Tuesday, December 27, 2022

Finovate Best of Show 5 Years Later

Among bankers, there is anxiety. Anxiety from outsiders promoting newfangled technologies that must be adapted in order for their bank to be relevant. Anxiety from insiders chiding them to innovate because this customer or that customer asked about some piece of technology their other bank has. Anxiety from conferences that feature young speakers touting shiny objects.


There is little benefit to anxiety if it doesn't result in action. And knowing where and when to act is critical in a changing industry like ours. The more we create and later hone the formula for making strategic decisions that result in positive action, the less anxious we will be.

For example, if you empower employees to present innovation ideas to your executive team or a committee, do so in a systematic way. Have the employee build a business case. A business case that you would have created the template and provided instructions on how the employee should proceed in getting their innovation idea considered and possibly adopted. Not a process so cumbersome it inhibits adoption of great ideas. But cumbersome enough to provide the needed filters to not chase shiny objects. Such as...

1) Must we do it (as in CECL)? 2) Is it consistent with strategy (as in demanded by high lifetime value (LTV) customers)? 3) Will it make us more efficient in how we run the bank (lower expense and/ or efficiency ratio)? 4) Will it improve the customer experience (and extend customer longevity, shorten sales cycles, improve pricing power)? 5) What is the cost? And, as you will note from the rest of this article, 6) Longevity of solution(s) provider.

Only then would you move to the solutions to solve the problem or innovate. But what solutions? Does it depend on the last conference attended by an employee? How much longevity does the solutions provider have?

This is increasingly on the minds of bankers. Many solutions providers in the fintech space are very young, don't have many installations, and have yet to turn a profit. Does it mean they are not viable alternatives to your bank? Not necessarily. But bankers want to ensure if they partner with a solutions provider, they will be viable into the future. And ideally would not have sold to a big three core processor that increases core dependency.

That is why I occasionally look at Finovate best of show companies. To see where they are now because they were much ballyhooed by a top trade show in the country for fintech solutions. It should be instructive to bankers that evaluate solutions and implement a disciplined innovation culture, without creating such roadblocks that slow bankers down into becoming the bank they need to be for long-term relevance.

Finovate Best of Show: Fall 2017

Five years ago, these were rated the best. I include the description from Finovate five years ago, and where they are today.


2017 Finovate Description: Envestnet was recognized for its Financial Health Check that leverages account and transaction-level data to measure and score overall financial health across multiple dimensions including spending, savings, borrowing, and planning.

Today: Envestnet continues to transform the way financial advice and insight are delivered by powering financial advisors and service providers with technology solutions that work toward expanding a holistic financial wellness ecosystem. It has over 108,000 advisors working for more than 6,000 companies including 18 of the 20 largest banks. Although reporting positive EBITDA in the four years and year-to-date (9/30/22) since being named best of show, it has reported net losses in two of the four full years and year to date. 


2017 Finovate Description: Finn.ai was chosen for its Virtual Banking Assistant, powered by artificial intelligence and available via channels ranging from Facebook Messenger to Amazon Alexa. It makes everyday banking simple and easy for customers.

Today: Finn AI was purchased by Glia in June 2022 where it remains a leading AI-powered virtual assistant platform for banks and credit unions, partnering with major FIs including ATB Financial, BECU, United Federal Credit Union, EQ Bank, Civista Bank and Truist Momentum.


2017 Finovate Description: Jiffee won best of show for its tap & pay mobile technology that turns any device into a payment terminal, enabling for consumers to pay anywhere and everywhere without relying on plastic credit and debit cards. 

Today: Jiffee is a white-label mobile payment and authorization platform that securely confirms the identities of both parties on either side of a transaction. Jiffee is owned by Neontri, formerly Braintri, a private fintech based in Warsaw, Poland that entered the U.S. market in 2019. There were no financials available and no list of U.S. users on their website.


2017 Finovate Description: Sensibill was selected for its +Pulse solution that helps spot revenue opportunities from on- and off-card purchase data, providing targeted prospect list for personalized, in-app campaigns. 

Today: Canada-based Sensibill is a customer data platform designed specifically for the financial services industry with an AI-powered, ethically sourced first party data with real-time actionable insights that help FIs drive personalization at scale. They claim over 60 million users across over 150 FIs in North America and the U.K. In October 2022, Sensibill was acquired by fintech aggregator Q2.


2017 Finovate Description: SpyCloud was selected for its monitoring and alert service that helps organizations better understand their employee and customer digital footprints by giving them visibility into their exposed credentials actively being traded in the underground.

Today: Spycloud's products leverage a proprietary engine that collects, curates, enriches and analyzes data from the criminal underground, driving action so enterprises can proactively prevent account takeover and ransomware. Its customers include half of the ten largest global enterprises, mid-size companies, and government agencies around the world from its Austin, Texas headquarters. It has been funded with four rounds for over $58 million, the latest raise occurring in 2020. 


2017 Finovate Description: Chosen for its social good platform for consumers and businesses that turns the spare change from shopping into micro-donations to philanthropic causes. 

Today: As best I can tell, Sustainably, a U.K. based 2016 startup that helped businesses and consumers earmark spare change from purchases to their charity of choice, shut down this year. Although this fintech did not make it, the idea could advance an FIs higher purpose by helping their customers fulfill their higher purpose.


2017 Finovate Description: Voleo was selected for its social trading app that makes it easy for people to invest together, saving time and money, while simultaneously leveraging the collective wisdom of networked investors to pursue market-beating returns.

Today: According to its website FAQ, effective June 2020, Voleo USA, Inc. closed its US brokerage. Although they claimed their user base swelled dramatically, Covid-19 had cut off traditional funding sources and since they were not yet profitable, their parent company indicated it was unable to continue to support the operating losses.  

Of the seven Finovate Fall 2017 Best of Show, three continue to operate independently. Two were acquired, and two shuttered. This exemplifies the anxiety bankers experience when selecting partners. There is vendor risk that the solution might not make it, as is usual when partnering with relatively new firms/ solutions. Take solace that your partner selling to a larger technology firm is usually a good thing, perpetuating the solution and its evolution.

However, there is risk. And bankers must assess the risk when selecting a solution partner. But only after going through the disciplined process outlined at the beginning of this article so you have a better chance of avoiding shiny objects.

~ Jeff

Friday, December 16, 2022

Banking's Top 5 Total Return to Shareholders: 2022 Edition

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

Not so over the eleven years I have been keeping track. The first bank to crack the Top 5 over $50 billion did so in 2020. As a reference, the best SIFI bank in five-year total return this year was JPMorgan Chase at 82nd overall. 

My method was to search for the best banks based on total return to shareholders over the past five years. I chose five years because banks that focus on year over year returns tend to cut strategic investments come budget time, which hurts their market position, earnings power, and future relevance more than those that make those investments. I call this "pulling into the pits" in my book: Squared Away-How Can Bankers Succeed as Economic First Responders. Short-term focus is a common trait of banks that focus on shareholder primacy over stakeholder primacy.

Total return includes two components: capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered out those FIs that trade less than 1,000 shares per day. I changed this from 2,000 shares as it was pruning too many fine institutions. But the 1,000 shares/day minimum naturally eliminates many of the smaller, illiquid FIs. I also filtered for anomalies such as recent merger announcements as a seller, turnaround situations (losses suffered from 2017 forward), mutual-to-stock conversions, stock dividends/splits without price adjustments, and penny stocks. 

As a point of reference, the S&P US BMI Bank Total Return Index for the five years ended December 9, 2022 was -1.21%.

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2021:

#1.  Silvergate Capital Corporation (NYSE: SI)
#2.  MetroCity Bankshares, Inc. (Nasdaq: MCBS)
#3.  Triumph Bancorp, Inc. (Nasdaq: TBK)
#4.  Live Oak Banchsares, Inc. (Nasdaq: LOB)
#5.  SVB Financial Group (Nasdaq: SIVB)

Here is this year's list:

Communities First Financial Corporation is the bank holding company for Fresno First Bank, which opened in December 2005 dedicated to meeting the banking needs of businesses, professionals, and successful individuals in Central California. Its headquarters is the only location. Each employee has an ownership stake in the bank through its Employee Stock Ownership Plan. In 2021, the bank expensed over $530 thousand to the ESOP to benefit employees. Twenty-six percent of the bank is owned by the Board, Executive Management, and the ESOP. I would call that stakeholder alignment. Since 2016, over 50% of total deposits are non-interest bearing, driving superior cost of funds and net interest margin. In addition, the bank developed a niche in the payments business, sponsoring multiple independent sales organizations (ISOs) specializing in bankcard and ACH payment solutions, generating $2.5 billion in processing volume in the third quarter of this year. All this generated a year-to-date ROA / ROE slash line of 2.23% and 29.56% respectively, and a 225.3% five-year total return to shareholders. Welcome to the top of the heap!

Since 1997, Coastal Community Bank, the wholly owned bank subsidiary of Coastal Financial Corporation, has delivered a full range of banking services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound (Washington) area through a traditional community bank branch network in its three-county market. The bank consists of two segments: 1) the traditional community bank, and 2) CCBX, which is its Banking as a Service (BaaS) division started in 2018. Prior to starting CCBX and for the year ended 2017, the Company had $806 million in total assets and $5.4 million in net income for an ROA of 0.73%. As of or for the year-to-date September 30, 2022, the Company had $3.1 billion of total assets, $36.7 million net income (YTD annualized), and a 1.27% ROA. Their CCBX segment continues to evolve, with 19 active partners, two in testing, five signed letters of intent, and three in wind-down as the bank focuses on larger and more mature relationships. What has this bifurcated business model delivered? A 221.5% five-year total return and #2 on the JFB Top 5! Well done!

#3 OFG Bancorp (NYSE: OFG)

San Juan based OFG Bancorp is a financial holding company under U.S. and Puerto Rico banking laws and regulations. Founded in 1964, OFG's banking subsidiary, Oriental Bank, is one of Puerto Rico's largest banks, and is focused on the island and the U.S. Virgin Islands. OFG also has Trust and Insurance services, which represent 1.9% and 2.6% of total revenues, respectively. The Company has grown to $10.1 billion in total assets at September 30, 2022, fueled by organic growth and acquisitions. The bank has a diversified loan portfolio of residential, commercial, and consumer loans. Most consumer loans are auto loans which represent 28% of the total loan portfolio. Loan yields for the YTD ended September 30th was 7.32%. Which compensates for an annualized net charge-off rate of 1.16%. Risk versus Reward. Demand deposits represent 61% of the deposit base, driving a net interest margin of 4.96%. The result: a 1.57% ROA and 15.25% ROE and a robust 219.4% five-year total return. Awesome!

#4 First BanCorp (NYSE: FBP)

First BanCorp is a full service financial institution with operations in Puerto Rico, the British Virgin Islands, and Florida. Its vision is grounded in the principle that investing in its employees, supporting the communities it serves, and providing an outstanding experience to customers is paramount to being successful and delivering shareholder value long-term... i.e. they pursue stakeholder primacy, and here they are in the Top 5 total return to shareholder list. At $18.4 billion in total assets, it is the largest among our Top 5 all stars. Their net interest margin popped 30 basis points from year end 2021 to present because the balance sheet is chock full of core deposit funding accompanied by a heavy dollop of variable rate loans. This helped drive down their efficiency ratio to under 48%. But there's more! In their investor deck they told shareholders that the efficiency ratio was likely to gradually rise to 50% as they continue to invest in people, technology, and capital projects. In other words, they are pulling into the pits to further pursue stakeholder primacy and make the investments needed for a long-term future. Refreshing! Oh and they delivered 203.5% five-year total return to shareholders. That too.

#5 The Bancorp, Inc. (Nasdaq: TBBK) 

Founded in 2000, this $7.8 billion financial institution remains one of the few banks in the U.S. that specializes in providing private-label banking and technology solutions for non-bank companies ranging from entrepreneurial start-ups to those in the Fortune 500.  They provide white label payments and depository services (think Paypal, Chime) and deploy that funding into specialized lending programs such as lending to wealth management firms, commercial fleet leasing, and real estate bridge lending. Note their asset size, because their value as the BaaS bank for Chime is that they are under $10 billion in total assets and not subject to the Durbin Amendment portion of the Dodd-Frank Act that fixes interchange income pricing. It has not been all sunshine and rainbows for TBBK. They were under an FDIC consent order from 2014 through 2020 relating to their BSA and OFAC compliance and their relationship with third parties seeking access to the banking system. Bankers considering becoming a BaaS provider to such third parties should read this order. Also, The Bancorp posted a $96.5 million loss in 2016, just outside the window the JFB Top 5 looks back to determine if it's a turnaround that drove total return. There probably is some of that in their ranking. But they posted a 1.69% ROA and 18.30% ROE year-to-date and have an aspirational goal (which they disclosed) of having a >2% ROA and >20% ROE. They put it out there! And have delivered a 202.2% five-year total return to their shareholders. Welcome back! 

There they are. Interesting that three of the top 5 have some sort of BaaS operation. And there are two Puerto Rican banks. There were two major hurricanes, Maria and Fiona, during this measurement period and I'm confident that this impacted trading activity in these banks' stocks, although I can't articulate how. 

The evolution of this august list tells me that having something other than "plain vanilla" is driving performance and shareholder returns. 

I would be remiss not pointing out that the #1 total return bank for 2020 and 2021, Silvergate Capital Corporation, had a five-year total return of 71.6%. Not bad considering the -1.21% for the same period for the S&P US BMI Bank Total Return Index. But Silvergate's current 1-year total return was -87.1%, knocking it decidedly off the JFB Top 5 list (currently ranked 45th). Putting most of your eggs in the crypto basket has its highs and lows. Perhaps diversify?

~ Jeff

Note: I make no investment recommendations in this article or this blog.

Thursday, December 08, 2022

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


Financial Markets & Economic Update -Fourth Quarter 2022

What a year 2022 has been!  Thanksgiving is this week and we can all be thankful for our families and friends.  May we all enter this holiday season joyously.  We are closer to the end of inflation and employment is still strong, with job openings exceeding unemployed persons by several million.  We’ve seen tremendous market declines in both stocks and bonds, volatility, and a Federal Reserve who is raising interest rates at a breathtaking pace.  Short-term rates have risen from .25% to 4.00% so far and the Fed says they are not done yet.  Housing markets have suffered, with mortgage rates climbing up to 7.00%.  We are thankful that there has been some recovery in stocks and bonds over the past two weeks.

My biggest concern with the Fed is that they are continuing to pile on outsized rate hikes and are not spacing them out to consider the typical six- to nine-month lag in their policy moves.  As Milton Friedman famously wrote: “Monetary policy affects the economy with long and variable lags.”  Thus, the Fed needs to anticipate and assess the damaging effect of large rate hikes on the markets and on economic activity.  I was rejoicing when I saw their latest FOMC statement from early November, which included wording about the pace of future hikes (they tell us there will be more): “The Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”  Maybe they will wait and assess the effect of the four big .75% hikes in June, July, September, and November; based on lags, we are not fully seeing their impact yet.  As Philadelphia Fed President Harker said recently: “Inflation is known to shoot up like a rocket and then come down like a feather.” 

The Fed is raising rates to reduce aggregate demand to fight off inflation, even though they themselves waited too long to raise rates and inflation began as a supply-chain-driven problem, when production of goods could not keep up with new demand.  The downside to all of the rate hikes is that we face a high risk of recession in 2023.  Consumer spending and business inventory financing will be hurt by higher interest expense and it will take a toll on savings and corporate margins, respectively.



Milton Friedman also wrote that “inflation is always and everywhere a monetary phenomenon.”  Money supply, as measured by M2, was growing in 2020 by over 20% year-over-year and in 2021 by 12% to 20% due to the Fed injecting liquidity through its bond buying program of $100 billion per month and the federal government passing continued Covid-19 relief bills, placing trillions of dollars into the economy.  It is no wonder that demand surged.  And M2 growth started 2022 at 12%, with the Fed still buying its $100 billion of bonds through the month of March, even though they knew inflation was a serious issue.  And now M2 growth is down to 1.3% in October, which is below the range we experienced during the prior 10-year recovery of 3% to 5%.  The Fed has reduced their balance sheet by $900 billion so far in 2022; a decline of $1 trillion is the equivalent of 1.00% of tightening.  Remember this “hidden tightening” as you see the rate hikes piling up.

Rates have risen since March 2022.  The CPI peaked at +9.1% year-over-year in June and is now +7.7% in October, which is a good declining trend but still too elevated.  The Fed’s preferred measure is the PCE deflator, which was +4.2% in the third quarter compared to +7.3% in the second quarter and +7.5% in the first quarter.  The core PCE (excluding food and energy) has fallen to 4.5% in the third quarter from +5.6% in the first quarter.  The CPI and PCE measures differ in the amount of housing and shelter used in the calculation; CPI has a weight of 42% for housing and 32% for shelter, which the PCE indices use 15% to 16%.

I mentioned earlier that the Fed was raising rates to reduce aggregate demand.  They cannot control the supply side, which has been particularly hard hit for goods from China, as their Zero-Covid policy locks down entire cities.  More analysts are pointing at energy policy as one of the main contributors to inflation, when government stopped drilling expansion of oil and natural gas and distribution networks such as the Keystone Pipeline to pursue a “green” agenda full of batteries, solar power, and wind.  The problem is that we are not ready as an economy to turn on a dime away from fossil fuels and businesses are reluctant to make the necessary capital investments to drill for more oil.  When Russia invaded Ukraine last February, the price of oil shot up to $110 per barrel in June but has since returned to pre-invasion levels at $77 per barrel.  Transportation costs have increased leading to an increase in the price of just about everything, especially food, where prices are dependent on the cost of goods getting to their final destination.  Food and energy prices have been damaging to family budgets.


Leading Indicators

How are the leading indicators doing?  There is some good news for inflation but worse news for the economy.  The index of leading economic indicators has continued to fall further, with October at -.8%, following September’s -.5%, and is now down for eight consecutive months.  This indicator accounts for the lag in Fed policy and projects six to nine months in the future. 

The FIBER leading inflation index also continues to fall, but this decline is good news for inflation.  The index turned down in May 2022 and is now -8.0% in October, following -5.8% in September.  This index also looks out six to nine months.

Stock markets have declined most of the year before stabilizing recently.  The Dow Jones and S&P 500 averages are down -6% and -16% respectively.  Nasdaq has been the worst performing, at -28% year-to-date.  Stocks are a forward-looking mechanism, based on projections of corporate earnings.  PE ratios 12 months forward are currently at 17.5 times for the S&P 500, which is slightly over the historical average of 16 times.  Bond markets have also declined from the relentless Fed interest rate hikes, with the Treasury aggregate price index down -12.7% in 2022.  The Fed said they will look for financial stress and may be getting their wish as we have witnessed crashes in Bitcoin and other “digital coins” and the sudden collapse of the FTX exchange.

Housing is leading the way lower as one of the most rate sensitive sectors of the economy.  Mortgage rates soared to above 7%, up from 3.25% at the beginning of the year; the higher rates have backed down slightly in the past couple of weeks but are still contributing to a fall in affordability.  New home sales surprised to the upside in October, but existing home sales keep falling.  Inventories remain tight for existing homes and much higher for new homes.  Commercial real estate is also under some pressure with projects proving uneconomical at higher borrowing rates.

Consumer savings rates are down to 3.1% in September as consumers dip into savings to afford higher priced goods.  Consumer credit has continued to rise at a time when credit card and borrowing rates are all up dramatically.  These signs, as well as personal income that has not kept up with inflation, are ominous for the consumer.  Labor markets have held up well so far but we are starting to see cracks.  Fed Ex, Amazon, and many technology companies who are dependent on consumer spending are cutting costs and laying off employees.  And they are doing this right before the holidays.  Employment is a lagging indicator and its weakness has been shown in fewer payroll jobs each month, with October at +261,000, but household employment declined by -328,000 jobs, pushing the unemployment rate up by .2% to 3.7%.

Finally, the Treasury yield curve is now inverted at both critical points.  The 10 year to 2 year Treasury spread is -.76% today and the Fed’s favorite measure, the 10 year to 3 month spread is at -.57%.  An inverted yield curve is a historically reliable indicator of future recession by six to 12 months on average, although it may be much longer.  In 2023, we will be there.  Long-term Treasuries will be seeing the recession first and typically will decline before short-term rates, which is happening now. 


The Outlook

NBER will declare a recession when four conditions are met:  falling production, falling real personal income, falling real business sales, and rising unemployment.  The first three conditions are very weak.

The Fed has acknowledged cumulative effects of rate hikes and lags in policy, but increases of nearly 400 basis points in nine months in a 2% (at best) economy cannot be good.  Recession probability is now very high for 2023 and will get higher if the Fed continues to increase rates.  There are signs in leading indicators, business surveys such as ISM, S&P, and Philly Fed, and actual reports that inflation is declining.  Unemployment should increase slowly from layoffs, hiring freezes, and cuts in job openings.

The yield curve is inverted in both important spread measures- the 10 year-2 year and the 10 year-3 month, and history tells us that recession follows inverted curves with a lag.  Government debt remains high, at $31.3 trillion currently, or 120.5% of GDP.  Remember, debt levels greater than 90% put pressure on GDP, leaving it at subpar levels.  GDP is about even to up slightly for 2022, after negative first and second quarters and a surprising increase of 2.6% in the third quarter with another increase possible in the current quarter.  I don’t expect better growth in 2023, and I don’t think the Fed does either, but they won’t say so.


“It is worth remembering that it is often the small steps, not the giant leaps, that bring about the most lasting change.”  Queen Elizabeth II


Thanks for reading!  D. Jaworski 11/23/22

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.