Occupy Wall Street: Occupy This!

The Occupy Wall Street gang seems to garner more press coverage than the state of the U.S. economy, the presidential election, and the MLB playoffs combined. In terms of media excitement, only the trial of Michael Jackson's doctor competes.

Who are these people and what do they want? The press can't even figure it out and spin it to something cohesive, even though they really, really, really want to. But it has something to do with economic justice, whatever that means. Whenever talking heads say "___fill in blank____ justice" it makes me nervous. It usually relates to socialism and according to all of my college economics professors, socialism doesn't have a great history of success. Though I admit that I could not understand many of my econ profs.

My first division officer in the Navy told me that if bad things were happening to me, look to me first before I start pointing the finger elsewhere. I think both bankers and Occupy Wall Streeters are falling into a whining trap. If Occupy Wall Street truly represented a movement to improve the economic status of lower and middle income families, here is where I think they should focus their energy, and also what banks can contribute:

1. Learn robotics. Factories provided blue collar workers with middle income wages. We ignored the signs of globalization, and instituted wage scales and inefficient work rules that made manufacturing things overseas much more attractive to companies (and buyers of the goods manufactured). So we let manufacturing leave our shores for cheaper labor and more flexible work rules. But the loss of manufacturing jobs in the U.S. has stabilized. If we are to grow manufacturing with middle income jobs we need to master robotics to make plants more efficient and attractive for companies to work here. According to Maxizip.com, a robotics technician can earn $30,000-$45,000. Do you want to do something to help the U.S. economy and your family, consider robotics. If not robotics, then research good paying blue collar jobs (see here) and focus your efforts there. And for Pete's sake, be flexible. If you install doors on GMC trucks, don't go on strike if asked to do dashboards on Chevy's.

2. Start a business. Economic cycles of yore resulted in many more business startups than the current one. One reason, in my opinion, is politicians' continually extending unemployment benefits. If you keep paying somebody not to work, it saps the sense of urgency for would-be entrepreneurs to seek opportunities to be their own boss. During periods of heavy uncertainty it is typical for opportunities to identify and fill a need to arise. Don't let the drug of the monthly check keep you on the sidelines. Do some research, write a plan, and start a business. You want bankers to suck up to you, see what happens when you get a successful business up and running.

3. Go to business school. If you would like to earn similar money to Wall Streeters, go to business school and earn it yourself. There is a misconception that people that work in finance were born with silver spoons in their mouths. To be fair, there are some on the Street that were born on second base and think they hit a double. But I know from experience that many if not most came from much humbler beginnings, went to B school, and worked hard to get where they are. Most Americans that are in the lower to middle economic categories do not pay full fare at business school. Some may go for little or no cost. So if you want to Occupy Wall Street, why not do it from inside the building instead of out.

This is a banking blog. So how can bankers improve the economy, their communities, and expand opportunities for Occupy Wall Streeters? Here is how I think:

1. Run an Angel Fund from your holding company. "Bankable" businesses typically have a profitable operating history or real estate with significant equity. This makes startups that don't have real estate to lend against unattractive to banks. So how can banks get capital to entrepreneurs with a great idea, solid business plan, and reasonable chance for success? How about run an Angel Fund that focuses on startups within the bank's markets? The bank need not be the only investor, but can run it profitably through management fees, the "ups", and diversification.

2. Do SBA lending. So many bank clients shy from SBA because of strict rules, paperwork, and fear of not receiving the guarantee if the business defaults. But there are ample vendors to do SBA lending for you and can be flexible in how the program is structured. If you don't want the risk, simply receive a marketing fee for bringing the vendor to the customer and providing an opportunity for that early stage business in your community to receive a government backed loan.

3. Run a business plan contest. How many times have you driven down the street and see a new business that you doubt will succeed? Many entrepreneurs jump in with both feet prior to doing research, writing a business plan, and having the capital in place. The discipline of doing so improves the likelihood of success. Why doesn't your FI run a contest in your community for the best startup business plan and award a meaningful prize, such as $25,000, to get the business off of the ground. The Nashua Bank in New Hampshire ran such a campaign and the CEO said it was a great success. The discipline of performing the research and drafting a business plan will help all participants, not just the winner.

There! Three things that would be more constructive than carping about bankers' pay by Occupy Wall Streeters and whining by banks about the state of the economy. Let's get off the whine and into the game!

What do you think would be more productive use of time for FIs?

~ Jeff 

The Elephant in the Room: Branches

In keeping up with industry reading it is clear to me that we, as an industry, are perplexed at what to do about branching. The recently released FDIC Summary of Deposits showed the second year of branch decline. The most recent ABA study on delivery channel preference showed online banking eclipsing branch transactions for the 55+ set. That's right... old people letting their fingers do the walking.

But the #1 or #2 reason cited by small businesses and individuals as to why they select their bank remains branch location. When I ask executives what makes a branch successful or not, the top two reasons continue to be branch location or personnel, not necessarily in that order. Confusing? Yes.

But the progressive talk about the future of the branch at times lacks common sense, in my opinion. This dates back to an interview I did with American Banker about a community FI that was opening coffee shop branches. I gave a twofold comment: 1) I saluted the FI for being creative; and 2) I doubted it would work, particularly in the locations and relatively conservative markets where they tried it. AB published the first and the second didn't make the editorial byline. The coffee shop experiment turned out to be a disaster, and the FI was later sold.

I recently had a Twitter conversation with a banker about branches that lack tellers. According to feedback from bankers that tried this concept, customers were confused when they walked into the branch. That made sense to me. We like the familiar... i.e. the teller line. But branch transactions have fallen off of the proverbial cliff. Do we need a long line full of bored tellers reading Nora Roberts novels? No. But perhaps we need a couple teller windows to process transactions and bring comfort to those of us that like familiarity.

As we evolve, I envision the comfort of knowing there is a branch nearby to continue. But the people who occupy those branches should evolve to those that can open accounts, troubleshoot problems, advise customers, develop business, and occasionally process transactions. This branch will probably be smaller, and less expensive to build out. Smaller is certainly a theme I am hearing from bankers and industry professionals. If you are of a mind to continue trying to make the branch into a destination to drive traffic, let me introduce you to Sisyphus. Going to the bank is a chore. Boom.

So what about these big branches that we all have? An industry stock analyst told me that big banks have advantages over small banks because they can pay for increased compliance expenses by closing branches. The community FI may not have this luxury. But big banks have challenges here, in my opinion. Many have built palatial branches that have no discernible value except as a bank branch.

The poster child of this concept is Commerce Bank of Cherry Hill, New Jersey which was acquired by TD Bank (see photo). Their brand is wrapped around their number of branches, the primo locations of their branches, and the look of their branches. But if branches become less important, and big banks can consolidate one branch with the one in the next town over, what are they going to do with the palace? These branches are very expensive, are fixed assets on the bank's books, and are 100% risk-weighted for capital calculation purposes. In other words, you have to carry more capital against the branch than a bond in the investment portfolio that might be 20% risk-weighted.

The pictured TD branch is about 100 yards from the Wells Fargo branch pictured below. Sorry for the poor focus but I took the picture with my phone while walking so cut me some slack! If Wells decided to consolidate this branch, it could easily be converted to an office, a hair salon, or a coffee shop. In other words, Wells could sell it and, current real estate market woes aside, can probably sell at a gain. The buyer can convert it to whatever they want. TD, on the other hand, may have to devalue their branch because they can't sell it. Or if they can, it would be for the land and the buyer may have to raze the building to something more functional. Think of all the empty gas stations dotting the landscape.

To be fair, the Wells branch had $52 million in deposits and the TD branch $130 million at June 30th. But the old Commerce was known for large branch deposit sizes because they aggressively pursued municipalities for their banking business. So aggressive, indictments were involved. But I digress. The TD branch does have more deposits, and perhaps this is partially due to the palace.

But as we determine our next step in branching, we can't ignore the trends that are telling us that transaction processing in branches is becoming secondary to something else. As branches decline in prominence, we should plan our next branch with the gas station in mind. We don't want to manage multiple properties of former branches that sit stale on our books eating our capital.

What is your opinion of what the "next" branch should look like?

~ Jeff

Guest Post: Third Quarter Economic Update by Dorothy Jaworski

Another Volatile Quarter

I know I risk sounding too negative, but we cannot seem to shake the crisis mentality that keeps whipsawing bond and stock markets. The crisis du jour originated in Europe with crushing debt levels in Greece, Italy, Portugal, Spain, Ireland and who knows where else. Germany remains fairly strong but sometimes appears to be coming to the rescue, sometimes not. Rumors of Greek bankruptcy surface every other day. French banks are the largest holders of sovereign debt, but, out of the blue, a Belgian bank, Dexia, has become the first to fall.

Liquidity is becoming a problem for these banks, and with their stocks battered daily, they have no ready sources of capital. There has been a lot of talk about rescues from the European Union, but the markets want action. The US is not of much help as the economic recovery is stalling and the debt ceiling/deficit debate/fight caused a great deal of harm to both consumer and business confidence.

In an environment like this, volatility rules. Stocks have taken the brunt of investor frustration, selling off steeply in the third quarter for the worst quarterly loss since the height of the financial crisis in late 2008 and early 2009. The Dow Jones Industrial Average was down -12.1% to just below 11,000 in the quarter, while the S&P 500 fell -14.3% and the Nasdaq fell almost -13%. And gold had the wildest price action of the quarter—beginning at $1,500 an ounce, soaring 27% to $1,900 on September 5th, and then selling off steeply by -14.5% to end the quarter at $1,624. Oh, the fortunes won and lost!

Enough about gold, and all I will say about stocks, because I always fear being a jinx, is that the forward price earnings ratio is not even 11 and the dividend yield is currently 2.3%, which exceeds the yield on the 10 year Treasury bond. This does not happen often.

Back to Back Historic Moves

The Federal Reserve made two historical easing moves during the quarter and still the markets are not happy. In August, for the first time since the 1940s, the Fed made a two year “promise”—to keep short term rates at their current exceptionally low levels until mid 2013. If you believe the expectations theory of interest rates, that long term rates are simply the compilation of the expected path of short term rates, then you believe that long term rates will stay exceptionally low too. Maybe this will not affect the really long term rates, such as the 10 year to 30 year range, which are so heavily influenced by inflationary expectations and the international flow of funds, but most other longer rates, such as 2 year to 9 year maturities, will be affected. So why were the markets disappointed in the Fed’s forward guidance? Why did the Fed have to act again in September?

Perhaps it is that the Fed did not tie their promise to economic performance, as I thought they should have, but they only chose an arbitrary period of time. By performance, I mean the unemployment rate, number of jobs created, or GDP growth. The Fed could have, and in my opinion should have, promised to keep rates low until unemployment falls to 7% or less, until we are creating 3 million jobs a year or more, or until real GDP grows at and stays above the 3.3% average growth rate of the past 60 years. Only then will inflation even hint at being a permanent risk.

We can only assess the Fed’s performance in terms of their dual mandate—maximum employment and stable prices—and not in terms of a two year waiting period.

So, disappointment in the “promise” to keep short term rates low until 2013 led to another historic action in September. In another easing action dubbed “Operation Twist,” the Fed stated that they will sell $400 billion of their shorter securities (less than 3 year maturities) and buy the same amount of longer securities (6 to 30 year maturities) by June, 2012. They haven’t tried a “twist” since the 1960s. They also added that they will reinvest cash flows from their mortgage backed securities from their Quantitative Easing QE1 Program into more mortgage backed securities, rather than into Treasuries.

Ben Bernanke was quoted as saying that Operation Twist is the equivalent of a 50 basis point cut in the Fed Funds rate. Hey, when Fed Funds is near zero, you have to try something. And don’t forget the cumulative actions they have taken to date—Fed Funds to 0%, QE1’s purchase of $1.5 trillion of Agencies’ bonds and Agency mortgage backed securities, QE2’s purchase of $600 billion of Treasuries, and now the “promise” and the “twist.” These actions someday will push consumers, businesses, and banks out of the liquidity trap.

Don’t Give Up on the Economy

It is not time to give up on the economy. The data has been weaker in recent months and GDP is stubbornly low, at 1.3% in the second quarter of 2011. Many forward looking indicators are showing positive signs, including the index of leading economic indicators, building permits, industrial production and survey measures, such as the ISM series. We have the full support of the Fed until at least 2013.

Companies are sitting on $1.9 trillion of cash on their balance sheets and banks have at least that amount in reserves at the Fed earning next to nothing. It will take time, but eventually, companies and banks will seek higher returns and invest and lend. We probably do not have much in the way of fiscal support from the government as high debt and the deficit make that unlikely. All companies lack the confidence to invest, to hire, or to move forward.

What is on the horizon to shake up the economy? For one, the original culprit of the economic weakness, in my mind, was the spike in oil prices to $115 per barrel and in gasoline prices to near $4.00 per gallon. Oil prices have slipped back by -30% to $80, while gasoline prices have only fallen by -15% to $3.39. Gas prices clearly have room to move downward. This will act like a tax cut at just the time when it seems Washington DC will not provide one.

Another positive is the beginning of another refinancing wave by consumers as the Fed has pushed down long term rates, including mortgage rates. Companies can take advantage by issuing debt at lower interest costs. Stay tuned!

Thank You, Steve

As I was writing this, I saw the announcement by Apple that Steve Jobs had died, after battling illness for eight years. He had a profound influence on so much of the technology that we use in our daily lives. He made computers easy to use and gave us the iPod, the iPhone, and the iPad. Fifteen years ago, these were products we did not even know that we wanted and needed. I have the iPhone and iPad and cannot imagine life without them. He will leave a huge legacy in the company he co-founded and the products he helped invent. I will miss his brilliance. Thank you, Steve!

Thanks for reading! DJ 10/05/11

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 First Federal of Bucks County since November, 2004.

Top 5 Total Return to Shareholders: #1 BofI Holdings Inc.

I was recently moderating a strategic planning discussion with a multi-billion dollar in assets financial institution. During the discussion, the President of one of the bank's most profitable divisions opined that less than $10 billion in assets was the "dead zone". They had to grow to survive.

I challenged the thinking. But he held firm that the regulatory environment, changing customer preferences, and the pace and expense of technology were driving the market towards bigger is better. In that, I thought, he has a point.

But I'm always looking for support. This blog has dug deep into the numbers to support the notion that bigger is better. I wrote about the best performing FIs in ROA (see link here), and how growth impacted expense and efficiency ratios (see link here). Neither supported this regional president's opinion.

This time, I searched for the top five best performing FIs by total return to shareholders over the past five years. After all, what is the point of becoming big if you cannot deliver value to shareholders? I used two filters: the FI had to trade over 2,000 shares per day so there is some level of efficiency in the stock (this created a larger FI bias in so doing); and the FI could not have a mutual-to-stock conversion during that period, which muddies the waters.

I have reviewed my top five in descending order. Last post was dedicated to the #2 Signature Bank of New York, New York (see post here). The rest of this post goes to our number 1 bank and winner:

#1: BofI Holdings Inc. (Nasdaq: BOFI) of San Diego, California

Old school bankers are rapping their fists on mahogany desks, mumbling under their breath, and turning over in their graves at the notion that the best performing FI based on five-year total return to shareholders is an Internet bank. Yet here we are.

Bank of the Internet was formed in 2000 and went public in 2005. Over the past five years, it has returned over 80%, compared to -4% for the S&P and -66% for SNL Bank & Thrift Index (see chart). As Mel Allen would say, "how about that".

In spite of the stellar five-year performance, the stock currently trades around book value, and a 9x earnings multiple... low by industry standards. The trading multiples are in spite of a 1.26% ROA and 14.83% ROE year-to-date. Why such low multiples for such high performance? I'm not sure, but I have to think some high-brow snobbery regarding Internet banks is involved, much like fine wine drinkers' attitudes while quaffing a Sam Adams.

Not sure why you would have a high-brow attitude towards this bank, since its management team is made up of investment bankers, blue-chip consultants, and engineers (see here for management bios).

BofI prides itself on process discipline, delivering the best technology at the lowest cost, without the millstone of branches dragging down performance. Their efficiency ratio was 40% for their fiscal year 2011 (ended June 30, 2011).

They collect deposits primarily through three online brands, and are seeking affinity relationships to expand their brands. At June 30, 2011, the online bank had 32,000 accounts being served by nine CSRs (see below). BofI has also launched BofI Advisors, giving financial planning firms the ability to offer banking to their clients through a self-branded portal. In other words, the financial advisory firms serve as the point of entry to the bank, with BofI providing the back end banking services.

Vietnam, a communist country, did not develop the infrastructure for a nationwide telephone system. When cellular technology advanced to the point that telephone lines, poles, and in-home wiring wasn't required, they embraced it. The result: Vietnamese can talk to one another as easily as we can in the U.S., but don't have telephone poles delivering outdated technology. BofI is Vietnam, without the beef noodles. Bankers should take note.

Congratulations to BofI Holdings Inc.. They are the best performing financial institution nationwide in total return to shareholders over the past five years. Here is our list of winners:

#1 BofI Holdings Inc.
#2 Signature Bank
#3: ESB Financial Corporation
#4: Bank of the Ozarks, Inc.
#5: German American Bancorp

~ Jeff

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. FINRA makes people take a test to ensure they know what they are doing before recommending securities. I'm sure that strategy works out.