Bankers: Is It Worth Buying Checking Accounts

At least somebody noticed. Noticed that I might be a valuable checking account customer. Aside from credit cards, I don't get much attention from bankers or financial advisors. Maybe the "do not call" list is more effective than I thought?

So when I opened my mailbox and received the bribe, I was interested. Interested to see how much a bank was willing to pay for my business. The answer: $300 (see picture). Thanks Santander! Or should I say, gracias! I should note that Santander has a branch in my town. Courtesy of their Sovereign Bank bailout, ummm… acquisition.

I've heard opinions on whether a community bank should buy checking accounts. Sure, the big banks seem to be on the bandwagon. Jeff For Banks readers likely get these offers. One bank controller opens accounts for all offers and gladly takes the cash. A community bank head of consumer lending recently told me he did the same with a Key Bank offer. Five hundred bucks! Key Bank values him more than mi banco values me.

Is It Worth It?

If you're a regular reader, you know me. And my philosophy that it all comes down to a spreadsheet. So I ran the numbers to see if offering me trescientos dolares was worth it to Santander. Below are the results.

The analysis is assumption driven. For example, I assumed that the annual marginal cost of my checking account to Santander was $100, which included items fees and per account fees charged by their items processor and core processor. A guess, of course. But one based on my experience and my own checking volume.

I also assumed the credit for funds, which is also the spread for a non-interest bearing account, which this offer was for, was the same spread as for all community banks that subscribe to my firm's profitability outsourcing service. The spread of 2.52%, taken from an FHLB yield curve, would be the equivalent of 5.75 years duration based on FHLB Boston's spot rates at the time of printing.

Sorry for the technical stuff, but my finance readers would want to know.

And 5.75 years seems like a reasonable duration for such an account. In other words, the bank thinks they can keep that account for that amount of time. Also, I used the average balance per account for my firm's profitability clients. You can calculate your own bank's average balance for similar accounts.

So, Is It Worth It?!

The above spreadsheet would indicate yes. But wait!

It does not include the cost of the campaign. And that cost must be spread over the number of accounts opened. So, if the campaign went to 50,000 households, with a 2% success rate, that would equate to 1,000 net new accounts. And I'd like my marketing friends to chip in, but 2% seems a stretch. 

If the campaign cost $50,000, and you opened 1,000 accounts, then it cost $50 in incremental cost per account. Still worth it. But if you solicited 10,000 households, and experienced a 1% success rate, you would only open 100 accounts. If that campaign, which sounds more realistic for a community bank, cost $25,000, then it would cost $250 per account, erasing the present value of all profits.

This is why, in my opinion, you see large banks doing larger campaigns to generate economies of scale in terms of fixed acquisition costs (cost of the campaign). And it is much less common in community banks, which do not enjoy the benefits of scale of campaign.

So, my answer is... it depends. But it is all about the math.

Does my math work for you?

~ Jeff

Memorial Day: Black Hawk Down

On October 3, 1993, the U.S. launched a raid to find forces of Somali warlord General Mohammed Farah Aideed, who had been ordering attacks on U.N. forces assigned there for humanitarian missions. Things went badly.

Black Hawk Down

That raid, initially the kind soldiers train for routinely, erupted into a crisis when militiamen downed two Black Hawk helicopters using rocket propelled grenades. The 15-hour battle that ensued, after raids were turned into a rescue mission, left 18 Americans dead and 73 injured. 

It also left shocking images of American soldiers dragged through the streets of Mogadishu so seared into our memories.

The 15-hour rescue operation was chronicled in the book Black Hawk Down by Mark Bowden and the subsequent movie of the same name. 

MSG Gary Gordon and SFC Randy Shughart

Into the melee comes Master Sergeant Gary Gordon of Lincoln, Maine, and Sergeant First Class Randy Shughart of Newville, Pennsylvania. 

Dispatched via another Black Hawk to provide reconnaissance and cover fire until ground forces could extract troops, they found a downed Black Hawk and its crew in peril, with militia closing in rapidly, and no ground troops in site.

Despite this, Gordon and Shughart demanded to be inserted on the ground. Their commanders only permitted the insertion if they did so voluntarily. They did.

They were inserted a football field south of the crash equipped with only their sniper rifles and pistols. While under intense small arms fire, they fought their way through a dense maze of shanties and shacks to reach the critically injured downed aircraft crew. 

They pulled the pilot and other crew members from the wreckage, and established a perimeter which placed them in a highly tenuous position. They fought until their ammunition was depleted. At that time, they surrendered one of their remaining loaded weapons to the pilot, and continued the fight.

Until they were out of ammunition. And were fatally wounded by the enemy. Their selfless actions saved the pilot's life. And earned them a posthumous Medal of Honor.

Memorial Day

I ask that you reflect on MSG Gordon and SFC Shughart, and all of your fellow Americans that gave their last full measure so you can enjoy the freedoms our country so often takes for granted.

Happy Memorial Day!

~ Jeff

The Real Benefit of Intelligent Automation

Fifty percent. That was the odds I gave myself when calling my health insurance firm regarding changing my date of birth. Fifty percent chance I could get this done in one phone call and a reasonable period of time.

Isn't that sad?

It did take 15 minutes to get the relatively simple task done. Making me wonder: shouldn't this be easier?

And easier is what me and my colleagues hunt for when we do process improvement projects at community financial institutions. Because there are a lot of complex, manual, outdated things happening in the bowels of your institution. Believe me.

In comes artificial intelligence, robotic process automation, chatbots. Mostly buzzwords to bankers. But it's growing on them. I recently attended a state bankers' convention where Fabio Sant'Anna of SRM delivered an interesting presentation on Intelligent Automation (see slides). 

One important slide was to distinguish some buzzwords and acronyms. RPA, or Robotic Process Automation, is a script or "bot" that executes repetitive tasks that are currently done by humans. Artificial Intelligence is the ability of a program to analyze data. To actually solve business problems. 

I'm sure readers can think of several use cases for their institutions. Balancing your card providers daily report to your core system? If it requires a checklist, you can automate it. Performing CIP diligence? Online banks already use automated processes. 

Think of the saved hours!

But let me tell you the real benefit of Intelligent Automation. The ability to deliver community banking services in the manner desired by your customers.

It's no secret that customers want more from their bankers. Efficient and accurate transaction processing is passé. Customers already voted with their smart phones and laptops on where they like to execute transactions.

But bankers have changed at a slower pace than customer demands. Much slower.

Take branch staffing for example. Survey after survey indicates that customers want branch bankers to help them solve more complicated problems, apply for loans, and assist them with financial tools that are available. Can your branch bankers do it? 

I'm skeptical, based on my experience. We still have efficient and accurate transaction processors. We skinnied branch staffing to achieve cost savings and improve profits. But we haven't translated less staff into more capable staff. Same skill set. Less people.

If you look at the support center expenses branches must absorb for operations, technology, compliance, etc. you would think that support functions also skinnied their ranks. Oh contraire. 

In 2013, when the median branch deposit size in our profitability outsourcing service peer group was $47.9 million, support center expenses were 1.12% of branch deposit balances. In 2018, when the median branch deposit size was $62.2 million, support center expenses were 1.02%. 

So you may think, "See! It went down! Economies of Scale!" 

But wait! In 2013, each branch had to absorb $536,000 of support center expenses per year. In 2018, each branch absorbed $632,000, an annual increase of 3.3%. Support functions got bigger!

And that, my readers, is why branches (and in most cases, lending functions) have been so slow to transform their capabilities to meet the modern customers' needs. We reduced branch staff to offset declining net interest margins and boost profitability. And we never reduced back office staff to invest in the collective abilities of branch staff.

Automating back office processes to reduce the resources needed to execute them can transform our workplace into what customers demand.

How long can we wait?

~ Jeff

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Guest Post: Financial Markets and Economic Update by Dorothy Jaworski

Never Satisfied

The markets never seem to be satisfied.  The Federal Reserve recently took heed of market and economic messages, ending its tightening campaign and beginning its “patience” campaign.  The yield curve had begun to invert in early March, 2019 in response to economic slowdown fears and a flight to quality began where demand for US Treasury bonds increased, pushing longer-term rates down.  I along with countless other managers and investors were finally happy.  Chairman Jerome Powell listened and stopped raising short-term rates.  The markets have always thought that the Fed tightens to keep an overheating economy and inflation in check, neither of which we have right now.  The Fed also announced that they would end the sales/runoff of their bond portfolio, affectionately known as “QT,” or quantitative tightening.  The markets hardly seemed satisfied with these two moves as they began building in rate cuts.  Rate cuts?  Who said anything about rate cuts?

But, what if rates are already too high?  The economy is slowing, as seen in the auto, housing, manufacturing, and retail sectors.  I’ve been watching the balance of the economic data releases shift to “weaker” over the past two months.  Growth around the world is slowing, too.  Every major economy, including the United States, European Union, China, Japan, Australia and New Zealand, and Great Britain (with Brexit issues), is dealing with weaker growth. 

Unemployment and Inflation

The Fed has to follow their dual mandate, which is to maximize employment and maintain price stability.  The Fed kept raising short-term interest rates because they felt unemployment under 4% was too low and would cause inflation (the traditional Phillips curve theory).  Yes, unemployment is low.  In fact, job openings are over 7.1 million and exceed unemployed persons of 6.2 million.  This has been the case for about the past twelve months.  The Fed worried that wage pressures would escalate because of skills gaps.  Yet, wages increases have been modest and did not contribute to higher inflation.   Consumer spending has weakened recently but is expected to resume its modest pace for the year.  High debt levels- consumer, business, and government- continue to weigh on growth, which should be between 2.0% and 2.5% this year.

Inflation remains well behaved, except for the March producer price index data release, which showed an increase of a surprising +.6% for the month.  Oil and gasoline price increases have caused this; oil has risen from $45 to $64 per barrel this year alone.  Before inflation bugs panic, one release does not make a trend.  Leading inflation gauges show a declining year-over-year pace of inflation.  The TIPS spread, or the difference between the 10-year Treasury and the 10-year Treasury inflation-protected yields, has fallen in recent months and is currently at 1.95%.  The weaker economy is keeping inflation in check.  And gold prices rose this year into February and March, but have fallen back to equal year-end 2018 levels today. 

Jamie Dimon

It is a not-so-well-kept secret that I admire Jamie Dimon, CEO of JPM Chase, and have followed his career since the late 1990s.  I admire his business savvy, his wealth of knowledge about the economy and the financial markets, his ability to deal with crisis, and his dedication to making people’s lives better through JP Morgan Chase Bank community initiatives.  His annual shareholder letter, like Warren Buffett’s, is a must-read for investors.  He touches so many subjects and isn’t afraid to criticize government policies that are holding our economy back.  Dimon believes that we will see weak GDP growth this year.  He warns that we could soon see poor liquidity and declining investor sentiment that will add to market volatility.

A Win for the Ages!

Did you have an opportunity to watch the Masters and witness Tiger Woods win his fifth green jacket?  He played the final round methodically, strategically, and did not let developments affect his play.  He watched others take the lead and then lose it…to him.  Once in the lead, he played to win.  He showed us that he can win despite the many setbacks he has endured, especially the physical ones of the past few years.  To me and to millions of supporting fans, Tiger’s win was one for the ages!  I will not forget that day!

The Outlook

I formulated my estimates for 2019 early this year and haven’t seen a reason to change them.  I estimated that real GDP growth would be between 2.0% to 2.5% for the year, which is at a slower pace than the +2.9% in 2018, but about equal to the average growth since 2011.  I had assumed that the Fed would not raise rates again.  The impact of the tax cuts has faded.  Interest rates have stabilized at lower levels, after falling dramatically since December, and the yield curve is relatively flat, with only 13 basis points between the three-month and 10-year Treasury yields.  The Federal Reserve made it clear that they would remain patient in assessing the economy and that they would not be raising short-term interest rates this year.  They recognize that growth is slowing here at home and around the world.  They stated that they did not want to cause an inverted yield curve and they meant it, as they realize that inverted curves are recession precursors.  I always believed that Chairman Powell would read the markets correctly and do the right thing.  He knows that market volatility has risen, the data has been weaker, and liquidity is reduced as M2 growth declines.  M2 growth is today at 4%, which is nearly one-half of what it was three years ago.  Yes, M2 matters.

Our current economic recovery is fast approaching a longevity record; growth through July, 2019 would set the new record at 121 months, surpassing the 1991 to 2011 recovery.  Unemployment is low at 3.8% in March, 2019 and inflation, as reflected in core personal consumption expenditures, was +1.8% in the fourth quarter of 2018.  I don’t expect much change in either of these measures.  Consumer spending has been weak in recent months, but as job growth continues at a steady pace, we should be able to see GDP growth of 2% or more.  However, don’t count on the usual spending boost from personal tax refunds as they are down by over $6 billion from this time last year.  And remember that the Fed stopped raising rates, so that should aid growth. 

While the guessing game has already begun about when the Fed will ease or lower rates, I think growth will be steady (if you call the low 2%s steady) enough to keep the Fed on the sidelines.  The markets seem to enjoy guessing what the future holds, especially when it comes to Fed policy.  I’m not playing the game right now although I mentioned earlier that I think short-term rates might be too high…

I finish writing this with a heavy heart.  I am watching video of Cathedrale Notre-Dame de Paris on fire.   Prayers and thanks for reading!  04/15/19

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.

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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