Tuesday, July 23, 2019

Why Did Oritani Sell For No Premium?

On June 25th, Oritani Financial Corp (ORIT) common stock closed at $16.21 per share. The next day they announced they were selling to Valley National Corp. for $16.29 per share. Virtually no premium. And less than ORIT traded one year ago. Why?

I was not part of the discussions regarding the transaction, and am not an advisor to either bank. I have no inside information to share. Only some observations and opinions. 

ORIT has historically been a high performing financial institution in a highly concentrated deposit market. For the calendar first quarter 2019 they had a 1.22% ROA, which was down from 1.31% in fiscal 2018 (ORIT is on a different fiscal year). Their efficiency ratio... fuggetaboutit! Thirty six percent for the quarter ended 3/31. 

So why did they receive 138% of book value, and 14x earnings when nearby (5 miles between headquarters) Stewardship Financial Corp. (SSFN) announced their sale to Columbia Financial (MHC) for 167% of book value, 17x earnings, and a whopping 77% premium. This transaction was also announced in June. ORIT is 4x the asset size of SSFN.

There are many factors that go into pricing merger transactions. Cost savings opportunities, attractiveness of markets, niches or specialties, seller's capitalization, buyers' stock valuations, etc. And in fact, ORIT was relatively highly capitalized compared to SSFN, with a leverage ratio of 12.92% versus 9.48%. That plays a role in price/book merger pricing. But ORIT consistently outperformed SSFN in financial performance. Yet received a lower valuation.

Bank Brand Value

You may recall I wrote about the value of brand in a post entitled: Bank Brand Value: Calculated! And I am very familiar with financial institutions in the Mid-Atlantic. So I suspected a key factor leading to the no-premium deal between ORIT and Valley might be related to ORIT's brand value. 

So I did the calculation described in the linked post (see table).

I searched for regional peers with total assets between $1 billion and $10 billion. I then filtered for loan peers that had multi-family and commercial real estate loans greater than 60%. ORIT's was 92%. These are highly competitive, transactional loans. And in the New York metropolitan area, are significantly originated by loan brokers and bid on by banks.

Even though I searched for peers with high levels of these types of loans, ORIT earned seven basis points less than peer in Yield on Loans minus NPAs/Assets, negatively impacting bank brand value (BBV). 

For deposits, I searched in the same region and size as loan peers, but controlled for banks that had total time deposits as a percent of deposits greater than 30%. ORIT's was 42%. The Cost of Interest Bearing Liabilities was the same as the deposit peer group. So it did not add or subtract from BBV.

So, although I filtered for financial institutions with a similar balance sheet composition, ORIT had an inferior Yield on Loans minus NPAs/Assets, and equivalent Cost of Interest Bearing Liabilities.

Leading me to the opinion that, among other factors, ORIT received no premium because it had a negative BBV.

Why do you think the bank received no premium?

~ Jeff

Monday, July 08, 2019

Bankers: If We're Serious About Helping Clients, What About These Two Products?

With all of the automation of financial products, one would think managing finances would be simple. Much more so than when our grandparents saved for the coal delivery in an envelope in the night stand.

My focus today is on consumer banking. Which is becoming more challenging for the community financial institution due to heavy competition from money center and super-regional banks, credit unions, and fintech firms. Do we cede the field? Hand Wells Fargo our sword, as it were?

I don't think community financial institutions can fund themselves solely from their commercial customers. They struggle serving deposit-only or loan-lite small businesses because commercial lenders have no interest and branch skills have not been elevated to create the confidence needed to have business banking conversations. If a commercial lender has 20% in compensating balances in his/ her portfolio, that would be a win.

But what about the funding for the other 80%?

No, I think community financial institutions should develop a solid strategy for retail banking. As my industry colleague Ron Shevlin aptly pointed out in his 2015 book, Smarter Bank, money management will be more important than money movement. Actually, since it was written four years ago, I might be as bold to say that it IS more important. 

This reminds me of a scene from Date Night with Steve Carell and Tina Fey. Steve played an accountant, and informed a couple that they would be receiving a nice tax refund. To which he suggested opening a Roth IRA. Not interested. They were going on vacation. The world needs more boring advisors like Steve in Date Night. Should your institution be the bore? To help your customers make better financial decisions?

If you believe yes, how is your financial institution equipped to handle such a business model? Not just in employee capabilities, but in products?

A 2018 Harvard Business Review article emphasized a growing financial problem among our retail customers: they are not prepared for retirement. HBR proposed what to do about it. But I ask my readers, what do you intend to do about it?

As HBR puts it:

"Ultimately, the shift from defined benefit pension plans to employee-directed defined contribution 401(k)s is the major driver of the impending retirement crisis. Beginning in the 1980s, this move helped companies reduce their retirement liabilities and better meet their quarterly financial targets, but put an unmanageable burden on employees."

Helping our customers manage this burden requires a change in strategy, from one of "more products per customer", to "promoting our customers' financial well being." If your financial institution is embarking on delivering the latter strategy to your customers, I think there are product gaps. Two come to mind.

Much Maligned Products

The below products are much maligned due to high reputation risk, outsized fees, and are difficult to deliver due to high maintenance costs or regulatory/licensing requirements. But to help our retail customers navigate retirement, they are legitimate options that need a trusted person to deliver, be that an advisor or banker. 


Many financial institutions "sell" annuities. But many advisors say this product is not worth it. Sales loads and ongoing fees are too costly compared to alternatives. And I agree. Vanguard was known as the low-fee producer, and they are transitioning account administration of their annuity products to Trans America. And I must admit, finding a legitimate website for objective comparison is difficult because annuity providers clog searches with pitches. And they sponsor websites that might appear objective.

Which screams for somebody to be on the side of the customer.

An annuity, properly constructed, can help your retail customers reduce the risk of running out of money in retirement. Much like a defined benefit plan does. A deferred annuity, or an immediate annuity, can be structured to provide fixed payments as long as the buyer lives. And to protect the buyer from pre-mature death and losing their savings, an insurance rider can be applied to reduce that risk.

It doesn't seem like this should be something that has a 2% annual expense ratio and a 6% sales load. Especially since your customers can pay no sales load and a 25 basis points fee for a robo advisor or an index fund. The costs are too great to overcome. 

This is an opportunity for a consortium of financial institutions, perhaps through their national trade associations, to develop products such as an annuity that protects community financial institution retail customers from running out of money in retirement. Without hyper-feeing the customer in the interim. 

The offloading of retirement risk from employers to employees scream for it. Why would banks sit on the sideline of such an important financial goal?

Reverse Mortgages

Or as the federal Department of Housing and Urban Development calls them, Home Equity Conversion Mortgages (HECM). There's an acronym for everything. Here's another product that requires some savvy web surfing to look up legitimate sources of information that is outside the product pushers purview. Imagine being a retired utility worker that is concerned about running out of money? No wonder they turn to Magnum P.I. and The Fonz for financial advice.

This one is close to home because I described it to my mom to alleviate her concerns about outliving her money. She owns her home outright. As many seniors or near-retirees do. A reverse mortgage is a legitimate product almost totally avoided by financial institutions due to reputation risk. Imagine the scenario, mom takes reverse mortgage but fails to tell her children. She passes and nobody keeps up with the payments. The bank forecloses. Geraldo is called in. Adult children on TV in tears. Holding grandchildren that thought the house was going to pay for school and give them a leg up on life. Sad.

This is not an unsolvable risk. It may, and likely does, require financial institutions to look beyond the mandatory disclosures. Because as I hear it, heirs not knowing about the loans are a big problem. Couldn't we solve for this and other risks and maintain our position as our retail customers' advocate?

A reverse mortgage requires little organizational effort in today's technology world. The loan origination resources wouldn't be materially different than a home equity loan. Loan maintenance would be even less. We already track that borrowers pay their real estate taxes on regular mortgages. The biggest difference will be at the end of the loan, where the full balance is due when the owner sells the house or passes away. And that effort and risk can be priced into the loan, without gouging.

But if we do have a retirement crisis, a reverse mortgage can be part of the solution.

Product Promoter or Retail Customer Advocate

Helping retail customers prepare for and navigate retirement can be a strategic objective of your institution. It is particularly important as so many Baby Boomers are taking their gold watch every day. Many if not most are ill-prepared for what is next. Becoming their advocate can be the best advertisement for attracting younger retail customers to your bank.

Because there are a lot of hucksters out there. Pushing Product.

~ Jeff

Monday, July 01, 2019

Is It Customer Loyalty That You Seek?

Why are customers loyal to your financial institution? I hear many reasons in strategic planning sessions:

1. Our people. They are loyal to their lender, branch manager, etc.
2. Our service. We have the best service!
3. Our products. We have a really cool checking product.
4. Our location. We're right in town.

Aside from the difficulty in proving each of the above, the underlying assumption is: "loyalty is good". And I ran the math on that assumption in my firm's most recent newsletter. Which hasn't come out yet as I type this. Because it is in editing and review. By a person that is on vacation. So I apologize that the link is to my company's newsletter page and not the specific newsletter.

But let's run with the assumption, "loyalty is good". How do you build it?

Recently, at the Financial Managers' Society FMS Forum, I heard James Kane speak. James is one of the most quoted and profiled authorities on loyalty. He also graduated from Notre Dame. I didn't, but I'm a lifetime Fighting Irish fan. And he grew up in Scranton. As did I. More so than Joe Biden, who claimed to grow up in Scranton but left before he was a teenager. Jimmy (which is what he would've been called if he grew up in Scranton) and I did the full tour until college.

On his website, Kane writes: "Anyone who has heard me speak knows the importance I put on understanding the things people truly care about to find some common connection. The easiest way to do that is to share first. Let people know what you care about and allow them to discover the similarities you may share with them, whether it is interests, hobbies, favorite products, artists, foods, sports teams, places you have been, or places you hope to visit one day." He left a brand palette as follows:

Do your people employ this method to increase customer loyalty? Do they frequently communicate their favorite things and know their most profitable customers' favorite things?

Kane led his speech with the things he likes, has done, or would like to do in rapid fire format. By the time he finished he likely had something in common with 90% of the audience. In fact, I spoke to him afterwards about being from Scranton. As did another audience member.

In keeping with Kane's method, here is my brand palette:

I live in Pennsylvania near Amish country although I am not Amish. It would be too difficult to come and visit you. I am married to my high school sweetheart, also from Scranton. Also Italian-American. Which means we can turn up the volume, and the people in Amish country think we argue frequently. Sorry. Just talking enthusiastically. 

I have two daughters, one out in California and the other in college. The one in CA thinks I recovered from being stupid but the college student still thinks I am. We have a dog that sometimes gets a bit more attention than me and we spend more money on her than me. 

I am more concerned about where a car was made than how people will think of me driving it. I don't like spending money on cars because you are trading a liquid, appreciating asset (cash) for an illiquid, depreciating one. I drive a truck and take a little bit of pleasure pulling up to financial institution clients in a vehicle not typically driven by a consultant. 

I like coffee but I can't tell the difference between good coffee and bad, so I would opt for cheap or free coffee. Where's your break room? Same with wine. Except I wouldn't expect that in your break room. I love this local brewery and winery revolution and when I travel I am always looking for a place to sample the local fare. 

I listen to podcasts on long rides. I can't be too salesy to plug for our podcast but I regularly listen to The Purposeful Banker, ABA Banking Journal Podcast, Dan Carlin's Hardcore History, NPR Up First, Stuff You Missed in History Class, and my favorite... Freakonomics.

Sports: Yankees, Rams, Sixers, Capitals, Union, and Notre Dame football.

So there ya go. Would knowing this about me help us make a better, and longer lasting connection. To have a common bond to build a relationship?

What Jimmy Kane says makes sense. So perhaps this should be part of your bankers' arsenal in developing customer relationships that lead to long term loyalty.

~ Jeff