10 Ways Banks Can Grow in 2012


water-grass.jpgIt’s old news that banks are operating with fewer avenues for growth than in years past,  and it’s no surprise that bankers are scrambling for new ways to make up for this lost growth. In doing so, however, bankers need a smart and focused strategy to make the most out of the opportunities available. In a recent report,  “Top 10 Ways Banks Can Grow in 2012,” Grant Thornton LLP comes up with a priority list for growth in the current financial environment.

1. Focus Strategic Plan on Growth

Strategic plans should not be viewed as simply a regulatory requirement, but as a valuable instrument in the assessment, and often continual reassessment, of goals. Grant Thornton writes, “Now that many companies are shifting from survival mode to seizing opportunities in an improving economy, banks should develop and modify their 2012 strategic plans with a renewed focus on growth objectives.” This includes examining whether you are properly incentivizing your growth goals with employees, taking a new look at where you should and shouldn’t be cutting expenditures in your marketing, and rethinking previous decisions about which products are most relevant to today’s market.

2. Examine an Acquisition

While there are many current roadblocks to a successful M&A transaction, ranging from new regulations to uncertainty about future pricing, M&A is still considered a popular avenue for growth. Before incorporating an acquisition into the growth plan, however, banks need to consider post-acquisition issues.

 Aside from preparing for the complex accounting and financial aspects of an acquisition, directors need to be prepared for potential cultural conflicts. “Communication and leadership are probably the most important prerequisites for a successful integration. It’s critical that there be transparent communication between the acquirer and the acquired entity, so that important cultural issues, such the composition of the combined institution’s senior leadership team, are handled in a timely manner,” says Grant Thornton.

3. Implement Smart Tax Strategies and Structures

Banks need to ensure their tax strategies are taking advantage of all new federal benefits, as well as being up-to-date with state and local rules that cover their operating area. “Incentive credits that apply to banks should be implemented in all applicable jurisdictions. Federal benefits from credits (e.g. new market tax credits, energy credits, low-income housing tax credits) and bonus depreciation should be analyzed,” says Grant Thornton.

4. Develop New Service Offerings

Banks should consider adding new services to their existing line-up, as well as maximizing the potential of the services they already have. In terms of maximizing current potential, bankers should increase cross-selling to their established clients and determine which services need a renewed focus after being pushed aside during the downturn. 

For new areas of growth, bankers should consider teaming up with other entities that can help them expand services such as brokerage and financial planning. At the same time, they should consider participating in quality loans that are recently becoming available through other institutions trying to increase capital ratios.

5. Make Technology Work for You and Your Customers

Putting money into new technology expenditures may be hard to stomach for banks during a downturn, but it also may be necessary if their competitors are making those same investments. Grant Thornton suggests supplying tablets or iPads to your field staff which can be used to personalize customer marketing materials and complete loan applications remotely.  Grant Thornton also recommends considering a switch to cloud computing services—after first evaluating the inherent risks—if you haven’t already. “Cloud computing offers a number of distinct advantages over its predecessors, including a more efficient and cost effective use of internal resources, greater speed to deployment, lower operating and capital costs, and higher performance,” says the report. 

6. Send the Right Message with Social Media

Larger financial institutions, and even many smaller ones, are interacting with their customers in new and creative ways across a wide spectrum of social media platforms. Whether it is to bolster public image or to spread information about new products and services, social media offers an inexpensive way to communicate directly with clients.

“Social media provides the opportunity for banks to demonstrate their commitment to corporate social responsibility and help regain confidence from their customers and the public after being largely maligned during the recession,” says Grant Thornton. 

Banks should be cautious, however, as such open communication is a two-way street, and it can be difficult to control negative feedback. In addition, social media provides an avenue for both fraud and privacy breaches, and this risk should be examined as part of any social media plan. 

7. Ready Your Bank for Risk

All banks prepare for risk, but banks should take the extra step of incorporating an enterprise risk management (ERM) approach that fits each organization’s individual needs and objectives. “(ERM) is an approach to assessing and addressing the full risk profile of the bank, including strategic risks such as operational, financial, regulatory, credit and market risks. The assessment process allows all parties to fully understand the impact of major new initiatives across the bank, and enables clear, strategic decision-making,” says Grant Thornton.

8. Understand Regulations

Keeping up and complying with new regulations can be a difficult task given the recent influx of rules stemming from the Dodd-Frank Act and the formation of the Consumer Financial Protection Bureau, but no bank wants to find themselves in noncompliance. Fortunately, as long as the bank’s overall risk management approach is sound and the most potentially costly regulations are given special attention (i.e. the Fair Lending Act, the Unfair or Deceptive Acts or Practices program, and the Bank Secrecy Act) then banks can still see growth while staying compliant. 

9. Plan for the Worst-Case Scenario: Stress Testing

While recently made mandatory for some of the nation’s top banks, stress testing can be a valuable tool to any bank wanting to fully understand potential risks and prepare its growth plans accordingly. “Continual stress testing should be relevant to the bank’s specific portfolios, balance sheet and customer base. Stress testing should cover: asset concentration and credit quality; contagion risk, such as exposure to European debt; and capital structure and availability,” says Grant Thornton. By understanding possible future risks and building contingency plans, banks can more confidently and strategically take advantage of growth opportunities.  

10. Build a Stronger Foundation for Mortgage Lending

Despite potential roadblocks stemming from recent mortgage reform, banks should still consider growing mortgage banking efforts in areas where there is still a large or expanding market. 

“The recent improvement in housing starts and sales of existing homes indicate that there is still a large market for home mortgages.  If properly managed, a new or expanded mortgage banking effort could be very profitable,” says the report.  

Aside from home mortgages, banks should also take a look at new growth sectors in commercial real estate such as apartments, which look promising due to a high number of rental customers and a relatively low number of new apartments being built in the past few years. 

The full article can be accessed on Grant Thornton’s web site.

The Loan Conundrum


Steve-Trager.jpgSteve Trager is president and CEO of Republic Bancorp, Inc., a Louisville, Kentucky-based, $3.1 billion-asset publicly traded company with 43 bank branches in Kentucky, Florida, Indiana and Ohio. Despite the crummy economic environment, poor loan demand and high regulatory demands, Republic Bancorp has maintained high profitability; even with half its loans in residential mortgages, and most of the rest in commercial real estate, construction, business and consumer loans.

Republic Bancorp had the second and third highest return on average assets and return on average equity last year, and the fifth best performance overall in Bank Director magazine’s ranking of the top 150 banking companies in the nation.

To be sure, the bank has experienced problems, too.  Its non-performing assets are 1.28 percent of total loans as of the second quarter, a decline from previous quarters, and it took a $2 million charge in second quarter earnings over a civil penalty from the Federal Deposit Insurance Corp. relating to its IRS tax refund anticipation loan service.  (The company says it will contest the fine before an administrative law judge and will work to make sure its tax firm clients comply with applicable banking regulations).

Trager talked to Bank Director recently about how he’s handling the challenges of the current regulatory and economic environment.

Can you talk about what sort of lending you do?

The challenge for us in residential mortgages is we compete with a government product that is a 15- and 30-year fixed rate at 3.5 percent for 15 years and 30 years at 4.25 percent and only the government would make a 15- or 30-year fixed rate loan at those kind of rates, with that kind of interest-rate risk. We are proud to be able to offer that government product to our customers as well and we service that product as a competitive edge. Every single one of our products is delivered by a Republic Bank banker as opposed to a broker and that is competitive difference for us. We sell those (government-backed) loans on the secondary market so we don’t keep them on our books.

So what kind of residential mortgages do you keep in your portfolio?

There’s an expanding universe of people who aren’t able to comply with the government’s rigid requirements. Some of those requirements don’t reflect credit quality. Some folks are very capable with good debt service characteristics, low loan-to-value. They might want to buy a condo and the secondary market is very difficult for condos.

We would love to expand our offering to an even bigger group of customers who are very credit worthy, if we could get a little better pricing. The biggest risk today is regulatory risk. The mortgages we do, the rates we do, and whom we make them to, is just subject to so much scrutiny, that we can’t take a chance to expand our portfolio credit offering to those who need it.

Didn’t your $2.2 billion loan portfolio grow a little bit in the second quarter, by 2 percent?

Absolutely, (it grew) by about $50 million. That was a little bit more than half commercial and some residential. I think customers see Republic Bank and our financial health as a stable, long-term option.

We’re still in the market for residential mortgages because we have enough size and enough volume. The risks are so great that it has pushed a lot of other lenders out of the market. Any mortgage loan we make, we’ve got to gather tons of fields of demographic information, for thousands of loans per year. It frustrates customers.

Have you loosened your underwriting standards recently?

We have not. Our underwriting standards have remained relatively stable over the last five years. I do worry that in this market, where there is not much loan demand and a lot of banks in desperate need of loans that that’s a dynamic that might cause some to stretch their underwriting models. We’re never going to sacrifice the long-term viability of Republic Bank or our customers for short-term gain.

Your focus has been maintaining a highly profitable bank. You saw profits rise 50 percent in the first half of the year compared to the same time a year ago to $80 million. How?

I think it’s a combination of the stability that our core bank provides. We haven’t been haunted by credit quality. We have had good demand from both the deposit and loan side. It’s just trying to do the right thing over and over again for a long period of time, and having the right people do it. We’ve got 780 associates and they do a spectacular job.

We also have niche businesses that supplement our bottom line. We are the largest provider of electronic tax refunds in the country. We service folks like Jackson Hewitt, Liberty and other tax services around the country, processing electronic refunds for their customer base. A small percentage of the customers would like to get an advance on their refund within 24 or 36 hours. That represented about 700,000 of our four million tax refund customers in the first quarter.  For the rest, when the IRS pays it, we make sure our customers get it quickly.

What advice do you have for other bankers in this difficult time to grow lending?

Go out and encourage and support a good lending staff. Get out and pound the pavement. Our lending staff is very incentivized to do that. Their incentives are tied to loan quality. Part of their annual bonus is determined by production and delinquency. We are fortunate enough to have had a lot of folks who have been with us for a long period of time, and that helps.

What Falling Home Prices Mean for Banks


skydive.jpgThe most recent S&P/Case-Shiller Home Price Indices declined 4.2 percent in the first quarter of 2011 on top of an earlier 3.6 percent drop in the fourth quarter of 2010. “Nationally, home prices are back to their mid-2002 levels,” according to the report.

If you are a connoisseur of home price data—and the countless expert predictions since the market’s collapse in 2007—you know that the housing market should have bottomed out by now and been well into its long awaited recovery. There was a slight rebound in housing prices in 2009 and 2010 due to the Federal Housing Tax Credit for first-time homebuyers, but that rally pretty much died when the program expired on Dec. 31, 2009. Now, housing prices are falling again like a skydiver without a parachute.

Recently I called Ed Seifried, Ph.D., who is professor emeritus of economics and business at Lafayette College and a partner in the consulting firm Seifried & Brew LLC in Allentown, Pennsylvania, to talk about the depressed housing market and its impact on the banking industry. Seifried is well known in banking circles and was a keynote speaker a few years ago at our Acquire or Be Acquired conference.

“We’re pretty close to a structural change in housing,” Seifried says. You, me and just about everyone else (including, apparently, former Federal Reserve Chairman Alan Greenspan) was taught that home prices always go up—sometimes by the rate of inflation, sometimes more—which made it a pretty safe investment. “That dream has pretty much been shattered,” Seifried continues. “The Twitter generation is looking at the European (housing) model, which is smaller and more efficient. Your home shouldn’t be a statement of your wealth.”

A broad shift in housing preferences could have important long-term implications for the U.S. economy, since housing has been one of our economy’s engines of growth for decades. What is absolutely certain today is that a depressed housing market is hurting the economy’s recovery after the Great Recession, and that has broad implications for the banking industry.

A depressed housing market translates into a depressed mortgage origination industry, which has significant implications for the country’s four largest banks—Bank of America, J.P. Morgan Chase, Citigroup and Wells Fargo—which have built giant origination platforms that might never again churn out the outsized profits they once did. In fact, I wouldn’t be surprised to eventually see one or two of them get out of the home mortgage business if Seifried’s structural change thesis is correct.

Community banks that lent heavily to the home construction industry during the housing boom are either out of business or linger on life support. But even those institutions that did not originate a lot of home mortgages, or lent heavily to home builders or bought lots of mortgage-backed securities are being hurt because housing’s problems have become the economy’s problems.

In a recent article, Seifried points out that for the last 50 years housing has contributed between 4 and 5 percent of the nation’s GNP. In the 2004-2006 period, that contribution rose to 6.1 percent.  In 2010, housing accounted for just 2.2 percent of GDP—and dropped to 2.2 percent in the early part of 2011. Seifried also estimates that the housing market accounts for 15-20 percent of all U.S. jobs when “construction and its peripheral impacts are weighed.”

“It’s difficult to imagine an overall economic recovery that can generate sufficient jobs to return the U.S. economy to full employment without a return of housing to its historical share of GDP,” he writes.

In our interview, Seifried told me of a recent conversation he had with a bank CEO who thought his institution was reasonably well insulated from the housing market’s collapse because it had made relatively few construction loans. But that bank still experienced higher than expected loan losses because of all the other businesses it had lent to that ended by being hurt by the housing downturn.

Indeed, virtually no bank in the country is immune to the housing woes because banks—even very good and very careful ones—require a healthy economy to thrive. The U.S. economy needs a strong and growing housing market to thrive, and that doesn’t seem to be anywhere on the horizon.