Bank Brand Value: Calculated!

I ask and ask and ask: what does brand get you?

Does it get you pricing power, shorter sales cycles, better employees, more loyal customers? Or does it get you increased expenses without measurable results?

Forbes calculated brand value in their "World's Most Valuable Brands" by taking anything that a company achieves over an 8% return on equity. Many people pay close attention to the ranking. Although I find the calculation to be arbitrary. What if the company is more capital intensive, and has to carry more capital than other companies? So the ROE is lower. Or what if a company is excellent at expense control? Driving ROE higher, but hardly due to its brand.

No, I do not like Forbes' calculation. It particularly doesn't work well for financial institutions. Which is probably why the first bank on their list is ranked 43rd. And it's Wells Fargo! Didn't help out Tim Sloan.

Bank Brand Value ("BBV")

So how would I calculate a financial institution's brand value? When I speak, I use great brand images such as Starbucks, JW Marriott, and Mercedes Benz. Why do these brands command higher price points than Dunkin, Best Western, and Kia?

Price points. A superior brand usually would command superior price points. And we can measure this by looking at a financial institution's cost of interest bearing deposits, and yield on loans, compared to other regional players that have similar balance sheets. Spread is usually 80%-85% of a community bank's revenues. An inferior or non-existent brand likely grows deposits and loans via decisions made in pricing committee.

Math

Fortunately, we have good data via Call Reports to make the calculation. And I propose the BBV method so you can calculate and track your BBV.

The first step is to select regional financial institutions with a similar size, in the below case $1 billion - $10 billion in total assets. I selected a bank in this group, First Bank of Nashville, Tennessee, because I was recently there. I then searched for banks with a similar loan composition to First Bank; fifty-to sixty percent commercial and commercial real estate loans to total loans. I netted yield on loans by their npa's/loans so those banks with riskier loan books are discounted. Banks that achieve a better than median yield on loans after netting npa's/loans, with a similar loan book in a similar region, likely do so because they are perceived to deliver better value to customers. i.e. brand. And First Bank passes this test, achieving 78 basis points over the loan peer median.

I then ran a second peer group for cost of interest bearing deposits. I kept it regional, and the same asset size range. And used less than 30% funded with time deposits, as First Bank was funded 27% with CDs. I could not use transaction accounts because of financial institutions' reclassing transaction accounts to savings/ money market accounts to reduce their Fed requirement. 

Anything under the median cost of interest bearing deposits, I attributed to brand. This didn't work out so well for First Bank, as their cost of interest bearing deposits was 37 basis points greater than deposit peer median. 

And then I added those two numbers together, giving a pre-tax brand value, and then tax effecting it and calculate as a percent of net income. If the bank is publicly traded, as First Bank is (Ticker: FBK), you can then calculate the BBV percent of net income as the percent of market capitalization to get an aggregate brand value. If not a publicly traded bank, you can calculate the BBV contribution to net income and multiply by a peer p/e multiple to get your aggregate BBV.

My suggestion is that you trend your BBV, looking to continuously improve. In First Bank's case, I would look to maintain my loan BBV advantage, and continuously improve my deposit one. 

Imagine continuous improvement of BBV as a strategic planning SMART goal?

See the table. Calculate your own BBV. How did you fare?

~ Jeff

The Untapped Power of Brand in Banking

“Our money is the same as the bank’s down the street.” And so were the Uber cars in my recent trips to Los Angeles and Nashville.

But something was different. Something that immediately made me feel better about being in Nashville than LA. And my wife nailed it: “the Uber drivers were so much friendlier.” 

Could that early impression pave the way for positive reinforcing interactions with other locals? Leading to our perception that Nashville is friendlier than LA. And why my wife was interested in tagging along to a recent banking conference there.

So, if you are asking, “what does brand get you?”, there ya have it. The Marsico’s doubled up on their visit.

Ask the Experts

My firm is not a marketing or branding firm. We leave that to the able hands of folks like Tim Pannell of Financial Marketing Solutions, a recent This Month in Banking podcast guest. Tim had great insights for banks on brand. And in our discussion, he mentioned how great brands tend to drive more value than firms operating in the same industry. 

To the point, Forbes estimates the brand with the greatest year over year growth in brand value was Netflix at 35%. These values are based on revenue over an 8% ROE; Forbes’ estimate of what a brandless firm could achieve. For Netflix, Forbes estimates the brand value at $11.5 billion. The best brand, Apple, was valued at $182.8 billion. Is brand worth it?

There are other measures that Tim mentioned in our podcast, and I encourage you to listen to it. So you can adopt your own version of tracking the evolution of your brand.

What do you want your brand to say? How do you want your customers to feel about your bank? And how will you track progress?

Bad Habits

Old habits may work against the brand you are trying to create.

For example, at that Nashville conference, one presenter went into detail about increasing deposits through odd-lot rate

promotions (see a pic I snapped of a slide). We know the trick. Run a 7-month CD special, in the hopes that a very high percentage that take it will roll into the standard 6- month rate. 

In other words, take advantage of customers that don’t keep tabs on you. I’m not saying there is no place for such promotions. But the unintended consequence is customers having to watch their back. Not a great place for your brand to be, right?

I moderate bank strategic planning sessions. And no banker or director ever said that they wanted to take advantage of their customers. Because it is contrary to the mantras I often hear: relationship building, community, and trust.

No, the odd-lot rate promotion is one old-school tactic that keeps our customers on edge. There are other ways to lower cost of funds. Such as increasing the relative size of transaction accounts to total deposits. But that takes long term planning, diligence, and brand building. So those customers that get angry at their current bank for trying to screw them can look to your bright, shining brand as an alternative to business as usual. 

Brand building is hard work. It's not just a name change and an ad campaign. Bankers should write down the type of bank they want to project. Create the guardrails for everyday interactions and decision making. Produce videos of positive, brand-consistent customer interactions. Get all employees on the same page.

Because as Tim said in our podcast, a great brand will mobilize a community bank's greatest asset, its people. Untap it.

~ Jeff




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Employee Retention: Keep the Keepers

You have a highly valued employee, and they quit. Why? The boss? The culture? The pay?

I'm sure if I searched for credible sources, I would get some version of one or a combination of the three. It is highly individualized. But what is universal is that each financial institution has employees that are highly valued and they want to keep. Yet rarely tell them so. For fear that the employee will recognize their worth and ask for more money or shop themselves around. Better to repress that employee, right? Shhhh. Don't say a thing.

The most recent Bureau of Labor Statistics analysis shows the number of quits, i.e. employee-driven departures, at 3.5 million in December 2018, the highest since pre-recession 2007. 

Best Strategy

The best single strategy for employee retention is management attention, according to Bill Conerly, a business economist and former banker. Employees may tell you they are leaving for more money, and if your compensation is not in the ballpark for the value they can get on the open market, then perhaps that is true. But if comp is in the ballpark, then it is likely the employee wouldn't be looking around if the company's culture was great and their boss paid attention to them.

Management and leadership are soft skills that are not on a financial institution's priority list. Seven years ago I wrote about this on these pages, and I haven't seen much improvement since. In that post, I wrote of a former military commander that worked for a large corporation that incorporated leadership into their development program. They hired psychologists to develop the curriculum, and actors to role play. 

So, in addition to the ideas below, it is important for financial institutions to develop good managers with leadership abilities. Because they are the ones that will be executing the following ideas to retain your high performers.

Three Ideas to Improve Retention

1.  Build a culture that salutes achievement. Accountability shouldn't be based on fear, recrimination, and public flogging. It should be built on open recognition of a job well done. Be it exceeding goals, achieving top quartile profitability, most improved, or proposing and implementing an innovative idea. Give that employee a trophy. Coach under-achievers that have an attitude of self improvement. Because, as one of my Navy Senior Chiefs once told me, if you have an employee that puts forth the effort and has a good attitude, and they don't succeed, that's on the supervisor.

2. Set career paths. And develop employees to achieve. So many financial institution development programs are ad hoc. No direction. But if you hire a junior credit analyst out of college, once they get the job, ask them what they aspire to be. Aside from compliance and functional training, develop them to hit their next level. Even if it is outside of Credit. Perhaps they want to be a commercial lender and some day, be CEO of your bank. That's great! If they achieve within their functional position, then we should be prepared to develop them for the next level. Instead of pushing them down in their current position because they are really good at it. Which is a sure fire way to have them shopping their resume, in my opinion.

3. Conduct stay interviews. Now, I will admit that I'm cynical about buzzwords. But I received a newsletter from a financial institution executive recruiter that caught my eye on improving employee engagement. Stay interviews will help your financial institution make tweaks to its culture and employee relations, and improve employee engagement, which I hear is a key reason why high performing employees stay. Because they matter to you. 

During our most recent podcast, we answered listener questions and one question was "what is the most effective way to recruit and find talent in a community bank?" My answer, build from within. 

Because there aren't many employees out on the street. And to woo them, you might have to pay up. And if you pay up, you may run into "equal pay" movements happening in many states, pricing up your existing talent. An unintended consequence.

What would you rather do to build an employee base capable of executing your strategy? Buy or build?

~ Jeff

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Why SunTrust and BB&T? Why?

I know on the investor conference call, Kelly King of BB&T and Bill Rogers of SunTrust spoke to why. But I may not have been listening well.

I suppose much of the discussion revolved around scale. So, along with my first inclination, my second inclination was also... why?

The Numbers

Here are their slash lines (read: Assets/ROA/ROE/5-Year Annual EPS Growth/Dividend Yield)

BBT: $225B / 1.47% / 10.95% / 9.5% / 3.3%

STI:  $216B / 1.34% / 11.50% / 15.5% / 3.1%

BBT (bank only) had $6.3B in operating expenses in 2018, five percent of which is in the Call Report category "Data Processing Expense", defined as expenses paid for data processing and equipment such as telephones and modems. It does not include employees. STI (bank only) had $5.4B, 10% of which was in Data Processing Expense. I find it difficult to believe they can't find enough money in that pot or outside of the Data Processing pot for technology innovation. It would be a travesty of management. 

Perhaps they would find it difficult to maintain that level of EPS growth, given the law of large numbers. But they chose to solve that problem by becoming larger? BB&T will issue 1.295 shares for each SunTrust share outstanding, increasing their share count from 777 million to 1.4 billion. So to earn one cent per share more, the combined company would have to generate $14 million in additional net income. And at the 1.5% ROA BB&T already achieves, they would have to grow $933 million for each penny of EPS growth. To maintain 10% EPS growth, the combined bank would have to grow about $39 billion per year (42 cents x $933MM).

Perhaps they felt the pressure "to do something", as my BB&T regional business banker friend told me, saying that at their size they were in "no man's land". I don't know what that means. But an investment banker told me today that investors are intolerant of tangible book value per share dilution of more than three years. So if you feel you need to "do something", and can't overly dilute your book value, perhaps a merger of equals (MOE) makes sense.

I have preached MOE virtues for banks that could actually benefit from scale to achieve better efficiency ratios. Statistically, banks between $5B and $10B in total assets are better at it than larger financial institutions. But I digress.

Law of Large Numbers

I have written in the past about financial institutions running into the law of large numbers, leaving only acquisition as its means to meet shareholder expectations. I'm not saying it's impossible, as JPMorgan Chase did it ($2.6T in total assets, 14% EPS CAGR since 2014). But it's difficult. And JPM received a huge boost from tax cuts. 

Financial institutions, in my experience, are not keen on turning themselves into cash cows, maximizing their profitability with slower growth and paying a higher proportion of shareholder returns in dividends. Financial institutions also don't tend to buy and divest lines of business as a means to stoke shareholder returns, as very large industrial firms do (i.e. GE).

So if BB&T and SunTrust have ample operating budgets to invest in technology, and are delivering strong shareholder returns, in good markets.. i.e. almost the same markets... 

I ask: Why merge?

~ Jeff

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Guest Post: Financial Markets and Economic Update by Dorothy Jaworski

A Long, Cold December 

I could just scream!  After a lengthy stretch of strong economic growth and stock market gains, the inevitable correction arrived with force in the fourth quarter, culminating with a December that can only be described as “tres terrible!”   Stocks of all industries sold off relentlessly in volatile trading sessions featuring price changes of 2% to 3%.  US stocks erased all gains in 2018 and ended the year down 4% to 6%.  If it is any consolation, stocks around the world were much worse.  China’s indices, for example, were down by 25% to 30% for the year.

For the month of December, 2018, the major indices were down about 9%, which was the worst December stock performance since 1931.  Three contributing factors caused the correction:  a tipping point of rising interest rates driven by the Federal Reserve, the ongoing trade wars, and the government shutdown.  The worst trading day was actually on Christmas Eve, when stocks reached their lows for the year.  Then, surprisingly, we actually got a Santa Claus rally (for the last week of December and the first two trading days of January averaging +1.4% since 1969, that brought stocks up over 4%.  So we spent Christmas day feeling bad, but for anyone who hung in there, the month at least ended on a good note.

Meanwhile, while stocks were displaying their volatile price swings, US Treasury yields for longer-dated issues were declining by .45% to .53% from their highs in November, on the 2 year and 10 year Treasuries, respectively.   The yield curve continued to flatten from 2 years to 10 years to only .19% at year-end, 2018, down from .52% at the end of 2017.  The spread between 3 month and 10 year Treasuries is not much better, dropping to .23% at the end of 2018, from 1.02% one year earlier.  At one time, former Fed Chairman Greenspan said that a healthy yield curve had .50% between 2 and 10 years.  Fears of the dreaded inverted yield curve rippled through the markets as investors kept seeing a Fed that would raise interest rates forever.

Inverted Yield Curves

An inverted yield curve occurs when the Federal Reserve raises short-term interest rates too much and longer-term rates are lower or falling below the short-term levels.  Currently the yield curve is not inverted, with the 3 month Treasury yield at 2.42% and the 10 year at 2.69%, but the cushion is only .27%; the Fed recently said that a cushion of .40% is more comfortable.  History has shown that inverted yield curves precede recessions by 18 to 24 months on average, as we saw in 1990, 2001, and 2005.  Since 1960, all six recessions have been preceded by inverted yield curves.  Investors are fearful because they see this type of curve hurting economic activity.  Indeed, banks generally pull back on lending if longer-term loan rates are less than their cost of funds, which are generally based on shorter-term rates.

The Fed has repeatedly said that they do not want to increase short-term rates if that would cause a yield curve inversion.  This leads many, including me, to believe that they will stop raising interest rates and will “wait and see.”  It is actually a good strategy.  Fed policy works with a long lag, so letting the effects of earlier rate hikes catch up would be good.  Long- term rates have fallen back and should only reverse and trend higher if inflation becomes an issue.  Inflation is currently stable or falling.

Money supply (M2) growth has slowed dramatically in the past few years, from a 6% to 7% year-over-year pace just two years ago to a pace under 4% today.  I am one of the “old school” advocates of monitoring money supply because it is used in some formulas for determining GDP growth.  M2 growth has slowed because of Fed tightening, which includes both the raising of short-term rates and the reduction of their balance sheet investments by $50 billion per month, draining money from the system.  Rates are too high and the Fed is too tight.

Large Hadron Collider Update

Many of you that have read my newsletters or seen my economic presentations in the past know about the Large Hadron Collider, the world’s most powerful atom smasher located in a 17 mile long tunnel deep under the mountains of Switzerland.  Back in 2008, the LHC started up with a bang and led to all kinds of new physics particle knowledge.  The discovery of the Higgs Boson particle so far is the pinnacle of the research.  But more physics discoveries (and updates from me) will have to wait.  The LHC was shut down in December, 2018 for two years for maintenance and upgrades.  How much faster and harder can they smash particles? 

The Outlook

All indications are that GDP growth is slowing, reverting back to its “new normal” range than has been in place since 2011 of 2.0% to 2.5%.  I believe that GDP will be stuck in this range, mostly due to the effect of high debt levels of consumers, businesses, and especially government.  Most economists and the Federal Reserve expect growth in 2019 will be 2.3% to 2.6% and lower in 2020.  Some are calling for a recession in 2020, but we should be able to avoid it if the stubborn Fed stops raising rates.  The slowdown in GDP was inevitable because of higher interest rates.  A tightening campaign that started in December, 2015 and has totaled 2.25% has basically offset the boost from tax cuts and the tightening also succeeded in flattening the yield curve.  The Fed has made cautious statements in the past few months about not wanting to raise short-term rates high enough to invert the yield curve.  No one wants that, if it will predict a recession in 18 to 24 months.

I believe that the Fed will not raise rates in 2019.  They will switch to fighting inflation that never came (sorry, Phillips curvers!) to supporting the economy and trying to avoid recession.  Supporting this belief is the fact that Fed Funds and Eurodollar futures, which trade on short-term rates, do not contain any rate increases in 2019.  But remember, just because we believe in no rate hikes does not mean that the Fed will always listen.  They will do what they want. 

Despite a very low unemployment rate of 3.9%, inflation and inflationary expectations have been falling and are at or below 2.0%, which is the Fed’s target.  Job growth continues to support the current expansion, which is now 9.5 years old.  And, if GDP expands through July, 2019, which is expected, we will set a new duration record of 121 months for a recovery, albeit the weakest recovery since World War II.  Supporting continued growth will be consumer spending, jobs, and falling oil and gasoline prices.  Hindering growth will be continued huge government deficits and the ongoing shutdown.

The time has come for a Fed pause.  The markets are a force to be reckoned with, as Chairman Powell has now acknowledged, and their volatility of the past several months, a flat yield curve, and slowing economic data have a newly humbled Fed ready to stop their tightening campaign.   Thanks for reading!  

DJ 01/11/19

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 Penn Community Bank and its predecessor since November, 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

IMO: How to Make Telecommuting Work in Banks

Schlepping to the office five days a week is enough to make employees, or would be employees, reconsider working for you. This is particularly true in urban areas, where 20 miles might equal an hour commute. Or in growing families, where daycare costs might eat their pay check. In comes telecommuting. 

And in an era of high competition for top-notch employees, even stick in-the-mud old schoolers have to consider telecommuting as an option for employees. Currently, there are an estimated 3.9 million telecommuters in the US. Up 115% from 2005. 

How To Manage It?

Jane has a 20 mile commute and bears a high proportion of parental duties, and works two days a week from home. Seems fair. 

John, her coworker performing in a similar job, is denied telecommuting. John doesn't have parental responsibilities. His commute is about the same as Jane. 

Mana from heaven for discrimination lawyers.

So you give in to John so he doesn't call the law offices of Duey, Cheatem, and Howe. You give him a laptop and set him up at home. 

Later, you have to reprimand John for his lack of availability while working from home. He promptly quits. And has your laptop. With your customers' information on it. Safely in John's spare bedroom, where he now uses it to play Grand Theft Auto (GFA).  

Imagine that disclosure to your customers? "Your personal information may have been compromised to a Missouri teen that achieved Level 20 on Grand Theft Auto and somehow gained access to one of our laptops in the possession of a former disgruntled employee that was playing GFA with the alleged data thief."

So what should you do? I have ideas. Most came from the ABA Banking Journal's thought provoking podcast: How to Make Telework Work in a Bank. 

Making it Work

1. Have a policy. In order to avoid discrimination and missing half of your department, develop a policy that all telecommuting decisions are made from. For example, the policy may read "after two years of continuous employment, a manager may grant permission for an employee to work from home either temporarily or on some routine schedule, depending on the circumstances." And then spell out the decision map that the manager must follow. Like exceptions to loan policy, there may be exceptions to this policy. Such as waiving the two-year requirement for competitive reasons (if the new employee had telecommuting as part of their prior employers benefits). But have as specific a policy as possible to make it clear when telecommuting is permissible to minimize gray areas, discrimination, employee envy, and dissatisfaction.

2. Use Virtual Desktops. Solutions such as Citrix or Horizon transforms static desktops into secure, digital workspaces that can be delivered on demand. Meaning a telecommuter can use a VDI app to access their at-work desktop as if they were actually at work. And since the VDI is only delivering images of  their desktop, data is not stored on the computer in their home. This solves for systems security and patching. And if the employee leaves, like our doppelganger John above, no worries. Access can be turned off from HQ.

3. Set expectations clearly. The ABA podcast suggested signing a contract with the employee. Such as ensuring they work a regular workday, instead of setting their own hours. You don't want branch staff calling a telecommuting employee for an IRA minimum required distribution amount and that person be out food shopping because the crowds are lighter at the supermarket mid afternoon. And be clear on days in the office versus working from home. Even if the telecommuting contract is short term, such as an employee recouping from a broken femur suffered while skiing. 

4. Use office chat software. Such as HipChat or Slack. You may not have the "shout over the cubicle" capability with the telecommuter, but you can almost have it with an office chat application. They are getting such wide acceptance, they are being used instead of shouting over the cubicle. So why not take advantage of technology?

5. Use video to include telecommuters in meetings. A risk of telecommuting is that this valuable employee, that you thought so valuable that you allow to work from home, would be disconnected to the workforce. Phone calls are one thing. But doubling up on the connectivity with video will improve internal camaraderie and make at-work and telecommuting employees feel more connected. If it means they have to shower and get out of their pajamas, so be it.

My millennial daughter recently asked an employer if she could telecommute a couple of days per week. The company said they were just implementing a new policy to accommodate that. So if you are a telecommuting resister, it's coming whether you like it or not.

I hope you can use the above ideas to make it work.

What other ideas do you have?

~ Jeff

Note: I am not an attorney or employment specialist. I have never passed the Bar. But I occasionally stop in :)

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What Makes an Effective Community Banking Board?

Frequently asked. Seldom answered.

According to the FDIC, directors' responsibilities include:

"Directors are responsible for selecting, monitoring, and evaluating competent management; establishing business strategies and policies; monitoring and assessing the progress of business operations; establishing and monitoring adherence to policies and procedures required by statute, regulation, and principles of safety and soundness; and for making business decisions on the basis of fully informed and meaningful deliberation."

Capiche?

So how do you, as an executive or Chair of your financial institution, construct your Board to be the most effective at the above and delivering solid shareholder returns? Over two years ago, I analyzed this same question, using top five and bottom five Return on Equity banks. I could find no correlation between professional backgrounds of board members and bank performance.

You may have read last month's Top 5 in Total Return to Shareholders post, where I searched for the best financial institutions in delivering long-term value to shareholders. The average 5-year total return for this group was 320%. Do their boards share something in common that other boards do not? See for yourself.

The average board size was 10, and the average age was 65. The average number of bankers, active or retired, was two to three. Remember that we are including the CEO, who is also on the Board.

So, what about the Bottom 5 in Total Return to Shareholders? Recall from the Top 5 post that I screened for low trading volume banks. So those with less than 1,000 shares traded per-day were removed. The average 5-year total return for the group below was -31%.

Here is the board composition of those on the unenviable Bottom 5 list.

The average board size for this group was 12, and the average age was 66. The age was not noticeably different, but the board size was 20% higher than the Top 5 banks. I'm not sure this matters because Hilltop Holdings has a whopping 20 board members, skewing this number for the other four. Absent them, the Bottom 5 board size is similar to the Top 5.

So what is it about the Top 5 that differentiates it from the Bottom 5? In terms of bankers, active or retired, this group looks no different than the Top 5.

I will say there seems to be more PE, Investment Banker, Investment Management types on the Bottom 5 boards than on the Top 5. This might be explained by the capital formation process, where a low performing bank gets equity injections and those folks go on the board. Perhaps not. Either way, having Investment-type folks on your board doesn't seem to be the secret sauce to great shareholder returns. 

So, as was my take from September 2016, there is no discernable difference between number of board members, age, professions of board members in top performing financial institutions and bottom dwellers. 

Then, as now, my working theory is that the best boards are ones that approve strategy and hold management accountable for achieving it, and effectively dispatch their duties as described by the FDIC above. Each board member is an ingredient in the effectiveness of the entire board. And it doesn't matter if they are in Ag Supply or are the brand manager for the Dallas Cowboys.

What are your thoughts on an effective board?

~ Jeff