Fact or Fiction: Bank Service Is Getting Worse

In my firm's most recent podcast, I editorialized near the end of the episode about declining service levels in banks, particularly the largest banks. I compared service levels to airlines, citing my recent spate of bad luck with air travel.

I should note that I type these words while waiting at the Minneapolis airport for my Southwest Airlines flight, which is delayed for an unknown reason for at least an hour. It's sunny at MSP and I squint as I write so I can see the screen. Perhaps it's delayed due to windshield glare.

Do I have a point? Or is it perception? According to Federal Bureau of Transportation Statistics (yes, this agency does exist, and you are paying for it), US airline flights were on time 83.45% in May 2016, up from 80.48% in May 2015. I went back five years and the trend is similarly positive.

So I'm wrong about airlines, right?

Not so fast. How do they measure those stats? Ever wonder why airlines board planes and push off the gate only to wait on the tarmac? Hmmm. Wonder if they measure "on time" from the time you push from the gate. The devil is in the details.

If airlines were so good, why do we not feel it? Why does strategyand.com, pwc's consulting arm, describe air travel as remaining "for many a disappointing, grumble-worthy experience"?

My theory is that airline mergers have reduced our choices. So our overall experience is "disappointing", simply because our options to economically get from point A to point B might be with one or two airlines for that route.

On to banks. My theory is similar. But the proof, like in airlines, is elusive. According to the J.D. Power 2016 US Retail Banking Satisfaction Study, our satisfaction with big banks rose for the sixth consecutive year. Satisfaction with mid sized banks dropped for the first time since 2010.

Again, I think the devil is in the details. I always wondered when working with community banks how they achieved such high satisfaction numbers, usually high 80's to mid 90's. And it seems like every large bank has a trophy case of J.D. Power hardware. But my experience with large banks points to inflexibility, lack of front line empowerment, and basically an "I don't care about you" attitude.

Similar to airlines, I think it relates to how much of US banking assets are in the comfortable arms of so few banks. Seventy five percent of US bank assets are held by the top 50 banks. Losing individual customers is no big deal. But drop a notch in BSA or CRA, that's a big deal. In other words, they don't necessarily care as much about being flexible with you as they do about rigidly complying with bureaucrats. 

This feels like how socialism begins. Continue to consolidate power into fewer and fewer hands, be it government or large oligopolies, and pretty soon we're giving blood samples for our DNA to open a savings account.

If a bureaucrat reads this, he/she is probably thinking: "Not a bad idea. We'll say we're doing it 'for the children'!"

It could happen! 

~ Jeff

Why Banks Merge: Listen to the Sellers

September 2004, driving from a meeting in New York, on the grossly miss-titled Cross Bronx Expressway, Nathan Stovall, a reporter from SNL Financial gave me a call. The question: What was up with an upstate New York bank? My answer: The CEO was 67 years old and that would obviously be an impetus for a sale. He printed it as I said it. The angry phone call I later received from a bank director was well deserved.

Unfiltered honesty is sometimes a personal blessing, but mostly a curse. Rarely do you see in merger press releases the selling CEO saying, "Hey, I'm tired. I'm out!" But that is often the reason behind the nicely polished words formulated in the Investor Relations Department.

In 2013 there were 246 bank and thrift merger and acquisition deals announced, the highest number since 2007 when there were 318 deals. Year to date through April 22nd, there were 73 announced deals, putting us on track for a similar number of deals to last year. This all comes with fewer banks than there were in 2007.

What is driving deal volume? Investment bankers will tell you the definitive answer, which is of course their opinion. So I thought it would be instructive to take a look at what selling bank CEO's say in the press release when they announce they are turning over the keys to someone else. Yes, these statements are contrived. But within them there is often nuggets of truth. I simply hunt for those nuggets and put my own spin on why the bank was sold. 

These deals were all announced this month.

"Our combined financial institution will offer a wider array of products and services while continuing our long-standing personal commitment to our customers and community."

- Gregory Schreacke, President of First Financial Service Corporation in Elizabethtown, KY on his bank's sale to Community Bank Shares of Indiana, Inc.

Read: We needed greater scale to offer the products and services demanded by customers.

"Our combination... will provide greater capital resources and operational scale that will allow us to grow as part of a larger community bank."

- Loralee Hutchinson, President of Alarion Financial Services, Inc. of Ocala, Florida on the bank's sale to Heritage Financial Group, Inc.

Read: We need to be bigger and have more capital to keep up with regulation and the industry.

"[North Akron Savings Bank customers will gain] access to a broader choice of financial products and services comparable to those offered by the large banks operating in the region."

- Steve Hailer, President and CEO of North Akron Savings Bank on the bank's sale to Peoples Bancorp, Inc.

Read: There's no way we can keep up with the product and distribution channel changes coming down the pike. And what is social media?

"Customers will gain access to many new products and services, including insurance, trust, and investments, plus a full suite of contemporary electronic services.  At the same time, our legal lending limit will be much larger, which will help us to make larger investments in the local communities."

- Dick Baker, Chairman of Ohio Heritage Bancorp of Coshocton on the bank's sale to Peoples Bancorp, Inc.

Read: You have to make lots and lots of little loans when you only have $25 million in capital.

“I am excited about our increased capacity to lend, which will have an impact on the communities we serve."

- Mark Candido, President and Chief Executive Officer of Quinnipiac Bank and Trust Company in Connecticut on his bank's sale to Bankwell Financial Group.

Read: We only have $10 million in capital and can't get more on our own. Oh, and the fact that the CEO is 65 is a mere coincidence.

Am I reading it right?

~ Jeff

The coming bank consolidation... but not why you might think.

If I had a nickel for every time an investment banker predicted the mass consolidation of our industry I could buy a free round to all attendees at next month's Financial Managers' Society Forum. Financial Institutions need greater scale to offset the rising regulatory burden imposed by Dodd-Frank and soon to be imposed by the Consumer Finance Protection Bureau (CFPB) is the most often cited reason.

But I have noticed a couple of trends that may be a better leading indicator of coming FI consolidations, one old and one new.

Old

The old reason is that our CEOs are old... pun intended. Prior to the 2007 financial crisis, we prognosticators used to look at CEOs age as an indication of whether a financial institution would sell. See the table for the average age of FI leadership for publicly traded banks and thrifts.  It tells a challenging story... one quarter of FI CEO's are two years from retirement. Half are seven years away. Are there successors in the wings?

I have not read one press release announcing a merger that stated: "Our CEO is old, we have nobody to replace him, so we sold." But the cynic in me says this reason stands tall in prominence in the Board meeting when the sale decision is made.

This could be because the CEO does a good job, and neither the CEO or the Board thinks there is another potential CEO candidate that can do as well. If this is the case, then I put to you that neither the CEO nor the Board has done a very good job of developing leadership in the organization making successful next- generation passing of the baton doubtful. The cynic in me suspects there may be no opportunity for the retiring CEO to unlock the value of his investment in the FI without a sale.

But there are exceptions, such as how Wayne Bank in Honesdale, Pennsylvania implemented a leadership change flawlessly. Bill Davis, a great banker who never thought the success of the bank was all about him, moved out of the executive suite on retirement day and passed leadership to his second in command, who had been groomed from within. See the link below for the jfb post on Bill Davis.

New

The newfangled reason for the coming consolidation wave, in my opinion, is the change in our shareholder base (see chart). Community FIs used to have very predictable shareholders. They were typically within our communities, liked the dividend, and were proud to own a piece of their local bank.

Having gone through a few consolidation waves, our shareholders have become more diverse. They're also becoming older, and many have already passed shares to the next generation that lacks that same connection to the bank.

Lastly and possibly more importantly, FIs have needed capital during the past few years as loan problems and operating losses have reduced industry capital ratios. We turned to the most prominent underwriters of community FI stock, Sandler O'Neill, KBW, and Stifel to replenish our capital coffers. Where do these underwriters place the community bank issues? With institutional shareholders such as asset managers, hedge funds, and the like.

These institutional shareholders have little interest in what you think you mean to your communities or employees. They plug in the number they bought into your shares, and expect a certain return. If you can't deliver the return via profitability, then you better sell to give it to them. These shareholders at times own a relatively large percentage of a stock that doesn't trade heavily. In these instances, it would be difficult for the institutional shareholder to exit the stock through any other means than a sale.

Yes, those that successfully raised capital in the past two years are proud that they have done so. But I wonder if, while basking in the glow of that success, they understand that they may have sealed their fate far in advance?

Do you think there will be an increase in FI consolidations? Why or why not?

~ Jeff

Ode to Bill Davis:

http://jeff-for-banks.blogspot.com/2010/02/ode-to-bill-davis.html