm wrong. If not for my two angels, the below charts might have broken my confidence. 

The charts show the price/tangible book and price/earnings multiples of two sets of banks. As the Criteria states, we took banks with between $800MM and $3.0B in total assets with healthy net interest margins and profitability. The size range is consistent with our bank client. We then divided the result into the top 10 yield on earning assets banks, and the top 10 (lowest) cost of funds banks. And then charted their trading multiple trends. Yes, there were two cross-over banks that made both charts. Quite an accomplishment, in my opinion.

The low cost of funds banks are no longer the clear winner, as the yield on earning assets banks sport a greater price/tangible book multiples. 


What caused the shift that improved asset driven banks trading multiples to be comparable to core funded banks? I have my opinions. Note the next chart.

Yeah, I know. Charts again from Marsico. Hey, I'm a strategy-finance wonk.

My firm measures the profitability of products for dozens of community financial institutions. As part of that service, we roll up bank specific products to common products so we can compare each client's product profitability to that of a peer group. Think home equity and commercial real estate loans, business checking and personal money market accounts, etc. 

As a result, we can determine the spreads (using actual yields for assets and costs for funding offset by a funds transfer price) of all products on the asset and liability sides of the balance sheet. The trend of those spreads are in the chart. Notice in 2006, when the Fed Funds rate stood at 5.25%, and the yield curve was inverted, liability spreads exceeded asset spreads.

Then the Fed started dropping short term rates (quickly to 0-25 bps) and the yield curve went positively sloped. Loan spreads quickly exceeded deposit spreads. And loan profitability followed in quick succession. 

So for an extended period of time that includes present day, loan spreads exceed deposit spreads, and loan profitability has mostly exceeded deposit profitability.

Therefore, asset driven banks were rewarded with greater overall profitability than core funded banks, and trading multiples moved to greater parity.

But it won't always be so. 

I thought you would like to know.

~ Jeff

Saturday, May 07, 2016

FinTech and Community Banking: Built for Marriage?

Recent news of Prosper scaling back and OnDeck Capital's ongoing losses has taken a little shine off of the FinTech apple. Doesn't this happen with every meteoric rise?

Recently a former bank director and active bank stock investor asked me about the rise of FinTechs and how it impacts community banks. Here is my answer to him.

"I think technology firms are going to change banking forever. So if bankers that you talk to reminisce about the good old days when they could shake hands, make loans, and win relationships, run away.'

'But the death of the community bank is exaggerated. Banks have customer trust. FinTechs have yet to earn it. Banks have customers. FinTechs want them. Banks have regulatory experience and regulators are now figuring out how to regulate FinTechs (good luck!). Banks have capital. Many FinTechs have sold to banks or seek investments from them (Note: I am on the advisory board to Hip Pocket that was currently cited by Finovate as a great prospect for bank strategic seed funding). Banks are FDIC insured. FinTechs are not. Banks have deposits. SoFi has none.'

'Somewhere in between the two extremes of 'ignore FinTech', or 'FinTech will rule the world', will be the future for community banks. Collaboration between banks and FinTech firms has already begun, and I expect it to continue."

How do you anticipate the future of these two industries come together?

~ Jeff

Note: I am not a licensed financial advisor. So do not buy or sell stocks based on anything you read here. The government requires a test. Go to one of those folks.