Pursuing the Pole Position in Digital Banking

digital-banking-11-3-17.pngBanks with unique strategies tend to perform well in the marketplace, and a $1.2 billion asset bank in Wausau, Wisconsin, is proving that formula through a digital platform and a strategy focused on lending to a niche community.

IncredibleBank serves customers nationwide as the digital division of River Valley Bank, a 15-branch community bank serving Wisconsin and the Upper Peninsula of Michigan. The division was established in 2009, when the bank was seeking to grow deposits and looked at the new online banks in the marketplace at the time, such as ING Direct (now Capital One 360). Then, the bank relied more on wholesale funding to fuel loan growth, but growing core deposits was a challenge, says Todd Nagel, River Valley Bank’s chief executive officer. “We started the online bank to create larger distribution in our regional footprint for deposits, and it was a way to replace our wholesale funding. We never dreamed that it would take off the way it did.

River Valley Bank’s net interest margin, at 4.13 percent per the Federal Deposit Insurance Corp., performs better than its peers, according to BankRegData. So does the bank’s return on assets (1.43 percent) and return on equity (15 percent).

These days, an online banking division focused on deposit gathering isn’t necessarily innovative. The management team has since expanded IncredibleBank’s focus to address the bank’s concentration in commercial real estate loans through a unique niche: motor coach loans. Motor coaches are one of Nagel’s passions, and he has one of his own, says Kathy Strasser, the bank’s chief operating officer. These vehicles aren’t the stereotypical cramped family RV, and the cost of these luxury homes on wheels range from $100,000 to $2 million or more. High-end motor homes are unique, with custom features that make it difficult to pinpoint their value. “That’s the hard part about financing them,” says Nagel. Two loan officers are dedicated entirely to this specialty niche, and these lenders visit motor coach manufacturers regularly to build their expertise in the area. Motor coach financing accounts for roughly 10 percent of River Valley’s overall business, according to Nagel.

In looking for a unique way to market IncredibleBank, Nagel and his team turned to another one of his passions: NASCAR. “There’s 150, 200 motor homes that go to every race, all over the country,” says Nagel. The bank sponsors NASCAR drivers Kyle Busch and Matt DiBenedetto, and brings the bank’s own motor home to entertain customers during meet-and-greets with the drivers at NASCAR races. A promotion around account openings offered a chance for customers to win a VIP pass at Watkins Glen International, a racetrack in Watkins Glen, New York, that hosts NASCAR events.

IncredibleBank accounts for 10 to 15 percent of the bank’s deposits, according to Nagel, and that, along with the division’s digital-only footprint, gives management some leeway to use it as something of an incubator for new technology. Nagel says the management team is working to examine every product offered by the overall organization—including all the necessary documentation—to explore whether it can be offered digitally. If that’s not possible, then “we may not offer it in the future,” he says. “We believe that everyone’s looking for an Amazon-like experience. I don’t want to be like Amazon, but I’d like to replicate the experience with banking.”

Seeing a future where Amazon is beating traditional retailers, Strasser says that River Valley Bank will continue as a traditional community bank in its markets, but won’t grow beyond a 15-branch footprint. The bank has been adding talent without traditional backgrounds—Strasser herself was an executive vice president at a company that is now a subsidiary of Deluxe Corp., which serves the financial industry with website design, customized checks and email marketing, among others. And good relationships with vendors are integral to innovation. The bank has worked closely with its core provider Jack Henry & Associates’ mobile division, Banno, which built IncredibleBank’s mobile banking app.

Still, the industry and its vendors aren’t moving fast enough for Nagel. He has high expectations for digital delivery. “Our greatest challenge is getting our partners in the industry to think like we’re thinking,” says Nagel. “You should be able to open a $1,000 checking account in two minutes. That’s my expectation.”

How Do You Build/Grow A Business…By Growing Loyalty

You’re a community bank and your customers love you, right? So why do bankers worry that customers–and deposits–will flee to high-yield online accounts when rates rise? Or maybe it’s the possibility of disruptive technologies that has so many bankers nervous. In this session from Bank Director’s 2016 Growing the Bank Conference, Joe Bartolotta, executive vice president and director of strategic partnerships at Eastern Bank, headquartered in Boston, explains the activities that undermine customer loyalty and expose banks to startups and other institutions that could threaten their bottom line.

Highlights from this video:

  • The Value of Loyalty
  • Examples of “Banks Behaving Badly”
  • How Banks Create Loyalty

Presentation slides

Who Are the Top Growth Banks?

bank-growth-5-20-16.pngTo every rule there is an exception—or in this case, 10 of them.

Conventional wisdom says that revenue growth at commercial banks and thrifts in the current environment is challenged by continued downward pressure on net interest margins as the competition for loans remains fierce. But there is a group of banks that are thriving in today’s banking market despite the competitive pressures facing the industry. Working with Atlanta-based Bank Intelligence Solutions, a Fiserv subsidiary that collects and analyzes performance data on depository institutions, Bank Director identified 10 banks and thrifts that exhibited strong top line growth over a five quarter period ending March 31. Bank Intelligence Solutions CEO Kevin Tweddle admits that the industry’s growth performance over that period of time has not exactly been stellar. “These aren’t numbers that jump off the page,” says Tweddle. “It’s a really tough environment.” Still, these companies have been able to rise above the environment and post strong performances—which are all the more impressive given the economic headwinds that most banks have to deal with. The ranking includes public and private institutions over $1 billion in assets.

The issue of growth will be addressed at Bank Director’s Growing the Bank conference, which is scheduled for May 23-24 in Dallas. Included on the agenda are sessions on how to grow your business through smart branching decisions, collaboration, partnerships and acquisitions.

The conference attendees could also learn a thing or two from the 10 banks on our ranking, where the order was determined by their compound average growth rate in revenues over the five linked quarters. The top ranked bank—Sioux Falls, South Dakota-based MetaBank—led the pack with a growth rate of 19.3 percent over that period. The $3 billion asset bank is well diversified across multiple business lines, although lending still accounts for a significant part of its growth and profitability. MetaBank operates from 10 branches in Iowa and South Dakota, and reported 22 percent loan growth in its most recent fiscal year, which concluded September 30, 2015.The bank also saw 10 percent loan growth in the first two quarters of its 2016 fiscal year, which ran through March 31. Loan growth was particularly strong in commercial and agricultural sectors, although MetaBank also benefited from its December 2014 acquisition of AFS/IBEX, then the seventh largest U.S. insurance premium finance company. This unit makes loans to commercial businesses to fund their property/casualty insurance premiums, and it grew at an annualized rate of 52 percent between the date of acquisition and Meta’s fiscal year end in September of last year. MetaBank’s is also one of the country’s largest prepaid card issuers in the country, and in fiscal year 2015, that business grew its deposits by 25 percent and fees by 16 percent.

MetaBank also has a significant tax related business following its September 2015 purchase of Refund Advantage, which provides tax refund transfer software to electronic return originators (EROs) and their customers. An ERO is a tax preparer who has been authorized by Internal Revenue Service to submit tax returns to the IRS in an electronic format, and MetaBank earned significant software usage fees during its second quarter which ended March 31. Although the prepaid card and tax related operations are run as separate businesses from the retail bank, they are included in MetaBank’s overall results for reporting purposes.

The third ranked bank on our growth list, San Diego-based BofI Federal Bank, is a digital bank that operates nationwide through online and mobile platforms. The bank’s compound average growth rate through the five-quarter period was 11.93 percent. Of late, BofI has been seeing considerable growth in jumbo single family loans, small balance commercial real estate and commercial and industrial loans. It has also benefited from its August 2015 acquisition of H&R Block Bank, which provided BofI with 257,000 new deposit accounts and the opportunity to cross-sell its products to that bank’s customers.

Growing revenues in the current economic environment is a challenge even for most of the banks on this list, although their performance shows that strong growth can be achieved. One thing that MetaBank and BofI have in common is a degree of specialization—agricultural loans and prepaid debit cards for MetaBank, jumbo mortgage loans for BofI. And if there’s one secret to cracking the revenue growth code, it might be having a niche that differentiates your bank from the rest of the pack.

The Top 10 Banks for Growth
Rank Bank Headquarters Assets (millions) Growth Percentage*
1 MetaBank SD 3,071 19.3
2 Academy Bank, N.A. CO 1,034 18.13
3 BofI Federal Bank CA 7,696 11.93
4 HarborOne Bank MA 2,246 11.49
5 Sterling Bank and Trust FSB CA 1,766 11.21
6 Beverly Bank & Trust, N.A. IL 1,012 10.62
7 WashingtonFirst Bank VA 1,755 9.74
8 First Foundation Bank CA 2685 9.7
9 Franklin Synergy Bank TN 2,298 9.7
10 TD Bank USA N.A. NJ 19,675 8.6

Source: Bank Intelligence Solutions and bank call reports
* CAGR based on revenue for bank for five trailing quarters through March 31, 2016
** MetaBank’s results include significant fee income from card and tax service related activities that are reported as part of its results.

Opportunities in Growth and M&A

acquisition-7-31-15.pngMost banks would like to grow but some have found it easier than others. Let’s look at a few perceptions and statistics about growth and a few opportunities to exploit it as well.

Many bankers feel that given the legislative and regulatory environment coupled with low rates, low margins, low loan demand and high competition, growth is very difficult. For those who experience this, they should consider selling. Far too many banks are seeing their franchise value diminish by not doing so. The good news is they can sell for a nice price and even receive stock from an acquirer improving their future growth and returns potential. Plenty of banks are able to do this. Bank stocks have outperformed the S&P 500 for the first six months of 2015 (8.56 percent vs. 1.09 percent), and should continue to do so based on their relative intrinsic values.

While the nation’s top five largest banks have over 80 percent of the industry’s assets, community banks, on average, have grown six times faster in terms of revenue growth. Assets of banks between $100 million and $1 billion have grown 27 percent from 1985 to 2013. Assets of banks larger than $10 billion have grown only 4 percent.

The banks showing the most growth have created that growth from three areas:

  • Organic loan origination
  • Mergers and acquisitions including branch acquisitions
  • Fee-related businesses such as:
    • Cash management.
    • Trust and wealth management
    • Brokerage services
    • Insurance and other related offerings

Growing by acquisition is much easier for smaller banks than larger ones, which suffer from “too big to fail” scrutiny and acquisition limitations. Of the 301 deals done in 2014, only five had deal values in excess of $500 million. Most of the activity is in small banks. While the total number of financial institutions has shrunk from 15,158 in 1990 to 6,419 today, the number of banks between $100 million to $10 billion in assets has grown from 4,194 in 1995 to 4,400 at March 31, 2015: a growth rate of 5.9 percent, representing over 68 percent of the number of financial institutions.

The M&A activity will remain healthy for the next several years as those who do not have the ability to grow and cope with the pressures will have to sell.

The keys to good M&A transactions are having ready access to debt and capital, an ability to strike quickly and efficiently, and a reputation for execution. A good capital plan can deal with the first issue, having capital available in all forms: senior/junior debt, preferred stock, privately placed retail and institutional capital, as well as public offerings. Pricing and placing the capital varies among investors and investment banks and can be more inefficient than most would think. The biggest inefficiency is placing subordinated debt with origination costs varying 1 to 3 points and rate differences of 2 to 3 points, even among banks whose funding capabilities should be equal. The ability to make a purchase offer quickly is an internal issue and is based on structure, experience and fast decision making processes. Quite frankly, most bankers are not as good as they think they are, and unfortunately this affects the issue of buyer reputation.

An open, honest assessment of the banker’s capabilities can do wonders for improvement of an acquisition success rate. There are many investment banks and consultants ready to help if asked and most would charge little or nothing for the added opportunity to be the advisors on the next deal.

The leading non-interest income area of growth targeted by banks is trust/wealth management. Yet far too many banks enter trust/wealth management without a proper assessment of what is realistic for time frames, opportunities, profitability and competitive advantage in products. There are good products, bad products, low margin and high margin in both, as well as high and low levels of competition. Most think they have the expertise to deal with all the new products and opportunities, but few do. Entering into niche opportunities such as alternative assets, 401(k) programs, or asset allocation models, while showing the most promise, are fraught with roadblocks and disappointment if not executed correctly.

By optimizing capital levels, opportunity sets and product lines as well as pursuing M&A opportunities, a good, clean, well run bank with a green light from regulators can grow at a very rapid rate over the next few years, increasing franchise value for the community bank and its investors.

How to Completely Change Your Future

strategic-planning.pngIs the regulatory burden getting you down? Does your market offer slow to no growth? Are your shareholders increasingly fed up with that?

It might be time to buy a bank or sell to a competitor with better prospects for growth.

Banks face some very significant challenges in the years ahead. The sharply increased cost of regulatory compliance might lead some to seek a buyer; I have seen others respond by trying to get bigger through acquisitions in order to spread the costs over a wider base.

Quite a few banks have already made difficult decisions such as these. For instance, one of last summer’s notable bank dealsCIT Group’s purchase of Pasadena, California–based OneWest Bank — was struck in part because of the costs of regulation. Likewise, the board of Michigan–based Citizens Republic Bancorp sat down with its CEO a few years ago and seriously considered its strategic options for the future, with the end result being a sale to Ohio–based FirstMerit Corp. It wasn’t that Citizens didn’t have a future. The conclusion was that the future was better paired with a larger organization.

In last month’s column, Will Nonbanks Impact Bank M&A?, I looked at how Lending Club and Prosper, two online lending marketplaces that offer loans to consumers and small business funded by private investors and institutional money, present significant challenges to those looking to expand their lending portfolios. With Lending Club announcing on July 14 that its marketplace is available to investors in Arkansas, Iowa and Oklahoma, I have to assume that officers and directors in those and other states are considering how to either fend off such threats — or potentially partner with them to gain access to new lending opportunities.

With competition coming from both the top of the market and from non-traditional players, it is imperative for community banks to focus on improving efficiencies and enhancing organic growth prospects. Those with the best prospects? The 550 or so banks between $1 billion and $10 billion in assets — and within this niche, banks with bold, creative and disciplined CEOs. Banks in this range have both the size to compete technologically and the scale to begin to afford the regulatory compliance burden.

While transforming a franchise through organic growth is desirable and potentially less risky, I continue to see better growth prospects from acquisitions in many parts of the country.

Earlier this year, at Bank Director’s Acquire or Be Acquired conference in Phoenix, KPMG’s Hugh Kelly offered that with growth opportunities available through M&A, many sellers will be motivated by getting out from regulatory burdens. At a minimum, regulators expect a bank’s strategic planning process to consider the following questions:

  • Where are we now?
  • Where do we want to be?
  • How do we get there?
  • How do we measure our progress?
  • What adjustments are necessary to meet our goals?

If you don’t have satisfactory answers to those questions, your bank might consider a sale to a bank with solid growth prospects. As John Gorman and Eric Luse with the Washington, D.C.–based Luse Gorman law firm shared at the same conference, “increased regulatory and compliance costs have changed the banking business in a fundamental way.” As the two note, this has squeezed profitability, particularly for smaller banks, and pressure to consolidate and achieve economics of scale has increased.

However, many deals are delayed for regulatory reasons.

While many point to the potential for nonbanks, such as the Lending Clubs and Prospers of the financial world, to steal marketshare, regulatory risk is probably the greatest obstacle to completing an M&A deal, and ironically, may be the very thing driving it.

Using Strategic Planning to Drive Value

strategic-planning-6-15-15.pngIt is certainly no secret to banking professionals and bank board members that the banking landscape has changed significantly following the financial crisis of 2008. Banks of all sizes now face radically altered economic and regulatory realities. To survive and, more importantly, thrive in this new environment requires banks and bank boards to be more proactive than ever before.

An important—perhaps the most important—element to proactivity is strategic planning. In our business, we run across banks of all shapes and sizes. I’ve spent years as a regulator and now an investment banker visiting with and observing the “haves” and the “have-nots” in our industry—and the associated outcomes associated with each type. If there was one element of bank oversight I could improve tomorrow, it would be the strategic planning process. We often tell bank boards of clients and prospective clients, “Whatever you are doing, do it on purpose.” In other words, have a plan.

Sometimes we are greeted with skepticism: We’ve all heard a variation of the old saw that no battle plan survives contact with the enemy. And that may well be true—but Dwight Eisenhower, no slouch at preparing and executing battle plans, reminds us that plans may be useless, but “planning is indispensable.” In other words, the process of systematically evaluating the challenges and opportunities facing your organization as it seeks to accomplish a set of defined goals is always worthwhile. It teases out differences in approach, sets the tone on corporate culture, and outlines benchmarks against which progress can be measured.

There are many benefits to instituting a planning process at your bank, but perhaps the most important is that the regulators expect it. The Office of the Comptroller of the Currency and the Federal Reserve endorse it. The Fed’s own examination manual stresses the importance of “designing, implementing and supporting an effective strategic plan.”  But we all know there is the “spirit” of the regulatory guidance and the “letter.” You can certainly go through the motions to ensure you have a document that passes muster with your regulator—but in my experience effective organizations do much more than this.

Far more than a perfunctory regulatory expectation, an effective strategic plan ensures continuity between the board and the management team on key matters of setting strategic goals, the process by which progress will be measured, the talent needed to achieve the goals, the challenges the organization currently faces, and planning for contingencies (or known unknowns). Done right, a good strategic plan is the backbone around which an organization can evaluate managerial effectiveness, design compensation structure, orchestrate team building and hiring decisions, ensure infrastructure is in place well in advance of each phase of growth, execute on plans to enter or exit lines of business, and position itself to take advantage of unexpected opportunities and challenges.

Having a common mindset on these matters will enhance organizational effectiveness and avoid crippling delay when presented with new and unexpected developments. As a regulator during the financial crisis, I was amazed that, in the stretch of a single morning’s phone conversations, I would visit with executives in both severely crippled organizations as well as strong banks methodically plotting how to seize on the opportunities presented by the downturn to expand, grow and strengthen their companies. One group was in harm’s way and the other was positioned to succeed. Often, the difference came down to planning, or the lack thereof.

Another benefit of planning is to position the organization for the future. A well developed strategy along with a track record of delivering on strategic promises can position an organization nicely for more advanced stages of growth. A community bank considering institutional investors, in anticipation of well thought out expansion or a public stock offering, for example, will benefit from a disciplined and thoughtful planning process. The track record presents a benchmark against which investors can evaluate management and board performance. The bank can anticipate questions investors may ask when a robust and performance-based discussion is already part of the bank’s internal dialogue.

Finally, a strategic plan can help the bank avoid foreseeable bad outcomes. Strategic plans don’t protect the bank from all harm. But the planning process can identify employees, customers, or lines of business out of step with the organization’s carefully considered tolerances for risk. It can help companies avoid needless and unproductive spats with regulators (over the failure to plan, for example) and tense conversations with restless investors, whose first question is often: What is the plan? Good execution can establish a track record which will serve the organization well in considering mergers or acquisitions — and it can drive greater value when it comes time to sell.

Clear–eyed and realistic self-assessment, plus robust planning and benchmarking, should be elevated to a much higher prominence in the company than a simple checked box on a regulatory form. Done right, it can result in an enhanced and more disciplined corporate culture, ensuring the organization is positioned to grow responsibly and drive shareholder value.