Monday, November 21, 2022

Debunked! Are Bank Merger Approvals Taking Longer?

I enjoy my Twitter community because I get diverse views on banking, sports, politics and entertainment. One of my Tweeps, Rick Childs, a Crowe partner, recently tweeted about the amount of time it is taking merger deals to get regulatory approval. His numbers are raw, and buck the conventional wisdom that regulators are dragging their feet on approvals. A conventional wisdom that our clients are asking us about, so it is tremendously beneficial to have actual data, instead of my standard answer: "we haven't noticed it at smaller bank deals." Data rules.

Conventional wisdom must result in actual wisdom, right?

Average Months From Announcement to Closing

Average Months From Announcement to Closing (Terminated Deals Separate)

Average Months From Announcement to Closing by Asset Size

Average Months From Announcement to Closing by NPA/Assets

Average Months From Announcement to Closing by Tang. Eq./Assets

Average Months From Announcement to Closing by ROA

Average Months From Announcement to Closing In-State vs. Out-of-State Acquirors

Average Months From Announcement to Closing for Merger of Equals

There you have it. Merger deals are taking no longer from announcement to closing this year versus recent history. Terminated deals intuitively take longer because the regulatory approach is not to reject the merger, but to inflict pain on the parties until they withdraw their application and subsequently terminate, a process that obviously would take longer.

Larger deals are taking longer, as has been the case in recent history. I should note there is likely a smaller universe to calculate averages, that likely skew the numbers for >$50B bank deals. Also intuitive is bank deals where targets have lower capital levels and profitability (ROA) took longer.

Not intuitive is that there doesn't seem to be a correlation between the seller's asset quality and time to complete a deal. And rounding out Rick's deep dive into the merger completion timeline rabbit hole, MOE's and out-of-state transactions take longer for approval.

There you have it. Now bankers don't have to rely on investment banker opinion as to the length of time it takes deals to get done. 

Thank you to Rick Childs and the Crowe researchers for keeping us steeped in facts!

~ Jeff

Friday, November 04, 2022

Bankers: Can You Create a Culture of Operating Discipline Even if You Have No or Few Shareholders?

Do shareholders give publicly traded financial institutions an edge over their private and non-shareholder owned financial institution brethren?

I posed this question while speaking at a recent conference. The following slides were used to make my case.

            Source: S&P Capital IQ for Banks-Savings Banks and Credit Unions between $1B-$10B in total assets. YTD=June 30, 2022.

Banks-Savings Banks (SBs) between $1B-$10B in total assets have a slight edge in Yield on Loans to the similarly sized CUs, which makes sense because there would be more commercial loans and relatively fewer residential loans than Credit Unions. Credit Unions held an edge in the Cost of Interest-Bearing Liabilities until 2020 when their cost eclipsed that of Banks-SBs. This might speak to the deposit betas being higher in Credit Unions than banks, as CUs would tend to have less core business and municipal accounts. All of this led to a slight edge in Net Interest Margin in Banks-SBs. Eleven basis points YTD to be exact.

Credit Unions, however, have a noticeable edge in Fee Income to Average Assets, 1.14% YTD versus 0.64% for Banks-SBs. Before my bank friends acclaim "aha, credit unions charge more fees than banks!", I will say you would be correct in fact but the context is nuanced. Although it is my experience that CUs do collect a relatively greater amount of deposit fees than Banks, this can be partly attributable to the average balances per account at CUs. They are lower than banks. It is intuitive that they would collect more deposit fees.

This nuance would be totally lost on Rohit Chopra of the CFPB. So naturally CUs are in alignment with Banks-SBs against the CFPB's crusade against "junk fees." 

Back to my point. CUs generate as much if not more revenue off of their balance sheet than banks. So why is their profitability in the form of Return on Average Assets ("ROA") noticeably and consistently inferior to banks? Twenty-seven basis points YTD inferior. Even though they pay no federal corporate income taxes?

Look no further than their expense ratio (non-interest expense / average assets). YTD the Bank-SB expense ratio was 2.27%. CUs was 2.86%. A 59 bps difference! If the median size credit union from the $1B-$10B group I analyzed achieved the bank versus the credit union expense ratio, the CU would make $11.8 million more in profit.

The CU would counter that they are a not for profit, and don't have sharholders as a constituency. Mutual banks would counter with the same. And while true that shareholders are not a constituency for either, I call bullshit on either of them not needing profits. Retained earnings is their least expensive form of capital. In some cases, their only form of capital. And for those uninitiated in balance sheets, retained earnings are generated from profits!

Now, perhaps, the lost $11.8 million is somehow benefiting one of the other three stakeholders: employees, customers, or communities. It wouldn't be benefiting customers in terms of fees or interest rates, as the analysis above shows. And the $11.8 million is from the expense ratio which has nothing to do with rates or fees.

It could be benefitting employees in the form of better compensation, benefits, etc. Or in the form of better technology. But I know of no credit union that pays their employees materially above market wages or has materially better tech than their banking brethren. I don't have the data or CU by CU analysis to make a definitive BS call, but let's say I'm skeptical.

Where I think the excess $11.8 million resides is buried in bureaucracy and infrastructure. They don't have to answer to shareholders, so the discipline of maximizing profitability for the benefit of stakeholders so often enforced by shareholders is not part of their culture. 

And it's a shame. Because if they had that $11.8 million, imagine the tech investments, employee initiatives, core deposit special dividends, or community support they can provide. 

For those that are not shareholder owned or are privately held, implement cultural operating discipline so you have the resources to be relevant, even important to the other stakeholders.

~ Jeff

Saturday, September 24, 2022

3 Ideas on Bank Branching

I moderated a strategic discussion at a recent banking conference. In that meeting, the CEO of a community bank said he offsets his branch costs by leasing branches out to unrelated businesses, like a masseuse. I thought he was joking.

He wasn't.

The anxiety community bankers feel about consolidating branches is palpable. What if you are the only bank in town and creating a banking desert? How about if you bank the local municipality? What if one of your directors is the town manager? Will the regulators frown on us closing a branch in a rural and/or low to moderate income town?

In survey after survey, retail and small business customers consider branch location as important in determining where to bank. This gives a lot of anxiety to fintech promoters. "Chime has 12 million accounts!" Failing to mention the average balance per account might get one of those account holders a couple cases of beer and pay the cell phone bill. 

Large banks, who are community banks' most impactful competitors, are consolidating away from low population density areas. Community banks consider branching a differentiator. This will put community banks at a significant disadvantage with pricing, as the direct operating expenses of the branch as a percent of its deposits averaging 90 basis points, according to my firm's profitability outsourcing service.

That's 90 basis points the bank can't pay in interest to depositors that Ally Bank can. How can the community bank compete?

Here are some ideas.

3 Ideas to Improve Branch Performance

1. Lease space to complementary businesses- I'm not sure I would do the massage parlor, but I'm also not sure I wouldn't. We have far more square footage in our branch than today's bank customer demands. The last cohort of branch-heavy transaction customers were forced to use online and mobile during the pandemic, and it makes no sense to design branches to serve that diminishing crowd's needs. Put some investment into partitioning to lease to the local insurance agent, lawyer, or wealth manager. The lease expense could offset branch direct operating costs and could provide the branch with an embedded center-of-influence referral source.

2. Staff with high powered bankers covering two markets- I think if we were brutally honest with ourselves, are our branches staffed with people that are so well known in the towns they serve that they are also the head of the local Rotary, or on the school board? Community banks have been slow to flip the script on the people demanded in branches. Efficient transaction processors or super star business developers and customer advisors? Be honest. What if we staffed with the latter, which would likely cost more (but also should result in greater deposit balances per office), and have that branch team cover two branches. Are there laws that require each branch to have 40 lobby hours and four extra drive through hours? Staff a branch with a manager, assistant manager, and two personal (universal) bankers and have the manager be the king/queen of one of the locations and the assistant branch manager the king/ queen of another. Split the hours. Install an ITM in a man-trap or inner drive thru lane so transactions can be processed when the lobby is closed. Keep your commitment to the town.

3. Proper Measurement- "We have loans there!" "We bank the municipality!" These are objections we hear in the branch consolidation discussion. These are emotional arguments. If you measured branch profitability, you would know which branches do and don't make money. You could allocate residential and commercial loans into the branch in your reporting to answer the question: "With loans added, are we profitable in this location?" Proper management accounting systems could look at branch profitability with loans (market profitability), and without them because branch managers are not responsible for the commercial and residential lending in that town. But we typically don't do it. So branch decisioning degrades to emotional arguments about this or that customer, or how the bank will be perceived if they consolidate that location. How would you be perceived if you starved strategic investments because you are supporting an unprofitable branch? 

Do you think branching serves as a differentiator in your markets? If so, how do you propose improving their overall performance?

~ Jeff

Friday, August 26, 2022

Anchors in Banking: Three Things to Do About Them

I suppose when I use the term anchor, of the 11 definitions offered by Merriam-Webster, "something that serves to hold an object firmly" is the closest to my meaning. And not in a good way.

In this Jeff For Banks video blog, listen to my thoughts on anchors at your institution. And what to do about them. Because we need to move forward. Which is difficult to do if you have anchors.

~ Jeff

Wednesday, August 24, 2022

Guest Post: 3rd Quarter 2022 Financial Markets and Economic Update by Dorothy Jaworski

Financial Markets & Economic Update -Third Quarter 2022


The Federal Reserve waited too long before beginning its fight against inflation.  We are all paying higher prices for food, clothing, gas, oil, cars, services like travel and eating out at restaurants, and goods of all kinds.  Until early this year, the Fed’s focus seemed to be the unemployment rate and recovery from the pandemic.  Now inflation is here and we hate it!

We spent too long waiting for the Fed to figure out that inflation was not “transitory” (to use Chairman Powell’s infamous phrase) and that inflation was, in fact, building momentum.  The transitory narrative worked for about a month last year, before inflation started taking off with a vengeance.  Supply chain issues and missteps caused much of the inflation by keeping goods in short supply, which resulted in higher prices.  We had an oil crisis, a gas crisis, and an electricity crisis all at once.  The Consumer Price Index headline peaked (for now) at +9.1% year-over-year in June, 2022 before falling back to +8.5% in July.  Producer Prices were +9.8% in July over the prior year and was +11.3% in June.  CPI and PPI, excluding food and energy, are currently just below +6% year-over-year.  Relief from declining oil and gas prices gave us some breathing room, but the Fed still has lots of work to do with inflation trending at 4 to 5 times its target of 2%.

The Fed let inflation ride from last summer until March, 2022, when they took a baby step of tightening by .25%.  In hindsight, it appears that this move was already too late to make a meaningful impact on 2022 inflation pressure.  Even more egregiously, the Fed continued to purchase $100 billion of Treasury and Agency bonds in the market each month through March, 2022!  This money was added even when it was known inflation was accelerating, and along with the fiscal stimulus handouts of cash, added fuel to the inflation fire.  As pandemic spending began to recover, the Fed slowed money supply growth in 2021 from 25.8% to 12%-13% for the second half of 2021, and to single digits by June of 2022.  The Fed has also announced they will allow their bond portfolio to begin running off at a pace of $47.5 billion per month until September, then at $95 billion per month after September.  

Hindsight is 20/20 and they realize that they need to get interest rates higher- thus the .50% and .75% hikes in short-term rates in May, June, and July and get money supply down quickly.  Cumulatively, the Fed Funds rate has been raised by 2.25% to 2.50%.  They’ll meet again in September and will be deciding how much to raise rates.  I would expect them to raise rates to at least 3.50% at year-end 2022.


GDP and Recession

The effects of Fed actions are realized with a lag of six to nine months, so I’m guessing there will not be much question about recession by then.  We experienced two negative quarters of GDP, which is the textbook definition of recession, in the first and second quarters of 2022, by -1.6% and -.9%.  Inventory changes were the predominant factor in the negative growth.  If companies grow inventories too much, they may have to reduce prices to liquidate them.  Walmart, Target, and Amazon can tell you this is true.  But NBER is the organization that gets to call the recession; it will peg the beginning and end, based generally on four factors:  falling production (GDP already is falling), falling real income (real disposable income is down 18 months in a row), falling real sales (slow declining trend), and falling employment/rising unemployment (not yet here- still seeing strong payroll growth).

We are seeing three of the four conditions for a NBER recession call already met.  The sole hold-out is unemployment, still low at 3.5%, and payroll growth of +528,000 in July, 2022.  The household report was weaker at +179,000 in July, following a decline in June of over -300,000.  Employment is a lagging indicator, with household reporting leading the payroll numbers, and eventually job cuts, layoffs, and hiring freezes will hurt employment growth, along with the inability to find talent.  One negative factor in our economy and affecting productivity is the level of those Not in the Labor Force, which topped 100 million in July.  NBER and our textbooks both predict that unemployment will rise at least .50% during recession, which is a cost of almost a million jobs.

We do need to understand that recession or the risk of recession will not stop the Fed from raising interest rates, liquidating their bond portfolio, and reducing the money supply.  M2 year-over-year growth has slowed to +5.9% in June, 2022, compared to +12.4% in December, 2021, and 21% to 25% during the pandemic months in 2020.  Prior to the pandemic, M2 growth ranged from 3% to 5%, which seemed to be a steady non-inflationary pace.   The Fed will keep raising rates to show their resolve to the markets that they will fight inflation or else inflationary expectations can soar pretty quickly.  So far, they are relatively steady, with the 10 year Treasury and TIPs measure showing inflation at 2.48%.  Meanwhile the 5 year Treasury- TIPs is 2.76%.

It is not just the US that is under threat of recession.  China’s economy is declining as housing/real estate and manufacturing are under pressure.  Europe is also under the gun as high prices for energy have sapped spending power.  Big heat waves struck the US and Europe during July, with temperatures exceeding 100 degrees for a time.  I can attest to the heat in Metz and Paris, as one day it was 100, the next was 102.  Then it would cool to 98 or 99.  Many areas of Europe are suffering from lack of rainfall.  The Rhine River, a mainstay of all the economies along the river as well as the favorite of river cruises, is so dry in areas that ships can no longer navigate.  Lack of rain is also hurting agriculture and hydroelectric plant production.  Pray for rain!  And pray for the grapes that will soon become wine!


Leading Indicators

What are leading indicators telling us?  The biggest leading indicator of all is the stock market, with its negative performance year-to-date.  The S&P 500 is down -10% and the Russell 3000 is down -11%, but have recovered from the lows in June.  The stock market is certainly pointing to down times in the economy and corporate profits.  Another leading indicator is the Treasury yield curve, which is currently inverted between the 2 year and the 10 year yields by -.45%.  The 3 month to 10 year yield spread is still positive, by .24%, but with one more Fed rate hike will turn it negative.  My preference has always been to follow the 2-10 year spread as a recession indicator, which is market determined.  The Fed prefers the 3month-10 year spread, but they control the 3 month.

The index of leading economic indicators, published by the Conference Board, was down -.8% in June and was down five of six months in 2022.  This bodes ill for the economy six to nine months from now, and coincides with the six to nine month lag in Fed policy.  The leading inflation index, published by FIBER, gives a glimmer of hope about inflation.  In May, the index turned down on a year-over-year basis for the first time in several years, and has been down three months in a row.  Commodity prices have also fallen recently, contributing to the small drops in inflation.  As I said, a small glimmer of hope...

Many surveys, such as ISM, S&P, and Philly Fed manufacturing and services, are showing declines in July for the Prices Paid component.  University of Michigan also shows that consumers think inflation will fall after the coming years; one year inflationary expectations are at 5.0% and 5 to 10 year expectations are at 3.0%.


Other Impacts

One silver lining of rapidly rising interest rates is the relative strength of the US Dollar versus other major currencies; the dollar has continued to be very strong and the dollar index is up +11.6% year-to-date.  A strong dollar serves to keep import prices lower than they otherwise would be, and kept inflation from becoming worse.  But the strong dollar has raised prices more rapidly in the rest of the world and the emerging markets are facing a crisis with high interest rates and potential defaults on debt.  Foreign investors not only suffered from market declines, but their US holdings also were down from exchange rates versus the dollar.  On our trip to France, the exchange rate was close to 1 to 1 between the US dollar and the Euro so we were pretty happy.  As mentioned, China’s and Europe’s economies are struggling- China with a real estate crisis and declining production and Europe with an energy crisis.

And speaking of debt, the US Treasury total now exceeds $30.4 trillion, or 122.6% of GDP at the end of the second quarter of 2022.  Ratios above 90% of GDP have been shown to seriously detract from GDP, which was evidence with average GDP of +2.2% to +2.3% between 2010 and 2019.  Debt levels keep rising so I believe our longer-term potential will now be below 2.0%.

And a word about the housing market- it has been, in a word- devastated.  Housing starts, building permits, new and existing home sales, pending home sales, and builder sentiment indices are all down sharply so far in 2022.  Price changes are still near the highs of +20% year-over-year as inventories on existing homes remain very low at 3.0 months’ worth of sales.  New home inventory is too high at about 9.0 months.  There is no happy medium.  Higher rates and recession will pull down the large price increases.


If we are not in recession already, we soon will be.  The data is pointing that way and the Fed will continue to raise rates.  Just think, before they had even tightened a tiny bit in March, GDP was already down.  They will keep raising rates until inflation is falling substantially.  They must show the markets they will fight hard.  They will keep raising short-term rates, while longer-term rates keep declining in response to recession and recession risk.  Even recession won’t stop the Fed, at first.  But recession will stop inflation.  It does every time.  Thanks for reading!


Large Hadron Collider Update

Everyone’s favorite machine is back up and running!  Since 2018, the Large Hadron Collider, or “LHC,” was down for maintenance and upgrades so that particles could smash at 6.8 trillion electron volts, or “TeVs,” for a total of 13.6 trillion TeVs when the protons collide.  The LHC restarted on July 5, 2022 and will run for four years until being shut down for maintenance in 2026.

The LHC fires protons at each other at almost the speed of light along the 17 mile tunnel under the Swiss and French Alps, where magnetic fields move the protons around.  The debris cloud when the protons collide reveals subatomic particles for study.  Linear accelerators were added to strip the electrons from the protons.  Also, upgrades were added to the software to sort the data that is felt to be useful for study; this is accomplished by artificial intelligence.  To date, only about 10% of the data has been analyzed; this can now be raised by 3 times.

There has not been much excitement since the discovery of the Higgs Boson particle in 2012.  New discoveries include new particles and scientists are attempting to explain dark matter, which makes up 95% of the universe.  So hopefully, someone will tell us what this all means and what it will do for us or teach us.



D. Jaworski 08/17/22

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.

She also was our guest on my firm's January 2022 podcast, This Month in Banking. To listen to that episode on interest rates and the economy, click here or go to wherever you get your podcasts.

Sunday, August 14, 2022

Operation Choke Point 2.0

In 2012 the Obama administration launched "Operation Choke Point" ("OCP") which was designed to ensure banks considered the risk of banking payday lenders that were engaged in abusive practices. It sounded laudable enough, with the goal of OCP, according to federal officials, to combat fraud by preventing criminals from accessing financial services.

But what it turned out to be is nothing more than old fashioned thuggery where the government would use the safety and soundness mandate so their regulatory bodies could pressure financial institutions from doing business with disfavored industries.

What were disfavored industries? The FDIC's quarterly Supervisory Insights for Summer 2011 had a list! It has since been modified and the list removed because it was too obvious what they were doing. But here are some of the "high risk" industries on the list: ammunition sales, ATM operators, coin dealers, dating services, drug paraphernalia, firearm's sales, fireworks sales, home-based charities, lottery sales, pawn shops, payday lenders, pharmaceutical sales, racist materials, surveillance equipment, tobacco sales.

This was an obvious attempt to bully banks into making it so risky to do business with disfavored industries that many banks, under fear of enhanced regulatory scrutiny, stopped doing business with them. OPC formally ended in 2017. But the bad taste lingered.

So much so that the acting Comptroller of the Currency of the prior administration, Brian Brooks, proposed a rule in November 2020 that would forbid banks to blacklist legal industries. But in January 2021, the new OCC announced it would pause the "Fair Access" rule that was intended to prevent another Operation Choke Point. Because we are going after "climate related businesses." Again, legal businesses that are politically out of favor.

Imagine the community bank that is experienced in lending to fuel oil businesses in or near its markets because it's comfortable using trucks, tanks, and oil inventory as collateral. Now, under the guise of "transparency", mandatory disclosures, and risk mitigation regulators begin asking more and more intrusive questions about the banking relationship with these local fuel oil businesses. 

They find your underwriting or risk mitigation techniques deficient. Issue matters requiring attention in your exams. And although your loss experience has been very good with these businesses, you are finding it troublesome to continue to bank them. Or, minimally, you will have to increase their credit costs to make up for the added scrutiny you are required to give. So you back out. And other local lenders aren't anxious to take up the mantle and relive your experiences. This could put significant pressure on the local fuel oil companies so many residents rely upon. No matter. Climate risk.

Now, imagine there is a change in presidency. And the current president has his/her own industries he/she disfavors. And evolves from "climate risk" to [insert risk de jour]. I encourage you to read Jenna Burke of the Independent Community Bankers Association's piece on this issue in their latest Independent Banker magazine (link: Jenna Burke: Leading the climate risk charge – Independent Banker). Interesting was the section "Lack of Empirical Data." As if that matters. :) 

Even if you want banks to stop lending to the local fuel oil company, you must be able to see the predictable consequences of picking and choosing disfavored industries and then bullying banks through regulation to stop doing business with them.

Because the "climate risk" ruse is exactly that. Let bankers determine if lending to this industry or that is risky. Not politicians or bureaucrats. Because that, my readers, is the slippery slope to tyranny.

~ Jeff

Tuesday, July 05, 2022

How Can Banks Thrive in the Next Five Years?

I was invited to speak at a bank client's annual meeting of shareholders on what I think a bank needs to do to thrive. Although I speak extemporaneously, I thought it best if I wrote my remarks beforehand and use it as a guide. Below is what I wrote and largely what I delivered, edited for easier reading.

My Remarks to Bank Client's Annual Meeting of Shareholders

"I want to thank [Chairman] and the Board, [CEO] and the management team for asking me to come out and remark on where I think the banking industry is going over the next five years. Now, normally, one would think they would be concerned about what I might say to their shareholders. But, since I AM a shareholder, and I've know the team for a long time, they put no limitations on me. Probably a mistake.'

'If you put together a word cloud on the history of banking from post Great Depression to the birth of the Internet (thank you, Vice President Gore), you probably would be hard-pressed to find the word "change." Indeed, since the banking laws that were spawned from the Great Depression, banking has been stable, reliable, and boring. I know, my first job in banking in 1985 at Northeastern Bank of Pennsylvania was making microfiche. I could barely stay awake during my shift.'

'Since Vice President Gore invented the Internet, things have been all catawampus. And it wasn't just the tech explosion. Banks were permitted to branch wherever they wanted. There was deregulation as to products and pricing. The money market mutual fund became a formidable competitor to the bank account. And products started migrating online. First Internet Bank in Indiana was founded in 1998. Probably ahead of its time but it currently has $4.2 billion in total assets. Rocket Mortgage (Quicken Mortgage at first) came into being in the late 1990's. In Pennsylvania, Rocket has number 1 market share. Of all of the banks you will pass on your way home, find me a Rocket Mortgage office.'

'In 1990 there were over 15,000 financial institutions. Today there are less than 5,000. It's been tough being an industry consultant.'

'And the challenge will not abate in the coming years. We have been blessed by The Greatest Generation and Baby Boomers. They once held all of the keys to the banking kingdom. They are/were the business owners, demanders of capital and loans, and significant depositors. They are/were steady, and changed slowly. I'm Gen X, the forgotten generation because we're a tad smaller than the generation above and below us. By the way, so is your CEO and much of your management team. Not your chairman. He's old.'

'Then came this bubble generation they named millennials. Initially, and maybe to this day, banks ignored them. They were weirdos. Staying indoors playing video games. Even as adults! Spending hours on their phones. Not talking. Texting! Ever call your millennial child only to get a text back asking "what?" Who are these freaks? Don't build our strategy around them.'

'This held serve because they didn't have any money. At first, the only money they had were from their Boomer and Gen X parents. There was no penalty for ignoring them. There was more of a penalty for chasing their bright shiny object financial needs.'

'Now, they're in their 30's and 40's. We can ignore them no more.' 

'There is a fintech firm, SoFi, that was born in 2011, that focuses on millennials financial needs. It started refi'ing student loans, something very few banks do. Because that is what millennials needed at the time. But SoFi focused on higher earning college majors: finance, accounting, medical, engineering. Sorry to the English majors. More recently SoFi acquired this little $170 million in total assets California bank. That transaction closed earlier this year. The bank is now over $2 billion in total assets. We can ignore millennials no more.'

'Even if you're a commercial bank, like [bank name], you can't ignore them. Firstly, commercial banks are significantly funded with retail deposits. Secondly, millennials own businesses that we want to bank.'

'So, what is demanded the next five years if we are to thrive? Here is what I think successful banks will do.'

Your Strategy To-Do List

'1. Identify your highest lifetime value (LTV) customer cohorts. Both businesses, by industry types, and retail, by retail demographic types. These customers may not be the most profitable today, like the millennials of yesterday. But over their lifetime, can deliver significant value to the bank and its stakeholders. But they must be in ample supply in your markets to support growth. No sense identifying trucking companies as high LTV customers where there are only a few in your markets. There simply isn't enough of them to drive growth. Marry your internal with external data to identify where you do well, can do well, and can make a difference. Those banks will win.'

'2. Prune and invest. It's no secret that since the Great Recession of 2008 branches have been in retreat. It was needed. We popped branches in every town for a decade. The accordion must contract. Now, some of you might be branch centric, executing your bank transactions over the teller line. But if I can give you the Cher Moonstruck slap, "Get Over It!" If that analogy doesn't work, think Will Smith on Chris Rock. If you're schlepping into the branch once per week or more, you are a dying breed. Millennials get annoyed if they have to go into a branch. And a branch, on average, cost about 1% of deposits in direct operating expenses. This is why online banks can pay higher interest rates. And oh by the way, it cost another 1% to support the operating expenses of support functions back at headquarters. Two percent is a big matzah ball out there to overcome and compete with Ally Bank. So banks, even community banks like [bank name] must take a sharp pencil to prune their branch network to compete with the higher interest rates of online banks, make investments in people and technology, and deliver to their shareholders. Because investments must be made. And those that make them have a much better shot at long-term success.'

'3. Build a positive culture with operating discipline. Millennials will be our next leaders too. And they are elevating above "just a job." They want meaning in their work. And what greater meaning can they get than at a community financial institution? For those institutions that embrace a higher purpose. Such as elevating the economic mobility of retail customers. Or increasing the housing stock to keep housing prices stable in your markets. Or funding businesses with high potential to be the next significant employer. And guess what, companies that have a higher purpose, are meaningful to all stakeholders (in banking world, shareholders, customers, employees, and communities) and tend to perform better over time. A 2014 book called Firms of Endearment identified such firms and found they outperformed the S&P 500 over 5, 10, and 15 year periods. But this requires discipline. Not wasting resources on small or overlapping branches. And finding inefficient or ineffective processes and changing or eliminating them. By reaching a certain scale to deliver top quartile profitability. Make the cost of absorbing headquarters at your business lines go down. That 1% it costs a branch to support HQ should be cut in half. That will release resources to improve the customer experience, deliver higher performing employees capable of advising customers (i.e. what is demanded), make purposeful investments in the community so it can thrive, and delivering on shareholder expectations.'*

'A thriving community is the seed-bed for a thriving financial institution.'

'I'm bullish on community banking. Communities are beginning, ever so slowly, to recognize that the local bank is more important to the success of the community than the national bank. But it's not a slam dunk. In fact, I would say, using a Kentucky Derby analogy, that Epicenter as the national bank is currently in the lead. But if you saw how Rich Strike snaked through the field, you can see how I feel community banks can win this game. But you have to have discipline, be purposeful, and have a plan.' 

'Be important to your stakeholders, and you will have a bright future."

I'm always happy to comment at your events, be it employee or shareholder or to your board of directors.

~ Jeff

* For more on building a purposeful financial institution that has the operating discipline to deliver to its stakeholders, I humbly invite you to read my book: Squared Away-How Can Bankers Succeed as Economic First Responders

Friday, June 10, 2022

Mr. Bank Investor, I Have Two Questions

I recently delivered remarks at a bank institutional investor conference titled "Don't Be Mr./Ms. Irrelevant." The conference included a panel of recognizable bank stock investors who waxed eloquent on their criteria for making and maintaining their interest as an investor in your financial institution.

As a follow-up to their remarks, I asked two panelists and an additional institutional investor two questions and got their permission to print their answers for your benefit. Before you browse away because you are not public, or have few institutional investors, know that your relevance depends on how you are perceived by outside stakeholders. And outside stakeholders with money at risk can teach us about value whether or not your financial institution is valued by shareholders every day.

First, here are the investors:

Jim Deutsch, Partner, Patriot Financial Partners. Jim is a 40 year industry veteran that serves on numerous bank boards because Patriot favors making investments where they obtain board seats. Jim led a de novo institution from its birth to an 11-branch, $750 million institution in less than six years. He held various executive positions at recognizable names such as Commerce Bancorp and Summit Bancorp.

Anton Schutz, President and Chief Investment Officer, Mendon Capital Advisors. Anton formed and has led Mendon Capital for over 25 years. He is a regular contributor to CNBC and other respected news outlets on bank stock investing. Prior to starting Mendon he worked for Tucker Anthony Capital Markets working in the banking sector, and before that worked in Structured Derivates at Chase Manhattan. 

Mark Lynch, Retired Partner, Wellington Management
. Mark was a senior financial analyst at Wellington since 1994 and a partner from 1996 until his 2019 retirement. He was also a portfolio manager of mutual funds, hedge funds, and institutional portfolios focused on the banking sector over that period. Prior to Wellington, he was a US regional bank analyst with Lehman Brothers and Bear Stearns. He currently serves on the board of Bermudian bank The Bank of N.T. Butterfield and Son Limited.

Question 1: What is the one thing a bank must have before you consider an investment?

Deutsch: Very hard to say just one thing, so I guess it's management. I believe there are lots of different ways to make money in banking which was evident in the room in Key Largo (bankers at the conference). As important as a core deposit franchise is, the most profitable bank in attendance has the highest cost of deposits. Another that operates above a 15% ROE operates in a state that investors hate and therefore won't buy the stock much above 115% of tangible book value. Some have low loan to deposit ratios and some are over 100%. Some have no branches and some have plenty of them. 

When considering long-term viability, I think the bank has to develop something that others will covet. Most often that is a loyal customer base. Once I acquire loyal customers, then I can use many levers to increase my profitability even if I don't have optimal scale.

Schutz: Strong management with plenty of skin in the game.

Lynch: It's very different for institutional and individual investors. Institutional investors are investing for someone else. The client views it as an asset allocation and has a time frame on average about 18 months and doesn't put much importance on the taxes paid. So, as a manager, you can maybe stretch the (investment) time horizon out to 30 months and with a lack of emphasis on taxes, that means (institutional portfolio) churn is a fact of life. So for the bank, the one important thing is A WAY TO MAKE THE COMPANY MORE PROFITABLE EVERY YEAR.

Retail investors hate paying taxes and hate losing money, particularly since in banking there's little chance of a community bank being the next Microsoft. So (investment) portfolio churn plummets and the importance of a stable underlying business is much higher. So, the one important thing is GROWTH IN CHEAP DEPOSITS as manifestation of a relationship with customers that's based on service rather than price or easy credit.

Question 2: What should every bank's strategy address?

Deutsch: Strategy sessions must include a BRUTALLY honest SWOT analysis which is rarely seen. You think your team is a strength? Really, you have better people than Goldman or JPMorgan? Technology? Really? Better than Amazon or Google or Square (Block)? Strengths have to be measured as something that is top decile, not just better than average. For most community banks, the business products are a commodity that the bank tries to craft into something that looks custom.

What I think many banks often overlook are intangibles that are really valuable and not easily copied. Things like reputation, culture, legacy customers, etc. Those things can be valuable to a significant customer base which can ultimately be sold to an acquirer for a premium (or be used to get premium pricing while the bank operates independently.)

And for any bank that has a large, independent shareholder base, the opportunity to sell the bank (get a better price by trading into a better currency) must be analyzed every year. Directors have to measure the value of independence vs. sale. That is a mathematical analysis, which then has to be judged against short-term and long-term variables.

Schutz: Every public company must justify its independence every day. A well run company does just that. A poorly run company has much more to prove.

Lynch: The strategy part is easy = what sort of customers does (the bank) want to attract and why should those customers choose them over other providers, i.e. what is the bank good at and how do they get paid for that skill?

Questions to consider when crafting and executing strategy.

Hope this has been helpful to you.

~ Jeff

Tuesday, May 31, 2022

Guest Post: 2nd Quarter 2022 Financial Markets and Economic Update by Dorothy Jaworski and Sam Weller

Spring Storms

So far, 2022 has brought one storm after another.  Winter storms became spring storms.  Longer-term rates rose very dramatically as Federal Reserve tightening and decades-high inflation converged.  Supply chain issues are the main culprit behind the huge inflation, and only now is demand beginning to fall to more normal levels.  The Russian-Ukraine conflict and resulting sanctions will exacerbate supply chain issues, especially for food and fuel.  Covid-19 lockdowns in China have cut production of goods and ships are again lined up off the coast of China, meaning long delays in getting products to the US.  Stock markets hit new highs in January and quickly began a long and painful sell-off that has continued into May. 

Bond and stock prices falling together for a sustained period of time is very unusual.  What’s even more unusual is that GDP fell -1.4% in 1Q 2022, showing economic weakness right as the Fed begins its tightening campaign.  Consumers, facing inflation pressures, may cut back on spending on discretionary items.  High mortgage rates will begin to affect the housing markets.  We will face challenges as we move forward:  with interest rates- how high is high, and with stocks- how low is low?

I’m very happy to introduce our guest writer for this quarter.  Sam Weller joined us in November, 2021 and has a strong financial background.  I’m sure you’ll enjoy his insights on the markets and the economy as much as I have.  Take it away, Sam...Dorothy

Sam’s Update

Movie fans are excited to see Tom Cruise fly back onto screens this summer with Top Gun: Maverick, a sequel that comes thirty-six years after the original 1986 blockbuster.  At the time the first Top Gun was released, the average cost of a movie ticket was $3.71, milk was $1.09 per gallon and a gallon of gas was only $0.86. Inflation was less than 2.00% and annual GDP was growing at a healthy 4.2%. Interest rates, however, were much higher – the Fed Funds overnight rate was 6.80%, compared to .80% today. But although interest rates above 4.00% seem like a historical anomaly in today’s low rate environment, the Fed Funds rate in 1986 was significantly lower than it was only a few years below, when Paul Volcker’s Federal Reserve used a series of increases in short-term rates to over 20% as its primary tool to “break the back” of inflation.  While we would not expect today’s rates to get anywhere near those levels, the adjustment of rates from zero to 2% and 3% in a short time period is a large move.

Q1 2022 inflation measured 8.5%, the highest single quarter of inflation growth rate seen since a rate of 8.9% in Q4 1980. Does our current Federal Reserve have the same will to fight inflation that Volcker had in the early 1980s?  Clearly, there is ample room to raise interest rates, and the Federal Reserve has been vocal about their willingness to do so.  They are in a difficult position; although desperate to tame spiking inflation, they begin a cycle of tightening rates in an economy that seems to be shrinking, not growing, which should limit the extent to which they can raise rates.

The first half of 2022 has been marked by extreme volatility.  The 10-year US Treasury ended 2021 at a yield of 1.51%.  As of mid-May 2022, it is currently hovering around the 3.00% mark. At the end of 2021, the 2-year US Treasury was yielding .73% and is currently yielding 2.33% as of mid-May.  Bond investors have priced in a substantial increase to inflationary expectations as they discount both long- and short-ends of the yield curve.

This volatility has not been contained to the bond market; the Dow Jones Industrial Average has shed over 4,000 points, or -11%, since the beginning of 2022, while the S&P 500 return is down -15.6% for the year.  However, all the volatility must be good for some asset classes, correct?  Perhaps a long-term store of value, uncorrelated to the broader markets – something like gold, perhaps, or some of the more stable cryptocurrencies?  Gold prices have remained remarkably…unchanged, beginning the year at $1,829 per oz; as of mid-May gold prices were hovering around $1,850.  However, cryptocurrencies have not fared as well: Bitcoin (BTC) began the year at $47,000+ and has plunged to less than $32,000 per BTC as of mid-May.

Most investors believe that we are in a period of “risk off,” with both equity and fixed income markets uncharacteristically moving in tandem as market participants seem to be selling off both bonds and stocks.


Real GDP

The first quarter of 2022 was marked by GDP growth of -1.4%, which was the first non-pandemic related negative GDP growth rate since 2014.  However, after a strong Q4 2021, where real GDP grew +6.9%, this negative growth rate may be a sign of things to come.  In retrospect, examining the high Q4 2021 growth rate shows some potential cracks in the positive fa├žade; 5.0% of the total in Q4 came from growing inventories, and many consumers were already reducing consumption as the effect of monetary stimulus spending during the pandemic began to abate.

Perhaps because of supply chain constraints and inventory challenges, the consumer confidence index remains extremely low going into Q2 2022.  Volatility is high, consumer confidence is low, and it’s very possible that we may see more negative GDP numbers before 2022 is out.



For the first time in over forty years, investors are looking at the prospect of inflation as a serious threat to future earnings.  The Consumer Price Index, or “CPI,” started 2021 at +1.4% to +1.7%, rose to +5.4% by mid-year, and ended December at +7.3%.  In January, 2022, it rose again to +7.5%, and in March, showed the highest annual inflation increase since 1980 at 8.5%.

For most American consumers, the timing of these inflationary pressures could not come at a worse time: after two years of pandemic-related isolation, many corporate managers (and their landlords!) are serious about getting workers back to the office.  With COVID seemingly receding into the background as an endemic health threat, case rates are dropping in many locations across the country.  The only obstacle to getting workers back in person may be the eye-watering sticker shock of funding the commuter lifestyle.

Consider the cost of a Starbucks Venti Frappuccino: now retailing at $5.25 in most locations, the cost of this massive coffee drink is up $0.50 since the beginning of the pandemic, or an increase of over 10%.  Think that’s bad?  Another commuter necessity – gasoline – hovered at around $2.50 per gallon pre-pandemic while today most drivers aren’t filling up their tank for less than $4.50 per gallon on a good day. Interestingly, although refined gasoline at the pump has commuters screaming “price gouging,” the underlying cost of a barrel of crude oil has steadily risen, from $58 a year ago to $110 today.

The Fed started out by saying inflation was “transitory” but had to admit later it was “persistent.”  Now we will see if the Fed can keep it from becoming “sustained,” which means preventing wage inflation from tight labor markets from filtering into the prices of all goods and services. 


The Fed’s Great Expectations

May, 2022 saw the Federal Reserve hike the core Fed Funds overnight rate by fifty basis points, the highest single-meeting rate hike in over two decades.  According to the pricing of the Fed Funds Futures market, the Fed still has a long way to go; traders believe that another 50-basis point rate hike is all but certain in both June and July.  Assuming that’s the case, this summer we will see the Fed Funds overnight target rate at 2.00%, while on our way to the end of our nearly decade long historically low interest rates.

What will the market look like with short-term rates in the 2.00% range?  We know what the Fed hopes will happen: a normalizing of the yield curve, with short-term rates in the 2s and longer-term rates rearranging themselves into a positively sloped yield curve shape that indicates continuing economic strength.  The only problem is, the long end of the curve does not seem to be getting the message yet.  The 10-year US Treasury is currently yielding 2.91% and the 20-year isn’t far behind with a yield of 3.32%.  Clearly investors believe that inflation is a longer-term threat than the Fed would like to believe.

The long-end of the curve has responded first to the Fed’s tightening.  Remember that the 10-year bond is up nearly 150 basis points since the beginning of 2022. However, have long rates gone as high as they can go?  If so, continued Fed tightening will result in the same phenomenon we’ve seen time and again during our historic low rate environment: a flat (or inverted) curve, where investors do not see any appreciable yield pick-up from going out into the longer end of the yield curve.  An inverted yield curve can be a precursor to recessionary conditions.

This is the scenario that the Fed hopes it can avoid.  Raising interest rates at what looks like the outset of a recessionary cycle is a risky move, but rampant inflation has forced the Fed’s hand into raising short-term rates, stopping their bond purchases and reducing the size of their balance sheet. As consumers, we can only hope that it does not tip the scales into additional quarters of negative GDP growth.  After two decades of sedate rate movements and moderate growth, suddenly it’s an exciting market – maybe too exciting.  As they say on the trading floor:  don’t be in a hurry to catch a falling knife. Be careful out there!


Sam Weller


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.

She also was our guest on my firm's January 2022 podcast, This Month in Banking. To listen to that episode on interest rates and the economy, click here or go to wherever you get your podcasts.

Sam Weller has worked as a banker and consultant to community banks for over 20 years. His career has focused on how banks use capital markets strategies to manage risk and enhance earnings. Sam joined Penn Community Bank in November 2021 and manages the Bank's investment portfolio, as well as contributing to asset-liability analysis, hedging, and other Treasury functions. He holds an MBA from the University of Texas and is a graduate of the U.S. Military Academy at West Point.

Friday, May 27, 2022

Memorial Day: Remember Captain Andy Haldane

Peleliu–an island just six miles long and two miles wide–was held by a garrison of more than 10,000 Japanese troops in 1944. The island’s airfield would allow Japanese planes to threaten any Allied operation in the Philippines, and General Douglas MacArthur pushed for an amphibious attack in order to neutralize this threat. 

Admiral William Halsey reported that enemy resistance in the region was far less than expected; he recommended that the landings in the Palaus be canceled entirely and MacArthur’s invasion of Leyte Gulf (in the Philippines) be moved up to October. MacArthur and Admiral Chester Nimitz followed Halsey’s advice about Leyte, but chose to go ahead with the attack on Peleliu.

On September 15, 1944, U.S. Marines landed on the western Pacific Island. Over the next several weeks, ferocious Japanese resistance inflicted heavy casualties on U.S. troops before the Americans were finally able to secure the island. The controversial attack resulted in the highest death toll than any other amphibious assault in U.S. military history. Approximately 40% of the 28,000 Marines and soldiers that saw action on Peleliu were killed or wounded.

Landing on Peleliu with his fellow Marines was Captain Andrew Haldane, the 27 year old Company K Commander of the 1st Marine Division. Haldane  hailed from Methuen Massachusetts.

Captain Haldane was already a chiseled veteran, having served with distinction on Guadalcanal and Cape Gloucester (New Britain, now Papua New Guinea), where he received his first Silver Star for leading Company K and repelling five Japanese bayonet attacks.

On October 12th Company K was engaged in a fierce battle with enemy troops to take Hill 140. They were holding their line but were pinned down and low in their trenches to avoid enemy sniper fire. This rendered their mortars and machine gun fire ineffective because there was nobody directing the fire, an unacceptable situation to Captain Haldane. He would not ask his men to do something he would not do himself. So he raised his head to gain bearings to pass to machine gunners. At that moment he gave his last full measure of devotion and was killed by an enemy sniper. It was three days before Company K was scheduled to be relieved.

The gruesome details of Haldane’s death were described by mortarman Romus Bergin in Islands of the Damned-Marines at War in the Pacific. The description is too graphic for me to repeat to you. Death in battle is not a Hollywood movie.

For Haldane’s actions, he was awarded a posthumous Silver Star that stated:

"The President of the United States of America takes pride in presenting a Gold Star in lieu of a Second Award of the Silver Star (Posthumously) to Captain Andrew A. Haldane (MCSN: 0-8740), United States Marine Corps Reserve, for conspicuous gallantry and intrepidity as Commanding Officer of Company K, Third Battalion, Fifth Marines, FIRST Marine Division in action against enemy Japanese forces on Peleliu and Ngesebus Islands, Palau Group from 15 September to 12 October 1944. A splendid and fearless leader, Captain Haldane repeatedly led his assault company through intense hostile artillery and small arms fire to rout the enemy from strongly held positions with heavy losses. On 12 October, he personally directed a platoon of his men against a firmly defended cave on an important ridge continuing his heroic efforts until mortally wounded by Japanese sniper fire. By his inspiring courage and disregard for personal safety, Captain Haldane contributed materially to the success of our forces in these strategic areas and his valiant conduct throughout was in keeping with the highest traditions of the United States Naval Service. He gallantly gave his life for his country."

Another Company K mortarman, E.B. Sledge (Sledgehammer), described his company commander as follows:

“Capt. Andy Haldane wasn’t an idol. He was human. But he commanded our individual destinies under the most trying conditions with the utmost compassion. We knew he could never be replaced. He was the finest Marine officer I ever knew. The loss of many close friends grieved me deeply on Peleliu and Okinawa. But to all of us the loss of our company commander at Peleliu was like losing a parent we depended on for security-not our physical security, because we knew that was a commodity beyond our reach in combat, but our mental security.”

~ from With The Old Breed by E.B. Sledge

While you are enjoying Memorial Day Weekend with family and friends, I ask you to remember Andy Haldane and all of his comrades that gave their last full measure of devotion on the inglorious rock called Peleliu.

~ Jeff

Note: I encourage you to watch the 2010 HBO Series The Pacific. Produced by Tom Hanks and Steven Spielberg, and narrated by Hanks. It graphically details the exploits of the 1st Marine Division in the Pacific theater during WWII. It may make you uncomfortable. 


Battle of Peleliu - HISTORY

Andrew Haldane - Wikipedia With the Old Breed: At Peleliu and Okinawa eBook : Sledge, E.B.: Kindle Store

Islands of the Damned: A Marine at War in the Pacific: Burgin, R.V., Marvel, Bill: 9780451232267: Books - Amazon

Andrew Haldane - Recipient - (