Wednesday, December 07, 2016

IMO: American Banker's Community Bankers of the Year

On November 30th, American Banker named three Community Bankers of the Year. When I read about their selections, and reviewed their financial performance, I e-mailed Bonnie McGeer, Executive Editor at American Banker Magazine, to say that, in my opinion, they nailed it!

Not that they need my endorsement. But they did notice when I sniped at one of their past Bankers of the Year awards. Banker of the Year typically goes to larger financial institutions. But I digress.

When I read about Banker of the Year and other such recognition, I will typically look at the financial performance of the bank to see if the award holds water. There are few things more regressive to me than for a banker to receive recognition without accomplishment. It cheapens the award, and diminishes our view of the truly accomplished.

But this year was a bumper crop, I tell ya!

Mark became CEO of GABC in January 1999. So he's been at it a long time. When he got the job, the bank was $637 million in total assets, had an Efficiency Ratio of 62.5%, an ROA of 0.96%, and an ROE of 9.1%. Today the bank has $3.0 billion in total assets, an Efficiency Ratio of 61.2%, and an ROA/ROE of 1.20%/10.7%, respectively. So the bank performed well in 1999, and Mark has improved on it. The bank is a consistent, German-engineered performer. 

As good as those numbers are, Mark's real home run was his total return to shareholders (see chart). From the day Mark assumed the reigns at GABC until today, the SNL Bank Index had a total return of 90%. GABC's was 424%.

Let that sink in a bit.

Credit: I got that "German engineered" quip from GABC's financial advisor.

Kevin's story isn't punctuated by his bank's total return since he became CEO in March 2013, although it did mirror the index. An investor would have enjoyed a 74% total return in HOPE stock during Kevin's tenure, versus 77% for the SNL Bank Index (see chart). 

No, Kevin had an impact from the moment he joined the Board in 2009, first advocating for raising more capital, and negotiating the merger between Hope's predecessor, Center Bancorp and Nara Bancorp, another Korean-American focused bank. The deal closed in 2011, and BBCN was formed. After closing another deal for Wilshire Bancorp, a $4B bank, in the third quarter, Hope became what it is today.

Financial performance is similar to when Kim assumed the reigns in March 2013. Then, the bank had an Efficiency Ratio/ROA/ROE of 45.5%/1.28%/9.13% respectively. Using this year's second quarter to avoid the Wilshire special charges, those numbers were 46.8%/1.20%/9.67%, respectively. 

What impressed me most was the bank's turnaround since Kevin joined the board, the transactions he has negotiated to significantly grow the bank, and the 32% earnings per share increase since he took over. That's right, 32%.

When Tony took the reigns at Sussex Bank in February 2010, non-current loans/loans was 5.48%. Today they are 0.75%.  I should end this section right there. But I'll continue.

The bank had $452 million in total assets. Today it is nearly twice that size. Net income was approximately $1.2 million annualized. Today it's $5.6 million. Efficiency Ratio/ROA/ROE? Was 61%/0.21%/2.80%, respectively. Now: 68%/0.70%/7.79%. And the bank continues in a significant growth mode. 

And due to the bank's historically rural markets, he's #GeoJumping! See my firm's most recent podcast, minute 17:40, for a discussion on geo-jumping. I'm claiming the trademark.

An investor earned a 288% total return since Tony took the reigns, versus 115% for the SNL Bank Index (see chart). I'm one happy investor. Disclosure: I'm personally invested in SBBX.

And there are my reasons why I think American Banker NAILED IT!

What other great banks are out there that didn't win the hardware?

~ 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.

Saturday, November 19, 2016

Are You a Bank With Benefits?

The American Bankers Association (ABA) recently announced a new benefit to assist its employees with repaying student debt. Beginning next month, ABA will provide each eligible employee up to $1,200 per year toward the payment of student debt, in addition to their current compensation. According to the Society for Human Resource Management, only four percent of employers nationwide offer this benefit

Is this an altruistic statement regarding the $1.4 trillion of student debt in America, or a prudent employee benefit targeting recent college graduates that each average $30,000 in student debt?

I recently proposed this topic for my firm's podcast, This Month In Banking, which is released on the last Wednesday of every month. Shot down. Too boring. But hey, I have a blog too! And I think it is an extremely important topic in talent acquisition and retention.

According to the Bureau of Labor Statistics June 2016 report, salaries, commissions and bonus accounted for 68.6% of total compensation, and benefits accounted for the remaining 31.4%. This is an increase from 29.9% in 2013. So benefits is a large, and increasing proportion of total compensation.

What makes the ABA announcement interesting is: 1) it is a benefit specific for those that carry student debt, meaning mostly millennials, and 2) that they felt they should announce it.

I don't think it is a mystery that bank employees seem to be getting older. And that succession planning in our industry is an issue. Since the financial crisis our industry's brand as a go-to employer has been hurt. And hurt badly. 

How do we attract quality, younger people and then retain them to be the future leaders of our industry? 

What employees value is in the eye of the beholder. Younger workers, for example, value cash on the barrel-head. Less important would be insurance (health or life), and retirement benefits. Not that it is unimportant. According to the Willis Towers Watson Global Benefit Attitudes Survey (What a mouthful! Some marketing person should revisit that title.), only 42% of US respondents said they would opt for more pay/bonus as opposed to other benefits if they had the choice (see chart). So other employees have different priorities.

For younger employees, there are some startups that focus on benefits important to them, such as Gradifi, that focuses on student loan paydown. Imagine the recruitment and retention with this benefit!

But as this benefit becomes less important to employees, perhaps a migration to something more meaningful, such as a greater 401k match, a more robust health plan, or life insurance benefits. Is it practical to earmark certain benefits dollars per full-time employee, and let them select, in menu fashion, what is important to them? For example, the recent college graduate may opt for a student loan paydown benefit, and take a high-deductible HSA health insurance option, rather than the traditional plan.

I think what is clear is that benefits that are important to your employees differ over different times in their life cycle.

Can bankers devise a cost-effective benefits program that recognizes this, would help them attract the best talent, and keep them?

~ Jeff

Thursday, November 10, 2016

What Did a Trump Victory Do To Bank Stocks?

The S&P 500 futures plunged during November 8th's vote count when Donald Trump started pulling ahead. The nosedive gave the news media, who could hardly bare to report good news for Trump, some bad news to deliver. The market was betting a Trump win would be a disaster for equities.

But in a surprise turnaround, the next day when the dust settled and pundits were begrudgingly calling Mr. Trump President-elect, the market turned the tide. Traders were indecisive during the first 90 minutes of trading the next morning, and then came a buying spree that elevated the index to a gain of 1.43%. When things settled down, the final tally for November 9th was a 1.11% gain. So much for that Citi prognostication of an immediate 3%-5% haircut. How much do those analysts get paid?

But what happened with bank stocks? Surely there would be volatility with Trump's carping about over regulation. No industry suffered through more regulation since 2008 than the banking industry, right? And the Consumer Financial Protection Bureau, that reports to no one and has carte blanche to regulate institutions over $10 billion in assets, would surely not sit well in a Trump presidency.

Let's take a look. I analyzed the difference in stock prices of all publicly traded financial institutions that trade over 10,000 shares per day on US markets. I used October 31st as the base period, and the closing price on November 9th. Highlights can be found in the table below.

Disaster, averted.

In fact, the biggest loser in the systemically important >$50B category (SIFI) was a Canadian bank. Yes, I know they don't count towards our SIFIs, but still. A little humorous that a Canadian bank would suffer a decline. They are about to receive a significant amount of our celebrities! Looking further up the list for the next worst SIFI, I find National Bank of Canada, then Bank of Montreal. I had to go all the way to Huntington Bancshares to find a US-based SIFI. And they gained 2.9% from Halloween until November 9th!

I should note that three of our clients are in the Top 10 Gainers. I'm not trying to claim causation, just putting it out there.

The average stock price gain of all US publicly traded financial institutions between Halloween and November 9th was 4.2%. There was no catastrophe. No meteoric rise. Just another day at the office.

~ Jeff

Monday, November 07, 2016

Guest Post: Quarterly Economic Commentary by Dorothy Jaworski

The third quarter of 2016 was relatively quiet after the surprise of the Brexit vote at the end of the second quarter.  There is a Presidential election coming and perhaps people are exhausted by it.  I cannot wait for the political TV ads to end.  But, either way, we will have a new President come January, 2017.  As far as the markets go, volatility has tamed down and prices respond to economic data releases and Fed speak, but not much else.  All I keep seeing is mixed economic data.  GDP for the 2Q16 was +1.4%, following +.8% in 1Q16.  Surely the 3Q16 will be better, but the 4Q16 will follow with a weak reading if it follows the typical pattern of the past several years.

There is NO momentum and really NO catalyst on the horizon to push GDP up above 2% to a more acceptable level, like 3% to 4%, except maybe Lady Gaga’s new album.  Job growth has been stronger than average at +1.7% each year since 2010, despite a declining labor force participation rate.  However, the job growth is not translating into higher consumer spending.  I think that job growth is symptomatic of weak productivity, which has risen by less than half of 1% from 2010 to 2015, compared to an average annual growth of 1.5% from WWII to 2009.

Our Federal Reserve keeps talking about raising interest rates.  Why?  Maybe they believe they must because rates are so low.  I think they are overlooking the fundamental causes of the weak growth - low rate environment- the high debt-to-GDP ratios- involving government, corporate, and consumer debt- and existing in every major country in the world.

Government Debt
Debt keeps mounting, especially government debt.  Let’s look at the US.  In the past 10 years, $7.9 trillion was borrowed to cover deficits but debt increased by $11 trillion, if other “spending” projects are included.  The Congressional Budget Office projects deficits at $9.2 trillion in the next 10 years and total debt issued to be another $13 trillion!  We are already over the 100% debt-to-GDP level that causes indigestion.  Other countries are in the same boat- Japan, China, all of Europe, and Australia.  Why do I write about this debt?  Because it is the high government debt levels that are crowding out private sector investment and that are pushing GDP and interest rates lower.  High government debt levels are hurting productivity, corporate profits, industrial production, and consumer spending.

Government spending is also crowding out consumers and businesses.  Recently, I have read Dr. Lacy Hunt’s materials and seen the research that shows that government spending is actually creating a negative multiplier; that is, every dollar of government spending is hurting GDP growth.  As government spending rises, GDP has fallen along with investment and productivity.  All we need to do is look around; we are living it. 

Investment managers are sitting on a near record level of cash in their funds, currently at 5.8%.  Banks are sitting on huge reserves at the Fed.  We are stuck in this endless liquidity trap for now.  So what does it mean?  Slow growth and low rates should continue.

The Fed
Someone said to me that if the Fed doesn’t raise rates now, they won’t have any tools later to use to fight recession, when it comes.  I disagree.  The Fed can use Quantitative Easing, or “QE,” again to buy bonds to keep rates low.  Janet Yellen recently said she is open to the notion of purchasing corporate debt, as is being done by the ECB in Europe, provided that Congress agrees and approves it with legislation.  Another tool that was fairly effective in the years after 2008 was Forward Guidance, which involved Fed promises to keep rates low until specific dates in the future; this tool was one of Ben Bernanke’s faves.  There is also the negative interest rate path, tried by other countries, but unproven so far.

I have noticed that the future inflation gauge published by ECRI has been rising steadily for months, with increases being larger on a year-over-year basis.  The gauge tries to forecast inflation six to nine months from now and things would be bleak if the projections came true.  I am sure the Fed has taken notice, and they, like myself, are trying to figure out if this is transitory.  I believe that it is, because the producer price index is still low and prices are not yet ready to flow through to consumers, despite higher than average increases in wages.  Average hourly earnings have risen 2.6% compared to last year.  Another factor worth noting is that gold prices have risen 19% year-to-date in 2016, but are off their worst levels; this commodity could be a safe haven for Brits fleeing Brexit.  Inflation is not a problem right now; getting GDP growth to exceed 2% certainly is.

Rates are low for several reasons- low economic growth, high debt-to-GDP levels, low inflation, and low productivity.  What do I see as I look out into 2017?  Low growth, low rates, no momentum, and high debt levels will continue to dominate.  I don’t believe inflation is an imminent threat because growth is so weak.  The Fed doesn’t either, as they project inflation to be under 2.0% into 2018.  Most notably, they seem to agree with me that economic growth will continue to be low.  Or is it that I agree with them?  Stay tuned!

Thanks for reading!   10/24/16

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, 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.

Saturday, October 29, 2016

Five Challenges to Your Bank of the Future and Ideas to Overcome Them

I recently spoke at a Financial Managers' Society (FMS) breakfast meeting on this subject and thought I would share my comments with you.

With all of our anguish, torment, debate, and deliberation about the future of our country, our industry, and our bank, here are some common themes that I have been seeing that can be improved should bank management commit to making them happen.

Forget the things outside of your control. These five themes are firmly within your ability to make a positive impact on your future.

1. We merge, citing economies of scale, but fail to realize them. In 2006, when the median asset size within my firm's profitability outsourcing service was $696 million, the operating cost per business checking account was $586 per year. In 2016, the median sized financial institution is $1.1 billion, and the operating cost per business checking account is $710. In other words, the financial institutions grew, and the cost per account grew. This is the theme across nearly every product category. Don't believe me, check your banks' expense ratio (operating expense/average assets) or efficiency ratio as you grew.

Idea: Create measurable incentives to support centers to provide more efficient support to profit centers and for risk mitigation. For example, deposit operations' expense as a percent of deposits should decline as the bank grows. Loan servicing expense as a percent of the loan portfolio should do the same. 

2. We over-invest in under-performing branches. I recently mentioned to a community bank management team that community financial institutions are slower to close branches because their decision making goes beyond the spreadsheet and market potential. Community bankers know the town mayor, and key business leaders. So they worry about other things that go beyond the fact that their branch in that market has little chance of being profitable. But allowing branches to operate at losses takes resources away from areas that need immediate resources, such as technology acquisition and deployment.

Idea: Develop objective analyses for entering markets. If the branch does not meet profit objectives within a reasonable period represented in the original analysis to open it, close it. Make it near-automatic.

3. Our brand awareness and customer acquisition strategy is moving at a turtle's pace, not the hare pace of the industry. In my firm's most recent podcast, we discussed the recently released FDIC Summary of Deposits data that showed, with all of the negative press surrounding large financial institutions, FDIC-insured banks with greater than $10 billion in assets moved from an 80.6% deposit market share in 2012 to an 80.7% today. This phenomenon was brought home when a banker told me that, in the Philly suburbs, Ally Bank was the most recognizable banking brand. Aren't they still owned by our government? 

Idea: Develop a clear message on what your bank represents and align your culture, and all sales and marketing channels to deliver your value proposition. 

4. We embrace complexity when we should be seeking simplicity. The decline in defined benefit pension plans combined with the increases in defined contribution (401k) plans, the abysmally low US savings rate (31% of non-retired people have no retirement savings), and the increasing complexity of running family and business finances presents an opportunity for community financial institutions to make their customers' lives simpler. We should start with ourselves. For example, when onboarding a customer, an FI can perform needs assessments, risk assessments (needed for risk management purposes), and customer capital allocation needs all at once, and add value to the customer relationship. 

Idea: At account opening, build an automated business process that includes the needed Q&A to assess customer needs that spurs post-account opening follow up, know-your-customer information, and risk assessments required to risk rate customers that assigns a rating that drives capital allocations to that customers' balances and rolls up to determine the bank's capital requirements.

5. We under-invest in the people that can build our bank. Because of over-investment in areas such as regulation and unprofitable branches, we under-invest in elevating the abilities of our employees to serve as advisers to customers, as highlighted above. Also, we tend to buy key people on the street, such as commercial lenders, rather than raising them within our bank, because of the time and resource investment needed to turn junior level people into productive commercial lenders.

Idea: Build a bankwide university that includes on-the-job training, web-based seminars, in-person training, and banking schools to create career paths for junior-level people that will reduce our need to buy senior-level people on the street, and elevate the skill sets of employees to actually advise customers, rather than only sell to them.

If I were to end this post with a theme, it would be urgency. We are past the time to lament about the interest rate and economic environment, and Dodd-Frank. They are outside of our control.

We are intuitively aware of the above challenges. The good news is we can do something about them. Address them this year, this month... no, this week! And your bank will move forward to an independent future for your employees, customers, and community. 

Did I miss any challenges within our control?

~ Jeff

Sunday, October 09, 2016

Evolution of Banking: Three Slam Dunk Predictions

The sheer number of strategic initiatives and technologies in the banking industry makes it very difficult to predict outcomes with any certainty. Not that me or other industry pundits don’t try.

I have been noticing some trends that are providing insights on our direction, evolution, and ultimate picture of our future.

Future Picture was coined by the US Military for defining flight mission success, and was brought to business prominence in Air Force pilot James D. Murphy's 2005 book, Flawless Execution.  Using his example of envisioning what success would look like, a bank’s Future Picture should be a detailed description of successful execution of strategy. I challenge bankers’ to describe their Future Picture.

It can be highly subjective and difficult, particularly in an era of unprecedented change. But I would like to share three strategic directions where the train has either left the station, or is boarding.

1. Branches must be larger to survive. According to my firm’s profitability database, branches generated revenue (defined as consumer loan spreads, deposit spreads, and fees) as a percent of branch deposits of 3.50% in 2006. Today, that number is 2.08% due to the interest rate environment, the regulatory environment (reducing deposit fees), and customer behavioral changes. Therefore, the average deposit size of branches grew, to over $60 million at the end of 2015 (see chart). This trend is not likely to change, as bankers are more apt to prune their network and increase overall branch profitability. And the customer. Don’t forget them. They use branches less, although many still identify branch location as important to bank selection.

2.  Technology expenditures will grow faster than overall expenditures. I recently performed this analysis for a client, identifying the “Data Processing” expense as a percent of total operating expenses for all FDIC insured banks as identified in their call report. Surprisingly, it represented only 4% of total operating expense.  Note this excludes IT personnel expense. But the number is growing faster than overall operating expense (see chart), meaning that IT expense is becoming a larger proportion of operating expense. It is disappointing that this trend is slowing so banks can meet their budgets and profit objectives, regressing back to old habits of cutting IT projects to make budget. But overall, banks are seriously evaluating technology to improve efficiencies and their clients’ banking experience.

3.   Robotics are coming. It was only recently I began to believe this. But there are opportunities being evaluated and implemented to automate repetitive processes to reduce overall costs, minimize risk, and speed the process. A couple examples where automation and/or robotics are ripe to improve processes include reviewing remote deposit checks, currently eye-balled by humans. Not scalable. The x-point evaluation could more quickly and effectively be accomplished by a robot. Another area where automation is coming is BSA case evaluation, where the bank’s BSA application identifies potentially high-risk client activity and a program goes through several standardized checks to clear the case or elevate it for human intervention, reducing the overall number of cases needing human review.

These aren’t the only changes. Just the ones that I believe are coming, no matter who tries to stop them.

So why try to stop them?

~ Jeff

Saturday, October 01, 2016

Thank You Mr. Stumpf!

Bank reputations were on the rise. After the financial crisis of 2007-08, led by making mortgage loans to people that had little resources to repay them, banks were climbing from the reputational abyss.

Then came September 8th, when the Consumer Financial Protection Bureau (CFPB), and the Office of the Comptroller of the Currency (OCC) jointly announced the issuance of a consent order to Wells Fargo that included $185 million in fines due to the widespread, illegal practice of secretly opening up customer accounts without the customers' consent. Fifty million of the settlement was to go to the City and County of Los Angeles, which brought a lawsuit against the bank a year ago for the same charge. For further discussion among my colleagues on this subject, click here for our podcast.

And the stench of that little news item is likely to sully the reputations of financial institutions across the country. Don't believe me? How many subprime mortgages did you make where your customers had little hope of repaying? And did the bursting of the housing bubble hurt your bank's reputation? 

Wells Fargo is so large, that many people view them as a proxy for the whole banking industry. Much like Apple or Samsung might be viewed as a proxy for the whole smart phone industry.

What does reputation get you? For Wells Fargo, it gets you $32.9 billion. Or lost them $32.9 billion. That is the decline in market value they suffered from August 31st to this writing. Thirteen percent of their market value, vanished like a puff of smoke in the wind.

According to Cutting Edge PR, sources of information that impact influencers (CEOs, senior business execs, analysts, institutional investors, etc.) are as follows:

Source of Information                          Proportion
Personal experience                                  64%
Major business magazines                        37%
Articles in national newspapers                35%
Word of mouth                                          31%
Articles in trade journals                           30%
Television news                                         14%
Articles in local newspapers                      14%
Television current affairs programs           13%

Is Wells Fargo lighting up the newswire? Yes. Will commentators start dropping Wells Fargo from the discussion and start generalizing that this is typical bank practices? I have little doubt.

I said it before in a previous post on branch incentives, and I'll say it again. Bankers should hold business line managers accountable for the service levels, profitability, and profit trends of their business units. When you begin to drill down and start measuring widgets, employees will gravitate to finding widgets. Which is exactly what Wells Fargo did.

And if you think this culture started recently. Guess again. Google the much lionized former Norwest and Wells Fargo CEO Dick Kovacevich that touted the "eight is great" cross-sell ratio. Stumpf has worked for Norwest/Wells for thirty four years. 

I guess eight isn't so great after all.

And the Schleprock cloud hovers above us all.

Thank you Mr. Stumpf.

~ Jeff