Cars: A Lesson in Brand Identity

A few weeks ago I was driving the Pennsylvania Turnpike when I noticed a sweet ride. Deep black, with flecks of blue, tan leather interior, advanced looking dash, and a pretty, well-dressed lady in the passenger seat to boot. I thought to myself, "what a handsome and successful couple". The car, as emblazoned on the trunk, was a "Genesis"... the beginning... awesome name.

I looked up the car later in the week. It is made by Hyundai. I thought "maybe that couple isn't so successful after all". The lightbulb atop my head went off, sirens blaring, slightly embarrassed by my reaction, but I think I had a blog post! My opinion of this couple, a couple I have never met, was significantly influenced by the car they drove. I promised myself I would swim in deeper waters in the future.

Is my reaction unique? When I transitioned from banking to bank consulting in 1997, I drove up to my new office with great anticipation. I was anxious to get started. My car... a Mitsubishi Eclipse. On that day, my boss matter-of-factly informed me that I would have to get another vehicle. He drove a Volvo.

When I coached my daughter's club softball team, I was in charge of finances. Funny how this banking thing bleeds into your personal life. But one family was persistently late making their fee payments. I caucused with the other coaches to see if we should cut them some slack. Cutting slack meant the other families would have to pay a little more to support the family having difficulty. We decided against it when the father pulled up in a Cadillac Escalade.

I don't think cars influencing our opinions of others is unique to me.

This causes some people great difficulty, including me. I grew up in a blue collar family. The first family car I remember was the Dodge Dart Swinger. As I moved through my professional life, my family income has naturally gone up. But my upbringing does not permit me to spend $20,000 more on a car just so people can think well of me. Look at the cars of other consultants, you'll find the Volvo's, BMW's, and Infinity's. I drive a Dodge. But not the famed Dart Swinger!

I witness many friends and colleagues spend suitcases of cash on vehicles. Some are spending cash they do not have. No matter what math you use, it does not make financial sense to drive a "status" car. And yet many do. I think there is a strong lesson here for financial institutions.

There are countless resources for FIs to research how to appropriately position their brand. Maybe we are looking at this the wrong way. Perhaps we should build a brand that enhances the brand of our target customers?

For example, after a bank board of directors meeting a few years ago, a director approached me on a different topic regarding something his Merrill Lynch broker told him. This bank had a significant Trust Department, and one of their directors had his money at Merrill Lynch. It almost felt like he wanted me to know he was a Merrill client. In the eyes of the director, Merrill Lynch elevated HIS brand. Wonder what he thinks of them now!

Getting closer to home, listen to how friends and colleagues discuss coffee. Some go to the break room and pour a free cup. Others go to Starbucks, often saying "I need my Starbucks". Their Starbucks? Again, this could be a case of a company elevating the personal brand of their customers.

The proliferation of Starbucks outlets has made drinking their coffee less exclusive, and therefore lessens their ability to elevate customers' personal brands. CEO Howard Schultz readily admits they diminished their brand by opening too many stores. Fortunately for personal brand builders, they keep their price points high so schleps like me gravitate to Mickey D's.

If the question about brand changes from building the brand of the FI to building the brand of the FIs customers, what changes need to be made? If our target customers are small businesses, how do we position the FI in such a manner that the small business person is proud to proclaim that we are their bank? And if we position ourselves as customer brand builders, do we have the courage to focus on our target customers to the exclusion of other customers that are valuable to us, but not our strategic focus?

It would be writing the obvious to say that banking is at a crossroads. History and culture did not require us to position our FI for anything other than locational convenience and efficient transaction processing. Now, we must be unique, be focused, have purpose. Much like Harley Davidson, our customers should be fiercely loyal to us because we mean something to them. We build their personal brand.

I think my next car will be a muscle car. Beats going to the gym.

What are your thoughts of brand building focusing on customers instead of our institutions?

~ Jeff

Back of the Envelope: Branch Acquisition Math Made Easy

On Sunday, July 31st, First Niagara Financial Group Inc. ($30.89 billion) agreed to buy 195 Northeast branches with approximately $15 billion in deposits from HSBC Holdings Plc for an approximate 6.67% deposit premium. During a conference call the next day, First Niagara President and CEO John Koelmel said the bank will divest 100 of the branches and will likely sell about two-thirds of the divested branches and close the others.

Aside from making the announcement on a Sunday, it is odd to strike a deal only to have to divest over half of the bounty. But the branch divestiture has some upstate New York financial institutions circling branches like hyenas around a wildebeest.

Branch purchases are on the mind of many CEOs these days as a means to accelerate growth to achieve the perceived scale necessary to absorb increasing, non value added costs such as compliance and systems security. Nobody knows how big they have to be, just bigger. Sort of like professional baseball players in the late 90's.

But it is not important enough to just be big. As noted in a prior post regarding how FIs failed to reduce expense and efficiency ratios as they grew (see link below), it is more important to be smart than big. Take this from one who invested some of my daughter's college money in Sovereign Bank, a bank that prayed at the altar of bigger is better, only to have me work harder to fund the money I lost. The lakehouse will have to wait.

Analyzing the impact of a branch purchase is not particularly complicated. I ran a hypothetical analysis on the back of an envelope for Schmidlap National Bank buying a $50 million in deposits branch from First Niagara (see photo).

Counter-intuitive for those not initiated in branch purchase is that the buyer actually receives funds.  For example, if Schmidlap buys $50 million in deposits for a $1 million premium and the value of the fixed assets of the branch (including real estate, tables, desks, everything except the signs) was $2 million, Schmidlap would get a check for $47 million at closing from First Niagara.

Except if you listen to some of my early adopter bank marketing or IT friends, First Niagara would more likely remit payment via a QR code on their smart phone.

Schmidlap would have to pay the interest expense on all $50 million of deposits. They would also have to amortize the premium paid over some period. In this hypothetical case, it amortizes straight line over 10 years. There are limited exceptions to having to amortize the entire premium. And First Niagara may very well be able to put some of their premium paid in goodwill. But when acquiring only one branch, such as what Schmidlap is doing, it is likely the whole premium will be amortized. This is a non-cash charge, but an expense nonetheless.

Since Schmidlap only receives $47 million in net proceeds, that is what they have to invest in either loans or the investment portfolio. Yields on bank qualified investments are so low these days, that for any branch purchase to be anything more than a single at best, the buyer would hope to deploy proceeds in loans. In Schmidlap's case, we assume that they can put the net proceeds to work at 3% and the deposits cost 1%.

When all is said and done, this branch purchase will only drop $385,000 to pre-tax profit. Readers may think that $385k is better than nothing. But this represents only 0.77% pre-tax return on assets. If Schmidlap has a better ratio at time of closing, than this transaction would bring their pre-tax ROA down.  If the bank allocated $4 million of capital (an 8% leverage ratio) to support the branch, that would yield a 9.63% pre-tax return on equity.

Not exactly a home run, would you agree? But Schmidlap would be bigger, just not better. Or am I looking at it wrong? Doesn't bigger equate to better? Barry Bonds thinks so.

~ Jeff

Does your bank achieve positive operating leverage? Post regarding expense & efficiency ratios:
http://jeff-for-banks.blogspot.com/2011/05/does-your-bank-achieve-positive.html

V-blog: From the desk of jfb. How should FIs use social media?

Financial Brand August 2010 Survey of Banks Social Media Presence
http://thefinancialbrand.com/13111/2010-bank-credit-union-online-marketing-study/

Frank Sorrentino’s (Twitter: @franksiii) Blog
http://www.bankingonmainstreet.com/

Susquehanna Bank’s blog
http://blog.susquehanna.net/

Chase’s Community Giving Facebook page
http://www.facebook.com/ChaseCommunityGiving

Banker Quotes: As Told to Me v2

I learn a lot from bankers as I visit their offices, speak to them on the phone or at industry events. Occasionally they will offer an insight that I think my Twitter followers would find interesting. Below are selected quotes that I tweeted this year along with my brief insights or background regarding the comment.

Note that if the quotes exceeded 140 characters, I would have abbreviated or substituted some words to make them fit. So if you are a CPA and want to count, a few of the quotes may exceed the 140 here, but not on Twitter. I quote bankers anonymously to protect the innocent.

@JeffMarsico Bank attorney to me: "The only thing worse than training an employee and having them leave, is not training them and having them stay."

jfb note: I'm not sure if this was original, and I find it odd that an attorney said it. But this attorney is also an ordained minister... an interesting fellow to say the least. The context was a discussion surrounding how community banks used to pilfer previously trained employees of large banks. Once those training programs went away, community banks never filled the void.

@JeffMarsico Bank COO to me: "We must install headphones on our ATMs so visually impaired people can drive up and use them."

jfb note: Think about that for a moment. There should be a common sense-o-meter that sounds the alarm in every office where banking laws and regulations are made.

@JeffMarsico Community bank head of retail: "The transitional branch model will be to acquire consolidated branch buildings and get them open cheaply."

jfb note: This was said in a strategic planning retreat. The transition is from current branches and future branches. Much is being debated about the future role of branches. I think the guiding principle should be: nobody knows and be skeptical of those that claim to.

@JeffMarsico Bank fund manager to me: "Our investment criteria is great management teams, in great markets, with great core deposit franchises."

jfb note: This fund focuses on under $10B in assets community banks. This is his opinion of value creation. It may not agree with yours. But he has hundreds of millions to invest.

@JeffMarsico Bank COO: "We've stopped playing 'let's make a deal' with CD-only customers."

jfb note: Transitioning funding sources into core deposits hasn't been particularly difficult in this low interest rate environment. The true test of this COO's philosophy will happen when rates rise.

@JeffMarsico Behavioral psychologist: "When you pay people enough, they are motivated by autonomy, mastery & purpose."

jfb note: I would agree with the statement. But I doubt there is agreement on the definition of "enough".

@JeffMarsico Bank Chief Risk Officer: "Regulators focus is slowly moving from credit to data security."

jfb note: Data security may very well be the next great banking crisis. I can't help but wonder if those evil geniuses intent on hacking financial systems would dedicate themselves to doing good, they can make a pretty good living. They still can sit at home without showering.

@JeffMarsico CU CFO to me: "We installed a remote teller in one of our branches and customers refused to use it. We had to uninstall it."

jfb note: Remote teller stations, where the actual person is on a screen and transactions are accomplished through ATM-like or suction tubes, are getting a lot of buzz. I think I've been around banking enough to be skeptical of buzz. How about you?

@JeffMarsico TD Bank CEO: "Americans get almost as much pleasure out of crushing an opponent as winning."

jfb note: Ok, this one wasn't told to me in person but I read it. I think the Canadians might be on to something. I wish he got the message to Osama bin Laden earlier.

@JeffMarsico CU CFO to me: "Because we have low balance accounts and a no fee culture, we need to leverage technology to lower costs."

jfb note: Common sense that, occasionally, needs to be said, and tweeted.

@JeffMarsico Bank director: "A loan participation transfers risk from one who lacks courage to one who lacks knowledge."

jfb note: Said in a board meeting where the bank's senior lender was proposing plugging a budget gap in loan production with participations. Ever try to collect on a loan gone sour that was originated by the bank in the next town over?

@JeffMarsico Bank CEO: "Our examiners were simultaneously examining us and interviewing for OCC jobs, which can't be a good thing."

jfb note: Wonder what agency examined this bank?  Hmmm?

What interesting things are you hearing out there?

~ Jeff

Guest Post: Second Quarter Economic Update by Dorothy Jaworski

2011 started with so much economic promise. Jobs were being created, stock markets were rising. Interest rates were rising quickly too, in anticipation of strong economic growth. Then, oil and gas prices spiked over the unrest in Egypt and Libya. Gas prices reached $4.00 per gallon in May and everyone’s tipping point was reached. Enough!

Consumers cut back spending and continue to pay down or shun debt. The economy was creating jobs at a half decent pace in the first quarter and then job growth hit a wall in May.  The unemployment rate ticked back up above 9%. Housing, so very important to consumer confidence, resumed its downward trend after seeming to have stabilized in late 2010.

Japan’s earthquakes, tsunami, and nuclear accidents caused severe disruptions in the supply chain for manufacturers of automobiles and electronics; these disruptions are expected to ease in the coming quarters. Bad weather, including tornados and river flooding, also hurt the economy in the second quarter.

Debt problems in Greece and other European countries reared up again and caused a flight to quality as investors bought Treasury bonds and sold stocks in the second quarter.  Forward price-earnings multiples are down to 12 times, versus a historical norm of 15.5 times. Weakening economic data did not help either and led to further rate declines, albeit only halfway to the “crazy” low levels of last October and November.

Some of the factors that are causing this economic “soft patch” are temporary (including bad weather, Japan woes, and high oil prices) and some of the factors will linger, most notably stubbornly high unemployment rates and weak housing markets. Some of the forward looking indicators, such as unemployment claims, construction spending, and especially backlogs, have weakened in the last couple of months, signaling slowing growth.

Economists keep ratcheting down their projections for GDP for 2011 and 2012, probably as a result of the weaker forward looking indicators. The latest Wall Street Journal Survey of Economists shows projections of 2.7% and 3.0%, respectively. The Federal Reserve is a little more optimistic, at an average of 2.8% and 3.5%, respectively. These growth rates imply slow, steady recovery and relatively low interest rates as unemployment will be slow to fall from its lofty levels above 9%.

Last quarter, I wrote that I was surprised by the employment data. The total labor force kept dropping this year through April and the numbers of persons “not in the labor force” kept rising. People don’t exit the labor force during a recovery, at least not in any recovery since World War II, according to Chris Low of FTN. Well, finally in May, the situation reversed and people reentered the labor force, so, at least for now, we have found some of the MIA.

But we still have work to do. Since the Great Recession began in December, 2007, until May, 2011, we are still down a net of 6.5 million to 6.9 million jobs, based on household surveys and payroll surveys of employment, respectively.

Anonymous

It is one of the most frightening stories that I have seen recently, with the exception of the Casey Anthony trial’s not guilty verdicts. There is a group of computer hackers calling themselves “Anonymous” and who are referring to themselves as “hacktivists.” They are attacking Internet websites, while encouraging others to do so too, of companies and governments that they simply don’t like or don’t agree with. The hacking began last year with denial of service, or “DOS,” attacks on Visa, MasterCard, and PayPal for rejecting Wikileaks payments. They have hacked the government sites of Iran, Egypt, and Turkey and even the public sites of the CIA and the FBI. They recently attacked Sony PlayStation’s site, which was down for one month. The group left a file on Sony’s networks, called “Anonymous.” Inside the file, it simply said “We are Legion.” Sony spent the entire month and over $170 million getting its site reopened. The costs of protecting Internet data are escalating.

In early June, the group declared war on the Federal Reserve. I guess they don’t like Ben Bernanke. They are apparently moving from DOS attacks to stealing data to disclosing data online. Will they be able to hack the networks of the largest owner/creator of pure money? This has to be one of corporate America’s biggest fears and potentially one of our economy’s biggest expenditures in protecting online networks. For our economy’s sake, let’s hope the Fed can win this war.

Putting It All Together

In the understatement of the year so far, Ben Bernanke stated that short term rates will be lower for longer than we think. So the Fed has just told us that they are keeping rates low for an extended (really extended) period of time. I have contended for some time that the Fed will not raise rates until the unemployment rate is substantially lower. Government stimulus, for all intents and purposes, is over. The ongoing arguments over the debt ceiling and the likelihood of large reductions in government spending to reduce massive deficits mean that there will be no more fiscal stimulus.

Burdensome overregulation is all we will “get” from government. No extended tax cuts and business credits are in our future. The Federal Reserve’s stimulus is ending too. The $600 billion quantitative easing, or “QE2,” program, which injected those funds into the economy, ended on June 30th. Lower gas prices, lower being a relative term from the high of $4.00 in May, will be the only tax cut we will get. Slow growth will be the result.

Low short term rates are also supported by one of Keynes’ favorites – the “liquidity trap” – which is alive and well. Fear of investing in an uncertain economy and unknown market conditions is mostly to blame. Businesses have $1.9 trillion in cash on their balance sheets at the end of the first quarter. Banks currently have $2 trillion in excess reserves, or cash.  At the end of May, money market mutual funds totaled $2.75 trillion. All of this money earns next to nothing, so critical is the desire to avoid risk and preserve principal. As long as this money remains parked in cash, short term rates will remain near zero.

You may notice that I have not mentioned the word “inflation” up to this point. That is intentional. The higher inflation rates caused by high energy and food prices will be proven to be “transitory.” Not until we have truly defeated the evil of deflation – ask anyone trying to sell a house – will we have an inflation problem. It is a problem for another day. QE3 anyone? Stay tuned.

Thanks for reading! DJ 07/06/11

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.

How do you feel about a 30% capital ratio?

I try to keep myself abreast of the significant changes within the banking industry so I can perform research, form a reasonable opinion, and advise my clients. But some industry luminaries are throwing out some far reaching opinions that I think need refuting.

Take Simon Johnson, former chief economist of the International Monetary Fund, co-author of 13 Bankers, and commentator on the NY Times Economix blog (see photo). In his most recent blog post titled "Are Bank Examiners to Blame for Slow Job Growth" he refutes bankers assertions that regulators are unnecessarily forcing banks to put loans that are paying as agreed on non-accrual. There is a bill currently circulating around Congress that allows banks to classify these loans as performing. Mr. Johnson testified against the bill.

But in his post (see link below), he makes two comments that bears refutation:

1.  Bank equity is the primary buffer against loan losses.

In the post, Mr. Johnson states "The problem is that some community banks do not have big enough loss-absorbing buffers — the role that bank equity plays." Certainly equity plays the role. But Mr. Johnson's implication is that it is the primary or sole buffer. In fact, against loan losses, the main subject of the post, the bank has a loan loss allowance.

The loan loss allowance has received little attention in the financial crisis. Banks are supposed to set aside a certain amount of reserves for loans to go sour in bad times. But the Financial Accounting Standards Board (FASB) allows banks to reserve for losses only after there is evidence of loss. FASB is now considering allowing banks to reserve on expected losses. This would put them in sync with regulators, that are requiring banks to write down loans on expected losses. But this difference in the treatment of loan loss reserves left banks under-reserved and therefore elevated the need for capital to ascend to greater prominence in absorbing losses from loans.  I understand that putting greater amounts in reserve, or provisioning, reduces profits and therefore equity, so the two are linked. But lets use the loan loss reserve for its intended purpose, shall we?

2.  Banks should have a 30% equity to asset ratio.

You read that correctly. In the post, Mr. Johnson says, "If we had any kind of free market in banking, you would expect banks to have equity funding of at least 30 percent of total assets." The context was bank failure risk is mitigated by FDIC insurance. True for depositors, not shareholders. But requiring $30 million of equity for every $100 million of assets would not yield equity investment returns. If a bank earned $1 million on $100 million of assets, or 1% ROA, that would yield a 3.33% return on equity. That is investment grade corporate bond returns. How many new banks would we see if we require a 30% equity to asset ratio? What rates would we have to charge on loans to achieve a reasonable return?

Mr. Johnson has an excellent resume. But the things he wrote rather nonchalantly are disturbing. I'm not sure they were thought through to their rightful conclusions. 

While making fundamental changes that will dramatically affect how we finance families and small businesses in this country, we must stop elevating lifelong bureaucrats to industry sage status and beating down bankers in the trenches as self-serving idiots. In the end, we are all self-serving, and we have to ask ourselves how do bureaucrats serve themselves. 

What are your thoughts on a 30% equity ratio?

~ Jeff

Economix: Are Bank Examiners to Blame for Slow Job Growth
http://economix.blogs.nytimes.com/2011/07/14/are-bank-examiners-to-blame-for-slow-job-growth/

Article on FASB consideration of loan loss reserve guidelines:
http://www.bloomberg.com/news/2011-02-16/fasb-proposes-change-to-loan-loss-reserves-may-pinch-payouts.html

Brain Science Anyone?

I recently attended a client's all day strategy session. My firm had a small presentation, and were available for Q&A throughout the day. But most of the day we were in the audience, listening to presentations by the executives of the bank and other consultants.

Part of the program was a continuation of the leadership program for bank executives. The program was led by the consulting firm Dorrier Underwood of Charlotte, North Carolina (see link below). This particular presentation revolved around brain science. Now think of an audience full of no-nonsense bankers. I thought the consultants were in for a tough time.

But the presentation intrigued me. Part of it was based on research by David Rock, a doctor of neuroscience, author, and co founder of the NeuroLeadership Institute (see link below). Based on Rock's research on how a brain reacts, he identified the Five Domains of Social Experience as follows (with explanatory bullets provided in the Dorrier Underwood handout):

1.  Status

• Status is about relative importance, pecking order, and seniority.
• A reduction in status resulting from being left out of an activity lit up the same regions of the brain as physical pain. (Eisenberger 2003)

2.  Certainty

• The brain is a pattern recognition machine that is constantly trying to predict the near future.
• Without prediction, the brain must use dramatically more resources to process moment to moment experience.
• The act of creating a sense of certainty is rewarding.

3.  Autonomy

• The perception of exerting control over one's environment-a sensation of having choices.
• Working in a team necessitates a reduction in autonomy.
• Sound policy establishes boundaries within which individuals can exercise their creativity and autonomy.

4.  Relatedness

• Relatedness involves deciding whether others are in our out of a social group.
• Whether someone is a friend or foe.
• When someone is perceived as a foe, different circuits are used in the brain.

5.  Fairness

• Unfair exchanges generate a strong threat response similar to disgust.
• A threat response from a sense of unfairness can be triggered easily.
• A sense of unfairness can result from a lack of clear ground rules, expectations, or objectives.

Sum the five up and we have the convenient acronym "SCARF", developed by Dr. Rock.

The context of the SCARF portion of the presentation was to help bank executives become better leaders. To understand how their own and their employees' minds work.

But I began to think that SCARF is also powerful in a sales or relationship building context. For example, it is important that the seller has status in the mind of the buyer, and also conveys status to the buyer to create a positive selling experience.

Buyers want to have relative certainty about what they will receive. This is the basis for people selecting chain hotels or fast food restaurants. The buyer is relatively certain about what they will get.

Buyers do not like to have products or services shoved down their throat. They would like to maintain control, or autonomy, over their buying decisions.

People buy from those that they like, or relate to. And finally, buyers like to walk away feeling they have received a fair shake from sellers, and vice versa.

It would seem that in financial services sales and marketing, we need to create an environment where customers are ready to buy from us. The SCARF model provides a road map to creating that environment, in my opinion.

What do you think is the proper environment to maximize sales in financial services?

~ Jeff

Dorrier Underwood

http://dorrierunderwood.com/index.html

David Rock

http://blog.davidrock.net/