Saturday, November 21, 2015

Bankers: Five Ideas to Create a Learning Organization

To get into the holiday spirit, I recently read a short story by William John Locke titled The Story of Three Wise Men. A story of three academics drawn to a country cabin where they delivered a baby to a dying woman. In the book, the author wrote the wise men "had grown old in unhappy and profitless wisdom". In other words, their experiments and theories benefited nobody, as they were all recluses.

I witness lots of wisdom when I interact with bankers. And I wonder, how do we avoid it being "profitless wisdom"?

My answer: create a learning organization. Here are 5 ideas on how to do so.

1. Hire for attitude, reward for effort and results.

So often we look for those with experience. Be careful what we ask for. Because with experience comes entrenched ideas, old habits, and know-it-all ism. There are benefits to experience, as the new employee will be productive quicker. But they are bringing their past culture with them. Instead, consider hiring someone eager and hungry to learn. Someone that is positive and others like to work next to. Someone that will be a builder of your learning culture, not a breaker. 

2. Have a baseline training curriculum.

Do you have a training curriculum by functional position that gives employees the tools to succeed? Based on my experience, I doubt it. You probably have compliance and operations training, because it's required by regulators and needed for employees to function. But do you match the rest of your training, if there is a rest, to your strategy and the job description? Training should start with an orientation program that shows employees the culture you are creating, how to function within it and nurture it, and what your bank's "way" is... i.e. how to answer phones, interact with employees, solve problems, etc. Beyond orientation, do you enroll budding credit analysts in Credit Admin school? Do you use a "test bank" to build a disciplined OJT program so your employees can be proficient at getting things done? 

3. Teach supervisors to supervise.

Banking is a hot-bed for the Peter Principle, advancing good performing employees into positions where they are not equipped to succeed. Does a great wire clerk make for a top notch Deposit Operations supervisor? Supervision and leadership skills to maximize employee performance and job satisfaction are learned skills. So teach them how to coach, reward, discipline, evaluate, and teach. Poor management and supervision is the greatest hurdle to building a learning organization.

4. Allow mistakes.

The amount of effort I have witnessed to avoid audit findings, regulator scrutiny, or supervisor retribution is monumental. Not that I mind this because bankers hire my firm to look at the resulting onerous processes to ask "why are you doing that?".  This no mistakes culture kills experimentation that can lead to significant improvements in how we get things done. An organization that treats mistakes as a lesson learned rather than an opportunity to write someone up is well on its way to becoming a learning organization.

5. Pass on the knowledge.

What good is the wisdom garnered from years of experience if it remains trapped within the mind of the experienced? Create a process to pass on knowledge. For example, perhaps the wire transfer clerk questions a cumbersome process to identity check a customer. The learning organization supervisor encourages employees to identify and solve for cumbersome processes, so the clerk interfaces with the wire transfer software firm to discuss alternatives. She makes a recommendation that looks favorable to the supervisor and compliance. Boom! The bank implements it, and the clerk drafts a "Knowledge Bomb" memo to her co-workers that changed the process for the better. The supervisor publicly acknowledges the accomplishment, and notifies the bank CEO about the clerk's initiative. The CEO publicly acknowledges the clerk in the company newsletter. Per the "allow mistakes" above, if regulators review the process next exam cycle and don't like it, make a modification that works for them and is efficient. But don't use the criticism as an opportunity to embarrass the clerk that designed the process. It would be a lesson learned.

What other ideas do you have for creating a learning organization?

~ Jeff

Further reading:

Harvard Business Review: Building a Learning Organization (1993) Create a Culture of Learning in 6 Steps

Saturday, November 07, 2015

The Niche Bank

Me to a community banker: Why don't you offer more options than real estate secured lending to help fund early stage businesses? Banker: Because that's not community banking.

I've been in this business over 20 years and still don't know the definition of community banking.

What I hear most often is that community banks take deposits from people and businesses in their community and lend it to people and businesses in that same community. This formula seems to espouse being able to at least adequately serve most banking needs in a particular geography. In other words, be a General Bank.

I've got news for you. If General Bank is what we are offering, then we don't need 6,000 of us roaming the countryside. Sure, when physical locations in every town was critical to be the community bank within that town, and state and federal laws limited branching and therefore competition, then we could make a go of it with the 15,000 banks and thrifts we had in 1990.

Since this is no longer the case, we have to rethink the General Bank business model. The decline from 15,000 to 6,000 tells me we haven't come up with an answer to "why bank with us?".

In comes the niche bank, that tends to have the answer for a particular segment.

I teach at the Utah Bankers' Association Executive Development Program. You want niche banks, go to Salt Lake City.

One such bank is EnerBank USA, owned by Michigan utility CMS Energy. This bank has been in the news recently, as its CEO, Louise Kelly, was featured in American Banker's recent 25 Most Powerful Women in Finance issue. Interestingly, Kelly started what would end up being EnerBank at Baltimore's First National Bank of Maryland (now M&T Bank), a former employer of mine in the mid 1990's. First National divested the unit because it didn't fit their definition of "community banking". Ironically, First National also divested my unit (Hopper Soliday & Co.), which is the pre-cursor to our current community bank consulting firm, The Kafafian Group, Inc. So we were both castaways.

Look what she has done since!

EnerBank, according to their website, is a highly specialized bank founded in 2002 that provides unsecured home improvement loans through strategic business partners and home improvement contractors throughout the United States. Strategic partners include manufacturers, distributors, franchisors, and major retailers of home improvement remodeling and energy saving products and services. The bank provides private label loan programs for strategic partners, which in turn makes those programs available to their networks of dealers.

EnerBank has portals on their website for their contractors and sponsors, as well as retail borrowers. The bank is funded almost 100% with brokered CDs. You read it right: 100%. 

Hmm, you might be thinking: Unsecured home improvement lending, funded by volatile time deposits. Seems risky. I would agree. But EnerBank represents about 5% of CMS's earnings, so regulators may find comfort that EnerBank's holding company, unlike most bank holding companies, has significant wherewithal to be a source of strength for the bank.

How has EnerBank done since it opened its doors in 2002? The first chart shows its growth trajectory over the past 10 years.
I know plenty of banks with 100 year histories that are nowhere near this bank's size. So if your bank wants to implement a growth strategy, would you be satisfied achieving EnerBank's results?

What about profits, you say? Well the accompanying two charts show the bank's ROA and ROE trend over the past ten years compared to an industry index. It is important to note that this includes the 2007-08 financial crisis where many banks suffered through poor credits and incurred losses. EnerBank did not, although they do unsecured lending.

In fact, they had no non-performing loans in 2007-08. Non-performing loans to total loans peaked at 22 basis points in 2012 and now stand at 9 basis points. That's 0.22% and 0.09%. Net charge-offs peaked at 2.19% of total loans in 2009. Before thinking "a-ha!", their yield on loans in 2009 was 12.19%. By my math, that's 10% to the good.

Let me be clear, I am not proposing that 6,000 community banks select a niche that drives 100% of the loan portfolio that is funded 100% with hot money. It does not seem like prudent risk management to do so. EnerBank is likely given a pass by regulators because of its relative size compared to the parent, and therefore the ability for the parent to absorb losses, should the bank incur them. Which they have not, even through the worst recession since the Great Depression. This tells me that they are very good at their chosen niche.

But wouldn't it also be prudent to develop a business plan that delivers the returns charted above? I frequently hear community bankers discuss delivering returns to shareholders. Perhaps being known for a few things would distinguish your bank from the thousands of others that continue to do fundamentally the same thing. Because the numbers indicate that General Bank is a failing strategy.

What are your thoughts on niche banking?

~ Jeff

Friday, October 30, 2015

Bank Decor

Sitting in a team meeting, I blurted out: I don't like the branch decor! As soon as the words came out of my lips I wanted them back. Why? I had nothing but my opinion to support my assertion.

Last week I moderated a strategic planning retreat in a swanky conference room. Wood trim, high def TV projection, high-back leather chairs. The discussion moved to branding, not one of my strong suits as a finance and strategy wonk. I brought attention to the decor of the room. Mandatory disclosure, the owner of the facility/bank director said the building was an albatross. So don't get me wrong, I'm not saying build a monstrosity. My suggestion is that branding goes far beyond your color palate, logo, and advertising.  

Branding is how you answer your phone, speed to the closing table, employee attire, and yes the appearance of your offices and buildings. How do you want your customers to feel about doing business with you? If you want them to feel as though you don't waste a nickel on things like soft colors in offices or power washing the branch, then perhaps a miserly appearance is consistent with your brand.

Look at the accompanying pictures. What does each one say to you? Do you see my point?

Don't get me wrong, there are banks that pride themselves in keeping costs so low that you better entertain customers at the local diner versus Ruth's Chris Steak House. For these banks, the top office comes with a sense of pride that shareholder money is prudently spent.

So are the owners of the bottom office spendthrifts? Not necessarily. A long time ago, I was trained as a branch manager in a supermarket branch. That was trial by fire, let me tell you. One thing I learned during that period, other than to hunt for customers in the "organic" aisle because more affluent people hung there, was that people generally don't like to discuss serious financial matters in a supermarket, no matter how distinct the in-store branch was designed. Sure, they liked to perform transactions. It was very convenient. But do things like talk about a loan or business cash flow management? Where's your closest "real branch", thank you very much. Will your target customers feel the same about the top pictured office?

This is why the favorite wood finish of a Trust Department is mahogany. Not a scientific study, mind you, but within the margin of error of a presidential election poll. The reason that Trust Department decor is so posh is because of how they want customers to "feel" when they come into the office. The Department wants to portray success, distinction, and conservatism. 

Trust Department decor may not be ideal for other segments, like farmers. Sure farmers may be high net worth too, but they get their hands dirty when they go to work and may not view kindly a work space that doesn't look like there's much work getting done. Much less the potential that the bank relationship manager recently had a manicure.

My point is this: There should be alignment between strategy, employees, technology, and yes, the physical plant. What do you want to portray to your customers and prospects about your bank without saying a word to them? 

Because our offices and buildings are saying it to them. Whether we like it or not.

~ Jeff

Wednesday, October 21, 2015

Different Paths to Superior Bank Profits

I frequently moderate strategic planning retreats. A recent discussion surrounding bank peer groups was very interesting. I have written and spoken about using peer groups constructively versus striving for "above average". This discussion related to the different paths superior performing banks took to achieve their notable profits.

There were many more than three banks in the peers we reviewed. But the three banks highlighted in the table below achieved superior results. So the board and management team wanted more discussion on what their numbers were telling us.

Bank 1's superior profits start with their yield on loans, complemented by their loan to deposit ratio, which resulted in a very good net interest margin in spite of their relatively high cost of funds. This is a typical profile of what I term an "asset driven" bank. It leads with the loan, solving for funding as it fills its pipeline. This usually results in a relatively higher cost of funds, as the quickest way to line up funding tends to be rate. I also suspect that this bank, absent seeing more data, might have had a one-time event such as recapturing some profits from the loan loss reserve. Because it's profits, at 1.51% return on average assets, seems high based on its other ratios, even though it sports a great yield on loans.

Bank 2 has a relatively low loan to deposit ratio which impacts its NIM, even though it has a solid yield on loans. They just have fewer loans relative to their balance sheet than Bank 1. And we know that the bond portfolio delivers smaller yields than loans. Rather, this bank achieves superior profits by an impressive efficiency ratio. This ratio measures how much in operating expense it takes a financial institution to generate a dollar of revenue. So the lower the better. In Bank 2's case, it takes 52 cents to generate that dollar. Since they don't generate significant fee income or have the NIM of Bank 1, we can assume this bank is cheap. As I often say, they can squeeze a nickel through the eye of a needle.

Bank 3 does have a +90% loan to deposit ratio, yet has the lowest net interest margin of the lot. The reason for their low NIM is their yield on loans. I suspect this bank prices aggressively to get loan deals. What this bank does considerably better than most, is in their Cost of Funds. In other words, it generates low-cost, core deposits. In fact, it's percent of CD's to total deposits was 14%.  I often comment that low cost of funds banks, or high core deposit funded banks, receive favorable stock trading multiples because they have built something that is difficult to replicate. This bank currently trades at 195% of book value. A significant premium to market, even though their earnings multiple is in line with the market. The bank is a strong earner.

It is important to note how strong earning banks achieve their results. Because when setting strategy, you have to chart how the strategy leads to profits. If you intend to generate superior results by creating a difficult to replicate core funded bank, it would be good to set sail with that course in mind. 

Because without identifying your destination, no wind is favorable.

~ Jeff 

Saturday, October 03, 2015

Former Pennsylvania Secretary of Banking Lays Down Ideas on How to Love Your Regulator

Glenn Moyer, the former Secretary of the Pennsylvania Department of Banking and Securities (pictured), spoke at a banking industry event this past week. His subject: How to love your regulator. Glenn is a senior advisor to my firm and I suggested the topic. He rolled with it.

Regulator relations is a pressure point in our industry. Some of the more common complaints include regulatory guidance that seems to change with the breeze, and community banks being treated like “too big to fail” (TBTF). So Glenn’s comments were timely. And since he was the immediate past Secretary, and a former bank CEO, his comments were insightful. 

Here are four of his talking points that hit home.

1.  Never ask your regulator “What would you like me to do?"

This indicates to your regulator that you are out of ideas. That your management team is out of ideas. That perhaps you had no ideas to begin with. From my perspective, I would worry that the regulator would answer you. Glenn’s experience aside, how many other regulators have run a bank?

2.  Communicate your strategic direction to your examiner in charge (EIC). And include his or her boss in the conversation.

This is particularly true if you are charting a path that is different than in the past, or is somewhat unique. Regulators do not like to be surprised. Imagine an examiner coming into the next exam to find that you suddenly entered into reverse mortgage lending and the portfolio has grown faster than all others. That might inspire a higher zoom magnifying glass to see “what else” you have been up to.

3.  A repeat MRA (Matters Requiring Attention) is never good.

In my practice we occasionally hear bankers lament that they have been unfairly treated by their examiners on relatively minor issues. When we peel back the onion to uncover why the regulatory scrutiny on small potatoes, we find MRA’s that were contained in past exams. So examiners asked that the bank clean something up, and later come back to find out the bank did nothing to clean it up. Why would we be surprised by a reduction in our CAMELS?

4.  Document the collegial tension between independent directors and senior management.

This goes against the grain of boards that like to demonstrate unity and therefore have unanimous votes. Voting aside, regulators like a board that challenges management's strategic decisions. Particularly decisions that increase the bank's risk profile. Board minutes are an interesting animal. Actually, having read volumes of board minutes, I may have overstated "interesting". But if there is healthy debate about the bank entering a new line of business such as reverse mortgages, include the highlights of the debate in the minutes. Don't just state "Director Smith moves to approve entering the reverse mortgage business. Director Jones seconds. Vote is unanimous." Don't give the impression that your board is a rubber stamp. Because regulators rely on your board to protect the safety and soundness of your bank. I think I read that somewhere in a Director Roles and Responsibilities pamphlet.

What do you say about how to build a great rapport with your regulator?

~ Jeff

Saturday, September 26, 2015

Compete With Yourself

Our daughter worked from our kitchen table this past week because the Pope was visiting Philly and her firm advised her to get out of town. I worked from home one day, so we got a chance to go up to the local college, workout, and beat back the age monster together (see picture).

She was a college athlete (softball). And she said it was more difficult to workout as an adult because there were no goals and you didn't get the quick gratification of seeing success on the field. Instead, she said, she found success competing with herself. Doing more crunches than her last workout, putting an extra 10 pounds into her lifts. 

This got me thinking about a speech I heard by George Brett, the legendary third baseman for the Kansas City Royals. George said he had a problem with today's baseball player: lack of hustle. He told the story of how he would compete with himself when he grounded out, seeing how far he got down the line before the ball hit the first baseman's mitt. Same with fly balls. How far could he get to second before the outfielder made the catch. Imagine that with today's player who is more likely focused on his stats compared to others.

But wait! Isn't that exactly what we do in banking?

The most ubiquitous culprit is the Uniform Bank Performance Report (UPBR). Not sure if there is an equivalent in the credit union world. If so, let me know. But every quarter senior executives pour over the UBPR to see how they did against similar financial institutions. How similar? Asset size. So if an ethnic, SBA-focused financial institution is the same size as a rural, ag-focused bank. Boom! On the same UBPR.

Differences in business models aside, are we satisfied comparing ourselves to other financial institutions? Five years ago I wrote on this topic in a post titled The Folly of Peer Groups.  I suggested comparing yourself to institutions that are like you, and institutions that you aspire to be like. But today I'm suggesting going further.

Compete with yourself. Continuous improvement. Asking yourself each morning how to be better at the end of the day than you are at the beginning of the day. That if you fail at something, don't count it as failure but as a lesson learned. And share your lesson learned with colleagues so they can benefit from your experience. 

You lead by example. It must have been difficult for a Kansas City Royal to trot to first base on a ground out when the star player hustled so he can be three steps away from the bag when thrown out instead of four. That type of leadership impacts a culture that doesn't show up on a UPBR. But it will.

I don't think the greatest companies or the greatest leaders run peer groups to make sure they are better than average. Side note: Wouldn't that make a great epithet on your tombstone? "Here lies Jeff. He was better than average." Not really.

When I coached lacrosse, I had pre-season meetings with parents. In those talks, I set parent expectations. One was that I don't compare players to the player next to them. Parents fall into traps thinking that as long as their child played better than the one next to them, their spot was assured. But what if the less talented girl hit 95% of her potential? Being one of the best on the team and only hitting 60% of your potential is not a win.

And we should stop treating it like one.

~ Jeff

Sunday, September 13, 2015

My Fantasy Banking Team

Last weekend, a bunch of friends got together for our annual Fantasy Football (FFL) draft. My first pick: Tom Brady (8th overall). I'm feeling pretty good about it since he threw four touchdown passes in week one.

But it got me thinking about who would be my picks if I were assembling a fantasy banking team. So I thought I would give it a shot.

First, I needed to decide positions needed. The owner... Chairman. The quarterback... CEO. The running back... Chief Retail Officer. The wide receiver... Chief Loan Officer. The kicker... Chief Information Officer. And defense/special teams... CFO.

The Owner/Chairman

Criteria: I looked to Bank Director Magazine's annual scorecard for my pick. I used the $1-$5 billion in assets category, and limited my pick to a non-executive chairman, because an executive chairman can influence excellence from the CEO role regardless of holding the Chairman position. No, I wanted a top notch Chairman/Owner of my team that worked his/her magic with the gavel alone.

Selection: Chan Martin, CommunityOne Bancorp (NASDAQ: COB).

Chan was a former Bank of America senior executive, serving as the Corporate Treasurer, Enterprise Risk, and various other functions during his career. He retired in 2008 from BofA, but they thought so much of him they brought him back to assist with the Merrill Lynch integration.

He joined COB's board in 2009 after its $310 million recapitalization which was needed from a disastrous slew of losses incurred starting in 2008 as a result of awful credit decisions, leading to a 21% NPA/Asset ratio peak in 2010. Chan came as part of the recap, and rose to Chairman in 2014. Since his joining the Board, the bank has stabilized, returned to profitability, recaptured it's deferred tax asset, and NPAs/Assets have declined to less than 3%. Yeah, Chan can own my team.

The Quarterback/CEO

Criteria: I am an aficionado of long-term total return. So when selecting my quarterback, I want the guy/girl that has the best three-year total return. I had to eliminate penny stocks, low-trading stocks, and merger targets.

Selection: Greg Garrabrants, BofI Holding, Inc, (NASDAQ: BOFI)

Greg has been in charge of the Bank since 2007. Prior to BofI, he was an investment banker, management consultant, and attorney to the banking industry. Imagine that. What has he delivered to his team? A 367% three-year total return to shareholders, when the industry averaged 60%, according to the SNL Bank & Thrift Index. He can QB my team.

The Running Back/Chief Retail Officer

Criteria: I sifted through banks with the best cost of funds and cost of interest bearing liabilities. Building a low-cost core deposit base is arguably the most difficult task in banking, and it creates significant value to the publicly traded bank because it is difficult to replicate.

Selection: Mitch Englert, EVP of Community Banking, Capital City Bank Group, Inc. (NASDAQ: CCBG)

When you dig deep into the organizational structure beyond the folks you see at investor presentations, you find people like Mitch, who started his career at Capital City in Tallahassee, FL as a part-time teller. What has he accomplished? Thirty-four percent of Capital City's deposits are non-interest bearing. A mere 9% are time deposits. Cost of funds: 9 basis points. Let that sink in a bit. I'll give Mitch the ball.

The Wide Receiver/Chief Lending Officer

Criteria: I searched for banks with the best yield on loans coupled with excellent asset quality as represented by NPAs/Assets. I focused on traditional community banks and did not consider high yield type banks such as credit card banks. But I also wanted to find a community bank that focused on lending to the businesses of today, and not solely the owners of the buildings these businesses reside. They "received" their funds, and lent it into their communities.

Selection: Monty Rogers, EVP and Chief Lending Officer, Security Bank

Is there any doubt that the leader of my receiving corp would be a Texan? Security Bank in Midland, Texas lends to business, period. Their loan portfolio is 47% C&I loans... i.e. true business loans. None of this "we support businesses so long as they have real estate collateral". Sure, Monty does real estate lending too, representing 50% of the loan portfolio. But last week I was at a bank whose loan portfolio had 94% real estate loans. What has Monty delivered to Security Bank? A 6.94% yield on loans combined with a 31 basis points NPA/Asset ratio. Go ahead Monty, spike the ball!

The Kicker/Chief Information Officer

Criteria: If you believe, as I do, that more people interact with your Bank via technology channels than all other channels combined, then you need a solid CIO on your fantasy team. There are no financial metrics to rank your CIO's for the fantasy draft. 

Selection: Robert Landstein, EVP and CIO and Chris Tremont (pictured), EVP of Virtual Banking, Radius Bank

Ok, I hedged. Call this one my first add/drop of the year. In my league, that cost 10 bucks. But Radius Bank in Massachusetts, the former First Trade Union Bank, is forming the type of FinTech partnerships necessary to drive community bank relevance into the future. Read more about their initiative in an American Banker Bank Technology News article here. Welcome to the team Bob and Chris!

Defense/Special Teams/CFO

Criteria: I want a strong balance sheet manager in the CFO role. The rumblings of Fed Funds rate hikes are strong, and a rate hike this year, perhaps this month, seems likely. So I wanted a solid one-year GAP, so the bank and therefore my team doesn't get pummeled in a rising rate environment. I also wanted a solid liquidity ratio, so the bank doesn't have to reprice rapidly to maintain liquidity. Lastly, if they can do that with an enviable yield on securities, then you're on the squad!

Selection: Greg Hollier, CFO, Gulf Coast Bank and Trust Company

My "Girl with the Dragon Tattoo" investigation could not dig up much on Greg from a personal standpoint. But let me tell you this... the Bank has a 1.98% ROA, and a 22% ROE. Its liquidity ratio is 28% and only 3% of its securities are pledged. Cumulative one year repricing GAP/Assets= (5.56%). Oh, and the yield on securities is 3.22%. I think he is doing work managing the $1.3 billion balance sheet. You?

There's my team. I think it's a winner, not just for this season, but to lead our industry into the future.

Who is on your banker fantasy team?

~ Jeff