Tuesday, December 29, 2020

Banking's Top 5 Total Return to Shareholders: 2020 Edition

For the past nine years I searched for the Top 5 financial institutions in five-year total return to shareholders because I support long-term strategic decision making that may not benefit next quarter's or even next year's earnings. And I am weary of the persistent "get big or get out" mentality of many industry pundits. If their platitudes about scale are correct, then the largest FIs should logically demonstrate better shareholder returns, right?

Not so over the nine years I have been keeping track. The first bank to crack the Top 5 over $50 billion did so this year. As a reference, the best SIFI bank in five year total return was JPMorgan at 33rd overall. 

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. Short-term focus is a common trait of banks that focus on shareholder primacy over stakeholder primacy.

Total return includes two components: capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered out those FIs that trade less than 2,000 shares per day, 1,000 more than past Top 5's. This, naturally, eliminated many of the smaller, illiquid FIs. I also filtered for anomalies such as recent merger announcements, turnaround situations (losses suffered from 2015 forward), mutual-to-stock conversions, stock dividends/splits without price adjustments, and penny stocks. 

As a point of reference, the S&P US BMI Bank Total Return Index for the five years ended December 23, 2020 was 46.3%.

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2019:

#1.  FS Bancorp, Inc. (Nasdaq: FSBW)
#2.  Fidelity D&D Bancorp, Inc. (Nasdaq: FDBC)
#3.  Plumas Bancorp (Nasdaq: PLBC)
#4.  First Capital, Inc. (Nasdaq: FCAP)
#5.  Meta Financial Group, Inc. (Nasdaq: CASH)

Here is this year's list:

Here we are. The first crypto currency bank to crack the Top 5 and in the top position no less! Most of the price runup has been over the past year, where the stock increased 330% versus 
-16% for the S&P US BMI Banks Index. It's five year total return was a whopping 452%! And in terms of bank stock valuation, Silvergate is punching well above its weight at over 4x tangible book value and 58x latest twelve months earnings per share. This bank has over $2 billion in crypto deposits, and facilitates payments between crypto exchanges via its Silvergate Exchange Network, or SEN. With that type of valuation, investors foresee rapid growth, increased economies of scale that will ultimately result in superior financial performance. It's current performance for the third quarter of 1.13% ROA and 10.14% ROE doesn't merit the valuation, so growth and greater profitability must be what investors see. And there are positive profit trends. Take note, however, the bank grew over 20% year over year, so their current 10.4% leverage ratio combined with their internal profit generation tells me they will be extending the proverbial hat to investors for more capital to support their growth. And at those valuation numbers, who wouldn't? Here is an interesting Motley Fool discussion on the bank. Give Silvergate credit, they picked a niche and are executing on it to the delight of investors. Welcome to the Top 5!

#2. Live Oak Bancshares, Inc. (Nasdaq: LOB)

I'm surprised that this is the first showing of LOB on the Total Return Top 5. It has been an industry darling due to its dedication to technology experimentation. It was the brain child for the nCino platform, which it formed in 2012 and spun off in 2014. Live Oak was founded in 2007 to provide business loans, primarily Small Business Administration (SBA) guaranteed loans, to select industries, like dentists and veterinarians. Live Oak is now the largest SBA 7(a) lender in the United States. They opened in 2007! But it goes beyond traditional banking. Subsidiaries, in addition to the bank, include: Live Oak Private Wealth, LLC, a registered investment advisor; Canapi Advisors, LLC that provides investment advisory services to new funds focused on providing venture capital to new and emerging fintechs; Live Oak Ventures, Inc. that invests in businesses that align with the company's focus on fintech; Government Loan Solutions, Inc., a management and technology consulting firm that engages in the settlement accounting, and securitization process for SBA and USDA guaranteed loans; and, get this, Live Oak Grove, LLC, which is their on-site restaurant for employees in Wilmington, North Carolina. Because of these niches, Live Oak also punches above its weight by traditional bank valuation standards, trading at over 3x tangible book and 51x trailing twelve months earnings. But it's five year total return: 250%! Well done!

#3. Fidelity D&D Bancorp, Inc. (Nasdaq: FDBC)

Fidelity D&D Bancorp, Inc. is over two times the asset size it was in 2016 due to the combination of organic growth and an acquisition that was announced in late 2019 and closed in May in the middle of a pandemic. When the pandemic hit, FDBC's stock took a tumble along with most everyone in the industry. But throughout the year, their stock bounced back to where it was a year ago. While the S&P US BMI Banks Index was down 16%, FDBC held serve. This puts its price to tangible book ratio slightly north of 2x, high by traditional community bank standards today. But it's price/earnings for the 3Q annualized was 15.9x. They had special charges in earlier periods as a result of the acquisition. Their 3Q ROA was 1.15% and ROE was 12.42%. A consistent performance record, plus the ability to profitably grow even though their core franchise is in a slow growth market, earned them their third consecutive year in the Top 5 delivering a 236% total return to shareholders! This is a bank that demonstrates what I like to term operating discipline. Well done!

#4. Silicon Valley Financial Group (Nasdaq: SIVB)

This must be the year of the niche bank. One that focuses nationwide on one or more niches to generate top five shareholder returns. Silicon Valley Financial Group is the parent company of Silicon Valley Bank, long considered a go-to bank for startups. At $97 billion in total assets, SVB is the largest financial institution to ever break into the Top 5 Total Return to Shareholders. And like Silvergate Capital Corporation above, it did not conform to banking's Covid decline. It's one year price change was +51% compared to the 16% decline of the S&P US BMI Banks Index. This bank lends to startups without positive cash flow. So one would think that the pandemic would cause a spike in non-performing assets. Except their NPAs/Assets was 12 basis points at September 30th. and their YTD ROA was 1.43% and ROE 16.20%. And they're trending better! This type of through-the-cycle financial performance earned them a five year total return to shareholders of 228%, good enough for Top 5 hardware! Nice!

#5. Bank First Corporation (Nasdaq: BFC)

They are blocking and tackling in Manitowac, Wisconsin! Which is home to my favorite news parody, the Manitowac Minute where they aptly describe Midwest nice! And I got my football reference in there, especially since the Packers are having a great year. Like Fidelity, Bank First demonstrates operating discipline by consistently delivering financial performance that gives them the investor credibility needed to rebound from the pandemic driven recession. Looking at their ROA slash line 2017-YTD you'll see 1.04%/1.43%/1.37%/1.44%. That level of consistent credibility is likely the reason why their stock is down only 4% over the past year versus 16% for all bank stocks. I searched for what they do different than traditional community banks. I found that they do core processing services for other financial institutions. That's a throw back to earlier days. But that only accounts for just over 3% of their total revenue. Like Fidelity, they announced an acquisition at the end of last year and closed on it during the pandemic. But it was only a $183 million in assets bank compared to the pro forma $2.6 billion Bank First. No, what Bank First does is be good. Consistently. It earned their shareholders a five year 197% total return. Go Packers! **** the Bears!

There you have it! The JFB Top 5 all stars. As in all prior years, no SIFI banks on the list. Increasingly on the list, though, are niche financial institutions that are making strategic bets that are being rewarded by their shareholders in the form of higher valuations. 

I thought about ending my nine-year run of recognizing these best in class performers in long-term total return to shareholders. Especially since my friends at BankDirector.com do such a nice job in their RankingBanking series. Perhaps in the future they'll add five year total return! I'll keep going as long as I can add value.

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.

Thursday, December 17, 2020

The Bank Branch Manager's Wish List

Now is the time for wishes. And if I were a branch manager, given all of the demands on me, here is what I would wish for:

1. Clarity of Expectations. Do you want me, your branch manager, to grow small business customers by being a trusted advisor to small business owners within a five mile radius of the branch? Why don't you tell me?

2. Clarity on Accountabilities. If you know me, you would know that I am a big fan of making branch managers responsible for the continuous improvement of their branch's income statement. All other accountability schemes you might have in place are unnecessary unless the branch manager is on a performance improvement plan. Number of net new accounts? Why do you care if the branch continuously improves its profitability? Aggregate deposit growth? What if the branch manager doesn't grow deposits at all, but replaces maturing CDs with small business deposits, and grows small-ticket business loans?

3. Empowerment. Stop calling me about waived overdraft fees. So long as I own my branch's profitability, if knowing the unique customer's situation leads me to waive their fee, so be it. Do you know the customer's situation better than me? I know a waived fee reduces my profitability. I'll find it somewhere else.

4. Support. My favorite line from Grease: "If you can't be an athlete, at least be an athletic supporter." You know those nasty e-mails I get from operations because I didn't fill a Know Your Customer line- item out correctly? You might want to pay a visit to operations and give them a lesson on how the bank makes money. I'm not saying that I shouldn't be trained how to do it right. But sometimes the self-righteousness coming out of HQ demonstrates a profound misunderstanding about who drives profits... customers, and who serves customers... me. So create a culture of empathy and wanting to support people that have customers sitting across their desk.

5. Offload Operations. Do you really want me counting vault cash, reconciling daily branch capture, and servicing the ATM? Take inventory of operational duties given to branches. Yes, there will be people other than the branch manager that can execute on them, but the manual timecard checks, continuous hounding about BSA training, printing and signing forms then rescanning because nobody can use our imaging system as intended, is a bit much. Always, always look for ways to reduce operational duties of people that are the tip of the spear between bank and customer. 

6. Develop Me. I have no idea how to use the small business loan underwriting system. Our online account opening solution has no relation to how we open accounts in branches. So I can't help a customer when they call me from home wondering how to advance past a certain page. Merchant services? Nobody trained me on that. Small business cash flow management? Isn't that what you mentioned in Clarity of Expectations above? If you want me to be awesome at what you expect of me, help me get there. 

Because I want to be awesome. And so too, do your branch managers.

~ Jeff

Wednesday, December 09, 2020

The Slippery Slope of Using Banks to Advance a Political Agenda

On October 29, 2020, the New York State Department of Financial Services (DFS) issued a letter to all depositories and non-depositories regulated by them regarding climate change and financial risks. This post is not about climate change. It is about how an unchecked bureaucracy can implement an agenda it cannot get through duly elected legislative bodies by wielding the power of regulation.

In her letter, Linda Lacewell, the DFS superintendent, said she expected regulated depositories under DFS supervision to:

1. Start integrating the financial risks from climate change into governance frameworks, risk management processes, and business strategies. For example, institutions should designate a board member, a committee of the board (or an equivalent function), as well as a senior management function, as accountable for the organization's assessment and management of the financial risks from climate change. This should include an enterprise-wide risk assessment to evaluate climate change and its impacts on risk factors such as credit risk, market risk, liquidity risk, operational risk, reputational risk, and strategy risk; and

2. Start developing their approach to climate-related financial risk disclosure and consider engaging with the Task Force for Climate-related Financial Disclosures framework and other established initiatives when doing so.

I visited the Task Force for Climate-related Financial disclosures website and downloaded their report to see what Superintendent Lacewell was talking about (see picture). 

Not sure what they mean by metrics and targets. But the report does suggest that financial institutions in their annual reports disclose all of the above, including how much lending they do to climate related industries. Meaning how much lending do you do to industries that a partisan might not like, so that the power of the mob could agitate such a high level of reputational risk that the reporting financial institution would reduce or eliminate serving the out-of-favor industry(s).

A reminder, this is a far bigger issue than climate change. So don't come at me if you want to talk about climate change. This is about using the power of regulation to exert political will that does not have enough popular support amongst the governed to enact legislation.

In response to this alarming tactic, the OCC proposed in November a rule to ensure fair access to banking services provided by national banks, federal savings associations, and federal branches and agencies of foreign bank organizations. In its letter, acting Comptroller of the Currency Brian Brooks said "Fair access to financial services, credit, and capital are essential to our economy. This proposed rule would ensure that banks meet their responsibility to provide their services fairly since they enjoy special privilege and powers because if the system fails to provide fairness to all, it cannot be a source of strength for any."

The OCC's proposal would apply to the largest banks (>$100B in assets) in the country that may exert significant pricing power or influence over sectors of the national economy. If that last sentence isn't a testament to the importance of diversifying financial services, not sure what is. The proposal would require a covered bank to ensure it makes its products and services available to all customers in the community it serves, based on consideration of quantitative, impartial, risk-based standards established by the bank. Under the proposal, a covered bank's decision to deny services based on an objective assessment of the person's creditworthiness, ability to pay, or other quantitative, impartial, risk-based reasons would not violate the bank's obligation to fair access. Not sure what's worse. Bank's being bullied to "not lend" to industries based on the shrill of the mob or being forced to lend to industries that are against their values.

Now you may be in full agreement with strong-arming financial institutions to not lend to coal burning utilities. 

But what about when you don't agree? Think about an industry or issue that you favor. And a bureaucrat waves the magic wand to cut off financial services or make it so difficult for the financial institution to bank your "favored" cause that it wouldn't be worth it.

The top 10 banks already control over 50% of all US banking assets. This is a testimony to decentralize banking. It's also a glimpse of how governments, without a will of the people mandate, can advance their agendas without consulting the people. It's a glimpse into tyranny.

~ Jeff

Tuesday, December 01, 2020

Could Net Interest Margin Woes Spell Opportunity?

When an in-person strategic planning retreat has to be hastily switched to a virtual one, sacrifices must be made. And in this case, I simply didn't have the time to review the long-term implications of the Fed's guidance that they were not inclined to raise the Fed Funds Rate until inflation hit or passed 2%. And they didn't anticipate that until 2023.

So we're in this environment together. Negative rates are not likely. Fed Chairman Powell is against that approach. The change from 2.25%-2.5% in 2019 to the 0%-0.25% year to date has resulted in the revenues per product to go down in all deposit products with the exception of money market accounts (see table).

The table is from my firm's profitability peer database, where we measure product profitability for dozens of community financial institutions. The above are peer averages.

The net revenue decline in business loans makes sense because these portfolios tend to have a high proportion of variable rates. What we learned from 2007-08 was to put floors in them, so hopefully the downward trend won't continue. Residential mortgages net revenue went up although we intuitively know that the 30-year rate has gone down. But for measuring product profitability, this number represents what the bank portfolios. Which is probably very little given the rate environment. The coveted gain on sale revenues from secondary market activities goes in the secondary market product, and the residential mortgage line of business.

In 2009, being armed with the above product profitability data, plus the profit trends in their branches, the very large financial institutions began closing branches en-masse. And since the floor fell out on the Fed Funds Rate this year, several including PNC, Wells, and US Bank announced more accelerated closures. From March through August, banks submitted closure requests to regulators for 893 branches. During the same time last year, 967 were submitted. So there was an 8% drop.   

But I think, faced with the declining revenues and their high depositor retention from past closures, more will be announced. Does this signal an opportunity for the financial institution with a long-term view to aggressively pursue core deposits in the face of reduced short-term profitability of those deposits? Especially if the bank could put those deposits to work at some positive spread, which we have to believe we can. 

It wouldn't bode well for your net interest margin. But could certainly generate growth in net interest income. And position your bank for the often repeated cycle of positive economic growth where loans grow faster than deposits for multiple years. When that happens, your competitors will start offering $400 for customers to switch deposit accounts. 

But you would have already won them.

~ Jeff

Note: The above data was taken from my firm's profitability peer database. If you want to learn how you can measure product profitability, line of business profitability, or customer profitability, click here.  

Monday, November 16, 2020

Guest Post: Financial Markets & Economics Update by banker Dorothy Jaworski

I intentionally waited until after Election Day to write this update, not knowing it would become Election Week.  I was hoping that the politics would have died down, but that was not to be.  The markets are taking it all in stride, rallying strongly for most of this week and they seem more grateful for the prospect of a divided Congress, i.e, gridlock, where the Senate is retained by Republicans to counterbalance the Democratic House than by the outcome of the Presidential election outcome.  The markets believe the chance of tax hikes, repeals of tax cuts, and gigantic initiatives are greatly diminished. 

Stock prices are rising strongly, but bond prices have fallen from their highs.  A great GDP growth number for the third quarter of +33.1% last week and a large, 1% drop in the unemployment rate to 6.9% today have left fixed income investors thinking that the worst may be over for the economy.  But the ever present threat of COVID-19 lingers, with cases rising around the world.


The Ongoing Pandemic & The Economy

Strict lockdowns in our area were lifted in June, but there are still restrictions on many segments of the economy, such as bars, restaurants, the travel industry, entertainment, sporting events, and the like.  Many schools are conducting hybrid and virtual classes.  Life has gone on, but has not returned to normal.  Our behaviors have changed with fear of the virus.  Did you manage a vacation over the summer?  Many people would say, no, they did not want to travel. 

Jamie Dimon, CEO of JP Morgan Chase, said recently that we need to reopen the economy, safely of course, and especially in New York City.  Stop the economic devastation from the lockdowns.  He encourages leaders to let businesses reopen, so they can generate revenues and rehire employees.  He encourages those employees to go into the office, although he admits that some work-from-home will become a permanent change.  He also thinks kids should return to their classrooms at school.

There are lingering effects that are restraining economic growth.  Despite the improvement in the unemployment rate to 6.9% from its high of 14.7% in April at the height of the lockdowns, there still remain 10 million jobs lost since the pandemic began.  That leaves many on unemployment compensation, unable to pay rent or mortgages.  Small businesses are behind in rent and building owners have sought deferrals of their payments to lenders.  If people can get their jobs back, they can possibly refinance their mortgages in this exceptionally low rate environment.  Moody’s estimates that there is $70 billion in back rent across the nation.  Think for a minute about how huge that number is.

GDP surged by +33.1% (annualized) in the third quarter, after devastating declines of -31.4% in the second quarter and -5.0% in the first quarter.  Our economy remains about 3.5% lower than its peak in the fourth quarter of 2019.  The Federal Reserve estimates that fourth quarter growth will be +6.0%, so we may get back.  By the way, our economy has done better than all other nations; for example, Europe is 4.3% under their fourth quarter peak.  Even if we “get back” to earlier GDP dollar levels, it will have been an uneven recovery, with many individuals and businesses still struggling without adequate revenues.  The Federal Reserve has pledged to keep interest rates low until we reach full employment, which I estimate at 4.0%, and inflation averages above its target of 2.0%.

This is very significant, in that Fed Chairman Powell finally threw out the Phillips curve.  The Fed seemingly relied on this curve in that every time unemployment got low, they screamed inflation!  So now they are prioritizing full employment and will switch to “AIT,” or average inflation targeting, allowing the inflation rate to exceed their target for a period of time, rather than raising rates as they did from 2015 to 2018 chasing inflation that never materialized. 


Bucks & Montgomery

Unemployment rates soared after the lockdowns began in March, 2020.  Our area did not escape the devastation.  The national unemployment rate peaked at 14.7% in April and has steadily declined to 7.9% in September and 6.9% in October.  For a time, from April to August, our counties were trending 2% to 3% higher than the national average, which was worrisome.  Thankfully, this has corrected at least into September, when the national average was 7.9%, Bucks was 7.1%, and Montgomery was 6.6%.

The housing market is robust across the nation.  Prices on a year-over-year basis are accelerating, especially as people are migrating from cities to suburbs and state to state and are trading up to newer or larger homes as the pandemic progresses and they spend more time at home.  The latest national CoreLogic home price index for September, 2020 was +6.7% year-over-year.  Bucks and Montgomery counties are close to that for September, according to Zillow, at +6.4% and +5.5% year-over-year, respectively.  Projections for 2021 are at about +7.0% for all, driven by new trends in migration, smaller than normal housing inventories, and extremely low mortgage rates.

Our regional economy, covered by the Philadelphia Federal Reserve’s Third District, is doing well into the fourth quarter.  Their published indices, the Philly Fed and Philly Fed Non-Manufacturing, both rose in October, to 32.3 and 25.3, respectively.  Backlogs for both are lagging and weak, at 8.3 for the regular index and only 4.0 for the non-manufacturing one.  Not surprisingly, the quick recovery could give way to slower growth as we move forward.


The Outlook

Federal Reserve Chairman Jerome Powell put it best:  The outlook for the economy is “extraordinarily uncertain.”  When the election is finally behind us, we can work on the things voters said were their priority- the economy, the pandemic, and health care.  A stimulus bill from Congress to aid individuals, small businesses, and devastated industries such as airlines, which have been completely crippled by COVID-19, seems a strong possibility before year-end.  That may have factored in to the Fed’s projection of +6.0% GDP in the fourth quarter, followed by +4.0% in 2021.  Much hinges on the pandemic, therapeutics, and vaccines.

We will have low interest rates for at least three years, as promised by the Federal Reserve.  Many economists think that rates will stay near zero for the next five to seven years.  Remember, it took the Fed seven years to raise rates from the zero bound after the Great Recession of 2008.  When they finally tightened in December, 2015, core inflation was at +1.5% and unemployment was at 5.0%.  Thankfully, the Fed pushed the final Phillips curvers out!

COVID-19 is our number one uncertainty.  Are vaccines on the way soon?  Four companies, including, Moderna, J&J, AstraZeneca, and Pfizer- have their vaccine in late stage clinical trials, and most are taking risk to produce vaccines in case they are successful and approved to save time in getting them to the people.

Now, I will continue my rant about huge amounts of debt being added by the US Government.  Year-to-date, there was $4 trillion of new debt issued, bringing the outstanding total to $27.2 trillion, or 127.6% of GDP.   Economic growth has been proven to slow when debt-to-GDP exceeds 90%.  It is no coincidence that growth was in the low 2% range since 2009, when debt was sustained at over 90%.  The one benefit of that time period was that it was the longest, although lowest growing, economic recovery since World War II at 127 months.  If we managed to have growth of 2% during that time, I think once the “lockdown” rebound is over, and we resume “normal” growth, I think GDP will be less than 2%, due to the continuing increase in the debt-to-GDP ratio.  That may be our new “normal.”

Finally we are all weary and tired of lockdowns, capacity limits, and travel bans.  I keep thinking of one of my favorite quotes by Ernest Hemingway:  “There are only two places in the world that you can live happy.  At home and in Paris.”  One can only dream!


Large Hadron Collider Update

For those of you who have known me and read my quarterly updates for years, you may remember my favorite machine, the Large Hadron Collider, the 17-mile long circular tunnel built deep under the mountains in Switzerland, where all kinds of physics experiments and smashing of atoms take place.

The Collider, which is now over 12 years old, was down for maintenance for the past several years, but news about its activity has started again.  Previously, researchers in 2012 discovered its most famous particle, the Higgs Boson, which is a key building block of the universe.  In October of this year, they observed the decay of these particles for the first time.  They are now looking for mini black holes, and possibly parallel universes.  Recently, scientists created matter from high speed light.  And they are looking to take the power in the Collider up to 9.5 TeVs, or Tera-electron volts.  Each TeV is one trillion electron volts.  It’s crazy how scientists can work with atomic particles.  Stay tuned!


Thanks for reading!  

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with Penn Community Bank and its predecessor since November, 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Friday, November 06, 2020

Create Operating Discipline at Your Bank

Bankers have made great strides in developing the strategies to succeed over the long-term, analyzing the customers that most value their strategic direction, and gaining the buy-in from their Boards of Directors and employees. The next challenge is to build the environment and culture where the organization moves toward its aspirational future. To create operational discipline that greases the gears toward the bank you want to be without continuous leadership intervention.

In the video blog I give one specific example of how to do that. Make your own choices on the operational discipline you need to move you closer to your aspiration.

Link in case the video doesn't appear on your device:  



~ Jeff

Saturday, October 31, 2020

For Banks, Self Assessments Are Hard

Self assessments are hard, period. Not just in banks. But since this is a banking blog, let's focus there.

Strategic plans should include a fact-based self assessment. Some call it a situation analysis, others an environmental scan. They usually include a SWOT, which some people dislike but I find the vitriol around a SWOT to be mostly related to them not being honest or laundry lists of things the management team plan on doing nothing about.

Strength: The Management Team. Which for some might be true. Is it supported by low turnover rates of top performing employees, deeper relationships with customers, superior financial performance?

I recognize that everything can't have a SMART goal (specific, measurable, aggressive yet achievable, relevant, and time-based). But if you are going to say your "culture" is a strength, I'm going to ask why, and what does that get you.

So should you. 

Culture is something that I recently focused on during a couple speeches (virtual, of course) on creating alignment between your culture and strategy. Because culture is the environment you create that promotes or inhibits execution. Do you have a culture of innovation, empowerment, and positive accountability?

Most financial institutions would like to have such a culture. Because that is the environment that can lead to rank-and-file employees that recognize a need, be it a product or service, among your most profitable customer cohorts, and makes a business case for it (innovation and empowerment). That environment can lead to a project team with diverse functional expertise that is tasked with implementation, and not in six to twelve months (positive accountability). 

In my talk about linking strategy and culture, I finished with the following "What Now":

1.  Adopt a clear strategy that maps where you are to where you want to be.

Imagine that.

2.  Articulate the culture you want, and perform an honest assessment of the one you have.

No hubris please.

3. Identify the initiatives you must take to align strategy, culture, and accountabilities.

Positive accountabilities whenever possible to maximize the performance of those under your charge. See my post on this here

If you build the culture you want, you will likely perform a fact-based self-assessment with the ability to capitalize on your bank's strengths and fix or avoid the weaknesses.

~ Jeff

Monday, October 05, 2020

A Whale of a Tale: Enloe State Bank

 "The bank's on fire!" So said the panicked cleaning person that ran across the parking lot from the bank to the adjacent restaurant. "Call 9-1-1!"

The bank in reference was Enloe State Bank, a $37 million in total assets, one-branch bank based in Cooper, Texas, population 1,969. The fire happened on May 11, 2019 and came from their board room

(see pictures). On fire were documents requested by the Texas Department of Banking (TDB). Which made them suspicious.

Ya think?!

As suspected, the fire was purposefully set so the TDB couldn't get their arms around what was apparently going on.

And what was going on in this tiny enclave 80 miles northeast of Dallas that has four heads of cattle for every one person? Fraud. For over a decade.

According to the Office of Inspector General (OIG) In-Depth Review (IDR) of the incident:

"Enloe State Bank failed because the President and the senior-level Vice President perpetrated fraud by originating and concealing a large number of fraudulent loans over many years. ESB's President was a dominant official with significant control over bank operations and limited oversight by the Board of Directors (Board). The bank President used her role as primary lender, with inadequately controlled systems access, to originate millions of dollars in fraudulent agricultural and other commercial loans. She hid them from the Board and regulators with assistance from unnamed co-conspirators."

When the TDB shut them down and the FDIC investigators came in, they had to occupy the church next door because of the smell from the fire. Then they started contacting customers who unknowingly had loans. Pat Ainsworth was one such customer on the hook for a loan, $127,000 worth to be precise. Well, not actually Pat. The borrower was her dead husband. Who apparently rose from the dead two years after his death to sign loan documents.  

Since 2009, bank president Anita Moody had been booking fraudulent loans to do things like buy herself a Jeep, pay off her daughter's loan, and deposit money into her boyfriend's business account. And, it should be noted, in ponzi scheme like format, booking loans to pay for other fake loans so they wouldn't go delinquent. Over 100 loans totaling over $11 million for over a decade. 

The OIG used the term "dominant official" 64 times in the IDR. According to the FDIC, a dominant official:

"A dominant official or policymaker is defined as an individual, family, or group of persons with close business dealings, or otherwise acting in concert, that appears to exert an influential level of control or policymaking authority, regardless of whether the individual or any other members of the family or group have an executive officer title or receive any compensation from the institution... [A] dominant official is often found in a "One Man Bank" wherein the institution's principal officer and shareholder dominates virtually all phases of the bank's policies and operations. However, a dominant official can be found at institutions of various sizes, structures, and without regard to organizational charts."

 The FDIC issued this guidance in June 2011. The first Report of Examination (ROE) mentioning the presence of a dominant official at Enloe was in 2018. Moody had worked at the bank her entire adult life, having started there in 1978 while still in high school. She became president in the mid 2000's, and owned a near 25% stake in the bank. She also controlled IT access, and various other duties customary in a small bank with eight employees. Certainly enough to be considered a dominant person.

But she had help. In August 2020 the bank's vice president, Jeannie Swaim also pleaded guilty to a bank fraud charge, admitting to creating fictitious loans to channel over $400,000 to her husband over a period of five years.

The OIG was critical of the TDB and the FDIC for how long it took them to uncover the relative level of loan fraud. In the examinations done by both regulators between 2013 and 2018 the bank received a composite CAMELS rating of either a "2" or a "1". They received the "close 'em down" CAMELS rating of "5" only after Moody went all pyromaniac in her board room. A blinking red light to say the least. 

For her actions, Moody agreed to pay back the over $11 million she stole, and to spend seven years in federal prison. Where she can be the "dominant official" in her cell.

 True story.

~ Jeff

For more reading on Enloe State Bank:

OIC: https://www.fdicoig.gov/sites/default/files/publications/EVAL-20-007_0.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery

Fox News: https://www.foxnews.com/us/texas-bank-ex-president-11m-embezzlement-fire

Fort Worth Star Telegram: https://www.star-telegram.com/news/business/article245687185.html

Dallas Morning News (2019): https://www.dallasnews.com/business/banking/2019/07/20/fire-and-fraud-the-mystery-of-a-small-texas-bank-that-became-the-nation-s-first-failure-in-years/

Tuesday, September 22, 2020

Bankers: We Have Choices. Choose Wisely.

Earlier this month I recorded a webcast for the Pennsylvania Institutute of Certified Public Accountant's Financial Institution Conference.  Because it was pre-recorded, I had the unique opportunity to not only think about my opening and closing, but typing them out so I was clear about the message. Here is what I said.


Hello and welcome to what I hope is the most unique PICPA Financial Institution's Conference ever, and will remain the most unique ever. I come to you today, not shaking your hands, or being able to point out and joke with old friends in the audience. Instead I'm in my home office, where I'm fortunate to have my 31 year old daughter, her boyfriend and their son, my grandson, and their 100 pound German Shepherd. Also my college-aged daughter, taking online classes, and her cat. And of course my wife and little dog. There is also construction happening. So if there are interruptions or impromptu visitors, please bear with me.

With the very unique environment unfolding at my house, we have an equally if not more unique environment happening at your bank. The pandemic has changed our lives, and the lives of our employees and customers, more than anything that I've ever experienced. And I've been in a war. It's just different. I feel like we remain quarantined, and many of your colleagues and those listening to my voice right now are doing so from home. What changes are permanent, and what will revert back to the way it was? It mostly depends on us.

Today, my task is to discuss these things and what I perceive as the way forward to long-term success. In the midst of uncertainty there can be opportunity. Our job is to recognize it, and act on it. Hopefully, my brief time with you this morning will generate discussion at your bank.

[Presentation happens here.]


A few slides ago, I spoke of culture. One that moved us from being tactical, thinking no further than six months to a year out. Of being complacent, hoping that the rapid change in technology and customer preferences will pass or somehow slow down, and being a "safe-choice" employer was not the same as being an employer of choice. Being that safe choice means that employees are comfortable, have mediocre salaries, decent benefits, and job security. They may not have the empowerment, career paths, continuous development, and upward mobility that younger, and yes more fickle employees want. But what type of employee does that leave us with?

Complacent means sitting back and waiting until things settle down. Do we want them to settle back to the environment where 4%-5% of our fellow financial institutions are acquired each year because they have not invested in the people or technology to lead us forward, or continue to strive for greater economies of scale, however investment bankers define that term? Was that trajectory ideal for our constituencies: employees, customers, communities and shareholders.

Being tactical is no longer tenable in its current practice. If we continue to trade strategic investments that have short term payoffs versus ones that may take two to three years then are we implementing the changes demanded by our constituencies? Will we continue to over-invest in support functions that can be automated, while under investing in areas where increased sophistication are becoming table stakes; the technologies, marketing sophistication, and highly capable employees that will deliver our bank to customers on their terms.

We have choices. Choose wisely.

Thank you to the PICPA for inviting me back!

If you want to read a blog post I wrote for them leading up to the conference, click here.

~ Jeff

Note: If you would like the deck from this presentation, please e-mail me at jmarsico@kafafiangroup.com

Friday, August 28, 2020

Texas Big: First Road Trip Since the Pandemic

It was bound to happen. After four months of lockdown, bankers are getting back to the office. They never stopped working, mind you. But work has been different to say the least. This month was our first opportunity to visit clients outside of driving distance since March!

The challenge: We are based in Pennsylvania and our governor still has a 14-day quarantine order for those traveling from Texas. So we condensed site work, and stayed the weekend! Here are some video highlights from the trip. Over 1,300 miles.

Special thanks to the eminently polite people of Texas, and our friends at FirstCapital Bank of Texas, N.A. for such a warm welcome.

Did you know someone planted Cadillacs in Amarillo?

In case your mobile device doesn't see the video to play, here is the YouTube link: https://youtu.be/8O3FicnHxQU

Monday, August 03, 2020

Bankers: Hunker or Pounce?

Unprecedented times. How many of our borrowers on forbearance can begin making payments? What provision do we make this quarter? How do we justify it? What will our constituencies think when we have to foreclose on borrowers?

For most of us, the onset of a recession means a time to assess the risk on our balance sheet, to tighten underwriting standards, and ramp up workout teams. It's what we did in 2008-10. And we were successful. We lived to fight another day.

But is it the right strategy for this pandemic recession?

I delivered this talk on a recent bank trade association webinar. And I'd like to share it with you.

At the end of 2019 everything seemed like sunshine and rainbows. Over a decade of economic expansion. Record earnings. Pristine asset quality. Capital aplenty. 

Then Covid-19.

Unlike 2008, banks were not the bane of our problems. In 2008, we were in the eye of the storm. Sure, community banks had little to do with liar loans or what was otherwise termed sub-prime. But many banks were, including the nation's largest. And "bank" is what's on our marquee. So community banks were grouped with the wrong-doers, even though the wrong-doers were a small percentage of our industry. They represented an outsized percentage of banking assets. So into the valley sank our collective reputations.

But today, we were not part of the problem. And through the Paycheck Protection Program, we actually became part of the solution. Community banks in particular. Banks with less than $10 billion in total assets accounted for 51% of PPP loans and 44% of PPP loan balances. We punched well above our weight. 

What's more, the very large banks that participated (Wells Fargo did not initially) largely ignored their small to mid-sized customers. When PPP opened, businesses flooded the gates. Like the Pamplona running of the bulls. Most of them banked with the very largest. And many of their calls to their "banker" went unanswered. So they called around to their community bank. Call-answered. Loan request-submitted. Approval-recieved. Funding-deposited. 

Steve Busby, CEO of Greenwich Associates, a financial services analytics firm, said this about PPP borrowers: "If business owners did not know what it meant to be a borrowing customer or have loyalty from their bank, they do now."

So, a win.

But now reality. The below chart shows S&P Global Market Intelligence estimates for the rise in bank non-performing assets.

And according to multiple bankers I spoke with today, the leaning is to wait it out. Feeling like Patrick Swayze described in Next of Kin.

But do we want to pass up on the opportunity to slay the gladiator (i.e. big bank) while they're down? Do we want to pass on the opportunity to operate with fewer, yet more capable (and therefore higher compensated) employees? Do we want to retrain our once branch-centric customers that were forced onto online and mobile platforms to be branch-centric again? All the while tending to our balance sheet?

Do we want to hunker?

This is our moment. What strategic initiatives will bust our 2020 budget? It's already busted! And our collective capital position is much stronger than 2008.

This is our moment to prove we can walk and chew gum at the same time.

This is our moment to invest in our employees to develop the human element, so critical in a "relationship".

This is our moment to invest where investing needs to be done, and pull the plug on inefficient uses of our capital.

This is our moment to prove that anything the big bank can do, we can do better.

Or, we could hunker, and wait it out. And let the moment pass.

Your choice.

~ Jeff

Sunday, July 19, 2020

Bankers: Who Has These Three Drivers of Value?

Two years ago bank stock analysts from investment banking firm Boenning & Scattergood identified three attributes in a financial institution that investors should look for. I wrote a blog post on it that is currently my third most read post of all time.

The three attributes were:

1. Superior Growth Prospects

2. Excess Capital

3. Strong Deposit Franchises

I can get behind these three. Can you?

Who Has "It"?

In 2018, I searched for individual financial institutions that met each of these criteria. In this post, I would like to search all publicly traded financial institutions between $1 billion and $10 billion in total assets to ensure I get adequate trading volumes to be able to compare trading multiples of banks that qualify as having these attributes and their financial performance. This resulted in 292 financial institutions (the "Measured Banks").

From there, I defined superior growth prospects as top quartile asset growth over a three year period. I defined excess capital as top quartile tangible equity to assets for the most recent year ended 2019. Strong deposit franchise was defined as top quartile non-interest bearing deposits to total deposits for that same period. 

The following table identifies all of the financial institutions that met at least two of the three criteria.

Thursday, June 25, 2020

Three Ways to Align Marketing With Profitability

The inability to connect Marketing activities to the bottom line is what I frequently hear from bankers that think the Marketing Department is a cost center. Measurement is difficult. 

I also hear that silos are a problem in banking. Yet Marketing is frequently held to account for the ROI of the checking or home equity campaign. And branch bankers say they weren't consulted nor were they included in promotion planning. They often hear of the campaign on the radio while driving home. 

If you read my articles, watch my videos, or have heard me speak you know I'm a big proponent of the Marketing function taking a more prominent role in banks because customer acquisition and the customer experience has changed so much in the past decade. There must be an integrated, cross functional approach to acquiring, onboarding, and serving customers well to deepen relationships and turn them into champions of your brand. And that includes support functions. Nothing is more frustrating than turning a raving fan customer into a cynic because they get buzz sawed by the wire transfer person at HQ.

I have a bias towards profitability and against widgets. I remember doing a process review at a bank where one branch had hundreds of checking accounts with $100 or less. When I asked... you know the answer, right? A CD promotion that required opening a checking account. Widget counting. If the branch manager was accountable for consistently improving the profitability of her branch, and the Marketer was responsible for the continuous profit improvement of retail checking, this wouldn't have happened. Because having hundreds of low balance retail checking accounts attracts cost, with little revenue. But I bet you the CD promotion report had none of this.

So here is what I suggest:

1. Make profitability the ultimate accountability. 

Mandatory disclosure, my firm measures line of business, product, and feeds to customer profitability systems. And I work diligently with banks to analyze, adjust, and improve their profit trends using this information. Because I believe it is the way to go. Imagine if Marketing were responsible for the continuous improvement of the home equity line of credit product (see table).

The pushback from using profit and profit trend as the ultimate accountability, and not just from Marketing mind you, is that there are so many things outside the control of the marketer. True. But isn't that the case for any line of business with their profit and loss responsibilities? I have no control over the D&O insurance premium at my firm. But I'm sure as heck responsible for the firm's profitability. Which leads me to my second way to hold Marketing accountable.

2.  Implement Product Management. 

Which is totally related to (1) above. If Marketing was accountable for managing the HELOC product, wouldn't they engage in cross-functional collaboration to improve the profit picture? For example, in examining the above table, it is clear that the Bank has done a good job at increasing the product's spread. Fee income has been flat. And operating expense as a percent of the portfolio has been rising, even as the portfolio has been growing. Aha! What is afoot? Is credit underwriting manual? Do customers apply online and the loan moves seamlessly and electronically through the bank's underwriting, closing, and booking process? Does someone in loan servicing spend half their time on insurance tracking? i.e. are your processes scalable and efficient? Did you have a $100,000 marketing spend to generate 10 loans? All would be on the table as the person responsible for the continuous profit improvement collaborates with all areas of the bank that touch the product to improve the profit trend. And if the HELOC profit trend improves, branches will be more profitable (if they are the line of business responsible for HELOC origination).

3.  Identify Root Causes and Track Improvement. 

I'm currently reading the book Everything They Told You About Marketing Is Wrong by Ron Shevlin. In it, Ron says "The key to future profitability isn't in simply keeping customers-it's from deepening their relationships. And engagement is a necessary precondition for that to happen." There's that profitability word. What was Ron thinking? But fine, let's assume that "engagement" is key to keeping and deepening relationships. What the heck is engagement? Ron says it's whatever the bank thinks it is. And here was the chart from the book to highlight the point: 

I took a picture from my Kindle. Don't judge.

I asked Ron how to measure it, and he sent me a slide deck that showed it was measured by survey. If there was evidence that there was a strong correlation between engagement and customer profitability, I think the savvy marketer can measure it without having to perform surveys in today's AI and CRM world. But let's assume engagement deepens and lengthens a relationship. Let's look at the profit trend of a business interest checking product.

This product is much more profitable than the HELOC. In terms of ROE, fuhgetaboutit. So profitability should drive what marketing initiatives you implement.

Back to increasing engagement to increase profitability. If Marketing was responsible for assisting bankers migrate customers from low, to medium, to high engagement, how would that impact the profit picture? For one, it would lessen the operating expense as a percent of the product portfolio, because there would be no Know Your Customer, Address Checks, promotions to win a new customer, etc. And second, the deposit spread would increase because the duration (CFO term) of the product would increase, yielding a greater FTP Credit for Funds. 

By increasing the profitability of Business Interest Checking, you also increase the profitability of branches that are generally responsible for deposits, and possibly the commercial lender if the bank measures their portfolio profitability, including the deposits they brought in. 

So identify root causes with high correlation to improving product profitability, and measure Marketing on them. 

This level of accountability breaks down silos as Marketing now works with various departments within the bank to improve the profit picture, and aligns Marketing interests with those of profit centers (i.e. no hundreds of low balance checking accounts). When product and therefore line of business profitability goes up, so goes the bank.

What's stopping you?

~ Jeff