Guest Post: Why Banks Fear Blogs by Dana Dobson

Banks have been dragging their feet about blogging since the beginning, rather than embracing the opportunities it offers. They are consumed by anxious questions:

• How do I protect customers and our technology infrastructure from phishing attacks to get customers to click links that lead to malware?

• What if one of our representative blogged a statement that was used as investment advice by a reader?

• What if I miss a customer’s complaint or I don’t document it properly?

• What if we fail to issue the proper disclosures? Can the bank be cited for a compliance violation?

• What if we get negative comments?

At the same time, bank regulators raise issues that are cause for concern. For instance, fraudsters and hackers become more sophisticated every day and seem to be one step ahead of security gurus. Most users, they fear, do not take into consideration the relative ease with which any form of electronic message can be redistributed in an uncontrolled manner. Alas, some bankers may communicate with customers without full knowledge about regulatory compliance issues.

For example, a business development officer, branch manager or commercial lender, each of whom is tasked to achieve aggressive sales goals, might create a personal LinkedIn account for the purpose of prospecting for new business and innocently promote rates and other features without including the required disclosure language.

All fears about blogging can be put to rest.

All that needs to be done is to present to management how any perceived risks should be addressed. Susquehanna Bank and Arvest do an excellent job of this by posting guidelines directly on their blog sites. Additionally, every bank marketing and compliance officer should work together to create a written policy that answers all the “fear” questions to management’s satisfaction. Marketers who are on top of the compliance issues that arise in print, broadcast and website advertising can easily manage blog content effectively and to the advantage of their organization.

These days, a company is in the minority of it doesn’t blog. People make buying decisions by using the Internet to learn about the products and services that best meet their needs. Banks who are holding out on blogging are missing an important tool to share their brand with prospective and existing customers.

Dana Dobson is an award-winning freelance copywriter who specializes in writing for banks and financial institutions. A former bank marketing executive, Dana has written a white paper entitled, “Banks & Blogging: Why they should, why they don’t, and how to go about it.” For more information, visit http://www.dana-dobson.com.

Your Branch in Your Pocket

I am attending the annual ABA Marketing Conference, where I spoke on how marketing can focus efforts on improving profitability and moving their bank forward.

The program had plenty of learning opportunities. One was the best attended general session in conference history, Brett King on the future of banking. Brett is the author of Bank 2.0, Branch Today, Gone Tomorrow, and the forthcoming Bank 3.0 and is what I would term an industry futurist, predicting and staying ahead of where he perceives the industry is going.

In the below clip, Brett speaks of the friction in our system that is slowing our adoption of change. He used the example of Compliance friction, that often thwarts efforts for online account opening and other technology adaptations. He makes the point, quite correctly in my opinion, that there is an irreversible trend in our industry away from customers coming to our branch, and calling us on the phone.

That puts a premium on building our bank's team on customer and prospect outreach, visiting them on their turf, with convenient technologies. Because if we wait for them to come to us, they're likely to go somewhere else.

Are you trying to reverse the trend and encourage customers to come to your branch? If not, how do you reach them?

~ Jeff

Customer Profitabilty in Banking: Do you do it?

According to an ABA survey (see table), I doubt it.

I am speaking at the upcoming ABA Marketing Conference next week. Well, maybe not as much speaking as appearing. Mary Beth Sullivan and I are appearing as guests of Susquehanna Bank's Susan Bergen, in an Oprah like talk show format. I suggested Saturday Night Live's Point-Counterpoint format, but it was rejected. To appease my objection to appearing on Oprah, they orchestrated my entrance to a Pitbull song. I did not know who Pitbull was.

Our discussion will revolve around an ABA survey done this summer regarding actions banks have taken, or intend to take, to improve profitability. One question that didn't make the cut in the interest of time, was the one represented in this post's table: Does everyone in management know profitable versus unprofitable customers the bank serves today?

If you were in the corporate headquarters of McDonald's, you would be alarmed at the results. If you are in banking... not so much alarmed as happy that so many others remain as in the dark as you. I think lack of knowledge of profitable customers comes from three things:

1. Getting such a number requires investment in resources your FI currently does not have:

2. The regulators don't require the information; and

3. Even if you had the information, what would you do about it anyway?

All are related. FIs earn money on the spread. In order to create spread, FIs focus on creating a basket of the highest yielding assets within risk parameters, while funding them with a basket of the lowest costing funding. Why do you need some fancy profitability information to tell you that?

Problem: Various assets and liabilities take differing amount of operating expenses to accumulate. Also, based on risk, different assets and liabilities require different equity allocations. If your attitude is that the "incremental" cost of chasing this business or that is minimal, you may very well be mis-allocating your precious resources to low profit customers.

For example, we have a client that served the bar/restaurant business in a college town. These establishments brought decent balances to the bank. The problem: we found employees that spent half their day sorting through the bag-fulls of cash delivered every day. Could the bank allocate that operating expense to a campaign to acquire and serve higher profit customers? Without determining the profitability of those customers, we would never know about the opportunity lost.

I think it's time to change the paradigm from acquiring the highest yielding assets and the lowest costing liabilities based solely on interest earned or cost of funds. We should instead focus on acquiring and serving baskets of the highest profit customers. Doing so will efficiently allocate resources, improve our profitability, and enhance our FIs value.

~ Jeff

Banker Quotes: As Told to Me v4

I learn a lot from bankers and industry experts 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. Since I estimate my Twitter community only reads about 10% of their tweet stream, and so many of my blog readers do not follow Twitter, below are selected quotes that I tweeted since version 3.

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.

1. Bank Senior Lender on branch traffic: It's like groundhog day. They see the same people every week.

In addition to declining branch transactions, in-branch sales opportunities are pressured by the above reality.

2. ALCO Consultant: If your bank is making loans, forget about retail and fund with an FHLB advance.

Sad but true that the combination of operating expense and interest expense to generate retail deposits exceeds the cost of getting on the phone and calling your FHLB. But does it make your bank more valuable? In lieu of Hudson City Savings Bank sale price, I’m not so sure.

3. Me to bank credit consultant: What's the best leading indicator of a loan problem? Consultant: The borrower doesn't return your call.

How do you fit that square peg in your ERM round hole?

4. Bank chairman to me: It's difficult to have vision when you're fighting alligators.

This short-term thinking may be a key driver in future consolidation… community FIs with no vision for a sustainable future.

5. Bank chief credit officer relaying to me an OCC comment: "We haven't issued an asset quality upgrade in quite some time."

This is a telling statement since industry credit metrics have been improving for at least a year.

6. Bank exec to me: The public is starting to come around that community banks do not have to be thrown under the bus like big banks.

Thank you, public.

7. Bank CEO: That bad loan is in Seaside Hts. Me: Maybe it's Snooki. CEO: You know she's pregnant.

Who says bankers are out of touch?

8. Bank chairman to me: It would be interesting to know our branch's profitability.

Do you think?

9. Me to Chief Credit Officer/CCO: Isn't having a 3% delinquency rate on a 7% yield portfolio OK? CCO: The 7% thing would never happen.

Sad, but true. If you can’t get the yield for the risk, perhaps you should let the next guy/gal do the loan.

10. Bank retail chief: Saying customer service is our differentiator is a 'me too' position.

You mean everybody doesn’t have superior customer service?

11. Bank CEO: I think 4 FTE's is the right number for future branches.

Note that he was thinking out loud in a session designed to improve branch profitability.

12.  Bank CEO: My most demanding job is playing pen pal with my examiners.

To say that we have been forced to engage in flattery with our regulators is an understatement.

13. Bank loan consultant: There is too little a difference on yields between the best and worst rated credits in bank loan portfolios.

See my comment on getting paid for risk.

14. Bank consultant: Your strategic plan projections should drill down to a value proposition.

Agreed! Your plan should deliver increasing shareholder value, discounting projected earnings to present day value.

15. Bank examiner: When evaluating an acquisition, assume that every loan portfolio is worse than you think it is.

Told to a CEO who relayed it to me... and perhaps the Day 1 loan mark will be worse than you estimated.

16. Senior lender to me: Does it make sense to have my lenders calling on businesses for operating accounts when we are so liquid?

My answer was to hunt when the hunting is good, not when you’re hungry.

17. Me: Maybe Dodd-Frank will result in reduced compliance costs because CFPB streamlines regs. Bank CEO: That's not going to happen.

But the Treasury Department said it was going to happen.

What are bankers telling you?

~ Jeff

Where will banks get their next dollar of capital?

Retained earnings.

I make a living helping financial institutions be as profitable as feasible. Why? To perpetuate their business model. This is how I feed my family.

But profits have been under pressure since 2008. First, FIs experienced pressure in their investment portfolios, purchasing Fannie Mae preferred's and other FIs trust preferred securities. Next, our over-exposure to construction and land development loans came to roost. Then commercial real estate fell under pressure as the economy teetered and rent roles declined.

Many banks had to replenish lost capital. The government stepped in to help, and taught us to ignore the guy/gal that knocks on our door and says "I'm from the government, I'm here to help." Absent or in concurrence with government-injected capital, FIs sought fresh capital.

But retail investors were nowhere to be found. This was one of the points made by Lisa Schultz of Stifel, Nicolaus, Weisel, an investment banking firm that specializes in FIs, at a recent Pennsylvania bankers conference.

Ms Schultz said retail investors were absent for all industries, not just FIs. She opined that they opt instead to invest in mutual funds, hedge funds, etc. Therefore, all of the action to attract capital was in the institutional market. I made this point in a past blog post, opining that the change in our shareholder base would be a significant factor driving future bank consolidation.

The change in shareholder focus, as presented by Ms. Schultz, is represented in the tables below. But this changing focus is from the institutional shareholder perspective... not the retail investor. The future investor will be concerned with quality growth that enhances shareholder value, combined with dividend policies that are mindful of capital preservation. I'm not sure how an FI will meet the 20%-30% capital appreciation, combined with sufficient liquidity, to meet "future", i.e. institutional, investor demand.

As if the shifting focus of the institutional investor wasn't challenging enough, what about the difference in what retail versus institutional investors value, and how they plan to exit their investment (see table below).

Tough luck finding your institutional investor at the local coffee shop bragging that they own stock in your institution. They could care less about how much resources your FI dedicated to the local food bank.

Here is what I think community FIs can do now to prepare for this shift in attitude:

1. Maximize retained earnings to reduce the need to visit the capital markets.

We have gotten a multi-year pass in generating profits because of the financial crisis and the subsequent teetering economy. Now it's time to cowboy up. How productive are your front line employees? How efficient is your back office? How well have you leveraged technology? Have you over-reached with your compliance program? If you don't have the answers, you better start looking for them.

2. Get a real investor relations program.

Investor relations is marketing. Marketing is much more than advertising. And your marketing message must be delivered long before you ever need capital. You must spin a story that gets locals excited about your bank. Yes, financial performance will play a significant role, but a supporting role to the story you tell about how your FI is a critical component to local communities. Retail investors may have shifted to investing in mutual funds, but the local community bank is probably one of few chances locals can invest in a company down the street.

3. If you must tap the institutional market, choose your partners carefully.

Ms. Schultz specifically addressed this issue in her presentation. Search for institutional investors that share your FIs objectives. Where did this fund invest? How long did it hold the investment? How did it exit?

4. Prepare for the exit strategy from the time of investment.

Receiving significant institutional investor dollars does not mean a fait accompli in terms of having to sell your FI so the investor can get out of the stock. However, if you don't plan for the investor's exit when they make their investment, the clock may run out when they are ready to go. Make evaluating strategic alternatives a regular part of your strategic planning, developing financial projections for a stretch case, base case, and stress case. See my post on this subject here. Also, make financial performance, investor relations, and stock trading liquidity a part of your strategy from the git go. If not, you'll find your FI might have up and went.

Where will your FI get it's next dollar of capital? I would like to know.

~ Jeff

Strategy drives structure... in theory only?

Strategy drives structure, so says Peter Drucker. Do you believe him? Does your strategy drive your structure?

I taught Organizational Structure this week at the North Carolina School of Banking. I was the one in the room with the accent, by the way. But I digress.

I created a case study of a bank called Blue Collar Bank, a New Jersey thrift whose vision was to be the #1 financial institution for working families in its markets. The assignment was to develop an organizational structure conducive to executing its strategy.

 

For the sake of time, I could not call each student to present their results, so I asked for volunteers. One student bravely came to the front of the class and presented an organizational structure that looked like the below chart.

 

I have never seen such a structure. When the student first described it, I imagined that this could be an Apple or HP structure... a company that was strong in product management. Imagine having Marketing and IT reporting to the executive in charge of Product Management and Distribution?

 

Upon reflection, this structure has merit. I have heard from multiple heads of IT that they lack clear direction in managing projects... which ones to undertake, and in what order. IT steering committee projects are driven by anecdotes and compliance. What if the project list is driven by the bank's strategy and managed by an executive responsible for delivering the right products over the right channels to target customers as described in its strategic plan? That would be revolutionary to our industry!

 

IT and other traditionally operational areas in FIs often report to other operational executives that are focused on making sure the back office runs efficiently. Now that most of our customer interactions are occurring through electronic channels, doesn't it make sense to re-think this structure?

 

Hats off to this creative student. Is it no surprise that he works for a marketing company that supports FIs, and is not a banker?

 

What are your thoughts on FI organizational structures?

 

~ Jeff

 

 

Note: Below is a picture of the books at the UNC Chapel Hill bookstore. In case you were wondering about the seriousness of that rivalry.

 

 

Job Description: Business Banker

I frequently hear lamentations about the gap between the performance expectations of community financial institution (FI) personnel and performance results. A frequent challenge is that performance expectations are not documented in the form of job descriptions. Instead, expectations are often trapped between the ears of the supervisor or senior management.

This post is geared toward drafting a job description of the FI business banker. Although I am not an HR expert, I am often engaged in discussions with FI senior management teams on what they expect from the person occupying this position. Often, senior management would like business bankers to build total relationships with businesses within the FI's market area. Instead, they often get commercial real estate transaction specialists, leaving small and medium sized businesses that don't own real estate in no-man's land between the branch manager and the "lender". The job description does not include qualifications or compensation, as each FI can assess what is needed based on their own expectations.

Business Banker

Summary of Responsibilities: Relationship management... Develop relationships with business's within the position's assigned market area. Relationships should include knowledge of the customers' business, industry, banking needs and their service expectations from their FI. Evaluate customer product use to determine optimal product utilization, and make routine customer contact. The objective is a level of customer satisfaction that increases customer loyalty based on service and relationship, not price/rate.

Product knowledge and expertise... Develop and maintain significant knowledge of FI product offerings, with an emphasis on products most needed by target customers as per the demographic profile of the area surrounding the FI and the FI's strategic focus. Develop and maintain financial acumen in customer balance sheet and cash flow management to assist customers achieve financial success. The objective is to establish the business banker as the subject matter expert of bank products within the bank's market(s).

Community relations... Become the primary community representative by joining a minimum of two community organizations with an emphasis on those where business owners are likely to participate. Volunteer for a leadership position in at least one. The objective is to promote community involvement consistent with the FI's strategy and to expand the business banker's relationships for future business development activities.

Business development... Grow customers at a pace faster than general market growth that is consistent with the FI's strategy. Interface with other FI departments such as branches and marketing to maximize effectiveness of business development efforts. Participate in social media efforts by contributing blog posts and managing FI-branded Twitter account geared toward small business.

Portfolio Management... Business bankers should manage 100-200 relationships, dependent on size and nature of relationships. Portfolios should include all forms of business lending within the FIs capability and strategy and consistent with risk appetite. Deposit portfolio should equate to at least 50% of loan portfolio. Business banker will lead the customer support team that includes portfolio managers, loan administration and loan servicing personnel.

Credit Quality... Business bankers are responsible for the quality of the loans they book. All loans shall be consistent with the FIs risk appetite and within loan policy, unless approved as exceptions to policy. The business banker will be the first to contact borrowers for non-compliance with loan covenants and the first to initiate collection on delinquent loans. However, loans scored as "doubtful" or worse shall be managed by the FIs workout department. A portion of the business banker's incentive compensation is subject to a multi-year holdback to offset loan losses.

Business Banking Department Profitability... Business bankers are collectively responsible for the overall profitability of the Department, and to establish a positive profit trend that is consistent with the FI's overall strategy.

Other duties as assigned.

What did I miss?

~ Jeff