Saturday, February 06, 2016

A Financial Institution Investment Banker Had Questions. Here Are My Answers.

My colleagues and I are frequent speakers at industry events. At one such event, a financial institution investment banker approached my colleague and handed him a list of questions he would like answered during his speech. My colleague gave it to me the next day, and I provided my answers thinking he wanted them. Not really. Just thought I would be interested in the questions. So I think: Blog Post!

The list of questions read like the script used to convince banks they can't go it alone. But I'm a cynic. And should give the investment banker the benefit of the doubt. Here we go...

1. What should a financial institution's target levels be in the following?

Return on Tangible Equity (ROTE): ROTE is a crap ratio. Not my term, but one told to me by a bank stock analyst, and I agree with him. If you don't want intangibles, don't do premium deals. If it was such a good deal, then measure ROE. ROTE is just an investment banker talking buyers into doing expensive deals and to not be accountable for the intangible.  

But to answer the ROE question, the long-term average should be >10%. Why? Because an investor in an equity security should expect a 10+% total return. So it serves as a proxy, of sorts. It is different, for each bank however. What if a bank trades at 125% of book? Then a slightly greater than 10% ROE would be required to deliver a 10% total return. It's math.

Note that I said long-term ROE because it should be better in a strong, expanding economy and worse in recessions AND periods of strategic investment. Dropping ROE to 8% to make strategic investments so the financial institution can elevate it to 11% makes total sense to the CEO and Board that manages for long-term performance. Not so much to the CEO and Board worried about his/her next analysts' call.

Tangible Equity/Assets: This depends on the financial institution's risk profile. They should calculate their unique "well-capitalized" by estimating the risk on their balance sheet per balance sheet item, now and as projected. I like the Basel III approach of setting a base level that they don't want to go below (4.5% in Basel III's case) with a 2.5% buffer in place in good times so when times are not so good, the buffer serves its purpose. But the risk buffer should be set by each institution based on the risk on their balance sheet and projected to be on their balance sheet. My guess is that if every bank did this, their target capital range (base + buffer) would be between 7%-9%.

ROA: Greater than 1% should be achievable by most financial institutions, as so many are currently doing it. For institutions with meaningful fee-based businesses, the number should be greater because a profitable fee-based business will deliver "return", without adding "assets".

Efficiency Ratio: This is totally dependent on the business model and growth trajectory. Not many investors complained about the old Commerce Bank (NJ) efficiency ratio of 70+% when they were delivering 20+% profit growth.

Organic Growth Rates: If they exceed their markets, then they are above average, right? So it depends, in large part on their markets. Earnings growth should exceed balance sheet growth. That's positive operating leverage that so many financial institutions struggle with. Earnings growth plus dividend yield should be close to or exceed 10%, in my opinion. If markets can't support it, expand, take it from the competition, or acquire!

2. What is the total non-interest expense to have full internal staffing? 

I have no idea how to answer this one Mr. Investment Banker.

3. What is a financial institution's cost of equity? 

I bet he was looking for a CAPM calculation, as I see this often in investment bankers' presentations. But no. I'm a simple man.

For slower growth, conservatively run banks I would estimate ~10%. For fast growth and/or banks pursuing a higher risk strategy, I would estimate 13%+ for common equity, as investors should demand more for that business model. For convertible preferred, I would estimate the coupon until the conversion date, then the cost of common equity. If it is not mandatorily convertible, then it's the coupon plus the cost of common equity mentioned above. Convertible preferreds are ridiculously expensive because they dilute common returns while sitting back clipping coupons, in my opinion.

4. What asset size is critical mass? 

You know when there is a rule, and someone throws up an exception to the rule that might represent 1% of the total universe subject to that rule? Banking has plenty of exceptions to the critical mass asset size estimates bandied about by bankers, consultants, and investment bankers. My firm's first podcast highlighted the average size of all Sub S banks in the US as $273 million. Small. Yet their average ROA was 1.36%. Sub S banks represent ~ 1/3 of all financial institutions in the US. 

So there are myriads of exceptions to the economies of scale conventional wisdom. I would say, however, that banks with <$500MM in total assets have unique challenges relating to technology investments, stock liquidity, and management succession that will make things difficult. They also suffer significant stock trading discounts to larger banks, even though they may perform better. The change in community bank shareholders from retail to institutional also works against smaller banks, as institutional shareholders typically have float requirements (i.e. so many shares must trade per day). That's where the small banks challenges lie, in my opinion. Not in their ability to deliver superior financial performance. Because they are doing it.

5. Should banks form a bank holding company (BHC)?

I've already taken up enough of my readers' time than to answer this boring investment banker question.

What are your opinions of the above questions?

~ Jeff

Thursday, January 28, 2016

A Solution for Closely Held Banks

If you are a family bank and want to sell your shares without selling the bank, what do you do? So was the question that my colleague, Sharon Lorman, put to me in my firm's very first podcast edition of This Month In Banking (follow link to listen!).

The question is not for family banks alone. But all banks that are privately held or have one or a few very large shareholders. How do those shareholders exit if they need liquidity for whatever reason?

This month, Old Fort Banking Company in Tiffin, Ohio gave us an answer... form an Employee Stock Ownership Plan (ESOP). Old Fort, founded in 1916, was run for generations by the Gillmor family. Dianne Gillmor Krumsee is the current Chairman. Looking to divest a portion of her stake, the bank's CEO, Mike Spragg, proposed establishing an ESOP to buy $15 million of her shares and therefore preserve its independence and the Gillmor family legacy.

An ESOP is a trust that is a qualified retirement plan designed to provide employees with an ownership interest in their company by investing primarily in stock of the employer. The ESOP is funded with tax-deductible contributions by the employer in the form of company stock, or in the case of the Old Fort ESOP, with cash that was used to purchase company stock. In this case from its Chairman. The bank's press release did not specify if the ESOP was leveraged, meaning it borrowed to fund the purchase. My guess is that it was leveraged with a loan from a financial institution or Ms. Krumsee herself. Either way, Old Fort would have likely secured the loan.

The bank can then make tax-deductible contributions to the ESOP to service the loan. As the loan is repaid, shares held by the ESOP are released and allocated to employee accounts.

Their may be tax benefits to the selling shareholder. According to Internal Revenue Code Section 1042, an owner of a closely held C corporation can defer, and potentially eliminate, all state and federal capital gains taxes on their sale of stock to an ESOP. This is done by reinvesting the sale proceeds in a Qualified Replacement Property (QRP) within 12 months of the sale. Don't take my word for it. Check with your tax adviser. That's another test I didn't take.

Chase has an excellent ESOP primer that I checked out for this post. Check it out for more information.

The benefits of an ESOP go beyond tax benefits for the seller and independence for the bank, in my opinion. Studies show that employees with ownership stakes in their companies tend to run the companies better... i.e. they perform better. A recent FDIC analysis concluded this. 

Indeed, I checked all the Sub S banks in the US, which are mostly closely held banks with significant employee and family ownership, for their financial performance. The table represents my findings.

For its part, Old Fort had a 2015 ROA of 0.96% and ROE of 10.90%. Not too bad for a $475 million in asset bank. By comparison, FirstMerit, also of Ohio, had a 0.91% ROA and a 7.90% ROE for the same period. Oh, and FirstMerit is $25 billion in assets. And just threw in the towel by selling to Huntington Bancshares (ROA: 1.01%, ROE: 10.60%, Total Assets $71B).

The twist for Old Fort, is the $15 million share purchase represented a 45% stake in the bank, which required the ESOP to apply to be a bank holding company. Which it did. And apparently succeeded, because the transaction closed last month.

Well done to Ms. Krumsee, Mr. Spragg, and all the employee-owners at Old Fort Banking Company for executing on an idea to perpetuate the family involvement, provide liquidity, and keep their well-run bank independent.

~ Jeff

Saturday, January 16, 2016

Guest Post: Fourth Quarter and Year End Economic Commentary by Dorothy Jaworski

Into 2016 We Go
This is no way to ring in a new year!  US stocks fell 6% to 7% during the first week of January, following world stock markets in a downward spiral.  It is the worst first week of trading in years, maybe ever.  There were several drivers of this nervous selling activity.  First and foremost, China is at it again.  Its stock markets are said to have led the world markets plunge, with clumsy attempts by their regulators’ circuit breakers to stem declines actually making them worse.  China’s manufacturing data fell for the fifth consecutive month, pulling their GDP growth down to 5.5%, as the painful transition of this Asian economy from a manufacturing one to a consumer one marches on.  And China surprised the markets by devaluing their currency- the yuan- again, similar to the sneak attack last August.

However, this time the red-faced and embarrassed International Monetary Fund, who granted China reserve currency status just weeks ago, has to acknowledge that this type of behavior breaks their regulations.  China is paying the price for these actions.  They used to hold reserves of $4 trillion in 2014.  Between February and November, 2015, foreign capital was pulled out of the country to the tune of $843 billion.  Their foreign exchange reserves are down in 2015 by 13%, or $500 billion, which is the first decline since 1992.  Ah, the price to pay…

Middle Eastern tensions escalated recently between Saudi Arabia and Iran.  The Saudis executed dozens of people including a Shiite cleric and Iran torched the Saudi embassy in Tehran.  In days gone by, oil prices may have spiked, but in today’s supply-glut-driven energy market, oil prices steadily fell, down by 10% during the first week of January, hitting $32 per barrel.  This decline will continue to harm the energy industry, of which many firms are already in decline or recession.

The Fed
The only Christmas present the markets received in December was a Federal Reserve rate hike of 25 basis points.  They said they would raise rates in 2015 and they did.  Merry Christmas to consumers and to small businesses, who will pay higher interest rates.  The Fed made their decision solely on the “low” unemployment rate of 5.0%, which they tout as proof that their zero rate campaign, which lasted six years, “worked.”  Well, certainly it “worked” because so many people dropped out of the labor force, which when coupled with moderate job growth, makes the unemployment rate of 5.0% look pretty good.  Record warmth in December contributed to a rise in payroll jobs of 292,000 and household jobs of 485,000, which the Fed uses as vindication that they were “right.”

One look at most of the other economic data shows slowing momentum in both the manufacturing and services sectors.  Housing is volatile, especially at this time of year.  GDP in the 4Q15 is tracking at 1.0%, according to the Atlanta Fed.  In our region, the Philly Fed indices of business activity all turned negative in December, but, hey, higher rates will help, right?  Why is the Fed trying to slow down GDP growth of 1%?  With the average growth in GDP achieved in the past six years at 2%, why try to slow this down?  Inflation readings and inflationary expectations are still quite low and the dollar is strengthening; it makes one wonder why they are so anxious to raise rates.  Usually the Fed would tighten in the face of strong GDP, rising inflation and wage growth, and a weak dollar, not the opposite.  Well, it is all still “data dependent” says Fed Chair Janet Yellen, so we shall see where the data takes us.

Oh, the Taylor Rule
Oh, wait!  I forgot!  The Fed follows the Taylor Rule, which is a formula that shows where the short term Fed Funds rate should be- and currently says Fed funds should be above 1%.  As a matter of fact, the formula has pointed to above 1% since 2009.  But many economists and market participants think that productivity, labor force participation, massive increases in regulatory burden during the past six years, still-high debt levels of businesses and households, financial market behavior, and corporate profits should all be adjustments to formulas such as the Taylor Rule, which considers inflation and unemployment but not other variables.  In an environment such as the one in which we finds ourselves, with slow 2% growth, “low” unemployment, high numbers not in the labor force, and slow wage growth, there is little to propel consumer spending, which makes up over two thirds of our GDP.  Low oil and gas prices did not propel spending and there is not much on the horizon to do so- unless whoever wins the $1 billion plus Powerball jackpot decides to spend it all.

Despite the waning momentum in the economy, most people, including myself, do not see a severe slowdown leading to recession.  One notable exception is Citibank, who has a poor economic forecast.  I believe that we will continue to grow between 1% and 2% GDP.  Inflation will remain low after rising slightly from a bottom, but the Fed may tighten again this year, not because they see something in the data that tells them to but because they say they must.  So I guess they will.

Large Hadron Collider Update
In December, it was announced that an unusual “bump” in the particle collisions data recorded by the Collider.  Is it a new particle or two new particles previously unknown to the Standard Model of physics?  Is it another form of the Higgs Boson?  In any event, it is an unexpected result of the particle collisions now occurring at up to 13 teraelectronvolts, or “TeVs,” which is up from the 8 TeVs between 2009 and 2013.

China is expected to build its own “Larger” Hadron Collider with a circumference of 30 to 62 miles, compared to Switzerland’s 17 miles.  CERN, the operator of the Collider, is eyeing its own future construction of a bigger machine to triple its distance.  Pretty soon, we will have to worry what is underneath every mountain.

Stay tuned!  Thanks for reading DJ 01/10/16

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 Penn Community Bank and its predecessor 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 of devotion.

Sunday, January 10, 2016

The Golden Age of Banking? Depends on Us.

Jerry Reeves, President & CEO of Sturdy Savings Bank of Cape May Court House in New Jersey and current Chairman of the NJ Bankers Association, penned an article The Golden Age of Banking in the NJBA's winter 2016 edition of New Jersey Banker magazine. He romanticized that more seasoned bankers might be reminiscing back to the "good old days", but newer bankers might see today as banking's golden age.

In that, I agree with Jerry. His optimism was palpable, citing the education levels of new bankers, technology innovations that can be implemented by large and small banks alike, and the stratification of seasoned and new bankers that can pave the way to future industry leadership.

His leadership transition comment brought to mind a comment by an industry FinTech professional, and my friend, Mark Zmarzly:

"We build moats in our industry... we need to build bridges."

- Mark Zmarzly, CEO, Hip Pocket

How does Mark's quote relate to the mix of seasoned and new professional bankers? Because there is tremendous friction in ushering in new leadership in our industry that weighs like a millstone around our collective necks that will likely lead to the continued shrinking of our ranks.

Some friction is sewed into our fabric and is largely out of our control. It relates to the regulatory scheme. A bank CEO recently told me that the CEO job at his bank could have only gone to an experienced bank CEO that came through the commercial lending ranks and his/her experience could not be with a troubled bank. Why the rigid criteria? Because regulators would approve no one else. Such attitudes bleed into the board room, as they create similar rigidity based on past bias or perceived regulatory preference. This ignores the fact that some of the most dynamic and forward looking bank leaders don't fit that criteria.

In other words, it is extremely short sighted. But it is the safe choice, as boards seek similar leadership to what they got in the past in spite of the rapid changes occurring before us.

Although some barriers to future leadership are beyond our control, most are within it. Humans protect what we have. Teachers ensure that only those with teaching credentials can teach. Even though there may be willing retired government officials available to teach Civics class, they couldn't break through the "teacher" barrier. Similarly, you can only practice law with a law degree. Three extra years of education and passing a bar exam. Abraham Lincoln practiced law with an elementary school education. We erect barriers to keep people out.

And so it goes in banking. What we need are development plans to turn our young bankers into future bank executives. Exposing them to multiple areas of the bank, formal training, and executive mentorship should be part of the transition. As executives near retirement, there should be multiple internal candidates to fill that role. 

Instead we turn to outsiders, or to the investment banker to help sell our bank. Successful banks of the future will purposefully hire, develop, and turn the keys over to their future leaders. Current leaders will have the resolve and humility to make it happen. Less than successful banks will call the investment banker and turn the keys over to someone else.

~ Jeff

Tuesday, December 29, 2015

SIFI Bank Ticked Me Off and What Are You Going To Do About It Mr./Ms. Community Banker?

There are many professions where incentive compensation is a big part of overall compensation. My profession is one of them. So I have occasionally been the grateful recipient of an incentive paycheck. An actual check. Yesterday was such a day, and I dutifully went to my bank to deposit it.

There was a teller line. When my turn arrived, I made my deposit. The teller, likely prompted by her terminal with an anti-money laundering inquiry, awkwardly asked if I was expecting the check. Being an industry consultant, I expected such a question. If I was not in the industry, I may have found it intrusive.

The teller was very nice. She informed me that there likely would be a hold on the funds for a short amount of time. I also knew this to be the case, as the bank waited for the funds to clear. I told her I expected the hold. She wasn't sure of the hold time, and said it would be on the receipt. Bank policy, baked into their teller system. When it printed, she informed me the funds would be available 13 days from today. Thirteen days. Let that sink in a bit.

The smile left my face. She knew it, and apologized, saying it was bank policy. I said that the bank would have collected those funds way before 13 days. This was a futile conversation to have with the teller. So we exchanged pleasantries and I left the branch. 

In my car, I began to think of the money I would have to move to compensate for this inconvenience. I had year-end tax planning, charitable contributions, and an upcoming holiday trip to fund. Then the nerve was struck.

Those that know me, know I have a long fuse. And for SIFI Bank (Systemically "Important" Financial Institution), the fuse expired. Why was I making accommodations to account for money that SIFI Bank would soon have, but would not let me have? IT'S MY $#*%!^@$! MONEY!

I marched back in and asked to speak with the manager, who seemed a little nervous because the teller informed her why I was there. The manager explained to me that sometimes these checks bounce. Anger level, up a notch. 

I have an idea how long it takes SIFI to collect those funds. The check was either imaged immediately at the teller station or would be imaged a little later in the day in the branch. The courier no longer picks up the check, takes it to a central location that takes it to the Fed for clearing, later to be sent to the introducing bank for remittance to SIFI. The image goes out that night, and the funds are plunked at SIFI immediately or the next day. 

The typical bank customer would not know the details of check clearing and might accept the branch manager's answer. Unfortunately for her, I knew the money would be at SIFI in one or two days. A business model based on the ignorance of your customers should not be sustainable!

I can imagine the SIFI meeting in the treasurer's office on the 14th floor in [Insert City Name Here, but far from my hometown]. Treasurer: What's our float on hold funds? Assistant: $22 billion today, and it has been steady the past month. Treasurer: Great! Let's put that money to use so we can help make our budget! Special thanks to the Compliance folks on the 12th floor for this little gift of long-term holds! (Note to SIFI: This is a hypothetical discussion typed in jest. Do not alert the attorney's on the 8th floor. Thank you.)

All because, what, Compliance determined that there might be a regulatory risk on large check deposits after the money was collected? Customers might be funding El Chapo's getaway!? But in terms of using hold funds to juice earnings... it hasn't worked well for this SIFI because their 10-year compound annual growth rate for earnings and dividends per share was -1.6% and -4.4% respectively. Those are negative numbers, folks. But it could be enough to earn the CEO Banker of the Year!

These rules that are hatched by bureaucrats and implemented over large geographies are the very reason community banks should be beating the crap out of my bank and other SIFI banks. The hold period was on the teller receipt! I doubt there is anybody in Pennsylvania, where my branch is located, that weighed in on that decision.

A community bank COO once told me that he left a large bank because he began to feel like he was being asked to do things to his customers instead of for them. Today folks, I felt like SIFI Bank did something to me.

But alas. Community banks continue to be market-share challenged against my and other SIFIs. Why?

Seriously. Why?

~ Jeff

Note: Lest you wonder why a community financial institution consultant banks with a SIFI bank... It wasn't my choice. My community bank was acquired by it. But once the dust settles, it will be my choice! And folks, it is now six days (three business days) past when I made the deposit and the funds are not yet available to me and the branch manager that promised to look into it has not called.

Saturday, December 19, 2015

Banking's Total Return Top 5: 2015 Edition

For the past four years I searched for the Top 5 financial institutions in five-year total return to shareholders because I grew weary of the persistent "get big or get out" mentality of many bankers and industry pundits. If their platitudes about scale and all that goes with it are correct, then the largest FIs should logically demonstrate better shareholder returns. Right?

Not so over the four years I have been keeping track.

My method was to search for the best banks based on total return to shareholders over the past five years. I chose five years because banks that focus on year over year returns tend to cut strategic investments come budget time, which hurts their market position, earnings power, and future relevance than those that make those investments.

Total return includes two components: capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered for those FIs that trade over 1,000 shares per day. This, naturally, eliminated many of the smaller, illiquid FIs. I also filtered for anomalies that result from recent mutual-to-stock conversions and penny stocks. 

Before we begin and for comparison purposes, here are last year's top five, as measured in December, 2014:

#1.  Open Bank (OTCQB: OPBK)
#2.  BofI Holdings, Inc. (Nasdaq: BOFI)
#4.  Western Alliance Bancorporation (NYSE: WAL)
#5.  Mercantile Bank Corporation (Nasdaq: MBWM)

This year's list is in the table below:

BNCCORP celebrates its second straight year on this august list. Congratulations to them. A summary of the banks, their stories, and links to their website are below. 

#1. Independent Bank Corporation (Nasdaq: IBCP)

Independent Bank dates back to 1864 as the First National Bank of Iona. It's size today, at $2.4 billion in assets, is smaller than it was a decade ago. You might be able to see where this story is going. The bank was hammered with credit problems during the financial crisis, as Michigan's economy was hit pretty hard. Between 2008-11, the bank lost over $200 million, and its equity base was cut in half. But management went to work. Selling branches, shrinking the balance sheet, raising equity, and working out bad loans.  At the height of its problems in 2011 over 9% of its assets were bad loans. Today that number is cut in half, and the equity has more than doubled. Those investors that jumped onboard at the end of 2010 were well rewarded. Their total return was greater than 1,000%. You read it right.

#2. Fentura Financial, Inc. (OTCQX: FETM)

In 2006, Fentura Financial, the holding company for the creatively named State Bank, had over $620 million in total assets, $51 million in total equity, an 0.85% ROA, and a book value per share of $24.08. Then the financial crisis hit. And yes, another Michigan bank. By 2011, total assets were cut in half, total equity was $14.7 million and book value per share was $6.27 after amassing $36.5 million of red ink 2007-11. Since those dire times, the bank has picked itself up, growing assets to $434 million and total equity to $30.8 million. Their year-to-date ROA was 0.95% and ROE was 13.3%. Not bad for a bank that was circling the toilet bowl. Investors that got in the stock at the end of 2010 were rewarded with an 862% total return. What a ride!


BNCCORP, Inc., through its subsidiary BNC National Bank, offers community banking and wealth management services in Arizona, Minnesota, and North Dakota from 16 locations. It also conducts mortgage banking from 12 offices in Illinois, Kansas, Nebraska, Missouri, Minnesota, Arizona, and North Dakota. BNC suffered significant credit woes during 2008-09 which led to material losses in '09-10, and the decline in their tangible book value to $5.09/share at the end of 2010. Growth, supported by the oil boom in North Dakota's Bakken formation, and a robust mortgage refinance business resulted in a tangible book value per share at September 30th of $20.09... a significant recovery and turnaround story that landed BNC in our top 5 for the second straight year.

#4. Carolina Bank Holdings, Inc. (Nasdaq: CLBH)

Carolina Bank opened its doors in 1996 under the name Carolina Savings Bank. With nearly $690 million in total assets and eight branches, it is led by the same person since its founding, Bob Braswell. Like the other banks in the Top 5, Carolina took a little on the chin during the financial crisis, suffering small to moderate losses in 2009-10. But these were minor setbacks compared to others, and their financial performance is better than ever, recording a year-to-date ROA of 0.92% and ROE of 10.72%. Not bad for a bank that is less than $1 billion in assets. Citigroup, by comparison, had a 0.77% ROA and a 6.63% ROE for the same period. And they have $1.8 trillion in total assets. Trillion with a "T".

#5. Coastal Banking Company, Inc. (OTCQX: CBCO)

Coastal is the $439 million in assets holding company of CBC National Bank, headquartered in Fernandina Beach, Florida. Which is interesting because Coastal is headquartered in Beaufort, South Carolina. But I digress. The Company's residential mortgage division, headquartered in Atlanta, has lending offices in Arizona, Florida, Georgia, Maryland, Michigan, Indiana, Illinois and Ohio. If I haven't confused you enough, they have an SBA division that originates loans in the Jacksonville, Ft. Myers, Tampa, and Vero Beach Florida markets, as well as Greensboro, NC and Beaufort. This crew gets around. Since mortgages were a great business to be in during the financial crisis *insert sarcasm*, they too suffered meaningful losses. But to get on the jfb Top 5, you have to execute a near perfect recovery. It looks like Coastal did so, and now sports a 1.18% ROA and a 14.83% ROE, delivering a 410% five-year total return to their shareholders. Well done!

Here's how total return looks for you chart geeks, with the lower red, and flat line being the S&P 500 Bank Index.

There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $2.4 billion in total assets. No SIFI banks on the list. What about that economies of scale crowd? Hmm.

The flavor of this year's winners, as in last year, is recovery, with the possible exception of Carolina Bank, which held up well during the recession. Congratulations to all of the above that developed a specific strategy and is clearly executing well. Your shareholders have been rewarded!

Are you noticing themes that led to these banks' performance?

~ 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, December 12, 2015

Where are The FinTech Darlings Now?

FinTech, FinTech, FinTech! That's all I'm hearing. We must be moments away from downloading a gamified banking app via our Google Glass, paying in Bitcoins using Apple Pay!

It's like global warming. We all know there is something to it.  But look back five years to see what the doomsayers were predicting and you'll have a healthy dose of skepticism about their predictions today.

And so I'm skeptical of the FinTech'ers. You know who you are. A banker told me yesterday that if I wanted headlines in American Banker, put FinTech in my copy. So far I'm up to five mentions. And I've used gamified, Google Glass (so passe), Apple Pay, and the piece de resistance, Bitcoin. Perhaps I should have mentioned blockchain. There. I did it.

Bank examiner focus moves in waves. Aside from interest rate risk, vendor management is high on the list. If a bank deems a vendor critical to its operation, it must analyze the vendor's financial statements to be confident in its viability. Firms started in the dorm room that have no employees, just an eager volunteer, no revenue, and no capital need not apply. There are frictions to having access to peoples' money in the United States. And I suspect elsewhere. So FinTech (six) firms need capital and revenues to grab a foothold in the financial services market. 

If looking for a FinTech (seven) partner, follow your vendor management procedures. Will this firm be around in five years? Legit question.

So I went to the Finovate 2010 Best of Show to see where these firms are now. I thought you would be interested.

Robo Advisors are another buzzword. For SEO, I'm killing it with this post. But among robo advisors, Betterment is emerging as the top FinTech (eight) startup, having opened it's virtual doors in 2008. With more than $3 billion in assets under management (AUM), it recently surpassed rival Wealthfront. But hold on, a recent article on Betterment's accomplishment mentions at the end that traditional fund company Vanguard's hybrid robo advisor offering, Personal Advisor Services, has over $17 billion in AUM.

Fear not Betterment! Analysts are predicting the robo advising market will grow to $489 billion by 2020. That's a pretty specific number, isn't it? Analysts must be clairvoyant.


BillShrink originally launched as a cost-cutting engine for consumers. It helped users save money across verticals including cell phones, credit cards, cable bills, and savings accounts. It later pivoted into the personalized offers and loyalty rewards space, renaming itself Truaxis.

Two years after being lauded as Finovate's best of show, it sold itself to MasterCard in 2012. Can't blame the FinTech'ers (nine) for wanting to make a buck.


I can only quote from their website:

"Bundle was founded in 2009 with the mission to help people make more informed choices with their money through data insight. In the subsequent three years, we created a collection of content and tools that reached millions of people.

'We were excited in late 2012 to join Capital One, a company with a shared passion for changing the world through data. Through that partnership we are now able to scale our vision and impact millions more people. Bundle's team seeded the NYC office of Capital One Labs, and we have been busy over the past year creating new data products to help Capital One customers.

'We have decided to retire to shift our full attention to Capital One initiatives in service of our mission to Change Banking For Good. Thank you to all of our users over these years who helped to make our community and products a success."

What I read: We sold to a bank.

Dynamics is a Pittsburgh firm founded in 2007 established to solve point of sale (POS) software fragmentation between credit and debit. They establish the "Chip & Choice", a battery powered card that has multiple EMV chips. Users can press the appropriate button on the card so the POS reader processes the transaction according to user choice.

Based on recent press, it looks like Dynamics is morphing into a card fraud protection company, expanding its computer in a card tech to protect us from card scammers. It received $70 million in capital a year ago. Not sure if their technology is out there and they're earning their keep, but they have a lot of money to burn.


oFlows was started in 2009, named Finovate best of show in 2010, launched its product in 2011, and sold to Andera that same year. That's quite a run. The CEO got a plum job at Andera, Chief Product Officer. Andera sold to Bottomline in 2014. Lots of business cards.

oFlows designed a paperless mobile platform customizable to run the bank/company rules, make offers, fill out forms, get them signed, and manage all supporting documentation such as disclosures. It used iPads, Android tablets, and smartphones as its platform.

PayNearMe is a technology that allows underbanked, low income, or those that don't trust banks, to pay their bills in cash at convenient locations like 7-Eleven stores. It recently partnered with nonprofit microlender Grameen America to let its borrowers repay their debts in cash at 7,800 7-Eleven stores nationwide.  Near me, users of Philly's bike share program can also pay in cash at 7-Elevens and Family Dollar Stores.

According to the PayNearMe website, 28% of US households use alternative financial services, including remote cash payments. We intuitively know that there is a large and growing cohort of US households that don't trust financial institutions. PayNearMe focuses on serving these underbanked households.  

SecureKey's mission is to build highly scalable, trusted identity networks that enable organizations to quickly and easily deliver high-value online secure services to millions of consumers.

The Toronto-based company allows Americans and Canadians to use their existing banking credentials to access government websites, which are typically used less frequently. The company also supplies the technology for the US governments project. In February, the company announced another equity round of $19 million. 

There's the "where are they now" look at Finovate's 2010 Best of Show winners. Some are doing well, others cashed in their chips. 

My point, and I do have one, is to not partake in the hubris that seems to be greeting every FinTech (ten) startup that issues a press release. Focus your tech investments and partnerships on where you perceive your customers are going. Because following the FinTech (eleven!) crowd's newest darling can cost you time, money, and your independence.

If you want something that lasts, let me suggest the Army-Navy football rivalry, which started on November 9, 1890. I didn't transpose the numbers in the year. What does this have to do with FinTech? Nothing. But the game is about to start!!

Go Navy! Beat Army!

~ Jeff