tag:blogger.com,1999:blog-61525382654954628722024-03-14T04:32:15.727-07:00liberate financial issuestips Loan and financial Solution Fians Kreatifindo Grouphttp://www.blogger.com/profile/15617299970426320772noreply@blogger.comBlogger247125tag:blogger.com,1999:blog-6152538265495462872.post-28430311514208242922015-07-24T14:06:00.000-07:002015-08-01T02:02:27.284-07:00Guest Post: Second Quarter Economic Commentary by Dorothy Jaworski<div class="MsoNormal" style="text-align: justify;"><u>The Crisis Begins<o:p></o:p></u></div><div class="MsoNormal" style="text-align: justify;">If your country was in default on its debt, in economic distress, and almost out of cash, would you vote “no” to a potential deal to get out of immediate trouble? Even if it meant spending less money- that you don’t have? None of us would do that, but tell that to the Greeks. 60% of them voted “no” in a national referendum on July 5<sup>th</sup> and thus rejected a deal with creditors and the likely chance to stay in the Euro. Greece may have to go bankrupt, impacting the many financial institutions who own the sovereign debt of Greece and impacting the many consumers who will lose part of their deposits as banks fail.<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixSTPpTi8eG9S3pngQRX-FQNadSXEuniqjc-KuKdj9WvbBAHEQj6X0-rM6rQiaDayyDxZxrVTpadb81nLfE6veGUr1j-lWfuv7wCDQ28Mg4kB8MwPOvkKF3nHvKH5jdg0_kDuSYRtIqKY/s1600/DJ.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixSTPpTi8eG9S3pngQRX-FQNadSXEuniqjc-KuKdj9WvbBAHEQj6X0-rM6rQiaDayyDxZxrVTpadb81nLfE6veGUr1j-lWfuv7wCDQ28Mg4kB8MwPOvkKF3nHvKH5jdg0_kDuSYRtIqKY/s1600/DJ.jpg" /></a></div><div class="MsoNormal" style="text-align: justify;">And so, the crisis the world has feared for several years is here. Investors will now worry about the ripple effect from other countries with debt levels that are unsustainable, including Spain, Portugal, Italy, and closer to home, Puerto Rico, and who have economies that are weak. All of this Greek drama could hurt the Euro initially, but it could actually improve if Greece exited. If selling in stocks and bonds begins in earnest over this crisis, we will have some of the first tests of liquidity in the markets since new regulations kicked in and restricted financial institutions from trading or making markets. <o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">After calls by the IMF and the World Bank for the Federal Reserve to postpone interest rate hikes, the calls seemed to be falling on deaf ears. Fed officials keep telegraphing rate hikes later this year “if the economy improves.” The Greek referendum and Puerto Rico’s threat of bankruptcy may do the trick. The Fed keeps insisting that they will tighten this year enough though we have had negative growth of -.2% in 1Q15 and 2Q15 growth does not look all that great. Inflation remains low. The European drama may change their minds, along with a greater than expected, or publicized, slowdown in China and recession in Brazil and Russia. Japan seems to have the only economy with decent GDP growth near 4%.<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><u>Unemployment Measures<o:p></o:p></u></div><div class="MsoNormal" style="text-align: justify;">The Fed keeps pointing at the low unemployment rate and saying that is their reason to raise rates. Have you seen the unemployment rate in June? It was reported at 5.3%, down from 5.5% in May. Payroll jobs grew a modest +223,000, but household employment fell by -56,000, while the labor force was declining by -432,000. So job growth is negative and the labor force declines, making the unemployment rate drop. And that is supposed to be so good that rates have to rise? Perhaps it is that the Fed “thinks” they have to tighten. They “think” they have to return short term rates to “normal” in order to be able to lower rates when recession comes. Yes, I actually read this recently! It would be strange to see the Fed tighten when job growth is pathetic, wage growth is stubbornly low, and inflation is not threatening anyone. <o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">While the unemployment rate may appear to be “good” at 5.3%, so many other employment measures are weak. The labor force declined in June and the labor force participation rate dropped to 62.6%, matching a low from 1977. The pool of available workers is still high at 14.4 million, with the augmented unemployment rate high at 8.8%. Greenspan would never tighten with the pool of labor so high! There are plenty of job openings, over 5 million, but employers are having trouble matching workers with the requisite skills. Part-time jobs are still the only alternative for many workers who actually want full-time work, showing how prevalent underemployment really is. Meanwhile, workers continue to exit the workforce, including the retiring baby boomers, who are taking with them knowledge, skill, and expertise without providing that knowledge to others. So my question to the Fed is- do you “think” you should tighten now or wait until we actually have sustainable growth? <o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">The so-called economic recovery is now six years old, as of June. The longest uninterrupted recovery lasted 10.7 years under the Maestro, Fed Chairman Alan Greenspan, in the 1990s. Growth over the past six years has averaged about 2.0%, compared to +4.5% for the past ten recoveries. The data still point to a mix of strength and weakness, with housing showing the most strength and inflation and manufacturing data releases showing the most weakness. Growth is high enough to just move along, but not much more. Am I proud of the +200,000 to +250,000 payroll growth each month? No. Am I proud of the 5.3% unemployment rate? No. Do I “think” the Fed should tighten? No. Why do I keep questioning the Fed? Because I see an economy barely able to generate growth and that same economy fragile enough for growth to slip away, before it ever gets to a sustainable level. Like I have said before, go ahead and tighten. Then you will be able to lower rates again- soon.<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><u>Large Hadron Collider Update<o:p></o:p></u></div><div class="MsoNormal" style="text-align: justify;">Our favorite machine is back in business- bigger and faster than ever! On Easter Sunday, the Large Hadron Collider of Switzerland started up again after a two year period in 2013 and 2014 for maintenance and upgrades to add twice as much speed to the machine. In June, the Collider began smashing protons together at 13 trillion electron volts, or “TeV,” in an effort to find new particles. In 2012, researchers found evidence of the Higgs Boson particle, which is the particle believed to give everything mass. What will they find this time?<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><u>First Federal Update<o:p></o:p></u></div><div class="MsoNormal" style="text-align: justify;">After our merger is approved by regulatory agencies, we will become part of Penn Community Bank. We have great team members and everyone will be working to combine our banks and systems so that we can better serve our customers. Stay tuned!<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: Arial; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">Thanks for reading! 07/06/15</span><br /><span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: Arial; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;"><br /></span><span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: Arial; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;"><br /></span><span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: Arial; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;"><strong style="text-align: justify;"><em>Dorothy Jaworski</em></strong><span style="text-align: justify;"> 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 </span><a href="https://www.bucksonlinebanking2.com/home/home">First Federal of Bucks County</a><span style="text-align: justify;"> since November, 2004. She is the author of <b><i><a href="http://www.amazon.com/Just-Another-Soldier-Dorothy-Jaworski/dp/1499102666/ref=sr_1_1?ie=UTF8&qid=1406494270&sr=8-1&keywords=another+good+soldier">Just Another Good Soldier</a></i></b>, which details the 11th Infantry Regiment's </span><span style="text-align: justify;">WWII</span><span style="text-align: justify;"> </span><span style="text-align: justify;">crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.</span></span>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-59503741575061196922015-07-11T05:59:00.000-07:002015-08-01T02:02:27.321-07:00The "About Me" That LinkedIn Doesn't Tell You<div style="text-align: justify;">How difficult is it to get to know someone that, well, you don't know? Very. Many of my readers know me. I'm not sure this is a good thing. Colleagues used to tell me that when meeting someone I should use "Jeff Lite". Just so you know... I'm not sure there is a Jeff Lite.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBHbs21kBervloPfZh5GKHDIZRBuQZwK5VvLOsi2e3aRWri0eJXAQE5DidEyS6ZbfGI0_-qyEi0bbINtNWlja9mrFFbiqQ8sEODAwlwv3idDHU-mmbktokA6dZCYe-QdzX7iWU1aL7oJo/s1600/About+Me2.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="201" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBHbs21kBervloPfZh5GKHDIZRBuQZwK5VvLOsi2e3aRWri0eJXAQE5DidEyS6ZbfGI0_-qyEi0bbINtNWlja9mrFFbiqQ8sEODAwlwv3idDHU-mmbktokA6dZCYe-QdzX7iWU1aL7oJo/s320/About+Me2.jpg" width="320" /></a></div>Most of my readers, however, don't know me. And the benefits of having a blog is that I can write what I want. I have written About Me posts in the past (see links), telling you my sports teams and some other personal information. So this post would be a complement to those.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><a href="http://jeff-for-banks.blogspot.com/2012/07/random-stuff-about-me.html">Random Stuff About Me</a>, June 2012</div><div style="text-align: justify;"><a href="http://jeff-for-banks.blogspot.com/2013/05/more-random-stuff-about-me.html">More Random Stuff About Me</a>, May 2013</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><u>Not in My LinkedIn Bio</u></b></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I think people that care too much what other people think are crazy. I think people that care nothing about what other people think are crazy too. We are all mostly in between the two crazies. I lean towards the latter. My wife thinks I lean a little too much. This leads to spirited discussions on what I choose to wear. I dress for comfort. And economy. If it were up to me, my blue jeans would come from the Dollar Store. What are they eight bucks? C'mon.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Modern day trappings are too expensive! If we had to, my family could cut our living expenses by a third. Over $200 a month for cable? Ridiculous. Two thousand dollars for a couch? You haven't been to Big Lots. Three hundred dollars for a pair of shoes? My most comfortable shoes are Tom McCann's I bought at Kmart years ago in a traveling pinch. I am convinced if I were living alone my flatware, furniture, clothes, etc. would all be bought at discount stores. I would have Tupperware-like containers that were once the olive or lunch-meat containers, and all my drink containers would be used milk jugs. I would live in an RV, like Trapper John MD. But electronics and other gizmos, that's another story.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I don't understand why a three person family would have a 4,000 square foot house. I also don't get status cars. If someone came up to you and said: "Buy this thing, it costs you 100% more than the other thing and will cost much more to operate, but people will think better of you." I don't think any of us would do it. But somehow we do. Marketing. It's all about Marketing!</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I believe in personal responsibility. I was on jury duty a couple of months ago and didn't get selected. If I was on a jury and someone said "I did it, but here is why"... It probably wouldn't matter to me, with limited exceptions. They did it. A Navy lieutenant once said be careful pointing fingers, because the rest are pointing back at you. If you did something, don't say it was because of him, her, or that person over there. You did it! Own up to it. In my view, society would be a better place if I can convince everyone to think the same.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Victimhood and personal offense. There are many current events swirling around us that offend people. Most aren't even impacted by the event! I know there are bad breaks in life. But they supposed to contribute to the person we are trying to become. And if you are suffering bad break after bad break, perhaps it is because of your choices. Or you're Job from the Bible. That guy couldn't catch a break. But for others not named Job, see my personal responsibility diatribe above. We are quick to align with the victim industry. After all, protectors of "victims" are here to help, right? How is that working out? Most of those protectors have bigger than 4,000 square foot houses.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I see things in black and white. If you are a victim, this was not a racist statement. I once ordered a black-and-white milkshake and my friend worried that people would think I was a racist. That is where we are in society. A racist milkshake. But I digress. Many people think everything is a gray area. I see most things as black and white. Don't know if that's good or bad, but it's me.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">American capitalism should evolve so we all strive to maximize our God-given talents, earn the fruits of our successes, and give what we don't need to the charity of our choosing, that is NOT the federal government. The challenge is to determine what we need since pensions have gone the way of the dodo bird and with 401k's we need to estimate when we'll die. I currently estimate 92. So if you see me on the street at 93, run me over because I will be broke. I will carry a note in my pocket forgiving you. As penance, though, could you run a GoFundMe campaign for my funeral? As I said, I will be broke.<br /><br />I think intelligence is being aware of how much you don't know. And the ability to predict consequences further into the future. Maybe that's because I don't know so much. Like specific lines from Goodfellas.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Which reminds me, I can't channel surf past certain movies, like Shawshank Redemption and Field of Dreams. I am compelled to stop and watch. At least until the wife walks by and says something like, "oh my God this again?!". Oddly, I can surf past other fantastic movies, like The Godfather and Hot Tub Time Machine.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As in my Scranton days, I still drink beer. But my tastes have definitely evolved. Sorry Genny 12-Horse.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I would go to jail for my daughters. That is for the benefit of anyone that might contemplate harming them. I write this because I'm a bank consultant, and probably couldn't sell the polishing the rifle in the back yard bit. Because I don't own a rifle. But there are many ways to skin a cat :) </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">My now-wife was my high school prom date. She saw the potential. She's wondering when I'm going to realize the potential. But hey, I'm working on it.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">There you have it. Hopefully you have a better idea of the person behind the words. Why don't you tell me something about you that is surprising?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I hope you are enjoying your summer! Thank you for reading!</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-79630688726827517992015-07-02T09:38:00.000-07:002015-08-01T02:02:27.337-07:00Bankers: Build Your Own Small Business Loan Platform<div style="text-align: justify;">Banks that grow revenues do it in spread or fees. To grow spread, increase your net interest margin, or grow earning assets while maintaining net interest margin. To grow fees, either increase your fee schedule or the activities that generate fees, or grow fee-based lines of business. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Since 2007, banks have been challenged to grow revenues. And if the bank strategic planning sessions I attend are an indicator, bankers think small business account acquisition and growth will be a significant driver of revenues.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This presents a challenge. Many if not most small businesses are not “bankable”, in the lending sense of the word. I once offered this hypothetical situation to a senior lender: An owner of a three year old engineering firm wanted to expand. The expansion would take him into the red for the next two years and his seed capital, taken from his personal savings and a home equity loan was not enough to fund the expansion. He leased his office space. Would the senior lender make the loan? His response: “I’m glad you’re not one of my lenders.”</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmhaFAfYiRKU_2d4EQHLGnu0qbPP1hX8tHmhMkBX1ig_VviQB8zFhHht2D96u9w4htZQXrAkfvof9LGw_vj5AzWB7HnfnfHVqCDYrb135d9wj1pXu54uRpC0dJV546jg5o-dLcw9q5fS0/s1600/Loan+Marketplace_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="292" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmhaFAfYiRKU_2d4EQHLGnu0qbPP1hX8tHmhMkBX1ig_VviQB8zFhHht2D96u9w4htZQXrAkfvof9LGw_vj5AzWB7HnfnfHVqCDYrb135d9wj1pXu54uRpC0dJV546jg5o-dLcw9q5fS0/s320/Loan+Marketplace_001.jpg" width="320" /></a></div><div style="text-align: justify;">Would his reaction be different at your bank? Check out your current and recent past loan pipeline. How many non real-estate backed business loans did you make? Yet this hypothetical business is more typical of the businesses that will lead our economy forward. So to grow revenue, perhaps your bank should be a little more creative in getting capital to businesses of the future.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">No risk appetite to do early stage business lending? There are alternatives to help that business get much needed capital to grow without plunking a risky loan on your balance sheet. Perhaps develop a small business lending marketplace with several options. One option could be balance sheet lending in the form of home equity loans or other similar avenues that fit your bank’s risk appetite. Think: Your Bank’s Small Business Capitalizer package.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">If outside of your risk appetite, how about <a href="https://www.sba.gov/loanprograms">SBA lending</a>? <a href="https://www.ridgestone.com/">Ridgestone Bank</a>, a $395 million in assets Wisconsin bank was ranked seventh in SBA 7(a) lending last year, generating between $20 – 25 million in gain on sale of loans per year. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">SBA loans not an option for our hypothetical engineering firm? How about a partnership with a peer to peer lending platform such as <a href="https://www.prosper.com/about/affiliates-partner-programs">Prosper </a>that can be co-branded with your financial institution? Prosper will pay an affiliate fee for each loan offered. <a href="https://www.ondeck.com/partner/">OnDeck Capital</a>, which specializes in business cash flow lending, will also affiliate with financial institutions, providing another avenue to fund our hypothetical engineering firm.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">It’s not necessarily the affiliate fees that will move our revenue needle, but providing budding businesses within our communities the needed capital to succeed will build loyalty, deposit balances, and eventually “bankable” loans should these businesses succeed. Instead, we send them elsewhere, giving a potential competitor the opportunity to win these businesses’ relationships.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Imagine the “Your Bank” small business loan platform, with multiple opportunities for the local business person to help fund their growth. You start with the least expensive, such as “bankable” real-estate secured loans from your bank, and work through the other options such as SBA, OnDeck, Prosper, and even equity platforms such as <a href="https://www.kickstarter.com/">Kickstarter</a>. That would be a bank dedicated to small business capital formation, and growth, within their communities.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">And a growing community usually leads to revenue growth at your bank.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Or you could stick to business as usual, and hope small businesses come your way. Your choice.</div><br /><br />~ Jeff<br /><br /><br />Note: This article was previously published in the April 2015 issue of <a href="http://www.aba.com/Products/bankmarketing/Pages/default.aspx">ABA Bank Marketing and Sales</a> magazine in the Growing Revenue series.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-84283118798118442002015-06-22T12:20:00.000-07:002015-08-01T02:02:27.380-07:00Bankers Need to Encourage, Even Compel Employees to Use Tech Tools<div style="text-align: justify;">Chris Cox, the head of Regions Bank eBusiness unit, was quoted in <a href="http://www.americanbanker.com/issues/178_18/regions-bank-to-tie-new-pfm-tools-to-online-banking-1056165-1.html">Bank Technology News</a> on how personal financial management (PFM) tools will soon be part of a customer's everyday interaction with their bank once they login. I believe him.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But will they do it through your financial institution? In a separate article, Jim Marous of The Financial Brand, <a href="http://thefinancialbrand.com/52417/mint-banking-pfm-competitive-threat/">opined </a>that Mint, a PFM tool that "screen scrapes" financial information from various financial institutions and aggregates it into their tool, is a serious threat to banks, thrifts and credit unions. I believe him, too.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">PFM tools have been dogged by low adoption rates. Woe to the retail banker or IT manager in convincing the CEO that PFM is a must-have . If it was so critical, why are so few people using it? I doubt this will surprise you, but I have my opinions.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjq8XCk8RkqG3nguweYw4YlmUEIQoBIQI4XLIEX23AKAa_fil786SEprPFRIOtnq2RVdRLMTGc8mSRtuuqUuxHjyXYbwv8H9KSIllZ6T39goaSRRCMKAsQ0o1T-341YdOwQR7b64Fi-BLQ/s1600/Mobile+Banking+Screen+Shot_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="155" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjq8XCk8RkqG3nguweYw4YlmUEIQoBIQI4XLIEX23AKAa_fil786SEprPFRIOtnq2RVdRLMTGc8mSRtuuqUuxHjyXYbwv8H9KSIllZ6T39goaSRRCMKAsQ0o1T-341YdOwQR7b64Fi-BLQ/s320/Mobile+Banking+Screen+Shot_001.jpg" width="320" /></a></div><div style="text-align: justify;">First, the likely adopters of bank technology tools are probably younger customers. I'm 49 years old and I have not demanded that my bank have a PFM tool because I don't think I would invest the time to learn and use it. In fact, I don't know if my bank has a PFM tool. My daughter is more likely to want and use such a tool. And guess what? She doesn't have any money... yet. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Bank profits are driven from balances, and expenses are driven by number of accounts and gizmos attached to those accounts. So effectively implementing a technology gizmo that is targeted to younger customers that currently generate little revenues does not make for a solid business case.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Secondly, I believe that PFM and other customer-facing technology tools have low adoption rates <b><i>by your employees</i></b>. Don't believe me? Why don't you poll them. Let me know how it turns out.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">People sell what they know. When I was a branch banker, I sold the heck out of home equity loans and retail checking accounts. Why? I knew them much better than business checking or a commercial line of credit. So my branch had a lot of retail deposits and loans. It was what I knew and was most comfortable.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I read an industry article, and I apologize that I can't recall where I read it or I would link to it (although I suspect it was a Jim Marous piece again), that a bank required their employees to open accounts using the same online account opening tool that customers would use if they did it themselves in their pajamas. The employees didn't have to wear pajamas, but you get my point.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">It forced the employees to know the tool that was available to customers. And why wouldn't you do it this way? You invest the money in developing or purchasing an intuitive online account opening tool and then saddle your employees with opening accounts using a clunky core processor user interface (UI) or tool? Why do we need both? </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">And if choosing, you should choose the one available to customers so your employees are subject matter experts on it. Imagine a customer calling the nearby branch for help using an online tool and the branch employee guides them through it, instead of transferring them to your call center or eBanking unit. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Don't stop at account opening. Transfer the logic to other customer tools, such as PFM. First, get your employees on it and using it via their own personal accounts. Only by repetition will they achieve the subject matter expertise to enroll their clients into it, train them on how to use it, and answer "how-to" questions about it. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">And don't stop at retail banking tools. Many if not most community banks are focused on the business segment, and there are plenty of available tools to help harried business owners make their financial lives simpler. Since employees are typically not business owners, this will take a little more diligence in giving them the needed training and repetition to be fluent in the available tools. Perhaps you can set up a "test account" at a "test bank" and require employees to use the tool a certain number of times prior to crowning them "cash flow management" qualified.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Mint, Yodlee, Moven, and other technology platforms are working hard to win the loyalty of your customers via their "cool" platforms. Many, such as Geezeo, focus on helping community financial institutions offer cool tech solutions and yet retain customer loyalty through the FIs own brand. To win the loyalty of those that demand such technologies now, and when they have the wealth to drive profits, financial institutions must develop front line staff to be fluent in what is available. Only then will they enthusiastically demonstrate the technology (go into an Apple store and have a "genius" demonstrate the Apple Watch and you'll know what I mean), describe features and benefits and their own experience with the tool, get customer adoption rates higher, and build greater loyalty to your brand.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Or you could let Mint do it.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-48909702105054484582015-06-14T07:11:00.000-07:002015-08-01T02:02:27.392-07:00Five Ideas to Build an Accountability Culture at Your Bank<div style="text-align: justify;">I recently spoke at the ABA CFO Exchange in Nashville on building an accountability culture. Talking banker accountability to a room full of CFOs is like a politician telling senior citizens that Social Security benefits should remain untouched. It was a friendly audience.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwJnyrEy92N9pUDZcsTAxEU_akLGUi-ccIuhAU2e4145QzHGDlAeJttKkx2JQEABaX7nhazpiL0rUhMT4GqDGFa4uXW2nFhjsjI9w3pdJiuScSc763jmAfamiEwYXHQe8ph94MV0jwni0/s1600/Award+pic3.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwJnyrEy92N9pUDZcsTAxEU_akLGUi-ccIuhAU2e4145QzHGDlAeJttKkx2JQEABaX7nhazpiL0rUhMT4GqDGFa4uXW2nFhjsjI9w3pdJiuScSc763jmAfamiEwYXHQe8ph94MV0jwni0/s200/Award+pic3.jpg" width="158" /></a></div><div style="text-align: justify;">I tried to be provocative. For example, it has been my experience that when discussing accountability, CFOs sometimes fall into the trap of talking about other departments. What about the Finance Department? How does it stack up to benchmarks, and are they realizing economies of scale, using less resources as the bank grows? They didn't flog me.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So how do you go about building a strong accountability culture at your bank? Accountability suffers a bad wrap. Most think of out-of-reach goals, difficult meetings with the boss, and recriminations for under-achievement. Does this sound like an enviable corporate culture?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Part of my coaching school curriculum for being a US Lacrosse certified coach was the <a href="http://www.positivecoach.org/">Positive Coaching Alliance (PCA)</a>. This portion of the certification was not lacrosse specific. Rather, it taught how to be a coach. And by the title of the course, it was not the coach that I knew. It has adherents like Joe Ehrmann and Phil Jackson. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The PCA discussion on "filling the emotional tank" for players has direct applicability to creating a positive culture that leads to better adjusted and happier employees, and results. If this culture interests you, I have five ideas on how you can build an accountability culture without cracking the whip and taking names.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>1. Make accountabilities measurable and transparent</b>. When I was a branch manager in the mid 90's, our sales incentive system was called RAISE (Realizing Achievement in Sales Excellence). I could calculate my quarterly bonus to the penny. I ran a spreadsheet before spreadsheets were cool. Me and another branch manager used to bet a beer each quarter on the size of our bonus. It worked. The best performers got the highest bonus.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>2. Link to your strategy</b>. Precious few banks state as their strategy to do large commercial real estate loans at very tight pricing to get deals done. Yet they continue to measure lender success by dollar production and portfolio size, incenting them to do just that. Instead, look to your strategy when building incentive systems.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>3. Have a little friendly competition</b>. As previously mentioned, my branch manager friend and me created our own internal competition that ended in a beer at the end of every quarter. It was fun, and motivated us to excel. I didn't want to show up for that meeting getting my butt kicked by my friend. Who would? Why not create ranking reports that include multiple measures, such as lender ROE, branch profitability (both ratio and dollars), or best trends in support center productivity.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>4. Include support centers.</b> Everyone thinks if only those branches would shape up, all would be well. So we prune the branch network, and branch staffing, etc. But how about all of those people in Compliance or Audit? How are they performing? It is understandably more difficult to do because we are not measuring their P&L, but we can use trends and benchmarks to highlight highly productive support centers and reward them appropriately.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>5. Have an awards ceremony.</b> When in Nashville, my wife and I bumped into a bunch of country music celebrities because it was the week of the CMA Awards. Entertainers tend to award themselves a lot. So why can't bankers? Imagine having a ceremony that celebrates your "Most Improved Branch", or "Top ROE Lender", or "Most Productive Support Unit". Imagine your own awards ceremony that creates the positive environment that promotes friendly internal competition and peer recognition for a job well done.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">How do you create a positive accountability culture?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-72941515482730030612015-06-01T15:08:00.000-07:002015-08-01T02:02:27.435-07:00Bank Board Compensation: An Amateur's View<div style="text-align: justify;">Lately I have been asked to opine on bank Board compensation. Although not a compensation expert by any means, I suspect I am being asked for an outside-the-box opinion. This reminds me of one of my colleagues favorite quotes; "those that live outside the box have never been in it." But with most areas that are outside of my technical expertise but within my industry expertise, I tend to revert to common sense.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">What are we trying to accomplish with Board compensation?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The FDIC Pocket Guide for Directors identifies the Board's responsibilities as:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">- Select and retain competent management.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">- Establish, with management, the institution's long and short-term business objectives in a legal and sound manner.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">- Monitor operations to ensure that they are controlled adequately and are in compliance with law and policies.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">- Oversee the institution's business performance.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">- Ensure the institution helps to meet its community's credit needs.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">How do we establish a compensation plan that is consistent with the above?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I have opined in the past that financial institutions' fixed to variable expense equation tilts too much towards fixed. So why exasperate the situation by creating more fixed expense with Board compensation? </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But there are certain moral hazards to incentive compensation at the Board level. Basing it on short term financial performance encourages greater risk taking. And the Board is responsible for the safety and soundness of the institution. To overcome this moral hazard, I suggest two things: 1) make the incentive compensation based on three-year average performance, and 2) include safety and soundness metrics to the equation.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This is similar to an unnamed bank that was suggested to me by an industry compensation consultant. I looked it up in their proxy, and their plan, which was for both executive management and the Board, looked similar to the below table.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrT5F6vH8s0H1pdgyu9LLWgvtuYWT27pD3Z3WrWYXxt8NYk2GxZ6Z4fV17rhfXCBTDhEOSu4bDxlSyt5KU8DFfXw0jbzpzuKQ8WTBkEcX-5pSzECYcAAz9Cy7B-SffTs-xbS0nyFUTaV4/s1600/Director+Incentive+Comp+Table_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrT5F6vH8s0H1pdgyu9LLWgvtuYWT27pD3Z3WrWYXxt8NYk2GxZ6Z4fV17rhfXCBTDhEOSu4bDxlSyt5KU8DFfXw0jbzpzuKQ8WTBkEcX-5pSzECYcAAz9Cy7B-SffTs-xbS0nyFUTaV4/s400/Director+Incentive+Comp+Table_001.jpg" width="400" /></a></div><div style="text-align: justify;">The unnamed bank did not name the performance metrics, calling them "Category 1", "Category 2", etc. because the actual metrics need not be disclosed. Shareholders that deem themselves compensation experts are a dime a dozen so why give them ammunition! </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So I decided to insert what I thought would be performance metrics consistent with Board responsibilities. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The metrics are relative to a pre-selected peer group, which is very common in executive compensation. But rather than limiting performance metrics to short-term, the unnamed bank used three-year averages. Meaning that there would be no payout for the first three years. All calculations thereafter would be based on three-year averages.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This did two things: 1) encouraged longer-term thinking so strategic investments can be made so long as it improved longer term performance, and 2) discouraged short-term risk taking that might result in future losses. It is not perfect, but what plan is?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The above table goes beyond the traditional performance metrics, and includes risk ratios such as leverage ratio growth, non-performing assets to total assets, net charge-offs to loans, and the one-year repricing GAP to assets. These are all risk metrics. But they should also be consistent with the Bank's strategic plan. If the plan calls for better than market growth, perhaps the leverage ratio will decline in relation to peers, etc. In such a case, perhaps exceeding long-term projected leverage ratios would be the metric.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The final addition, which was not in the unnamed bank's comp plan, was achievement of strategic objectives. I have expressed my concern over banks short-term, budget-centric focus on business results that discourage long-term strategic thinking that builds sustainable institutions. Why would I encourage it in a Director Comp Plan? </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So achieving strategic objectives is a litmus test to making the incentive comp available for payment. Note that not all strategic objectives need to be achieved because incenting for 100% success encourages sand-bagging, which is another industry obstacle to long-term excellence.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">If adopted, Director's that received $30,000 in annual compensation could be eligible for incentives that increase total compensation by one third. Not an immaterial sum. Such comp could be paid in cash or stock, and expensed as incurred.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I recently mentioned to an industry colleague and bank Board member that you don't want to create unfunded liabilities for Board compensation that will ultimately get deducted from a buyer's offer to your shareholders, should one come your way. The savvy shareholders will catch on, and could make your life a little uncomfortable. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">What are your thoughts on incentive comp for Board members?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-77147228699754523002015-05-16T08:20:00.000-07:002015-08-01T02:02:27.448-07:00Bank Board Reports: War and Peace or Cliff Notes?<div style="text-align: justify;">Today, Board reports closely resemble War and Peace. Why? The same reason regulators focus on the little things... to CYA! We don't want to be criticized that our Board was uninformed, so that little embarrassment about the audit exception that turned into employee fraud is on page 262 of your Board report. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">You mean you didn't see it? That's on you, fella.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhfxufub_Wxm5D0sa5uJGiNAlMT53WJuOKqLbBM1ISK3sZNEzJolD6yF3cyWrl2joSrMyfdSSg-Go2U35NwejcKQYopVKkbEcaOZ1kVFpR7Satb5hgkOKe-eKPADpmoWXxNqeajEPy5Hg/s1600/Stack+of+paper.JPG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhfxufub_Wxm5D0sa5uJGiNAlMT53WJuOKqLbBM1ISK3sZNEzJolD6yF3cyWrl2joSrMyfdSSg-Go2U35NwejcKQYopVKkbEcaOZ1kVFpR7Satb5hgkOKe-eKPADpmoWXxNqeajEPy5Hg/s320/Stack+of+paper.JPG" width="320" /></a></div><div style="text-align: justify;">Are we trying to fool ourselves into believing that all of our Board members are reading the 300+ pages we send to them two days prior to the Board meeting every month? Sure, there will be some that do. But my suspicion is there are more that do not. How could they? It's 300 pages! In two days! And most Board members have full time jobs!</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">According to the FDIC pocket guide for directors, a financial institution's Board should:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">- Select and retain competent management</div><div style="text-align: justify;">- Establish, with management, the institution's long and short-term business objectives in a legal and sound manner</div><div style="text-align: justify;">- Monitor operations to ensure that they are controlled adequately and are in compliance with law and policies</div><div style="text-align: justify;">- Oversee the institutions' business performance</div><div style="text-align: justify;">- Ensure that the institution helps to meet its community's credit needs</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">How many pages per month do we need to fulfill Board responsibilities? What is not in the above list are the following things that I often see Boards debating:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">- Selecting contractors for the buildout of the new branch</div><div style="text-align: justify;">- Determining raises for employees that are not Senior Management</div><div style="text-align: justify;">- Credit underwriting</div><div style="text-align: justify;">- Small ticket charitable donations</div><div style="text-align: justify;">- Loan administration's $100 budget variance</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">All of these distractions take valuable time away from Boards doing what they should be doing, described above. Here is what I suggest for Board reporting:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">1. Financial reports for the current period, and trends. </div><div style="text-align: justify;">2. Budget variance reports</div><div style="text-align: justify;">3. Financial progress towards strategic plan</div><div style="text-align: justify;">4. Financial condition and performance versus peer</div><div style="text-align: justify;">5. High level risk management reports (because more granular risk reports are reviewed in Committee) and trends.</div><div style="text-align: justify;">6. Compliance and audit reports, not included in 5 above</div><div style="text-align: justify;">7. Other business such as approving policy changes, large/exception credits requiring Board approval as per policy.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Aside from including a whole policy (changes are blacklined so Board member doesn't have to search for them), or a credit package, I can't see why a Board package has to be more than 100 pages.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Executive recruiter Alan Kaplan recently wrote an article for Bank Director magazine titled <a href="http://www.bankdirector.com/index.php/committees/governance/what-makes-great-boards-great/">What Makes Great Boards Great</a>. His number one characteristic was quality dialog, debate, and discussion. With Board packages that are 300+ pages and agenda's crammed with unfocused topics not directly related to Board responsibilities, how can there be quality dialog, debate, and discussion?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Especially since most directors don't have the time to read 300 pages for their upcoming Board meeting. So they sit in silence when they should be focusing on debate emanating from what is on page 262.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Do you think Board packages focus on the right things?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt; font-stretch: normal;"> </span></span></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-70247194360017391552015-05-09T15:31:00.000-07:002015-08-01T02:02:27.492-07:00Bankers: Think about what gets measured.<div style="text-align: justify;">"What gets measured, gets managed." Why did we need Peter Drucker to point this out? Educators are forever carping about standardized tests because they are spending a lot of time on teaching kids to improve their test scores.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Baseball players are measured on batting average, on base and slugging percentages. So they are spending significant energy to improve them. Why is this a bad thing?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Because in banking, what we measure is not always consistent with where we want our institution to go... i.e. with our strategy. We measure branches by number of accounts opened. And we're surprised that Wells Fargo gets accused of opening accounts without customers' knowledge. We measure lenders by size of portfolio, and we're surprised that we drop rate, points, and covenants to get deals done.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I recently did a podcast for PrecisionLender regarding this subject for lenders entitled: <a href="http://lenderperformance.com/using-bank-data-better-results/">Using Bank Data to Get Better Results.</a> That's right, I did a podcast. I only learned a few months ago what a podcast was.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But if you didn't invest the twenty minutes to listen to the interview, I'll exemplify my comments about another way to measure lender performance. The age-old measure by portfolio has led to what we have today... lenders willing to make any concession to get a deal done. A done deal is the best deal.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But what if your strategy revolves around superior service to a certain commercial customer segment? How would you measure it. Most likely the size of the lenders portfolio plays a part. But should the lender be the best price if he/she provides the best advice? That runs the risk of providing Four Seasons service at Motel 6 prices.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So I suggested using different measurements, such as coterminous spread, coterminous spread less provision, pre-tax portfolio profit, and ROE. See my suggestion exemplified in the table below.</div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjB8RDs3e6qDtAIfo8UcltJ_PcMhQq0qMENvCn0fMsSJdNd6xCpt-Ts9vp-3g_1zoZOhAWeDYV5JnXDzIzd29XkTUvKRDIprbvLB9PATZiZYNbA1CUnGscv4KpoYVm-7zK_J2tmZDDVtOI/s1600/Lender+P-L_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em; text-align: justify;"><img border="0" height="253" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjB8RDs3e6qDtAIfo8UcltJ_PcMhQq0qMENvCn0fMsSJdNd6xCpt-Ts9vp-3g_1zoZOhAWeDYV5JnXDzIzd29XkTUvKRDIprbvLB9PATZiZYNbA1CUnGscv4KpoYVm-7zK_J2tmZDDVtOI/s400/Lender+P-L_001.jpg" width="400" /></a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Now this lender's portfolio may be considered small, at $30.3 million in the current period. But it has been growing, while maintaining its spread. When considering the provision expense, which brings credit quality into the picture, spread has grown from 1.95% to 2.01%, all while growing the average balance of the portfolio.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">You can see this portfolio took a credit hit in CP-1, as the provision spiked a bit, possibly due to a loan downgrade and the resulting provision increase. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But overall this lender's trend is good, as represented by the ROE increase from 15.89% to 17.34%. Which brings us to a second report I suggest for lender accountability, the Schmidlap National Bank Lender Ranking Report.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnGh6KvFPTA3-2sXlGphVkDmE_2DuHqClX_ndwcO6pSbvPY0YcXYVSRY6FXhaFp-sNvdDpOtl0awFXDisrmhBuWF6TKjNbnEWd-ppRFNVsvkU21kOdzkGk697R2CsfIGfkCvTYkV2RPqw/s1600/Lender+Ranking_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="223" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnGh6KvFPTA3-2sXlGphVkDmE_2DuHqClX_ndwcO6pSbvPY0YcXYVSRY6FXhaFp-sNvdDpOtl0awFXDisrmhBuWF6TKjNbnEWd-ppRFNVsvkU21kOdzkGk697R2CsfIGfkCvTYkV2RPqw/s320/Lender+Ranking_001.jpg" width="320" /></a></div><div style="text-align: justify;">It is clear from this report that Jeff's portfolio is relatively small, ranking him 8th of 12 lenders. This contributes to the bottom half ranking in Net Asset Spread on a dollar basis, Net Asset Spread Less Provision on a dollar basis and ROE.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But the portfolio is growing, ranking him 3rd, and the Net Asset Spread percentage has him 2nd, even when considering the provision. So there are some positives in Jeff's performance. Which is good because I wouldn't want to be let go from my fictitious lending job at a fictitious bank. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Imagine the behavior that would ensue if you held your lenders similarly accountable? The performance review would go like this: "Jeff you are doing an excellent job maintaining pricing while growing your portfolio with strong credits. Your biggest challenge is continuing to grow the portfolio. For this upcoming period, Schmidlap will do x, x, and x to help you accomplish this while staying in the top quartile for spread. Let's do this!"<br /><br />I know Jeff pretty well, and being ranked in the bottom half of his peers won't sit well. Let me get back to some fictitious work!<br /><br />How do you measure lender performance?<br /><br />~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-23059353997389636172015-05-02T09:19:00.000-07:002015-08-01T02:02:27.505-07:00Hire a Vet: Part Two<div style="text-align: justify;">Five years ago <a href="http://jeff-for-banks.blogspot.com/2010/05/be-all-that-you-can-be.html">I wrote </a>that bankers should look outside the typical talent pool for our next generation of leaders. This week, an executive recruiter contacted me again for an "experienced banker" to be the heir-to-be CEO of a community bank. Problem: the last heir-to-be that this bank hired didn't pan out. I can only speculate why, but I told an industry friend that I suspected that the candidate probably had new-fangled ideas on banking that didn't jive with the old-schooler.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhW0jnTlh6cnTNCXbULu7-Fqemzg_ZjWdCpr_y2kY2e_30aeM-KayrMMPOp9HDm3Kd1U66AsdCrTUFMJ-TiUSqrVCH4bBf60DWHeKjrlGm-oEVlqZGjebT7iw_4pKZ3JH5Fr-H1omKFw7c/s1600/Assisting+Our+Defenders+Image.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhW0jnTlh6cnTNCXbULu7-Fqemzg_ZjWdCpr_y2kY2e_30aeM-KayrMMPOp9HDm3Kd1U66AsdCrTUFMJ-TiUSqrVCH4bBf60DWHeKjrlGm-oEVlqZGjebT7iw_4pKZ3JH5Fr-H1omKFw7c/s1600/Assisting+Our+Defenders+Image.png" height="244" width="320" /></a></div><div style="text-align: justify;">If the old-schooler comment fits you, let me tell you this: what brought you and your bank to success in the 1990's will not do so tomorrow. There were 14,000 banks in the 1990's. Only 6,500 today. Think about it.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But this post is about something greater than your succession issues. In April, my wife spearheaded a county-wide <a href="http://lancasteronline.com/sports/highschool/lacrosse/l-l-league-lacrosse-teams-raise-k-for-wounded-warriors/article_e7772cf2-e6c8-11e4-9eca-53a7bd13a432.html">lacrosse community campaign</a> to benefit the <a href="http://www.woundedwarriorproject.org/">Wounded Warrior Project</a>. I still believe very strongly that banks should dive heavily into recruiting veterans. But some veterans will return home broken. And the Wounded Warrior Project was formed to help them adapt and overcome.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Here is the address delivered before most lacrosse games during our Assisting Our Defenders week.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">"<i>Ladies and Gentleman,</i></div><div style="text-align: justify;"><i><br /></i></div><div style="text-align: justify;"><i>Thank you for coming out and supporting our players. This week, nine Lancaster-Lebanon League lacrosse teams show their support for the Wounded Warrior Project. </i></div><div style="text-align: justify;"><i><br /></i></div><div style="text-align: justify;"><i>Today, as you listen to these words, defenders of our country are engaged in hazardous training, patrolling dangerous villages, and fighting battles and skirmishes in the world's most volatile countries. As a nation, we asked them to go, and they heeded the call.</i></div><div style="text-align: justify;"><i><br /></i></div><div style="text-align: justify;"><i>Not all will come back the same person that left. Some will return home with emotional or physical scars from the dangers we asked them to endure. Through your support of the Wounded Warrior Project, our lacrosse community shows our commitment to returning soldiers, sailors, airmen and marines.</i></div><div style="text-align: justify;"><i><br /></i></div><div style="text-align: justify;"><i>With our players' and volunteers fundraising efforts, our collective community has raised over $12,000 to benefit our wounded warriors! Let's give a round of applause for the collective efforts of players and volunteers, and to send a loud message to our wounded warriors that WE ARE WITH YOU!</i>" </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Because this post drifted from banking, I apologize. But if nothing else, you feel motivated to actively seek vets in positions of leadership at your bank or support a charity that helps returning veterans, then your attention would have been well worth it!</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">P.S. Plus I'm pretty proud of my wife!</div><div style="text-align: justify;"><br /></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-14726623907310340832015-04-25T08:54:00.000-07:002015-08-01T02:02:27.548-07:00De Novo Banks: Only Apply If You Intend to Matter<div style="text-align: justify;">ABA President Frank Keating wrote an <a href="http://thehill.com/blogs/congress-blog/economy-budget/239141-new-jobs-and-new-growth-call-for-new-banks">Op-Ed piece</a> recently in The Hill entitled <i>New jobs and new growth call for new banks</i>. I don't believe it. A more accurate title should have been <i>New jobs and new growth call for new businesses</i>. His leap-of-faith assumption was that new banks are critical to new business formation. I'm skeptical.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Why? I don't think de novo banks are key players to business startup capital formation. Sure, if you cite studies that say these banks' loan books are predominantly small, as the FDIC measures them. But that is because de novo's are limited to making a loan to one borrower of 15% of their capital position. If a de novo starts with $15 million of capital, its largest possible lending relationship is $2.2 million. So the bank necessarily hunts for smaller relationships.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I'm also skeptical that small community banks in general are financing startup businesses. See the accompanying chart for the loan composition for all FDIC-insured banks and thrifts with less than $1 billion in total assets.</div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhC8r37XYzMJ4sWdT3OYKEYzM9ZbyLXuXQExezgN3Ssni_ajhu_FcZc0DVXhUyXG6feU0nKfXkPBJ6_krUr5BOh7PYoVe00CIyV52_q5tQvrpkJZZcdN0TxOQJggvohlrr_gSsPNu4ours/s1600/Commty+Bank+Loan+Composition+4Q14_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhC8r37XYzMJ4sWdT3OYKEYzM9ZbyLXuXQExezgN3Ssni_ajhu_FcZc0DVXhUyXG6feU0nKfXkPBJ6_krUr5BOh7PYoVe00CIyV52_q5tQvrpkJZZcdN0TxOQJggvohlrr_gSsPNu4ours/s1600/Commty+Bank+Loan+Composition+4Q14_001.jpg" height="310" width="400" /></a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So, if a de novo bank has $100 million in total assets after its first year of operation, and it's loan portfolio was $70 million, then its business loan portfolio would be $9 million, if they achieved the community bank average. And that's all non real-estate loans to businesses, not necessarily startup or early stage businesses. Since I often hear credit people talk of getting three years of tax returns to get a loan decision, it makes me wonder how a 1 year old business can satisfy the requirement.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">OnDeck Capital, not a bank, will lend to businesses with one year of operating history and only $100,000 of annual revenues. How do I know this? They tweeted it to me. That's right, they tweeted it.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4y8JwjInGVFORaYYBNn53fi4f3G4-Y2X26ORkqGBhI1ALR26jwryEueuLO3Jq-SyrS0oUuvuo0SaBgvDQ2fBkfVeqBuUpa7r2OvE_Lz48nxc3Now35RZaRtsJRVwwyUwUxOZRKIZhX9k/s1600/OnDeck+Tweet_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4y8JwjInGVFORaYYBNn53fi4f3G4-Y2X26ORkqGBhI1ALR26jwryEueuLO3Jq-SyrS0oUuvuo0SaBgvDQ2fBkfVeqBuUpa7r2OvE_Lz48nxc3Now35RZaRtsJRVwwyUwUxOZRKIZhX9k/s1600/OnDeck+Tweet_001.jpg" /></a></div><div style="text-align: justify;">I am doubtful many financial institutions would make such a loan.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">To be fair, the loan portfolio composition in the above pie chart is from Call Reports, which categorize loans by collateral, not purpose. There may be small business loans in the residential category, because the business owner pledged his or her house as collateral for the loan. But I doubt OnDeck or similar neo-banks are requiring such collateral. And OnDeck and similar lenders are growing rapidly in the startup or early stage business financing landscape.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So, no, Mr. Keating, I don't think de novo banks, being run and regulated as they are currently, are critical to small business formation. Who wants a regulator to come in for their periodic exam cycle and ask "why did you make this loan"? What banker is running to capitalize an early stage business without real estate as collateral?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I don't know of many.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Do you think de novo banks are actively participating in startup or early stage business financing?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-75805032439314032712015-04-19T15:07:00.000-07:002015-08-01T02:02:27.561-07:00Bankers Tell Me Their Top Industry Game Changers<div style="text-align: justify;">If you were asked what one industry trend will change the face of banking forever, what would you say?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I did that very thing to dozens of bankers that attended their respective state banking associations' Executive Development Programs (EDP). And their answers gave me a more positive outlook for our future.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I teach Bank Profitability for the Washington, Utah, and Montana Bankers' Associations EDP programs. Each year I make pilgrimages to Seattle, Salt Lake City, and Helena to meet future leaders of our industry. Each state has its unique flavors of banking. Washington has a more traditional mix of very large and community financial institutions. Utah has many Industrial Loan Companies (ILC's), which are FDIC supervised financial institutions that can be owned by commercial firms not regulated by a federal banking agency, like a utility company. Montana has many small, closely held financial institutions. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As part of the day-long curriculum, we discuss trends facing our industry and at the end of this discussion, I asked for their opinion regarding our top industry game-changers. Their answers are summarized in the chart below.<br /><br /></div><div style="text-align: justify;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcO2HWO6jJAYLiTVuuKZ7QD6OgYwdclr-kWhzKPPoGoO4pvLkwe1RpU8Lcdp7XAuB3sg_IpsI9rLvZXC3fSf900sqpH00FZMyldtD2yzL8dnn7zep-4O3UTS1hzmAItZzvcLIQlxco7Tk/s1600/2015+EDP+Game+Changers_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcO2HWO6jJAYLiTVuuKZ7QD6OgYwdclr-kWhzKPPoGoO4pvLkwe1RpU8Lcdp7XAuB3sg_IpsI9rLvZXC3fSf900sqpH00FZMyldtD2yzL8dnn7zep-4O3UTS1hzmAItZzvcLIQlxco7Tk/s1600/2015+EDP+Game+Changers_001.jpg" height="240" width="400" /></a></div>This should not be surprising to anyone. Neo banks are investing and moving quickly into creating a banking experience not based on personal relationships or locational convenience. Moven, a banking application that was seeded with $4-5 million, and <a href="http://blog.moven.com/moven-completes-a-round/">subsequently raised $8 million</a> more last summer, aspires to <a href="https://www.youtube.com/watch?v=NHpMkVZB48c">remake banking through the smart phone</a>. They see their IT department as a profit center. </div><div style="text-align: justify;"><br />Traditional community bankers see it as a support center, and staff it accordingly. Oddly, if you look at top IT projects for financial institutions, Online, Mobile, and Product Development reigned supreme (see chart). So why do we continue to view the IT Department as a cost center staffed with techies that have little feel, responsibility, or accountability for acquiring customers and improving their experience?<br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifW7vziIxIqif7fGeDteML0FKJjpQXtUi_4ojNUJWTCPN1tRXr5-YRi2irXX20k7z1DxRMGJtni93IhoMrc47_pXBrSJDLdYHK815PaLrdsnuQtrkYIiuAvELdX1yN4fC3nOokTBi9CVA/s1600/Top+IT+Projects+at+Banks+2014_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifW7vziIxIqif7fGeDteML0FKJjpQXtUi_4ojNUJWTCPN1tRXr5-YRi2irXX20k7z1DxRMGJtni93IhoMrc47_pXBrSJDLdYHK815PaLrdsnuQtrkYIiuAvELdX1yN4fC3nOokTBi9CVA/s1600/Top+IT+Projects+at+Banks+2014_001.jpg" height="221" width="400" /></a></div><br />In 2013, I wrote a <a href="http://jeff-for-banks.blogspot.com/2013/02/job-description-evp-of-distribution-and.html">blog post</a> on a job description for an EVP of Distribution and Service Excellence. Not that I've experienced such a position, but that does not mean it should not exist. Readers of my blog know I like to dabble in how things <i>should be</i>, rather than how they are. Two years and I still haven't seen this position.<br /><br />There should be no more debate that customers interact with your bank more frequently with technology than any other distribution point. That ship has sailed. It is not only how it is, but I believe it is how customers <i>prefer </i>it. As a society, we are becoming increasingly accustomed to self service, and by our actions deem it more desirable to get a task done on our own time rather than wait for another human being to help us. There are exceptions of course, but in the main, don't you agree?<br /><br />If you do, then here are some ideas on what to do next:<br /><br />- Build a technology platform with the right partners that makes our customers' lives simpler that has a distinctive look and feel, even though we are likely to use the same platform that hundreds of other financial institutions use.<br /><br />- Create a separate profit center for your online/mobile banking center. That means you have a center manager that is responsible for growing customers and balances, and generating profits via your technology platform.<br /><br />- Implement a rational costing scheme to charge branches for their customers use of the mobile/online banking platform, and for your mobile/online center customers' use of branches. Keep it simple and understandable.<br /><br />- At the top of the Mobile/Online Banking Center, put an executive with customer acquisition and customer experience know-how. Not a former FORTRAN programmer that wears a pocket-protector that is more comfortable discussing circuits and switches than how to acquire more customers.<br /><br />Do you think the time to treat our mobile/online banking centers as support centers should end?<br /><br />~ Jeff</div><br /><br /><br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-31670608698469267292015-04-10T13:10:00.000-07:002015-08-01T02:02:27.604-07:00Guest Post: First Quarter Economic Commentary by Dorothy Jaworski<div class="MsoNormal" style="text-align: justify;">Two brutally cold winters in a row! By this time, we have all had enough of the cold, the polar vortex, the snow, the freezing rain, the ice, and the potholes that are left on our roadways to harass and frustrate us. At least we are not in Boston. We need a change of seasons!<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipD74lljPdNLap2Ih70ZwsDDj3wUpuKfk7uuHUk1NzpSLcHneKXqKmls83C_f8aj3h6m3foSH7v3BqNYAuKXZViMwjrqocWTA_JOO8NtaVaKJ42TkTWcMTw0cgqQAwLWYlam8VCETeC7Y/s1600/DJ.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipD74lljPdNLap2Ih70ZwsDDj3wUpuKfk7uuHUk1NzpSLcHneKXqKmls83C_f8aj3h6m3foSH7v3BqNYAuKXZViMwjrqocWTA_JOO8NtaVaKJ42TkTWcMTw0cgqQAwLWYlam8VCETeC7Y/s1600/DJ.jpg" /></a></div><u>A New Year of Volatility<o:p></o:p></u></div><div class="MsoNormal" style="text-align: justify;">2015 ushered in a whole new season of volatility in the bond and stock markets. Stocks have seen a large number of trading days with price changes greater than 1% and coincidentally, the Dow and SandP averages are up year-to-date by about 1%. Longer term interest rates have moved by large amounts in short periods of time. Witness the 10 year Treasury note- its yield dropped by 0.50% in January to 1.68%, rose by 0.33% in February to 2.01%, rose to a short term high of 2.21% on March 9<sup>th</sup> and dropped back to 1.94% for the end of March. Investment decisions and timing are unusually difficult. US bonds are also whipsawed every time a geopolitical event rocks the newswires, such as growing Middle East conflicts, ISIS fighting, and the Russia-Ukraine situation.<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">Speaking of the change in seasons, the Federal Reserve seems determined to begin their own season of change by raising interest rates. Some Fed officials want to raise rates regardless, saying rates are just too low with an unemployment rate of 5.5% and should be returned to “normal.” It has been nine years since the Fed last tightened policy in June, 2006; maybe they are getting anxious. However, some officials, including Chair Janet Yellen, want to keep letting the economy and the data lead them to raise rates if necessary, but to keep rates low if necessary, too. Just last week, Chair Yellen addressed the slow GDP growth that we have experienced for the past six years of our so-called recovery, which has been anything but “normal.” She acknowledged studies that suggest that future GDP growth will also be painfully slow due to changing demographics and low productivity.<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">This slow growth, despite the low 5.5% unemployment rate, would cause the Fed to keep rates at the current low levels for an extended time period. The studies suggest stagnation much the same as what Japan has experienced in the past twenty years, where zero interest rates and central bank easing campaigns failed to stimulate growth. Here in the US, short term rates have been at zero since December, 2008 and countless rounds of forward guidance and trillions of dollars of bonds bought by the Fed in QE programs have failed to push our growth rate much above +2.0%. In 2014, our GDP growth was +2.4%; in the fourth quarter, it was +2.2% with real final sales rising only a measly +0.1%. The so-called recovery that began in June, 2009 has produced growth rates only about one half of “normal” recoveries since WWII.<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><u>Oil Steals the Show<o:p></o:p></u></div><div class="MsoNormal" style="text-align: justify;">The biggest story of the past year in the markets has to be the plunging price of oil, down 50% in 2014 to below $50 per barrel. The US has led the world in energy and oil production from its shale and fracking operations. Suddenly, the extent of excess supply became apparent. Weak demand for oil from struggling economies in China, Japan, Russia, and Europe, almost assures continued excess supply in 2015. Falling oil prices, and falling gasoline prices, are like a welcome tax cut for consumers who are saddled with low wage growth and lack of good jobs. Many people, including myself, thought that the drop in gas prices would lead to higher consumer spending, perhaps even more than the amount they save when filling their gas tanks, but this has not been the case. Spending has been weak since December and the savings rate has risen to 5.8%, which is the highest since December, 2012. Energy companies moved to cut production and investment to align to the new $50 per barrel reality and, in the process, would cut jobs. Since the US is now a larger producer of energy in the world markets, the effects are being felt here at home as well as in OPEC countries and Russia. <o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">Stock market volatility began after the plunge in oil prices, as fear of the effects on energy companies emerged. Bonds recognized something else- the reality of falling inflation- and the prospects that inflation is expected to be lower in the next several years. Year-over-year CPI was flat in February, 2015; there has been only one year-over-year decline since 1955 and that happened at the height of the financial crisis in 2008. This brings me back to the Fed- slow growth, low inflation- is that a recipe for raising interest rates? I think not. But if they do raise rates, they will control short term rates. Long term rates will still be driven by inflationary expectations and should stay low. Will the Fed manipulate long term rates by selling some of their accumulated $4 trillion of QE bonds? <o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><u>Strong Dollar<o:p></o:p></u></div><div class="MsoNormal" style="text-align: justify;">While we weren’t looking, the US dollar strengthened by 20% in the past year. This strengthening is cited as one of the factors that contributed to falling oil prices, since oil is usually denominated in US dollars. A strong dollar serves to ultimately hurt our exports, and thus our GDP growth, while keeping imports attractive and import prices low. This is another factor that will be considered by the Fed; a strong dollar will support lower interest rates as demand for US securities increases relative to the bonds of other nations.<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">So will the Fed raise rates in 2015? Only they know for sure. I try not to make bold predictions anymore, because just when you think you can throw a one yard touchdown pass, some guy comes out of nowhere and intercepts it. Many of the Fed officials keep saying rates should be increased because they want to raise them. Maybe they will; maybe they won’t. But I do believe that, if they do, they will be lowering them a few meetings later. The economic growth we have is too slow and is perhaps unsustainable, wage growth is low, inflation is even lower, and the dollar is strong. When I enter those key inputs into my formulas, the result is lower rates, not higher ones. Maybe Janet Yellen’s own words from her speech last week tell it all: “The tightening pace could speed up, slow down, pause, or reverse.” If you know what she is going to do, let me know! Stay tuned!<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">Thanks for reading! 03/30/15 </div><div class="MsoNormal" style="text-align: justify;"><br /></div><br /><br /><strong style="text-align: justify;"><em>Dorothy Jaworski</em></strong><span style="text-align: justify;"> 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 </span><a href="https://www.bucksonlinebanking2.com/home/home">First Federal of Bucks County</a><span style="text-align: justify;"> since November, 2004. She is the author of <b><i><a href="http://www.amazon.com/Just-Another-Soldier-Dorothy-Jaworski/dp/1499102666/ref=sr_1_1?ie=UTF8&qid=1406494270&sr=8-1&keywords=another+good+soldier">Just Another Good Soldier</a></i></b>, which details the 11th Infantry Regiment's </span><span style="text-align: justify;">WWII</span><span style="text-align: justify;"> </span><span style="text-align: justify;">crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure.</span>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-62004837365320626502015-03-27T03:07:00.000-07:002015-08-01T02:02:27.618-07:00Perception Versus Reality: Do People Get More From Credit Unions Than Banks?<div style="text-align: justify;">The Credit Union National Association (CUNA), the credit union equivalent to the American Bankers' Association (ABA), <a href="http://www.cuna.org/Thecredituniondifference/">states </a>that credit unions exist to serve members, returning earnings to members in the form of lower loan rates, higher interest on deposits, and lower fees.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Nearly four years ago, I tested the higher interest on deposits claim in a <a href="http://thefinancialbrand.com/18712/are-credit-unions-a-better-value-than-banks/">guest post</a> with the exact title on <a href="http://thefinancialbrand.com/">The Financial Brand</a>, an industry publication geared towards marketing executives at banks and credit unions. The reaction that I received, in person, via e-mail, and in the comments were a little sharp-edged. Clearly this remains an emotional issue.</div><div><br /></div><div style="text-align: justify;">When the going gets tough, go to the facts. In 2011, banks paid higher interest on their interest bearing deposits than credit unions throughout the measurement period. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">When I re-ran the analysis, what was true back in 2011 still holds true (see chart).</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwMzhvocqkelF-sAPAczx2JYZKTXx9kqLTBq81GJelIfWNdse-mpOd1UcPotlbTbRgSUCkVdAOnLCz7LdLRtMAv9_vt0VX6s-E4Rq_bOHEQXo7whfLIHRLiaYScU_kDWVEoyYdGO5-JJw/s1600/2015+Banks+v+CUs+Cost+of+Deps_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwMzhvocqkelF-sAPAczx2JYZKTXx9kqLTBq81GJelIfWNdse-mpOd1UcPotlbTbRgSUCkVdAOnLCz7LdLRtMAv9_vt0VX6s-E4Rq_bOHEQXo7whfLIHRLiaYScU_kDWVEoyYdGO5-JJw/s1600/2015+Banks+v+CUs+Cost+of+Deps_001.jpg" height="212" width="400" /></a></div><div style="text-align: justify;">There is a difference in my analytics. I searched on banks and credit unions between $500 million and $5 billion in total assets. I took a wider swath in 2011 with institutions between $100 million and $10 billion. Today's analysis reduced the amount of very small financial institutions.</div><div><br /></div><div style="text-align: justify;">I continued to control for commercially oriented banks by limiting to banks with less than 30% commercial real estate or commercial business loans as a percent of total loans. Those banks tend to have higher level of business deposits, which tend to drive down cost of deposits. However, to further control for this, I only selected interest expense as a percent of interest bearing deposits, not counting checking accounts that pay no interest.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Based on the above, for the sum total of all interest bearing deposits, banks pay higher rates, on average.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Surprisingly, changing the institution size did tell a different story in non-interest expense to average assets, or what is termed the expense ratio (see chart).</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcXcZh5rxVvN9sNxZVkq-a0QQh3QpdrGoHRa3ReRw92wyyzzXujThcG2am4mmBiKSMQi2ds0SWMs_eH_BhlVgsT2yEGMF_6QmXMMi8r8NqAtdZZJL4WQ111QZdMbA39tpYwaxwj5658r4/s1600/2015+Banks+v+CUs+Op+Expense-AA_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcXcZh5rxVvN9sNxZVkq-a0QQh3QpdrGoHRa3ReRw92wyyzzXujThcG2am4mmBiKSMQi2ds0SWMs_eH_BhlVgsT2yEGMF_6QmXMMi8r8NqAtdZZJL4WQ111QZdMbA39tpYwaxwj5658r4/s1600/2015+Banks+v+CUs+Op+Expense-AA_001.jpg" height="212" width="400" /></a></div><div style="text-align: justify;">Perhaps the financial crisis, which credit unions survived surprisingly well with the exception of corporate credit unions (similar to bankers' banks), woke up credit union leadership to scrutinize operating expense to increase profits. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Yes, you read profits. Where do you think credit unions get their capital? If credit unions suffered a similar fate to many community banks, they couldn't back up the truck for shareholders to pony up equity to help absorb losses. Becoming more profitable was the logical solution to building up capital positions.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">There are probably other reasons at work. In 2011, those expense ratios for credit unions were in the fours (greater than 4%). That was likely due to my going down to institutions with $100 million in assets. While I did the same for banks, many smaller banks are privately owned, one branch operations with very low expense ratios. By raising the bar to $500 million, my analysis likely raised bank expense ratios by excluding those hyper-efficient small banks, and reduced credit union expense ratios by eliminating very small, inefficient institutions.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As the charts show, there is little difference in expense ratios, on average, for the measured institutions. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I think both trend charts show something that previously happened between thrifts, savings banks, and commercial banks: the homogenization of business models. In the late 1990's, many traditional thrifts entered commercial banking with both feet. The result is falling net interest margins for banks and rising net interest margins for thrifts, long term. Thrift expense ratios began to rise as they took on the more expensive commercial banking teams.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Credit unions are shedding their Select Employer Group (SEG) strategies by adopting community charters or by adding so many SEGs that nearly everyone qualifies to join. They have entered commercial banking to the extent permissible by their regulators. So I expect financial performance ratios to begin looking more and more like their bank competitors.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Except for the shareholders. And the taxes.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Do you thing credit union and bank business models getting more similar?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-61708020198801556352015-03-15T17:21:00.000-07:002015-08-01T02:02:27.661-07:00Bank Deals: How Are They Working Out for You?<br /><div style="text-align: justify;">Bank mergers are picking up steam. Technological change, regulation, and scale are cited most often by sellers. Take a premium now, rather than drift slowly into the abyss of irrelevance.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But what about buyers? I have written about <a href="http://jeff-for-banks.blogspot.com/2011/05/does-your-bank-achieve-positive.html" target="_blank">achieving positive operating leverage</a> in the past. In fact, it is one of my most read blog posts. In his most recent <a href="http://www.berkshirehathaway.com/2014ar/2014ar.pdf" target="_blank">Chairman's letter</a>, <b>Warren Buffett</b> weighed in with the following about buyer performance post acquisition:</div><br /><div style="text-align: center;"><i>"We've also suffered financially when this mistake has been committed by companies whose shares Berkshire has owned (with the errors sometimes occurring while I was serving as a director). Too often CEOs seem blind to an elementary reality: The intrinsic value of the shares you give in an acquisition must not be greater than the intrinsic value of the business you receive.'</i></div><div style="text-align: center;"><i><br /></i></div><div style="text-align: center;"><i>'I've yet to see an investment banker quantify this all-important math when he is presenting a stock-for stock deal to the board of a potential acquirer. Instead, the banker's focus will be on describing "customary" premiums-to-market-price that are currently being paid for acquisitions - an absolutely asinine way to evaluate the attractiveness of an acquisition - or whether the deal will increase the acquirer's earnings-per-share (which in itself should be far from determinative). In striving to achieve the desired per-share number, a panting CEO and his "helpers" will often conjure up fanciful "synergies." (As a director of 19 companies over the years, I've never heard of "dis-synergies" mentioned, though I've witnessed plenty of these once deals have closed.) Post mortems of acquisitions, in which reality is honestly compared to the original projections, are rare in American boardrooms. The should instead be standard practice."</i></div><br /><br /><div style="text-align: justify;">How can Warren's words be put into practice? To exemplify, I took two of the largest acquisitions in 2011 to back-check if it improved the buying bank's EPS and efficiency ratio. I went back over three years because mergers should be considered and executed with long-term financial improvement and overall bank strategy in the forefront of the "should we buy" decision. Citing the first few "clean" quarters after closing the transaction perpetuates the short-term budgeting culture that plagues our industry and prohibits long-term investing. By looking three plus years after merger announcement, I avoid that self defeating game.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I didn't take the largest deals from 2011, which were: Capital One Financial/ING Bank ($9.0B), PNC/RBC Bank (USA) ($3.5B), and Comerica/Sterling Bancshares ($1.0B). These transactions were so large, and two were foreign banks selling US subs, that it doesn't relate to my readers. But the next two deals in the table certainly relate.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxORvYFsTHTngOFk0RC8GmAqP3w7PCo-vgtcoQ0PPTBgyn-s8w55F8-n-tQjYgmwYeYZcjo8nWczA0AvE3cmBl-3VyzBSUWdbLWmRVXWtURFqn1iy0QETUgHLS0k5QbMr1WCzneCf4Y9k/s1600/2011+M-A+Deals+for+Berkshire+Hath+post_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxORvYFsTHTngOFk0RC8GmAqP3w7PCo-vgtcoQ0PPTBgyn-s8w55F8-n-tQjYgmwYeYZcjo8nWczA0AvE3cmBl-3VyzBSUWdbLWmRVXWtURFqn1iy0QETUgHLS0k5QbMr1WCzneCf4Y9k/s1600/2011+M-A+Deals+for+Berkshire+Hath+post_001.jpg" height="400" width="331" /></a></div><div style="text-align: justify;">Both deals look like they improved the buyer's EPS, with People's United achieving a 10.8% annual growth rate and Susquehanna achieving an even better 19.9%. People's efficiency ratio, a measure of how much in operating expenses it takes to generate a dollar of revenue, went down slightly. Achieving economies of scale should drive down the efficiency ratio. Although People's decline in this ratio was small, the relative size of Danvers ($2.6B) was only 10% of People's size ($25.0B) at the time the deal was announced.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Susquehanna's efficiency ratio went up. This is counter-intuitive, especially since Tower's relative size ($2.6B) was more significant to Susquehanna's ($14.2B) at the time of announcement. One would think that realizing the necessary cost savings to justify paying a premium would result in a lower efficiency ratio. Susquehanna was unable to achieve this "economy of scale". It is also worth mentioning that Susquehanna's earnings were sub-par at the time they announced the Tower deal. They had a 0.32% ROA at announcement. Not something to include in the shareholders' letter. Nowhere to go but up, right?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">People's, on the other hand, had a better ROA (0.84%) when they announced the Danvers deal than in the fourth quarter (0.74%). The primary culprit was a precipitous decline in net interest margin of 116 basis points (yikes!). The fact that their efficiency ratio went down tells me they hit their operating expenses hard. As Warren alluded to above, I bet that wasn't in their post-merger projections.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I don't think it's very complicated to decide to do a transaction or not. What fits your strategy? Can you build it or must you acquire it? If an acquisition, can you afford the premium for the target so your bank is better off for having done the deal than passing?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Once you land a deal, accountability should be equally uncomplicated. My firm once represented a bank that had an activist investor on the Board. All that guy wanted to talk about was the efficiency ratio. Very one dimensional. But I digress.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">He did hold management accountable for achieving the cost savings in the projections. So management prepared a spreadsheet of the phase-in of cost savings and the overall cost structure of the combined bank once all synergies were achieved. It wasn't a very complicated spreadsheet, and also gave management some leeway to alter where things were cut, so long as they achieved their aggregate numbers.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">At the end of your strategic measurement period post-acquisition, the value of your bank (intrinsic value mentioned by Warren) should be greater for having done the deal than if you went it alone. If People's and Susquehanna could not achieve the earnings growth in the table above, then doing those deals improved their value.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">If each could have achieved those numbers on their own, and there are reasons to believe they could have, then why do the deal at all?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Is it a fair question?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-28884783338333981702015-03-07T07:31:00.000-08:002015-08-01T02:02:27.674-07:00Say It Ain't So Doug! Square 1 Bank Sells to PacWest<div style="text-align: justify;">In the name of head scratchers, Square 1 Financial of Durham, NC, one of the most successful startup banks in a generation, is turning over the keys to PacWest, a California bank. The deal left me scratching my head, because at first glance it made little sense that a bank with Square 1's earnings trajectory would sell.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Niche banks are a growing part of our financial institutions landscape. I often cited Square 1 for their focus and success. In their own words, "Square 1 is a financial service company focused primarily on serving entrepreneurs and their investors." A bank with a focused strategy! Brings a tear of joy to my eye.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">It had one banking office (in Durham), and twelve loan production offices located in key innovation hubs across the US. Its Chairman and CEO, Doug Bowers, was a 30-year BofA vet and more recently a member of a private equity firm. So the niche Square 1 adopted made sense.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But why sell Doug?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">An industry reporter hypothesized that it was the price... 22x earnings, 262% of tangible book... c'mon?! But that was close to where Square 1 was trading at announcement. So there was no price premium. In fact, the below chart demonstrates that if Square 1 remained independent, their stock price would soar past the value received in this merger.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7AAUfQct9Da7N4RlTmBOc3vapvxKLtQEWuHgD9YO9O6FYzTNxaYwA7dUVRq-qBe_xRdCyKq4LGem4yvEMhR7QMeQbFPVn7bdxJ30JFhe6O12EkEKpiP9a7pr4WxC5V4Ul6QgEttXr7uQ/s1600/PacWest+Square+1+Charts_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em; text-align: justify;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7AAUfQct9Da7N4RlTmBOc3vapvxKLtQEWuHgD9YO9O6FYzTNxaYwA7dUVRq-qBe_xRdCyKq4LGem4yvEMhR7QMeQbFPVn7bdxJ30JFhe6O12EkEKpiP9a7pr4WxC5V4Ul6QgEttXr7uQ/s1600/PacWest+Square+1+Charts_001.jpg" height="236" width="400" /></a></div><div style="text-align: justify;">Like most projected performance, the devil's in the details. What I did was assume Square 1's 3-year compound annual growth rate in EPS (86%) linearly came down to earth to 12% by the end of the projection period, which is PacWest's 3-year EPS CAGR. I assumed PacWest's 12% would continue throughout the projection period. If all were true, it would have been more beneficial for Square 1 to go it alone. It is what I term "earning their right to remain independent."</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So if future valuation wasn't the reason, then why? Perhaps they are receiving an outsized portion of the resulting bank than their current contribution. As I mentioned above, Square 1 did not receive a price premium from PacWest. So their pro forma ownership of PacWest is pretty much in line with their contribution (see table). Usually in a merger the seller receives a larger pro forma ownership stake because they receive a premium on their stock and they are relinquishing control. Not so, in this case.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgi9hFqPYR9f-9eg7pBeXrMiFflJgYq3AXBhgr_y4FYa3hODPsfPLCrmGfkfXeardo6e9v7PtJjARiWXXZS8hcSBKxBd0uo-Z5ewzwN1VSTzibOl4oOZQgfD_j2xw1k5HxF19-Va_HPVlM/s1600/PacWest+Square+1+Contributions_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em; text-align: justify;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgi9hFqPYR9f-9eg7pBeXrMiFflJgYq3AXBhgr_y4FYa3hODPsfPLCrmGfkfXeardo6e9v7PtJjARiWXXZS8hcSBKxBd0uo-Z5ewzwN1VSTzibOl4oOZQgfD_j2xw1k5HxF19-Va_HPVlM/s1600/PacWest+Square+1+Contributions_001.jpg" height="102" width="320" /></a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So why did they sell? Here is what Bowers said in the press release: "Joining PacWest will be a terrific opportunity for our clients, employees, and stockholders. Square 1 offers PacWest a complementary line of business and significant core deposit growth. As part of PacWest, we will maintain our steadfast commitment to the entrepreneurial and venture communities, will be able to offer clients a wider array of products and will be well-positioned to continue to serve them through all stages of their growth."</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">That seems to tell us why PacWest bought Square 1, not why Square 1 sold to PacWest. So with Doug silent on the issue, here are my opinions on why one of my darling niche banks turned over the keys:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>1. Institutional Ownership</b> - Square 1 went public last March, raising $52 million at $18 per share from primarily institutional owners. The company was 70% institutionally owned with such names as Patriot Financial Partners, Castle Creek Capital, Endicott Opportunity Partners and other notables. Some had 5%-10% stakes, or about two million shares. Square 1 traded about 30,000-40,000 shares per day until around February 24th, when volumes soared (a fact that will not be lost on FINRA, although increased volumes prior to a merger announcement are not uncommon due to speculation). With such significant institutional ownership and relatively light normal trading volume, it would have been very difficult for those investors to lock in the trading gains experienced by Square 1 from November-February. How do you lock it in.... sell. Even if you are paid no premium. You can still lock in the price appreciation since you bought into the IPO.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>2. Law of Large Numbers</b> - As Square 1 grew larger, it would have to generate larger and larger amounts of business volume just to keep pace. For example, they had a $1.3 billion loan portfolio, the vast majority of which was commercial business loans. If 25% of that portfolio turned over every year, and I suspect it was more because business loans churn faster than commercial real estate loans, they would have to originate >$400 million of new/renewed loans per year to <i>keep pace</i>. Never mind growth. Which brings me to my third potential reason for selling...</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>3. Growth Trajectory</b> - Square 1 was trading at 22x earnings when they sold. Banks their size typically trade around 13x-14x earnings. The premium was most likely the result of their balance sheet and earnings growth. Perhaps Doug and his senior management team were staring down the barrel of normalized growth. As investors began to recognize the slower growth, multiples would intuitively come down to the planet earth, suppressing stock price appreciation until the multiple normalized. That could have meant trading in a tight price range for a number of years. Why not lock in your tremendous gain since the IPO, and move on?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Square 1 was truly an extraordinary financial institution and I am sorry to see them go because I held them up as a premier example of how focused effort can lead to superior results.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">If Doug Bowers and team were facing normalized growth and stock price appreciation, they could have decided to "cash cow" the bank, turning over a significant part of their earnings to investors in the form of dividends. In 2014, they enjoyed a 1.25% ROA and a 12.85% ROE. A great candidate for a cash cow. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But alas that ship may have sailed when they backed up the truck to the institutional investor loading dock. They were numbers on a spreadsheet and were supposed to deliver the fund managers a big win. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">They did.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">What else could Square 1 have done to satisfy their investors?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-22481931523791728262015-02-21T06:42:00.000-08:002015-08-01T02:02:27.716-07:00Breaking Branch Mediocrity<div style="text-align: justify;">Another day, another convoluted organizational structure that includes “small business bankers” that are dispersed into the branch network to shore up branch capabilities. If not small business bankers, it’s “cash management officers”, or “business development officers”. Why add a protective wrap of additional employees around your branches?</div><div style="text-align: justify;"><br /></div><div class="MsoNormal"><o:p></o:p></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnNKJBPrjpwPgHIrdtoy8cvLeEGbFhg8RlE5VWhFgM3wYB7ufexj3qYLq-C7J3Za7XqWvDpw-CpyjX16UecMucfP2PQjDSI9jp7cEIFXwGN8IOhJaMyNhyphenhyphenHb2lr2DpYnHgBRVg6-TUzS4/s1600/OFNB.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnNKJBPrjpwPgHIrdtoy8cvLeEGbFhg8RlE5VWhFgM3wYB7ufexj3qYLq-C7J3Za7XqWvDpw-CpyjX16UecMucfP2PQjDSI9jp7cEIFXwGN8IOhJaMyNhyphenhyphenHb2lr2DpYnHgBRVg6-TUzS4/s1600/OFNB.jpg" height="240" width="320" /></a></div><div class="MsoNormal" style="text-align: justify;">Because branch staff are too busy with operational duties to go out into the community and pro-actively hunt for business. I’ve been to a lot of branches as I travel the land looking for opportunities for banks to improve profits. I rarely see a “busy” branch. One time I saw a line for a teller and was so amazed at the site that I snapped a photo. The bank security officer set me straight. Don’t case the joint.<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">If bankers were truthful to themselves, they would recognize that these branch wraps, i.e. additional employees with fancy titles, are nothing more than covering up for the perceived shortfall in branch staff skills to be the face of the bank in our communities and pro-active business developers. If you are nodding your head in agreement, read on. </div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">If you are irritated at the theory and are scrunching your eyebrows like you bit into a lemon, then continue to add the layers to your organizational structure and move on to an article about the “branch of the future”.<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">Instead of adding staff and layering the cost onto an already burdened branch network (who pays for the compliance analyst you just hired?), why don’t you get the most from the investment you already make in your branches? I have four suggestions for you to improve the abilities of these critical profit centers.<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><b><i>1. Hire to execute your strategy.</i></b> <span style="text-indent: -24px;">This assumes you have a strategy that is more focused than “we’re a bank”. If your strategy is to be the number one business bank in the markets that you serve, then hire branch employees that can speak intelligently to business owners about how your bank can better serve them. If those employees are inept at balancing a teller drawer, then so be it. If your staff is highly capable at ATM replenishment but cringe at the thought of speaking to a small business owner about a sweep account, read on…</span></div><div class="MsoNormal" style="text-align: justify;"><span style="text-indent: -24px;"><br /></span></div><div class="MsoNormal" style="text-align: justify;"><span style="text-indent: -24px;"><br /></span></div><div class="MsoNormal" style="text-align: justify;"><span style="text-indent: -24px;"><b><i>2. Develop your branch staff. </i></b></span><span style="text-indent: -24px;">In my experience, the percent of banks that have specific training curricula for branch staff that goes beyond operations and compliance is somewhere south of Pi, if Pi were a percent, and I actually knew what Pi is. But you get the picture. When I was in the military, we had a training calendar for every functional position that included on-the-job (OJT), computer based, self-taught/correspondence, and classroom training. Each sailor was responsible for matriculating through the training program when they were not forward deployed. When they completed certain stages, they received certificates and were deemed “South-East Asia qualified”, or whatever designation the training was intended to accomplish. Do we have a “Small Business Qualified” designation in your training curriculum? If you are not satisfied with branch staff abilities to execute your strategy, and have invested the time and energy into developing them without results, then perhaps you have the wrong staff. But don’t complain about staff capabilities if you have done nothing to improve them.</span></div><div class="MsoNormal" style="text-align: justify;"><span style="text-indent: -24px;"><br /></span></div><div class="MsoNormal" style="text-align: justify;"><span style="text-indent: -24px;"><br /></span></div><div class="MsoNormal" style="text-align: justify;"><b><i>3. Provide meaningful incentives.</i></b> <span style="text-indent: -24px;">If you have heard me speak, I bang the drum loudly about branch incentives. You want branch staff to be the tip of the spear for small business relationship acquisition but give those that succeed a 4% raise and a $500 holiday bonus while those that are not successful a 3% raise and a $400 bonus? Why are we surprised that we have to build a “wrap” of different employees around branch staff? Instead of providing incentives based on deposit balances, how about branch profitability? Imagine the behavior differences if branch managers were charged with improving their deposit spreads, fee income generation, and managing their expenses? Would you get the desperate phone call for a rate exception for a $200,000 CD for a single-service customer to “keep the money at the bank”? Doubt it, because that $200,000 would be generating far less spread than the $40,000 operating account from Joe’s Tire and Battery. Even though Joe leaves grease at your teller counter every time he comes in. Why not pay branch managers for the important position that they hold in executing your strategy? Would it be beneficial to make variable compensation a greater and more meaningful component to the overall compensation package?</span></div><div class="MsoNormal" style="text-align: justify;"><span style="text-indent: -24px;"><br /></span></div><div class="MsoNormal" style="text-align: justify;"><span style="text-indent: -24px;"><br /></span></div><div class="MsoNormal" style="text-align: justify;"><span style="text-indent: -24px;"><b><i>4. Communicate your strategy</i></b>. </span><span style="text-indent: -24px;">That is, communicate it if you actually have a strategy. Being everything banking to everyone in the markets where you have branches is not a strategy, dear reader. If your strategy is the beef stew of all strategies (i.e. throw everything into the pot), then expect to be average. Wouldn’t that make a great epithet? Here lies Jeff, he was average. But assuming you have a strategy that clearly identifies the bank you strive to become, then communicate it to your employees! Who else do you expect to execute on the strategy day to day? If your strategy is to be the number one business bank, as ranked by the regional business journal, then identify objectives to achieve it and have your employees march a straight line to get there. Maybe then your branch manager will know that you want more customers like Joe’s Tire and Battery, regardless of having to use Mr. Clean on your teller counter after he leaves.</span></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><br /></div><br /><div class="MsoNormal" style="text-align: justify;">There you have it! Four concrete steps you can take to make branches more effective at achieving your strategic objectives. Did I miss anything?<o:p></o:p></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">~ Jeff</div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;">Note: This post first appeared as a guest post on Deluxe Corp's <a href="http://fi.deluxe.com/community-blog/deluxe-blogs/performance-management/breaking-branch-mediocrity/" target="_blank">Forward Banker Blog</a> in July 2014.</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-33465521232997648102015-02-07T10:18:00.000-08:002015-08-01T02:02:27.734-07:00Say on Pay for Financial Institutions<br /><div style="text-align: justify;">Researchers at Rice University performed a <a href="http://business.rice.edu/news_payratio/" target="_blank">study</a> on CEO compensation, including bank CEOs, relative to average employee compensation. The study was in reaction to the media's often cited pay disparity between the CEO's of the largest institutions and their rank and file employees.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As for banks, the Dodd-Frank Act mandates that all corporations administer a non-binding shareholder vote on the compensation of its executives. For publicly traded banking institutions, the study found the mean pay ratio was 16.6x, well within the 25x bounds identified by Peter Drucker in 1977. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Not leaving well-enough alone, I did some digging into the matter on my own, knowing that when you move up the banking food chain (i.e. asset size), the disparity, or ratio, will get larger. But most community financial institutions don't live in that world, or so I thought. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So I searched for publicly traded financial institutions with total assets between $1 billion and $3 billion that reported their CEO's total compensation (i.e. was not "NA"). The search yielded 148 financial institutions. I then took their annualized salary and benefits expense for their last reporting period and divided by their full-time equivalent employees ("FTEs") to come up with average salary and benefits per employee, and compared to the CEO's total compensation. </div><div style="text-align: justify;"><br /></div>The results are in the following table:<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgh941O8U9goDZC1TX5KbIkFIyYBK3O4s0T5qWeRUu3lhdpLEK2JFf661B6_NFiunt9KyFfmyx_-P9uh8J-PQXkBIB291QHOrszLiUCz6eqUThuyqwaC_aP1XOGZoJX6JvLUNyFh-gkL44/s1600/CEO+Comp+Analysis+2015_001.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgh941O8U9goDZC1TX5KbIkFIyYBK3O4s0T5qWeRUu3lhdpLEK2JFf661B6_NFiunt9KyFfmyx_-P9uh8J-PQXkBIB291QHOrszLiUCz6eqUThuyqwaC_aP1XOGZoJX6JvLUNyFh-gkL44/s1600/CEO+Comp+Analysis+2015_001.jpg" height="120" width="320" /></a></div><br /><div style="text-align: justify;">Although not the exact methodology of the Rice study, the table indicates that publicly traded community bank CEOs are not excessively compensated.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Since I went that far, I decided to see if there was a correlation between the CEO compensation multiple and financial performance, such as Return on Average Assets (ROAA). </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I took my search of $1 billion - $3 billion financial institutions and narrowed it down to $1 billion to $1.2 billion to keep a tight range, yet yield a decent sized sample. I eliminated companies with multiple bank subsidiaries, because the granular salary plus benefits and FTE data is typically at the bank-level. Plus I had to look and calculate manually. The search resulted in 36 financial institutions. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I separated them into quartiles based on ROAA. The results are in the below table.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZD57VExZG5_Z04okBfDWAf2b9B-RdC22TeCaPwCtBhZH9TdoIk0qvpGfBwk3J5-NPP-oqjg5pTvuCpVY-E-fGyTCXXOntNMA0Pq5bO_wDvCcALQGX00zwG-T24rZUw_bpKy0k3LMv04g/s1600/CEO+Comp+Analysis+2015+Multi+Bank_001.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZD57VExZG5_Z04okBfDWAf2b9B-RdC22TeCaPwCtBhZH9TdoIk0qvpGfBwk3J5-NPP-oqjg5pTvuCpVY-E-fGyTCXXOntNMA0Pq5bO_wDvCcALQGX00zwG-T24rZUw_bpKy0k3LMv04g/s1600/CEO+Comp+Analysis+2015+Multi+Bank_001.jpg" height="126" width="400" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"></div><br /><div style="text-align: justify;">Each quartile had nine financial institutions. Interestingly, the bottom quartile performer had the greatest CEO to average employee pay disparity, the highest CEO total compensation, and the highest average employee salary. But I'm not certain the message here is to not pay employees well. Perhaps the bottom performers have too many employees AND pay them well, lacking the expense discipline to elevate financial performance.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The middle quartiles are similar in total CEO compensation and average employee compensation. In fact, the top through the third quartile are intuitive in their financial performance versus compensation versus the pay multiplier. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In my experience, there are some financial institutions that pay executives well regardless of their relative financial performance. This was the main logic behind Dodd-Frank's Say on Pay.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The answer may not be in reducing executive compensation, although some Boards should consider it based on the facts. The answer, in my opinion, is to find ways to increase the compensation of rank and file employees. If we were socialists, we would mandate it and everyone would gravitate towards the lowest common denominator in employee productivity and financial performance would plummet.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But we're capitalists. And the way to increase real compensation is to improve productivity. That means instead of needing ten people in a department with average wages, we do it with seven people and pay above average wages. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Time and again my firm reviews departmental processes that are outdated and unnecessary, technologies that are underutilized, and managers that protect "the way we've always done it". If executives don't assume a leadership position in removing inefficiencies and elevating real wages while improving financial performance, perhaps their compensation <i>should </i>be evaluated.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As technology changes, it is difficult to keep up with process change. But the cost of doing business should decline as industries and the technologies that support them become more mature. When I performed my research, even though the asset size of the financial institutions was tight, the amount of FTEs per institution varied widely. One had 130 FTEs, another had 521. And average salary plus benefits varied, with the top payer averaging $135k, and the bottom payer averaging $45k. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The top payer, by the way, was in the bottom quartile financial performer, and the lowest payer was the last bank in the second quartile. Somewhere in between lies the answer for your financial institution.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Any thoughts on pay philosophy?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Note: The below SNL Financial article by Kiah Lau Haslett alerted me to the Rice study. It may require a subscription to view:</div><br />https://www.snl.com/InteractiveX/article.aspx?ID=30979109&KPLT=4<br /><br /><br /><br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-55373694613555138002015-02-01T10:00:00.000-08:002015-08-01T02:02:27.786-07:00Stupid Bank Names<div style="text-align: justify;">In the mid to late 1990's, my employer, First National Bank of Maryland based in Baltimore, bought Harrisburg, Pennsylvania based Dauphin Deposit Bank. They put together a transition team. I was on <br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXp9EF_3t7N-TTQBdpSBJAI4yfrtEECSRuhQR_Fvf25BNk5SB3Usi9ri3QAj9wzqXsWn7dKaqJeVU5DSdPLrps_33A0QXHRZoQGITB8dq0YBzuEVgUdq5f8i1b9bxjlXzCy7xaSQ6GKlU/s1600/Blank+Bank_001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em; text-align: justify;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXp9EF_3t7N-TTQBdpSBJAI4yfrtEECSRuhQR_Fvf25BNk5SB3Usi9ri3QAj9wzqXsWn7dKaqJeVU5DSdPLrps_33A0QXHRZoQGITB8dq0YBzuEVgUdq5f8i1b9bxjlXzCy7xaSQ6GKlU/s1600/Blank+Bank_001.jpg" height="171" width="200" /></a></div>that team. One of our responsibilities was coming up with a new name. After thousands of hours and millions of dollars, <b><i>Allfirst </i></b>was born. And hence the title for this blog post.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Are you going through a similar exercise? With Allfirst still fresh in my psyche, I occasionally throw stupid bank names at bankers contemplating a name change to increase the likelihood they won't make the same mistake. Here is what I came up with so far...</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><i>Allfirst </i></b>- My poster child for stupid bank names. They didn't even include bank in their marketing materials, leaving customers and potential customers wondering, <i>who</i>?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><i>Open Bank</i></b> - I featured Open Bank in my annual <a href="http://jeff-for-banks.blogspot.com/2014/12/bankings-total-return-top-5-2014-edition.html" target="_blank">total return top 5</a>. Kudos for delivering value to their shareholders. As for their name... what if they are closed?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><i>First Bank</i></b> - The context of this blog post is for considering a new name. I know many of you may be named First Bank because that's the way it was 100 years ago, or your name was First Savings Bank and you dumped the Savings or First National Bank and you dumped the OCC. But there are 77 other First Banks in the country. If your brand strives for assimilation, then go with it.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><i>Rabobank</i></b> - Not a large leap to Rob A Bank.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><i>IndyMac Bank</i></b>, FSB - Sound like a burger joint to anyone else?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><i>First Integrity Bank</i></b> - This Minnesota bank failed in 2008. If you have to put integrity in your name, well... The same with Honest, Fair, or any other similar name describing behavior that should be part of the culture. The exception being Trust, since this is a distinct charter and/or service offering. I may get a call from my friends at a similarly named bank near my home on this one. But they should've given me a call before printing the letterhead.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><i>Bank of Bird In Hand</i></b> - This is an Amish focused bank. Named for the town where it is located. So they probably don't view the name with the same smirk as me. And no, for my non-Pennsylvania friends, you cannot drive from Blue Ball, through Bird In Hand, on to Intercourse, and arrive in Paradise. All Central Pennsylvania towns. But not lined up in that order. My point here is, not every town name should be on your billboard.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><i>MutualBank</i></b> - On the surface, not a bad name. And I may get an e-mail from my FMS friend, Chris Cook. But truth be told, MutualFirst Financial of Muncie, Indiana, the holding company for MutualBank, is publicly traded. It's not a mutual.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><i>BestBank</i></b> - A distinction earned, not bestowed. Same with Superior Bank, etc.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><i>Excel Bank</i></b> - A spreadsheet?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><i>K Bank</i></b> - In today's abbreviated texting and social media world, this is a bad name, K?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><i>Innovative Bank</i></b> - Through the worst banking crisis since the Great Depression, only about 5% of FDIC-insured financial institutions failed. Could being in the 5% group qualify you as innovative?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This is only a small list of banks based on my personal knowledge and some database searches. I'm sure there are more out there.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">You may be surprised that I excluded some names such as the often lampooned poster child for stupid bank names, Fifth Third Bank. But it is a distinctive name, that has been around for a long, long time. I also respect some old school bank names, such as Old Second, etc. And banks with small town names that don't result in sophomoric snickers are also fine, in my opinion. Even affinity branded banks, like <a href="http://redneckbank.com/" target="_blank">Red Neck Bank</a> (actual division of a bank), have some merit.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So if you are grappling with the bank name issue, make sure that when you are presented with options as to what to call your bank, take a step back, and think. Ask somebody outside of the re-branding process. Common sense trumps a marketing study.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">What other stupid bank names are out there or were out there?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">P.S. If I offended anyone, I apologize.</div><div style="text-align: justify;"><br /></div><div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-52734702932644601222015-01-24T10:55:00.000-08:002015-08-01T02:02:27.799-07:00Bankers: What's Your "Well Capitalized"?<div style="text-align: justify;"><b>Prediction</b>: The <a href="http://www.federalreserve.gov/bankinforeg/stress-tests-capital-planning.htm" target="_blank">Federal Reserve's Comprehensive Capital Analysis and Review (CCAR)</a> and its complementary Dodd-Frank Act Stress Testing (DFAST) will meet its intended purpose, to better ensure financial institutions have sufficient capital during times of economic duress.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But not why you think.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">If you look at Citigroup's or BofA's leverage ratio today versus 2006 or 2007, it is clear that they carry far more capital than before the financial crisis. And that, my readers, was the intended purpose. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But it is not because CCAR or DFAST are properly assessing risk. The models are too complex and theoretical. An investment banker from a very large financial institution told me his bank submitted an 11,000 page CCAR to the Fed and they turned it down. Another prediction: nobody read an 11,000 page document. Nobody. And nobody understood it. That doesn't mean somebody didn't understand page 5,387, but the entire document? C'mon.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As long as the answer was, carry more capital, complex banks will be better prepared to weather economic storms. Perhaps regulators would save banks time, resources, and money if they took the age-old parent response to why banks should carry more capital... <i>Because I said so!</i></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As feared, DFAST schemes are being pushed down to smaller organizations. Regulators are asking for capital plans, and an assessment of risk in the bank's strategy to determine capital needs. In other words, <i>what's your well capitalized?</i> My firm wrote a <a href="http://kafafiangroup.com/pdf/TKG%20Newsletter_3Q_14.pdf" target="_blank">newsletter </a>on the issue. But I want to break it down to an even simpler form. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Call it the <b><i>Marsico Method</i></b>. Because I'm a narcissist and want something named after me.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The below table shows the Marsico Method in its simplest form.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIfyp5pvNy1_H6z2QbGr4MMrhX81PrJShwU6lZVNWYp1W03Ewv5ye_6xD4EBQNus9xZrIww8rDtZqfK__SNTmkI3T83RMLHiMCciqLGYUkMyBXg4JpxeWmaKS3MUuoj0SYzbx40oqaxEg/s1600/Well+Capitalized+Sample_001.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIfyp5pvNy1_H6z2QbGr4MMrhX81PrJShwU6lZVNWYp1W03Ewv5ye_6xD4EBQNus9xZrIww8rDtZqfK__SNTmkI3T83RMLHiMCciqLGYUkMyBXg4JpxeWmaKS3MUuoj0SYzbx40oqaxEg/s1600/Well+Capitalized+Sample_001.jpg" height="341" width="400" /></a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Currently, a bank is required to have a Leverage Ratio of 5% to be considered "well capitalized" by US regulators. So the Marsico Method begins with 5% applied to each asset category. No application of the 5% to liabilities, since capital ratios are calculated off of assets. That doesn't mean that liabilities don't carry risk, as you will see with the Risk Buffer.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The Risk Buffer column is similar to the buffer concept applied by Basel III, except that scheme applies a straight up 2.5% buffer to a common equity tier 1 (CET1) minimum of 4.5%, for a total CET1 ratio of 7%, to be fully phased in by 2018.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But in the Marsico Method, the Risk Buffer is an assessment of the potential loss estimate of each balance sheet item, based on a rational analysis by the financial institution. The table above is a high level balance sheet. Hypothetical? Not really. It is Cape Cod Five Cent Savings Bank's balance sheet. And according to the analysis, their well capitalized is 7.90%. Meaning that if they experienced stress and began taking losses, the 2.9% buffer above the 5% should be sufficient to staunch the bleeding.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">There would be more detail provided by specific loan, deposit, and other balance sheet categories to come up with the overall Risk Buffer per category. For example, upon analysis of the performance of the home equity line of credit portfolio during past downturns and rapid interest rate changes, the bank determines that the loss potential is 1.85%... hence the Risk Buffer for that particular balance sheet category.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Banks should not limit themselves to on balance sheet items. There is risk in pass through residential mortgage lending, loan commitments, and fee-based businesses to account for. And there is risk on the liability side of the balance sheet such as interest rate and liquidity risk, fraud, etc. That is why there is a Risk Buffer applied to those categories as well, although the risk is typically less than the asset side.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Using the Marsico Method, banks can then project the impact to the balance sheet and therefore Required Equity based on their strategy. This would flow nicely into their Capital Plan that identifies actions to augment capital should the bank experience a stress scenario. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">It also provides a nice answer to your regulators, Board of Directors, and other constituencies when they ask, <i>what's your "well capitalized"?</i></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I'd love to hear your thoughts on this approach!</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-45772265723597257852015-01-12T07:07:00.000-08:002015-08-01T02:02:27.930-07:00Guest Post: Year End Economic Commentary by Dorothy Jaworski<div class="MsoNormal" style="text-align: justify;"><u><span style="font-family: inherit;">2014’s Biggest Surprise<o:p></o:p></span></u></div><div class="MsoNormal" style="text-align: justify;"><span style="font-family: inherit;">It never fails. The markets provide us with completely unexpected surprises and leave us scrambling to update our projections for rates and economic growth. And so it was in the latter part of 2014. Oil prices began a massive plunge, down 46% for the year to $53 per barrel. And who expected this? Well- no one. Now we all have to adjust to this new reality. What are the implications of the crash in oil prices? And why did they plunge?<o:p></o:p></span></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgntcytgiY-WSKvLAJT9Fxc89K-xuaeyWTa1YyZoAoQdFV1l_1zcIBD2Ij6vPv4NJZO_xa_lvWKhtrtT_2L6IqqFvNdL-z9ep5opMSibGV3TZbk-I3cQiixRwEI_f31Idvne0oZoG6-pjU/s1600/DJ.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgntcytgiY-WSKvLAJT9Fxc89K-xuaeyWTa1YyZoAoQdFV1l_1zcIBD2Ij6vPv4NJZO_xa_lvWKhtrtT_2L6IqqFvNdL-z9ep5opMSibGV3TZbk-I3cQiixRwEI_f31Idvne0oZoG6-pjU/s1600/DJ.jpg" /></a></div><div class="MsoNormal" style="text-align: justify;"><span style="font-family: inherit;">We all have been reading for years how the United States was dramatically increasing energy production, especially from a method of extracting oil and natural gas in shale regions of the country known as hydraulic fracturing or “fracking.” Suddenly the US was the world leader in oil production. Suddenly the world realized that there was a supply glut. OPEC members and Russia stand to suffer the most from lower oil prices, but have continually sworn to keep production at current levels, perhaps using low prices to stall US investment and production. While the US economy is growing slowly and steadily, this is not the case in China, Europe, and Japan, who are experiencing low growth, no growth, and outright recession, respectively. This is a recipe for weak demand which, when combined with a supply glut, means lower prices. Also, the US dollar has been strengthening, with a 12% increase in 2014, further pushing oil prices lower as oil is typically traded as a dollar denominated commodity.<o:p></o:p></span></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><span style="font-family: inherit;">Think back, too, as to when oil prices were close to $100 per barrel earlier in 2014. Geopolitical tensions were running rampant as fighting was ongoing in Israel-Gaza, Russia-Ukraine-Crimea, and Syria with ISIS stepping up as a huge threat. Supply disruptions were the typical fear but the tensions have since subsided. These tensions could reappear if unrest rises in Russia, Iran, Saudi Arabia, Venezuela, and other countries that are highly dependent on oil for revenues. Now US consumers can be the biggest beneficiary of falling gasoline prices, which recently peaked at $3.69 per gallon in April, 2014 and ended the year at $2.23. Consumers rejoice! And don’t forget that heating oil prices have plunged, too, just in time for another polar vortex. I have always believed that cheaper oil and gas prices are like a tax cut that helps consumers save money on their “taxes” and spend it on other discretionary goods and services. I was gratified to hear Janet Yellen reiterate this same point. Consumer can and will rejoice and spend. Economists revised their projections to include new assumptions that consumers will save between $70 billion and $100 billion annually on gas and will spend most of the savings, perhaps increasing real GDP by at least a net +.5%. Yeah, finally! A 3% GDP number! Happy 2015!<o:p></o:p></span></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><u><span style="font-family: inherit;">The Economy in 2015<o:p></o:p></span></u></div><div class="MsoNormal" style="text-align: justify;"><span style="font-family: inherit;">Most economists were projecting +2.5% in real GDP growth in 2015, prior to the windfall from plunging oil prices. As mentioned, they have increased projections to +3.0%. Over the past five years, GDP has averaged +2.2%, which is quite disappointing compared to the average growth of +4.6% for the past ten recoveries. If we make it to +3.0% in 2015, it will be the first time in six years of recovery that we have touched +3.0%. Perhaps that is why former Federal Reserve Chairman Alan Greenspan just proclaimed that “we still have a sluggish economy,” which will not fully recover until there is more investment in long lived, productive assets and the housing market recovers. Despite all the euphoria over a lower unemployment rate of 5.8% (down in 2014 from 7.0%), the fact that many of the jobs created have been part-time, lower wage ones and many experienced workers are dropping out of the labor force. I do see millions of jobs being created in 2015, but still many are part-time, thanks mainly to Obamacare and other regulations.<o:p></o:p></span></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><span style="font-family: inherit;">Who projected that interest rates would fall in 2014? Well- no one- except maybe Dr. Lacy Hunt of Hoisington Management, who has been on top of trends most of us do not see. I read his quarterly newsletters with great interest and you should, too. The ten year Treasury yield topped 3% at the end of 2013 and fell to 2.20% by the end of 2014. Why? Falling inflation and falling inflationary expectations will do the trick. Falling inflation confounds the Philips Curvers, who read their textbooks and expected higher inflation from the falling unemployment rate. I’ll bet John Taylor is a little upset, too, with trying to use inflation in his Taylor Rule formula. Weakness in most world economies other than the US is keeping inflation under control with weak demand- especially as seen with commodity prices. US rates continue to be substantially higher than rates in Europe and Japan with less risk. That upsets me, because it is not normal. Yet, the Federal Reserve stubbornly continues to proclaim that they will raise interest rates by mid-2015. I say, go ahead. The Fed will just end up lowering them shortly thereafter when they realize they have tightened prematurely. New York Fed President William Dudley recently warned of just this risk, when he spoke of the historical classic case of premature tightening in 1937 by the Fed, when recession and deflation followed. <o:p></o:p></span></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div class="MsoNormal" style="text-align: justify;"><u><span style="font-family: inherit;">Risks to Growth<o:p></o:p></span></u></div><div class="MsoNormal" style="text-align: justify;"><span style="font-family: inherit;">I’m an optimist at heart, but I feel obligated to point out the risks to economic growth. Measuring and managing risk has been my specialty in a banking career that is now 40 years old, of which 29 years have been spent dealing with risk. The aforementioned risk of a Fed policy error of premature tightening tops the list. Economies around the world are struggling and their policy makers are still easing monetary policy, making the spread between US rates and those economies’ rates unnaturally wide. The ever rising US dollar could contribute to weaker and weaker currencies around the world, leaving countries to struggle and have to raise rates. We have geopolitical (the word made famous by Greenspan in the early 2000s) risks of war, terrorism, epidemics such as ebola and influenza, and cyber attacks.<o:p></o:p></span></div><div class="MsoNormal" style="text-align: justify;"><br /></div><div style="text-align: justify;"> <span style="font-family: inherit;">And there are two more risks that are not getting a lot of press- deflation- which can lead to deferred demand, declining wages, and slowing GDP- and liquidity risk- where restrictions and regulations have nearly strangled the life out of financial institution market makers, who seem increasingly unwilling or unable to take bonds into inventory and hedge them, instead opting to act like brokers, taking too much time to execute trades and too wide a bid-ask spread. Market makers are not alone in this regulatory nightmare; 79,000 proposal and final rule pages were published in the Federal Register in 2014 affecting all industries, with a cumulative total of 468,500 since the recovery began in 2009. Once again, I digress. But, that’s what I am here for. Stay tuned! </span></div><span style="font-family: inherit;"><br /></span><span style="font-family: inherit;">Thanks for reading! 01/05/15</span><br /><span style="font-family: inherit;"><br /></span><span style="font-family: inherit;"><br /></span><span style="font-family: inherit;"><strong style="text-align: justify;"><em>Dorothy Jaworski</em></strong><span style="text-align: justify;"> 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 </span><a href="https://www.bucksonlinebanking2.com/home/home">First Federal of Bucks County</a><span style="text-align: justify;"> since November, 2004. She is the author of <b><i><a href="http://www.amazon.com/Just-Another-Soldier-Dorothy-Jaworski/dp/1499102666/ref=sr_1_1?ie=UTF8&qid=1406494270&sr=8-1&keywords=another+good+soldier">Just Another Good Soldier</a></i></b>, which details the 11th Infantry Regiment's </span><span style="text-align: justify;">WWII</span><span style="text-align: justify;"> </span><span style="text-align: justify;">crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure.</span></span>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-56400164974719702152015-01-05T16:02:00.000-08:002015-08-01T02:02:27.947-07:00Leadership: In My Own Words<div style="text-align: justify;">With all of the scholarship on leadership, what could I add to the conversation? I have my ideas. And if we reflect on the decline of our industry, an honest in-the-mirror assessment of bank leadership merits discussion.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In 2004 I wrote an article for a banking industry association entitled <a href="http://kafafiangroup.com/pdf/lead-like-lincoln.pdf" target="_blank"><i>Lead Like Lincoln</i></a>. The article identified three traits that were critical to Lincoln's success: Vision, Communication, and Commitment. Ten years later, I stand by those traits.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQCm4MrGyRlxeQ97RfWqlndSmSHJ0M7r4ZCVJapGGYgocVyFTSFP_mP-K6I03zg_YizN3CmP89lC7Jo1skvdogBC2TGqwuxpEJnJXwhhRMTczV1znC__XUY0Pd2CJDFPBuNT9aUV4mV-w/s1600/lincoln.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQCm4MrGyRlxeQ97RfWqlndSmSHJ0M7r4ZCVJapGGYgocVyFTSFP_mP-K6I03zg_YizN3CmP89lC7Jo1skvdogBC2TGqwuxpEJnJXwhhRMTczV1znC__XUY0Pd2CJDFPBuNT9aUV4mV-w/s1600/lincoln.jpg" height="320" width="254" /></a></div><div style="text-align: justify;">At this stage of the post, I could cite studies, books, and management luminaries on what makes great leaders. Instead, I will give you my slightly varnished view, straight from the gut. Slightly varnished because I grew up in Scranton, where directness has greater value than tact. Not always an admirable trait for a consultant, or a leader.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">A great leader has <i>a vision for the future</i>. This is particularly important and challenging in rapidly changing industries like technology and media. It was not particularly important in slow moving industries like banking. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But that has changed. The greatest banking leaders can see their bank several years into the future, and organize resources around making that vision a reality.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">A great leader is <i>humble</i>. As with any general statement on leadership traits, there are exceptions. Say what you will about Steve Jobs. Humble he was not. But hard charging, egotistical leaders can only move an organization so far, and to a certain size, before the ego starts to become a liability. Recall that Jobs got fired from the company he founded. Not an easy task to accomplish. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The humble leader, on the other hand, takes counsel from his/her people and understands that no human being is all knowing, or even close to it. A great leader <i>does not judge his/her importance by an org chart or the size of paycheck, but by the happiness of their people</i> (sum total of all of their people, not just keeping an individual happy) <i>and the purpose of their work</i>. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">A great leader <i>does not fear failure</i>. Failure is the lesson plan for success. Avoid failure, and the leader understands that their company is destined for the ash heap of irrelevance. In banking, failure is clearly a dirty word when relating to the overall bank. But the most innovative and sustainable business models in our industry are moving farther away from business as usual into less tried and true paths. If there was ever a need for great leaders in banking, now is the time.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">A great leader <i>has great followers</i>. When the Navy trained me on leadership, an early lesson was that before becoming a great leader, a sailor must be a great follower. So before assuming leadership, a future leader supports their current leader, working with purpose for the betterment of the company, with no interest in highlighting shortcomings of their leader or those around them in order to move them up the organizational ladder.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Surrounding yourself with great followers implies hiring those that can step into your shoes, or that have such potential and you are dedicated to ensuring their development. Great followers are smart, motivated, humble, forward looking, and care about their colleagues and the company. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Great followers give the leader informed information and opinions, and if the leader, after careful reflection, decides to go against the follower's recommendation, the great follower charges forward lock-step with the leader.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Poor leaders don't want great followers for fear that they can easily slip into the leader's shoes. Great leaders<i> cheer their followers and prepare them to slip into the leader's shoes</i>.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Great leaders <i>are committed</i>. If a vision is worth pursuing, should it be abandoned when obstacles rear their inevitable head? Weak leaders cut their losses. Great leaders forge forward.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Great leaders <i>are likable</i>. By this I don't mean liked by everyone at all times. They can make the difficult decisions, counsel employees, and be firm when necessary. But if a leader must motivate employees to challenge their boundaries and create great companies, employees must believe in the man or woman. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Can a person with wavering honor or integrity, or is generally a jerk get the entire company to move as one in a direction that has great risk yet may lead to great reward for a sustainable period of time? </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I think not. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">What are your thoughts on leadership in financial services?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><br /><br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-69894428622072421812014-12-28T07:20:00.000-08:002015-08-01T02:02:27.990-07:00Year End Message to Community Financial InstitutionsThank you, my readers, for taking the time to read Jeff For Banks. I appreciate all of you.<br /><br />If you were curious why I enjoy working with community financial institutions, below is my weak attempt at explaining myself. Hey, I recorded while on vacation, so there's that!<br /><br />But the over-riding message is: Let's go get the big boys in 2015!<br /><br />Happy New Year everyone!<br /><br /><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.youtube.com/embed/Bv8FusET0CQ?feature=player_embedded' frameborder='0'></iframe></div><br /><br />In case you can't watch directly from my blog, here is the YouTube link:<br /><br />https://www.youtube.com/watch?v=Bv8FusET0CQ&feature=youtu.be<br /><br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-50859515591169059852014-12-18T15:00:00.000-08:002015-08-01T02:02:28.002-07:00Banking's Total Return Top 5: 2014 Edition<div style="text-align: justify;">For the past three years I searched for the Top 5 financial institutions in five-year total return to shareholders because I grew weary of the "get big or get out" mentality of many bankers and industry pundits. If their platitudes about scale and all that goes with it are correct, then the largest FIs should logically demonstrate better shareholder returns. Right?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Not so over the three years I have been keeping track.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">My method was to search for the best banks based on total return to shareholders over the past five years... capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered for those FIs that trade over 1,000 shares per day. This, naturally, eliminated many of the smaller, illiquid FIs.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For comparison purposes, here are <a href="http://jeff-for-banks.blogspot.com/2013/12/bankings-total-return-top-5-2013-edition.html" target="_blank">last year's top five</a>, as measured as of December, 2013:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">#1. BofI Holdings, Inc.<br />#2. Marlin Business Services Corp.<br />#3. Fidelity Southern Corp.<br />#4. Eagle Bancorp, Inc.<br />#5. Bancorp, Inc.<br /><br /><br /></div><div style="text-align: justify;"><div class="separator" style="clear: both; text-align: center;"></div>This year's list is in the table below:</div><div style="text-align: justify;"><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhT_zFVS5fC6BUk1XZvI3hPDFHmhwX0_nhIgBvkNU2U9mZ22-CpQ8eKKJmW4WenODp7UNTpULSio_kxv2KODpHkKT4fJ0VHfKuxzt-RX68DlgSjOgu3HbhkWiYQtYmoemtBhbWNaHagh2s/s1600/top+5+total+return+as+of+12-15-14_001.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhT_zFVS5fC6BUk1XZvI3hPDFHmhwX0_nhIgBvkNU2U9mZ22-CpQ8eKKJmW4WenODp7UNTpULSio_kxv2KODpHkKT4fJ0VHfKuxzt-RX68DlgSjOgu3HbhkWiYQtYmoemtBhbWNaHagh2s/s1600/top+5+total+return+as+of+12-15-14_001.jpg" height="85" width="400" /></a></div><br /></div><div class="separator" style="clear: both; text-align: justify;"></div><div style="text-align: justify;"><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"></div><br /></div><div style="text-align: justify;">BofI Holdings celebrates its third straight year on this august list. Congratulations to them. A summary of the banks, their strategies, and links to their website are below. </div><div style="text-align: justify;"><br /><br /></div><div style="text-align: justify;"><b><a href="http://www.myopenbank.com/" target="_blank">#1. Open Bank</a> (OTCQB: OPBK)</b></div><div style="text-align: justify;"><br />Open Bank commenced operations in 2005 as First Standard Bank in the Koreatown section of Los Angeles. They are built as a relationship bank serving the Korean community in LA and surrounding areas. It is a significant SBA 7(a) lender, ranking in the <a href="https://www.sba.gov/lenders-top-100" target="_blank">top 100</a> (#54) in the country in that category, ahead of much larger financial institutions like Bank of America. Year to date through September 30th, Open Bank had $4.5 million gain on sale of loans, representing 24% of its total revenue for that period. The lion's share of their growth, profitability, and capital have come since their re-branding to Open Bank in 2010. In June, the bank raised an additional $30 million of common equity, positioning it to continue its strong growth.<br /><br /><br /><b><a href="https://www.bofifederalbank.com/" target="_blank">#2. BofI Holding, Inc.</a> (Nasdaq: BOFI)</b><br /><br />BofI Holdings Inc. and its subsidiary BofI Federal Bank aspire to be the most innovative branchless bank in the United States providing products and services superior to their competitors, branch-based or otherwise. In its latest investor presentation, BofI claims that its business model is more profitable because its costs are lower. It supports the claim by highlighting its efficiency ratio is in the top 2% of UBPR peers, and its operating expenses as a percent of average assets are in the top 12% of peer banks. So, as a branchless bank, BofI has leveraged its significantly lower operating expenses into profit. That profit led to the top spot in five year total return to shareholders, three years running. Well done!</div><div style="text-align: justify;"><br /><br /></div><div style="text-align: justify;"><b>#3. <a href="https://www.bncbank.com/index.htm" target="_blank">BNCCORP, Inc.</a> (OTCQX: BNCC)</b></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">BNCCORP, Inc., through its subsidiary BNC National Bank, offers community banking and wealth management services in Arizona, Minnesota, and North Dakota from 14 locations. It also conducts mortgage banking from 12 offices in Illinois, Kansas, Nebraska, Missouri, Minnesota, Arizona, and North Dakota. BNC suffered significant credit woes during 2008-09 which led to material losses in '09-10, and the decline in their tangible book value to $5.09/share at the end of 2010. Growth, supported by the oil boom in North Dakota's Bakken formation, and a robust mortgage refinance business resulted in a tangible book value per share at September 30th of $17.18... a significant recovery and turnaround story that landed BNC in our top 5 for the first time.<br /><br /><br /></div><div style="text-align: justify;"><b>#4. <a href="http://www.westernalliancebank.com/" target="_blank">Western Alliance Bancorporation</a> (NYSE: WAL)</b></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Western Alliance, through its subsidiary Western Alliance Bank, provides comprehensive business banking and related financial services, operating full service banking divisions in local markets as Alliance Bank of Arizona, Bank of Nevada, First Independent Bank, and Torrey Pines Bank. It also has a national platform of specialized finance units in homeowners' associations, public finance, resort finance, and warehouse lending. Its diversified and primarily commercial loan portfolio and a loan/deposit ratio of 91% resulted in a year to date net interest margin of 4.41%. This margin plus a 2.07% operating expense ratio resulted in a YTD efficiency ratio of 47%. That type of financial performance plus picking yourself up from credit problems leads to top 5 total returns for your shareholders. Well done!<br /><br /><br /></div><div style="text-align: justify;"><b>#5. <a href="https://www.mercbank.com/" target="_blank">Mercantile Bank Corporation</a> (Nasdaq: MBWM)</b></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In June, Mercantile Bank and Firstbank Corporation closed on a merger of equals to form the fourth largest Michigan-based bank by deposit market share. Firstbank traced its roots back to the 1800's, while Mercantile was founded in 1997. As part of the transaction, Mercantile shareholders received a $2/share special dividend prior to closing, shaving off of tangible book value. But the total return story is similar to others on the list. Mercantile suffered through its share of credit snafus, losing a collective $70 million 2008-10, only to recover and negotiate a franchise changing merger of equals. Best of luck on the integration and congratulations for landing on the JFB top 5 total return to shareholders list! </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDkPAaoa5nzBaVcUx2HGjrVxdrj_jpFvB59dfUvsJktqELmZd5ToAWOwMCMNicthnKl9dHT4jDrKgRKdJL8qfSU6NJhg27bfXsDwcPfkHoRc-rmGHM2ZTIYJl-HZ8nHxkg4AHFjH2ssME/s1600/top+5+total+return+chart+as+of+12-18-14_001.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDkPAaoa5nzBaVcUx2HGjrVxdrj_jpFvB59dfUvsJktqELmZd5ToAWOwMCMNicthnKl9dHT4jDrKgRKdJL8qfSU6NJhg27bfXsDwcPfkHoRc-rmGHM2ZTIYJl-HZ8nHxkg4AHFjH2ssME/s1600/top+5+total+return+chart+as+of+12-18-14_001.jpg" height="202" width="400" /></a></div><br />There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $10 billion in total assets. No SIFI banks on the list. What about that economies of scale crowd? Hmm.<br /><br />The flavor of this year's winners is recovery, with the exception of our consistent top performer, BofI. Congratulations to all of the above that developed a specific strategy and is clearly executing well. Your shareholders have been rewarded!</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Are you noticing themes that led to these banks' performance?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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 well.</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-82027434866797189412014-12-09T07:49:00.000-08:002015-08-01T02:02:28.045-07:00Why Does Kim Kardashian Kick Your Bank's A**?<div style="text-align: justify;">I have never heard Kim Kardashian speak. I never watched her show. I don't know the family story. I can't name family members beyond Bruce Jenner. Until today, I never searched on her name.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But I know who she is. I know she's pretty. I have heard her claim to fame is an online sex video. I have seen her butt. But not in person. I saw it on a prime time news program. That's right, her derier was featured on a prime time news story.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">How has this person turned nothing into significant brand recognition and revenue stream?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">By typing Kim Kardashian, and adding her as a label, I just significantly increased this blog post's SEO, or search engine optimization. According to Yahoo, she was the <a href="http://searchengineland.com/2014-yahoo-search-trends-ebola-ranks-1-popular-searches-searched-news-story-210087">sixth most popular search</a> during the year. There were no banks in the top 10. If I add her picture, which I am contemplating doing, I would increase my traffic. This is known as "click bait". Put a pretty girl next to any post... be it about fishing or the Victoria's Secret fashion show, and you'll get more clicks, so they tell me.</div><div class="separator" style="clear: both; text-align: center;"></div><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEUJvjBAzXk8qyZpSYCLS5mxDHEtT-IsQMV_1hz13zAifFvMl6uSFpCVxLt2hyphenhyphenhPODyI5QOXiVlHOZY9EOIfiQyhPq-E258D5QnOAFLIaYj0oM75jCH060xUpdBm0SgKfk4Tm4wpGjLBE/s1600/Sig+Hansen.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEUJvjBAzXk8qyZpSYCLS5mxDHEtT-IsQMV_1hz13zAifFvMl6uSFpCVxLt2hyphenhyphenhPODyI5QOXiVlHOZY9EOIfiQyhPq-E258D5QnOAFLIaYj0oM75jCH060xUpdBm0SgKfk4Tm4wpGjLBE/s1600/Sig+Hansen.jpg" height="142" width="320" /></a></div><div style="text-align: justify;">In fact, when I searched (via Bing) "Washington Trust Bank", a $4.7 billion in asset community bank based in Spokane and founded in 1902, I had 74,900 hits. I did the same for "Wells Fargo" and got 3.4 million hits. Kim Kardashian: 4.3 million hits.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Strategy teams perform a Situation Analysis prior to developing bank strategy, surveying reams of facts to get an accurate assessment of their operating environment. One particular part of a US bank's environment, sadly, is that we are celebrity obsessed. You want to follow Will and Kate, our crack news coverage has you covered. Wonder how far along Iran is in their nuclear program? Good luck.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This became apparent to me when I was speaking to a Washington state banker about his most famous customer, Sig Hansen, the captain of the <a href="http://fvnorthwestern.com/">F/V Northwestern</a>, a crab fishing vessel. Yes, I hot linked to a crab fishing vessel. They have a website, and a pretty nifty one too. How could this be? Because Sig and the Northwestern are front and center on Discovery Channel's <i>Dangerous Catch</i>. Click over to their website and you can buy the coffee Sig drinks. Clearly, Sig's celebrity has aided the cash flow ups and downs typical of a fishing vessel.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">How can banks respond to our celebrity obsessed culture? I don't think it is by hiring a celebrity to pitch your bank. Society has grown accustomed to this, and I'm not convinced it moves the needle much. Honda recognized this by enlisting Stretch Armstrong as spokesman for its line of cars this holiday season.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But perhaps we can make a celebrity or two out of our senior executives. For example, I live in Central Pennsylvania, where a credit union uses its CEO in all of its advertisements, billboards, etc. Forget the fact that he wears tights and a cape in most ads. No, seriously, I'm trying to forget that fact. But you get my point. This credit union has made a celebrity out of their CEO, and he is widely recognized in the community.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">If done properly, this strategy could leave you exposed to the new celebrity departing the bank, or demanding higher compensation due to their new found status. There are ways to mitigate this risk. Progressive Insurance did so with Flo.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Do you think turning key employees into celebrities would help execute your strategy?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><br /><br />P.S. I went with Sig Hansen's photo. Not as pretty as Kim.<br /><br /><br /><br /><br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6152538265495462872.post-4373112808493158552014-11-28T08:21:00.000-08:002015-08-01T02:02:28.060-07:00Bankers: You spend like drunken sailors.<div style="text-align: justify;">As a former sailor, I take offense to the post title. As if I spent my family's food money on alcohol while on shore leave. I only spent <i>my </i>food money.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But the phrase is synonymous with spending money without direction or regard to consequence. And sometimes, we bankers fall into the trap of not considering our operating expenses as strategic investments.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">On December 8th I am speaking at the Northwest Bank Executives conference in Seattle. My topic: <i>Ten Things Banks Should Do, But Generally Don't</i>. One of the ten is "not considering operating expenses as strategic investments".</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As an example, let's take an average $1 billion in assets financial institution. The below table was drawn from a peer group analysis my firm performed for a client. Dollar amounts are annual averages for each expense category of 13 financial institutions with an average asset size of $1.0 billion. </div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjldvZtsP37_-sif83EMtu9dOZs4Y1IlAKaKQdhUXkUTNOmB1vHYPQkRCclVK4AdlvYCnxxjwxXIVzPWRZJH-yP61NKJWHzfe0Wx85NCHQfCPXpHpgSqwXIDADpFIOXE6MqKy148qbJiO4/s1600/1B+Community+Bank+Exp+Breakdown+2014_001.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjldvZtsP37_-sif83EMtu9dOZs4Y1IlAKaKQdhUXkUTNOmB1vHYPQkRCclVK4AdlvYCnxxjwxXIVzPWRZJH-yP61NKJWHzfe0Wx85NCHQfCPXpHpgSqwXIDADpFIOXE6MqKy148qbJiO4/s1600/1B+Community+Bank+Exp+Breakdown+2014_001.jpg" height="640" width="532" /></a></div><br /><div style="text-align: justify;">At a time when so many banks are challenged to grow revenues, marketing expenditures represent 2.1% of all operating expenses. And that includes professional services, such as consultants that have little to do with winning the next customer.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Strategically, this hypothetical bank spends $30.4 million per year. Now let's assume you had this thirty mil to execute a strategy to build your bank for a sustainable future. Whatever that strategy may entail, could you not find the resources to fund it?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But we are often bound by legacy. We have seven people in Deposit Ops, and need a new piece of technology or another person and therefore must increase our budget by 7%. Three percent increase in Loan Servicing, and another 5% in IT, etc. etc. etc.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">What if you blew up your budget and started constructing an infrastructure, footprint, and employee base hyper-focused on executing your strategy? Instead of 20 branches staffed with six transaction processing pro's each, you need only 16 branches, strategically located, with four higher paid relationship building go-getters per branch. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This hypothetical bank spends $1.2 million/year, or 4% of total operating expenses, on data processing (not including personnel). Can we allocate that sizable chunk into core and ancillary systems specifically designed to serve our core customers, as per our strategy, in a superior fashion to the financial institutions that spend wide and far to satisfy every constituency? Perhaps we should recognize the importance of the digital distribution system and appoint the appropriate executive to be its champion. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As McKinsey director Somesh Khanna states in an interview titled "<i><a href="http://www.mckinsey.com/Insights/Financial_Services/The_bank_of_the_future?cid=DigitalEdge-eml-alt-mip-mck-oth-1411">The Bank of the Future</a></i>" on who should drive the digital strategy in a bank...</div><br /><div style="text-align: center;"><span style="line-height: 107%;"><span style="font-family: inherit;">"<i>I actually think that it’s less dependent on the role. It’s much more dependent on the person. If the person is someone that is able to visualize a future, get the organization rallying around a bunch of different objectives, and inspire people to actually pursue that path, it’s their real leadership capabilities that’ll come to bear to pull off digital agendas.</i>"</span></span></div><br /><div style="text-align: justify;">So you build your digital strategy around such a person, allocating an appropriate slice of the budget pie to develop your bank of the future for the benefit of your constituencies. Or is our digital strategy champion hyper-focused on installing ATMs that are ADA compliant?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I am not proposing an academic exercise. I am proposing considering every dollar you spend as an investment. And you should invest in your strategy, not your legacy. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Can we shake our budget mentality, and view our operating expenses as investments into the bank we want to become? I hope so.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">~ Jeff</div><div style="text-align: justify;"><br /></div>Unknownnoreply@blogger.com0