Friday, October 24, 2014

Guest Post: Third Quarter Economic Commentary by Dorothy Jaworski

The Bond Guru Switches Teams
The surprise of September was the abrupt departure of the Bond Guru, Bill Gross, from PIMCO, the company that he helped found forty years ago.  Shock went through the bond markets, especially at
PIMCO, who found out about Gross’ exit along with the rest of us.  Between the September 26th surprise announcement and October 2nd, investors pulled nearly $24 billion from PIMCO funds and ETFs.  There is no way to know exactly how much money will ultimately move and land with Bill at Janus Capital, his new home.  And he doesn’t even have to stray far from the beautiful beaches and leisurely lifestyle of Newport Beach, California, because Denver-based Janus is opening an office in Newport Beach, California.  How about that?

She’s Getting Better at Press Conferences, But
The Federal Reserve has let the talk of rising interest rates hang over the markets like a fog.  We have seen several restless Fed governors, who keep dissenting to the Fed’s statements on policy to keep rates low for a “considerable time.”   Many in the markets thought that the Fed would drop these words from the September statement because they act like a promise to the markets, but the Fed retained them.  Following the meeting, Janet Yellen gave her press conference.  She was repeatedly asked about the words and their meaning and she kept saying over and over again that the Fed’s moves are “data dependent.”  She was not very convincing.  She could have said that returning to “normal” is taking longer than expected and the market projections that rates will rise in the middle of 2015 is about as good as any right now.  Markets build in assumptions for short term rates and this impacts long term rates, of course along with inflationary expectations.  She could have used some coaching to reassure investors.

Growth and Inflation
One would have to question a Fed that would raise rates when the US economy is the only one of the four largest world economies that is displaying any growth, albeit at a very slow 2%.  China, Japan, and Europe are all struggling.  Remember that we are five years in this recovery and we are only managing 2.2% average growth, compared to 4.6% after the prior ten economic recoveries.  Inflation is falling along with many commodity prices (except for gas prices, but I digress).  In China, consumer price inflation is -2.0%, in Europe, it is +1.0%, and here in the US, it is +1.7%.  It would not be unprecedented for the Fed to raise rates with falling inflation, as happened in 1994, but it would be unusual and fairly shocking.

Geopolitical tensions abound in the Russia-Ukraine conflict, Syria, Iraq and a US led group of allies fighting against the evil that is ISIS, and the Israel-Palestinian fighting.  The threat of the spread of Ebola is increasing tensions as well.  This is not an environment that screams for rates to rise; reality may be quite the contrary.

The Unemployment Rate
Much of the fear of Fed tightening springs from the decline in the unemployment rate to the Fed’s “goal.”  For the month of September, the unemployment rate fell to 5.9%, within the NAIRU band quoted by Fed Chair Yellen in her press conference.  NAIRU, or the non-accelerating inflation rate of unemployment, is the unemployment rate below which inflation will rise.  Oh, Phillips curvers, where have you been?

I have a couple comments when I look at the drop in the unemployment rate over the past two years.  First, the drop has been caused more by workers dropping out of the labor force than from job creation.  Job growth has established itself at an average above 200,000 per month, which is fairly good, but well below the pace of other recoveries when the economy was so much smaller.  The labor force participation rate has dropped to 62.7%, the lowest since 1978.  It is not just retirees lowering the rate, but it is young people, too.  Those Not in the Labor Force now total 92.6 million, which is a record.  Many of the jobs created are lower level or part-time, so wages are not rising dramatically.  I cannot believe that productivity will benefit from the structural shifts that we are seeing in employment and I believe we will continue to see sub-par growth in GDP.  I saw this quote on Bloomberg in September and it resonates:  “The economy always appears stronger if you ignore the weakness.”

Speaking of productivity, we are in the midst of another period where we will pour trillions of dollars of our precious earnings into protecting our computer systems and networks from the scourge of hacking.  I have listed this as a risk to the economy in the past but I didn’t realize the extent to which cybercrime would reach new heights.  The evidence was revealed by JP Morgan in the first week of October.  Hackers got into their bank systems and stole names, addresses, and email addresses (but supposedly not account data) of 76 million households and 7 million businesses.  No system is sacred anymore.   Witness the Acme announcement of a major hack at their stores recently.  We are just getting over Home Depot’s admission of 60 million credit and debit card numbers being stolen over the course of months, eclipsing Target’s data breach.  So, nothing is sacred online.  The complete waste of time and money is an ever-increasing drag on GDP.  Add this to the purported estimates of regulatory costs of $1.86 trillion on our economy, and 2% growth seems like a gift.

Our Bank’s Senior Vice President of Deposit Operations and Information Technology, Karen Shinn, knows all too well the risk and costs of these breaches to banks.  She works continuously with our vendors and has implemented fraud detection tools to protect our customers’ debit cards.  But customers can work closely with the Bank, too, by being vigilant about their personal information and by notifying us right away about any unusual activity.  Hacking prevention and network protection expenses will continue to filter into the costs of every company.  Maybe this will be the inflation that the Fed and ECB so desperately desire.

Last Word
Dr. Charles Plosser, President of the Philadelphia Federal Reserve, recently announced his retirement as of March, 2015.  Thank you for all that you have done for our Philadelphia region over your years here!

Thanks for reading!  10/09/14

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.

Friday, October 10, 2014

vBlog: How to break down organizational silos in financial institutions

There are a number of challenges that nearly every financial institution faces, in my experience. Regulatory over-reach, check. Compliance woes. Got it. Branch under-utilization. Ditto. 

One such omnipresent challenge is how to blow up thick-walled organizational silos to serve the customer well over several banking and neo-banking disciplines. The below video highlights some of my ideas on how bankers can break down barriers to win more of their customers' business.

What are your ideas?

~ Jeff

Note: Here is the YouTube link of the above video in case you can't view it in the Blogger application.

Saturday, October 04, 2014

Disruptive technology will not kill banks

So said John Authers in a recent Financial Times article. And I believe him. Bankers have been killing banks for decades. We do it by dismissing change. We do it by implementing "me too" or business as usual strategies in a changing world. We do it by accepting mediocrity. We do it by relying on the payments system or the difficulty in switching banks to retain customers. We engage in hubris.

We don't need no stinking disruptors to do it for us! 

But wait! There may be something to disruptors pillaging bank customers. I remember the days soon after leaving the military in the 1990's that banks were hesitant to enter investment sales for fear of disintermediation of their deposits. Now the amount of money in US registered investment companies exceeds that in FDIC insured banks. Was Vanguard a disruptor?

The branch is king, and if you don't have one in a market, you will not succeed there. But wait, ING Direct grew to $92 billion in assets until ING Group divested it to Capital One. Do you think your bank customers had an Orange account? Was ING Direct a disruptor?

Simple sold to BBVA, touting 120,000 accounts. Were any of them your potential customers? Lending Club funded $5 billion in loans since its founding in 2007. How many loans did you fund in that time? And Quicken Loans... don't they appear at the top of mortgage and home equity rankings? No worries, I bet they're somebody else's customers.

Everywhere we turn we have disruptors pilfering our business. The other day I was in a strategy discussion formulating the tasks to execute strategy. The cash management specialist wanted to advance the product set so corporate customers could use their own interface with the banking core system instead of using the bank's online banking tool. Aside from the cyber security of it, let's think of the implications from a corporate accounting system that wants to interact directly with the bank's core.

Is that testimony to banks not keeping pace with corporate needs? How long before those corporate accounting system providers strike a deal with some regional or national bank to provide seamless views to corporate customers? No worries, probably not your customers.

We are allowing our potential future customer base to be so narrow as to almost guarantee our extinction. 

I don't want to be the doom and gloom guy. Just trying to jolt my readers into action.

As Auther says, banks still provide access to the payment system. Banks remain centers of communities and the number one source for capital for small business. They remain trusted by customers.

But it won't last forever. And it may not last for long. So let's disrupt ourselves!

~ Jeff

Thursday, September 25, 2014

Grow Your Own Business Bankers

Commercial loan growth is difficult to come by these days. Some is a result of anemic economic growth and an uncertain business climate. These factors are beyond a banker's control. But what is within your control is the number and quality of business bankers deployed into your bank's markets.

Nearly two years ago I wrote a job description for a business banker based on what I heard from bankers on the qualities they value most from people occupying this position. How rare is it to find an exact match between people and expectations? Do your business bankers build well-rounded relationships, or bring you deals? Do they bring value to the customer relationship with expertise in cash flow management, inventory financing, and liquidity needs? If so, can they consistently bring loans that are priced appropriately for the risk, or do they need to shave rates or terms to get deals done?

The answers to these difficult questions makes me wonder why we keep relying on "experienced lenders" to move our institution forward. Perhaps populating our ranks with long-tenured lenders married to price-driven deal making is holding us back from becoming the institution we strive to become.

Maybe there is another way. When bankers comment that they can't find experienced lenders to add to their staff, I frequently ask what they are doing to grow their own business bankers. What is your answer to that question? Show me the curriculum you have in place to turn the recent hire into the business banker you envision?

There are plenty of high quality training opportunities out there. Both the American Bankers' Association and Risk Management Association have formal training to teach bankers the skills needed to become the business bankers of the future. Beyond formal training, is a plan, a process if you will, to create bankers capable of flawlessly executing your bank's strategy and give you a competitive advantage. How can you achieve a competitive advantage by developing business bankers to your exacting standards? Because so few are doing it.

Brokerage firms and insurance companies troll college campuses for their next "big producer". Most
recruits flame out because they see themselves as the "Wolf of Wall Street", only to find out that they make little money and get little respect from customers and coworkers at the outset. The "eat what you kill" variable compensation structures don't pay back the student loans, in most cases.

Banks, conversely, hire with the majority of employee earnings coming in the form of salary. This is a key differentiator to bring your next rising star on board from the college ranks. Entry level professional positions could include the assistant branch manager or branch manager, which was my entry point. Or it could be a credit analyst or portfolio manager. A continuous plan to populate these ranks with recent college graduates with great attitudes and a willingness to learn will breath fresh life into your institution and provide a solid base to build business bankers into the future.

But you need a plan, and have to execute it. If not, good luck on your hunt for experienced lenders.

Do you have a development plan to build business bankers?

~ Jeff

Note: This post first appeared as a guest post for Sageworks in March.

Saturday, September 06, 2014

Banker Quotes As Told To Me v8

I learn a lot from bankers and industry experts as I visit their offices, speak to them on the phone or at industry events. Occasionally they will offer an insight that I think my Twitter followers would find interesting. Since I estimate my Twitter community only reads a fraction of their tweet stream, and so many of my blog readers do not follow Twitter, below are selected quotes that I tweeted since version 7.

Note that if the quotes exceeded 140 characters, I would have abbreviated or substituted some words to make them fit. So if you are a CPA and want to count, a few of the quotes may exceed the 140 here, but not on Twitter. I quote people anonymously to protect the innocent.

1.  Bank CFO: The amount of money I hear over $10B banks spend prepping for CFPB exams is ridiculous.

Soon we will forget that the CFPB was established so that bankers don't take advantage of borrowers that lacked common sense. It is morphing into what many were predicting, a bureaucratic black hole that will provide no societal benefit, just cost.

2.  Bank CEO: Regulatory risk weights are BS. It takes me three years to foreclose on a house. I could repossess a car in a week.

States think they are protecting borrowers by making it difficult for lenders to foreclose on the homes of borrowers that stop paying their mortgage. Who pays the increased cost? Think about it.

3. Bank CFO: Our commercial line of credit utilization rate is in the low 40% range.

One of the reasons that loan growth is not robust in an economic recovery.

4. Bank head of HR: Lack of writing skills is an epidemic. How do these people get degrees?

I double checked my grammar on this post. No guarantees though.

5. Bank retail exec: Customers interact with our website more than they interact with all of our branches combined.

My marketing friends know this. But what to do about it?

6. Bank retail exec: Customer retention in our closed branches was somewhere in the 90's.

If you could keep 90% of your customers when you close a branch, I wonder what math justifies keeping the expense? Perhaps if the branch is growing in a vibrant market, it would make sense. But in a mature market with little branch growth? Hmmm.

7. Bank CEO: Lending has forever changed when the borrower took the position "yeah I borrowed the money but it's not my fault."

People speak of going bankrupt in casual conversation. It used to be embarrassing. When walking away from debts, somebody does pay. 

8. Bank chief risk officer: We want to do the right thing (re mortgages), but with more than 1,600 pages of regs, we're not sure what right is.

The complexity in the mortgage market was primarily driven by Uncle Sam. Uncle Sam is sending in the CFPB to fix it. Wonder how that will turn out?

9. Bank Chairman: There are no sacred cows except for the sacred cows.

Does self-interest slow down progress in community FIs?

10. Bank CEO: Moving forward, it's not business as usual, but business as planned.

So long as the plan works towards a competitive advantage.

11. Bank CEO: Your speech was good. Your wife is hot.

Was that faint praise for my speech?

12.  Me to bank exec: What do you do that you wish you didn't have to do? Exec: Talk to consultants. #ouch

It's the only way to end up in my blog.

13. Bank CEO: The more our bankers know how to run a bank, the more successful they will be because they understand the decisions made.

Communicating strategy through the ranks... what a great concept!

14. Bank director: A customer should have confidence that the banker sitting across the desk from them can get things done for them.

Are your bankers empowered to get things done for the customer? Or does a "no mistakes" unwritten policy make them call around the organization to make decisions?

15. Bank compliance officer to me: New lending regs have almost crippled us.

Didn't see that coming.

16. Bank CEO: Bigger isn't better. Better is better.

This CEO clearly needs to drink the investment bankers' Kool Aid.

17.  Me to bank director: I was so bad at picking bank stocks that my wife made me clear them through her. Director: And you're advising us?

Fair point.

What are you hearing out there?

~ Jeff

Friday, August 22, 2014

Four Ideas on Bank Retail Investment Sales

Bank Investment Consultant magazine recently published the results of a bank/credit union investment sales benchmarking report from Kehrer Bielan Research and Consulting. The report, as cited in the article, (via @CUInsight) stated credit union investment revenues equated to $360 per million in share deposits, and that number was 21% greater than in banks, implying bank reps achieve $298 per million in deposits.

So if an investment rep covered $500 million in a credit union, he/she achieved $180,000 in gross production. A bank investment rep would achieve $148,750 for the same coverage. However, the article also stated that credit union reps produce less in gross production than bank reps, implying that bank reps cover more deposits. 

Bank investment sales is treated as an inconsequential line of business in most financial institutions, in my experience. My firm measures line of business and product profitability for dozens of community financial institutions, and hardly any of them make real money in retail investment sales, if they make any money at all. The most profitable program that we measure, on a pre-tax profit as percent of revenue basis, is one that is totally outsourced. The rep is a full-fledged employee of the third party broker-dealer, and the bank incurs little expense from it. It also receives little revenue. But it's profitable! Little is the operative word here.

Why does this line of business languish in our financial institutions? I think the answer comes back to attitude and execution. Because it can't be because our customers don't demand it. At the end of 2013, US registered investment companies managed $17.1 trillion in assets, while bank assets in all FDIC insured financial institutions was $14.7 trillion for the same period.

Here are a few ideas on how to turn this significant opportunity into a meaningful profit contributor to your financial institution:

Grow your own reps. So often we associate success with this LOB by plucking a higher producing rep from a brokerage firm because we want his/her book and to get profitable quickly. Why would a high producing rep join a bank that has limited products and lower payouts? Most won't although bank leads may be enticing. But, let's face it, as a brand for investment sales, most banks don't or can't achieve the panache of having Merrill Lynch on your business card. So grow your own reps. Pluck them from your ranks of junior professionals such as branch managers, credit analysts, marketing analysts, and perhaps, directly out of college.

Build a real program. A rep should be assigned a specific cluster of branches in an area that makes geographic sense. Each branch employee should be treated as a Center of Influence (COI) for that rep to source business. Each rep should develop a regimented calling program that includes internal bank customers, COI's, community outreach, and new relationship development. The Marketing Department should be tasked with assisting the rep along the way by mining data, developing mailing lists, coordinating educational events, etc. As the rep gets more experienced, he/she should expand internal COI's to include commercial lenders, who would tend to have leads to bigger fish with more sophisticated financial needs. As one senior lender once told me, "we're not going to refer our customers to some 25 year old that doesn't know squat and won't be here next year."

Customers are bank customers. Disintermediation was the dirty word that relegated bank investment sales to the bench. Better to let Charles Schwab take our customer money than to let an internal bank employee, right? Because that is what happened. And by the way, Charles Schwab has a $100 billion in assets bank. That's right, you read billion.

Another reason banks are reticent to move this LOB forward is because the business has traditionally been closely tied to the rep. If the rep leaves, then so go the customers. So build a program where multiple employees serve the customer and are part of a well-oiled system that exposes the customer to numerous employees.

Part of such a program should include Personal Financial Management (PFM) tools. I remain confounded why, in such a digital age, I must build my family's balance sheet annually in Excel. There are tools, and many banks have them, that essentially allow customers to view their entire financial picture on one platform... PFM. A successful retail investment sales program would set customers up, and train them, on using a PFM tool that allows them to view their entire financial picture. The more your customers use your PFM tool, the stickier they become to your institution.

Also, create an environment that is collegial and collaborative, making for an overall more pleasant experience for the rep as opposed to the "eat or be eaten" world of brokerage. Why would the right rep want to go to Acme Brokerage to cold call, do their own work, pay for their office, source their own leads, and have a sales manager shout expletives at him/her because he/she didn't meet their monthly production goal? But if they do choose that path, you have built the environment to make it very difficult for customers to want to leave your bank.

Build better reps. The days of graduating college and do no further learning are done. To be a licensed investment representative, you must minimally acquire your continuing education (CE) credits. That will not distinguish your reps from peers, because all must do it. There are professional certifications, such as Certified Financial Planner (CFP), that can distinguish your rep from others.

Sure, a rep can achieve the CFP certification and then bolt to a competitor. But you can protect yourself when making a large investment such as CFP by paying for it in the form of a forgivable loan. If the rep leaves before the forgivable period, then the amount expended immediately becomes a loan to that person.

And don't limit your rep development plan to financial matters. Money is very personal to people, and human skills are essential. Sometimes, the highest producing reps are so focused on driving revenue, they transform into a boiler-room broker. Remember, they are bankers. With that title comes trust, security, and integrity. Don't turn them into Gordon Gekko.

Getting back to profitability... it is reasonable to expect a retail investment sales program to generate $360,000 in revenue for every $1 billion in deposits. Further, based on our experience measuring profitability and the profitability of public retail brokerage firms, that this line of business could achieve pre-tax profit margins of 30%, dropping $108,000 in profits to your FI's bottom line. That is profit that requires little equity, and no balance sheet assets. Calculate that ROA or ROE!

What do you think is lacking in bank / credit union retail investment sales programs?

~ Jeff

Saturday, August 16, 2014

vBlog: Bankers... What's Your Criteria for Your CEO Search?

Bankers and Credit Union executives and Board members, be careful when limiting your choices for your next leaders. Because you might get what you asked for.

What traits and experience do you think equates to success?

~ Jeff

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