Wednesday, 21 December 2011

It's a Wonderful Life

This 1946 Christmas classic is a story about the impact one man made on his family, his business, and his community. It goes beyond the fate of the Bailey Building and Loan. It teaches us to take stock of our lives, to be helpful instead of hurtful, and be thankful for what we have instead of stressed over what we don't.

But It's a Wonderful Life is also a testament to the importance of community financial institutions (FIs). The classic scene of the run on the Bailey Building and Loan after the 1929 stock market crash depicts the basic principals of community banking, how FIs work, and how important character plays in bank lending and community development.


What you don't see here is the villainous Mr. Potter's diatribe on how the Bailey Building and Loan advanced loans to "riff-raff", and was unwilling to foreclose when the "rabble" ran into difficulty making payments. Instead, the Bailey's modified the terms to help borrowers make it through tough patches.

What you also don't see is the bank examiner showing up to review the bank's books. Note the examiner wasn't plowing through the loan portfolio and criticizing this underwriting anomaly or that. He was there to ensure what the bank reported in its footings was accurate. In the end, Uncle Billy Bailey loses $8,000 when depositing the funds in the correspondent bank; Mr. Potter's bank. It was the mismatch in footings that landed George Bailey in hot water with the examiners. It wasn't lax underwriting, or troubled debt restructurings.

When the Bedford Falls community pulls together to raise the missing $8,000, they toast George as the "richest man in town". The bank examiner actually contributed to the pot of money. My how times have changed.

It's a Wonderful Life portrays the significance a financial institution plays in elevating the socio-economic status of local residents. The working poor increase their wealth by owning cars so they can get to work, to go to college or technical school, and/or to achieve home ownership. The middle class can improve their wealth by upsizing their home, going to grad school, and/or starting a business. Many of these loans don't fit the one-size fits all underwriting criteria of government bureaucrats whose sole objective is to cover their butts should asset quality falter in an institution they examine. "Rabble" need not apply.

In this sense, regulators that examine our financial institutions are the modern day Mr. Potter. But in order to help businesses work through difficult economic times, to help families stay afloat during periods of unemployment, and to help communities re-adjust to remain economically vibrant during changing times, we need more Bailey Building and Loans, not less.

Is anybody listening?

~ Jeff

Note: Since this post, the NY Times wrote an article about a modern day Bailey Building & Loan: Bank of Cattaraugus. Cattaraugus, coincidentally, is in upstate NY, near Buffalo. Perhaps not too far from the fictional Bedford Falls. Although I salute the Bank for its success in helping local people, I do believe community FIs can achieve long-term success through the profit motive, which is consistent with operating in vibrant communities.

http://www.nytimes.com/2011/12/25/nyregion/the-bank-of-cattaraugus-new-york-states-smallest-bank-plays-an-outsize-role.html?_r=1&adxnnl=1&ref=nyregion&pagewanted=all&adxnnlx=1325347237-Q5F/vRUqZwymOgvBcu0zFg

Saturday, 17 December 2011

The 17 Fundamental Traits of Organizational Effectiveness

I recently read Harvard Business Review's 10 Must Reads on Strategy and reviewed it in this blog. One of the "must reads" was The Secrets to Successful Strategy Execution by Gary Neilson, Karla Martin, and Elizabeth Powers from Booz & Co. I dedicated one blog post: naming it Common Sense to Successful Strategy Execution because I didn't think it was a secret. In this post I would like to write further on the subject, focusing on the 17 fundamental traits uncovered during Neilson, Martin, and Powers' research. 

The below table was drawn from research from more than 26,000 people in 31 companies. The Booz consultants distilled them in the following order of importance...


A note about the study: The Booz consultants tested organizational effectiveness by having participants fill out online diagnostic that contained 19 questions... 17 traits and two outcomes. The traits were ranked and indexed to a 100-point scale to determine their relative importance to organizational effectiveness.

In the study, 61% of respondents in strong-execution organizations agree that field and line employees understand the bottom-line impact of their decisions. This figure plummets to 28% in weak-execution organizations. For community FIs, this is terrible news, as so many rely on top-level profit reporting to determine success or failure. Does the deposit operations manager know the implications on product costs for adding a software component? Doubtful. Does the lender understand the profit implications to his or her line of business by authorizing the waiving of a fee? Unlikely.

A similar analysis can be performed on your organization as a whole, focusing first on the top traits and working your way down, ensuring your FI moves toward affirmative responses to each trait. Once completed, FIs can then incorporate the 17 traits into executive performance reviews.

Imagine an FIs board of directors using the above table to evaluate the effectiveness of its CEO. Or a CEO to evaluate the effectiveness of his or her direct reports. Simply putting the 17 traits in a spreadsheet, and responding on a five-point scale of "strongly agree" to "strongly disagree" would certainly motivate the person evaluated to create a strong execution culture in his or her organization. For proponents of the 360 review process, subordinates can also respond, giving the Board or CEO insights beyond their own perceptions and bias.

This blog has dedicated countless posts to strategy. If an FI is to promote an execution culture, it begs the question "execute what"? It reminds me of legendary Tampa Bay Buccaneers coach John McKay's response when asked about his team's execution after a lackluster performance: "I'm all in favor of it." My point is, and I do have one, when evaluating the organization and its executives on execution, it should be executing long-term strategy. That implies the FI has a long-term strategy to chart the course to compete and succeed in a rapidly changing industry.

What are your thoughts on developing an execution culture?

~ Jeff

Note: I tried to make the table as large as I could. If you would like a larger version, e-mail me.

Sunday, 11 December 2011

Power to the People

I asked the head of commercial lending how best to turn the tide in business loan growth. His response: people. I asked the head of branches how to elevate the results from low performing branches. Response: people. I asked the head of an insurance subsidiary how he intends to improve margins. Again, it's the people.

My firm moderated a brainstorming session with a client on improving profitability in certain areas. We came up with several credible ideas. But a senior executive spoke up and said something to the effect that the responses that revolved around people were so far ahead of the others, that if the bank got the people issues right then performance will surely improve.

I have opined that bankers come in two general categories: balance sheet managers and customer managers. Since that post over a year and a half ago, financial institutions continue their migration toward the customer aspect. A strategy heavily focused on balance sheet management does not do much to differentiate one FI from another, and therefore does little to improve franchise value.

But strategies that focus on customers require people that are better than the people at the FI across the street. From this perspective, our assets do go up and down the elevator every day. So what are we doing to have the right people in the right positions?

We first attacked this challenge over 10 years ago when we aggressively pursued lenders. The hot pursuit led to wage inflation. The challenge was that we wanted lenders that went after the total client relationship and were surprised when what we got were loans. They were deal people, selling loan transactions usually at attractive pricing and loose covenants. We found it difficult to get the old salts to change their perspective, to build a strong relationship, to achieve trusted advisor status with their clients. They simply wanted to do deals.

Perhaps we can learn from this experience. If FIs seek to supplement their staff with more customer managers, maybe we should focus on attracting motivated, less experienced, but more malleable talent. Or perhaps such talent exists within our franchise.

To succeed at such a strategy, the FI would need a performance measurement process that identifies top performers and hot prospects, develops a training program to teach them the skills to meet performance expectations, and to ingrain your FIs Way (manner in which your FI would ideally like to do business).

If you bring onboard new, yet under-developed talent, perhaps you implement a mentor program with more senior people that have bought into your Way and are performing well. Additionally, ensure your compensation system is consistent with your Way. If you compensate for loan volume, don't be surprised if you get the aforementioned aggressively priced loan transactions and few loyal relationships.

As you populate your employee base with higher quality people your FI will perform better. If you keep in place employees that are millstones around your neck, your FI will struggle to perform better. Your objective should be to maximize the former, and minimize the latter. That's the simplest business strategy ever, don't you think?

~ Jeff

Wednesday, 30 November 2011

Book Report: HBR's 10 Must Reads on Strategy

A Written on the cover is a definitive statement made by an entity that has supreme confidence in itself: "If you read nothing else on strategy, read these definitive articles from Harvard Business Review." Wow. And while we're at it, if you read no other blogs on banks, read Jeff For Banks. As much as I would like to believe it's true, I would also have to believe that a higher authority is leading the Denver Broncos on their improbable run. You and I both know that's not true... ???
But if a compendium of essays on vision, strategy, and execution written by luminaries such as Michael Porter, Jim Collins, and Michael Mankins interests you, then this book is for you. I'm pretty much a strategy junkie, and this book gave me fix after fix, every time I powered up the Kindle.

What I liked about the book:

1. Covers, in good detail, disciplines such as strategy development, strategy execution, decision rights, balanced scorecards, and vision;
2. Many essays were in "how to" format, such as how to develop your strategic principle;

3. Summarized key points in Idea in Practice segments.

What I didn't like about the book:

1. Not much. But if I had to pick something, it would be that the essays were penned by academics and/or consultants. It is instructive to hear from practitioners too, although the book is chock full of real world examples of idea implementation.

Do I trust Harvard Business Review to select the appropriate compendium on strategy? Well, no. I'm sure they have their bias and it flows through not only to the essays selected, but also the authors, as many are associated in some way with HBR. But I can't argue with any of their selections, and I am better for having read the book. I think you will be too.

~ Jeff


Book Report note: I will occasionally read books that I believe are relevant to the banking industry. To help you determine if the book is a worthwhile read for your purposes, I will review them here. My mother said if I did not have something nice to say about someone, then don’t say it. In that vein, I will only review books that I perceive to be a “B” grade or better. Disclosure: I will typically have the reviewed book on my Amazon.com bookshelf on the right margin of this blog. If you click on any book on the shelf and buy it, I receive a small commission; typically not enough to buy a Starbucks skinny decaf latte with a sugar-free caramel shot, but perhaps enough to buy a small coffee at Wawa.

Wednesday, 23 November 2011

The Grand Mishandling of Strategic Projections

After nineteen years in financial services, I am finally witnessing the tide turn in bank and credit union strategic planning. What once was an annual budgeting exercise, is now beginning to take the more productive path of identifying and paving the way to the financial institution (FI) of the future. The one that makes clear either-or choices to ensure future relevance for their customers, employees, communities, and shareholders (if stock owned).

But the fate of strategic plan projections, for the most part, remains mired in the old-school budgeting process. When asking senior leaders what success would look like if they executed their plan well, the answer is all-too-frequently what leaders reasonably think they can achieve. In other words, success looks like next year's budget.

In February, I proposed that FIs evaluate strategic alternatives as a regular part of the strategic planning process. To use the present value of future earnings streams to determine if the strategy is actually adding value. Developing strategic projections so you have an extremely high likelihood of achieving them may not yield the answer you want. What if your Board expects senior management to increase the value of the FI by 10% per year, and you project a 5% increase in earnings because you feel comfortable you can succeed? You will erode the value of the franchise.

The Board may decide to turn the keys over to someone capable of increasing franchise value. See the chart below for the decrease in the present value of tangible book value per share versus the nominal increase in tangible book. If you were a Board member of this franchise, what would you do?

In my opinion, FI strategic plans should have three scenarios:



Scenario 1: Stretch. These projections should depict "what success should look like" in executing your strategy. I am not proposing creating projections that cannot be achieved, a risk that an investment banker told me often happens when FIs evaluate their strategic alternatives. If I were to handicap these projections, I would give senior leaders at least a 40% likelihood of achieving them. The more strategic leaders gain credibility with the Board and their shareholders (if publicly owned) at achieving stretch goals, the greater the likelihood the FI earns its independence. Creating overly optimistic or "hockey stick" projections only erodes credibility with your constituencies. "Stretch" are the projections that should be discounted to determine the present value of the strategy.

Scenario 2: Base. These projections take more the form of budgets. They are estimates of what senior leaders reasonably believe they can attain. As mentioned, present valuing these projections may not yield the answer you want. But in setting Board and regulator expectations, these projections are likely to be around 70% achievable.

Scenario 3: Stress. These projections serve to identify the things that can go wrong, and their impact on your FIs balance sheet and capital ratios. FIs tend to do this within their ALCO process regarding swings in interest rates. But interest rate risk is only one form of risk that can pose significant challenges. By modeling the most likely stressors, senior leaders can develop contingencies in advance to improve their balance sheet and profitability.

In my experience, FIs tend to use scenario 2. Why? In my opinion it is because they want to manage expectations, and it is how it has always been done via budgets. Another reason may be the uncertainty in projecting out several years. Banking, unlike many other industries, has significant macro issues that are beyond bankers' control which impact their balance sheets and income statements. Because of these uncertainties, we shy away from what our financials will look like in the future.

But if, through strategic planning, we set our sights on the bank we want to become, we should model what that would like like in our financial statements. Not doing so dilutes our credibility and accountability to our Board, our shareholders, and ourselves.

How does your FI use strategic projections?

~ Jeff

Note: The above chart represents the actual tangible book value per share of a Northeast FI from 2005-2010. If the Board of this FI expected a 10% annual return, they were sorely disappointed.

Sunday, 20 November 2011

Jeff For Banks 10 Thankful Things

I should be thankful every day. But I'm not. That internal negativity sometimes wins the day. I blame my internal wiring. Thanks to all of my ancestors for my genetic code. See! I AM thankful.

But if I get better at improving myself, a never ending project mind you, here is where I have some pretty serious thankfulness:

1. I am thankful for my family. And occasionally, I think they are thankful for me. But this may be day-to-day.

2. I am thankful for my coworkers. I enjoy your friendship and working with you.... most of the time.

3. I am thankful for the banking industry. Most colleagues are cordial, humble, smart, and fun to be around. For the ones that don't fit this description, you know who you are.

4. I am thankful for regulators. They keep requiring bankers to hire consultants.

5. I am thankful I am not a turkey.

6. I am thankful somebody at our Thanksgiving Dinner understands the difference between a turnip and a rutabaga.

7. I am thankful for my LinkedIn connections, Facebook friends, and Twitter followers. Even that guy that keeps trying to make me an Internet millionaire. I know in his own way, he really cares about me.

8. I am thankful I don't know what ROFL means. In this regard, ignorance is bliss.

9. I am thankful that I've never seen Jersey Shore, and...

10. I am thankful for my blog readers. Although after reading my 10 Thankful Things you may not be thankful for me.

What are you thankful for?

Have a great Thanksgiving everyone!

~ Jeff

Wednesday, 16 November 2011

The coming consolidation wave... for bank consultants.

Last year Millward Consulting merged with my firm. The combination gave Millward greater resources to serve clients, and my firm senior-level expertise to develop our talent, deepen our services, and expand our geography. At the time, I didn't think much about a trend developing in bank consulting.

A couple of months ago two other community bank consulting firms merged, Danielson Associates and Ambassador Financial Group. When I asked Dave Danielson about the combination, he expressed interest in having a mix of transactional business and recurring revenue business. The merger served to accomplish that.

Most recently, Stern Agee expanded its services to financial institutions by making the bold move of buying a bank. The reason: use the bank charter as a platform to offer correspondent banking services to clients. This gives Stern Agee the recurring revenue business Danielson mentioned as important to his combination.

Community bank consulting is highly fragmented, ranging from the larger firms to the one-person shops. Consultants are typically highly specialized, such as asset-liability management, and geographically focused. Indeed, when I attended the North Carolina Bankers' convention for the first time, I hardly knew the other consultants that attended. Last week I attended the New York Bankers' convention and knew most of them.

But the number of banks continues to decline, albeit slower than most investment bankers had hoped and predicted. For community bank consulting firms, this means expanding services or geography, or both, in order to thrive. My firm is doing both.

A logical means to accomplish expansion is through merging with other firms. This makes perfect sense, for the reasons mentioned regarding my firm's combination with Millward. Larger, more robust consulting firms can provide a greater depth of experiences for the benefit of clients.

Combinations can also expand geographic reach. Community bankers (and credit union execs) typically don't hire consultants from an Internet search. They hire consultants because they know them first-hand, through mutual aquaintances that are familiar with their services, or by reading articles, commentary, and/or speeches by them. Consulting rain makers must travel to more distant locales, requiring more rain makers. As the number of community financial institutions continue to shrink, this will become more challenging for the very small consulting shops.

The challenges of combining firms, however, rest in the attitudes of the consultants and investment bankers of the firms themselves. Horizontally integrated firms are commonly designed for thriving lines of business to carry struggling ones until they get back on their feet. Ideally, the once struggling business lines are then in a position to carry others when they struggle. Makes sense.

Except thriving lines of business' full of type-A personalities typically don't WANT to carry struggling ones. They want all the fruits of their labor to accrue to themselves. This attitude permeated one of my past employers. The business model made sense on paper, but was difficult to apply. This challenge must be recognized, but need not stop a consolidation wave.

The decline of community FIs will result in continued consolidation among community FI consulting firms, in my opinion. Some small firms may seek greener pastures in other professions. But the relatively larger firms (large consulting firms for community FIs may be 10 employees or more) have an opportunity to expand services, expertise, and geography to better serve clients. This can be positive for the firms' and the FIs they serve.

What are your experiences with community FI consulting firms or your opinion on their consolidation?

~ Jeff

Sunday, 6 November 2011

Community Financial Institutions: Parking Lot for the Benjamins

The current market volatility has been with us for nearly three years. To resuscitate the economy, the Fed is doing everything possible to keep interest rates low through monetary policy. First dropping the Fed Funds rate to near zero, and most recently with Operation Twist designed to guide long-term rates even lower. The Euro Zone debt crisis and resulting lack of investment alternatives makes US Treasuries, as one economist put it, the "best house in a bad neighborhood".

This has kept investment options for community financial institutions at historic lows. Low loan demand further exasperates the challenge.

While investment options dwindle, FIs find themselves awash in cash. Market volatility and prolonged low bond yields is keeping investors on the sidelines. The sidelines, as it turns out, is in banks. This led to Bank of New York Mellon's decision in August to begin charging very large depositors fees for parking their money. There simply isn't any place for them to lay it off.

Community FIs are experiencing similar activity from their Main Street customers. From December 31, 2009 through June 30, 2011, deposits for all FDIC insured depositories increased 5.84%. But average deposits per money market account, according to my firm's peer database, increased 31% during that same period (see chart). Community FI customers are parking their money waiting for better, more certain times.

At first, senior managers of FIs felt good about the inflow. Loans from 2002 through 2007 generally grew faster than FIs' ability to fund them. This resulted in FIs turning to CD rate promotions, brokered CDs, and FHLB borrowings to bridge the funding gap. Deposit mixes became more expensive and less attractive.

But with loan demand at historic lows, FIs began running off their high-cost CDs and other so-called "hot money" to right-size their funding sources. This may have created a little hubris among senior managements, thinking it was the quality of their service and the value of their brand that attracted the core funding. But looking from a wider lens shows us it has been an industry phenomenon more than what any institution did on their own.

This is creating uncertainty with Treasurers across the landscape. What does the FI do with the money? How long will the money remain in the FI before migrating back to the market or the hottest CD promotion? With historically low re-investment rates, FIs are keeping the money highly liquid. FDIC insurance costs, on average, are 12 basis points on deposit balances. This, and the operating costs for maintaining the accounts, is resulting in some core deposit accounts actually being unprofitable... a highly unusual situation.

But this too shall pass. If FIs are pleased at their current mix of funding, perhaps they should take positive action to maintain it. Initiatives could include a disciplined onboarding program for new customers, and a timely calling program for existing ones. Your customers may certainly be parking their money at your FI, but they probably have money elsewhere too. If you demonstrate service beyond what they experience at their other FIs, perhaps you can win their loyalty, including their core deposit balances.

Alternatively, you could do nothing, stuff your vaults full of cash, and pray that customers stick with you. Hey, it's possible, just not probable.

What do you suggest FIs do to keep core deposit customers?

~ Jeff

Note: I will be part of a panel discussion at the Financial Managers Society (FMS) Philadelphia Chapter on Wednesday, November 9th to discuss liquidity, value, and profitability of core deposits.

Saturday, 29 October 2011

Common Sense to Successful Strategy Execution

The title of this post is a modification to the original, The Secrets to Successful Strategy Execution, originally published in Harvard Business Review in 2008 by Booz & Co. consultants. As the authors noted in the article, "A brilliant strategy, blockbuster product, or breakthrough technology can put you on the competitive map, but solid execution can keep you there."

The authors' research, querying 125,000 employees from over 1,000 companies, identified four fundamental building blocks to create an execution culture. These are:

1.  Clarify Decision Rights. Sometimes called empowerment, this building block is critical for quick, effective decision making. Have you ever worked for a boss that frequently questioned decisions you made? The result: you push the decision up the chain of command so you don't get blamed for mistakes. This behavior is endemic in a dysfunctional organization that requires senior leadership to make even the most mundane decisions. This, in my experience, is a common challenge with community financial institutions (FIs). Clarify the kinds of decisions that managers and rank-and-file can make at every level, and don't second guess those decisions when made. Learn from mistakes, but don't punish or second guess less than optimal decisions. Because we all make them.

2.  Design Information Flows. If we are to push decision rights down the chain of command, we must provide the necessary information to make informed decisions. Clarifying decision rights does not mean creating a culture of winging it. To supplement the culture for successful execution, ensure the needed information flows across organizational silos and up and down the chain of command. This is a challenge in financial institutions, as our silos are Superman strong. For example, in a recent meeting I attended the head of retail banking was pleased at the level of new account acquisition. However, we did profitability measurement that demonstrated the aggregate number of accounts barely budged. Why? Nearly as many accounts closed as were opened. Had Finance shared information with Retail, perhaps this trend could have been uncovered earlier and Retail could have implemented strategies to stem the outflow of customers.

3.  Align Motivators. I would report that this is the easiest to put in place. But I would be wrong. So many FI strategy sessions include revamping their incentive compensation system to align with strategy. I wrote a post specifically about branch incentives on these pages. But FI's remain doggedly attached to compensating on volume versus profitability for lenders, and the traditional holiday bonus for staffers. If you want to create an execution culture, develop incentives that motivate strategy execution.

4.  Change Your Structure. I teach Bank Organizational Structure at two banking schools *yawn*. In those sessions I dream of an FI that organizes according to their strategy versus legacy. FIs are starting to look at their org structures to determine if it inhibits strategy execution, a promising development. But history remains, and change is slow. Take small business banking as an example. Most FIs are struggling to serve this important customer base well because responsibility for service rests squarely between commercial and retail. Small businesses typically don't borrow or use credit cards and home equity loans for early stage funding. Not fertile ground for commercial lenders. Branch bankers are uncomfortable talking about cash management or financing with the small business owner. What results is a confusing web of responsibilities in serving small businesses. If you want a to foster successful strategy execution, ensure your organizational structure is consistent with your strategy.

There you have it! Four common-sense building blocks to create an execution culture. Thankfully, FIs are more often looking to develop strategies for a sustainable future instead of looking only one year down the road through their budget. Executing on such a strategy is critical for us to remain relevant to our customers, our employees, and our communities.

What do you see as critical to successful strategy execution?

~ Jeff

Saturday, 22 October 2011

Tweet Stream: Dick Durbin Staffers on the Durbin Amendment

Today I had a Twitter conversation about how the Durbin Amendment turned out to be a boon for retailers and a bust for financial institutions and consumers. Senator Dick Durbin from Illinois sponsored the amendment to the Dodd-Frank Act, decrying the unfairness of the debit interchange fees charged by financial institutions to retailers and how it inflated costs to consumers.

The consequences of the amendment are becoming clear; 1) lost revenue to all financial institutions, not just the largest, 2) Increased other fees by financial institutions charged to consumers to make up for the loss, or the decline in "free checking", and 3) no price reductions at the register for consumers. Dick Durbin took to the Senate floor to castigate Bank of America for trying to bridge the revenue gap by charging debit card fees.

What did Senator Durbin think would happen? Frank Sorrentino III, CEO of North Jersey Community Bank, weighed in on this question with an obligatory community bank bias. But the larger question remains, what did Senator Durbin and his staff think would happen?

If Senator Durbin and his staff had a Twitter debate about framing the amendment, here is how I imagine it would have went...

@sendurbin Alright, we gotta do something to get my name on Dodd-Frank. Can't have that weasel from Mass. or the has-been from CT getting all the PR.

@suckupstaffer You are right Sir! Your name somewhere on that bill would be huge!

@lifelongstaffer The perception is that banks are evil. Let's play off of that.

@sendurbin That's a good angle @lifelongstaffer. Tell me more.

@lifelongstaffer Well, we could scour bank income statements and talk to some lobbyists to see where banks make money, and attack there.

@newstaffer Wait. Isn't the bill supposed to stop the abuses in mortgage originations, packaging, and selling by large banks and mortgage brokers?

@suckupstaffer Pipe down @newstaffer, I think the Senator is about to tweet.

@sendurbin Where do banks make money? Hold on, I think I remember Mike Duke of @walmart whining to me about debit cards at a $500/plate fundraiser. Give him a call.

@suckupstaffer Yes Sir! Right away!

@lifelongstaffer @walmart is a big contributor. So if Dukey has an idea, we can pummel banks, get our name on the bill, and throw a bone to a patron. Win-win-win.

@suckupstaffer Mr. Duke suggests we commission a study in the bill with the ultimate goal of reducing what banks charge on debit card transactions.

@sendurbin That sounds like a great idea. We can call it the Durbin Amendment!

@suckupstaffer You're a genius, sir!

@lifelongstaffer We could spin it that we are reducing fees for consumers. We can exempt small banks so we don't look like big, bad government.

@newstaffer But if we reduce interchange fees for big banks, and try to exempt small ones, how would that work?

@lifelongstaffer It doesn't matter newbie. It only matters that it looks like we're helping consumers at the expense of too big to fail banks. Could be huge!

@sendurbin I like it fellas!

@suckupstaffer Then I like it too!

@lifelongstaffer And the windfall to @walmart will keep our campaign coffers full for the foreseeable future!

@newstaffer Wait, isn't the amendment supposed to reduce prices at the register for the consumers, not inflate @walmart's profits?

@sendurbin *laughs* Son, if that's the way it goes down and the banks charge more fees, I'll take to the Senate floor as the champion of the consumer!

@suckupstaffer Another win. Genius!

@newstaffer But the likely result is more fees to the consumer as banks try to make up for decline in interchange fees. We may win in perception, but lose in consequences.

@sendurbin *grins*

@lifelongstaffer @newstaffer Son, you have a lot to learn about politics.

It could've happened!

If you are a Senator Durbin staffer, please forward your cease and desist letter to me via e-mail. I would be happy to post it here, take down this post, for fear of having the full force of the rather sizable federal government coming after me.

~ Jeff

Saturday, 15 October 2011

Occupy Wall Street: Occupy This!

The Occupy Wall Street gang seems to garner more press coverage than the state of the U.S. economy, the presidential election, and the MLB playoffs combined. In terms of media excitement, only the trial of Michael Jackson's doctor competes.

Who are these people and what do they want? The press can't even figure it out and spin it to something cohesive, even though they really, really, really want to. But it has something to do with economic justice, whatever that means. Whenever talking heads say "___fill in blank____ justice" it makes me nervous. It usually relates to socialism and according to all of my college economics professors, socialism doesn't have a great history of success. Though I admit that I could not understand many of my econ profs.

My first division officer in the Navy told me that if bad things were happening to me, look to me first before I start pointing the finger elsewhere. I think both bankers and Occupy Wall Streeters are falling into a whining trap. If Occupy Wall Street truly represented a movement to improve the economic status of lower and middle income families, here is where I think they should focus their energy, and also what banks can contribute:

1. Learn robotics. Factories provided blue collar workers with middle income wages. We ignored the signs of globalization, and instituted wage scales and inefficient work rules that made manufacturing things overseas much more attractive to companies (and buyers of the goods manufactured). So we let manufacturing leave our shores for cheaper labor and more flexible work rules. But the loss of manufacturing jobs in the U.S. has stabilized. If we are to grow manufacturing with middle income jobs we need to master robotics to make plants more efficient and attractive for companies to work here. According to Maxizip.com, a robotics technician can earn $30,000-$45,000. Do you want to do something to help the U.S. economy and your family, consider robotics. If not robotics, then research good paying blue collar jobs (see here) and focus your efforts there. And for Pete's sake, be flexible. If you install doors on GMC trucks, don't go on strike if asked to do dashboards on Chevy's.

2. Start a business. Economic cycles of yore resulted in many more business startups than the current one. One reason, in my opinion, is politicians' continually extending unemployment benefits. If you keep paying somebody not to work, it saps the sense of urgency for would-be entrepreneurs to seek opportunities to be their own boss. During periods of heavy uncertainty it is typical for opportunities to identify and fill a need to arise. Don't let the drug of the monthly check keep you on the sidelines. Do some research, write a plan, and start a business. You want bankers to suck up to you, see what happens when you get a successful business up and running.

3. Go to business school. If you would like to earn similar money to Wall Streeters, go to business school and earn it yourself. There is a misconception that people that work in finance were born with silver spoons in their mouths. To be fair, there are some on the Street that were born on second base and think they hit a double. But I know from experience that many if not most came from much humbler beginnings, went to B school, and worked hard to get where they are. Most Americans that are in the lower to middle economic categories do not pay full fare at business school. Some may go for little or no cost. So if you want to Occupy Wall Street, why not do it from inside the building instead of out.

This is a banking blog. So how can bankers improve the economy, their communities, and expand opportunities for Occupy Wall Streeters? Here is how I think:

1. Run an Angel Fund from your holding company. "Bankable" businesses typically have a profitable operating history or real estate with significant equity. This makes startups that don't have real estate to lend against unattractive to banks. So how can banks get capital to entrepreneurs with a great idea, solid business plan, and reasonable chance for success? How about run an Angel Fund that focuses on startups within the bank's markets? The bank need not be the only investor, but can run it profitably through management fees, the "ups", and diversification.

2. Do SBA lending. So many bank clients shy from SBA because of strict rules, paperwork, and fear of not receiving the guarantee if the business defaults. But there are ample vendors to do SBA lending for you and can be flexible in how the program is structured. If you don't want the risk, simply receive a marketing fee for bringing the vendor to the customer and providing an opportunity for that early stage business in your community to receive a government backed loan.

3. Run a business plan contest. How many times have you driven down the street and see a new business that you doubt will succeed? Many entrepreneurs jump in with both feet prior to doing research, writing a business plan, and having the capital in place. The discipline of doing so improves the likelihood of success. Why doesn't your FI run a contest in your community for the best startup business plan and award a meaningful prize, such as $25,000, to get the business off of the ground. The Nashua Bank in New Hampshire ran such a campaign and the CEO said it was a great success. The discipline of performing the research and drafting a business plan will help all participants, not just the winner.

There! Three things that would be more constructive than carping about bankers' pay by Occupy Wall Streeters and whining by banks about the state of the economy. Let's get off the whine and into the game!

What do you think would be more productive use of time for FIs?

~ Jeff 

Thursday, 13 October 2011

The Elephant in the Room: Branches

In keeping up with industry reading it is clear to me that we, as an industry, are perplexed at what to do about branching. The recently released FDIC Summary of Deposits showed the second year of branch decline. The most recent ABA study on delivery channel preference showed online banking eclipsing branch transactions for the 55+ set. That's right... old people letting their fingers do the walking.

But the #1 or #2 reason cited by small businesses and individuals as to why they select their bank remains branch location. When I ask executives what makes a branch successful or not, the top two reasons continue to be branch location or personnel, not necessarily in that order. Confusing? Yes.

But the progressive talk about the future of the branch at times lacks common sense, in my opinion. This dates back to an interview I did with American Banker about a community FI that was opening coffee shop branches. I gave a twofold comment: 1) I saluted the FI for being creative; and 2) I doubted it would work, particularly in the locations and relatively conservative markets where they tried it. AB published the first and the second didn't make the editorial byline. The coffee shop experiment turned out to be a disaster, and the FI was later sold.

I recently had a Twitter conversation with a banker about branches that lack tellers. According to feedback from bankers that tried this concept, customers were confused when they walked into the branch. That made sense to me. We like the familiar... i.e. the teller line. But branch transactions have fallen off of the proverbial cliff. Do we need a long line full of bored tellers reading Nora Roberts novels? No. But perhaps we need a couple teller windows to process transactions and bring comfort to those of us that like familiarity.

As we evolve, I envision the comfort of knowing there is a branch nearby to continue. But the people who occupy those branches should evolve to those that can open accounts, troubleshoot problems, advise customers, develop business, and occasionally process transactions. This branch will probably be smaller, and less expensive to build out. Smaller is certainly a theme I am hearing from bankers and industry professionals. If you are of a mind to continue trying to make the branch into a destination to drive traffic, let me introduce you to Sisyphus. Going to the bank is a chore. Boom.

So what about these big branches that we all have? An industry stock analyst told me that big banks have advantages over small banks because they can pay for increased compliance expenses by closing branches. The community FI may not have this luxury. But big banks have challenges here, in my opinion. Many have built palatial branches that have no discernible value except as a bank branch.

The poster child of this concept is Commerce Bank of Cherry Hill, New Jersey which was acquired by TD Bank (see photo). Their brand is wrapped around their number of branches, the primo locations of their branches, and the look of their branches. But if branches become less important, and big banks can consolidate one branch with the one in the next town over, what are they going to do with the palace? These branches are very expensive, are fixed assets on the bank's books, and are 100% risk-weighted for capital calculation purposes. In other words, you have to carry more capital against the branch than a bond in the investment portfolio that might be 20% risk-weighted.

The pictured TD branch is about 100 yards from the Wells Fargo branch pictured below. Sorry for the poor focus but I took the picture with my phone while walking so cut me some slack! If Wells decided to consolidate this branch, it could easily be converted to an office, a hair salon, or a coffee shop. In other words, Wells could sell it and, current real estate market woes aside, can probably sell at a gain. The buyer can convert it to whatever they want. TD, on the other hand, may have to devalue their branch because they can't sell it. Or if they can, it would be for the land and the buyer may have to raze the building to something more functional. Think of all the empty gas stations dotting the landscape.

To be fair, the Wells branch had $52 million in deposits and the TD branch $130 million at June 30th. But the old Commerce was known for large branch deposit sizes because they aggressively pursued municipalities for their banking business. So aggressive, indictments were involved. But I digress. The TD branch does have more deposits, and perhaps this is partially due to the palace.

But as we determine our next step in branching, we can't ignore the trends that are telling us that transaction processing in branches is becoming secondary to something else. As branches decline in prominence, we should plan our next branch with the gas station in mind. We don't want to manage multiple properties of former branches that sit stale on our books eating our capital.

What is your opinion of what the "next" branch should look like?

~ Jeff

Tuesday, 11 October 2011

Guest Post: Third Quarter Economic Update by Dorothy Jaworski

Another Volatile Quarter

I know I risk sounding too negative, but we cannot seem to shake the crisis mentality that keeps whipsawing bond and stock markets. The crisis du jour originated in Europe with crushing debt levels in Greece, Italy, Portugal, Spain, Ireland and who knows where else. Germany remains fairly strong but sometimes appears to be coming to the rescue, sometimes not. Rumors of Greek bankruptcy surface every other day. French banks are the largest holders of sovereign debt, but, out of the blue, a Belgian bank, Dexia, has become the first to fall.

Liquidity is becoming a problem for these banks, and with their stocks battered daily, they have no ready sources of capital. There has been a lot of talk about rescues from the European Union, but the markets want action. The US is not of much help as the economic recovery is stalling and the debt ceiling/deficit debate/fight caused a great deal of harm to both consumer and business confidence.

In an environment like this, volatility rules. Stocks have taken the brunt of investor frustration, selling off steeply in the third quarter for the worst quarterly loss since the height of the financial crisis in late 2008 and early 2009. The Dow Jones Industrial Average was down -12.1% to just below 11,000 in the quarter, while the S&P 500 fell -14.3% and the Nasdaq fell almost -13%. And gold had the wildest price action of the quarter—beginning at $1,500 an ounce, soaring 27% to $1,900 on September 5th, and then selling off steeply by -14.5% to end the quarter at $1,624. Oh, the fortunes won and lost!

Enough about gold, and all I will say about stocks, because I always fear being a jinx, is that the forward price earnings ratio is not even 11 and the dividend yield is currently 2.3%, which exceeds the yield on the 10 year Treasury bond. This does not happen often.

Back to Back Historic Moves

The Federal Reserve made two historical easing moves during the quarter and still the markets are not happy. In August, for the first time since the 1940s, the Fed made a two year “promise”—to keep short term rates at their current exceptionally low levels until mid 2013. If you believe the expectations theory of interest rates, that long term rates are simply the compilation of the expected path of short term rates, then you believe that long term rates will stay exceptionally low too. Maybe this will not affect the really long term rates, such as the 10 year to 30 year range, which are so heavily influenced by inflationary expectations and the international flow of funds, but most other longer rates, such as 2 year to 9 year maturities, will be affected. So why were the markets disappointed in the Fed’s forward guidance? Why did the Fed have to act again in September?

Perhaps it is that the Fed did not tie their promise to economic performance, as I thought they should have, but they only chose an arbitrary period of time. By performance, I mean the unemployment rate, number of jobs created, or GDP growth. The Fed could have, and in my opinion should have, promised to keep rates low until unemployment falls to 7% or less, until we are creating 3 million jobs a year or more, or until real GDP grows at and stays above the 3.3% average growth rate of the past 60 years. Only then will inflation even hint at being a permanent risk.

We can only assess the Fed’s performance in terms of their dual mandate—maximum employment and stable prices—and not in terms of a two year waiting period.

So, disappointment in the “promise” to keep short term rates low until 2013 led to another historic action in September. In another easing action dubbed “Operation Twist,” the Fed stated that they will sell $400 billion of their shorter securities (less than 3 year maturities) and buy the same amount of longer securities (6 to 30 year maturities) by June, 2012. They haven’t tried a “twist” since the 1960s. They also added that they will reinvest cash flows from their mortgage backed securities from their Quantitative Easing QE1 Program into more mortgage backed securities, rather than into Treasuries.

Ben Bernanke was quoted as saying that Operation Twist is the equivalent of a 50 basis point cut in the Fed Funds rate. Hey, when Fed Funds is near zero, you have to try something. And don’t forget the cumulative actions they have taken to date—Fed Funds to 0%, QE1’s purchase of $1.5 trillion of Agencies’ bonds and Agency mortgage backed securities, QE2’s purchase of $600 billion of Treasuries, and now the “promise” and the “twist.” These actions someday will push consumers, businesses, and banks out of the liquidity trap.

Don’t Give Up on the Economy

It is not time to give up on the economy. The data has been weaker in recent months and GDP is stubbornly low, at 1.3% in the second quarter of 2011. Many forward looking indicators are showing positive signs, including the index of leading economic indicators, building permits, industrial production and survey measures, such as the ISM series. We have the full support of the Fed until at least 2013.

Companies are sitting on $1.9 trillion of cash on their balance sheets and banks have at least that amount in reserves at the Fed earning next to nothing. It will take time, but eventually, companies and banks will seek higher returns and invest and lend. We probably do not have much in the way of fiscal support from the government as high debt and the deficit make that unlikely. All companies lack the confidence to invest, to hire, or to move forward.

What is on the horizon to shake up the economy? For one, the original culprit of the economic weakness, in my mind, was the spike in oil prices to $115 per barrel and in gasoline prices to near $4.00 per gallon. Oil prices have slipped back by -30% to $80, while gasoline prices have only fallen by -15% to $3.39. Gas prices clearly have room to move downward. This will act like a tax cut at just the time when it seems Washington DC will not provide one.

Another positive is the beginning of another refinancing wave by consumers as the Fed has pushed down long term rates, including mortgage rates. Companies can take advantage by issuing debt at lower interest costs. Stay tuned!

Thank You, Steve

As I was writing this, I saw the announcement by Apple that Steve Jobs had died, after battling illness for eight years. He had a profound influence on so much of the technology that we use in our daily lives. He made computers easy to use and gave us the iPod, the iPhone, and the iPad. Fifteen years ago, these were products we did not even know that we wanted and needed. I have the iPhone and iPad and cannot imagine life without them. He will leave a huge legacy in the company he co-founded and the products he helped invent. I will miss his brilliance. Thank you, Steve!

Thanks for reading! DJ 10/05/11

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.


Tuesday, 4 October 2011

Brand Leadership: What does it mean? What should it mean?

I am a student of my industry: consulting and banking. If bankers tell me their institution has a superior brand, I want to know what that means. Too often I am told that the FI has a superior brand because customers come up to senior executives and board members on the street and tell them so.

I am no statistician or expert on human behavior, but I have to believe that people willing to approach senior executives or board members of the local financial institution are probably going to say something positive by an overwhelming majority. A polite neighbor does not make for a statistically significant study.

What I do find in many FIs that claim the throne of brand leadership is higher cost deposits, and lower yielding loans. I hear how the FI keeps deposit prices high so customers don't leave, or runs deposit pricing specials to bring new deposits in the door. I find lenders loosening covenants, waiving fees, and lowering rates to "get the deal done".

Is this our perception of brand leadership? I say no.

Mike Schultz and John Doerr, in their 2009 book Professional Services Marketing, identified traits of brand leaders in the consulting industry. Here is what they found:

"Brand leaders:
  • Priced their services at a higher level than their competitors in the market; and
  • Realized higher actual hourly rates compared to the lesser-known firms in all categories of professionals."
In other words, according to Schultz and Doerr, brand leadership translates to real money as buyers of consulting services are willing to pay more. See the chart below:



I frequently cite such studies, plus life experiences we see everyday of how brand equates to either 1) getting more customers faster than competitors; 2) keeping customers longer than competitors; and/or 3) charging more than competitors. Take Mac users versus PC users. Mac has clearly created a brand that evokes loyalty, even at higher price points. How about Marriott customers, citing Marriott Rewards and the superior quality of the hotels? Remember the old axiom, "you will never be fired for hiring IBM" when it comes to hiring a technology solutions firm? Brand, brand, and brand.

My firm recently lost a small strategic planning engagement because of our price. The price was not particularly high, but it wasn't Wal-Mart low either. We work hard to build an environment for robust dialogue that results in a well thought-out strategy. Background work to bring together the data and prepare to create that environment takes time. This FI was not willing to pay for that time and shame on me for not building a brand that this CEO was willing to pay for. I will work harder to do so in the future.

But my colleagues and I should not be alone in building brand. If community FIs believe they bring greater talent, faster responsiveness, and tailored solutions to their customers, then customers should be willing to pay for it. If not, we run the risk of building Four Seasons expenses that we give away at Econo Lodge prices.

Your brand should mean more than that. What do you think brand leadership should result in?

~ Jeff

Link to the Fees and Pricing Benchmarking Report: Consulting Industry 2008

Note: I have no relationship with the authors of the report or the firm(s) that conducted the study. I cite it hear because it demonstrates, in clear terms, the value of brand.

Saturday, 24 September 2011

Our Finest Hour

Things look grim for us: community financial institutions (collectively, "banks") and those that serve those august institutions.

We lost the mortgage business a generation ago to category killers like Countrywide, Golden West, Fannie Mae, and Freddie Mac and the mortgage brokers that fed the beast. When the beast collapsed, we inexplicably donned the bullseye of blame.

But we faltered in our own right. We bought the bonds that kept that mortgage machine running. Those bonds cost us dearly. We lent to one another in the form of Trust Preferred Securities, and our investment portfolios choked as these banks faltered under the weight of poor decisions.

When the economy took its nosedive, we found ourselves over-invested in construction and investment property commercial real estate that were one or two bits of bad news away from disaster. The result: a rapid need to recapitalize. With no investor appetite to invest in us, the government stepped in.

We immediately regretted it. We were encouraged to take government capital, only to have the government change the rules on us afterward, and the public decry "government bailout". Even though the government made a significant return on its investment in us, the public thinks they gave us the money. Yet, the only losses the government suffered from TARP is because of AIG Insurance and General Motors. We still bear the badge of shame.

Now our politicians are doing everything in their power to get us to lend, while their examiner surrogates are doing everything in their power to criticize our loans. Regulations are nipping at our revenue, and piling on our expenses. The Fed, under the guise of helping the economy, is doing what it can to keep long and short term rates low, wreaking interest rate risk havoc on our balance sheets. Much is working against us these days.

But in our darkest hour, I envision tremendous opportunity. Our industry is changing. Excess regulation and costs are driving weak competitors such as mortgage brokers out of the market. Can we re-ascend as the place our customers get a mortgage? I think so.

Large banks, that own a significant part of the banking market, move farther and farther from the customers... turning them to self-service delivery channels to chart their own path in a complex financial world. Can we help our customers navigate turbulent and complex times? I think so.

We don't have the resources to make large technology investments to develop efficient processes, comply with the myriads of regulations, and deliver products and services to today's tech-savvy customer. But community FIs have access to robust, vendor-driven solutions that are on par with our larger brethren. Can we have competitive products and delivery channels delivered with similar efficiency to the large banks? I think so.

In times of great strain, opportunity rises from the ashes like a phoenix. We are closer to our communities, our customers, and our employees. Decisions are made in the office down the street, or the next town over. We don't have to navigate a bureaucracy in a different state or across the country to get to the closing table. Local depositors provide the capital to local borrowers and businesses.

Can we be different, more local, faster, friendlier, better?

We are a community bank. What we do next, is up to us. This can be our finest hour.

~ Jeff

Thursday, 22 September 2011

Top 5 Total Return to Shareholders: #1 BofI Holdings Inc.

I was recently moderating a strategic planning discussion with a multi-billion dollar in assets financial institution. During the discussion, the President of one of the bank's most profitable divisions opined that less than $10 billion in assets was the "dead zone". They had to grow to survive.

I challenged the thinking. But he held firm that the regulatory environment, changing customer preferences, and the pace and expense of technology were driving the market towards bigger is better. In that, I thought, he has a point.

But I'm always looking for support. This blog has dug deep into the numbers to support the notion that bigger is better. I wrote about the best performing FIs in ROA (see link here), and how growth impacted expense and efficiency ratios (see link here). Neither supported this regional president's opinion.

This time, I searched for the top five best performing FIs by total return to shareholders over the past five years. After all, what is the point of becoming big if you cannot deliver value to shareholders? I used two filters: the FI had to trade over 2,000 shares per day so there is some level of efficiency in the stock (this created a larger FI bias in so doing); and the FI could not have a mutual-to-stock conversion during that period, which muddies the waters.

I have reviewed my top five in descending order. Last post was dedicated to the #2 Signature Bank of New York, New York (see post here). The rest of this post goes to our number 1 bank and winner:

#1: BofI Holdings Inc. (Nasdaq: BOFI) of San Diego, California

Old school bankers are rapping their fists on mahogany desks, mumbling under their breath, and turning over in their graves at the notion that the best performing FI based on five-year total return to shareholders is an Internet bank. Yet here we are.

Bank of the Internet was formed in 2000 and went public in 2005. Over the past five years, it has returned over 80%, compared to -4% for the S&P and -66% for SNL Bank & Thrift Index (see chart). As Mel Allen would say, "how about that".


In spite of the stellar five-year performance, the stock currently trades around book value, and a 9x earnings multiple... low by industry standards. The trading multiples are in spite of a 1.26% ROA and 14.83% ROE year-to-date. Why such low multiples for such high performance? I'm not sure, but I have to think some high-brow snobbery regarding Internet banks is involved, much like fine wine drinkers' attitudes while quaffing a Sam Adams.

Not sure why you would have a high-brow attitude towards this bank, since its management team is made up of investment bankers, blue-chip consultants, and engineers (see here for management bios).

BofI prides itself on process discipline, delivering the best technology at the lowest cost, without the millstone of branches dragging down performance. Their efficiency ratio was 40% for their fiscal year 2011 (ended June 30, 2011).

They collect deposits primarily through three online brands, and are seeking affinity relationships to expand their brands. At June 30, 2011, the online bank had 32,000 accounts being served by nine CSRs (see below). BofI has also launched BofI Advisors, giving financial planning firms the ability to offer banking to their clients through a self-branded portal. In other words, the financial advisory firms serve as the point of entry to the bank, with BofI providing the back end banking services.

Vietnam, a communist country, did not develop the infrastructure for a nationwide telephone system. When cellular technology advanced to the point that telephone lines, poles, and in-home wiring wasn't required, they embraced it. The result: Vietnamese can talk to one another as easily as we can in the U.S., but don't have telephone poles delivering outdated technology. BofI is Vietnam, without the beef noodles. Bankers should take note.

Congratulations to BofI Holdings Inc.. They are the best performing financial institution nationwide in total return to shareholders over the past five years. Here is our list of winners:

#1 BofI Holdings Inc.
#2 Signature Bank
#3: ESB Financial Corporation
#4: Bank of the Ozarks, Inc.
#5: German American Bancorp

~ Jeff

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. FINRA makes people take a test to ensure they know what they are doing before recommending securities. I'm sure that strategy works out.

Monday, 19 September 2011

Top 5 Total Return to Shareholders: #2 Signature Bank

I was recently moderating a strategic planning discussion with a multi-billion dollar in assets financial institution. During the discussion, the President of one of the bank's most profitable divisions opined that less than $10 billion in assets was the "dead zone". They had to grow to survive.

I challenged the thinking. But he held firm that the regulatory environment, changing customer preferences, and the pace and expense of technology were driving the market towards bigger is better. In that, I thought, he has a point.

But I'm always looking for support. This blog has dug deep into the numbers to support the notion that bigger is better. I wrote about the best performing FIs in ROA (see link here), and how growth impacted expense and efficiency ratios (see link here). Neither supported this regional president's opinion.

This time, I searched for the top five best performing FIs by total return to shareholders over the past five years. After all, what is the point of becoming big if you cannot deliver value to shareholders? I used two filters: the FI had to trade over 2,000 shares per day so there is some level of efficiency in the stock (this created a larger FI bias in so doing); and the FI could not have a mutual-to-stock conversion during that period, which muddies the waters.

I will review my top five in descending order. Last post was dedicated to the #3 ESB Financial Corporation of Ellwood City, Pennsylvania (see post here). The rest of this post goes to our number 2 bank:

#2: Signature Bank (Nasdaq: SBNY) of New York, New York
 
Signature Bank is a very interesting story. Started in 2001 with a significant investment from Bank Hapoalim, Israel's largest bank, it has been on an upward trajectory ever since. Signature has been so successful that it's growth was beginning to put strains on Bank Hapoalim's capital. So in 2004, Signature went public and in 2005 Bank Hapoalim divested its controlling interest.

From 2006 through the second quarter of 2011, the bank's assets grew from $5.4 billion to $13.1 billion. It made no acquisitions. During that period return on average assets went from 0.72% in 2006 to 1.15% year to date. It did not lose money during the financial crisis. This superior performance led to superior total return to shareholders (see chart).


How did Signature do it? As stated, they did not do it through whole bank, branch, or asset acquisitions. Instead, they do it by attracting high performing private banking teams. This strategy started from the very beginning by wooing former Republic National Bank of New York  bankers. Republic was acquired by HSBC in 1999. Apparently, HSBC's treatment of key bankers created fertile ground for their recruitment by Signature.

But it is not the disenfranchisement of HSBC bankers that is fueling their current success. It is their commitment to building a bank designed to support private bankers serve their clients extraordinarily well. Read their vision statement, which is different than any I have ever read or helped design:

"Signature Bank was created to provide talented, passionate, and dedicated financial professionals a supportive environment in which they can conduct their practice to the maximum benefit of their clients.

The result is a special feeling clients associate with Signature Bank professionals and, ultimately, the Signature Bank brand: the experience of being financially well cared for."


How many vision statements have we read that takes great strains to offend no one, and commit to nothing? In this alone, Signature stands tall.

If you roll your eyes at the thought of a vision, don't lose track of Signature because they may roll over you.

Another key differentiator of Signature's strategy is their single point of contact delivery system. Banks that try to deliver multiple products and services to customers often have different customer touch points. For cash management, call John, for a loan, call Jane, etc. But Signature simplifies for their clients, and lets their relationship manager find the resources necessary to serve client needs. In fact, in an era where it's difficult to tell one bank from another, Signature prides itself in how it is different. See the below slide from their investor presentation.



Congratulations to Signature Bank. They rank #2 in total return to shareholders over the past five years. So far, our list is:


#3: ESB Financial Corporation
#4: Bank of the Ozarks, Inc.
#5: German American Bancorp


~ Jeff

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. My bank stock broker chuckles when I phone in trades. Get the picture?




Tuesday, 13 September 2011

Top 5 Total Return to Shareholders: #3 ESB Financial Corporation

I was recently moderating a strategic planning discussion with a multi-billion dollar in assets financial institution. During the discussion, the President of one of the bank's most profitable divisions opined that less than $10 billion in assets was the "dead zone". They had to grow to survive.

I challenged the thinking. But he held firm that the regulatory environment, changing customer preferences, and the pace and expense of technology were driving the market towards bigger is better. In that, I thought, he has a point.

But I'm always looking for support. This blog has dug deep into the numbers to support the notion that bigger is better. I wrote about the best performing FIs in ROA (see link here), and how growth impacted expense and efficiency ratios (see link here). Neither supported this regional president's opinion.

This time, I searched for the top five best performing FIs by total return to shareholders over the past five years. After all, what is the point of becoming big if you cannot deliver value to shareholders? I used two filters: the FI had to trade over 2,000 shares per day so there is some level of efficiency in the stock (this created a larger FI bias in so doing); and the FI could not have a mutual-to-stock conversion during that period, which muddies the waters.

I will review my top five in descending order. Last post was dedicated to the #4 Bank, Bank of the Ozarks of Little Rock, Arkansas (see post here). The rest of this post goes to our number 3 bank:

#3: ESB Financial Corporation (Nasdaq: ESBF) of Ellwood City, Pennsylvania

ESB started in 1915 as the Ellwood Federal Savings and Loan in Ellwood City. It converted to a public company through a Mutual Holding Company conversion in 1990 and performed the second step conversion in 2001. Since its humble beginnings, it has grown to 24 offices and $2.0 billion in assets. Since 2006, it has returned 32% to shareholders as the industry returned -62% (see chart).

How has ESB done it? Upon reviewing their financial performance and reading their annual report and website, it appears as they do it through plain vanilla banking, a style that this blogger has expressed concerns about its future viability.

But you can't argue with results. ESB operates like many other thrifts... i.e. low net interest margins (currently 2.75% at the bank level), accompanied by a low non-interest expense to average assets ratio (currently 1.44%/the "expense ratio"). The expense ratio is extraordinary, as typical commercial banks hover around 3% and thrifts register in the 2.50% range.

ESB does traditional mortgage lending, with some commercial real estate too, funded by retail deposits with a heavy dose of CDs. Whether you like this model or not, it has delivered tangible book value and earnings per share growth that has driven its total return to shareholders (see table).

If you believe traditional thrifts currently trade on book value, as I do, then 12.42% compound annual tangible book value per share growth should deliver superior returns, all things being equal. Add a 3.68% current dividend yield, and the "plain vanilla" thrift is delivering to their shareholders.

Part of the secret sauce may be management longevity, as most senior managers, including CEO Charlotte Zuschlag, have been with ESB for 20 years or more. This gives employees comfort in management consistency, management a deep understanding of bank operations, and customers comfort in seeing familiar faces at the bank and in the community.

The CEO describes their success in the 2010 annual report as follows:

"Throughout our 95-year history, ESB has continually and successfully responded to change. However, we believe that sticking to basics and maintaining our commitment to the strategies that have made us a leading financial service provider remains a solid roadmap for continued growth and success. In this regard our priorities have not changed and remain:


• Focusing on per share results and working diligently to maintain our reputation as a company that creates superior shareholder value;

• Being financially conservative and managing our Company to the highest ethical standards;

• Growing the Company in a controlled and safe manner;

• Maintaining strong credit quality;

• Continuing to strive to exceed our customer expectations for quality products and services;

• Continuing to make investments in human capital, technology and physical infrastructure to ensure our long-term success;

• Continuing to provide a productive work environment that maximizes the alignment of customer and employee objectives and

• Seeking and consummating acquisition opportunities when practical."

She didn't say anything about economies of scale, regulators, or leading edge technology. The first bullet is very telling. Perhaps other bankers should take note.


Congratulations to ESB Financial. They rank #3 in total return to shareholders over the past five years. So far, our list is:

#3: ESB Financial Corporation
#4: Bank of the Ozarks, Inc.

~ Jeff

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. My year to date return on bank stocks... negative. Need I say more?