Thursday, September 25, 2014

Grow Your Own Business Bankers

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

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

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

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

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

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

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

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

Do you have a development plan to build business bankers?

~ Jeff

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

Saturday, September 06, 2014

Banker Quotes As Told To Me v8

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Does self-interest slow down progress in community FIs?

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

So long as the plan works towards a competitive advantage.

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

Was that faint praise for my speech?

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

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

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

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

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

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

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

Didn't see that coming.

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

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

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

Fair point.

What are you hearing out there?

~ Jeff

Friday, August 22, 2014

Four Ideas on Bank Retail Investment Sales

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

~ Jeff

Saturday, August 16, 2014

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

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

What traits and experience do you think equates to success?

~ Jeff

YouTube link in case you can't view on your device...

Wednesday, August 13, 2014

The Law of Large Numbers for Banks and Credit Unions

While a colleague and I sat patiently waiting for our flight, we were discussing an upcoming strategic planning session with a client. He asked what I thought were their chances of success. I thought their future was bright, but pointed to a couple of headwinds working against them. One of them was the law of large numbers.

The law of large numbers in banking requires ever more asset generation as the bank becomes larger to sustain growth. If a bank is publicly held and management tells their investors they shoot for 10% growth, the number gets harder to achieve as the bank grows larger.

This was true of our client, where I estimated they needed between $1.5 billion and $2.0 billion of new loan production to grow their balance sheet 10%. We have many clients that haven’t achieved that total loan size in their 100 year history.

Some banks have done it. One such bank that consistently stunned competitors and analysts with hefty growth was the former Commerce Bank of Cherry Hill, NJ. They did it through rapid branching, buying business in new markets particularly from municipalities, and their reputation (self-proclaimed) as America’s Most Convenient Bank. Their CEO was not as much concerned with top tier financial performance, quarter over quarter, so long as the bank was investing in the growth engine.

Many of us do not have that luxury. So how do we get 10% growth, or deliver double-digit total return to shareholders, as we get larger? Some do it through acquisition. Acquisition criteria gets looser as the bank gets larger and the need to “feed the beast” grows.

But could there be another way? It may be difficult because while the bank was growing, the CEO was touting the growth strategy to constituencies. So changing strategic course calls for strategic leadership.

As it gets more difficult to grow, and as potential acquisition targets decline, could it be time to turn this growth engine into a cash cow? It’s the natural evolution of business. If you’re management team is ideal for your current size and not much larger, and your markets are not yielding sufficient growth, why not maximize profits and reward shareholders, not in the form of robust capital appreciation, but in dividends? Mutuals and credit unions could reward depositors in the form of a special dividend. What a great benefit to bank with you!

The accompanying table shows banks that are growing slowly, yet have superior financial performance and a strong total return to shareholders, delivered in great part by a greater than 4% dividend yield.

Perhaps the bottom two are restrained more by their markets than the law of large numbers. I particularly wanted to throw in the sub $200 million in asset bank to show bankers that it can and is being done at this size. But I ask you, what is wrong with this strategy? If the answer relates to taxes, I’m not sure you’re getting my point.

And my point is this: staking your success to a growth strategy that your management team cannot deliver and your markets cannot support requires you to make acquisitions to deliver the total return demanded by your shareholders. Following this strategy will result in poorer acquisitions, diminished ability to manage a sprawling franchise, and ultimate erosion of franchise value.

Think Sovereign Bank. Do you want to join them?

What’s your number?

~ Jeff

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. FINRA makes people take a test to ensure they know what they are doing before recommending securities. I'm sure that strategy works well.

Saturday, August 02, 2014

Dear Mr./Ms. Bank Regulator

My firm will occasionally provide feedback on correspondence to our clients' regulators. Today we did just that. Our advice: don't come off as combative. Since hitting send on that e-mail, I reflected on how a half Italian, half Irish firebrand like myself became so melancholy. 

Truth is, I haven't. I thought about what we should have said to the regulator, versus the sweet words I was encouraging our client to use. I mentioned to him that we should keep two versions of the letter: one that we will send crafted to get our intended result, and one that says what we mean. Below is a sample letter to your regulator, saying it like you mean it.

August 2, 2014

Mr. John Whatshisname
Examiner In Charge
Bank Regulatory Body
1 Bureaucrat Way, NW
Washington, DC 20429

Mr. Whatshisname,

Below is our response to the Matters Requiring Attention ("MRA") that were included in your most recent examination report on Schmidlap National Bank ("Schmidlap"). 

Although our Tier 1 leverage ratio is greater than 10%, you criticized us for our stress scenarios contained in our capital plan. You opined they lacked analytic rigor. Aside from the clear lack of analytic rigor you exercised to come to this conclusion, it is important to remind you that estimating future negative events that impact our capital is guesswork. We like our guesses better than yours, and our spreadsheets are bigger than yours. So, no, we are not re-doing our capital plan.

Our level of investor commercial real estate is trending closer to your guidance levels. We get that. What you suggest we do is create greater diversity in our loan portfolio. We have a lot of small restaurants in our markets that can pledge pizza ovens as collateral. We are now training our lenders on pizza oven market valuations and setting a pizza oven loan to value limit in our loan policy. We will be dispatching lenders to pizza shops up and down our valley in the coming months. Mangia!

In the management section, you had two items for us: our succession plan and strategic risk. If I win the lottery, Frank will take my slot. If Frank gets hit by a beer truck, Jane is up to the task. If Mary goes buh-bye, Alex will step in. There's our succession plan. The Board is a little more difficult, because getting local luminaries to get paid twenty five grand a year to put up with your bullsh*t is difficult. We're working on it.

In terms of strategic risk by the recent new products and delivery channels we have added, we will need further definition from you on "strategic risk". When sending your clarifying statement, also send your resume containing the qualifications you possess to dictate product and delivery channel strategies. Also, please clarify the definitions contained within CAMELS, because we didn't think the S meant strategic. If our memory serves correctly, and the S does not stand for strategic, then we don't give a rats a** what you think about our products and delivery channels.

We recognize that there are so many laws and regulations that apply to banks that you can couch any criticism you have for us under some law, such as the Truth in Lending Act. It reminds me of high school geometry, when the teacher asked me to solve for a triangle, I would say "CPCT", knowing it could be so. So you can say, "I don't like this checking account... BSA/AML", and I would have to enlist regulatory attorneys to investigate the matter only to come to the conclusion that "you can't fight Uncle Sam".

That, Mr. Whatshisname, is the definition of tyranny. And Schmidlap is not gonna take it.

Warm Regards,
Schmidlap National Bank

Sunday, July 27, 2014

Guest Post: Second Quarter Economic Review by Dorothy Jaworski

Summer’s Here
We are all thankful that summer has arrived!  Heat and humidity!  And no one complains!  After the brutally cold and stormy winter, stuck in the perpetual polar vortex, no one dares to complain.

Our winter mood was brutally apparent in the GDP report that was released for the first quarter of 2014.
Actually the report comes out three times with a preliminary report, a revision, and a final report.  The Bureau of Economic Analysis, or “BEA,” a part of the Commerce Department provided their preliminary peak at 1Q GDP at the end of April.  GDP was reported at -.1%, they said.  Hey, great!  That winter wasn’t so bad after all…The second release at the end of May came in at -1.0%.  Wait!  That winter was bad.  Business just didn’t replenish inventories…Then came the shocking final report at the end of June showing -2.9%!  Wait!  The economy was so bad, the weather was so bad, consumers did not spend…

This is supposed to be an economic recovery.  In fact, it is now five years old.  And we get a terrible quarter like that?  What is going on here?  I will tell you that the change from -1.0% to -2.9% by the BEA was the largest downward revision since this GDP methodology was developed in 1976.  And do some math- if GDP grows at 3% (by some miracle) for the rest of 2014, GDP will average 1.5% for the year!  Plenty of excuses accompanied the final report, but I am not completely buying them.  I sum up the revisions by the BEA with a thought from Mike Flynn (06/30/14):  “If you torture economic statistics long enough, they will confess to anything.”

What’s Really Going On
I am still of the view that our economy will continue its growth path at 2% to 2.5%, well under its normal recovery speed and well below its potential.  Numerous regulations burdening all industries and higher capital requirements for the banking industry will weigh down growth.  Investors’ Business Daily has estimated the annual cost of regulation at $1.86 trillion.  Just think about that number as it relates to $17 trillion in annual GDP.  Consumer spending tanked in 1Q14, but should rebound in 2Q14.  Remember the spike in electricity prices in January and February?  That put consumers in a bad spending mood.  Gas prices began a slow climb in 1Q14 and the increases have not yet abated.  Gas prices have passed $3.70 per gallon and are up 12% year-to-date.  I’m outraged, aren’t you?

Having just read an article on Bloomberg that the US has now surpassed Saudi Arabia and Russia with average daily output of 11 million barrels of oil in 1Q14, I would have thought that the concepts of supply and demand were still alive.  Due to the fracking boom (extracting energy from shale rock by using high pressure liquid to split rocks and release oil or gas) has made the US competitive in the energy industry again and there is little impact to reduce our prices?  That leaves me outraged!  Will we approach our all time high gas prices of $4.11 per gallon from July, 2008 and $3.99 in May, 2011 soon?  At both of those times, consumers reached a tipping point where spending fell on most discretionary goods as a result.

Recent employment reports have been increasingly positive, showing the potential for GDP improvement. The June report showed that 288,000 jobs were created.  The unemployment rate fell to 6.1% in June from 7.5% one year earlier.  Many of the jobs being created are low paying ones or are part-time.  The proportion of part-time jobs to total jobs is now at 19% compared to 17% in 2008.  People dropping out of the labor force have certainly contributed to a falling unemployment rate; Those Not in the Labor Force rose again in June to a record 92.1 million.  The labor force participation rate is still at a 30 year low at 62.8%. These two statistics speak volumes- we are losing the productivity of a great number of persons, probably very experienced ones.

To know if interest rates will rise soon, or sooner than the market expects, my advice would be to watch the Yellen Dashboard on employment and pay attention to whether the measures are improving over pre-crisis ones.  The markets expect the first short term rate increase in mid-2015 and this is built into the futures markets.  The Fed has already indicated that they will be ending the QE program by the fall of 2014.  It is my view that the program initially worked, but in 2013, the Fed lost credibility with it and had to begin to unwind it.  And, as always, watch inflation, too.  It is still tame and at or below Fed targets.

The Economy
Yes, our economy is resilient, but five years into a recovery, growth of about 2% is well under our potential. Since the recovery began in June, 2009, real GDP has averaged +2.2%.  In the ten previous recessions, real GDP averaged +4.6%.  I do think we will continue to grow around 2%.  Hiring is up, albeit with lots of part-time jobs.  Average hourly earnings are up to $24.45, which is an increase of 2% in the past year. Consumer spending may not be much higher than 2% as borrowing to supplement spending is not as prevalent as it was before the 2008 crisis.  Technology is advancing and aiding productivity growth.  Stock markets are reaching new highs with the Dow Jones average at 17,000 and the S&P 500 approaching 2,000, with a PE ratio of 15.7 times.

We would love to grow exports but Europe and Asia’s economies are fairly weak.  I may have to personally go to Europe and investigate!  The European Central Bank, or “ECB,” just lowered rates again and this time tested negative interest rates, at -.10%, on bank reserve deposits.  Speaking of other parts of the world, the unrest and fighting in Iraq, Syria, Israel, and over in the Ukraine make for a very uncertain world indeed.  In the US, children and immigrants from South America are flooding through our borders in huge unmanageable numbers.  Uncertainty is often the enemy of economic growth.

As always, take heed of the roadblocks to higher growth (the Fed calls them headwinds) - high gas prices, regulatory burden, weak world economies, low income growth, uncertainty, and bad pothole repair!  Stay tuned!

Thanks for reading and Happy Summer!  DJ 07/09/14

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

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