Sunday, April 23, 2017

Are Banks Different?

Does your financial institution need to be different than the five others in town or the multitudes outside of town?

If you believe the paradigm that a business model must generate low-cost solutions or differentiated solutions in order to build a sustainable competitive advantage, then my guess would be that your answer would be yes. Truth be told though, I still hear that "our money is no different than the banks' across the street" defeatism. 

If you believe that to be true, then the pair of Levi's jeans you purchase at the JCPenney in the mall, at Walmart, or on Amazon are no different, either. Yet one of those three has built a low-cost competitive advantage, the other a unique distribution network differentiation, and the third might go the way of the General Store.

It is annual report season. As a bank consultant, and bank stock investor, I review many of them. And my opinion is, I can't tell them apart by their "Letter to Shareholders". Chairmen and CEOs alike spout undifferentiated bromides that tells me their strategy in their markets must be low cost. Because I can't make out any difference.

Below are three such letters, taken from publicly available annual reports for three financial institutions headquartered in the same large U.S. city. I removed names, numbers, and geographies. But they are public companies, so these letters are available to the public in unedited form. No reason to call them out here, as it is beyond the point of the post.

Do these banks sound alike? Do they sound like your bank? 

~ Jeff

Bank A:

To our shareholders,

Since our inception, we have used the word ‘‘Absolutely’’ as a part of our brand. We believe this word reflects our customer centric and solutions oriented approach to banking. In 2016, we decided to ask our customers for feedback on their relationship with [Bank A]. Frankly, we couldn’t say it any better ourselves.

[Customer comments were here]

We are both extremely proud of, and honored by, this feedback. We also believe there is a direct correlation between these customer quotes and our bank’s performance, and we’re very pleased to report that 2016 was an outstanding year for tangible results at [Bank A]. Numerous milestones were achieved, including record earnings, crossing $x billion in total assets, and maintaining sound asset quality. Growth in interest and noninterest income outpaced declining accretion income, resulting in a significant increase in total revenue. Disciplined execution on our strategic priorities resulted in exceptional growth in organic loans and core deposits, which combined with effective expense management, collectively yielded net income of $xx million.

In addition to our financial success, we announced two bank acquisitions during the year: [Bank acquisitions]. Both of these acquisitions were completed on [date], providing us with well-known and talented bankers and an expanded statewide footprint into new strategically compelling markets. We now have a meaningful presence and efficient footprint in seven of the eight largest MSAs in [state].
[Bank A’s] results in 2016 demonstrate our commitment to grow low-cost transaction deposits, improve our noninterest income lines of business, maintain strong credit metrics while growing loans, prudently deploy capital, and become a more efficient company.

Our payroll, treasury services, and cash management product offerings continue to provide a competitive advantage in growing core funding and allow us to successfully compete with banks of any size. We had $xx million of deposit growth in 2016, including $xx million, or x%, growth in transaction deposit accounts. Noninterest-bearing deposits comprised xx% of total deposits at year-end 2016. Our long-term success is going to be primarily driven by the quality of our deposit base and having very deep relationships with our primary depositors.

We also generated organic loan growth of $xx million, or xx%, while managing our risks effectively and without compromising our high credit standards. Our credit quality metrics continue to be among the best in the entire industry.

Positive momentum in our noninterest income lines of business carried over into 2016 as all three of our key fee income initiatives—mortgage, SBA, and payroll—had double digit growth in 2016. In our SBA business, we added a team with a national market focus and completed major improvements to our operating processes that will significantly improve productivity and efficiency. We remain very pleased with the pace of growth in payroll clients, which in turn, delivers core funding and a solid recurring revenue source.

We are making measureable progress with our commitment to become a more efficient company. Total noninterest expense, excluding merger and credit-related expenses, declined nearly x% in 2016.
Expense reductions occurred across the board in nearly every category leading to a significant improvement in our efficiency ratio in 2016. In addition to the capital deployment through two acquisitions, we maintained an attractive dividend, with a yield of more than x% based on our year-end share price, equating to a dividend payout ratio of approximately x% for the year, and we repurchased over $x million of our common shares. We continuously evaluate our overall capital management strategy and remain committed to being conservative stewards of your investment in [Bank A].

In summary, we are blessed to operate in genuinely attractive markets with diverse growth drivers and positive economic trends, which make us very optimistic about the future for [Bank A]. Our existing markets represent a significant growth opportunity for our company. We continue to grow market share in the [metro] market, strengthen our number one market share in [region], and are excited about the tremendous opportunities we have in our new markets. 

As we reflect upon the successes of 2016, we are grateful for each client, board member, and employee that contributed to this success, and are ‘‘Absolutely’’ thankful for your continued confidence as a shareholder.

Bank B:

Dear Shareholders and Friends:

It seems the pace of change escalates as our business continues to expand. Integrity, intelligence, energy, sense of responsibility is more important than ever. The understanding that our role is to serve our customers – and each other – is critical. Attitude really is everything, and first experiences do make lasting impressions.

We try to run our businesses with these truths to guide us and our success, along with a dose of luck, indicates we are on the right track.

Mortgage grew both in production and in markets served, adding offices in [state], [state], and [state], as well as adding lenders in existing markets. Wealth Management added new product offerings and we are now building our marketing team. SBA increased production and expanded the lending footprint to include the [region] as well as the [region]. Commercial and Construction Lending continued steady expansion.

Our focus on retail branches shifted from expansion to one of efficiency and profitability for these new markets, though we remain open to new acquisition opportunities. To keep up with increasing production, we invested heavily in internal systems and software. Online Account Opening, when fully introduced, will give us another way to be accessible and user friendly.

Our financial results remained strong with net income of $x million or $x earnings per diluted share.
For you, our Shareholders, both cash dividends and book value per share increased again in 2016.
Some highlights are listed here to give a sense of our momentum:

[Financial highlights here]

[Name], with the team he has selected, is building a foundation to last and has the talent to meet our market opportunities. He will properly be named CEO of the Bank at the April meeting.
Our “Golden Rule” philosophy works. Increased Shareholder value from customer service is the result.

We thank you for your continued support and confidence in our Company.

Bank C:

For [Bank C], serving our clients means connecting with people. It means engaging at a deeper level than simply doing business or handling transactions. We are committed to leading and strengthening our relationships and serving the needs of others. For us, the best way to accomplish this is earning trust and investing in these relationships to grow our Company.

[Bank C] built its reputation by remaining firmly rooted and accessible in the communities we serve. We combined trust, loyalty and personalized relationship banking with the delivery of high touch service and life focused financial solutions. Our rich history and legacy has provided us the foundation and the inspiration to innovate and seek ways to continue to drive shareholder value.

Now, more than ever, we know that innovation paired with human interaction enables us to not only provide financial empowerment and guidance on a grander scale, but also sets us apart in the marketplace. By increasing our visibility and footprint in new as well as existing markets we are attracting, building, and maintaining a growing customer base and a more sustainable future for our internal and external stakeholders.

We launched our 95th anniversary year by remaining purposefully focused on building our brand with a deliberate charge toward the future. To make us even more agile to face and optimize new opportunities, we focused on four core strategic priorities: Bringing the Brand to Life; Defending and Growing the Business; Mobilizing the Brand across All Platforms; and Driving Organizational Excellence. As you will learn throughout this message, the successful implementation of our initiatives revealed our ability to execute and utilize technology to be responsive to our clients and grow our business.

[Financial highlights here]

[Separate discussion of each of the core strategic priorities mentioned above here]

Our legacy is who we are...Our future is what we are defining.

Lastly, we celebrated our 95th anniversary in 2016. This is a significant milestone of which we are extremely proud. I would like to thank our clients and community for supporting us all these years and for putting their trust in us, our board of directors for their encouragement to reach new milestones and our teammates who created the successes that we are reporting with their efforts and dedication.

To our shareholders, thank you for partnering with us by investing in our Company. We commit to you that we will continuously strive to build a better bank that will support our values, serve our clients and provide you a return.

We are looking forward to 2017 and the exciting opportunities it will bring.

Wednesday, April 12, 2017

Three Ideas for Banks to Reverse the "Silvering" of Their Customer Base

Are your customers older than your markets? A common theme among students that expressed concern about it during our Executive Development Program (EDP) sessions in Seattle, Montana, and Salt Lake City.

Customers leave their banks for the 4-D's: Death, Divorce, Displacement, or Dissatisfaction. Three of the four are life events outside of our control. And with switch rates that have persistantly hovered around 10% of total customers, how do we get 'em in, and keep 'em in?

Here are three ideas.

What other ideas do you have?

~ Jeff