Saturday, April 25, 2015

De Novo Banks: Only Apply If You Intend to Matter

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

Why? I don't think de novo banks are key players to business startup capital formation. Sure, if you cite studies that say these banks' loan books are predominantly small, as the FDIC measures them. But that is because de novo's are limited to making a loan to one borrower of 15% of their capital position. If a de novo starts with $15 million of capital, its largest possible lending relationship is $2.2 million. So the bank necessarily hunts for smaller relationships.

I'm also skeptical that small community banks in general are financing startup businesses. See the accompanying chart for the loan composition for all FDIC-insured banks and thrifts with less than $1 billion in total assets.

So, if a de novo bank has $100 million in total assets after its first year of operation, and it's loan portfolio was $70 million, then its business loan portfolio would be $9 million, if they achieved the community bank average. And that's all non real-estate loans to businesses, not necessarily startup or early stage businesses. Since I often hear credit people talk of getting three years of tax returns to get a loan decision, it makes me wonder how a 1 year old business can satisfy the requirement.

OnDeck Capital, not a bank, will lend to businesses with one year of operating history and only $100,000 of annual revenues. How do I know this? They tweeted it to me. That's right, they tweeted it.

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

To be fair, the loan portfolio composition in the above pie chart is from Call Reports, which categorize loans by collateral, not purpose. There may be small business loans in the residential category, because the business owner pledged his or her house as collateral for the loan. But I doubt OnDeck or similar neo-banks are requiring such collateral. And OnDeck and similar lenders are growing rapidly in the startup or early stage business financing landscape.

So, no, Mr. Keating, I don't think de novo banks, being run and regulated as they are currently, are critical to small business formation. Who wants a regulator to come in for their periodic exam cycle and ask "why did you make this loan"? What banker is running to capitalize an early stage business without real estate as collateral?

I don't know of many.

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

~ Jeff


Sunday, April 19, 2015

Bankers Tell Me Their Top Industry Game Changers

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

I did that very thing to dozens of bankers that attended their respective state banking associations' Executive Development Programs (EDP). And their answers gave me a more positive outlook for our future.

I teach Bank Profitability for the Washington, Utah, and Montana Bankers' Associations EDP programs. Each year I make pilgrimages to Seattle, Salt Lake City, and Helena to meet future leaders of our industry. Each state has its unique flavors of banking. Washington has a more traditional mix of very large and community financial institutions. Utah has many Industrial Loan Companies (ILC's), which are FDIC supervised financial institutions that can be owned by commercial firms not regulated by a federal banking agency, like a utility company. Montana has many small, closely held financial institutions. 

As part of the day-long curriculum, we discuss trends facing our industry and at the end of this discussion, I asked for their opinion regarding our top industry game-changers. Their answers are summarized in the chart below.

This should not be surprising to anyone. Neo banks are investing and moving quickly into creating a banking experience not based on personal relationships or locational convenience. Moven, a banking application that was seeded with $4-5 million, and subsequently raised $8 million more last summer, aspires to remake banking through the smart phone. They see their IT department as a profit center. 

Traditional community bankers see it as a support center, and staff it accordingly. Oddly, if you look at top IT projects for financial institutions, Online, Mobile, and Product Development reigned supreme (see chart). So why do we continue to view the IT Department as a cost center staffed with techies that have little feel, responsibility, or accountability for acquiring customers and improving their experience?

In 2013, I wrote a blog post on a job description for an EVP of Distribution and Service Excellence. Not that I've experienced such a position, but that does not mean it should not exist. Readers of my blog know I like to dabble in how things should be, rather than how they are. Two years and I still haven't seen this position.

There should be no more debate that customers interact with your bank more frequently with technology than any other distribution point. That ship has sailed. It is not only how it is, but I believe it is how customers prefer it. As a society, we are becoming increasingly accustomed to self service, and by our actions deem it more desirable to get a task done on our own time rather than wait for another human being to help us. There are exceptions of course, but in the main, don't you agree?

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

- Build a technology platform with the right partners that makes our customers' lives simpler that has a distinctive look and feel, even though we are likely to use the same platform that hundreds of other financial institutions use.

- Create a separate profit center for your online/mobile banking center. That means you have a center manager that is responsible for growing customers and balances, and generating profits via your technology platform.

- Implement a rational costing scheme to charge branches for their customers use of the mobile/online banking platform, and for your mobile/online center customers' use of branches. Keep it simple and understandable.

- At the top of the Mobile/Online Banking Center, put an executive with customer acquisition and customer experience know-how. Not a former FORTRAN programmer that wears a pocket-protector that is more comfortable discussing circuits and switches than how to acquire more customers.

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

~ Jeff



Friday, April 10, 2015

Guest Post: First Quarter Economic Commentary by Dorothy Jaworski

Two brutally cold winters in a row!  By this time, we have all had enough of the cold, the polar vortex, the snow, the freezing rain, the ice, and the potholes that are left on our roadways to harass and frustrate us.  At least we are not in Boston.  We need a change of seasons!

A New Year of Volatility
2015 ushered in a whole new season of volatility in the bond and stock markets.  Stocks have seen a large number of trading days with price changes greater than 1% and coincidentally, the Dow and SandP averages are up year-to-date by about 1%.  Longer term interest rates have moved by large amounts in short periods of time.  Witness the 10 year Treasury note- its yield dropped by 0.50% in January to 1.68%, rose by 0.33% in February to 2.01%, rose to a short term high of 2.21% on March 9th and dropped back to 1.94% for the end of March.  Investment decisions and timing are unusually difficult.  US bonds are also whipsawed every time a geopolitical event rocks the newswires, such as growing Middle East conflicts, ISIS fighting, and the Russia-Ukraine situation.

Speaking of the change in seasons, the Federal Reserve seems determined to begin their own season of change by raising interest rates.  Some Fed officials want to raise rates regardless, saying rates are just too low with an unemployment rate of 5.5% and should be returned to “normal.”  It has been nine years since the Fed last tightened policy in June, 2006; maybe they are getting anxious.  However, some officials, including Chair Janet Yellen, want to keep letting the economy and the data lead them to raise rates if necessary, but to keep rates low if necessary, too.  Just last week, Chair Yellen addressed the slow GDP growth that we have experienced for the past six years of our so-called recovery, which has been anything but “normal.”  She acknowledged studies that suggest that future GDP growth will also be painfully slow due to changing demographics and low productivity.

This slow growth, despite the low 5.5% unemployment rate, would cause the Fed to keep rates at the current low levels for an extended time period.  The studies suggest stagnation much the same as what Japan has experienced in the past twenty years, where zero interest rates and central bank easing campaigns failed to stimulate growth.  Here in the US, short term rates have been at zero since December, 2008 and countless rounds of forward guidance and trillions of dollars of bonds bought by the Fed in QE programs have failed to push our growth rate much above +2.0%.  In 2014, our GDP growth was +2.4%; in the fourth quarter, it was +2.2% with real final sales rising only a measly +0.1%.  The so-called recovery that began in June, 2009 has produced growth rates only about one half of “normal” recoveries since WWII.

Oil Steals the Show
The biggest story of the past year in the markets has to be the plunging price of oil, down 50% in 2014 to below $50 per barrel.  The US has led the world in energy and oil production from its shale and fracking operations.  Suddenly, the extent of excess supply became apparent.  Weak demand for oil from struggling economies in China, Japan, Russia, and Europe, almost assures continued excess supply in 2015.  Falling oil prices, and falling gasoline prices, are like a welcome tax cut for consumers who are saddled with low wage growth and lack of good jobs.  Many people, including myself, thought that the drop in gas prices would lead to higher consumer spending, perhaps even more than the amount they save when filling their gas tanks, but this has not been the case.  Spending has been weak since December and the savings rate has risen to 5.8%, which is the highest since December, 2012.  Energy companies moved to cut production and investment to align to the new $50 per barrel reality and, in the process, would cut jobs.  Since the US is now a larger producer of energy in the world markets, the effects are being felt here at home as well as in OPEC countries and Russia. 

Stock market volatility began after the plunge in oil prices, as fear of the effects on energy companies emerged.  Bonds recognized something else- the reality of falling inflation- and the prospects that inflation is expected to be lower in the next several years.  Year-over-year CPI was flat in February, 2015; there has been only one year-over-year decline since 1955 and that happened at the height of the financial crisis in 2008.  This brings me back to the Fed- slow growth, low inflation- is that a recipe for raising interest rates?  I think not.  But if they do raise rates, they will control short term rates.  Long term rates will still be driven by inflationary expectations and should stay low.  Will the Fed manipulate long term rates by selling some of their accumulated $4 trillion of QE bonds? 

Strong Dollar
While we weren’t looking, the US dollar strengthened by 20% in the past year.  This strengthening is cited as one of the factors that contributed to falling oil prices, since oil is usually denominated in US dollars.  A strong dollar serves to ultimately hurt our exports, and thus our GDP growth, while keeping imports attractive and import prices low.  This is another factor that will be considered by the Fed; a strong dollar will support lower interest rates as demand for US securities increases relative to the bonds of other nations.

So will the Fed raise rates in 2015?  Only they know for sure.  I try not to make bold predictions anymore, because just when you think you can throw a one yard touchdown pass, some guy comes out of nowhere and intercepts it.  Many of the Fed officials keep saying rates should be increased because they want to raise them.  Maybe they will; maybe they won’t.  But I do believe that, if they do, they will be lowering them a few meetings later.  The economic growth we have is too slow and is perhaps unsustainable, wage growth is low, inflation is even lower, and the dollar is strong.  When I enter those key inputs into my formulas, the result is lower rates, not higher ones.  Maybe Janet Yellen’s own words from her speech last week tell it all:  “The tightening pace could speed up, slow down, pause, or reverse.”  If you know what she is going to do, let me know!  Stay tuned!


Thanks for reading!  03/30/15        



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

Friday, March 27, 2015

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

The Credit Union National Association (CUNA), the credit union equivalent to the American Bankers' Association (ABA), states that credit unions exist to serve members, returning earnings to members in the form of lower loan rates, higher interest on deposits, and lower fees.

Nearly four years ago, I tested the higher interest on deposits claim in a guest post with the exact title on The Financial Brand, an industry publication geared towards marketing executives at banks and credit unions. The reaction that I received, in person, via e-mail, and in the comments were a little sharp-edged. Clearly this remains an emotional issue.

When the going gets tough, go to the facts. In 2011, banks paid higher interest on their interest bearing deposits than credit unions throughout the measurement period. 

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

There is a difference in my analytics. I searched on banks and credit unions between $500 million and $5 billion in total assets. I took a wider swath in 2011 with institutions between $100 million and $10 billion. Today's analysis reduced the amount of very small financial institutions.

I continued to control for commercially oriented banks by limiting to banks with less than 30% commercial real estate or commercial business loans as a percent of total loans. Those banks tend to have higher level of business deposits, which tend to drive down cost of deposits. However, to further control for this, I only selected interest expense as a percent of interest bearing deposits, not counting checking accounts that pay no interest.

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

Surprisingly, changing the institution size did tell a different story in non-interest expense to average assets, or what is termed the expense ratio (see chart).

Perhaps the financial crisis, which credit unions survived surprisingly well with the exception of corporate credit unions (similar to bankers' banks), woke up credit union leadership to scrutinize operating expense to increase profits. 

Yes, you read profits. Where do you think credit unions get their capital? If credit unions suffered a similar fate to many community banks, they couldn't back up the truck for shareholders to pony up equity to help absorb losses. Becoming more profitable was the logical solution to building up capital positions.

There are probably other reasons at work. In 2011, those expense ratios for credit unions were in the fours (greater than 4%). That was likely due to my going down to institutions with $100 million in assets. While I did the same for banks, many smaller banks are privately owned, one branch operations with very low expense ratios. By raising the bar to $500 million, my analysis likely raised bank expense ratios by excluding those hyper-efficient small banks, and reduced credit union expense ratios by eliminating very small, inefficient institutions.

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

I think both trend charts show something that previously happened between thrifts, savings banks, and commercial banks: the homogenization of business models. In the late 1990's, many traditional thrifts entered commercial banking with both feet. The result is falling net interest margins for banks and rising net interest margins for thrifts, long term. Thrift expense ratios began to rise as they took on the more expensive commercial banking teams.

Credit unions are shedding their Select Employer Group (SEG) strategies by adopting community charters or by adding so many SEGs that nearly everyone qualifies to join. They have entered commercial banking to the extent permissible by their regulators. So I expect financial performance ratios to begin looking more and more like their bank competitors.

Except for the shareholders. And the taxes.

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

~ Jeff

Sunday, March 15, 2015

Bank Deals: How Are They Working Out for You?


Bank mergers are picking up steam. Technological change, regulation, and scale are cited most often by sellers. Take a premium now, rather than drift slowly into the abyss of irrelevance.

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

"We've also suffered financially when this mistake has been committed by companies whose shares Berkshire has owned (with the errors sometimes occurring while I was serving as a director). Too often CEOs seem blind to an elementary reality: The intrinsic value of the shares you give in an acquisition must not be greater than the intrinsic value of the business you receive.'

'I've yet to see an investment banker quantify this all-important math when he is presenting a stock-for stock deal to the board of a potential acquirer. Instead, the banker's focus will be on describing "customary" premiums-to-market-price that are currently being paid for acquisitions - an absolutely asinine way to evaluate the attractiveness of an acquisition - or whether the deal will increase the acquirer's earnings-per-share (which in itself should be far from determinative). In striving to achieve the desired per-share number, a panting CEO and his "helpers" will often conjure up fanciful "synergies." (As a director of 19 companies over the years, I've never heard of "dis-synergies" mentioned, though I've witnessed plenty of these once deals have closed.) Post mortems of acquisitions, in which reality is honestly compared to the original projections, are rare in American boardrooms. The should instead be standard practice."


How can Warren's words be put into practice? To exemplify, I took two of the largest acquisitions in 2011 to back-check if it improved the buying bank's EPS and efficiency ratio. I went back over three years because mergers should be considered and executed with long-term financial improvement and overall bank strategy in the forefront of the "should we buy" decision. Citing the first few "clean" quarters after closing the transaction perpetuates the short-term budgeting culture that plagues our industry and prohibits long-term investing. By looking three plus years after merger announcement, I avoid that self defeating game.

I didn't take the largest deals from 2011, which were: Capital One Financial/ING Bank ($9.0B), PNC/RBC Bank (USA) ($3.5B), and Comerica/Sterling Bancshares ($1.0B). These transactions were so large, and two were foreign banks selling US subs, that it doesn't relate to my readers. But the next two deals in the table certainly relate.

Both deals look like they improved the buyer's EPS, with People's United achieving a 10.8% annual growth rate and Susquehanna achieving an even better 19.9%. People's efficiency ratio, a measure of how much in operating expenses it takes to generate a dollar of revenue, went down slightly. Achieving economies of scale should drive down the efficiency ratio. Although People's decline in this ratio was small, the relative size of Danvers ($2.6B) was only 10% of People's size ($25.0B) at the time the deal was announced.

Susquehanna's efficiency ratio went up. This is counter-intuitive, especially since Tower's relative size ($2.6B) was more significant to Susquehanna's ($14.2B) at the time of announcement. One would think that realizing the necessary cost savings to justify paying a premium would result in a lower efficiency ratio. Susquehanna was unable to achieve this "economy of scale". It is also worth mentioning that Susquehanna's earnings were sub-par at the time they announced the Tower deal. They had a 0.32% ROA at announcement. Not something to include in the shareholders' letter. Nowhere to go but up, right?

People's, on the other hand, had a better ROA (0.84%) when they announced the Danvers deal than in the fourth quarter (0.74%). The primary culprit was a precipitous decline in net interest margin of 116 basis points (yikes!). The fact that their efficiency ratio went down tells me they hit their operating expenses hard. As Warren alluded to above, I bet that wasn't in their post-merger projections.

I don't think it's very complicated to decide to do a transaction or not. What fits your strategy? Can you build it or must you acquire it? If an acquisition, can you afford the premium for the target so your bank is better off for having done the deal than passing?

Once you land a deal, accountability should be equally uncomplicated. My firm once represented a bank that had an activist investor on the Board. All that guy wanted to talk about was the efficiency ratio. Very one dimensional. But I digress.

He did hold management accountable for achieving the cost savings in the projections. So management prepared a spreadsheet of the phase-in of cost savings and the overall cost structure of the combined bank once all synergies were achieved. It wasn't a very complicated spreadsheet, and also gave management some leeway to alter where things were cut, so long as they achieved their aggregate numbers.

At the end of your strategic measurement period post-acquisition, the value of your bank (intrinsic value mentioned by Warren) should be greater for having done the deal than if you went it alone. If People's and Susquehanna could not achieve the earnings growth in the table above, then doing those deals improved their value.

If each could have achieved those numbers on their own, and there are reasons to believe they could have, then why do the deal at all?

Is it a fair question?

~ Jeff



Saturday, March 07, 2015

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

In the name of head scratchers, Square 1 Financial of Durham, NC, one of the most successful startup banks in a generation, is turning over the keys to PacWest, a California bank. The deal left me scratching my head, because at first glance it made little sense that a bank with Square 1's earnings trajectory would sell.

Niche banks are a growing part of our financial institutions landscape. I often cited Square 1 for their focus and success. In their own words, "Square 1 is a financial service company focused primarily on serving entrepreneurs and their investors." A bank with a focused strategy! Brings a tear of joy to my eye.

It had one banking office (in Durham), and twelve loan production offices located in key innovation hubs across the US. Its Chairman and CEO, Doug Bowers, was a 30-year BofA vet and more recently a member of a private equity firm. So the niche Square 1 adopted made sense.

But why sell Doug?

An industry reporter hypothesized that it was the price... 22x earnings, 262% of tangible book... c'mon?! But that was close to where Square 1 was trading at announcement. So there was no price premium. In fact, the below chart demonstrates that if Square 1 remained independent, their stock price would soar past the value received in this merger.

Like most projected performance, the devil's in the details. What I did was assume Square 1's 3-year compound annual growth rate in EPS (86%) linearly came down to earth to 12% by the end of the projection period, which is PacWest's 3-year EPS CAGR. I assumed PacWest's 12% would continue throughout the projection period. If all were true, it would have been more beneficial for Square 1 to go it alone. It is what I term "earning their right to remain independent."

So if future valuation wasn't the reason, then why? Perhaps they are receiving an outsized portion of the resulting bank than their current contribution. As I mentioned above, Square 1 did not receive a price premium from PacWest. So their pro forma ownership of PacWest is pretty much in line with their contribution (see table). Usually in a merger the seller receives a larger pro forma ownership stake because they receive a premium on their stock and they are relinquishing control. Not so, in this case.


So why did they sell? Here is what Bowers said in the press release: "Joining PacWest will be a terrific opportunity for our clients, employees, and stockholders. Square 1 offers PacWest a complementary line of business and significant core deposit growth. As part of PacWest, we will maintain our steadfast commitment to the entrepreneurial and venture communities, will be able to offer clients a wider array of products and will be well-positioned to continue to serve them through all stages of their growth."

That seems to tell us why PacWest bought Square 1, not why Square 1 sold to PacWest. So with Doug silent on the issue, here are my opinions on why one of my darling niche banks turned over the keys:

1. Institutional Ownership - Square 1 went public last March, raising $52 million at $18 per share from primarily institutional owners. The company was 70% institutionally owned with such names as Patriot Financial Partners, Castle Creek Capital, Endicott Opportunity Partners and other notables. Some had 5%-10% stakes, or about two million shares. Square 1 traded about 30,000-40,000 shares per day until around February 24th, when volumes soared (a fact that will not be lost on FINRA, although increased volumes prior to a merger announcement are not uncommon due to speculation). With such significant institutional ownership and relatively light normal trading volume, it would have been very difficult for those investors to lock in the trading gains experienced by Square 1 from November-February. How do you lock it in.... sell. Even if you are paid no premium. You can still lock in the price appreciation since you bought into the IPO.

2. Law of Large Numbers - As Square 1 grew larger, it would have to generate larger and larger amounts of business volume just to keep pace. For example, they had a $1.3 billion loan portfolio, the vast majority of which was commercial business loans. If 25% of that portfolio turned over every year, and I suspect it was more because business loans churn faster than commercial real estate loans, they would have to originate >$400 million of new/renewed loans per year to keep pace. Never mind growth. Which brings me to my third potential reason for selling...

3. Growth Trajectory - Square 1 was trading at 22x earnings when they sold. Banks their size typically trade around 13x-14x earnings. The premium was most likely the result of their balance sheet and earnings growth. Perhaps Doug and his senior management team were staring down the barrel of normalized growth. As investors began to recognize the slower growth, multiples would intuitively come down to the planet earth, suppressing stock price appreciation until the multiple normalized. That could have meant trading in a tight price range for a number of years. Why not lock in your tremendous gain since the IPO, and move on?

Square 1 was truly an extraordinary financial institution and I am sorry to see them go because I held them up as a premier example of how focused effort can lead to superior results.

If Doug Bowers and team were facing normalized growth and stock price appreciation, they could have decided to "cash cow" the bank, turning over a significant part of their earnings to investors in the form of dividends. In 2014, they enjoyed a 1.25% ROA and a 12.85% ROE. A great candidate for a cash cow. 

But alas that ship may have sailed when they backed up the truck to the institutional investor loading dock. They were numbers on a spreadsheet and were supposed to deliver the fund managers a big win. 

They did.

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

~ Jeff


Saturday, February 21, 2015

Breaking Branch Mediocrity

Another day, another convoluted organizational structure that includes “small business bankers” that are dispersed into the branch network to shore up branch capabilities. If not small business bankers, it’s “cash management officers”, or “business development officers”. Why add a protective wrap of additional employees around your branches?

Because branch staff are too busy with operational duties to go out into the community and pro-actively hunt for business. I’ve been to a lot of branches as I travel the land looking for opportunities for banks to improve profits. I rarely see a “busy” branch. One time I saw a line for a teller and was so amazed at the site that I snapped a photo. The bank security officer set me straight. Don’t case the joint.

If bankers were truthful to themselves, they would recognize that these branch wraps, i.e. additional employees with fancy titles, are nothing more than covering up for the perceived shortfall in branch staff skills to be the face of the bank in our communities and pro-active business developers. If you are nodding your head in agreement, read on. 

If you are irritated at the theory and are scrunching your eyebrows like you bit into a lemon, then continue to add the layers to your organizational structure and move on to an article about the “branch of the future”.

Instead of adding staff and layering the cost onto an already burdened branch network (who pays for the compliance analyst you just hired?), why don’t you get the most from the investment you already make in your branches? I have four suggestions for you to improve the abilities of these critical profit centers.


1. Hire to execute your strategy. This assumes you have a strategy that is more focused than “we’re a bank”. If your strategy is to be the number one business bank in the markets that you serve, then hire branch employees that can speak intelligently to business owners about how your bank can better serve them. If those employees are inept at balancing a teller drawer, then so be it. If your staff is highly capable at ATM replenishment but cringe at the thought of speaking to a small business owner about a sweep account, read on…


2. Develop your branch staff. In my experience, the percent of banks that have specific training curricula for branch staff that goes beyond operations and compliance is somewhere south of Pi, if Pi were a percent, and I actually knew what Pi is. But you get the picture. When I was in the military, we had a training calendar for every functional position that included on-the-job (OJT), computer based, self-taught/correspondence, and classroom training. Each sailor was responsible for matriculating through the training program when they were not forward deployed. When they completed certain stages, they received certificates and were deemed “South-East Asia qualified”, or whatever designation the training was intended to accomplish. Do we have a “Small Business Qualified” designation in your training curriculum? If you are not satisfied with branch staff abilities to execute your strategy, and have invested the time and energy into developing them without results, then perhaps you have the wrong staff.  But don’t complain about staff capabilities if you have done nothing to improve them.


3.  Provide meaningful incentives. If you have heard me speak, I bang the drum loudly about branch incentives. You want branch staff to be the tip of the spear for small business relationship acquisition but give those that succeed a 4% raise and a $500 holiday bonus while those that are not successful a 3% raise and a $400 bonus? Why are we surprised that we have to build a “wrap” of different employees around branch staff? Instead of providing incentives based on deposit balances, how about branch profitability? Imagine the behavior differences if branch managers were charged with improving their deposit spreads, fee income generation, and managing their expenses? Would you get the desperate phone call for a rate exception for a $200,000 CD for a single-service customer to “keep the money at the bank”? Doubt it, because that $200,000 would be generating far less spread than the $40,000 operating account from Joe’s Tire and Battery. Even though Joe leaves grease at your teller counter every time he comes in. Why not pay branch managers for the important position that they hold in executing your strategy? Would it be beneficial to make variable compensation a greater and more meaningful component to the overall compensation package?


4. Communicate your strategyThat is, communicate it if you actually have a strategy. Being everything banking to everyone in the markets where you have branches is not a strategy, dear reader. If your strategy is the beef stew of all strategies (i.e. throw everything into the pot), then expect to be average. Wouldn’t that make a great epithet? Here lies Jeff, he was average. But assuming you have a strategy that clearly identifies the bank you strive to become, then communicate it to your employees! Who else do you expect to execute on the strategy day to day? If your strategy is to be the number one business bank, as ranked by the regional business journal, then identify objectives to achieve it and have your employees march a straight line to get there. Maybe then your branch manager will know that you want more customers like Joe’s Tire and Battery, regardless of having to use Mr. Clean on your teller counter after he leaves.



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

~ Jeff


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

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