With interest rates still at record low levels, there is still many opportunities for banks to grow their mortgage book of business. Niket Patankar, senior vice president of financial services for Sutherland Global Services, discusses ways banks can increase market share now and in the future.
The title of the E.F. Schumacher book “Small is Beautiful” best articulates the argument that bigger may not be better. There’s no mistaking the fact that efficiency ratios and size have a negative correlation. Surprised?
Community banks are doing a bang-up job when it comes to controlling the largest expense line in a bank—people. Unlike the larger global banks that seem inclined to hire-and-fire as a knee-jerk approach to controlling staff costs, community banks are a shining example of how to get it right. In fact, the big banks have a few lessons to learn from their smaller counterparts in this area.
This is evident when you compare the efficiency ratios of community banks to the larger banks.
Efficiency ratios are a good way of measuring how a bank is doing from a revenue-to-expense perspective and here the community banks have done an outstanding job of managing costs well. Also, their locational advantage in the burbs and serving the communities there in a focused manner needs to be acknowledged and large banks can learn from this approach to the small- and medium-sized customers.
The average efficiency ratio of the top 200 community banks in the third quarter 2012 at 50 percent was significantly better than JPMorgan Chase & Co. (63 percent), Bank of America (77 percent), Citi (73 percent) and Wells Fargo & Co. (58 percent) at the end of 2012.
That said, lack of size and lack of a critical mass of transactions are drawbacks when it comes to optimizing operations and technology costs. In general, since people and real estate costs tend to be low in the locales where community banks operate, the strategy has been to replace people with people instead of people with technology. While this approach has withstood the test of time, it remains to be seen whether it will continue to be successful – especially in a world where consumers are demanding better banking products and savvier technologies, and millennials are emerging as the largest customer base for retail banking.
Let’s consider the cost of technology and how size affects strategy. Take the case of voice biometrics, a multi-channel approach to customer service whereby one platform self-serves customers’ needs for voice, email, text, chat and fax. It costs between $100,000 to $150,000 to deploy a voice biometrics technology. But in the absence of a large transaction base that can benefit from this technology, it becomes a wasteful mechanism to bring this type of technology in-house and smaller banks end up hiring more internal staff to service customers. While that is not a bad move from a short term return perspective, it’s not a strategy for the long haul. Customers today (thanks to Apple and similar companies) are gradually demanding better ways to be served by institutions that offer the latest technologies and enable day-to-day tasks like mobile banking.
Consider, too, how size affects the ability to incorporate an analytics platform, an essential tool that provides everything from customer lifetime value to pricing sensitivities or churn management. Again, this technology costs a few hundred thousand dollars, an expense that many community banks cannot justify. Unable to embrace these techniques, these institution remain locked in the same orbit while bigger banks are able to more accurately price, segment and gather key information about their customers. This helps them better serve their target customers.
While it is tough to assign a number to what size is right, it seems that banks at $5 billion and above have a better chance at embracing leading-edge technologies and operations processes—and, as an outcome of deploying superior processes, are able to achieve significant operations and technology improvements. So, what is the solution for smaller community banks? Here are some suggestions:
Look for size elsewhere. If M&A is not an option to pool resources, look into a variety of service providers, such as Fiserv and Sutherland Global Services, which are able to extend their efficiencies of scale and operations to smaller community banks, based on global aggregated demand for these services.
Look at buying a service wrapped with a technology, rather than buying a technology. This ensures the blended unit cost of getting both the service and the technology is low.
Use long-term variable contracts as a technique to keep short-term pricing low, but build into the contract the language to ensure poor performance is penalized.
Ensure that a Project Management Office (PMO) that will serve your needs in operations and technology is part of any technology service contract.
Community banks have consistently been the most important driver of economic activity in the US. When they become more efficient from an operations and technology perspective, they are a growing tide that buoys other small banks across the industry. Size and efficiencies do have a correlation, and it is very important for community banks to embrace modern techniques of managing operations and technology. By definition, community banks are small and “Small is Beautiful” indeed.
Early last year, we examined many of the factors that caused the public markets to no longer support community banks. Since that time, President Obama signed into law the JOBS Act, which enables community banks to remain private longer or more easily delist from the public stock markets. While this legislation is an important step in the right direction, community banks still confront significant liquidity needs.
Liquidity Runs Dry
In 2012, we spoke with dozens of community bankers around the country, and also conducted a survey alongside the Independent Community Bankers of America (ICBA) to better understand the capital and liquidity needs of private community banks. After all, more than 75 percent of the nearly 7,000 community banks and thrifts in the United States are privately held. The ICBA’s findings indicated that many community banks do not have a platform to provide liquidity for their shareholders. This means that thousands of community bank shareholders do not have access to liquidity on a regular basis. Our conversations with management teams across the country made it clear that a new, stronger market needed to emerge for community banks across the country.
So why do banks want a secondary market for their shares in the first place? We posed the question to a number of private banks, who shared their top reasons. A secondary market:
Makes it easier to raise capital by providing new investors with a viable future exit option
Makes it easier to find new investors
Provides shareholders with liquidity while remaining private
The SecondMarket Approach
In February 2012, we launched a pilot program in select U.S. states to create customized, private liquidity programs for community banks. The SecondMarket pilot program allowed banks to control all aspects of their secondary market, including who can buy and sell stock, and the frequency with which shares were sold. This model emulates the successful approach we pioneered for private technology companies during the past several years.
One year later, we reflect on the pilot by sharing some of the characteristics of the bank-approved buyers and sellers who worked with us, as well as the features of the banks themselves.
Characteristics of SecondMarket Banks
We often are asked about the makeup of SecondMarket community banks. We initially decided to focus on banks in three different states, but did not restrict the types of banks that could participate in the pilot programs.
We conducted seven trading windows in three different states: Texas, Pennsylvania and New Jersey. The pilot program included Team Capital Bank of Lehigh Valley, Pennsylvania.
The asset size of the banks ranged significantly, from $300 million to $1 billion.
The size and diversity of the shareholder bases also fluctuated, as participating banks ranged from 125 to more than 500 shareholders.
Banks were founded as far back as 1917 to as recent as 2005.
The banks’ shareholdings were both physical certificates as well as street name shares.
Characteristics of Buyers and Sellers of SecondMarket Bank Shares
Another frequent inquiry from bank executives across the country is the types of buyers that participated in the pilot program. Interestingly, the majority of bank-approved buyers consisted of individuals (70 percent) and trusts (21 percent). Institutional investors comprised the remaining 9 percent of buyers. Likewise, the sellers approved by the banks primarily comprised of individuals (79 percent) and trusts. The composition of buyers and sellers did not vary between region and/or state, as most banks preferred individual investors.
Limited access to capital is making it more difficult for private community banks to grow and remain independent. The success of SecondMarket’s pilot program supported our initial theory that institutions facing difficulty providing secondary liquidity to their shareholders can benefit from liquidity programs facilitated by SecondMarket. Thus, we will be expanding the program this year beyond the initial pilot states to help community banks more effectively respond to shareholder liquidity needs.
While we have only just begun to understand the nature of community bank liquidity needs, the early feedback from our clients has been positive. An executive from a community bank in Texas stated, “A service like the one from SecondMarket could ease pressure while still providing a vehicle for raising capital. For small banks, this could be revolutionary.” We couldn’t have said it better ourselves.
The Consumer Financial Protection Bureau (CFPB) is trying to crack down on some of the biggest contributors to the financial crisis: mortgage loans with balloon payments, high-interest loans, no-doc loans and loans that exceed 43 percent of a borrower’s income.
The agency’s newly finalized rule that goes into effect in January 2014 creates a qualified mortgage standard and ability-to-repay rule that forbids those kinds of loans, that is, unless the lender wants to get sued for making them.
The trouble for small community banks and rural lenders is they often make some of those loans and they’re not trying to fleece customers.
Community banks sometimes make balloon payment loans of about five or seven years to hedge against interest rate risk. It sounds like a bad deal for the consumers, but these loans are kept in the bank’s portfolio and then simply refinanced without fees when the term is up–so no balloon payment is ever made and the borrower isn’t socked with a hefty reappraisal fee and other fees normally associated with a refinance.
People who don’t qualify for a loan under Fannie Mae and Freddie Mac underwriting standards–they work for themselves and don’t have a steady paycheck, or they own property that doesn’t qualify for a Fannie or Freddie loan for example—might be interested in getting such a loan from a community bank.
The banks don’t sell these loans in the secondary market or to a governmental authority. The bank keeps these loans, and their inherent risk, on their books. The logic is the bankers know their customers (in fact, their families have probably known each other for upward of 50 years).
One such banker is Jeff Boudreaux, the president and CEO of The Bank, in Jennings, Louisiana, a community of about 12,000 people about 36 miles from Lake Charles.
“We can’t make 20- to 30-year fixed-rate loans because we don’t know what will happen with CD rates,’’ he says. “We cannot box ourselves in and have that interest rate risk.”
The CFPB recognized that some small banks and lenders serve rural areas and other parts of the country that don’t have good access to credit. The agency said it wants to mitigate the risk that the new qualified mortgage rules would cut access to credit for people in those areas. The agency is carving out some exceptions for rural and small lenders. Yet, some community banks may still fall through the cracks.
For instance, rural lenders can make qualified mortgages with a balloon payment as long as they stay on the bank’s portfolio and the lender makes more than 50 percent of their mortgages in a designated rural or underserved area. The definition of rural will come from the U.S. Office of Management and Budget, but lenders such as The Bank won’t qualify. Despite its rural nature, Jennings falls in the metro area of Lake Charles. Only about 9 percent of the U.S. population lives in a designated rural area, says Matt Lambert, senior manager and policy counsel for the Conference of State Bank Supervisors (CSBS).
In a separate proposed rule available on the CFPB’s web site, the agency proposes creating a fourth category of qualified mortgages for borrowers who don’t meet the required 43 percent debt to income ratio or will be getting an interest rate that exceeds 150 basis points of the prime lending rate. The only entities that qualify to make such loans would be certain non-profit or designated housing organizations, or small lenders with less than $2 billion in assets that made fewer than 500 first-lien covered loans the previous year. Those lenders will be able to charge as much as 350 basis points above the prime rate. They must keep those loans in their portfolios, however.
But those lenders still can’t do interest only, negative amortization or balloon payment loans, or charge more than 3 percent in total fees and points (a higher fee is allowed for loans below $75,000), otherwise the mortgage is no longer a qualified mortgage. The rule has not been finalized.
Michael Stevens, senior executive vice president at the CSBS, points out that non-qualified mortgages are still allowed. They just don’t carry the newly created legal protection for lenders against lawsuits.
The question is whether a lot or very little lending will take place outside the definition of a qualified mortgage. Stevens thinks that if a lot of good borrowers are left out of the mix, the market will find a way to serve those people.
Richard Cordray, the director of the CFPB, this week encouraged the audience at a Credit Union National Association meeting to make loans outside the qualified mortgage rule.
“Of course, we understand that some of you–or your boards or lending committees–may be initially inclined to lend only within the qualified mortgage space, maybe out of caution about how the regulators would react,’’ he said in written remarks. “But you should have confidence in your strong underwriting standards, and you should not be holding back.”
Chris Williston, the president and chief executive officer of the Independent Bankers Association of Texas, is not satisfied. He wants a two-tiered system of regulation: one for small banks and one for larger banks that have the resources for complying with a deluge of government regulations.
The new qualified mortgage rule alone has more than 800 pages in it, and a concurrent proposal has more than 180 pages.
“All of our bankers are just weary and frustrated,’’ Williston says. “We have a lot of banks that are ready to throw in the towel.”
Raymond P. Davis, president & CEO of Umpqua Holdings Corp. and keynote presenter at Bank Director’s 2013 Acquire or Be Acquired Conference in Scottsdale, Arizona, shares his insight on how community banks can remain competitive during this challenging economic environment.
Video Length: 45 minutes
Creating a meaningful value proposition
Differentiating yourself from the competition
What does a strong culture look like?
Advice and warnings about valuations
About the Speaker
Ray Davis is the president and CEO of Umpqua Holdings Corporation. Mr. Davis pioneered a new approach to the delivery of financial products and services built on the development of innovative store designs that engage and excite customers. Mr. Davis joined Umpqua Bank in 1994 and has grown the bank from six banking locations and $140 million in assets to nearly 200 stores and $12 billion assets today.
In April of last year, Congress enacted the JOBS (Jumpstart Our Business Startups) Act with the purpose of easing the capital raising process for small and growing companies. While only some of the provisions have been put into effect, many small banks have already taken advantage of the new registration and deregistration threshold. According to the latest numbers released by SNL Financial, more than 100 banks have deregistered with the Securities and Exchange Commission (SEC) following the passage of the enactment of the JOBS Act. Most of the attention has been placed on the amount of money and resources banks save as a result of deregistration, but what has not been addressed is the flip side, the new threshold that will require registration. Going forward, banks won’t need to register until they have 2,000 shareholders of record. This change opens the door for small to mid-sized banks that in the past were reluctant to raise capital or merge in fear of increasing their regulatory burdens. What’s important to note is that for non-bank and non-bank holding companies, the statutory shareholder threshold remains the same. In writing the new laws, Congress purposefully carved out banks, acknowledging not only the need for banks to access capital but also the highly regulated environment that banks already face.
SEC Registration Versus Public Markets
Even with this statutory easing, many banks still view the capital markets with caution and often the hesitation comes from a dearth of information and misunderstanding of how the public markets function for small companies. The common perception is that a bank must undergo a costly and time-consuming process to become public, one that requires underwriting, SEC registration, and compliance with Sarbanes-Oxley. While that process still exists, it only applies to banks seeking to do an Initial Public Offering (IPO) and trade on a registered national securities exchange such as NASDAQ. As long as there are freely tradable shares, banks can have broker-dealers quote and trade those shares on OTC Markets without filing with the SEC.
With greater demand and regulatory pressure to hold more capital, it is no longer efficient for banks to sell stocks by pulling out a list of interested buyers from desk drawers. However, as a company enters the capital markets, the information gap also begins to widen and it becomes infeasible for companies to know each shareholder and conversely, investors become removed from the daily ins and outs of the companies they are investing in. The classical definition of markets assumes that information is widely available, allowing buyers to make informed decisions, and sellers to have access to the capital they need to grow and expand their businesses. Yet, information is not always widely accessible, or the information availability is asymmetric, meaning that one side has more information than the other, making a marketplace inefficient.
An Efficient Marketplace
There are three elements that make a stock market efficient:
Access for investors with widespread pricing and the ability to easily trade through any broker
Availability of publicly disclosed information to allow for fair valuation of the stock
Confidence from investors that companies are reputable and information is trustworthy
All three elements above address the problem of asymmetric information in a marketplace by bridging the knowledge gap between company management and investors. Transparent pricing facilitates the assessment process, letting companies and investors determine whether the valuation is fair and actionable. Markets are self-regulating, and when information is widely available, prices will adjust to reflect a combination of company performance, investor demand, and overall economic conditions. Intrinsically, SEC filings are meant to eliminate the discrepancy of information between companies and their investors, yet the high cost associated with registration doesn’t always seem to match the intended benefits. Banks on a quarterly basis already produce call reports to their regulators, and many of them also publish additional financials and disclosures to their shareholders via public portals such as www.OTCMarkets.com, through SNL, or on their own shareholder relations page. For a small bank, the cost of SEC reporting typically ranges from $150,000 to $200,000 per year, and on annual net income of $1 million, that’s a very significant amount.
In the U.S., there are roughly 7,000 banks, a majority of which are small community banks with under $1 billion in assets. Of the 7,000, about 15 percent are publicly traded, around 450 on registered national securities exchanges such as New York Stock Exchange and NASDAQ, and 600 over-the-counter, primarily on the OTCQB marketplace operated by OTC Markets Group. Fifteen percent is a relatively small fraction, especially given the current economic climate and disposition towards mergers and acquisitions. In general, banks are viewed more favorably and are in better positions to be acquired when the bank’s stock is publicly traded. There is always going to be greater confidence in a deal when valuation is publicly derived (even if the price/book is less than 100 percent).
However, should banks become publicly traded solely for the fact that they would be “more attractive” in an acquisition? Without a doubt being traded on a public market exposes the company to potential market volatility, and there are inherent risks and costs associated with being publicly traded, even with the recent changes outlined in the JOBS Act. A common impediment delaying and preventing companies from going public is the fear that the public valuation will be less than the management’s internally perceived price. A parent will believe that his or her child is the best, but unfortunately we live in society where individuals are subject to comparison and ability is often determined by some form of standardized testing or arbitrary measurements. Public scrutiny is hard to swallow, but public acknowledgement can be equally, if not more, gratifying.
Since the financial crisis in 2008, markets have been perceived as the big bad wolf, the visible scapegoat for why companies go bankrupt and why shareholders lose millions of dollars in their investments. However, despite the recent ups and downs, they still remain the best indicator of good investments and the most efficient way to access capital. If the company has a sustainable and profitable business, if a bank’s loan portfolio has consistently provided high returns with minimal default risks, then the well-informed markets should adjust to reflect those successes.
Leadership succession represents a growing challenge for community banks—and their boards of directors—especially in the current environment. Far too often, banks lacking sufficient executive talent or proper management succession are scrutinized by their regulators. In the worst cases, some banks may even be encouraged to find a merger partner. This dynamic has played out too many times during my 25 years in executive search serving the banking industry. Thus, one thing stands out clearly—talent matters. Superior talent really does make a difference, especially for banks intending to remain long-term survivors.
Think about how commoditized and seemingly similar many bank products have become. Plus, given the broader array of financial services firms, such as mutual fund companies, credit unions, brokerage firms—all of which offer redundant or wanna-be products—how is the customer to decide with whom to do business? What sets our most successful clients apart from their competitors today is less about strategy and differentiation, and more about how well they execute that strategy. And these clients know that the variable factor around execution nearly always comes down to people.
Despite decades of well written books and Harvard Business Review articles, few companies remain fully committed to fundamental business activities such as leadership development, talent management, grooming high potentials, and overall people enhancement. Furthermore, nearly every piece of research regarding leadership succession validates that internally groomed successors almost always perform better and cost less than outside hires. It might seem antithetical for a professional executive recruiter to encourage clients to develop their own talent, but facts are facts. Still, too many of our clients either make a half-hearted effort at talent development, or nibble at the outer edges until the next round of expense cuts.
Developing talent for the long run should not be daunting, and does not require huge amounts of funding. What it does require is a commitment to the process of developing future leaders throughout your institution. Becoming what’s known as a learning organization requires a mindset shift that may take years to root deeply, yet pays huge dividends over the long term. Plus, the option to look outside for executive talent—whether for a strategically critical role or to deal with succession challenges—always exists. It should remain just that—an option—but not a necessity. Here are seven action steps for bank directors and incumbent CEOs to emphasize with their talent agenda:
1. Make discussion of the bank’s talent and leadership development activities a regular agenda item at board meetings—not just annually, but at least quarterly.
2. Hold the current CEO and other executive leaders accountable for grooming their successors. Linking a meaningful portion of executive incentive compensation pay to the achievement of these goals will provide appropriate motivation.
3. Don’t be afraid of selectively using some outside experts, such as an executive coach or organizational development professional, to assist. Your senior leadership team might be good, but support them with the right tools to help them develop their people.
4. Developmental opportunities should involve more than traditional up-the-org-chart advancement. Much learning can be accomplished via lateral moves, special project assignments, add-on responsibilities and the like. Think outside the box when it comes to stretching your people.
5. Let your up-and-comers know that they matter. Your handful of rising stars want to hear it, and letting them know that they have a bright future ahead may do more to retain these high potentials than anything else you may offer.
6. Shift your compensation programs to a pay-for-performance orientation, and reward your best performers appropriately. Giving everyone the same raise regardless of performance creates a disincentive for high-impact players.
7. Don’t ignore succession at the board level. Director succession may be the most sensitive topic in your boardroom, but that doesn’t mean that it shouldn’t be put on the table. Make director development or board repopulation a regular agenda item as well. Board skills need refreshing and updating too.
The institutions that survive and thrive over a lengthy time horizon benefit from the successful execution of strategy which flows from a continuity of leadership. CEOs and boards of directors must recognize this imperative, and regularly prioritize talent at the top of their agendas.
Many community banks are reluctant to consider interest rate swaps due to perceived complexity as well as accounting and regulatory burdens. But, in a record low interest rate environment, the most desirable customers almost universally demand something that is hard for community banks to deliver: a long-term, fixed interest rate. Large banks are eager to accommodate this demand and usually do so by offering such a borrower an interest rate swap that, together with the loan facility, delivers the borrower a net long-term, fixed rate obligation and the lending bank a loan with an effective variable rate.
The alternatives to using swaps are not appealing. A community bank can limit its product offerings to only variable rate loans or short-term, fixed rate loans and thereby lose many good customers to larger competitors. The bank can offer a long-term fixed rate on the loan and then (a) sell the loan and lose ongoing earnings and the customer relationship, or (b) borrow long-term funds from the Federal Home Loan Bank to match that asset with appropriate liabilities, a choice that significantly erodes profit on the loan and uses up precious wholesale liquidity.
If a community bank wants to compete using interest rate swaps, then there are three general methods for packaging an interest rate swap with a typical loan offered by a community bank. There are several regulations that apply to swaps, including changes to the Commodities Exchange Act enacted by the Dodd-Frank Act and the numerous related rules and regulations promulgated by the U.S. Commodity Futures Trading Commission (the CFTC). If the community bank is under $10 billion in assets, then all three swap methods described below should qualify for an exemption from regulatory requirements that interest rate swaps be cleared through a derivatives exchange. Avoiding clearing requirements saves considerable costs and operational effort.
The first is a one-way swap in which a community bank simply makes a long term, fixed-rate loan to its borrower and then executes an interest rate swap with a swap dealer (such as a broker-dealer affiliate of a larger commercial bank) to hedge against rising interest rates. In a one-way swap, the community bank is subject to fair value hedge accounting, which requires the bank to mark the swap to market on its balance sheet and run changes in fair value through its income statement.
The second is a two-way swap, otherwise known as a back-to-back swap, in which the community bank makes a variable rate loan to its borrower and enters into an interest rate swap with the borrower that, together with the loan facility, delivers the borrower an effective fixed-rate obligation and the lending bank a loan with an effective variable rate. The bank then enters into an offsetting swap with a swap dealer. Even though the terms of the two swaps in a two-way swap may be identical economically, the two swaps can present quite different credit risks to the community bank and the bank may still have to, under accounting rules, track a significant variance between the two swaps.
Both one-way and two-way swaps have some other disadvantages. Under the CFTC’s proposed margin (collateral) regulations , financial end-users of swaps such as community banks likely will have to post initial and variation collateral to secure obligations under swaps. In one-way and two-way swaps, the borrower and the community bank must maintain records that are complete, systematic, retrievable and include, among other things, all records demonstrating the bank qualified for an exception from swap clearing requirements. Also, in a two-way swap, the community bank must ensure that the swap is economically appropriate to reduce the borrower’s interest rate risk and fulfill the bank’s reporting obligations to swap clearing organizations.
The third method is an outsourced swap product designed for community banks. Under this model, the community bank makes a variable rate loan and the borrower signs a simplified swap-type agreement with the swap provider, which results in the bank receiving its preferred variable rate and the borrower paying a net fixed rate. This third method generally does not carry the disadvantages of the first two methods if the provider has properly designed the product.
Once your bank has decided which method or methods it wishes to use with interest rate swaps, the bank must supplement its policies and procedures (at least its interest rate risk, asset/liability and accounting policies) and train its board, management and applicable staff in several key areas. All of this requires careful study and execution, but it can be done.
Industry analysts agree that community banks are lagging behind the big banks when it comes to mobile technology. A recent survey from Celent, a research and consulting firm based in Boston, showed that among those surveyed, more than 80 percent of banks with $50 billion in assets or more offered an iPhone or Android mobile app, while for those with less than $1 billion in assets, the number hovers around 50 percent. Community banks “typically aren’t trying to compete on technology with the big banks. They can’t,” explains Bart Narter, senior vice president of banking at Celent. “The community bank’s competitive advantage is not [in] technology, but in personal relationships.”
However, community banks are seeing benefits from offering a mobile banking application. Banks that offer a mobile app can expect to see “fewer calls to the call center, which costs money. They’re going to get fewer visits to the branch,” says Narter.
Reliant Bank, a $372-million asset bank headquartered in Brentwood, Tennessee, introduced a mobile app just last August. Brian Shaw, chief retail and deposit officer at the privately owned bank, believes that the mobile app can expand the bank’s reach. Unlike larger banks, he says, “we’re not going to have a location on every corner.” Customer expectations also drive community banks, including Reliant, toward offering a mobile app. Darrell Freeman, a director and co-founder of the six-year-old bank, says that it’s important that Reliant Bank develop products that differentiate it from other community banks.
Shaw and Vice President of Marketing Marion Ingram pushed for the mobile app, although it became a bank-wide effort with the support of a tech-savvy board. “We believe that the consumer has already embraced mobile products,” says Freeman.
The board wanted to get the best value, which meant ensuring the “safety and security of the product” as well as delivering a user-friendly app, says Freeman. Ingram researched vendors and products thoroughly, but ended up selecting a vendor the bank knew—FiServ, which already served as the bank’s core processor. Most community banks purchase mobile apps through their core vendor so they can easily integrate the app with the bank’s core systems, says Narter.
FiServ was also able to offer a mobile app specifically branded for Reliant, instead of a generic, non-branded mobile app. “It looks very similar to our online presence, so customers already see something that they’re very familiar with,” says Ingram. The bank paid roughly $35,000 for development of the app, which included integration, implementation, and employee training. Of the total, $10,000 was spent on app customization, which included branding. Ingram says that the additional investment is worth it, as the bank seeks to further establish itself online as well as remain recognizable to current customers. Developmental costs also included the integration of online bill pay (Ingram was unable to divulge how much bill pay contributed to developmental costs at press time). Per user costs were negotiated, and though Shaw declined to provide specifics, these costs tend to average $1 per user per month, says Narter.
What about banks that don’t feel they’re ready for a fully branded mobile app? Packaged apps are available from a variety of vendors, including so-called “wrapper apps” that can direct to the bank’s website. Narter also explains offering a mobile-ready website could be advantageous for a community bank, as it does not require building separate versions for iPhone and Android. However, “[mobile] apps can do more,” explains Stephen Greer, an analyst in Celent’s banking group, “[they] have a better user experience in general.”
The bank has been pleased with the reviews from customers, who have commented that Reliant’s mobile app is fast and user-friendly. Reliant has set an initial two-month goal to get one half of current online banking bill pay customers signed up as mobile app users, although bank officers declined to say how many customers that is. “Within the first 30 days of launch, we’ve reached 42 percent of the initial goal,” Ingram says, “so we are very pleased with that number.” The number of users continues to grow as the bank spreads the word on the app through email campaigns, Facebook contests, and monthly statements. The bank’s customers “have been waiting for [the app],” she says. “They’ve been very patient.”
Small bank stocks that don’t trade on the big exchanges have missed out on the price gains of the big bank stocks lately. During the third quarter, the Monroe Securities community bank stock index rose .7 percent and its thrift index climbed 4.1 percent, while the SNL Bank and Thrift Index climbed 7.1 percent, according to the firm, which is a market maker for more than 1,000 community bank stocks.
That’s a change from the second quarter, when big banks were sucking wind and community stocks saw slight gains.
Valuations for community banks improved slightly during the third quarter. The average price to tangible book value for community banks, defined as banks below $1 billion in assets, was 78 percent, according to Monroe Securities. That was an improvement from about 76 percent in the prior quarter but a big climb from end of 2011, when community bank stocks sunk to a low of about 66 percent price to tangible book value.
The number of small bank mergers or acquisitions improved slightly in the quarter, at 49, compared to 45 the quarter before, and 50 deals in the first quarter. M&A deal values fell a bit, from 125 percent of tangible book value to 95 percent in the third quarter.
Monroe Securities uses stock values based on OTC Markets and OTC Pink, an electronic bulletin board for stocks that don’t trade on the New York Stock Exchange or NASDAQ OMX.