Saturday, October 03, 2015

Former Pennsylvania Secretary of Banking Lays Down Ideas on How to Love Your Regulator

Glenn Moyer, the former Secretary of the Pennsylvania Department of Banking and Securities (pictured), spoke at a banking industry event this past week. His subject: How to love your regulator. Glenn is a senior advisor to my firm and I suggested the topic. He rolled with it.

Regulator relations is a pressure point in our industry. Some of the more common complaints include regulatory guidance that seems to change with the breeze, and community banks being treated like “too big to fail” (TBTF). So Glenn’s comments were timely. And since he was the immediate past Secretary, and a former bank CEO, his comments were insightful. 

Here are four of his talking points that hit home.

1.  Never ask your regulator “What would you like me to do?"

This indicates to your regulator that you are out of ideas. That your management team is out of ideas. That perhaps you had no ideas to begin with. From my perspective, I would worry that the regulator would answer you. Glenn’s experience aside, how many other regulators have run a bank?

2.  Communicate your strategic direction to your examiner in charge (EIC). And include his or her boss in the conversation.

This is particularly true if you are charting a path that is different than in the past, or is somewhat unique. Regulators do not like to be surprised. Imagine an examiner coming into the next exam to find that you suddenly entered into reverse mortgage lending and the portfolio has grown faster than all others. That might inspire a higher zoom magnifying glass to see “what else” you have been up to.

3.  A repeat MRA (Matters Requiring Attention) is never good.

In my practice we occasionally hear bankers lament that they have been unfairly treated by their examiners on relatively minor issues. When we peel back the onion to uncover why the regulatory scrutiny on small potatoes, we find MRA’s that were contained in past exams. So examiners asked that the bank clean something up, and later come back to find out the bank did nothing to clean it up. Why would we be surprised by a reduction in our CAMELS?

4.  Document the collegial tension between independent directors and senior management.

This goes against the grain of boards that like to demonstrate unity and therefore have unanimous votes. Voting aside, regulators like a board that challenges management's strategic decisions. Particularly decisions that increase the bank's risk profile. Board minutes are an interesting animal. Actually, having read volumes of board minutes, I may have overstated "interesting". But if there is healthy debate about the bank entering a new line of business such as reverse mortgages, include the highlights of the debate in the minutes. Don't just state "Director Smith moves to approve entering the reverse mortgage business. Director Jones seconds. Vote is unanimous." Don't give the impression that your board is a rubber stamp. Because regulators rely on your board to protect the safety and soundness of your bank. I think I read that somewhere in a Director Roles and Responsibilities pamphlet.

What do you say about how to build a great rapport with your regulator?

~ Jeff

Saturday, September 26, 2015

Compete With Yourself

Our daughter worked from our kitchen table this past week because the Pope was visiting Philly and her firm advised her to get out of town. I worked from home one day, so we got a chance to go up to the local college, workout, and beat back the age monster together (see picture).

She was a college athlete (softball). And she said it was more difficult to workout as an adult because there were no goals and you didn't get the quick gratification of seeing success on the field. Instead, she said, she found success competing with herself. Doing more crunches than her last workout, putting an extra 10 pounds into her lifts. 

This got me thinking about a speech I heard by George Brett, the legendary third baseman for the Kansas City Royals. George said he had a problem with today's baseball player: lack of hustle. He told the story of how he would compete with himself when he grounded out, seeing how far he got down the line before the ball hit the first baseman's mitt. Same with fly balls. How far could he get to second before the outfielder made the catch. Imagine that with today's player who is more likely focused on his stats compared to others.

But wait! Isn't that exactly what we do in banking?

The most ubiquitous culprit is the Uniform Bank Performance Report (UPBR). Not sure if there is an equivalent in the credit union world. If so, let me know. But every quarter senior executives pour over the UBPR to see how they did against similar financial institutions. How similar? Asset size. So if an ethnic, SBA-focused financial institution is the same size as a rural, ag-focused bank. Boom! On the same UBPR.

Differences in business models aside, are we satisfied comparing ourselves to other financial institutions? Five years ago I wrote on this topic in a post titled The Folly of Peer Groups.  I suggested comparing yourself to institutions that are like you, and institutions that you aspire to be like. But today I'm suggesting going further.

Compete with yourself. Continuous improvement. Asking yourself each morning how to be better at the end of the day than you are at the beginning of the day. That if you fail at something, don't count it as failure but as a lesson learned. And share your lesson learned with colleagues so they can benefit from your experience. 

You lead by example. It must have been difficult for a Kansas City Royal to trot to first base on a ground out when the star player hustled so he can be three steps away from the bag when thrown out instead of four. That type of leadership impacts a culture that doesn't show up on a UPBR. But it will.

I don't think the greatest companies or the greatest leaders run peer groups to make sure they are better than average. Side note: Wouldn't that make a great epithet on your tombstone? "Here lies Jeff. He was better than average." Not really.

When I coached lacrosse, I had pre-season meetings with parents. In those talks, I set parent expectations. One was that I don't compare players to the player next to them. Parents fall into traps thinking that as long as their child played better than the one next to them, their spot was assured. But what if the less talented girl hit 95% of her potential? Being one of the best on the team and only hitting 60% of your potential is not a win.

And we should stop treating it like one.

~ Jeff

Sunday, September 13, 2015

My Fantasy Banking Team

Last weekend, a bunch of friends got together for our annual Fantasy Football (FFL) draft. My first pick: Tom Brady (8th overall). I'm feeling pretty good about it since he threw four touchdown passes in week one.

But it got me thinking about who would be my picks if I were assembling a fantasy banking team. So I thought I would give it a shot.

First, I needed to decide positions needed. The owner... Chairman. The quarterback... CEO. The running back... Chief Retail Officer. The wide receiver... Chief Loan Officer. The kicker... Chief Information Officer. And defense/special teams... CFO.

The Owner/Chairman

Criteria: I looked to Bank Director Magazine's annual scorecard for my pick. I used the $1-$5 billion in assets category, and limited my pick to a non-executive chairman, because an executive chairman can influence excellence from the CEO role regardless of holding the Chairman position. No, I wanted a top notch Chairman/Owner of my team that worked his/her magic with the gavel alone.

Selection: Chan Martin, CommunityOne Bancorp (NASDAQ: COB).

Chan was a former Bank of America senior executive, serving as the Corporate Treasurer, Enterprise Risk, and various other functions during his career. He retired in 2008 from BofA, but they thought so much of him they brought him back to assist with the Merrill Lynch integration.

He joined COB's board in 2009 after its $310 million recapitalization which was needed from a disastrous slew of losses incurred starting in 2008 as a result of awful credit decisions, leading to a 21% NPA/Asset ratio peak in 2010. Chan came as part of the recap, and rose to Chairman in 2014. Since his joining the Board, the bank has stabilized, returned to profitability, recaptured it's deferred tax asset, and NPAs/Assets have declined to less than 3%. Yeah, Chan can own my team.

The Quarterback/CEO

Criteria: I am an aficionado of long-term total return. So when selecting my quarterback, I want the guy/girl that has the best three-year total return. I had to eliminate penny stocks, low-trading stocks, and merger targets.

Selection: Greg Garrabrants, BofI Holding, Inc, (NASDAQ: BOFI)

Greg has been in charge of the Bank since 2007. Prior to BofI, he was an investment banker, management consultant, and attorney to the banking industry. Imagine that. What has he delivered to his team? A 367% three-year total return to shareholders, when the industry averaged 60%, according to the SNL Bank & Thrift Index. He can QB my team.

The Running Back/Chief Retail Officer

Criteria: I sifted through banks with the best cost of funds and cost of interest bearing liabilities. Building a low-cost core deposit base is arguably the most difficult task in banking, and it creates significant value to the publicly traded bank because it is difficult to replicate.

Selection: Mitch Englert, EVP of Community Banking, Capital City Bank Group, Inc. (NASDAQ: CCBG)

When you dig deep into the organizational structure beyond the folks you see at investor presentations, you find people like Mitch, who started his career at Capital City in Tallahassee, FL as a part-time teller. What has he accomplished? Thirty-four percent of Capital City's deposits are non-interest bearing. A mere 9% are time deposits. Cost of funds: 9 basis points. Let that sink in a bit. I'll give Mitch the ball.

The Wide Receiver/Chief Lending Officer

Criteria: I searched for banks with the best yield on loans coupled with excellent asset quality as represented by NPAs/Assets. I focused on traditional community banks and did not consider high yield type banks such as credit card banks. But I also wanted to find a community bank that focused on lending to the businesses of today, and not solely the owners of the buildings these businesses reside. They "received" their funds, and lent it into their communities.

Selection: Monty Rogers, EVP and Chief Lending Officer, Security Bank

Is there any doubt that the leader of my receiving corp would be a Texan? Security Bank in Midland, Texas lends to business, period. Their loan portfolio is 47% C&I loans... i.e. true business loans. None of this "we support businesses so long as they have real estate collateral". Sure, Monty does real estate lending too, representing 50% of the loan portfolio. But last week I was at a bank whose loan portfolio had 94% real estate loans. What has Monty delivered to Security Bank? A 6.94% yield on loans combined with a 31 basis points NPA/Asset ratio. Go ahead Monty, spike the ball!

The Kicker/Chief Information Officer

Criteria: If you believe, as I do, that more people interact with your Bank via technology channels than all other channels combined, then you need a solid CIO on your fantasy team. There are no financial metrics to rank your CIO's for the fantasy draft. 

Selection: Robert Landstein, EVP and CIO and Chris Tremont (pictured), EVP of Virtual Banking, Radius Bank

Ok, I hedged. Call this one my first add/drop of the year. In my league, that cost 10 bucks. But Radius Bank in Massachusetts, the former First Trade Union Bank, is forming the type of FinTech partnerships necessary to drive community bank relevance into the future. Read more about their initiative in an American Banker Bank Technology News article here. Welcome to the team Bob and Chris!

Defense/Special Teams/CFO

Criteria: I want a strong balance sheet manager in the CFO role. The rumblings of Fed Funds rate hikes are strong, and a rate hike this year, perhaps this month, seems likely. So I wanted a solid one-year GAP, so the bank and therefore my team doesn't get pummeled in a rising rate environment. I also wanted a solid liquidity ratio, so the bank doesn't have to reprice rapidly to maintain liquidity. Lastly, if they can do that with an enviable yield on securities, then you're on the squad!

Selection: Greg Hollier, CFO, Gulf Coast Bank and Trust Company

My "Girl with the Dragon Tattoo" investigation could not dig up much on Greg from a personal standpoint. But let me tell you this... the Bank has a 1.98% ROA, and a 22% ROE. Its liquidity ratio is 28% and only 3% of its securities are pledged. Cumulative one year repricing GAP/Assets= (5.56%). Oh, and the yield on securities is 3.22%. I think he is doing work managing the $1.3 billion balance sheet. You?

There's my team. I think it's a winner, not just for this season, but to lead our industry into the future.

Who is on your banker fantasy team?

~ Jeff

Monday, September 07, 2015

A Labor Day Analysis of American Banker's Best Banks To Work For

American Banker recently published their annual Top 50 Banks to Work For compendium. I am proud to say that a few of the winners are clients. Why the pride? My firm does not specialize in happiness. We specialize in strategy and profitability. So why would I care if clients were lauded for bringing job satisfaction to their employees?

It's all about perspective. During strategy sessions I am sometimes dismayed at some banks that make shareholder returns the fulcrum of their strategy. Shouldn't the very existence of our bank be nobler? We are all working our way through life. And most of us want our neighbors, coworkers, family and friends that navigate life beside us to do so with peace and happiness. We have far more customers than shareholders. And how we run our bank has a much more direct impact on employees' lives than shareholders' lives.

On this Labor Day, I put to you that a strategy focused on customers and employees satisfaction is a better undertaking than solely focusing on shareholders. Shareholder returns is the scorecard that shows us how we are doing in serving customers and employees, and whether we deserve to remain independent to execute our strategy.

I often invoke the term "right to remain independent". Put simply, a bank should deliver financial performance and total return equal to or better than would-be acquirers, so it is presumably better for shareholders to hold your bank's stock. 

The banks in American Banker's list ranged in asset size from $220 million to $19 billion and the number of full-time equivalent employees ranged from 51 to over 2,200. To say the least, the banks were wide and varied in size, charter, strategy, and geography. So comparing them to an index peer group is difficult. 

But I did it anyway. Below are some financial condition and performance metrics of the Top 50 compared to SNL's Bank & Thrift index banks.
It appears that a focus on employee satisfaction has not adversely impacted financial performance. In fact, we have found that there is generally a positive correlation between bank size and financial performance, and the SNL Bank & Thrift index banks are undoubtedly bigger than the average sized bank in the Top 50, which was $2.2 billion in assets. The SNL Index includes all major exchange (NYSE, NYSE MKT, NASDAQ) banks and thrifts. No limited trading markets or private companies, where smaller banks tend to be. So the relatively smaller Top 50 delivered very similar financial performance than the larger index banks.

The American Banker list highlighted what was perceived as the major benefits of working for the Top 50. I carefully sifted through their list to identify common themes that were valued by employees. The results of my analysis are below.

I was not surprised by some, such as free employee meals. Feed someone to make them happy. Makes sense. It did surprise me that gym and/or health initiatives topped the list. Perhaps, with continued digitization of bank processes and transactions, banks need less real estate than they have and it makes sense to put that space to good use for a healthy lifestyle employee perk. 

Some of the most mentioned benefits cost little to nothing, such as executives communicating with employees and vice versa, and flexible scheduling. Others do cost money, such as generous benefits, incentive compensation, and career development. But these hard costs did not result in lower financial performance, according to the first table. Perhaps one can conclude that a great place to work attracts more capable employees that can more effectively and efficiently serve customers even though the cost structure of the bank may be higher.

Would you rather build a bank with a slightly higher cost structure and very satisfied employees that delivers a similar return to banks with leaner cost structures and a greater proportion of curmudgeons? 

What do you think?

~ Jeff

Link to American Banker Top 50 Banks to Work For

Saturday, August 22, 2015

Banks Are Far From Amazon

If you haven't read the New York Times article on Amazon working conditions, you should. By trying to create a meritocracy, the unintended consequence included nothing more than petty zinging and flaming. The kind you see on social media. Except at least Amazonians do it to your face, but in a public setting. My response to reading the article is in my tweet below.

Jeff Bezos refutes the characterization of Amazon in the article as a soulless, dystopian workplace, stating it's not the Amazon he knows. Possibly true. Using anecdotes to make your entire case is lazy. What is the company turnover rate? How much overtime do they dish out? Because the article indicates nights and weekends are the norm. A little facts supported by anecdotes would have been more effective, and in keeping with journalistic standards. Not that I'm an expert on journalistic standards, but when a blogger like myself comments on lack of facts from the Old Gray Lady, journalism in the USA is in trouble.

While reading the Amazon article, I thought to banking. How far from a meritocracy we have become. In some financial institutions, the inertia reminds me more of a government agency than a shareholder owned company. One bank chairman said that when he wants to get something strategic done quickly in his company it takes two weeks. In banking, it takes two years.

Regulation counts as a progress inhibitor. Especially since the financial crisis. Bankers are wary of charting a different path for fear of how regulators would react. Plain vanilla business models receive the most favorable examiner reactions. Veer off the norm, scrutiny is sure to follow.

Internal to our banks is the inertia that comes from compartmental-ism, mediocrity, and old-school leadership. While there is not much we can do about regulatory attitudes towards moving our industry forward, there is plenty to do about our business models.  Here are a few suggestions to create a greater meritocracy that rewards moving the bank forward while minimizing the unintended consequences that Amazon is likely dealing with.

1. Create incentive systems with meaningful and transparent awards for achievement. I have spoken and written on this subject often. Use incentives as a positive means to reward behaviors positive to your institution. At Amazon and in many other meritocracies, incentive systems are wielded like sledge hammers to drive underachievers into the ground. Instead, lift achievers up. Persistent underachievers will self select out or be shown the door.

2. Fire people. When an executive tells me about the issues they are having with a subordinate that is hurting the bank, I always ask if the subordinate is an employee at will. Why? Because you can fire them! As one banker told me, there is nothing more motivating than a strategic firing. If an employee is not putting forth the effort, has a bad attitude, or simply doesn't care or works against where you want the bank to go, FIRE THEM! The remaining employees will take note.

3. Build a collaboration culture. Some banks have tried this and it morphed into a crazy number of meetings. But you must forge forward with the pre-eminent question being "how should this be"? Usually the answer is obvious. Get the people you need to move an initiative forward into a room and don't leave until you work it out. You don't need standing meetings for this. Be bent on taking action once the talking is done.

4. Promote learning from failure. Do not penalize failure. This is true if a bank employee is working to innovate and move the institution forward, but the initiative fails. I often hear about bank employees getting "written up" (an audit comment, examiner comment, or supervisor action) for trying a process that may not have worked or unknowingly violated an esoteric rule. Wrist slaps are for employees that ignore supervisory directives, or knowingly violate policy. Not for trying something that doesn't work out. That's called innovation.

What do you recommend for creating a meritocracy without pounding your people into the pavement?

~ Jeff

Saturday, August 15, 2015

Bankers: Don't Hate the Dividend

Me to Bank CEO: Have you considered, instead of a growth strategy, maximizing profits and paying out most of it in dividends? CEO: *crickets*

And so it goes with my suggestion that slow growth, superior profits and high dividends is a viable strategy. Particularly for financial institutions in slow growth markets. This strategy could also manifest itself in mutuals and credit unions, as they can pay a bonus dividend to core depositors out of their robust profits.

But as I told one banker yesterday, not many are drinking my Kool Aid. 

Growth is sexy. With growth comes accolades. Management gurus spew bromides such as "grow or die". And so our industry has been cut in half in the past twenty years, because so many of us chose the latter.

I think it may have been a business professor that told me growth above and beyond market growth would only last for a short time. The bank CEO, mentioned above, was asking for my opinion on his growth and acquisition strategy. His market grew at 3.6% the prior year. The market leader, of the "too big to fail" variety, actually grew market share from the prior year while the CEO's bank declined in market share. So they weren't succeeding taking business from the 800 pound gorilla to sustain growth. Nor was their market growing at a pace that would fuel book value and EPS. Hence my suggestion.

When I suggested it he sought examples. I didn't have the answer off the top of my head but he motivated me to look at the strategy from a total return perspective. I have an affinity for total return because it focuses on what you deliver to your shareholders, regardless of how you deliver it. Capital appreciation plus dividends, no matter the proportion. My suggestion to the CEO was 4% EPS growth combined with a 5% dividend yield delivering a 9% total return.

Getting back to my research, I reviewed all publicly traded banks and thrifts with between $1 billion and $5 billion in total assets. I eliminated any bank with greater than a 2% non-performing asset/total asset ratio to control for credit quality challenges that impacts profits and trading multiples. The results are in the below table.

I admit that the lower dividend paying banks delivered a better three-year total return than the higher dividend banks. But not materially so. Certainly not a slam dunk that motivates the vast majority of bankers to opt for a lower dividend, higher growth strategy.

The remaining ratios are very similar: ROAA, price/book, and price/earnings. Shareholders don't appear to penalize the higher dividend strategy by ascribing lower trading multiples to those banks' stock valuations. In fact, by growing slowly, maximizing profits, and paying the majority of profits in shareholder dividends (or depositor dividends for mutuals and CUs), one could argue that this is a lower risk strategy and avoids the roller coaster "high-highs" and "low-lows" that banking's high fliers tend to experience during economic cycles. Lower risk shareholders should expect slightly lower returns. So it is intuitive, right?

But no. Instead, those in slow growth markets set sail hoping to perpetually grow faster than their markets will allow, and rely on acquisitions to stoke their growth. Grow or die. Are we going to get a different result than we have gotten?

~ Jeff

Saturday, August 01, 2015

Bankers: Play to Win

I recently read Playing to Win: How Strategy Really Works by A.G. Lafley, Chairman and CEO of Procter and Gamble, and Roger L. Martin, Dean of the Rotman School of Management at the University of Toronto.

The book identified five choices businesses have to make to win, called the Cascade of Choices, because each one cascades from the prior one. And I thought, bravo! But then I tried to think of banks that are making these choices.

Banks rarely had to choose. Instead of focusing on small and medium sized, closely held businesses and the personal banking/wealth needs of their owners (note: Cobiz Financial), we choose to be everything to everyone in towns where we operate. This has sapped resources to the point of ineffectiveness, never committing to any particular path for fear of being wrong. 

In sports, you can never be the hero without the risk of being the goat. In our risk management meetings deep within the bowels of headquarters, we work diligently to avoid being the goat, never allowing us to be the hero.

Here are Lafley and Martin's Cascade of Choices, with my commentary following each one.

1. What is your winning aspiration? The purpose of your financial institution, the motivating aspiration.

I've called this vision, future-picture, high definition destination, and aspiration. It's all the same thing. What does your financial institution aspire to be? If you hear someone say that aspiring doesn't matter, ask yourself: Are they holding you down?

2. Where will you play? A playing field where you can achieve your aspiration.

Equally important, where will you not play in achieving your aspiration? I recall banks that went toe-to-toe with the old Commerce Bank of Cherry Hill, New Jersey on locational convenience. Commerce paid top dollar for prime locations touting extended hours and dubbing themselves America's Most Convenient Bank. Today, those banks are unwinding excess branch expenses that resulted from playing on Commerce's turf.

3. How will you win? The way you will win on the chosen playing field.

On Service! I take my liberties poking bankers on the service imperative because superior service must graduate beyond the platitude it has become. If you will win on your chosen playing field on service, then you focus on customers proven to appreciate service, price accordingly, hire capable employees that can be of service, develop them to hone their skills, and reward their success. 

4. What capabilities must be in place? The set and configuration of capabilities required to win in the chosen way.

The author of a recent American Banker article opined that it wasn't likely millenials will replace human interaction with financial technology. They still wanted someone to advise them and help them with their budget. Do banks have this ability now? If a millenial walked into your branch for financial advice or to help with their budget, could your bankers do it? 

5. What management systems are required? The systems and measures that enable the capabilities and support the choices.

I recently penned a BAI Banking Strategies article Linking Accountability to Strategy. I took the wild leap of faith that a bank would have branch and officer profitability reporting abilities. My experience tells me many don't, and they often revert to lender production and portfolio size to maintain accountability. This may have unintended consequences that is not consistent with your strategy. So in moving through the Cascade of Choices, make sure you have the management systems in place to execute on your strategy.

There you have it. I highly recommend the book. P&G thought so highly of Lafley that they brought him back shortly after he retired. In the introduction to the book on Amazon, the pitch read:

"This is A.G. Lafley's guidebook. Shouldn't it be yours as well?"

~ Jeff

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