Does Mobile Matter?

5-1-15-Naomi.pngThere are five services via the smartphone that the top five banks in the country all offer: mobile banking, mobile bill pay, mobile check deposit, person-to-person payments, and ATM/branch locator. Does your bank have all five?

The question was posed at Bank Director’s Bank Board Growth and Innovation Conference in New Orleans on Wednesday. With more than 150 bank directors and officers in the room, only a handful raised their hands.

The speaker, Dave DeFazio, a partner at StrategyCorps, which provides deposit account and mobile phone products to banks, said all of these services are necessary. The nation’s population is increasingly in love with smartphones. If people lose their phone, they feel out of sorts, disconnected. It’s the first thing many people touch in the morning when they wake up. They use their smartphones when they’re driving (not a good idea). They check Facebook at work.

The end result is that banks that don’t provide easy-to-use, indispensable mobile apps will increasingly find themselves losing the battle for market share in the years ahead, DeFazio said.

Mobile service vendors are not the only ones who think mobile matters. There are now more mobile phones than landline phones in the United States.  Sixty percent of smartphone or tablet owners who switched financial institutions said mobile played an important or very important role in their decision to switch, according to a survey by the consulting firm AlixPartners.

It’s important not to confuse mobile services with online services for a laptop or desktop. Young people use their phones, and less frequently, their laptops. Your customers shouldn’t have to sign up for mobile banking services using an online portal for a laptop or desktop, he said.

“I have young people in my house who barely touch their laptops anymore,’’ DeFazio said. “Make it your mission to have an app people can’t live without.”

Millennials, the generation that tends to be in their late teens through early 30s, are distrustful of the biggest banks, but a greater percentage of them switch to big banks than older generations, according to the survey by AlixPartners. The reason? Millennials want digital services that are convenient and easy-to-use, and small banks don’t provide the same level of mobile services that big banks do, in general. Millennials aren’t as interested in going into a branch and speaking to a banker face to face as older generations are.

Not everyone in the crowd at the Bank Board Growth and Innovation Conference was impressed. One attendee questioned whether his bank should want to attract millennials. He pointed out that most of the more successful banks profiled at the conference focus on commercial customers. DeFazio answered that whatever its audience, a bank should pay attention to its mobile offerings.

“There are as many digital baby boomers as digital millennials,’’ he said. There are other reasons as well. Those most interested in using mobile services from their banks are the young and those with higher incomes. People who use mobile banking services tend to get a higher number of banking products from their bank than the average customer, according to AlixPartners.

Smaller banks may not have as many offerings as large banks, but some of them have leaders who don’t want their banks to fall behind. Brian Unruh, president and CEO of $600 million asset National Bank of Kansas City, in Overland Park, Kansas, says it’s almost overwhelming how many different technology companies are out there offering services to banks. But his bank is committed to offering mobile banking services. It recently switched Internet banking providers, and went with Austin, Texas-based Q2 Software, a smaller and more nimble company, he said. His bank recently hired a software developer and may hire a second, to develop mobile apps in-house.

Mobile services are definitely necessary, he said. “You have to get it to attract new customers,’’ he said.

A Tale of Three Growth Banks

4-29-15-Jack.pngFinding themselves stymied by low interest rates and a hyper-competitive business loan market, growth has become the Holy Grail for a great many banks today. There are essentially two strategies that banks can employ to grow their top lines. One is the tried-and-true acquisition method, where banks essentially buy their growth. Over the past several decades vast banking empires in the United States have been built this way, including, but by no means limited to, the country’s two largest banks—JPMorgan Chase & Co. and Bank of America Corp. But acquisitions are not without their risk. A poorly conceived, over-priced and badly executed acquisition can so thoroughly damage a bank’s stock price (not to mention its reputation) that it can take years for it to recover and for the bank to rebuild its credibility with the investor community.

Organic growth is the second growth strategy, and while it is not without its risk—growing too fast in a volatile asset class can lead to significant concentration problems later on—many analysts and investors seem to appreciate a good organic growth story. Three very different growth stories were presented at Bank Director’s 2015 Bank Board Growth & Innovation Conference Tuesday by Bryce Rowe, a senior research analyst at Robert W. Baird & Co.

The first bank that Rowe profiled was $6 billion asset Pinnacle Financial Partners in Nashville, which was founded in 2000. Pinnacle has benefited from two trends over the last two and a half decades, beginning with the impressive growth of the Nashville metro area. Nashville’s economy has grown impressively over this period of time and Pinnacle, which focuses on businesses and their owners and employees, as well as affluent consumers, has benefited handsomely from that growth. The 1990s and early 2000s were also a time of considerable consolidation in many U.S. banking markets, including Nashville, and Pinnacle also benefitted from the service disruptions that many of the market’s big mergers created. By emphasizing service, Pinnacle has been able to beat many larger banks at their own game. Since its inception, Pinnacle has grown its loan portfolio at a compounded annualized growth rate of 53 percent. Investors have rewarded the bank’s stock with a strong valuation, which currently trades around 285 percent of its tangible book value. After a long hiatus, Pinnacle recently returned to the acquisition market with two announced deals for banks in the Chattanooga and Memphis markets. Acquisitions that Pinnacle made in 2006 and 2007 accelerated its penetration of the Nashville market, but also increased its exposure to the commercial real estate market—and credit issues during the recession. Historically, Pinnacle has placed more emphasis on organic growth than growth through acquisitions.

The second bank that Rowe looked at was County Bancorp in Manitowoc, Wisconsin. This $770 million asset institution is heavily focused on agricultural and business banking in the dairy state. County benefits in part from a lack of other lenders in its space. Its primary competitors in most of its markets are the Farm Credit System and BMO Harris, the U.S. subsidiary of Canadian-based Bank of Montreal. County also benefits from specialization, since it knows the agricultural business so well and has a deep appreciation for how that sector performs over time. In fact, County uses a “boots to driveway” philosophy where it currently employs 10 ag lenders who actually grew up on dairy farms. County has been able to achieve strong and consistent loan growth since its inception in 1996 without sacrificing profitability, achieving a pre-provision return on assets (PPROA) of 1.89 percent in 2014.

The final bank in Rowe’s growth trilogy provides something of a cautionary tale. Tristate Capital, a $2.8 billion asset specialized bank lender that focuses on middle market commercial lending from a regional office network, has been able to generate an impressive 45 percent compounded annualized rate for loans since its inception in 2007, but its concentration in the highly competitive commercial loan market–where profit margins tend to be much thinner than in other loan categories—have reduced its profitability. The Pittsburgh-based bank’s price-to-tangible book value was 117 percent in 2014 compared to a peer median of 142 percent. In an effort to improve its profitability, Tristate has pulled back somewhat from the commercial loan market and placed greater emphasis on higher margin private banking loans that it sources via a network of financial intermediaries. The moral to Tristate’s story is that while growth is important, the investor community also wants profitability—which means the two must be kept in balance.

Technology: Driver of Profitability or a Big Expense?

How does technology play a role in a bank’s growth and profitability? When asked to rank the importance of certain factors as drivers of their bank’s organic growth plans—culture and people, technology, unique products and services, and brand—technology placed second for 74 attendees who participated in an on-site audience poll at Bank Director’s Acquire or Be Acquired, held in Scottsdale, Arizona, in January, and the Bank Board Training Forum, last week in Nashville, Tennessee. The responses came mostly from bank directors, chairmen and CEOs.

In terms of importance to the organic growth of your bank, rank the following:

  Overall Rank Score*
Culture/people 1 235
Technology 2 157
Unique products/services 3 136
Brand 4 135

*Score is a weighted calculation, with items ranked as first receiving a higher value, or weight, of 4, second weighted as 3, etc… The score is the sum of all weighted values. Source: Bank Director

Technology continues to change the way customers interact with their banks. Respondents were also asked about their biggest fear—an open response about what keeps them up at night—and 10 percent cite non-bank competition. One of the speakers at the Bank Board Training Forum mentioned that Staples plans to begin offering small business loans. The Apples, Googles and retailers of the world are an increasing concern for bank boards, but will a focus on short-term profitability impede a director’s ability to take a long view of the business?

“Technology can move from an expense to a competitive advantage, if you do it right,” says George McGourty, president of the financial services group at Computer Services Inc. Big banks used to have the advantage with a significantly larger branch footprint, but technology can erase this advantage.

Looking at profitability for your bank in 2015, what do you believe will have the most positive impact?



Looking at profitability for your bank in 2015, what do you believe will have the most negative impact?


Sixty-nine percent of survey participants see loan growth as the factor with the most positive impact on the profitability of their financial institution, while no one cites technological innovations. Yet the right use of technology—and the right partnerships—can expand a community bank’s reach and help drive demand. Titan Bank, a $79.4 million asset bank based in Mineral Wells, Texas, partners with San Francisco-based peer-to-peer online lenders Prosper Marketplace and Lending Club to make small business loans, according to a spokesperson at the bank. These relationships help expand the bank’s reach beyond its local markets. (In addition to its Mineral Wells headquarters, the bank has a branch in nearby Graford, Texas, and a loan production office in Dallas, about 90 miles away.)

For Bethesda, Maryland’s Congressional Bank, with $446 million in assets, Lending Club helps the bank diversify its loan portfolio through the purchase of unsecured consumer loans, according to Jeffrey Lipson, the bank’s president and CEO. In February 2015, Lending Club partnered with BancAlliance, giving members of the Chevy Chase, Maryland-based lending platform—roughly 200 community banks—access to Lending Club’s expanded market for consumer loans.

Another technological opportunity is the use of data analytics. Too few banks take advantage of personal financial management tools and even for those that do, few effectively use the valuable customer data it provides, says Bradley Leimer, senior vice president and head of innovation at Santander Bank, N.A., the U.S. subsidiary of Banco Santander, S.A., headquartered in Madrid, Spain. Leimer just joined Santander in September 2014: He previously served as vice president of digital strategy at Richmond, California-based Mechanics Bank, with $3.4 billion in assets, from January 2010 to September 2014. During his tenure, almost 40 percent of Mechanics Bank’s customers used personal financial management tools, with the majority aggregating financial data from external accounts. The bank was able to use that information to target offers to its customers. “There’s money to be had in looking at the data that your customers provide you,” he says.

One-quarter of those polled in Bank Director’s survey view cybersecurity as their biggest fear. Do concerns about cybersecurity turn technology, in the minds of these board members and CEOs, into a potentially disastrous threat? Technology helps fuel growth, but it’s also a big expense. Finding technology’s place in a profitable bank isn’t easy. But bankers that view technology simply as an expense item, and not a way to grow, may find it difficult to get ahead. “If they look at [technology] clearly as an expense, I think they’re going to make some bad strategic decisions,” says McGourty.

Integrating a New Product Line: Asking the Right Questions in the Boardroom

2-13-15-BryanCave.pngAs year-end results are finalized, many financial institutions are now budgeting for the coming year. With many banks struggling to find new revenue sources, these conversations are often focused on operational matters, including diversifying into new loan products and electronic payment applications designed to attract and retain new and existing customers. And while some boards of directors have a productive conversation regarding new products, these detail-rich discussions can result in the board overlooking the impact of the new product line on the bank’s strategic direction.

Directors, as part of their duty to maximize shareholder value, are responsible for charting the strategic course of the bank. Too strong of a focus on operational matters may have the effect of muddling the important distinction between the roles of directors and officers going forward, leaving management feeling micro-managed and directors overwhelmed by reports and data in their “second” job. Instead, a higher-level discussion may be necessary in order to ensure that the board is focused on overseeing the institution’s strategic plan, while management is charged with safely and profitably executing the new business line.

So what are the appropriate questions for directors to ask and resolve when considering a new product? The following can help ensure that the board achieves the right strategic decision for any new product or activity. 

Consider management first.  When evaluating a new line of business, the board should consider whether the institution has the appropriate management needed to supervise the activity in a safe and sound manner. For example, banks looking to diversify their asset portfolios into other types of lending, including C&I and SBA-guaranteed loans, may need to recruit a group of experienced lenders from another institution. But the board should first consider how the new lenders will integrate into the bank’s culture and if the bank’s credit department will have the expertise to underwrite the loans.  

The addition of new loan products is perhaps the simplest example, but for new online customer applications, finding and hiring the right team to manage the related franchise and regulatory risk may be more challenging. With a new mobile banking app, the institution will face new data security and “know your customer” challenges that may exceed the skills of the current staff. In either case, understanding the personnel required to execute the new business safely will give the board an idea of not only the new activity’s cost, but also its risk.     

Project the path to profitability.  After considering the personnel demands of the new product line, the board should then determine the timeline for fully integrating the new activity into the bank’s core business. Depending on the scope of the institution’s current product offerings, some new business lines may be easier to integrate than others, particularly where the bank and its management have prior experience.  

On the other hand, many institutions are now considering acceptance of new online payments products, recognizing these services will be essential to attracting younger customers. Even if ultimately profitable, these new applications can expose the bank’s operating system to new online threats and unfamiliar customer segments, which may result in more risk and expense than benefit for a significant period of time. Evaluating these costs and benefits, particularly within the context of the bank’s strategic plan, is a central component of the board’s role.  

Determine if changes are necessary to the institution’s strategic plan.  Any meaningful strategic plan includes a statement by the board of whether the bank will pursue a “buy,” “sell,” or “hold” strategy over the next three to five years. Depending on the importance, cost and risk of the new product line to the future success of the bank, the board’s discussion of the new product may change its buy, sell or hold determination. In some cases, if it appears too costly or risky to integrate an essential new product into the bank’s core business, the board of directors ought to consider whether a sale or strategic partnership with a larger institution would bring more value to their shareholders.   

So while some discussion of tactics is essential to the board’s consideration of a new product line, directors should stay focused on managing the bank’s risk appetite and strategic direction during these conversations. Boards that focus on the big picture have a great vantage point for considering a new product offering—they can better evaluate the bank’s strengths and weaknesses and have a better understanding of the bank’s core business. Using this perspective, some boards may conclude that staying the course in advance of an eventual sale, rather than steering the bank into the unfamiliar waters of a new product line, may result in the best returns for the institution’s shareholders.

Technology Solutions That Drive Revenue Growth

What technologies should every bank have on their radar to improve organic growth? In this video, filmed during Bank Director and NASDAQ OMX’s inaugural FinTech Day in New York City, we asked four financial technology providers to share what solutions are being implemented to help banks improve customer experiences, increase market share and grow revenue.

Lessons Learned from Proven Growth Performers

For several years, Fiserv’s Bank Intelligence Solutions has studied banks with the strongest organic growth in terms of core revenue, core noninterest income, core deposit growth and loan growth. In this video, Kevin Tweddle reviews why these banks have been successful with their growth strategy and what makes them top performers.

Strategic Thinking: It Has Never Been More Critical

5-19-14-wipfli.pngStrategic planning has never been more critical to the continued success of any financial institution. After all, the financial services environment continues to be extremely challenging, and these are no ordinary times. Many institutions are thinking about a rebirth in strategy as they get back to the basics and focus on their core business model. As you approach your forthcoming strategic planning initiatives, you will need to focus on several external and internal themes that demand attention and require ongoing, fluid strategic solutions.

Key External Themes to Keep in Mind

  1. A “wave of consolidation” is expected to accelerate. If your financial institution is going to be a survivor, how will you compete successfully? What does that portend for strategy?
  2. The core business model should be examined to decide what strategies will maximize shareholder value and ensure a return on investment. There is a limit to how far expense reduction and recapturing loan-loss provisions can boost industry earnings. At some point, profitability must come from the ability to grow revenue. Margin is not likely to come roaring back, efficiency ratios have remained relatively flat and the increasing regulatory burden and new delivery channels have added to expense. The supposed lower cost of electronic/mobile delivery has not hit the bottom line.
  3. The ultimate challenge is to identify the source of tomorrow’s profitable growth. What markets are growing? Which niches within those markets should the bank target? What are the habits of your customers? What role should technology play?
  4. Regulatory reform has changed the game. At the end of the day, it’s still about our ability to manage risk within a complicated, complex web of regulation.
  5. A distinctive competitive advantage needs to be ensured. Simply put: Why do customers choose your bank?
  6. The key to success is to focus and to prioritize. Reaffirm what your institution does really well and build the strategic direction on core foundational strengths and on the most significant opportunities. Motivated execution of strategic priorities equates to sustained bottom line performance. Implementation and execution of a well-developed strategic plan will significantly enhance earnings.

Key Internal Themes to Keep in Mind

  1. Strategic planning should result in sustained bottom line performance and should be the highest yielding annual investment a financial institution makes.
  2. The planning process has a defined purpose: To help an organization focus its energy on clearly aligned goals and to assess and adjust strategic direction as appropriate in a dynamic, rapidly changing environment.
  3. The process must be customized to meet the unique needs of each organization. A “cookie cutter” process or “glorified budgeting” meeting will not produce forward-looking strategies, nor will it maximize shareholder value.
  4. Strategic planning requires discipline and a focused, productive planning meeting where questions can be raised and assumptions tested. The leadership challenge is always about making choices. As we frequently say, “If you emerge from a planning session ‘exhausted…but invigorated,” you have likely had a successful session that propelled needed action and a renewed commitment to aligned results.
  5. Organizational structure needs review. Look forward, not backward. Pretend you are starting from scratch. Reaffirm what works and what does not work for your organization.
  6. Leadership does matter. In fact, it is all about the “M.” The quality of management is probably the single most important element in the successful operation of a financial institution. Proactively assess the talent within your organization. Develop a deeper culture of accountability that rewards implementation, execution and sustainable high performance.
  7. Board governance has never been more important. It has never been more challenging to find competent, qualified directors willing to assume the personal risk associated with being on a board.

The Outlook

All components of your strategic plan should align with the strategies the bank needs. Even if you have a well-crafted strategic plan, that is not enough. All critical issues must be addressed in an executable plan implemented within a well-led culture of accountability.

Difficult times can be an opportunity in disguise. On the other side of most challenges lie great opportunities. To survive and flourish, financial institutions must exploit the current opportunities—carefully, deliberately, and thoughtfully.

Investors Weigh In On Growth

A panel of three leading banking analysts from top research and brokerage firms share their insights and views on trends specific to financial institutions during Bank Director’s 2014 Acquire or Be Acquired conference in January. Moderated by Gary R. Bronstein, partner with law firm Kilpatrick Townsend & Stockton LLP, the panel discusses what bank investors consider key in terms of building a strong and profitable business.

Video Length: 46 Minutes

About The Speakers

Gary Bronstein is a partner with Kilpatrick Townsend & Stockton LLP. Gary provides a broad spectrum of strategic advice to financial institution and public company clients. He concentrates on initial public offerings and other specialized public and private capital raising transactions, M&A, proxy contests and a host of other corporate and securities law matters that arise during the life of clients.

Jefferson Harralson is the managing director, financial institutions research at Keefe, Bruyette and Woods a Stifel Company. Mr. Harralson joined KBW in 2002 and is responsible for its small and mid cap bank research groups. In 2012, Mr. Harralson was ranked as the nation’s 2nd leading regional bank analyst according to a Greenwich survey of 216 buy side firms. Mr. Harralson also heads Keefe Bruyette Woods’ southeastern bank research team, writing on 15 banks, ranging from community banks to Bank of America.

Ken Usdin is a managing director and senior research analyst at Jefferies LLC covering the U.S. banking industry. Mr. Usdin joined Jefferies LLC in 2010 and has over eighteen years of experience within the financial services industry, including fifteen years in equity research. Prior to joining Jefferies LLC, Mr. Usdin spent six years at Bank of America Merrill Lynch covering regional banks and trust/custody banks.

William Wallace is the vice president, equity research at Raymond James & Associates, Inc. He joined Raymond James in April 2011 through the acquisition of Howe Barnes Hoefer & Arnett, which he joined in October 2010. Mr. Wallace is responsible for coverage of banks and thrifts primarily located in the Mid-Atlantic and Southeast. Previously, he was an assistant vice president at FBR Capital Markets, where he assisted in the coverage of primarily mid and large cap regional and super-regional banks and thrifts. Mr. Wallace began his equity research career in 2004 at BB&T Capital Markets.

A Team Approach to Growth in the Big Apple

10-18-13-Emily-Signature-Bank.pngJoseph DePaolo, president & CEO of Manhattan-based Signature Bank, a $19.7-billion asset financial institution, has what he calls a healthy paranoia when it comes to competition. In part, this paranoia extends to something all banks worry over these days—competition for clients. But potentially losing the strength of the teams his bank has managed to build is what really keeps him up at night.

“You hire colleagues that are wanted by others,’’ says DePaolo. “Because if they’re not, then you didn’t hire the right people,” says DePaolo.

He’s right to worry—to hear him tell it, Signature Bank’s team-based approach has driven a lot of the bank’s growth, from a mere $50 million in assets at its founding in 2001 to close to $20 billion today. But the management and board of Signature Bank possess an exceptional ability to recruit and retain great teams that bring a good book of business with them to the bank—and keep it.

Signature Bank has a “very unique model and in conjunction with that, they’re executing the model in one of the strongest markets on the East coast and maybe in fact the country,” says Joe Fenech, managing director in equity research at investment banking firm Sandler O’Neill + Partners L.P. “They established a strategy several years ago, where the middle market wasn’t being served all that well, which is hard to believe in an area like Manhattan,” he says. Signature was able to take advantage of dislocation in the industry to attract strong, experienced teams from big banks. Many members of top management worked with DePaolo at Republic National Bank, which was sold to HSBC in 1999. Signature Bank continues to add on, acquiring seven new teams in the first half of 2013 from big banks like Citibank and HSBC.

While some banks have seen growth through acquisition, “we’ve done it organically by hiring the best people, clearly taking advantage of acquisitions that have occurred” in the industry, says DePaolo.

Signature’s teams are responsible for bringing in new business and keeping it. “The day you bring in a client, it’s your client. Twelve years later, if the client is still here, you participate in the revenue,” says DePaolo. “That’s something that simply doesn’t happen at other institutions.” Since many institutions pass the client on from the originating banker to another team that services the relationship, he says that these bankers don’t have a financial stake in client retention. Signature Bank focuses on client retention, and makes it worthwhile for its teams. “We’ve created an environment [in which bankers are] treated as professionals, paid for how well they do, compensated very well because we don’t have advertising, we don’t have marketing promotions, what we have is the teams going out and developing that business and getting a piece of the action,” explains DePaolo.

“[Talent] retention is phenomenal,” he says.

Signature Bank’s performance in 2012 was fueled by 42.6 percent loan growth and 20 percent growth in core deposits. It ranked fifth on Bank Director magazine’s 2013 Bank Performance Scorecard among mid-sized banks, defined as those with $5 billion and $50 billion in assets. The ranking is based on profitability, asset quality and capital strength.

Commercial real estate lending is an important piece of Signature Bank’s loan portfolio, growing to $8.3 billion as of the second quarter. DePaolo credits much of this growth to the 2007 hire of a team focused on commercial real estate from North Fork Bank, which is now part of McLean, Virginia-based Capital One Financial Corp.

Fenech says that another driver of recent growth for Signature Bank has come with the addition of a specialty finance team in April 2012 comprised of 50 members, many of them poached from Capital One’s financing and leasing subsidiary. This team is the foundation for Signature Financial, LLC, a specialty finance company based in Melville, New York. “That really opened up a new door for them in terms of opportunities for growth,” says Fenech.

While strong growth in lending brought on by high performing teams is a key part of Signature’s success, DePaolo says Signature Bank has “always been an institution that thinks about deposits first.” Deposits grew 20 percent in 2012, to $14.1 billion, and as of June 30, 2013, each Signature team averaged $175.7 million in deposits, according to SNL Financial.

“Anybody can do a loan, but not everybody can bring in a deposit,” says DePaolo. “When you’re building the bank for the depositor, you run the bank in a very different way in terms of risk.” He credits the bank’s five consecutive years of record earnings to this focus on deposits, which he says the bank has been able to grow despite competitive pressures from multi-trillion dollar competitors in the New York City market. Core deposits fund loan growth, and he says Signature must show depositors that the bank will “keep high capital levels and that [the] risk profile will be fairly transparent.” Depositors must be able to sleep well at night, despite keeping their money at a bank that is relatively small for its market.

With the teams Signature Bank has in place, DePaolo expects 2014 to bring more of the same steady growth. Signature had planned for the addition of four new teams of employees in 2013; they exceeded this goal and hired seven instead, most recently adding an asset-based lending team in September. DePaolo says there is room for more growth, and sees opportunities to bring on more teams, perhaps even before the close of 2013.