Banks Versus Credit Unions: Much Ado About Nothing

Credit Unions don't pay taxes! They're trying to steal our business customers!

I often quote Sun Tzu from his over 2,000 year old book, The Art of War. One of my favorites: "If you know the enemy and know yourself, you need not fear the result of a hundred battles." The frequent and resource sapping waling about credit unions tells me that banks don't know their enemies, umm, competition.

Last year I attended the CUNA Government Affairs Conference (GAC). By the way, it was the trade show beyond all trade shows. Clearly credit unions put heavy resources into lobbying. So I will give banks that point. We had a booth, and my company's tagline is "helping banks perform better". We like the alliteration, and use the word "banks" in a generic way, like Kleenex.

But one would think we would hear about it from CU executives and trustees. And we did hear some quips. But one CEO opined that the rift between banks and CUs was greatly exaggerated by trade associations to keep the masses engaged. I believe her.

Why? Take my home state, Pennsylvania, for example. We do business with both banks and CUs in the state. Admittedly, mostly banks. And we hear plenty about credit unions in strategy sessions. But I pulled deposit market share data for the state, and the results are telling (see table).

Credit Unions boast a 9.5% deposit market share in the state, or $33 billion out of $345 billion total. There are 497 credit unions headquartered in PA, but 447 of them are less than $100 million in deposits (ok, shares for you CU technocrats). All PA CUs combined have the same in-state deposits as Wells Fargo, and half that of PNC. There are only two CUs in the state's top 20 in deposit market share.

Does the banking industry dedicate disproportionate strategic decision-making, marketing and lobbying resources fending off CU competition? Because when I look at the above table, it's clear where a community bank's strategic focus should be. And it shouldn't be on the Locomotive & Control Employees FCU in Erie.

What is this table telling you?

~ Jeff

Lessons Learned: Banks that thrived during crisis grew loans slower prior to it.

The St. Louis Fed recently performed a study to uncover the characteristics of community banks that thrived during the financial crisis. Thriving banks were defined as under $10 billion in assets, and maintained a composite CAMELS 1 rating in each exam cycle from 2006-11, an impressive accomplishment. As with most government driven academic studies, there were numerous answers. But one struck me as particularly instructive.

Former legendary Fed Chairman William McChesney Martin, Jr. once quipped "I'm the fella that takes away the punch bowl just when the party is getting good." It appears that banks that had the ability to do the same during the heady lending times of 2004 - 2007 found it to be an enduring strategy (see table from Fed study).

Banks that failed during the financial crisis did so predominantly for two reasons: over-concentration, and foolishness. Both are related. Banks that thrived, however, had the discipline to stay on the sidelines while their competitors did aggressively priced, borrower friendly structured, and competitor beating loans. 

Sitting on the sidelines is difficult. Competitors have snarky smiles on their faces when they bump into you at the local Chamber meeting or industry get togethers, knowing that their pipeline is fuller than yours, and they just beat you for the latest big construction deal. If we learn anything from this study, it is that at least one member of senior management should be like William McChesney Martin.

In addition to that, here is what I think a bank should do to avoid the lending hubris that led up to the crisis:

1. Lend Consistent With Your Strategy. I've seen my share of banks that "chased assets", to keep their pipeline as full as the bank down the street. But keep to your knitting. Be known to specialize in certain asset classes and/or industries. And, unless your strategy says "do land loans out of our markets", don't do them. Come to think of it, even if your strategy says to do land loans out of your market, still don't do them. And fire your strategists.

2. But Diversify. Being great at serving specific industries is critical to developing a competitive advantage, but it doesn't mean your balance sheet should be chock full of loans to one or two industries. It just means that you strive to be great at a few things. Continue seeking quality loans in other loan categories and industries. 

3. Minimize Broker-Originated Loans. For some reason, brokers that originate loans but assume no risk of default, don't care too much if the loan goes bad. Go figure? In addition, since the broker owns the relationship, the borrower may be more apt to default on your loan because he/she barely knows you.

4. Include Clawbacks in Bonus Pools. I am not a fan of regulators running your bank. But they favor clawbacks to deter profligate risk taking in lending. This makes sense to me. Keep two pools for each lender, and senior management. One for performance today, and the other for multi-year portfolio performance. Let lenders see that bonus pool grow and plan for the backyard pool when it is released, to motivate them to bring good borrowers and well-structured transactions to the table. 

5. Build a Better Lending Function. Populate lending with a few well-connected, experienced, and respected lenders. Then build a structure that is designed to develop junior people into your lenders of the future. Start them as portfolio managers, or credit analysts, with a targeted development plan. Banks that chased "experienced" lenders all over town ended up with those that made loans at all costs to get deals done. I've seen one or two of these "cowboys" bring banks to their knees. Just like I suggest not chasing deals at all costs, don't chase "experienced lenders" at all costs. Build your own pipeline of next generation rain makers.

What should I add to this list?

~ Jeff

Banking and Social Media. Guest Post: If Everyone Told You to Jump Off a Bridge...

By: Shannon Marsico

My sister is still in high school, and she claims she is deprived of everything.  A tactic my sister often uses with my mother when she wants something is stating how “everyone” else is doing it -everyone is going to 

the mall after school, everyone owns an iPhone, everyone is allowed to stay out past 10PM, and so on.  To teens, keeping up with their friends and looking trendy are of the utmost importance.  Their decisions are based on what’s viewed as popular rather than what works best for them as individuals.  Working in media, I have found that some companies get fixated on similar concepts.  Social media is one of today’s hottest trends and most brands are jumping on the bandwagon – If everyone is doing it, why not us?  Read more...

jfb note: The author is pretty sharp, no? The samples are particularly helpful. Enjoy!

Does fee income hedge banks and credit unions from spread swings?

The drum is starting to beat again for fee income in the minds of banking executives and in financial institution strategy sessions. This week I heard "hedge" against interest rate fluctuations, a comment more common in the late 1990's to mid 2000's. So I ran some numbers, and the answer to the post title is: it depends.

Fee income comes in many sources. And for most community banks, which I define as banks with less than $10 billion in assets, fee income comprises 10%-20% of total revenue, on average. See the table for a break down of fee income sources by Call Report category for community banks.

With all the talk about fee income lines of business, much if not most of our fee income comes as additional revenue from traditional spread products, such as deposits or residential mortgages. This makes sense. It is our primary business, and fees improve the profitability of bread and butter banking.

But what about this hedge philosophy? I was skeptical. I know from my company's profitability measurement service that fee income products contributed 1% to profits at the average, and -0.8% at the median of all clients. Admittedly, this includes loss leader products such as safe deposit boxes. But, in the main, fee based products are not dropping much to the bottom line.

However, when I sorted top fee based banks and compared their Return on Average Assets to the industry, it appears as though having significant amounts of fee income does protect the institution from the ski slope decline in financial performance that plagued the industry. In effect, high levels of fee income gave financial institutions a softer landing at the bottom (see chart).

But if financial institutions want more from fee based lines of business than to soften their fall, they must focus on delivering profits. This has been a challenge. When I hear executives clamor over fee income, they more often than not focus on revenue generation, not profits. In my experience, profits have been elusive. 

I hear lots of excuses why fee-based LOBs don't make money: soft insurance market, best efforts execution on mortgages, stock market decline, high pay to keep talent, yadda, yadda, yadda. I once heard a complaint from a head of Trust about having to share the copier expense with another department that used said copier more. 

Bottom Line: Insurance, Trust, Investment Advisory, Mortgage Banking, these are all businesses that are common sense complements to traditional spread banking. Almost all of bank customers demand these services. 

Why can't we deliver them profitably?  

~ Jeff

The Danger Within: Banking Conferences

The boss goes to a banking conference and senior management worries what new idea he or she will come back to implement. Sound familiar?

I'm currently at a banking conference in Florida at a swanky hotel that I would not go to if not for work. Too pricey, too reserved, and too old. But I can't complain. I'm waiting for room service as I type. The accompanying picture was my work view yesterday.

Most conferences I attend the breakout sessions to learn from colleagues and other bankers. But there is a danger to this. Learn what? I thought of putting a couple slides from a presentation I attended but decided against it for professional courtesy. Although I doubt that courtesy would be extended by the presenter to me.

Although the trade association selects topics based on what they perceive to be the most relevant for attendees, they don't typically scrutinize the content beyond the session description.

This could be dangerous. You are giving an industry consultant free reign to say whatever they want, right, wrong, or untested. As a consultant myself, I believe you must demonstrate confidence in your subject matter to influence the audience. But presenting your philosophy as if it were emblazoned on stone tablets wreaks of arrogance. And unfortunately, this is occasionally what we get.

My purpose for this post, if you are a banker or credit union executive, is to encourage you to absorb education sessions using the lens of your personal experience and common sense to know if it makes sense for your institution. If you are an industry consultant, bring a little humility to your presentation. You're probably not as great as the Caesar you see in the mirror.

How do you distill information from conferences?

~ Jeff

More Random Stuff About Me

Last year, a tweep of mine, Ken Mueller (@kmueller62), posted an interesting bio-post titled "Random Stuff You Should Know About Me" on his Inkling Media blog. I saw his reference to it on Twitter, I read it, I enjoyed it, so I decided to copy it... with Ken's blessing of course. But there is more to me than what can be documented in that short blog post, so I thought on the day prior to Mother's Day, I should open up my proverbial tent about my upbringing and my Mom.

1. Racism Cascades Through Generations: My grandfather, an Irishman whose ancestors came over during the Potato Famine, told my mother not to marry a Dago... a widely used insult to Italian-Americans. But she did anyway, and my grand father ended up loving his son-in-law dearly.

2. Life is Hard: My father died in 1972 from Hodgkin's Disease, a form of lymphoma. My family was on the lower rungs of the socio-economic ladder at his death, and he was the bread winner, leaving my mother with three boys, ages 8, 6, and 3 and little means to support us.

3. It Takes a Village: I believe this to be true. Not the way it is portrayed in today's society, where few take responsibility for their children due to bad breaks. But my Mom, as quarterback to our upbringing, used the men in her life to provide fine examples to emulate. To name a few: My grandfather, my uncles Joe and Bob, my baseball coaches Mr. Ross and Fritch, parents of friends, and my mother's eventual husband when she remarried 11 years later, Jack. In addition to our father, my brothers and I probably exhibit a combination of traits from these fine men.

4. Life is Not All Sunshine and Rainbows. My mother's life during those years following my father's death is testament to this. And my brothers and I were not the easiest to raise. But because my Mom never gave up, always pressed forward, doing the best she could, we turned out just fine.

During times when the traditional role of mother is frowned upon as a thing of the past, we should recognize the role mother's outside of the kleig lights of the corporate world, politics, and entertainment play in shaping lives.

Here's to you Mom. Thanks for being you.

~ Jeff

A Community Banker for the Ages

On Sundays, I go old school. I pick up the Sunday paper from my sidewalk, go inside, pour a cup of coffee, and read it. On a recent Sunday, the headliner in the Business Section was about the retiring Bob Enck, a long time community banker in my hometown, Elizabethtown, Pennsylvania.

Bobby Enck is a relic of an old time era in banking, when you started and finished your career at the community bank in the center of town. Bob started at the Elizabethtown Trust Company, which was aquired in 1981 by what is now Susquehanna Bank.

Did Bob climb the corporate ladder, and pick up stakes and move to the corporate headquarters 20 miles away. No. Did he stop burning shoe leather and shaking hands in E-town. Again, no. Bob works in the same office he cleaned when he was 15 years old, the old E-town Trust Company's headquarters. He served on the school board, helped found the ambulance company, and is raising money for athletic fields.

There are precious few Bob Enck's remaining in community banking. As I often say, if you succeed in banking you move farther and farther from the customer. Recently, I was interviewing community bank Board members regarding their strategy, and one director lamented that nobody wanted to work in the branch. They all wanted to transfer to the back office. A situation I think is the rule, not the exception.

But bankers keep telling me they want to erect the foundation of their bank around customer relationships. If so, why do they foster an organizational structure that encourages distancing key employees from customers if they are to succeed? 

Susquehanna stuck with the market manager concept with Enck. I am unsure if they do it throughout their franchise, or they made exception in E-town. I suspect the latter. E-town Trust was a market leader when acquired, and the remnants of that franchise, namely Bob Enck, continue to lead the market (see table). They now have three branches in a town with 40,000 residents (one came by way of acquisition). 

Not all markets can support senior level support like Susquehanna's E-town market, where the bank boasts $190 million in deposits, larger than many community banks. But there is a case to be made that, if relationships are the core to your strategy, your bank should have senior, lifelong bankers in your market. That means you have to build compensation, incentives, and support around this strategy.

Relationship building within communities requires time. Operating your branches with an employee revolving door doesn't get the job done. That is transactional bank thinking. Does your structure support your strategy?

Do you know of other Bobby Enck's? Or should this old-school approach go the way of the rotary phone?

~ Jeff

Note: After posting this, a Susquehanna Bank executive called in a correction. They do pursue a market manager approach and work to replicate Bob Enck's throughout their franchise.