The Danger Within: Banking Conferences

The boss goes to a banking conference and senior management worries what new idea he or she will come back to implement. Sound familiar?

I'm currently at a banking conference in Florida at a swanky hotel that I would not go to if not for work. Too pricey, too reserved, and too old. But I can't complain. I'm waiting for room service as I type. The accompanying picture was my work view yesterday.

Most conferences I attend the breakout sessions to learn from colleagues and other bankers. But there is a danger to this. Learn what? I thought of putting a couple slides from a presentation I attended but decided against it for professional courtesy. Although I doubt that courtesy would be extended by the presenter to me.

Although the trade association selects topics based on what they perceive to be the most relevant for attendees, they don't typically scrutinize the content beyond the session description.

This could be dangerous. You are giving an industry consultant free reign to say whatever they want, right, wrong, or untested. As a consultant myself, I believe you must demonstrate confidence in your subject matter to influence the audience. But presenting your philosophy as if it were emblazoned on stone tablets wreaks of arrogance. And unfortunately, this is occasionally what we get.

My purpose for this post, if you are a banker or credit union executive, is to encourage you to absorb education sessions using the lens of your personal experience and common sense to know if it makes sense for your institution. If you are an industry consultant, bring a little humility to your presentation. You're probably not as great as the Caesar you see in the mirror.

How do you distill information from conferences?

~ Jeff

More Random Stuff About Me

Last year, a tweep of mine, Ken Mueller (@kmueller62), posted an interesting bio-post titled "Random Stuff You Should Know About Me" on his Inkling Media blog. I saw his reference to it on Twitter, I read it, I enjoyed it, so I decided to copy it... with Ken's blessing of course. But there is more to me than what can be documented in that short blog post, so I thought on the day prior to Mother's Day, I should open up my proverbial tent about my upbringing and my Mom.

1. Racism Cascades Through Generations: My grandfather, an Irishman whose ancestors came over during the Potato Famine, told my mother not to marry a Dago... a widely used insult to Italian-Americans. But she did anyway, and my grand father ended up loving his son-in-law dearly.

2. Life is Hard: My father died in 1972 from Hodgkin's Disease, a form of lymphoma. My family was on the lower rungs of the socio-economic ladder at his death, and he was the bread winner, leaving my mother with three boys, ages 8, 6, and 3 and little means to support us.

3. It Takes a Village: I believe this to be true. Not the way it is portrayed in today's society, where few take responsibility for their children due to bad breaks. But my Mom, as quarterback to our upbringing, used the men in her life to provide fine examples to emulate. To name a few: My grandfather, my uncles Joe and Bob, my baseball coaches Mr. Ross and Fritch, parents of friends, and my mother's eventual husband when she remarried 11 years later, Jack. In addition to our father, my brothers and I probably exhibit a combination of traits from these fine men.

4. Life is Not All Sunshine and Rainbows. My mother's life during those years following my father's death is testament to this. And my brothers and I were not the easiest to raise. But because my Mom never gave up, always pressed forward, doing the best she could, we turned out just fine.

During times when the traditional role of mother is frowned upon as a thing of the past, we should recognize the role mother's outside of the kleig lights of the corporate world, politics, and entertainment play in shaping lives.

Here's to you Mom. Thanks for being you.

~ Jeff

A Community Banker for the Ages

On Sundays, I go old school. I pick up the Sunday paper from my sidewalk, go inside, pour a cup of coffee, and read it. On a recent Sunday, the headliner in the Business Section was about the retiring Bob Enck, a long time community banker in my hometown, Elizabethtown, Pennsylvania.

Bobby Enck is a relic of an old time era in banking, when you started and finished your career at the community bank in the center of town. Bob started at the Elizabethtown Trust Company, which was aquired in 1981 by what is now Susquehanna Bank.

Did Bob climb the corporate ladder, and pick up stakes and move to the corporate headquarters 20 miles away. No. Did he stop burning shoe leather and shaking hands in E-town. Again, no. Bob works in the same office he cleaned when he was 15 years old, the old E-town Trust Company's headquarters. He served on the school board, helped found the ambulance company, and is raising money for athletic fields.

There are precious few Bob Enck's remaining in community banking. As I often say, if you succeed in banking you move farther and farther from the customer. Recently, I was interviewing community bank Board members regarding their strategy, and one director lamented that nobody wanted to work in the branch. They all wanted to transfer to the back office. A situation I think is the rule, not the exception.

But bankers keep telling me they want to erect the foundation of their bank around customer relationships. If so, why do they foster an organizational structure that encourages distancing key employees from customers if they are to succeed? 

Susquehanna stuck with the market manager concept with Enck. I am unsure if they do it throughout their franchise, or they made exception in E-town. I suspect the latter. E-town Trust was a market leader when acquired, and the remnants of that franchise, namely Bob Enck, continue to lead the market (see table). They now have three branches in a town with 40,000 residents (one came by way of acquisition). 

Not all markets can support senior level support like Susquehanna's E-town market, where the bank boasts $190 million in deposits, larger than many community banks. But there is a case to be made that, if relationships are the core to your strategy, your bank should have senior, lifelong bankers in your market. That means you have to build compensation, incentives, and support around this strategy.

Relationship building within communities requires time. Operating your branches with an employee revolving door doesn't get the job done. That is transactional bank thinking. Does your structure support your strategy?

Do you know of other Bobby Enck's? Or should this old-school approach go the way of the rotary phone?

~ Jeff

Note: After posting this, a Susquehanna Bank executive called in a correction. They do pursue a market manager approach and work to replicate Bob Enck's throughout their franchise.

Too Small to Succeed in Banking

Conventional wisdom: The onslaught of new banking laws, regulations, and regulatory activism requires scale to absorb costs. Or, the rapid pace of technological change and the sophistication of hackers requires resources not found in small community banks.

There is truth to conventional wisdom. But with all generalities, there are exceptions. And in banking, lots of exceptions. How do I tell the $250 million in asset client that I just visited that they are too small to make it, even though they sport a 1.47% ROA? The financial institution landscape is littered with banks and credit unions like my client.

Almost two years ago I wrote that bank shareholders were changing. (see The Coming Bank Consolidation) Community bank investors used to be the local insurance agent, mortician, and family that sits next to us in church. Today, many of traditional bank investors put their money in mutual funds, and leave the investing up to fund managers. No longer does the local barber show up at our annual meetings complaining about the pastries. Instead, professional money managers call to tell us how to run the bank.

As we migrate towards greater institutional ownership, stock liquidity is becoming increasingly important. Occasionally money managers call me with their criteria for their fund. One criteria is typically float and volume. Under 10,000 shares trading volume you say.... fuggedaboutit! 

My firm is occasionally called upon  to value banks that don't trade. Part of the valuation includes a discount for the lack of liquidity. Not a term foreign to other industries, by the way. In determining the discount, we look to trading markets to see the discounts applied, if any, to thinly traded bank stocks compared to their high volume brethren.

I recently ran an analysis of banks that trade over 10,000 shares per day, to those that trade 500-10,000 shares per day. The results are in the table below.

I controlled for financial performance (greater than 1% ROA), and asset quality (less than 2% NPAs/Assets). Of course, more performance and market data factor into trading multiples, but I couldn't control for everything. The result: Low Trading Volume financial institutions trade at a price/tangible book ratio of 110.5%, and a price/earnings ratio of 12.1x, compared to High Trading Volume FIs at 160.6% and 13.2x respectively.

What do I think community banks can do about the disparity?

1. Get a real investor relations program. Bankers think we should actively court investors when we need capital. Not so. Trading multiples are a direct result of supply and demand. If you want greater multiples, build demand... always.

2. Focus on retail investors. Community bankers think they can tap the institutional market. Investment banking firms tell them so. The truth is, institutions willing to invest in a bank that trades 2,000 shares per day are typically those that expect to exit the stock by selling the bank. How else can they exit your stock at such low trading volume? One benefit of having local, retail investors is they tend to have greater patience when implementing strategic change. To institutional investors, you are a number on a spreadsheet. If you take institutional money, plan their exit before they invest anything.

3. Perform. There is a positive correlation between financial performance and condition, and trading multiples, period. 

Banks that trade at low trading volumes trade at lower multiples and may be shut out of the institutional market for capital. Those that don't build retail investor demand for their shares may be required to sell if they need capital. You may be too small to succeed, but not because you can't deliver superior performance. But because nobody will invest in your bank.

~ Jeff

Banking Billboard Strategies v2: Nordstrom or Wal*Mart?

Welcome to the second installment of Banking Billboard Strategies.

In this episode, we have a bank that can't decide what it wants to be when it grows up. Does it want to be best price? Or best service? Undecided? No worries. Go for both! There is nothing like draining the treasury by investing in top notch personnel, systems, and processes, and charge little for the effort. I can't think of a business that has succeeded with this model, but maybe one will come to me.

   Follow the artist, Shannon Marsico on Twitter or Instagram

Do you know any financial institutions that are making this work?

~ Jeff

Banking Strategies: Should We Look to Utah?

If you could build a bank that delivered a 2.49% ROA, twenty three percent deposit growth that is 100% core, and zero non-performing loans, would you do it? That is exactly what Salt Lake City's Optum Bank delivered.

Over four years ago I penned an American Banker article encouraging financial institutions to specialize to develop a competitive advantage over large financial institutions that dominate our industry. Two years ago I wrote a blog post that plain vanilla banking, now considered conventional wisdom, may lead us to irrelevance. In December, I ranked the top five financial institutions by five-year shareholder total return. On top of the list was a niche bank, BofI Holdings, Inc.

Just this month I taught Bank Profitability at the Utah Bankers' Association Executive Development Program. Utah, home of the Industrial Bank, is the epicenter of niche banking... i.e. banks chartered to focus on a narrow strategy. Now, how many of you are rationalizing the performance of Optum Bank from the first paragraph, thinking, "oh, it's only an Industrial Bank"?

Optum Bank is owned by UnitedHealth Group, a health insurer, to specialize in Health Savings Accounts. It opened for business in 2003 and hasn't been below a 2% ROA since 2005. If you could deliver such performance, would you?

One of my students at the UBA's EDP was from EnerBank USA. Here is another Industrial Bank that has a specific niche, lending to homeowners for home improvements through construction contractors or home improvement supply dealers. EnerBank is owned by a utility company. Many community bankers would roll their eyes at such banks. But look at EnerBank's performance!

Would you like those numbers? I'm not suggesting closing down the mortgage department and boarding up the branches. Prudent risk management suggests we should have diversification in our loan portfolio and funding sources. But this fear of specialization confounds me. Why can't we be known for banking dentists and veterinarians, like Live Oak Bank in North Carolina, or serving Philly's Main Line affluent, like Bryn Mawr Trust? And yes, why can't we learn from the 31 active Industrial Banks from Utah?

I think there is something to be learned. What do you think?

~ Jeff

Banker Quotes: As Told To Me v5

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 about 10% of their tweet stream, and so many of my blog readers do not follow Twitter, below are selected quotes that I tweeted since version 4.

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 to me: Whistling by the graveyard is the best of bad choices when looking at our parked deposits.

In the third quarter 2008, the average money market account had a balance of $72,823. Scroll forward to 3Q 2012, the average balance ballooned to $112,060. Do you think your duration assumptions should change?

2. Bank consultant: If the house is on fire, don't expect credit for finishing the basement.

Regulators will focus on the fire. Your carpeting job in the basement doesn't matter.

3. Car salesman to me: 98-99% of my 2012 sales were financed.

And auto loans performed well during the most recent recession. I suppose the saying is true: You can sleep in your car but you can't drive your house.

4. Bank CEO to me: A great relationship might get you 25bps on a loan. Covenants can get you another 25-50.

Skeptical. I would like to see this in action. So those with great relationships don't discount the price to "get the deal done?"

5. Bank institutional investor to me: "For banks to be relevant they should have 35% of revenue in fee income." Me: Profitable fee income?

Your level of fee income only matters if something drops to the bottom line. For many, the only thing left for the bank is the risk.

6. Bank CEO: We're feeling some [economic] recovery but why does it have to be so painfully slow?

It took US Bank two years to evict Kiss' Ace Frehley from his house after he stopped making payments and paying taxes. 

7. NJ Bank Exec: We have a handful of shore loans where we not only can't find the building, we can't find the land. #sandy

Real world problems.

8. Bank CEO: We need to fix our processes because I can't get the egg through the snake fast enough.

At a time of low loan demand, perhaps a process review is in order.

9. Bank consultant: If a regulator doesn't like your bank, there's always something they can find in Compliance. #tyranny

Unfortunately, true.

10. Retail Banking Exec: Until today retail deposit products were driven by the land of the free.

An industry self-inflicted wound. Agree?

11. Bank director: re-imagining the branch network will include complexity and drudgery. But it will be worth it.

I was surprised to hear this from a director. Usually, by change, bank director's mean switching to the tuna salad instead of the chicken salad.

12. Bank Chairman: In my business, getting something done quickly meant by Friday. In banking, it's in two or three years.

One reason: There are roadblocks to asking permission and penalties for begging forgiveness. But let's not forget the Sergeant's that run our bank that embrace change like my daughters embrace my opinion.

13. Bank CEO: We're doing so well because our competition is so bad. #classic

And many of you reading this are this bank's competition.

14. Bank Chief Risk Officer: Our biggest risk is regulatory grind. It is constantly wearing down our staff.

Let's not allow the final arbiter of our strategy to be the "no" person in compliance.

What are you hearing out there?

~ Jeff

Note: To get banker/industry quotes as I hear them, follow me on Twitter @JeffMarsico