Saturday, February 18, 2017

Capacity Planning in Banks: Three Measurement Ideas

Joe Lender's loan portfolio grew $5 million last year. The Trust Department's revenues grew nine percent. The Market Street branch's core deposits grew to 64% of total deposits. All objective measurements for front liners.

But what about support centers? Loan Servicing, IT, Deposit Operations et al? Perhaps they look busy. I have actually heard that before. One CEO said he judges capacity by looking out of his office window at 6pm. Are there cars in the employee lot? Perhaps it's time to add resources. If not, the request for an additional FTE is denied!

How can executive management, most of whom did not come from support centers demanding more resources, decide if they should give it to them?

I have some ideas.

1. Number of Accounts and Operating Cost Per Account

One statistic I turn to for clues on the capacity of a support center is how they were operating at their peak. Let's discuss the accompanying table.

With the exception of one period with a slight upward blip, this bank has been losing checking accounts over the eight periods measured. Yet the bank has not been reducing aggregate costs because the operating cost per checking account is more than it was eight periods ago. According to these data points, this bank supported eight percent more checking accounts at 13% less cost eight periods ago.

This data point suggests an 8%-13% available capacity.

2. Benchmarks

Data are like humans. Rarely perfect. When data does not support our theory, we tend to point to its imperfections. So it goes with benchmarks. There are no apples to apples comparison with a basket of banks data compared to yours. But does it represent a relevant data point to consider? The chart below suggests another relevant point of information so an executive can determine the capacity of a support department.

In this bank's case, the number of deposit accounts per deposit operations FTE has been declining. When deposit accounts were greater, this bank achieved the benchmark median. As number of accounts declined, personnel did not, and this metric fell below the benchmark. At the current period, the bank is 7% below the median benchmark and significantly below the top quartile. Time to reduce resources, or at a minimum challenge the department to become more efficient?

3. Recognizing Economies of Scale

A third data point to consider when determining capacity in a support center is how much resources as a percent of the relevant balance sheet item does this center consume (see chart)?

I have written, spoken, and debated that to achieve economies of scale, you must reduce relative resource consumption as you grow. I have also pointed out that many financial institutions fail to achieve it. This is a key fact in why many mergers don't achieve the economic benefits touted on merger announcement day. To realize economies of scale at your bank as you grow, incorporate the discipline to reduce relative resource consumption per support centers.

Given the above table, should this executive increase resources available to the Deposit Operations Department?

I don't believe taking one data point of the three mentioned above would be enough. As I contend, there are imperfections to each, imperfections that you can rest assured the Deposit Operations Manager will point out to you when considering a resource request.

But the margin for error declines when you consider multiple data points to make a more informed decision. I'm not suggesting seeking data ad nauseam. There is a declining value to adding more data. At some point a leader must lead.

And in Schmidlap National Bank's case, the Deposit Operations Department can do better.

What other data should be considered in determining support center capacity?

~ Jeff

Friday, February 03, 2017

Guest Post: Quarterly Financial Markets and Economics Update by Dorothy Jaworski

Happy 2017, everyone!  Who is ready for all of the change that is about to be upon us?  A new President will be inaugurated tomorrow, January 20th, and Donald Trump has promised change.  He has used his slogan of Make America Great Again to show that his focus will be on the US and the US economy.  His election has already brought change to the financial markets, sending stocks rising 6%, as measured on the S&P 500 index, and sending interest rates to their highest levels in years.  Clearly, the markets expect change.  After Trump becomes President, the markets are expecting actions that will mean positive change for the economy,

Analyzing what change will mean to economic growth is clearly a challenge.  I wrote in October that there is no momentum and no catalyst to push GDP much above 2.0%.  The thought of change may have tried to do that, but change itself may not accomplish it.  For so long, we have been stuck at 2.0% growth.  Since the recovery began in June, 2009, real GDP growth has averaged 2.3%.  Most recoveries in the US have averaged far more than that.  This recovery is already 90 months old and growth has not yet reached its potential.  In the past ten years, the economy has not managed even one year of 3.0%+ growth.  So what has been holding us back?  First, we have inordinately high debt levels, especially in the federal government sector, of nearly $20 trillion.  Actual non-financial debt in the US totals about $70 trillion, or 370% of GDP.  Debt at multiples above 100% begins to hurt the economy.  Debt at multiples above 250% to 300% has been proven to dramatically slow economic growth and push inflation downward.  The last seven years are proof.  Debt is not going away, change or not, and will keep pressure on growth.

Secondly, productivity has been very poor over the past five years or so.  Since 2011, productivity has fallen by -.4%.  Compounding the issue has been a reduction in the labor force, with retirements removing skills from the workforce, discouraged workers, and skills mismatches resulting in people not able to find appropriate jobs.  Corporate profits have been held back as costs rose on a relative basis as productivity fell.  Third, the explosion in regulations over the past eight years has served to hinder businesses, especially new small business formation, and has drained valuable resources as compliance costs soared.  Bank lending has not been the catalyst it used to be for improved growth in this recovery compared to prior ones; maybe we can point at regulation after regulation being forced onto banks and higher, more restrictive capital requirements.  Maybe change will be coming.

What Will Change Look Like?
Change has already resulted in higher stock prices and higher interest rates.  I mentioned that interest rates have risen dramatically since Election Day.  The two year Treasury yield reached 1.26%, its highest level since August, 2009 and the ten year Treasury yield reached 2.58%, its highest level since September, 2014.  The quick jump in rates in late 2016 is reminiscent of the increases in 2013, with rates rising in both cases up 100 basis points in just over 100 trading days.  The markets must think that GDP growth will soar on January 21st.  I have news for them; it takes a lot longer for fiscal policy to translate to growth than you think.

President Trump has promised several policies that should improve economic growth, and Make the Economy Great Again.  He has promised the elimination of many regulations that are strangling businesses.  If bank regulations are lifted, lending and thus growth can improve.  Some regulations have had a negative impact on the markets, such as the Volcker Rule, which has reduced liquidity in the marketplace by restricting trading activities.  I have a theory that some of the rate increases and drop in bond prices were due to reduced liquidity and lack of market making.  I cannot quantify how much at this time, but I am sure it’s there.  Other regulatory reform promised by Trump involves energy production, which could improve growth and serve to keep gas and oil prices lower, keeping inflation at bay.

Corporate and personal tax cuts were promised, with the corporate rate dropping from 35% to 15%.  I don’t know if that large a cut would occur, but these actions will add to economic growth.  I saw an estimate that 50% of the effect of tax cuts flows through to growth in the first eighteen months.  To be truly effective, tax cuts should be paired with cuts in government spending so that there is not additional borrowing to fill the deficit.  In the early 1980s, the Reagan tax cuts took two years to push GDP growth above 3.0% and that was with a Federal Reserve, run by Paul Volcker, who was aggressively lowering rates.  Trump has a Fed, run by Janet Yellen, who continues to believe that they need to raise rates.

Rebuilding our infrastructure is another proposal, but I think government borrowing would increase- either from paying for projects or from tax credits to companies to do the work.  If government borrowing continues to increase, it will add to the crowding out effect on private investment, and not adding much to growth.  But I am in favor of much of this infrastructure improvement and am so tired of having to drive to dodge potholes.

Growth Forecasts
Economists are mixed on their reviews of the Trump proposals and change on GDP growth.  The latest Fed forecasts, released in December, 2016, have ranges for 2017 for GDP of 1.9% to 2.3% and 2018 at 1.8% to 2.2%.  Wait!  That is no better than the 2.3% since 2009.  And the Fed felt compelled to raise rates and to say they will keep raising them?  I think they must be looking at a few signs of inflation and thinking they must tighten now.  If inflation sticks, they will be right, since it will exceed their 2.0% target.  More than likely, high debt levels will keep it under control.  The latest Bloomberg survey, released in January, 2017, has GDP in 2017 at 2.3% with rising rates.  Wait!  That is no better than the 2.3% since 2009.   Some of the “higher” projections are from private economists, Dr. Don Ratajczak and Brian Wesbury with 2017 at 2.6%.  Dr. Ratajczak has 2018 at 2.9%.  The lowest I have seen is for real GDP below 2.0% for 2017, because high levels of debt keep growth and inflation at reduced levels.  With many of these forecasts, I wonder:  Why did rates rise so much?

Thanks for reading!  DJ 01/18/17

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

Thursday, January 26, 2017

Bankers: Build Your Own Wealth Management Platform

Will millennials come to your financial institution once they've acquired the investable assets to make your Trust Department interested? 

Community banks must think so, because I don't hear many strategies centered on helping customers build wealth from early to late. Got $500,000 in investable assets? Boom! You'll start hearing from bankers, financial planners, and investment advisers alike. Want to start saving with $100/month. *crickets*

I wrote a blog post in 2015 about banks building their own small business loan platform. The reason: bankers tend to ignore small businesses until they are "bankable", meaning they have real estate collateral to borrow against. Well what about all that time from early stage to stable business? Credit cards still fill the breach. But into the fight came OnDeck, Kabbage, and Funding Circle. Ignoring a prospective customer until a bank is ready for them, risks that the customer may never be ready for the bank.

So, do we stand on the sidelines and let others serve Early Savers and hope bank sales forces are sophisticated and successful enough to woo them back once they meet bank thresholds?

I think this is a risky strategy. So let me suggest this to you. Build your own wealth management platform. (see below)

I will concede that banks work to get savings accounts. It is the platform that provides you with low-cost, core funding. But do you strive to grow number of accounts, or to grow savers? Does your bank have a savings account that could be opened for $100 without a monthly fee? Can branch or call-center personnel assess savers' goals and outline a path to become that high net worth or mass affluent individual or household I hear that bankers crave so much? 

Because, unless you are bequeathed with family money, we all started with a buck. Who, in your bank, will talk to customers when all that they have is that buck, and teach them to plant it, water it, give it sunshine, and turn it into real wealth?

Or do we open the savings account and hit the monthly number-of-account target?

Once enough money is built up in savings, then what? The Financial Planner doesn't want a $20,000 account. No problem. Robo-Advisers will take them. Side note: According to the President of Wealthfront, robo-adviser is a derogatory term. He prefers "automated investment services". Sorry to hurt your feelings fella.

Robo-Advisers, including Wealthfront, Betterment, SigFig and others are projected to manage $2 trillion in AUM by 2020, or 6% of all AUM. So they'll take that $20,000 account, and add $200/month to it.

No worries, right? Once that saver builds up that nest egg at WealthFront, they'll be knocking at the bankers' door to seek advice! C'mon. You Can-Not Be Serious! *insert John McEnroe voice*

So why doesn't your bank collaborate with a Robo-Adviser for this period of wealth accumulation? They are anxious to work with banks, including white labeling, so you will continue to have access to the customer although the Robo will be managing those investable assets. Create trigger points to contact customers to schedule appointments with your Financial Planners as customer needs evolve and grow. 

I modeled this relationship out in the accompanying table and infographic. I assumed the customer would go through four phases, each with differing needs of advice and sophistication: Early Savers, Wealth Striver, Future Planner, and Wealth Maximizer and Harvester. I then assigned number of years to be in each phase, and the average balance of the savers' accounts during those phases (see table).

To arrive at the Lifetime Value calculation, I used the average profit per year, for the year the platform earned the profit, and discounted it back to present day using a 10% discount rate. For the Wealth Striver years, I used a 20 basis point marketing fee against no expenses to calculate the average pre-tax profit. As one would expect, the present value of the profits in the Wealth Maximizer/Harvester years was the greatest, at $822 (see infographic). But the Future Planner and Wealth Striver years aren't so bad either. And, in my experience, banks aren't very interested in the Wealth Striver phase.

Odd because the lowest present value period is the Early Saver. That is where Wells Fargo had a big interest to meet their number-of-accounts goals. 

Would banks be better off thinking about their customers' wealth journey as depicted in the infographic? Do we think about it this way? Can your bankers advise those Early Savers on how to chart the course to become Wealth Maximizers?

Do we have the product set to help customers at each stage? Or do we pick our spots, let customers find their own way at our bank or elsewhere, and hope they come back when they are more valuable to us?

What's your strategy? Please don't say "hope".

~ Jeff

Friday, January 20, 2017

Banking Economies of Scale Revisited

In 2011, on these pages, I wrote my most read blog post ever, titled: Does your bank achieve positive operating leverage? Even today, nearly six years later, it receives a material amount of views. Particularly from larger financial institutions.

Economies of scale has eluded our industry in its purist form. For some time, banks between $1B and $10B in total assets tend to wring out the best expense ratios (operating expense/average assets) and efficiency ratios. So economies of scale hucksters walk with this chink in their armor as to why their story-line falters at a certain size.

I also noted in my most recent and in all of my past Top 5 total return posts that community banks deliver superior returns to their larger brethren. So, although there are plenty of consultants and investment bankers with pitch books telling you to get bigger, there are also contrarians such as myself that believe that bigger is not always better. And my pitch book is simply a bunch of spreadsheets. No fancy bubble charts, green light/red light tables, or tombstones. 

In this post I would like to revisit a couple of tables. First, I broke down all commercial banks by asset size to show expense and efficiency ratios as banks became larger. The results are below.

As the table suggests, financial institutions of all sizes reduced their relative operating expenses since 2011, with the only blip being a slight expense ratio increase in the $500MM-$1B commercial bank category. I should note that the efficiency ratio from that sized bank actually went down between 2011-16, suggesting a slightly better net interest margin.

The economies of scale argument clearly has merit, as you can see from the table. As asset sizes increase, expense and efficiency ratios tend to decrease. With that pesky exception of financial institutions between $5B-$10B in assets. These are averages. So there are exceptions. And I have often spoken about there being a significant number of exceptions to the economies of scale bromide. 

One example is German American Bank, highlighted in American Banker's Community Banker of the Year issue, and on this blog. It is a $3B bank with a 55% efficiency ratio. Open Bank in Los Angeles is a $722 million bank with a 58% efficiency ratio. I didn't have to research small efficient banks. They rolled off my tongue. Actually, my fingertips.

The below table was taken from my firm's profitability outsourcing database. We do the cost accounting for dozens of financial institutions that includes calculating operating cost per product account. Did costs go down at this granular level as assets grew?

Obviously, no. But why? If assets grew, and the bankwide expense and efficiency ratio has generally declined as banks grew, how did these costs go up? It is a fully absorbed cost system, so all costs within the bank are allocated to products and services.

My theory is this. Average balances per account have been growing since the low end of the yield curve has hovered near zero, and today is below 1%. The cost to originate and maintain a $100,000 money market account is nearly identical to originating and maintaining a $50,000 money market account. The growing average balance per account phenomenon has been occurring in most bank products. So, bankwide, costs would appear to go down because denominators, average assets in the expense ratio and total revenue in the efficiency ratio, are going up with the average balance per account.

Number of accounts, however, have not been increasing at nearly the same pace as the balance sheet, if at all. So all of those resources at your financial institution designed to grow new account relationships have not been efficiently utilized. 

In other words, in account originations, financial institutions are generally, and on average, over capacity. 

Financial institutions have tried to reduce this capacity in branches by consolidation and staff reduction. That is why you don't see material increases in cost per account in deposit categories. 

But either through expense reduction or new account acquisition, there is more left to do.

Sunday, January 08, 2017

Are Bankers At the Intersection of These Three Traits?

Jeff Weiner, CEO of LinkedIn, penned a post titled The Three Qualities of People I Most Enjoy Working With that was based on a Venn diagram (see below) he had previously posted. The diagram had 20k+ likes and comments on LinkedIn, and 2.2k retweets and favorites on Twitter. 

Does any bank culture produce these qualities? Does yours? There are headwinds. Banking, a slow moving tortoise of an industry until only recently, was not a big thinking industry. With all of the scrutiny, negative press, and regulatory change, I don't experience many bankers having fun, either.

What I do see at good performing financial institutions is the get sh*t done attitude. But even that is inconsistent. Impeding this culture is a "no mistakes" culture, or as we used to say in the Navy, "one aww sh*t wipes out 10 atta-boys". So whatever needs to get done goes through unnecessarily long approval chains to dilute accountability in case something goes wrong. And by wrong, I'm not talking something big, such as a regulatory order, or big losses. I'm talking about the possibility of an audit finding being enough to kill a get sh*t done culture.

A culture with all three would indeed be unique. And I'm confident there are financial institutions that have all three. I would like to hear from you about your bank, or one that you know, that has these three in their DNA.

Here are a couple of financial institutions that possess these traits.

Dream Big

In the fourth quarter of 2010, an investor group recapitalized a $66 million in assets financial institution, that was breaking even, and had less than $6 million in capital. The investors changed the management team, moved the headquarters, and dreamed big. Today, First Commerce Bank, in Lakewood, New Jersey, has $826 million in assets, $101 million in equity after a recent capital raise, and delivers a 1.56% ROA and a 17%+ ROE. By every financial metric this bank has been a success. The secret: Work Hard, Dream Big. My words, but not dissimilar to the words I've heard their CEO, Herb Schneider, say.

Get Sh*t Done

In my firm's most recent podcast, Tony Labozzetta, CEO of Sussex Bank, described how his team engineered a simultaneous turnaround, growth, and profitability story. When Tony's team was forming in the first quarter 2010, the bank had $452 million of assets, was barely making money, and over 5% of its loan portfolio was non-performing. Rather than hunker down and work through their troubles, they assigned bankers to work through them, and built a wall around them so the rest of their team could focus on that other thing... running and growing a profitable bank. Asset growth has been 12%, 15%, and 27% (year-to-date September 30th) the last three years respectively, the ROA was 0.72%, and non-performing loans to total loans was less than 1%. I'd say they got sh*t done. And they're still doing it.

Know How to Have Fun

A bank that knows how to have fun is difficult to pinpoint, although I'm confident there are some. With so many financial institutions tense about their next exam due to regulators' often times capricious interpretation of the implementation of regulations and law, how can bankers channel this tension into experimentation, technology adoption, and yes, fun. I think fun can be had. Here are a few things I think would work in creating an atmosphere ripe for employees having fun. 

1. Embrace mistakes as opportunities to learn. So long as the mistakes aren't of the "bet the bank" variety. 

2. Highlight and reward successes. Do so publicly, in the company newsletter, or an awards ceremony, etc. So often the positive to negative feedback ratio is way out of whack. Catch people doing something right. And train your supervisors to do the same.

3. Fire people. That's right, I'm suggesting firing people in creating a fun culture. Because nothing kills a fun culture than those sergeants in your bank that criticize far more than compliment, have zero tolerance for mistakes, and thwart efforts to move your bank forward. Get rid of them. The employees that remain will silently cheer. 

4. Start at the top. CEOs and executives could smile more, lighten up a meeting, pat people on the back, say thank you, etc. Your team is more likely to have fun if most signs they see from you is that you are having fun.

Tell me, what bank culture has all three?

~ Jeff

Friday, December 23, 2016

Three Wishes for Bankers

If I had a genie in a bottle that granted me three wishes, I would shoot for grander goals such as world peace, end poverty, and ban Mariah Carey Christmas songs. But this is a bankers' blog, and I want to remain topical.

Most readers are accustomed to me being analytical. Searching for trends and truths in a sea of numbers. And it is true, that numbers weave a tale that should be told. But in this post, I would like to rub the bottle, unleash the genie, and go for three grand wishes for banking.

Wish 1: Banks and Credit Unions - Can We All Get Along?

I believe in compassionate capitalism. In an evolved capitalist society, in my opinion, those "do-ers" would maximize their abilities and their legal/ethical earning power, and give their excess to worthy societal goals. Altruism? Sure. There will be those capitalists that buy gold toilet seats or hold lavish spousal birthday parties on Sardinia to prove they are in love. But let's focus on the good, shall we?

According to a 2015 FDIC National Survey of Unbanked and Underbanked Households, seven percent of US households were unbanked, meaning they had no account at an insured financial institution, and 19% were underbanked, meaning they used non-traditional financial providers like pre-paid cards and/or payday lenders. This is a significant percentage of the populace, and ripe pickings for credit unions, that tend to have better success profitably banking these customers than do banks. 

For example, in my firm's profitability measurement service for community financial institutions, credit unions make 80-90 basis points pre-tax profit on consumer loans, while banks make an anemic 5-10 basis points. And banks' have an average consumer loan account balance of over $40,000, whereas credit unions are around $14,000. 

Credit unions tend to deliver profits on smaller balance accounts. Accounts, dare I say, that bankers are happy to yield to them because they are not well suited to serve those customers.

But the tax thing. Bankers' can't get over it. And with NCUA loosening their definition of who can join credit unions, you can see the point.

So here's my idea: Collaboration in a market between a bank and credit union to cure some social challenge.  For example, what if Schmidlap National Bank and Pipefitters Local CU teamed up to end poverty in their local market? Schmidlap could commit 10% of their pre-tax profit to contribute to local charities whose specific mission is to end poverty. The CU could commit 20% of pre-tax profit to do the same, creating greater parity on the expense side of the ledger, and uniting the one-time foes to make their communities better.

I know one Midwest bank CEO that will disagree. How about you?

Wish 2: Simplify

In every executive meeting, every operations manager meeting, every sales meeting, I wish bankers would ask "how can we simplify?". Simplify their processes, their systems, and for their customers.

We have enough complexity in the world. I spent half a day trying to get my Mom's iPad to interface with Alexa. I was so successful that Alexa gave us the time and the weather, and nothing else. My Mom had to enlist the support of the Geek Squad.

There is enough complexity in everyone's lives. Internally, we have been over-reacting to interpretations of regulation, hyper-complying to avoid an audit finding or, shudder, a matter requiring attention (MRA) on our exam. Externally we have been doing the same to customers. 

Finances, either personal or business, are more complex today than at any time in my life. And quite possibly, in anyone's life. Technologies that have been making finances easier are growing at a rapid rate. I believe customers want to interact with humans about their finances. But we can't heap all this complexity on them and expect them to reject easy to use tech solutions.

Financial institutions that come out on top will be the ones that figure out how to simplify their processes, their infrastructure, and their customers' financial lives.

Goal 3: Automate and Elevate

I did a back of the envelope estimate that a $1 billion in asset financial institution might have 240-250 full-time equivalent (FTE) employees. I also estimate that less than half of them would be customer facing.

The investment financial institutions make in support center functions that scream for automation is not sustainable into the future. In a prior post, I made one slam dunk prediction that robotics was coming. Repetitive tasks will be increasingly performed by an application or a robot. Reconciling the suspense account now done by an accounting clerk? An app. Five point checks on personal check capture images now done by a clerk in Deposit Ops? A robot. 

This will make available significant resources to invest in employees to perform higher level tasks either in support or the front line. How often do I hear executives hope their branch employees would elevate from efficient transaction processing to customer service and advice? Often. How often do senior lenders exhort their lenders to be relationship focused and not solely deal guys/gals? Regularly. And how often do I hear frontline staff wish that support staff would find creative ways to get things done instead of erect road blocks? Every performance improvement engagement team I have ever been on.

So, for financial institutions, always look for ways to reduce paper, automate repetitive processes, and invest greater resources into delivering the financial institution your customers deserve.

Those are my three wishes for bankers. What are yours?

Happy Holidays everyone!

~ Jeff

Monday, December 12, 2016

Banking's Total Return Top 5: 2016 Edition

For the past five years I searched for the Top 5 financial institutions in five-year total return to shareholders because I grew weary of the persistent "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?

Not so over the five years I have been keeping track.

My method was to search for the best banks based on total return to shareholders over the past five years. I chose five years because banks that focus on year over year returns tend to cut strategic investments come budget time, which hurts their market position, earnings power, and future relevance than those that make those investments.

Total return includes two components: 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. I also filtered for anomalies that result from recent mutual-to-stock conversions and penny stocks. 

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2015:

#1.  Independent Bank Corporation (Nasdaq: IBCP)
#2.  Fentura Financial, Inc. (OTCQX: FETM)
#4.  Carolina Bank Holdings, Inc. (Nasdaq: CLBH)
#5.  Coastal Banking Company, Inc. (OTCQX: CBCO)

Here is this year's list:

Independent Bank Corporation celebrates its second straight Top 5 recognition, and BNCCORP celebrates its third straight year on this august list. Congratulations to them. A summary of the banks, their stories, and links to their website are below. 

#1. Independent Bank Corporation (Nasdaq: IBCP)

Independent Bank dates back to 1864 as the First National Bank of Iona. Its size today, at $2.5 billion in assets, is smaller than it was a decade ago. It is a turnaround story because the bank was hammered with credit problems between 2008-11, when it lost over $200 million. In 2011, at the height of its problems, non-performing assets/assets was nine percent. Today that number is 3.6%. Exclude performing restructured loans, and that number plummets to 0.62%. The result: those investors that jumped onboard at the end of 2011 were well rewarded. Their total return was greater than 1,500%. You read it right.

#2. Waterstone Financial, Inc. (Nasdaq: WSBF)

Waterstone is a single-bank holding company headquartered in Wauwatosa, Wisconsin. It has $1.8 billion of assets and operates eleven branches in the metropolitan Milwaukee market, a loan production office (LPO) in Minneapolis, Minnesota, and 45 mortgage banking offices in 21 states. The mortgage bank has more than 3x the employees of the bank. Year-to-date, the company has generated more fee income, at $95.2 million, than it has in operating expense, at $95.0 million. I don't know any other bank that accomplished this. I'm sure there are some. But I haven't heard the tale. This tale is true. That means their year-to-date $31.8 million net interest income after provision... is gravy. And that is a key reason why their five-year total return exceeded 1,000%!

#3. Summit Financial Group, Inc. (Nasdaq: SMMF)

Summit Financial Group, Inc. is a $1.7 billion in asset company headquartered in West Virginia, providing community banking services primarily in the Eastern Panhandle and South Central regions of the state, and the Northern and Shenandoah Valley regions of Virginia. Summit also operates an insurance subsidiary. In 2011, the company had net income of $4.1 million on assets of $1.5 billion. Today, the company has annualized net income of $16.8 million. A reversal of fortune from a 0.28% ROA to a 1.09%. How did they do it, from my perspective? 1: Margin expansion, and 2: Expense discipline. Annual operating expenses were $36.6 million in 2011, and are $33.2 million today. And that includes some of the expenses associated with an acquisition that is set to close shortly. So they grew. And spent less to do it. A bank that viewed its operating expenditures as investments. Amazing!

#4. MBT Financial Corp. (Nasdaq: MBTF)

In 1858, while Lincoln and Douglas debated for a US Senate seat, Benjamin Dansard started Dansard State Bank to operate from the back of Dansard General Store. Ultimately renamed Monroe Bank and Trust, this bank pre-dates the Civil War! Similar to IBCP above, MBT is a turnaround story. In 2011, non-performing assets/assets was at 7.7%. Today they are at 1.8%, and below 1% if you exclude restructured yet performing loans. The asset quality issues led to a $3.8 million loss in 2011. Since that time, nothing but black ink, leading to a year-to-date ROA of 1.10%, and ROE of 10.13%. How did they get there? A dramatic improvement in asset quality, a process and efficiency initiative that led to reduced costs and improved processes, and motivation. Insiders own over 22% of the company. That's motivation! Well done!  


BNCCORP, Inc., through its subsidiary BNC National Bank, offers community banking and wealth management services in Arizona, Minnesota, and North Dakota from 16 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 banking business, is challenged due to  the decrease in oil and ag commodity prices. But earnings continue to increase in spite of the challenges. This has resulted in a tangible book value per share at September 30th of $22.51... a significant recovery and turnaround story that landed BNC in our top 5 for the third straight year. Your investment five years ago would have resulted in over an 800% total return!

Here's how total return looks for you chart geeks, with the lower green, and flat line being the S&P 500 Bank Index.

There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $2.5 billion in total assets. No SIFI banks on the list. Ask your investment banker why this is so.

Congratulations to all of the above that developed a specific strategy and is clearly executing well. Your shareholders have been rewarded!

Are you noticing themes that led to these banks' performance?

~ Jeff

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