Bankers: Build Your Own Small Business Loan Platform

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. 

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.

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.”

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.

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.

If outside of your risk appetite, how about SBA lending? Ridgestone Bank, 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. 

SBA loans not an option for our hypothetical engineering firm? How about a partnership with a peer to peer lending platform such as Prosper that can be co-branded with your financial institution? Prosper will pay an affiliate fee for each loan offered. OnDeck Capital, which specializes in business cash flow lending, will also affiliate with financial institutions, providing another avenue to fund our hypothetical engineering firm.

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.

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 Kickstarter. That would be a bank dedicated to small business capital formation, and growth, within their communities.

And a growing community usually leads to revenue growth at your bank.

Or you could stick to business as usual, and hope small businesses come your way. Your choice.

~ Jeff


Note: This article was previously published in the April 2015 issue of ABA Bank Marketing and Sales magazine in the Growing Revenue series.

Bankers Need to Encourage, Even Compel Employees to Use Tech Tools

Chris Cox, the head of Regions Bank eBusiness unit, was quoted in Bank Technology News 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.

But will they do it through your financial institution? In a separate article, Jim Marous of The Financial Brand, opined 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.

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.

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. 

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.

Secondly, I believe that PFM and other customer-facing technology tools have low adoption rates by your employees. Don't believe me? Why don't you poll them. Let me know how it turns out.

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.

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.

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? 

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.  

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. 

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.

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.

Or you could let Mint do it.

~ Jeff

Five Ideas to Build an Accountability Culture at Your Bank

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.

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.

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?

Part of my coaching school curriculum for being a US Lacrosse certified coach was the Positive Coaching Alliance (PCA). 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. 

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.

1. Make accountabilities measurable and transparent. 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.

2. Link to your strategy. 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.

3. Have a little friendly competition. 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.

4. Include support centers. 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.

5. Have an awards ceremony. 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.

How do you create a positive accountability culture?

~ Jeff

Bank Board Compensation: An Amateur's View

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.

What are we trying to accomplish with Board compensation?

The FDIC Pocket Guide for Directors identifies the Board's responsibilities as:

- Select and retain competent management.

- Establish, with management, the institution's long and short-term business objectives in a legal and sound manner.

- Monitor operations to ensure that they are controlled adequately and are in compliance with law and policies.

- Oversee the institution's business performance.

- Ensure the institution helps to meet its community's credit needs.

How do we establish a compensation plan that is consistent with the above?

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? 

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.

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.

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! 

So I decided to insert what I thought would be performance metrics consistent with Board responsibilities. 

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.

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?

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.

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? 

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.

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.

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. 

What are your thoughts on incentive comp for Board members?

~ Jeff

Bank Board Reports: War and Peace or Cliff Notes?

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. 

You mean you didn't see it? That's on you, fella.

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!

According to the FDIC pocket guide for directors, a financial institution's Board should:

- Select and retain competent management

- Establish, with management, the institution's long and short-term business objectives in a legal and sound manner

- Monitor operations to ensure that they are controlled adequately and are in compliance with law and policies

- Oversee the institutions' business performance

- Ensure that the institution helps to meet its community's credit needs

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:

- Selecting contractors for the buildout of the new branch

- Determining raises for employees that are not Senior Management

- Credit underwriting

- Small ticket charitable donations

- Loan administration's $100 budget variance

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:

1. Financial reports for the current period, and trends. 

2. Budget variance reports

3. Financial progress towards strategic plan

4. Financial condition and performance versus peer

5. High level risk management reports (because more granular risk reports are reviewed in Committee) and trends.

6. Compliance and audit reports, not included in 5 above

7. Other business such as approving policy changes, large/exception credits requiring Board approval as per policy.

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.

Executive recruiter Alan Kaplan recently wrote an article for Bank Director magazine titled What Makes Great Boards Great. 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?

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.

Do you think Board packages focus on the right things?

~ Jeff

·         

Bankers: Think about what gets measured.

"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.

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?

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.

I recently did a podcast for PrecisionLender regarding this subject for lenders entitled: Using Bank Data to Get Better Results. That's right, I did a podcast. I only learned a few months ago what a podcast was.

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.

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.

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.

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.

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. 

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.

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.

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. 

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!"

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!

How do you measure lender performance?

~ Jeff

Hire a Vet: Part Two

Five years ago I wrote 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.

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.

But this post is about something greater than your succession issues. In April, my wife spearheaded a county-wide lacrosse community campaign to benefit the Wounded Warrior Project. 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.

Here is the address delivered before most lacrosse games during our Assisting Our Defenders week.

"Ladies and Gentleman,

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. 

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.

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.

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!" 

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!

~ Jeff

P.S. Plus I'm pretty proud of my wife!

De Novo Banks: Only Apply If You Intend to Matter

ABA President Frank Keating wrote an Op-Ed piece recently in The Hill entitled New jobs and new growth call for new banks. I don't believe it. A more accurate title should have been New jobs and new growth call for new businesses. His leap-of-faith assumption was that new banks are critical to new business formation. I'm skeptical.

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.

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.

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.

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.

I am doubtful many financial institutions would make such a loan.

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.

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?

I don't know of many.

Do you think de novo banks are actively participating in startup or early stage business financing?

~ Jeff

Bankers Tell Me Their Top Industry Game Changers

If you were asked what one industry trend will change the face of banking forever, what would you say?

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.

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. 

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.

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 subsequently raised $8 million more last summer, aspires to remake banking through the smart phone. They see their IT department as a profit center. 

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?

In 2013, I wrote a blog post 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 should be, rather than how they are. Two years and I still haven't seen this position.

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 prefer 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?

If you do, then here are some ideas on what to do next:

- 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.

- 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.

- 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.

- 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.

Do you think the time to treat our mobile/online banking centers as support centers should end?

~ Jeff

Guest Post: First Quarter Economic Commentary by Dorothy Jaworski

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!

A New Year of Volatility

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^th 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.

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.

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.

Oil Steals the Show

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. 

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? 

Strong Dollar

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.

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!

Thanks for reading!  03/30/15        

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with First Federal of Bucks County since November, 2004. She is the author of Just Another Good Soldier, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure.

Perception Versus Reality: Do People Get More From Credit Unions Than Banks?

The Credit Union National Association (CUNA), the credit union equivalent to the American Bankers' Association (ABA), states 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.

Nearly four years ago, I tested the higher interest on deposits claim in a guest post with the exact title on The Financial Brand, 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.

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. 

When I re-ran the analysis, what was true back in 2011 still holds true (see chart).

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.

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.

Based on the above, for the sum total of all interest bearing deposits, banks pay higher rates, on average.

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).

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. 

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.

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.

As the charts show, there is little difference in expense ratios, on average, for the measured institutions. 

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.

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.

Except for the shareholders. And the taxes.

Do you thing credit union and bank business models getting more similar?

~ Jeff

Bank Deals: How Are They Working Out for You?

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.

But what about buyers? I have written about achieving positive operating leverage in the past. In fact, it is one of my most read blog posts. In his most recent Chairman's letter, Warren Buffett weighed in with the following about buyer performance post acquisition:

"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'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."

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.

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.

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.

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?

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.

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?

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.

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.

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.

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?

Is it a fair question?

~ Jeff

Say It Ain't So Doug! Square 1 Bank Sells to PacWest

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.

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.

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.

But why sell Doug?

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.

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."

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.

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."

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:

1. Institutional Ownership - 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.

2. Law of Large Numbers - 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 keep pace. Never mind growth. Which brings me to my third potential reason for selling...

3. Growth Trajectory - 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?

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.

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. 

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. 

They did.

What else could Square 1 have done to satisfy their investors?

~ Jeff

Breaking Branch Mediocrity

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?

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.

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. 

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”.

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.

1. Hire to execute your strategy. 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…

2. Develop your branch staff. 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.

3.  Provide meaningful incentives. 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?

4. Communicate your strategy. 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.

There you have it! Four concrete steps you can take to make branches more effective at achieving your strategic objectives. Did I miss anything?

~ Jeff

Note: This post first appeared as a guest post on Deluxe Corp's Forward Banker Blog in July 2014.

Say on Pay for Financial Institutions

Researchers at Rice University performed a study 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.

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.  

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. 

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. 

The results are in the following table:

Although not the exact methodology of the Rice study, the table indicates that publicly traded community bank CEOs are not excessively compensated.

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). 

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. 

I separated them into quartiles based on ROAA. The results are in the below table.

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.

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. 

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.

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.

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. 

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 should be evaluated.

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. 

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.

Any thoughts on pay philosophy?

~ Jeff

Note: The below SNL Financial article by Kiah Lau Haslett alerted me to the Rice study. It may require a subscription to view:

https://www.snl.com/InteractiveX/article.aspx?ID=30979109&KPLT=4