Thursday, April 29, 2021

Squared Away- How It Happened

March 11, 2020: The World Health Organization declared a global pandemic. I attended the Pennsylvania Bankers' Association Women in Banking Conference the next day. And I wouldn't attend another for a year and three months. I will be attending the Financial Managers Society FMS Forum this upcoming June.  

The first few months were a haze of helping clients navigate the uncertainties in their business, and the uncertainty in our own.


And then we began settling into a routine. When the U.S. tried to open up in the summer, we actually embarked on a 10-day business trip to Texas to work on a project. And then the second wave hit. Back in the work-from-home (WFH) saddle again.

Do you know how much time a traveling consultant recaptures when they no longer travel? Sure, road warriors try to be productive on phone calls and in hotel rooms. But when all travel is paused, you suddenly have much more time to get things done and be productive.

It was with this newfound time that got me thinking in the summer of 2020.... write a book! 

Annually I would review my most read blog posts for the past year and all time. I've been writing since 2010. Some made sense to me. Others surprised me, such as the amount of views expended on board composition, or on deploying bank capital. And I thought, well, readers know what they want. And viola! Idea! Write a book curated by readers of Jeff For Banks. 

So in the summer I drafted a summary, and an introduction chapter, and solicited the usual publishing suspects for business books. The challenge was that it was a book designed for community financial institutions. Very niche. Not a large audience. No worries though, I could build my own publishing house. So I did, building off what I learned when my then 10 year old daughter published a pre-teen book.


Editors Rule

My first hire was an editor. Here I leaned into my connections. I have written many articles for multiple publications. My best editor, as it turned out, was the ababankmarketing.com editor, Kate Young. She tore up my articles to sometimes unrecognizable levels. Yet they were better, much better, than what I submitted. Could I keep my ego in check by submitting myself to so much red ink again? You betcha.

If you want to write a book, have a great editor. Kate was great, and I think the product shows her skills.

While writing we quickly realized we needed permissions to include references and graphics. Since the book includes blog posts in their original form, I had to ensure every graphic was royalty free or I had to substitute with royalty free graphics. Also, if I included slides from conferences and presentations that I attended, I asked the firm if it was ok to use their material. The last permission was a cartoon on page 57 of the paperback and hardcover, the work of a commercial cartoonist. That one required a royalty payment. Most of the tables and graphs in the book were done by me. I gave myself permission.

My theory behind the book is that serving all stakeholders can be the next best version of my readers' financial institutions. While seventy-five percent done with writing, I read Conscious Capitalism by John Mackey of Whole Foods Market and Raj Sisodia. They put hard numbers behind it in their appendix that shows "Firms of Endearment", i.e. those that serve a higher purpose than solely delivering to shareholders, outperform the general market. That was my theory. Stakeholder primacy is not a zero-sum game. You can deliver value to all stakeholders at the detriment to none. It was good to have confirmation in the form of analysis. I do favor spreadsheets. Oftentimes success is measured by them. 


What's In A Name?

I naturally had a few book names knocking around in my head. And I bounced a few off of Kate, my editor. But for this exercise, I leaned on my family. It was January, and my college daughter was home. It was the pandemic, and my LA daughter's family (fiancée and child) were riding the pandemic out with us. Boom! Naming team.


We sat around the kitchen table and knocked out possible titles. We started with banking specific possibilities, until my daughter's fiancée suggested we link other aspects of my life into the title.  That ended up being the last three titles in the accompanying picture (third from the top offered by my daughter because it's what might have come out of my mouth as a result of teenager hijinks). Obviously we started out less serious. But my wife actually came up with the last one and the winner-Squared Away. It's a typical military term that has widespread civilian adoption. If you're squared away, you got your sh*t together. 

The subtitle came from a virtual conference where Jelena McWilliams, the FDIC Chair, said those words. Actually, I did not attend the virtual conference. You know how I heard of what she said? Several tweets from my Twitter friends. My subtitle came from a tweet. You read it here.


Graphic Artists Drool

Once written and edited, now is the time to bring more professionals onboard. First, a typesetter. Publishing houses and international book standards require certain formats. You'll hear more on this below, but do you know there is not supposed to be any blank pages? That is why some books have This Page Intentionally Left Blank. So it's not blank. Publishers do this to manage where the Table of Contents rest, and each chapter starts on the right side of the book, etc. 

Did you also know that the book title with author and publisher must appear immediately prior to the copyright page. Who knew? At any rate, I hired an experienced typesetter that knew all of these things and promptly formatted the interior of the book for Kindle, Paperback, and Hardcover. She was great, and quick. I had minimal changes.

The cover artist was a bit different. And the cover, as it turns out, is very important to book sales. More important for fiction, but still important. So I researched the most experienced in design and found my Nigerian artist via Fiverr. His design was great, in my opinion (see picture). He gave me a couple mock-ups to choose from but I liked the symbolism of the squares. Each different book format required a different cover (Kindle, Paperback, Hardcover). And for paperback and hardcover, I had different publishers (Amazon and Lulu). Amazon does not do hardcovers. 

As great as the graphic artist was in art, he was a bit challenged in delivering book cover formats correctly. The Kindle version went off without a hitch. The paperback had a couple revisions. The hardcover was a challenge, including putting the wrong barcode on the back. Did you know that each format has a different ISBN number and therefore barcode? Also, did you know, that the barcode on the back of printed books needs to have a white background and be in the exact same spot on every book? 

My graphic artist struggled with this. And ultimately my daughter's fiancée finished the last five yards of the hardcover design. 


Marketing

I'm now in the book marketing business.

Before release, I noticed that two of my social media contacts that served financial institutions and financial technology companies penned their own tomb: Beyond Good. And I worried that much of their thesis was similar to my own. It is similar in that they encourage capitalism's evolution to be more balanced in serving stakeholders. But it is not as targeted towards micro issues facing community financial institutions, as was mine. Phew! I encourage you to read both!

No matter if you use a publisher or create your own, you are ultimately responsible for book sales. My first move was to order author's copies and send pre-release versions to industry insiders. I did so, but only two weeks prior to release. It wasn't like I gave them tremendous time to read, opine, and help promote. But hey, I'm a newbie. 

This led to me being on the Banking Transformed podcast, and be scheduled for a few more. It was a great conversation with Jim Marous. And I look forward to others.

Before going public I e-mailed all of my banking contacts, letting them know before others that I wrote a book specifically designed to bring value to them. And that really started the ball rolling. That was only two weeks ago, so we'll see how it goes. So far the feedback has been positive. But who calls out the author and says "this is crap!" I worked hard to make it valuable, so I'm hoping nobody feels that way. But ya never know.

My LA daughter is helping me with marketing. She works for a marketing agency that specializes in health care and has been in the marketing agency biz her whole professional career. Knows more than me. But don't tell her I said so. If you see an ad on LinkedIn or Amazon, likely done by her. She also guides me in content and pushing out to the world. 

I wonder if she'll like this blog post?


At any rate, that's how my book came to be. I hope you enjoy it. Order by clicking on the below links or go to wherever you get your books:

Kindle

Paperback

Hardcover

Thank you for your consideration!


~ Jeff



Tuesday, April 06, 2021

Unintended Consequences of Aggressive Regulation

"In case you're looking for some light reading this weekend, FRB-Philadelphia working paper 21-08, Does CFPB Oversight Crimp Credit?" 

~ Robert Morro (@bmorro44)


So went a tweet from one of my Twitter connections. So I listened to him, and dialed up the FRB-Philadelphia WP 21-08. Forty three pages later, with formulas like:


CFPBLoanSharelt = αl + β · Postt + εlt


And a 27 page appendix with subtitles like:


Alternative difference-in-differences model


I got my answer.


Note that the study was limited to Federal Housing Administration (FHA) loans. For the uninitiated, an FHA loan is government-backed mortgage insured by the FHA. It is popular with first-time homebuyers, low to moderate income (LMI) homebuyers, and those with relatively low credit scores... as low as 500. It normally has a low down payment requirement, as low as 3.5%. You can see how it accelerates home ownership, which many economists and policy makers feel is critical to improving net worth.

The study analyzed FHA lenders that were subject to CFPB oversight, which were non-bank FHA lenders and bank FHA lenders with greater than $10 billion in total assets. The period analyzed was immediately prior to the commencement of CFPB oversight in 2011, and afterward. The study also analyzed the impact of the change in oversight intensity brought about by the 2016 election. 


Conclusions

The study revealed intended and unintended consequences. First, the intended consequence was that CFPB oversight is associated with improvement in mortgage servicing practices, leading FHA mortgages from CFPB-supervised banks to become less likely to transition from moderate to serious delinquency. Poor servicing practices were an important driver of the foreclosure crisis during the Great Recession; the study results suggest that tighter regulatory oversight may help reduce inefficient foreclosures during economic downturns. This is good.

There were two unintended consequences. The first was regulator arbitrage, where a bank decides to have an activity regulated by one entity rather than another because of the perception that the chosen regulator will be less risky to them. In this case, bank holding companies (BHC) with mortgage subsidiaries in the holding company had a tendency to put the mortgage sub under the bank where it would be regulated by the bank's primary regulator and not the CFPB so long as the bank was less than $10 billion in assets. If it was in the BHC, it would be a non-bank mortgage lender, and therefore subject to CFPB oversight, even if the bank was under the $10 billion threshold. Meaning: banks chose to avoid CFPB oversight.

The second, and presumably more actionable unintended consequence: Banks subject to CFPB oversight decreased FHA lending and replaced that activity with jumbo mortgage lending. To avoid the reputation and regulatory risk of doing FHA lending, banks chose to do less of it, and therefore reduced the amount of credit advanced to first-time homebuyers and LMI families. Jumbo mortgages are typically for larger homes for wealthier and more credit-established families. There was no conclusive evidence that non-bank FHA lenders and under $10 billion FHA bank lenders increased FHA lending to make up for the shortfall.

Let that sink in a bit.

Further, after the 2016 election, banks subject to CFPB oversight began anew with FHA mortgage lending. They must have perceived lower reputation and regulatory risk in doing so, and therefore came back into the market. 

This is actionable information for both lawmakers and regulators. Particularly given the aggressive rhetoric coming out of the new-teeth CFPB.


Maybe they should read the study. And modify their approach. One can hope. But as Red from Shawshank Redemption said:

"Let me tell you something my friend. Hope is a dangerous thing. Hope can drive a man insane."


Add FRB-Philadelphia WP 21-08 to your night time reading list!


~ Jeff



Tuesday, March 23, 2021

Fintech Buys Bank. Keeps Stratospheric Valuation.

Imagine a fintech, with off-the-chart valuations such as 2.6x book value and 51x EBITDA, buying a bank. For 1.85x book. 

In today's M&A valuations, 1.85x is pretty lofty. Especially for a community bank. But you don't have to imagine it. Because that was what LendingClub paid for Radius Bank. Since the deal closed, LendingClub has kept its valuations. In fact, since February 17, 2020, one day prior to the Radius Bank deal announcement, LC's share price has risen 58% versus the S&P BMI Software & Services Index increase of 20% (see chart). 








LendingClub bought a bank and didn't trade down to traditional bank valuations. Their valuation grew loftier. Making for even better currency to buy even more banks. And putting them at a strategic advantage over other would-be financial institution buyers mired in the lowly yet more rational bank stock valuations. Truth be told, LC paid mostly cash in the deal. What's cash worth these days? And there are plenty of examples of investors throwing barrelfuls of cash to technology firms.

This is a clear threat to financial institutions. How can we overcome such a hurdle? I wrote that one primary reason banks need scale is to enjoy greater trading multiples. It was one of my most read posts and is a chapter in my upcoming book, Squared Away (soon to be available in your favorite bookstore). 

But we can't pay 2x book for a target when our stock is trading at 1.2x book. Even if we enjoy higher bank-like trading multiples because of scale we may get to 1.5x. Green Dot Corporation is currently trading at 2.6x book and over 6x tangible book. They can easily afford 2x book with that valuation. With more experience acquiring banks in the rearview mirror, fintech's who might have once been worried about bank valuations weighing them down, will be more confident to bid on for-sale banks, to be aggressive, to get deals done. 

Having said that, net interest income is a very small part of  LendingClub's revenue mix, at 22% for 2020, which was prior to the close of the Radius Bank transaction. And they're in the business of lending! Green Dot Corporation showed less than 2% revenue attributed to net interest income. So the continued lofty valuation might be relating to the relative size of the bank within the fintech. 

We were worried that credit unions would be buying banks. Using their ample cash positions, which aren't earning much in the investment portfolio or at other financial institutions, and turning taxable earnings from target banks into non-taxable earnings at credit unions.

What about fintechs that may not be too concerned about profit? I reviewed LendingClub's last five years and see nothing but red ink. Radius Bank had net income of $6.7 million in 2020. On a consolidated basis with the currently bleeding LendingClub, that might revert to tax-free money. Just what we feared with credit unions. 

Should we be worried about more fintechs stepping up to buy banks? (Ref: SoFi and Golden Pacific Bancorp) 

Will these precedents be part of a trend?


~ Jeff

Friday, March 05, 2021

CFPB: Are They Coming to Get You?

A bank trade association CEO asked me a couple of questions while he was researching an op-ed piece. The edited Q&A is below.


Q. Shouldn't the CFPB work to address the impediments to starting a bank in LMI markets rather than punish community banks who scrambled to serve their customers when the economy shut down?

Author's note: This was probably relating to the late January released statement about the acting director of the CFPB's promise to take aggressive action in response to perceived Covid-19 relief violations, including the policy of some banks to only take PPP applications from pre-existing customers, which may have a disproportionate negative impact on minority-owned businesses.

 

A. The problem stems from the spreadsheet, in my opinion. With deposit spreads so low, branch deposit sizes need to be very large for a branch to be profitable. According to my firm's profitability peer group, a branch with $74 million in average deposits made a mere pre-tax profit of three basis points. That is a fully absorbed number, with support center expenses allocated to it. On a direct cost basis, the branch must be at least $38 million in deposits. Knowing this, very large financial institutions operate branches where they can have greater scale to drive greater profitability, which frequently excludes LMI neighborhoods, creating what is termed "bank deserts."

Another challenge is imposed by the very government that tries to assist LMI households: regulation. The average operating cost to originate and maintain an unsecured personal loan is $287 (again, according to my firm's profitability outsourcing service peer group). And the average balance per account is $3,800. The spread needed to cover the cost alone would be 7.5%. That's not the yield... it's the spread. So if the bank's cost of funds was 1% the yield would have to be 8.5%.

But there's more! The provision for loan loss is 1.25% of that balance. A bank would have to charge a 9.75% yield on an unsecured personal loan just to break even. The operating cost is largely attributable to the distribution through the branch network and regulation. Since a bank can't cut regulation, they trim their branch network to lower those costs. And the obvious bullseyes are on branches that lose money.

Similarly, the annual operating cost per account for a retail checking account is $398. With a 1.89% spread and with 0.91% average fees as a percent of balances, the average balance of a retail checking account would have to be over $14,000 to be profitable. A very high hurdle in an LMI neighborhood. Again, much of the cost per account is driven by branch distribution and regulation. Retail banking is heavily regulated. And it's difficult for financial institutions to operate in neighborhoods that have low average balance loans and deposits. Plus, if an institution charges the high yields on loans to be profitable, or assess the high fees it would need to make the retail checking account profitable, think of the reputation risk they would assume. That is why very few of our clients consider retail banking as the driver of future profitability in strategy sessions. 


Q. Should communities today be concerned by the M&A activity taking place? What advantages or disadvantages do they face when institutions consolidate?

A. If we lose 4% of FDIC-insured institutions per year, which was pre-pandemic pace, we will have ~ 3,300 institutions in 10 years. There are people that believe we are over banked, and look to Canada and Europe as case studies for having fewer, larger banks. There are benefits to scale. The most efficient banks in the U.S. tend to be between $5 billion - $10 billion in total assets.

But there are myriads of examples of very efficient $500 million banks, and technology should make it easier for smaller community banks to deliver relevance-sustaining profitability that enables the bank to invest in its future by remaining relevant to its stakeholders. The really small institutions, however, should consider merging, even if one or two engage in a merger of equals to have the resources to remain relevant. Smaller institutions run the risk of nobody wanting to buy them.

As institutions get larger, and their HQ's get farther away, decisions are made that can be sub optimal to the local area, town, and/or borrower. For example, think of the Credit Analyst in Charlotte evaluating a rural Indiana ag loan to an Amish borrower. What does that write-up look like? We will lose that local flavor to allocating capital by centralizing banking. That is what I fear we will lose by continuing the trend that took us from 15,000 banks in 1990 to less than 5,000 today.


~ Jeff



Tuesday, February 23, 2021

Twitter Reacts to M&T / Peoples United Bank Deal

The headlines for subject deal, which dealmakers hope beyond all hope starts a robust bank M&A frenzy, were like the following:

(you can click on articles and tweets to enlarge)


































Conversely, here are what some Twitter users thought of the deal, which starts with a factual tweet from yours truly. Keep in mind most tweets were from investors, not other stakeholders.
























Any other reactions?


~ Jeff

Wednesday, February 17, 2021

Is Your Contemplated Bank Merger Anti-Competitive?

Yesterday at the ABA's virtual Conference for Community Bankers (CCB), Federal Reserve Governor Michelle Bowman gave a speech, My Perspective on Bank Regulation and Supervision. In that speech, she briefly commented on the FRB's review of merger applications from an anti-trust standpoint. She said:

"Technological developments and financial market evolution are quickly escalating competition in the banking industry, and our approach to analyzing the competitive effects of mergers and acquisitions needs to keep pace. The Board's framework for banking antitrust analysis hasn't changed substantially over the past couple of decades. I believe we should consider revisions to that framework that would better reflect the competition that smaller banks face in an industry quickly being transformed by technology and non-bank financial companies. As part of this effort, we have engaged in conversations and received feedback from community banks about the Board's competitive analysis framework and its impact on their business strategies and long-term growth plans. We are in the process of reviewing our approach, and we are specifically considering the unique market dynamics faced by small community banks in rural and underserved areas." 


The Fed's FAQs on their approach in analyzing the competitive effects of a merger say the following:


On the initial evaluation of the competitive effects of a combination: 

The competitive analysis of banking acquisitions begins with an initial screen based on market shares and market concentration for the local banking markets in which the parties to a transaction have overlapping operations. Market shares for a local banking market are based on the deposits of depository institutions in the market. The Herfindahl-Hirschman Index (HHI) is the usual measure of market concentration and is calculated as the sum of squared market shares in a local banking market. For these initial calculations, the deposits of all institutions with a commercial bank charter receive 100 percent weight and the deposits of all institutions with a thrift charter (i.e. savings banks and savings and loan institutions) receive 50 percent weight in computing market shares. This weighting indicates that the Fed doesn't think thrifts offer a full retail banking suite of products and/or they are concerned about the anti-competitive effects for in-market commercial banking. Although readers know that many thrifts pursue business banking strategies. And to a lesser degree, credit unions. Which are not part of the HHI calculation.

The Board delegates merger approval to individual Reserve Banks unless, among other reasons (i) the merger or acquisition would raise the HHI by 200 points or more to a level of 1,800 or higher in any local banking market in which the parties to a transaction have overlapping operations, or (ii) the merger or acquisition would increase the post-transaction market share for the acquiring firm to more than 35%. If these are triggered, off to Washington the merger application goes.


On how the Fed defines geographic markets:


No hard and fast rule. Many geographic markets follow Metropolitan Statistical Area (MSA) definitions or rural county lines, but some markets comprise multiple MSAs/counties or parts of MSAs/ counties, reflecting that economic activity does not always track political boundaries. Up-to-date geographic market definitions are available at the St. Louis' Fed CASSIDI database or from the relevant Reserve Bank. Banks can dispute the definition of a geographic market relevant to their application by proposing an alternative market definition and providing evidence supporting the alternative. Such evidence should focus on retail banking customers' substitution behavior (emphasis mine) or on the economic integration of the relevant economic areas for the proposed geographic market definition. 

This runs contrary to the deposit weighting of 100% for commercial banks and 50% for thrifts. Why discount thrifts, and not even count credit unions if the true concern is retail customers' ability to substitute?


And what about branchless banks? This gets to the crux of Governor Bowman's comments, in my opinion. Why do we not count virtual banks such as USAA, Discover, and Ally, or neo banks such as Chime (Stride Bank or The Bancorp Bank)? 

What I would suggest to regulators in contemplating change is to have FDIC and NCUA insured financial institutions report deposits by geography, such as Zip code, and break it down further between business and consumer. Let that be the new Summary of Deposits from which the anti-competitive effects of a merger is calculated. If you continue to weight deposits by institution type, determine first what anti-competitive risk we are trying to mitigate. Are we concerned more about business banking than retail banking? Then perhaps business deposits get 100% weighted in the HHI calculation and retail deposits get something less than that. Or, alternatively, perhaps Americans value a bank with a physical presence in the market, and therefore financial institutions with a physical presence get 100% weighted versus something less for institutions with no in-market presence. But the bank/thrift weighting scheme currently in effect does not reflect reality.


So in terms of how competitive analysis is now performed, I agree with Governor Bowman's comments. Change is coming. And welcome.


~ Jeff



Saturday, January 30, 2021

How Can Community Financial Institutions Improve? Project Management.

In this video blog, I discuss my thoughts on community financial institutions upping their project management game. In summary:


There are two types of projects: support function projects where you try to improve the gears within the bank, and customer experience projects (CX) where you meet the demands or emerging demands of your most valuable customer cohorts.

First, be selective in the projects you undertake. The ones that create the greatest value in terms of reducing resources needed to run the bank, or improve your most valuable customers' experiences.


Here are the high level steps:


1. If a CX project, determine your most valuable customer cohorts by lifetime value. Why undertake a project for customer segments that are unprofitable?


2.  Select a project team that includes executive sponsorship, mid-level leadership, do'ers (after selection), and vendors (after selection). Use a "many hands make light work" approach. Because it's true. And many hands make quick work.


3.  Evaluate and select the vendor based on their solution, support, and potential longevity. Don't be saddled by your rigid vendor management practices to eliminate promising vendors.


4.  Set deadlines. Not six months out. Think PPP fast. We did it then, we can build on that. Make sure you keep the vendor fully engaged in the process, like they promised in your contract.


5.  Maintain accountabilities. Even after flipping the "on" switch. 


The Jimmy McHugh's tour is a bonus!




Here is the actual link in case you can't click on the video:

https://youtu.be/prROd5F2ies


Thursday, January 14, 2021

The Death of the Community Bank

In June of 2008 I gave a speech titled "The Death of the Community Bank" and in that speech I made predictions. Recently I was cleaning out my files and I ran into the hard copy slide deck that accompanied the speech. 

If I ignore where I was wrong then I am as guilty of willy-nilly prognostications that I sometimes think industry pundits engage in. So, below is a list of predictions I made and if I was right or wrong, or somewhere in between.


Prediction: The General Bank will become extinct. Much like the General Store fell victim to the supermarket and the lumber yard fell victim to Home Depot, I predicted the community bank that did not pick targeted customer niches or develop product expertise will meet it's doom. The anecdote I used was how the Stephen's Island Wren was rendered extinct by a lightkeeper's house cat. That might be an exaggeration, as many feral cats feasted on the flightless bird as well. Much like competitors nip at community banks' customers. 

Result: Mixed. A mid-2020 survey performed by Cornerstone Advisors showed that 51% of retail customers that opened a new bank account within the last three months did so at a large, national bank. Eighteen percent of that group opened an account at a digital bank. Two percent opened an account at a community bank. When I made that speech in 2008, there were approximately 8,500 FDIC-insured financial institutions and today that is around 5,000, a 40% decline. However, last year's top 5 total return to shareholders post had two traditional community banks on that august list. So there are community banks that bring discernable value to their shareholders and other constituencies. They can have the operating discipline and service to their constituencies to earn their right to remain independent. And I had ING Direct as an example of who might be the lightkeeper's cat to the community bank. A bank that was purchased and is now, well, extinct.


Prediction: Community Banks with < $10 billion in total assets will continue to lose market share. Here was my chart to support the prediction...


It was a pretty alarming slide. 

Result: I was right. I ran the numbers again. Banks and savings banks with greater than $10 billion in total assets control 86% of all FDIC-insured assets and 85% of deposits for the most recent quarter. The days of getting in the ring and slugging it out for market share with other community banks are done. Strategies cannot ignore big banks any longer.


Prediction: Banks with < $500 million in total assets must have superior net interest margins (NIMs) to deliver financial performance. Here is the slide that accompanied the prediction...


Result: Mixed. Banks with less than $500 million in total assets delivered a 3.82% NIM at the median for 2019, while banks above that size was 3.67%. So smaller institutions continue to enjoy a NIM advantage, but not to the extent they did in 2007. And the ROA for <$500MM banks was 1.08% versus 1.22% for the rest in 2019. I used 2019 because of the NIM compression caused by PPP loans and the outsized impact that had on smaller institutions. And I did not filter for Sub S banks, so the ROA difference was probably greater. Having said that, the ROA difference was only 14 basis points. With a narrow advantage on NIM, size is a factor to drive down costs to elevate the performance of smaller banks to that of larger banks.


Prediction: Community banks must solve for the profitability of fee-based lines of business to generate superior results. Here is the slide I used to support the contention...


Result: Mixed. If I put a column in the above chart for third quarter 2019 fee based products profit contribution was -6%. This is from my firm's profitability outsourcing service, which is mostly community banks. In a low rate environment, deposits are less valuable and therefore less profitable. In terms of fees, community banks have not solved for making this a contributing element to their profit picture, yet they remain profitable. Imagine if they did operate fee-based lines of business profitably. That would be an ROA/ROE accelerator. 


Prediction: Senior management will migrate to being strategists, coaches, and leaders rather than tacticians. Here is the slide I used on how leadership should spend their time courtesy of The Breakthrough Company by Keith McFarland.


Result: I was wrong. Although I do not have statistics, only observation. I often hear the "day job" comment regarding strategy execution. In my view, senior managers spend their time more like the first line supervisors in the slide above rather than how the then CEO of Chico's suggest they should spend their time. Could this be a factor in how slow we've moved in adapting to customer needs? Are we spending more time solving for tactical issues rather than moving us closer to our aspirational future?

How do you spend your time?


But the big mea culpa is in the title of this post. As I write, community bankers across the country are helping struggling small businesses with PPP loans, much like they did in the spring to quickly distribute this critically needed funding jolt. In the words of FDIC Chair Jelena McWilliams, community banks were the economic first responders during the pandemic. So in terms of the Death of the Community Bank, I WAS WRONG.


And thankfully so. Let's work together to keep me wrong.


~ Jeff