Monday, July 21, 2014

Will Bigger Lead to a More Efficient Bank?

A friendly competitor of ours, Anita Newcomb, spoke about strategic planning and economies of scale in banking at the recent Maryland Bankers Association annual convention. She led attendees through the increasing regulatory burden and the need for some level of scale to remain competitive.

This got me thinking, if Anita's premise is correct, that bigger is necessary to compete, then what is bigger? And what has changed since before the dawn of Dodd-Frank? So I went to the numbers. As I have often said, it always comes down to a spreadsheet.

I searched for all banks and thrifts that have existed since at least 2007. Any institution that had "NA" in their efficiency ratio for either 2007 or year to date (YTD) 2014 I eliminated. So the sample size was fairly large, nearly all financial institutions in existence today. I then parsed them into seven asset size categories, and compared their efficiency ratios in 2007 and today. The result is the below tables.



For both periods, the lowest efficiency ratios come from the $20B - $100B asset class. In 2007, this asset class had 60% of their members achieve an efficiency ratio lower than 55%. That number has shrunk from 60% to 30% YTD, a dramatic fall from glory. Yet the asset class retains the honor of the highest percent of banks that achieve the under 55% honor.

All asset classes suffered declines in the percent that have efficiency ratios lower than 55%. In 2007, however, you can see the steep dropoff in efficiency between the $500MM - $1B and the $1B - $5B classes. In 2014, the dropoff moved upstream to the larger banks, with 24% of the $5B - $10B banks achieving < 55%, and the $1B - $5B asset class only having 15% under 55%.

So, at least statistically, it appears as though it is becoming more difficult for banks with less than $5B in assets to achieve superior efficiency.  But it is difficult for everybody, not just the under $5B class.

One of my working theories regarding the "you must be bigger" argument was that the number of smaller institutions that achieve superior efficiency is shrinking. So the anecdotes about how this small bank or that small bank do it (achieve superior efficiency) are declining. But the anecdotes about all banks achieving superior efficiency are also in decline, according to the statistics.

Even though only 11% of banks with less than $500MM in assets achieve a sub 55% efficiency ratio, it still represents the greatest amount of banks that achieve the feat. So, if you are sitting around your Board table or in senior management meetings lamenting about rising costs relating to regulation and technology, perhaps instead of calling your investment banker, you should ask how the 11% of small financial institutions do it.

It's a legitimate question, right?

~ Jeff

Wednesday, June 25, 2014

Five Bank Marketing Leadership Takeaways from the ABA School of Bank Marketing Management

Lance Kessler introduced a new subject to the ABA School of Bank Marketing Management (SBMM) this week... Marketing Leadership.

A few months ago, he asked me and two other marketing experts to be on a panel for the class. I rejected the moniker "marketing expert". I may be an expert on a couple of topics, but marketing is not one of them. But I applaud Lance and the school for putting a finance and strategy wonk on the panel to get some outside perspectives on how the marketing function can be a significant contributor to the evolution of our respective banks from what we were to what we can be.

The class was a combination of lecture, questionnaire, and panel. So there was not a list of key takeaways displayed in a slick PowerPoint presentation. But I was taking notes on key items identified as critical takeaways for marketing leadership. Unfortunately, I left my notes back in Atlanta. So you, my readers, are stuck with my memory.

Key takeaways for marketing leadership:

1. Speak the language of the C-Suite. As much as marketers read and discuss the increased number of "impressions" they get from a witty Facebook post, your CFO could care less. If you talk social media impressions, you better know how that translates to greater unaided brand awareness, and ultimately more at-bats for your sales force that leads to greater balances than you would have otherwise achieved without the increased impressions. Tell the CEO/CFO how you will drive volume, increase margin, or drive down costs, and their ears will spike like a German Shepard that heard a rabbit shuffling in a thicket. Otherwise, check the marketing-speak at the door.

2. Take your CFO to lunch. But first take heed of (1) above. Building internal relationships will be critical to improving the marketer's influence on the future direction of your bank. Having stronger relationships with bank executives will give you the opportunity to demonstrate you do more than run the ad budget and branch merchandising. 

3.  Be analytical. Many if not most marketers got into the profession to leverage their creative nature. But the marketing function is evolving to be more analytical. Correlating organizational actions to outcomes based on statistical analysis gives the marketer far greater internal credibility than a discussion on how different primary colors impact the senses. You're going to have to trust me on this one.

4. Don't wait to be asked for help. It grates me when marketers focus on retail account acquisition when the bank's strategy is to grow commercial customers. I have not yet concluded that this is because it is within the marketer's comfort zone or that commercial bankers simply don't think they need marketing's help. Maybe a combination of both. If marketers' want to be an integral part of executing bank strategy, then go to the senior commercial banker and show them how marketing will be helping them achieve their objectives.

 5. Grow revenue. Position marketing expenditures as the fuel that grows organizational revenue. Having a well thought out campaign that shows multiple financial outcomes should result in funding. Delivering on the results improves your internal credibility and will make it easier to fund your next project, reducing the need to "whine for dollars" (i.e. can I puhleeezzzz have $50,000 for a direct mail campaign?).

Five is all that my memory will allow. There was a lot of great discussion, and marketers had excellent questions for panelists. 

What else is critical to marketing leadership?

~ Jeff


Thursday, June 12, 2014

Barriers to Entry In Banking Spell Opportunity. But Do We Seize It?

There are numerous and significant barriers to entry in banking. Regulation, capital requirements, competition, and the concentration of customers at the largest institutions have all contributed to only one bank charter being granted over the past three years. 

But I rarely hear of opportunity as a result of high barriers to entry in bank strategy sessions. I mostly hear lamentations and gnashing of teeth over the sluggish economy, aggressive regulatory environment, and irrational competition.

We are missing an opportunity, in my opinion. Here are the 10 strategic issues banks should address to position themselves to take advantage of high barriers to entry:

1.  We have thousands of customers, but do we understand who they are and what they want? Don’t believe me, ask your head of retail or commercial for an analysis of your customer base, including trend. If you get it immediately, good for you. I have my doubts.

2.  Do we have employees that grip old habits with white knuckles?  And, if yes, have failed to move them forward or out?

3.  We speak of relationships, but have we defined in detail what that means?

4.  We spend tens of millions in operating expenses, but do we direct expenditures to strategic priorities? Or have we failed to identify strategic priorities?

5.  We talk of service, but have we communicated service expectations?

6.  We expect customer contact staff to reach out to customers, but do we train them to do so?

7.  We speak of sales, but what percent of our staff have sales responsibilities?

8.  We spend millions on technology. But breaking it down, does our budget look like we are more focused on replacing Windows XP than building the distribution network of the future?

9.  Do we focus more on building the bank of the future or making budget?

10.  Do we identify the bank of the future, and the bank we want to become? Or do we remain some slightly modified version of the bank we were in 1950.

It is time for bold thinking to break from our past. We can no longer be some slightly modified version of what we once were. If we don’t bust our business model, someone else will.

And hey, I need community banks to thrive. So do your communities. So let’s get to it.

~ Jeff

Sunday, May 18, 2014

The Three Levels of Business Bankers

Community bankers hunt aggressively for experienced lenders to grow their loan portfolios. I outlined a Business Banker job description in a prior post based on what I hear from bankers about what they expect from that position. 

You can't teach an old dog new tricks. If that job description represents our ideal, then we have a long way to go to develop the type of business bankers that will drive our bank forward. Instead of striving for our ideal, we continue to pluck old-school lenders from competitors because we need our pipelines filled now, not two years from now. So I opined to a community bank client what I thought was a healthy composition of business bankers.

Note I mention banker composition, not loan composition. For risk management purposes, we are accustomed to managing the mix of loans on our books. We may not be as accustomed to managing the mix of employees responsible for generating those loans. I put Business Banker composition in three categories.

1.  The Fat Cat

Don't contact my HR department. This is not commentary on his or her body composition. It's more a testimony as to the size of the Fat Cat's portfolio. It's usually large (typically > $50 million). And size does matter. Because of the large portfolio, this lender comes with a high number of relationships, and little time for meaningless meetings and all of your chatter about "total relationships" and "core deposits". Their portfolio is large and profitable, and they know it. Their salary is high and the bonus pool is flush. They are not as concerned about growing their portfolio as they are about maintaining it. They might be open to sharing smaller relationships with more junior business bankers, but not because they are the best team players. They simply don't have time to deal with lower balance customers, and they know that balances drive their bonus pool. They are also hesitant to bring other bankers into their relationships, for fear they may screw them up.

2.  The Builder

This person has a mid-range portfolio, somewhere in the $25-$50 million range. They take their growth goals seriously. Because they see the Fat Cats reaching critical mass and milking those portfolios into retirement. They want that too! So they leverage their relationships into more relationships such as calling on COI's they met at the latest Chamber mixer. This group may also be willing to take the junior business banker under their wing. They are not so far removed from the "junior" status that they lack empathy for the Up and Comers. Unlike the Fat Cats, this group tend to be better team players, because they may have greater organizational ambitions other than to be a Fat Cat.

3.  The Up and Comer

This person came from the branch manager, credit analyst, or portfolio manager ranks. They received a taste of the life of a business banker in their former position and they liked it. They have small portfolios, typically well under $25 million. Community banks frequently have inadequate support structures to nurture the Up and Comer. They have no mentoring programs, little in terms of formal training, and even less in terms of patience and the ability to carry "non-producing" producers for any significant period. But the Up and Comer can be the Builder and Fat Cats of the future, if the community bank thought farther than the current budget into the future. Another benefit of populating your Business Banker ranks equally with Up and Comers is instead of taking more experienced ones from competitors and inheriting their way of doing things, this group grew up in your way of doing things. 

If your Business Banker ranks were built by you, first as Up and Comers, steeped in your bank's way, that grew into Builders and Fat Cats, would you be better capable of moving your bank forward?

~ Jeff

Wednesday, May 14, 2014

Why Are Bank Net Interest Margins Under Pressure?

Industry analysts are beating the drum of net interest margin (NIM) decline. Irrational pricing by competitors is often cited in strategy sessions.

But in picking through the numbers, there appears to be something else at work. Factually, NIMs were actually greater in 2013 than in 2007 for Bank and Thrifts, according to the financial institutions included in SNL Financial's Bank & Thrift Index (2.91% in 2007 versus 2.94% in 2013). But NIM has been on the decline since 2010 when it stood at 3.31%.

Is it irrational pricing by the competition? I think all bankers will attest that at the forefront of the financial crisis, credit spreads worked their way back into pricing decisions. Banks were not only more cautious about the quality of the credit, but the yield on the loan too. And this partially explains why the NIM rose from 2007-2010. But has irrational loan pricing driven the NIM south since that time? The below chart shows differently.

                        Source: The Kafafian Group, Inc.

The largest loan categories on bank balance sheets actually showed spread gains during this period, until they finally began to wane in 2013.  This analysis measures loan spreads by taking the actual yield of the loan portfolios, and charging a transfer price for funding the loans using a market instrument with the same repricing characteristics. In plain English, it removes interest rate risk from the spread, often called co-terminous spread. 

How do we explain rising loan spreads, combined with decreasing NIMs? Well one reason can be the reduced benefit of deposit repricing. Financial institutions have benefited by the significantly reduced funding costs brought about by the historically low Fed Funds rate. But that benefit has been mostly exhausted. Leaving re-pricing of loans to be offset by, well, nothing.

The second culprit behind NIM decline since 2010 is the continued decline in loan to deposit ratios (see chart). Perhaps you hear talk of this in your FIs senior management meetings over the last couple of years. "We don't need more deposits because we have no place to put them." "We have tons of cash to lend." Etc.


But loan pipelines are getting fuller as the tortoise-like economic recovery grows deeper roots. With many FIs still mopping up excess liquidity, competition remains strong for those "good" credits, whatever that means. Presumably it means borrowers who will pay you back. This will continue to put pressure on NIMs. Once rates rise, there will likely be additional pressures as the least liquid FIs start pricing up their deposits to keep funding their pipeline. 

Will deposit rates rise faster than the loans those deposits will fund? Time will tell. 

Do you think NIMs will continue to decline, even when rates rise?

~ Jeff

Friday, May 02, 2014

Guest Post: First Quarter Economic Review by Dorothy Jaworski

Spring-At Last

We are all thankful to leave the brutal winter of 2014 behind, especially the polar vortex! The constant barrage of snowstorms was mind numbing. The ice storm that hit our region (Philadelphia Region) with damage and over 700,0000 power outages was perhaps the worst storm. I missed being on the eastbound Pennsylvania Turnpike by 30 minutes on February 14th. For that, I am truly thankful. The lost productivity cost our local economy greatly. and the lasting legacy of potholes will keep drivers on their guard for months!

But it is pring and a new beginning. The equity markets are reaching new highs, expecting the economy to emerge from the deep freeze in the first quarter. GDP is expected to rebound from 1% to 1.5% in the first quarter to its "normal" mediocre growth rate of 2% to 2.5% in the second quarter.

Long term interest rates remain near their highs of last year, with the 10 year Treasury trading around 2.75%, as a result of the Federal Reserve tapering of their QE bond buying program. The bond markets unwound the benefits of QE during 2013, so it quickly became apparent to the Fed to reduce it. Rates would be much higher today if the economy was expected to grow more than the rates I indicated here. Markets are ignoring would events, such as Russia's annexation of Crimea, further unrest in Ukraine, earthquakes, and the missing Malaysian Airlines Flight 370.

We have a new beginning at the Federal Reserve, too.  Janet Yellen was sworn in as the first female Fed Chairwoman and she is expected to rule an empire in the same traditions as her two predecessors, the Maestro and Big Ben.  She worked for both men and is a fan of each.  She is a proponent of studying the data and is not fooled by numbers that do not provide the full picture of economic health, such as the unemployment rate.  She learned her first lesson at her first press conference.  When asked to define “considerable time,” she blurted out “six months or that type of thing” without thinking.  What?  “Considerable” is that short?  Bernanke always implied it was years!  Bond markets quickly adjusted to rate hikes sooner than expected.  I don’t think she meant that at all.  Nearly five years into our “recovery,” she knows that she must keep short term rates low to improve employment and prevent inflation from getting too low.  She knows if she tightens too soon, economic growth could stall.

Cautious Growth for 2014

We still expect that GDP growth for 2014 will be between 2% and 2.5% nationally.  Once the country recovers from the brutal winter in most parts of the US, growth will resume but uncertainty will remain, as businesses and consumers adjust to the new healthcare laws, regulatory burden, and general discomfort with the economic outlook.  Many of our bank customers remain reluctant to borrow and spend on large projects.

The Federal Reserve released their updated economic projections on March 19, 2014.  Generally, they lowered their GDP projections for this year and the next two slightly, kept their inflation forecasts about the same- still at 2% or below, and lowered their unemployment rate projections due to structural problems with the rate falling from persons exiting the labor force and lower paying jobs being added.  They slightly raised their Fed Funds projections, including an earlier increase of the Fed Funds rate from the prior December projections.  The market interpreted this as tightening sooner than had been built into the term structure.  Janet Yellen, when asked directly about this change in the scatterplot, stated that we should “ignore” it and pay attention to Fed statements released after their meetings.  Here we are- back to the good old days when everything the Fed says is vague!

Fed QE Programs

I am of the opinion that the QE bond buying programs served to reduce long term rates and were initially successful.  During 2012 and 2013, long term interest rates, including mortgage rates, fell and contributed to an improvement in the housing markets, allowing home price increases to gain some momentum and prompt the new construction markets to improve.  Then, the Fed mishandled their message on QE early in 2013 and the markets abruptly removed its favorable impact, sending long term rates soaring over 100 basis points.  This type of increase is very rare in a declining inflationary environment, but we live with it.  With the markets having removed the benefits of QE, the Fed began “tapering” the program, which started at $85 billion per month last year and is now at $55 billion per month.  Markets expect the Fed to continue reducing purchases by $10 billion per month until it is down to zero- in October or November, 2014.  So our question to Janet is:  What will you do if the economy stalls and you need to ease?  Her answer:  More QE!

By the way, Europe is about the start up a QE bond buying program for the first time- to the tune of $1 trillion Euro to help the struggling economies, where growth turned positive, but only by about +.5%.  Mario Draghi, the head of the European Central Bank, is revealing his plans to the International Monetary Fund for buying sovereign debt, or maybe even private debt!  Later, he will make a public announcement.  The European markets are abuzz with speculation, but it will not be the first time Draghi has proposed something big and not followed through on it.  Yeah, like negative interest rates, Mario!  Stay tuned!

Discovery of the Waves

Albert Einstein predicted in 1915, in the general theory of relativity, that the universe contained gravitational waves, left over from the Big Bang billions of years ago.  A second theory developed in the 1980s predicted these waves as part of a process known as cosmic inflation.  An instant after the Big Bang occurred 13.8 billion years ago, the universe expanded exponentially, inflating in size trillions and trillions of times.

An announcement by the Harvard-Smithsonian Center for Astrophysics in Massachusetts on March 18, 2014 stated that researchers have discovered the gravitational waves, confirming both theories, by looking through telescopes on the South Pole.  This is another monumental breakthrough in understanding the universe, after the discovery of the “God particle” by the Large Hadron Collider team in Switzerland last year.  Yeah, now we know!  Now, if we could only predict interest rates!


Thanks for reading and Happy Spring!  DJ 04/07/14



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.

Friday, April 25, 2014

Why Banks Merge: Listen to the Sellers

September 2004, driving from a meeting in New York, on the grossly miss-titled Cross Bronx Expressway, Nathan Stovall, a reporter from SNL Financial gave me a call. The question: What was up with an upstate New York bank? My answer: The CEO was 67 years old and that would obviously be an impetus for a sale. He printed it as I said it. The angry phone call I later received from a bank director was well deserved.

Unfiltered honesty is sometimes a personal blessing, but mostly a curse. Rarely do you see in merger press releases the selling CEO saying, "Hey, I'm tired. I'm out!" But that is often the reason behind the nicely polished words formulated in the Investor Relations Department.

In 2013 there were 246 bank and thrift merger and acquisition deals announced, the highest number since 2007 when there were 318 deals. Year to date through April 22nd, there were 73 announced deals, putting us on track for a similar number of deals to last year. This all comes with fewer banks than there were in 2007.

What is driving deal volume? Investment bankers will tell you the definitive answer, which is of course their opinion. So I thought it would be instructive to take a look at what selling bank CEO's say in the press release when they announce they are turning over the keys to someone else. Yes, these statements are contrived. But within them there is often nuggets of truth. I simply hunt for those nuggets and put my own spin on why the bank was sold. 

These deals were all announced this month.


"Our combined financial institution will offer a wider array of products and services while continuing our long-standing personal commitment to our customers and community."

- Gregory Schreacke, President of First Financial Service Corporation in Elizabethtown, KY on his bank's sale to Community Bank Shares of Indiana, Inc.

Read: We needed greater scale to offer the products and services demanded by customers.



"Our combination... will provide greater capital resources and operational scale that will allow us to grow as part of a larger community bank."

- Loralee Hutchinson, President of Alarion Financial Services, Inc. of Ocala, Florida on the bank's sale to Heritage Financial Group, Inc.

Read: We need to be bigger and have more capital to keep up with regulation and the industry.



"[North Akron Savings Bank customers will gain] access to a broader choice of financial products and services comparable to those offered by the large banks operating in the region."

- Steve Hailer, President and CEO of North Akron Savings Bank on the bank's sale to Peoples Bancorp, Inc.

Read: There's no way we can keep up with the product and distribution channel changes coming down the pike. And what is social media?



"Customers will gain access to many new products and services, including insurance, trust, and investments, plus a full suite of contemporary electronic services.  At the same time, our legal lending limit will be much larger, which will help us to make larger investments in the local communities."

- Dick Baker, Chairman of Ohio Heritage Bancorp of Coshocton on the bank's sale to Peoples Bancorp, Inc.

Read: You have to make lots and lots of little loans when you only have $25 million in capital.



“I am excited about our increased capacity to lend, which will have an impact on the communities we serve."

- Mark Candido, President and Chief Executive Officer of Quinnipiac Bank and Trust Company in Connecticut on his bank's sale to Bankwell Financial Group.

Read: We only have $10 million in capital and can't get more on our own. Oh, and the fact that the CEO is 65 is a mere coincidence.


Am I reading it right?

~ Jeff













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