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.

Saturday, February 07, 2015

Say on Pay for Financial Institutions

Researchers at Rice University performed a study on CEO compensation, including bank CEOs, relative to average employee compensation. The study was in reaction to the media's often cited pay disparity between the CEO's of the largest institutions and their rank and file employees.

As for banks, the Dodd-Frank Act mandates that all corporations administer a non-binding shareholder vote on the compensation of its executives. For publicly traded banking institutions, the study found the mean pay ratio was 16.6x, well within the 25x bounds identified by Peter Drucker in 1977.  

Not leaving well-enough alone, I did some digging into the matter on my own, knowing that when you move up the banking food chain (i.e. asset size), the disparity, or ratio, will get larger. But most community financial institutions don't live in that world, or so I thought. 

So I searched for publicly traded financial institutions with total assets between $1 billion and $3 billion that reported their CEO's total compensation (i.e. was not "NA"). The search yielded 148 financial institutions. I then took their annualized salary and benefits expense for their last reporting period and divided by their full-time equivalent employees ("FTEs") to come up with average salary and benefits per employee, and compared to the CEO's total compensation. 

The results are in the following table:

Although not the exact methodology of the Rice study, the table indicates that publicly traded community bank CEOs are not excessively compensated.

Since I went that far, I decided to see if there was a correlation between the CEO compensation multiple and financial performance, such as Return on Average Assets (ROAA). 

I took my search of $1 billion - $3 billion financial institutions and narrowed it down to $1 billion to $1.2 billion to keep a tight range, yet yield a decent sized sample. I eliminated companies with multiple bank subsidiaries, because the granular salary plus benefits and FTE data is typically at the bank-level. Plus I had to look and calculate manually. The search resulted in 36 financial institutions. 

I separated them into quartiles based on ROAA. The results are in the below table.

Each quartile had nine financial institutions. Interestingly, the bottom quartile performer had the greatest CEO to average employee pay disparity, the highest CEO total compensation, and the highest average employee salary. But I'm not certain the message here is to not pay employees well. Perhaps the bottom performers have too many employees AND pay them well, lacking the expense discipline to elevate financial performance.

The middle quartiles are similar in total CEO compensation and average employee compensation. In fact, the top through the third quartile are intuitive in their financial performance versus compensation versus the pay multiplier. 

In my experience, there are some financial institutions that pay executives well regardless of their relative financial performance. This was the main logic behind Dodd-Frank's Say on Pay.

The answer may not be in reducing executive compensation, although some Boards should consider it based on the facts. The answer, in my opinion, is to find ways to increase the compensation of rank and file employees. If we were socialists, we would mandate it and everyone would gravitate towards the lowest common denominator in employee productivity and financial performance would plummet.

But we're capitalists. And the way to increase real compensation is to improve productivity. That means instead of needing ten people in a department with average wages, we do it with seven people and pay above average wages. 

Time and again my firm reviews departmental processes that are outdated and unnecessary, technologies that are underutilized, and managers that protect "the way we've always done it".  If executives don't assume a leadership position in removing inefficiencies and elevating real wages while improving financial performance, perhaps their compensation should be evaluated.

As technology changes, it is difficult to keep up with process change. But the cost of doing business should decline as industries and the technologies that support them become more mature. When I performed my research, even though the asset size of the financial institutions was tight, the amount of FTEs per institution varied widely. One had 130 FTEs, another had 521. And average salary plus benefits varied, with the top payer averaging $135k, and the bottom payer averaging $45k. 

The top payer, by the way, was in the bottom quartile financial performer, and the lowest payer was the last bank in the second quartile. Somewhere in between lies the answer for your financial institution.

Any thoughts on pay philosophy?

~ Jeff

Note: The below SNL Financial article by Kiah Lau Haslett alerted me to the Rice study. It may require a subscription to view:

Sunday, February 01, 2015

Stupid Bank Names

In the mid to late 1990's, my employer, First National Bank of Maryland based in Baltimore, bought Harrisburg, Pennsylvania based Dauphin Deposit Bank. They put together a transition team. I was on
that team. One of our responsibilities was coming up with a new name. After thousands of hours and millions of dollars, Allfirst was born. And hence the title for this blog post.

Are you going through a similar exercise? With Allfirst still fresh in my psyche, I occasionally throw stupid bank names at bankers contemplating a name change to increase the likelihood they won't make the same mistake. Here is what I came up with so far...

Allfirst - My poster child for stupid bank names. They didn't even include bank in their marketing materials, leaving customers and potential customers wondering, who?

Open Bank - I featured Open Bank in my annual total return top 5. Kudos for delivering value to their shareholders. As for their name... what if they are closed?

First Bank - The context of this blog post is for considering a new name. I know many of you may be named First Bank because that's the way it was 100 years ago, or your name was First Savings Bank and you dumped the Savings or First National Bank and you dumped the OCC. But there are 77 other First Banks in the country. If your brand strives for assimilation, then go with it.

Rabobank - Not a large leap to Rob A Bank.

IndyMac Bank, FSB - Sound like a burger joint to anyone else?

First Integrity Bank - This Minnesota bank failed in 2008. If you have to put integrity in your name, well... The same with Honest, Fair, or any other similar name describing behavior that should be part of the culture. The exception being Trust, since this is a distinct charter and/or service offering. I may get a call from my friends at a similarly named bank near my home on this one. But they should've given me a call before printing the letterhead.

Bank of Bird In Hand - This is an Amish focused bank. Named for the town where it is located. So they probably don't view the name with the same smirk as me. And no, for my non-Pennsylvania friends, you cannot drive from Blue Ball, through Bird In Hand, on to Intercourse, and arrive in Paradise. All Central Pennsylvania towns. But not lined up in that order. My point here is, not every town name should be on your billboard.

MutualBank - On the surface, not a bad name. And I may get an e-mail from my FMS friend, Chris Cook. But truth be told, MutualFirst Financial of Muncie, Indiana, the holding company for MutualBank, is publicly traded. It's not a mutual.

BestBank - A distinction earned, not bestowed. Same with Superior Bank, etc.

Excel Bank - A spreadsheet?

K Bank - In today's abbreviated texting and social media world, this is a bad name, K?

Innovative Bank - Through the worst banking crisis since the Great Depression, only about 5% of FDIC-insured financial institutions failed. Could being in the 5% group qualify you as innovative?

This is only a small list of banks based on my personal knowledge and some database searches. I'm sure there are more out there.

You may be surprised that I excluded some names such as the often lampooned poster child for stupid bank names, Fifth Third Bank. But it is a distinctive name, that has been around for a long, long time. I also respect some old school bank names, such as Old Second, etc. And banks with small town names that don't result in sophomoric snickers are also fine, in my opinion. Even affinity branded banks, like Red Neck Bank (actual division of a bank), have some merit.

So if you are grappling with the bank name issue, make sure that when you are presented with options as to what to call your bank, take a step back, and think. Ask somebody outside of the re-branding process. Common sense trumps a marketing study.

What other stupid bank names are out there or were out there?

~ Jeff

P.S. If I offended anyone, I apologize.

Saturday, January 24, 2015

Bankers: What's Your "Well Capitalized"?

Prediction: The Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) and its complementary Dodd-Frank Act Stress Testing (DFAST) will meet its intended purpose, to better ensure financial institutions have sufficient capital during times of economic duress.

But not why you think.

If you look at Citigroup's or BofA's leverage ratio today versus 2006 or 2007, it is clear that they carry far more capital than before the financial crisis. And that, my readers, was the intended purpose. 

But it is not because CCAR or DFAST are properly assessing risk. The models are too complex and theoretical. An investment banker from a very large financial institution told me his bank submitted an 11,000 page CCAR to the Fed and they turned it down. Another prediction: nobody read an 11,000 page document. Nobody. And nobody understood it. That doesn't mean somebody didn't understand page 5,387, but the entire document? C'mon.

As long as the answer was, carry more capital, complex banks will be better prepared to weather economic storms. Perhaps regulators would save banks time, resources, and money if they took the age-old parent response to why banks should carry more capital... Because I said so!

As feared, DFAST schemes are being pushed down to smaller organizations. Regulators are asking for capital plans, and an assessment of risk in the bank's strategy to determine capital needs. In other words, what's your well capitalized? My firm wrote a newsletter on the issue. But I want to break it down to an even simpler form. 

Call it the Marsico Method. Because I'm a narcissist and want something named after me.

The below table shows the Marsico Method in its simplest form.

Currently, a bank is required to have a Leverage Ratio of 5% to be considered "well capitalized" by US regulators. So the Marsico Method begins with 5% applied to each asset category. No application of the 5% to liabilities, since capital ratios are calculated off of assets. That doesn't mean that liabilities don't carry risk, as you will see with the Risk Buffer.

The Risk Buffer column is similar to the buffer concept applied by Basel III, except that scheme applies a straight up 2.5% buffer to a common equity tier 1 (CET1) minimum of 4.5%, for a total CET1 ratio of 7%, to be fully phased in by 2018.

But in the Marsico Method, the Risk Buffer is an assessment of the potential loss estimate of each balance sheet item, based on a rational analysis by the financial institution. The table above is a high level balance sheet. Hypothetical? Not really. It is Cape Cod Five Cent Savings Bank's balance sheet. And according to the analysis, their well capitalized is 7.90%. Meaning that if they experienced stress and began taking losses, the 2.9% buffer above the 5% should be sufficient to staunch the bleeding.

There would be more detail provided by specific loan, deposit, and other balance sheet categories to come up with the overall Risk Buffer per category. For example, upon analysis of the performance of the home equity line of credit portfolio during past downturns and rapid interest rate changes, the bank determines that the loss potential is 1.85%... hence the Risk Buffer for that particular balance sheet category.

Banks should not limit themselves to on balance sheet items. There is risk in pass through residential mortgage lending, loan commitments, and fee-based businesses to account for. And there is risk on the liability side of the balance sheet such as interest rate and liquidity risk, fraud, etc. That is why there is a Risk Buffer applied to those categories as well, although the risk is typically less than the asset side.

Using the Marsico Method, banks can then project the impact to the balance sheet and therefore Required Equity based on their strategy. This would flow nicely into their Capital Plan that identifies actions to augment capital should the bank experience a stress scenario. 

It also provides a nice answer to your regulators, Board of Directors, and other constituencies when they ask, what's your "well capitalized"?

I'd love to hear your thoughts on this approach!

~ Jeff

Monday, January 12, 2015

Guest Post: Year End Economic Commentary by Dorothy Jaworski

2014’s Biggest Surprise
It never fails.  The markets provide us with completely unexpected surprises and leave us scrambling to update our projections for rates and economic growth.  And so it was in the latter part of 2014.  Oil prices began a massive plunge, down 46% for the year to $53 per barrel.  And who expected this?  Well- no one.  Now we all have to adjust to this new reality.  What are the implications of the crash in oil prices?  And why did they plunge?

We all have been reading for years how the United States was dramatically increasing energy production, especially from a method of extracting oil and natural gas in shale regions of the country known as hydraulic fracturing or “fracking.”  Suddenly the US was the world leader in oil production.  Suddenly the world realized that there was a supply glut.  OPEC members and Russia stand to suffer the most from lower oil prices, but have continually sworn to keep production at current levels, perhaps using low prices to stall US investment and production.  While the US economy is growing slowly and steadily, this is not the case in China, Europe, and Japan, who are experiencing low growth, no growth, and outright recession, respectively.  This is a recipe for weak demand which, when combined with a supply glut, means lower prices.  Also, the US dollar has been strengthening, with a 12% increase in 2014, further pushing oil prices lower as oil is typically traded as a dollar denominated commodity.

Think back, too, as to when oil prices were close to $100 per barrel earlier in 2014.  Geopolitical tensions were running rampant as fighting was ongoing in Israel-Gaza, Russia-Ukraine-Crimea, and Syria with ISIS stepping up as a huge threat.  Supply disruptions were the typical fear but the tensions have since subsided.  These tensions could reappear if unrest rises in Russia, Iran, Saudi Arabia, Venezuela, and other countries that are highly dependent on oil for revenues.  Now US consumers can be the biggest beneficiary of falling gasoline prices, which recently peaked at $3.69 per gallon in April, 2014 and ended the year at $2.23.  Consumers rejoice!  And don’t forget that heating oil prices have plunged, too, just in time for another polar vortex.  I have always believed that cheaper oil and gas prices are like a tax cut that helps consumers save money on their “taxes” and spend it on other discretionary goods and services.  I was gratified to hear Janet Yellen reiterate this same point.  Consumer can and will rejoice and spend.  Economists revised their projections to include new assumptions that consumers will save between $70 billion and $100 billion annually on gas and will spend most of the savings, perhaps increasing real GDP by at least a net +.5%.  Yeah, finally!  A 3% GDP number! Happy 2015!

The Economy in 2015
Most economists were projecting +2.5% in real GDP growth in 2015, prior to the windfall from plunging oil prices.  As mentioned, they have increased projections to +3.0%.  Over the past five years, GDP has averaged +2.2%, which is quite disappointing compared to the average growth of +4.6% for the past ten recoveries.  If we make it to +3.0% in 2015, it will be the first time in six years of recovery that we have touched +3.0%.  Perhaps that is why former Federal Reserve Chairman Alan Greenspan just proclaimed that “we still have a sluggish economy,” which will not fully recover until there is more investment in long lived, productive assets and the housing market recovers.  Despite all the euphoria over a lower unemployment rate of 5.8% (down in 2014 from 7.0%), the fact that many of the jobs created have been part-time, lower wage ones and many experienced workers are dropping out of the labor force.  I do see millions of jobs being created in 2015, but still many are part-time, thanks mainly to Obamacare and other regulations.

Who projected that interest rates would fall in 2014?  Well- no one- except maybe Dr. Lacy Hunt of Hoisington Management, who has been on top of trends most of us do not see.  I read his quarterly newsletters with great interest and you should, too.  The ten year Treasury yield topped 3% at the end of 2013 and fell to 2.20% by the end of 2014.  Why?  Falling inflation and falling inflationary expectations will do the trick.  Falling inflation confounds the Philips Curvers, who read their textbooks and expected higher inflation from the falling unemployment rate.  I’ll bet John Taylor is a little upset, too, with trying to use inflation in his Taylor Rule formula.  Weakness in most world economies other than the US is keeping inflation under control with weak demand- especially as seen with commodity prices.  US rates continue to be substantially higher than rates in Europe and Japan with less risk.  That upsets me, because it is not normal.  Yet, the Federal Reserve stubbornly continues to proclaim that they will raise interest rates by mid-2015.  I say, go ahead.  The Fed will just end up lowering them shortly thereafter when they realize they have tightened prematurely.  New York Fed President William Dudley recently warned of just this risk, when he spoke of the historical classic case of premature tightening in 1937 by the Fed, when recession and deflation followed.   

Risks to Growth
I’m an optimist at heart, but I feel obligated to point out the risks to economic growth.  Measuring and managing risk has been my specialty in a banking career that is now 40 years old, of which 29 years have been spent dealing with risk.  The aforementioned risk of a Fed policy error of premature tightening tops the list.  Economies around the world are struggling and their policy makers are still easing monetary policy, making the spread between US rates and those economies’ rates unnaturally wide.  The ever rising US dollar could contribute to weaker and weaker currencies around the world, leaving countries to struggle and have to raise rates.  We have geopolitical (the word made famous by Greenspan in the early 2000s) risks of war, terrorism, epidemics such as ebola and influenza, and cyber attacks.

And there are two more risks that are not getting a lot of press- deflation- which can lead to deferred demand, declining wages, and slowing GDP- and liquidity risk- where restrictions and regulations have nearly strangled the life out of financial institution market makers, who seem increasingly unwilling or unable to take bonds into inventory and hedge them, instead opting to act like brokers, taking too much time to execute trades and too wide a bid-ask spread.  Market makers are not alone in this regulatory nightmare; 79,000 proposal and final rule pages were published in the Federal Register in 2014 affecting all industries, with a cumulative total of 468,500 since the recovery began in 2009.  Once again, I digress.  But, that’s what I am here for.  Stay tuned!  

Thanks for reading!  01/05/15

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.

Monday, January 05, 2015

Leadership: In My Own Words

With all of the scholarship on leadership, what could I add to the conversation? I have my ideas. And if we reflect on the decline of our industry, an honest in-the-mirror assessment of bank leadership merits discussion.

In 2004 I wrote an article for a banking industry association entitled Lead Like Lincoln. The article identified three traits that were critical to Lincoln's success: Vision, Communication, and Commitment. Ten years later, I stand by those traits.

At this stage of the post, I could cite studies, books, and management luminaries on what makes great leaders. Instead, I will give you my slightly varnished view, straight from the gut. Slightly varnished because I grew up in Scranton, where directness has greater value than tact. Not always an admirable trait for a consultant, or a leader.

A great leader has a vision for the future. This is particularly important and challenging in rapidly changing industries like technology and media. It was not particularly important in slow moving industries like banking. 

But that has changed. The greatest banking leaders can see their bank several years into the future, and organize resources around making that vision a reality.

A great leader is humble. As with any general statement on leadership traits, there are exceptions. Say what you will about Steve Jobs. Humble he was not. But hard charging, egotistical leaders can only move an organization so far, and to a certain size, before the ego starts to become a liability. Recall that Jobs got fired from the company he founded. Not an easy task to accomplish. 

The humble leader, on the other hand, takes counsel from his/her people and understands that no human being is all knowing, or even close to it. A great leader does not judge his/her importance by an org chart or the size of paycheck, but by the happiness of their people (sum total of all of their people, not just keeping an individual happy) and the purpose of their work

A great leader does not fear failure. Failure is the lesson plan for success. Avoid failure, and the leader understands that their company is destined for the ash heap of irrelevance. In banking, failure is clearly a dirty word when relating to the overall bank. But the most innovative and sustainable business models in our industry are moving farther away from business as usual into less tried and true paths. If there was ever a need for great leaders in banking, now is the time.

A great leader has great followers. When the Navy trained me on leadership, an early lesson was that before becoming a great leader, a sailor must be a great follower. So before assuming leadership, a future leader supports their current leader, working with purpose for the betterment of the company, with no interest in highlighting shortcomings of their leader or those around them in order to move them up the organizational ladder.

Surrounding yourself with great followers implies hiring those that can step into your shoes, or that have such potential and you are dedicated to ensuring their development. Great followers are smart, motivated, humble, forward looking, and care about their colleagues and the company. 

Great followers give the leader informed information and opinions, and if the leader, after careful reflection, decides to go against the follower's recommendation, the great follower charges forward lock-step with the leader.

Poor leaders don't want great followers for fear that they can easily slip into the leader's shoes. Great leaders cheer their followers and prepare them to slip into the leader's shoes.

Great leaders are committed. If a vision is worth pursuing, should it be abandoned when obstacles rear their inevitable head? Weak leaders cut their losses. Great leaders forge forward.

Great leaders are likable. By this I don't mean liked by everyone at all times. They can make the difficult decisions, counsel employees, and be firm when necessary. But if a leader must motivate employees to challenge their boundaries and create great companies, employees must believe in the man or woman. 

Can a person with wavering honor or integrity, or is generally a jerk get the entire company to move as one in a direction that has great risk yet may lead to great reward for a sustainable period of time? 

I think not. 

What are your thoughts on leadership in financial services?

~ Jeff

Sunday, December 28, 2014

Year End Message to Community Financial Institutions

Thank you, my readers, for taking the time to read Jeff For Banks. I appreciate all of you.

If you were curious why I enjoy working with community financial institutions, below is my weak attempt at explaining myself. Hey, I recorded while on vacation, so there's that!

But the over-riding message is: Let's go get the big boys in 2015!

Happy New Year everyone!

In case you can't watch directly from my blog, here is the YouTube link:

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