Banker Quotes: As Told to Me v3

I learn a lot from bankers as I visit their offices, speak to them on the phone or at industry events. Occasionally they will offer an insight that I think my Twitter followers would find interesting. 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 so far this year.

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

@JeffMarsico Bank head of branches: "All I need is time to sell, new shoes, and business cards."

jfb note: There are a lot of vendors out there selling the newest sales widget. But when it gets down to it, this banker gets to the heart of the matter. While typing this post, my bank called me from the local branch to tell me about their home equity lines! Third time my bank has called me in 16 years. Progress! But read the next quote.

@JeffMarsico Bank CEO: "People work at banks because they don't like to sell. It's how it has always been and still is."

jfb note: I think it is changing, though.



@JeffMarsico Bank Chief Risk Officer: "Not sure if ERM (enterprise-wide risk mgt) is theory or theology."

jfb note: Surprised that this came from the Chief Risk Officer because they are usually preaching the virtues of checking on the checkers that are checking on revenue generating bank activity. See my comments on ERM here.

@JeffMarsico Gas station attendant on free windshield inspection: "Sir your windshield looks great. To keep it that way, avoid highways."

jfb note: Ok, this has nothing to do with banking. But, seriously, this was his advice.

@JeffMarsico Bank analyst: "If there are such great returns to scale, then where are the Citigroup Inc. shareholders' yachts?"

jfb note: This was in a research note and not told to me directly. The economies of scale gang still can't answer this one. But a colleague of mine dubbed it "diseconomies of scale due to organizational complexity". I say I could have wiped out just as much shareholder value as Citigroup's Charles Prince for far less money.

@JeffMarsico Credit Union CEO: "The differences between CUs & community banks are inflated by trade groups. We should focus on big banks."

jfb note: This was told to me at a conference that was designed specifically to lobby the Federal government with the key issue being expanding CUs business lending. But, with the sum total of assets in CUs being less than JPMorgan Chase, it should make us wonder where community FIs should spend their energy. And don't count on your trade association to help you to target their largest contributors.

@JeffMarsico Bank exec: "If our regulator walked by our water cooler & saw that it was half full, they would write us up for it."

jfb note: Symbolic of the relationship between examiners and examined.

@JeffMarsico Branch banking exec: "We need to figure out how to give good service to rate sensitive customers & Nordstrom service to those that value it."

jfb note: Banks still struggle with the squeaky wheel philosophy of customer service... give the greatest service to those that make the most noise or are the most visible, versus those that are the most profitable.

@JeffMarsico Retiring Bank CEO: "I've been around (50 years) to see a few things. I've never seen an environment as difficult as this was for banks."

jfb note: Enough said.

@JeffMarsico Bank CEO: "If I don't know within 30 minutes of meeting w the borrower if the loan is a good one, I'm in the wrong business."

jfb note: I hope he meant in the context of the next quote.

@JeffMarsico Bank director on strategy: "I would like to make loans to borrowers that can pay us back."

jfb note: I agree with this strategy.

@JeffMarsico Bank director: "A great leader has empathy, sympathy, integrity, and consistency."

jfb note: I was impressed that a bank experiencing difficulties would speak about leadership instead of regulators, borrowers, lenders, etc. It inspired this blog post.

@JeffMarsico Mortgage banking specialist to me: "FNMA has $25B of pending repurchase requests outstanding."

jfb note: Well that's not comforting. One of my clients received a significant repurchase request from Fannie. If we sell them, but have to retain the risk, pricing and terms are going to have to change on residential mortgages.

@JeffMarsico Bank CEO: "In my 40 year career, it's never been easier to book loans." 

This is one of those counter-quotes... quotes that go against conventional wisdom. This bank is feeding off the castaways from large banks. I hope the castaways can pay the loans back.

@JeffMarsico Community bank CEO: "I'm fm a big bank and I was surprised I had to make holiday decoration decisions."

jfb note: Welcome to community banking.

@JeffMarsico Bank institutional investor: "Great banks have 1. Great asset qual, 2. Good IRR position, 3. Great efficiency ratio, and 4. Great sales/service."

jfb note: Always great to know because institutional investors own a significantly greater portion of community banks now than pre-2008, which leads to the next quote.

@JeffMarsico Bank analyst: "Attractive banks: have a lending niche and/or in strong economy; managed credit problems well; & have excess capital."

jfb note: I suppose if you asked 10 analysts and institutional investors you would get 10 different answers.

@JeffMarsico Bank CEO: "In a perfect financial year, you have done well if you don't have to think about your bank more than 10 minutes."

jfb note: The context was that banks should make it easy for businesses to perform banking chores.

Bank CEO: "We would have to be much bigger than we are to be a technology leader."

jfb note: Some still believe they can be a technology leader.

Bank CEO: "Ally Bank did an excellent job convincing the public that the opposite of the truth is true."

jfb note: This was in response to me citing a survey that showed Ally Bank one of the top recognized bank brands. Advertising saturation can work for those with the wallets.


Bank CEO: "We were surprised at quick adoption rate of our mobile banking app."

jfb note: Because bank customers used to be notoriously slow at adopting new delivery channels. Needless to say the turtle is making gains on the hare.


Bank CFO to me: "You were able to pronounce that branch correctly when you didn't have that beard."

jfb note: Wise guy CFO.


What have bankers been telling you?

~ Jeff

Do We Care About Leadership?

On a recent plane ride I sat next to the Commander of the NCO Academy at Fort Jackson, South Carolina (see picture from one of last year's classes). He is a reservist, and had interesting perspectives on how the military operates versus private industry. In his "real life", he is a sales manager for a pharmaceutical company.

One form of training I fondly recall from my Navy days was Navy Leadership Development school, or NAVLEAD. We have acronyms for EVERYTHING in the military. I have not come across anything like it in my civilian life working with community financial institutions.

The commander, however, worked for a large company and said they do incorporate leadership, management, and supervisory training to employees. He spoke of the company hiring psychologists to develop the curriculum and provide instruction, and actors to do role playing.

When we talk of the cost of regulation, we often think of cutting back on number of personnel, technology, and branching to bridge the profit gap. But one fatality is likely to be personnel development. Community FIs do not have large training budgets to prepare future leaders to take the next step, to manage, to supervise, to lead.

Aside from the cost, part of the reason may be our attitude towards "soft" disciplines such as leadership and supervision. We promote top performers and assume they can also take on additional responsibilities, such as employee coaching, without effort. But in my experience, this is not so. Prior to me taking the NAVLEAD course, I will put to you that I was ill prepared for such a large responsibility of leading other sailors.

The Navy understood this, and prepared me to succeed so I may prepare those under my charge to succeed. See a portion of a 2006 message sent by the Chief of Naval Operations (CNO) as to the importance of leadership development to the effectiveness of our Navy. I do find it interesting that these Navy dispatches look very much like the ones I recall over 20 years ago.

In an era of uncertainty, increased regulation, and competitive pressure, do we have the foundation to lead us into the future? When I write foundation, what does it mean to you? Does it mean the technological infrastructure, the branch footprint, or the special niche? Or can it also mean that we are developing the type of leaders that ensures those under their charge are performing to their potential?

If people are important to your FIs success, what are you doing to develop your people?

~ Jeff

Guest Post: First Quarter Economic Update by Dorothy Jaworski

The Fed Goes Too Far

First, let me say, we owe the Federal Reserve our gratitude. Their actions to ease in many ways during and after the financial crisis averted financial meltdown and produced results in an economy that is regaining its footing, albeit at a “frustratingly slow” pace.

The Fed lowered the Fed Funds rate to 0%, where it has stood for over three years. They purchased securities during the crisis and stepped up where they could as a lender of last resort. They embarked on quantitative easing, or “QE,” programs twice in 2009 and 2010, buying up $2.3 trillion of securities. Last summer, they went where no Fed has gone before and “promised” to keep rates low until 2013, then earlier this year extended the “promise” until the end of 2014. Last Fall, they embarked on “Operation Twist,” to sell shorter dated securities and buy longer dated ones in an effort to push long term rates down, especially to get mortgage rates lower to help the still struggling housing market. Ben Bernanke has been holding press conferences and the Fed recently published their first-ever rate forecasts—even though it was published on a scatterplot—that shows Fed members’ thoughts on where short term rates will go.

But we know that only three things in life are certain—death, taxes, and a Fed that goes too far. Despite the trillions of dollars used to buy securities and zero cost money, economic growth is struggling at 1.7% over the past year, which is one of the weakest recovery rates since the early 1980s. Of course, coming out of one of the worst recessions since the 1930s, any pace of growth has been nothing short of miraculous.

So what do we make of the latest idea that the Fed is floating? They want to go into a third round of QE, but they would purchase securities and borrow the money back short term. This latest idea would be a form of “sterilized” easing—allowing the Fed to buy long term securities (to push down long term rates) and borrow the money short term to keep the money supply from growing, and thus keep inflationary expectations under control.

So what will “sterilized” easing accomplish? In my opinion, nothing. It is not about money anymore, it is about psychology and a belief that we can do better as an economy without government interference and being flooded all over by money that will someday be difficult to pull out of the economy when the time to tighten policy arrives. Philly Fed president Plosser has stated recently that the Fed should only use its balance sheet as a crisis tool, not as a regular tool for monetary policy. For once, I agree with him.

Goodbye, Yield Curve

At this point, I believe this new idea would prove that they are clearly going too far. The sole purpose of such a move is to artificially push long term rates even lower than the unbelievable lows we have currently attained in an effort to manipulate the yield curve. This manipulation adds to their “promise” and “Operation Twist” and distorts the yield curve even further. The problem is that the yield curve has been one of our most reliable market indicators over the past several decades.

Generally, we use a yield curve to deduce whether inflation is an issue or the economy is expected to grow—through an upward sloping yield curve—or whether there is a poor economic outlook or recession coming—through a negatively sloping yield curve. Flat yield curves have typically resulted from Fed tightening and the creation of one from Fed easing will be highly unusual, but, alas, I think that is their plan.

From yield curves, we can calculate market expectations of rates in the future. Without such a reliable indicator, what objective signals will we get that the recovery is strong or weak? Fed “promises?” Scatterplots? I think we all know how this experiment is going to turn out.

A Fed That is Mad at Us

Chairman Bernanke has been on the warpath for the past several days. Apparently, he is not thrilled about the recent selloff in the bond market, that took interest rates up by .40% to .50% from the end of January into the third week of March; there was an especially nasty stretch of nine days from March 8th through March 20th, where rates rose continually each day before finally tempering their advance and falling back since the peak. Historically, the nine day streak is only the second of its kind since a similar streak in 1974—the other being during June, 2006.

Bernanke has been talking down recent economic good news and chastising the bond markets for allowing rates to rise, which could hamper growth. He must be angry that so many of us opposed his “sterilized” money scheme and are a little skeptical of his extended “promise” to keep rates low until the end of 2014. Maybe he was mad that investors were reallocating money from bonds into stocks. He didn’t mention the real villain—rising gasoline prices, which today stand at $3.90 per gallon, according to AAA, for the highest level ever recorded this early in the year.

The Tipping Point

Just when economic growth started looking better, with new job growth of 200,000 per month in four of the past six months, we run into the same old nemesis—rising gas prices. It is no surprise that growth slowed in 2011 as gas prices reached a “tipping point” of $4.00 per gallon in May that caused consumers to dramatically slow other spending.

The media keeps speculating that gas prices will reach $5.00 per gallon by Memorial Day. This doesn’t help with consumer psychology and, if gas does reach $4.00 or more, we can expect the same psychological reaction from consumers—reduced spending—just as they would react to higher taxes. Let’s hope that the rise in oil and gas prices this year will again prove to be “transitory,” as Ben Bernanke has been claiming once again. Every one cent rise in gas prices leads to $1 billion annually in extra consumer spending on this volatile liquid and $1 billion less spending on other goods and services.

Slow growth, slow improvement. That is what is happening in the economy. The recovery is at its most vulnerable. High oil and gas prices could push us to slow growth, no improvement, which could once again cause job losses. We do not want to see consumer psychology in this scenario.

Stocks Rock On

It is no surprise that stocks began to do much better as the economic data began to strengthen late in 2011 and into this year. Stocks were virtually flat in 2011 as the markets improved early, sold off in a horrible third quarter, and quickly regained the flat line. Year-to-date in 2012, the S&P 500 and Nasdaq indices are up 12.6% and 20%, respectively. The price-earnings multiple on the S&P is 13.4 times and the dividend yield of 2.1% is approximately equal to the ten year Treasury yield.

Stronger growth, with real GDP at record dollar levels, has been translating into stronger corporate profits. The S&P now tops 1,400 for the first time since late 2007 and Nasdaq now tops 3,000 for the first time since 2000. Momentum is clearly driving the markets, as well as Bernanke’s campaign to keep returns on bonds artificially low for a long time. But remember that the markets do not usually go up in a single straight line—especially during a presidential election year. Stay tuned.

Thanks for reading! DJ 03/27/12

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with First Federal of Bucks County since November, 2004.

What is it about Midwest Financial Institutions?

SNL Financial LP does an annual ranking of best performing banks using six core financial performance metrics that focus on profitability, asset quality and growth for the 12-month period ended Dec. 31, 2011. SNL measured each company's standard deviation from the mean of each metric. The standard deviations, which were each equally weighted, were then added together to calculate a performance score for each company. They then sorted the top 100 by asset class... less than and greater than $500 million in total assets.

I was pleasantly surprised to see so many of my firm's clients on the over $500 million list. I am patting myself and my colleagues on the back as I type, but readily admit, as much as I would like to take credit, it is the bankers that deserve the bravo zulu (well done in Navy parlance).

Interestingly, as I parsed through the data, I noticed that in the less than $500 million category were mostly Midwest banks (see table). If not a Midwest bank, then it was a niche bank. For example, the best performing bank in this asset category was Amerasia Bank, a Flushing, NY based financial institution focused on serving Asian-Americans in the borough of Queens.

Aside from niche players, I dug deeper to find out why Midwest banks dominated this list. I started at net interest margin, but found the SNL Midwest Banks average margin of 3.37% for 2011 was outflanked by the Southwest (3.57%) and the West (3.96%).

I checked how efficient Midwest banks were and found that they had the second best efficiency ratio, or how much in operating expenses it takes to generate $1 in revenue (i.e. the lower the better). Midwest banks had an efficiency ratio of 59% for 2011. But the West beat them with an efficiency ratio of 56%. Similarly, I reviewed net operating expense to average assets (net operating expense = operating expense less fee income), and found Midwest's ratio of 0.97% ranked closely to the Mid-Atlantic (0.99%) but was higher than the West (0.82%).

My last ratio analysis was asset quality represented by net charge-offs/average loans. Midwest, although doing well at 1.32%, was outperformed by the Southwest (0.89%) and New England (0.60%).

Having looked at the common ratios which identify why certain banks do well and others don't, it is unclear that one particular area is driving Midwest bank performance. But perhaps we can conclude that the Midwest did not experience significant real estate inflation and the accompanying asset quality issues, serve industries that have remained healthy during our economic malaise (i.e. agriculture), and have business models that foster good margins and strong expense discipline.

In other words, maybe Midwest bankers are so over-represented in SNL's less than $500 million class because they are.... good bankers.

Why do you think the Midwest dominates this list?

~ Jeff

Vblog: The Benefits of Niche Profit Reporting with David Acevedo

I regularly attend industry conferences and occasionally will particpate as an exhibitor. One of the benefits of spending long hours in the exhibit hall is to take advantage of the industry expertise plainly evident as you roam the aisles.

Today a financial institution CFO asked what we thought about measuring the profitability of certain niches, or SEGs in credit union parlance. None of my firm's clients were doing that, but I thought it was a great idea. So I sought the counsel of David Acevedo of 360 View to ask his opinion of the benefits of niche/SEG profitability reporting. Here is our brief interview at a relatively noisy exhibit hall.

How would you use such reporting to meet your FIs objectives?

~ Jeff

Bank Cost Structures: Mostly Fixed

I recently taught Bank Profitability to a Washington Bankers' school. As part of the curriculum, we discussed the cost structure of financial institutions and how it impacts decision making.

True to the subject, we discussed using product profitability data to make decisions. For example, if a product is unprofitable, should we make changes to it or cut our losses? The answer is not so easy, in my opinion.

In reviewing the table below, one might conclude that we need to do something about business checking. How can such a core offering be ranked eight of ten in profitability? But, as with everything, there are reasons.

One is how profitability is measured. The method from the table is using funds transfer pricing to determine the spread generated from the product. In such a low interest rate environment, the funding credit is at historic lows. Aside from the interest rate environment, the product's profitability is determined by fully absorbed costing. This begs the question about the variability, or lack thereof, of operating costs.

Community financial institutions don't have much in terms of variable costs. Let's ask the question, what cost would be reduced by discontinuing this product? The answer... very little. Perhaps the core processor charges per account, and the business is on bill pay, also invoiced per account. But will we reduce branches without the product? Probably not and branches represent a significant cost to deposit products.

This is why leveraging your FIs infrastructure is so important to profitability. We have a step variable cost structure. That means we buy resources in bulk. Similar to buying a palate of Hot Pockets at Sam's Club, we add resources and then utilize the resources over time until they are exhausted. If properly utilized, the FIs operating cost ratios should decline over time, until the infrastructure becomes stressed.

How do you tell when your infrastructure is stressed? One CEO uses the parking lot theory. He looks out in the parking lot to see how many cars remain at the Bank after 6pm. I'm sure there are other, more sophisticated methods, but the overall point is that there is a consistent, downward trend in operating cost per account.

In terms of strategic decision making, understanding the FIs cost structure may motivate the FI to increase volumes in business checking, knowing that the marginal cost to add more accounts is minimal, and the revenue per account is significant (3rd greatest in the above menu). Not to mention that the average balance per account tends to be greater than most others. Discontinuing a product based on its fully absorbed profitability simply pushes the costs currently borne by the doomed product to other products.

How do you use your profitability information?

~ Jeff

Job Description: Branch Manager

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 branch manager. 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. The job description does not include qualifications or compensation, as each FI can assess what is needed based on their own expectations.

Branch Manager

Summary of Responsibilities:  Relationship management... Develop relationships with the branch's most profitable customers. Relationships should include knowledge of the customers' banking needs and their service expectations from their FI, evaluation of customer product use to determine optimal product utilization, and 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 the branch's target customers as per the demographic profile of the area surrounding the branch 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 branch manager as the subject matter expert of bank products within the branch market.

Community relations... Become the primary community representative by joining a minimum of two community organizations with an emphasis on those where the FI's target customers 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 branch manager's relationships for future business development activities.

Business development... Grow branch customers at a pace faster than general market growth that is consistent with the FI's strategy. Manage branch business development efforts that include, but is not limited to, in-branch sales, outbound calling, prospect visitations, direct mail, branch-specific social media activities, etc.

Supervision... Supervise branch staff. Set performance expectations based on job descriptions and capabilities. Coach staff to exceed expectations. Manage staff training to include compliance, operations, and sales/product knowledge. Perform routine performance evaluations. Position subordinates to succeed within the FI. Coordinate with HR for developing optimal staffing levels, modifying job descriptions based on changing expectations, and filling open positions. Address performance deficiencies of subordinates.

Branch operations... Manage branch operations activities such as efficient and compliant transaction processing, correct and compliant account opening and closing, branch/teller cash, etc. Branch manager is not expected to perform these duties. Rather, the branch manager will supervise staff that performs duties and receives regular assessment on the operations of the branch from the branch operations manager and outside sources such as Audit and Compliance departments. Branch manager is responsible for the overall appearance of the branch, ensuring it is consistent with the image the FI wishes to present based on its strategy. Responsibilities include the branch physical plant. Again, the branch manager is not expected to perform these duties, but supervise personnel to ensure that they are satisfactorily discharged. The objective is for the branch to operate smoothly so branch staff has greater availability to deliver service that is noticeably better than the competition, and for sales activities.

Branch profitability... Branch manager is responsible for the overall profitability of the branch, 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