Bank Director | Strategic Growth Archives

Fueling Future Growth

Posted on September 24, 2018 at 1:48 pm.

Over the past year and a half, there’s been a lot of good news for the banking industry. New regulators have been appointed who are more industry-friendly. Congress managed to not only pass tax reform, but also long-awaited regulatory relief for the nation’s banks. And the economy appears to remain on track, exceeding 4 percent gross domestic product (GDP) growth in the second quarter of 2018, according to the Bureau of Economic Analysis.

Bank Director’s 2018 Compensation Survey, sponsored by Compensation Advisors, a member of Meyer-Chatfield Group, finds that the challenges faced by the nation’s banks may have diminished, but they haven’t disappeared, either.

Small business owners are more optimistic than they’ve been in a decade, according to the second quarter 2018 Wells Fargo/Gallup Small Business Index survey. This should fuel loan demand as business owners seek to invest in and grow their enterprises. In turn, this creates even more competition for commercial lenders—already a hot commodity given their unique skill set, knowledge base and connections in the community. Technological innovation means that bank staff—and boards—need new skills to face the digital era. These innovations bring risk, in the form of cybercrime, that keep bankers—and bank regulators—up at night.

For key positions in areas like commercial lending and technology, “banks have to spend more,” says Flynt Gallagher, president of Compensation Advisors. “You have to pay top dollar.”

But a solid economy with a low unemployment rate—dropping to 3.8 percent in May, the lowest rate the U.S. has seen in more than 18 years—means that banks are facing a more competitive environment for the talent they need to sustain future strategic growth.

And regulatory relief doesn’t mean regulatory-free: With the legacy of the financial crisis, along with the challenges of facing economic, strategic and competitive threats, all of which are keeping boards busy, there’s more resting on the collective shoulders of bank directors than ever before, and boards will need new skill sets and perspectives to shepherd their organizations forward.

For more on these considerations, read the white paper.

To view the full results to the survey, click here.

Need to Grow? Try Data

Posted on October 3, 2016 at 7:57 am.

Written by mbiery

To survive, a plant at a minimum needs soil, sunlight and water.

Plants that grow better than others have usually received fertilizer on a regular basis. Think of the vegetable garden that produces bushels of produce throughout the summer.

Farms that produce commercial volumes utilize all of these resources, but they also have someone directing strategy based on a big-picture view including weather forecasts, equipment maintenance needs, field reports on pests, research on future risks to the crop, etc.

Banks, too, can subsist on the basics: good staff, products that meet the market’s current needs and essential data about the customer or operations. These financial institutions may be able to get by without analyzing the tons of data in their systems. Other banks may “fertilize” their growth by analyzing some of their data to shape product development or efficiency processes.

However, even at these institutions, a common factor stunting growth is disconnectedness between analysts, teams and departments when it comes to day-to-day operational or regulatory information. Just as the data is siloed, so is the insight and communication, making it challenging to provide either top-down or bottom-up strategy reviews. When people from multiple departments try to piece together data from multiple systems, it can be nearly impossible to glean actionable insight for outpacing current and future competitors. This quandary is magnified at top management levels, where executives must balance strategic objectives and pressures without a data-driven big picture.

Indeed, bank CEOs, directors, chief information officers and chief technology officers responding to Bank Director’s 2016 Technology Survey recently overwhelmingly indicated their institutions are plagued by the inability to effectively use data.

Financial institutions using data over the life of a loan are better able to manage and direct the big picture, shaping institutional strategy for superior growth. They can help determine not only where the institution has been making money, but also where it can expect to make money, how it can maximize profits and how it can minimize risk.

For example, at an ill-equipped institution, loan pricing decisions may be based only on competitive information. While comparability of terms is important to borrowers, it can also lead the institution into a disadvantageous relationship—one that could lose money for the institution. However, at an institution using a life-of-loan system, the loan officer would have an accurate measure of risk and overall profitability of the relationship, providing the loan officer with a range of acceptable terms that still ensure the bank meets its targets. When decisions aren’t made in a vacuum or from a single lender’s spreadsheet, the bank benefits from better decisions, and when better decisions happen across the commercial portfolio, the institution wins.

In addition to pricing, an integrated solution streamlines and automates much of the:

loan origination process
credit analysis
loan approval
loan administration and
portfolio risk management.

Connecting the data throughout the entire loan process allows bankers, underwriters and risk management professionals to communicate better and more efficiently. These systems also tend to unify employees with diverse skills into a more cohesive unit while building in a layer of awareness and appreciation for the full life of the loan.

All of this enables the financial institution to make better lending decisions based on relationship profitability and strategic goals, and it makes it easier for management to make informed decisions that ensure outperformance—even in an environment where interest rates and loan demand remain low and compliance risks are high.

In short, an integrated solution addresses the three greatest business concerns cited in Bank Director’s Technology Survey: regulatory compliance, becoming more efficient and competition from other banks.

The intersection of insight provided through an integrated solution not only creates more opportunity to develop an effective strategy, it can also guide the strategy. It gives bank management the ability to pivot, and the knowledge of where best to pivot to, so that the institution can focus its investments, development and sales efforts on the right areas for growth. In this way, the financial institution can flourish, rather than simply survive.

Want to learn more about integrated banking solutions? Sageworks has a free guide for bank executives.

The Little Bank That Could

Posted on September 23, 2016 at 1:54 pm.

Written by Naomi Snyder

Soon after Josh Rowland’s family bought Lead Bank in Garden City, Kansas, in 2005, the small financial institution felt the full impact of the financial crisis. The loan portfolio was in bad shape. Several employees lost their jobs. The entire experience lead to a lot of soul searching.

“It was really existential,’’ Vice Chairman Rowland says. “What do we survive for? What’s the point of a community bank? The situation was that dire. We had to really decide whether we should give it up.”

After much discussion, the family decided to hire Bill Bryant as the chief executive officer to help clean up the bank, now with $164 million in assets, and really focus on its niche: small business owners. A lot of community banks say they are serving small business owners, but Lead Bank decided to go a step further. In 2011, it launched a business advisory division for the purpose of coaching small business owners on cash flows, provide part-time or interim chief financial officers, and advice on strategic planning and even mergers and acquisitions. Rowland says a lot of small businesses could use advisory services, especially if they can’t afford to hire a full-time CFO. Lead Business Advisors has senior managing director Patrick Chesterman, a former energy executive for a large propane company and Jacquie Ward, a trainee analyst. The bank overall made a profit of $500,000 in the first six months of the year and saw assets grow 30 percent in the last year and a half, according to Federal Deposit Insurance Corp. data.

But the investment in advisory services is not a quick payback. Rowland says the division is not profitable yet. The challenges include marketing the program to a business community more accustomed to relying on trusted accountants or lawyers for such advice. Banks naturally have a lot of financial information and expertise, but they fail to provide it to their clients. “We ought to be figuring out every possible way to deliver that kind of financial expertise to Main Street business,” he says.

The tactic is an unusual one for community banks, which might have a wealth management division but not a business advisory division per se. And it’s expensive. Baker Boyer, a $571 million bank in Walla Walla, Washington, has been offering business advisory services as part of its wealth management division for years. But it has taken some 15 years to restructure the bank to offer such services, says Mark Kajita, president and chief executive officer. The average personnel expense per employee for the bank is roughly $80,000 annually with six lawyers on staff and the bank’s efficiency ratio is 73 percent, higher than the peer average of 66 percent.

However, the bank made $2.5 million in profits during the first half of 2016, with half of that coming from the wealth and business advisory division. Kajita says what made it possible was the fact that the bank is family owned and can invest in the long term without worrying about reporting quarterly financial results to pubic shareholders.

“Community banks of that size have a real need to create a niche,’’ says Jim McAlpin, a partner at Bryan Cave in Atlanta who advises banks. “Historically, community banks have been focused on the small businesses of America, and to offer services to those small businesses is a great strategy.”

Joel Pruis, a senior director at Cornerstone Advisors in Phoenix, says banks have done themselves a disservice by relinquishing advisory services to CPAs and attorneys. “In terms of empowering lenders, in terms of providing more advice, we definitely need more of that,’’ he says. “Bankers need to be seen as a resource and an expert in the financial arena instead of just application takers.”

For Rowland, rethinking the role of the community bank is fundamental to its survival. “I don’t know how we expect to keep doing the same things and expect different results,’’ he says. People don’t feel their bank is adding any value for them, he says. “If that’s our industry’s problem that we haven’t given them an experience, that’s our fault,’’ Rowland says. “We have taught them over years and years that our services are so cheap, they ought to be free.”

Finding New Sources of Growth Takes Leadership

Posted on May 25, 2016 at 9:50 am.

Written by JP Nicols

The Office of the Comptroller of the Currency has some very good advice in its publication, The Directors Book: “Sound financial performance means more than simply how much the bank earned last quarter. Equally important is the quality of earnings over the long term.”

This has always been challenging for bank leaders because of the inherent cyclicality of interest rates and the overall economy. Now, additional challenges have emerged from the relatively new phenomenon of fintech startups that provide competitive alternatives for every bank product and service. The average time spent at the top of any industry, whether a bank, or a company in the Fortune 500, is getting shorter and shorter. Yesterday’s top performers are soon long forgotten, and today’s leaders are already watching out for tomorrow’s darlings in their rearview mirror.

How is that some companies seem to defy the gravitational pull of these forces? How do some companies always find new ways to keep the growth engine going? How do they transition their company’s focus from low growth products to high growth products? One of the most important roles of boards and executive management is the effective allocation of resources—financial resources, human resources, managerial attention—and the best leaders allocate resources not to optimize for current returns, but for the long run.

Kodak was not suddenly surprised by the invention of digital photography; they were one of its key pioneers. So why did they end up being a poster child for an industry leader disrupted by new upstarts? In the final analysis, they didn’t adequately shift enough of the company’s resources away from the dying celluloid film business to the nascent digital photography business. When they did, it was too little, too late.

Direct examples like this are harder to find in banking—and the lessons harder to learn—because banks never really die, they just get absorbed by stronger performers. “Lack of innovation” is never listed as a cause of death in banking, but there is an unmistakable commonality among the industry leaders today—they are all investing resources in new products and services, and many of them are technology-driven.

A huge part of Steve Jobs’ lasting legacy is how he focused Apple’s resources away from the less profitable sectors of PCs and peripherals to create new products at the right times to capture market share in the growing categories of digital music, smartphones and tablets. It remains to be seen if Tim Cook can do it again in smartwatches, in-home entertainment, or even the Apple Car, but innovation is a valued and expected act of leadership in the company’s culture.

Bank customers today are increasingly comfortable with the value those technologies provide, and they expect their bank to keep up with their growing expectations. That takes a leadership team that invests in new ideas, but it goes beyond technology.

Whether those new ideas are created from the front lines, in an internal innovation lab, or through partnerships with external entrepreneurs, they only become valuable when they are implemented. That takes a leader willing to dedicate the right resources—and that usually means directing them from something else—in order create new sources of value for the company.

Beyond M&A: Staying Relevant Through Innovation & Transformation

Posted on April 7, 2016 at 4:01 am.

Written by Bank Director Staff Writer

Banks of all sizes are facing a fiercely competitive environment, reduced interest margins and regulation. While many in the industry are leveraging acquisitions to address these pressures, some are thinking outside the box. In his presentation at Bank Director’s 2016 Acquire or Be Acquired Conference, Andrew Wooten of PricewaterhouseCoopers LLP reveals how leading banks are adapting their business models, and the role technology plays in that transformation.

Highlights from this video:

Forces Shaping Banking
Fintech Landscape
Becoming Digital: Build, Buy Or Partner?

How to Safely Generate Bank Income Through SBA Loans

Posted on August 19, 2015 at 1:21 pm.

Written by Brian Carlson

Small Business Administration (SBA) lending is one of the key lending activities that can quickly and dramatically improve the bottom line of a community bank. It is not that difficult for a bank to generate $20 million in SBA loans, which will earn the institution between $1.0 to $1.2 million in pretax net income, if the loan guarantees are sold. Some bankers get concerned because they have heard stories of the SBA denying loan guarantees and that the SBA loan process is too time consuming and complex.

Sourcing SBA Loans
The basic strategies that most successful SBA lenders use to source SBA loans are as follows:

Hire an experienced SBA Business Development Officer (BDO), who can find loans that fit your credit parameters and geography.
Source loans from brokers or businesses that specialize in finding SBA loans.
Utilize a call center to target SBA borrowers.
Train your existing staff to identify and market to SBA loan prospects.

I have put these in the order of which approach is likely to be the most successful. However, ultimately it is the speed of execution that enables one lender to beat out another in the SBA business. So if you want to hire that high producing SBA BDO, the bank needs to have a clear idea of the types of credits that they will approve and a process that can quickly get them approved.

This can create a catch 22 for the lender, since in order to justify hiring SBA underwriters and processing personnel, you have to make sure that you generate loans. But in order to recruit those top performing SBA BDOs, you will need to show them that you have a way of getting their loans closed quickly.

The most effective solution for solving these problems is to hire a quality SBA Lender Service Provider (LSP). This is the quickest way to add an experienced SBA back shop that will warranty its work and handle the loan eligibility determination, underwriting, processing, closing, loan sale and servicing. This gives the bank a variable cost solution, and allows them to have personnel to process 100s of loans per year. While some of the better LSPs will help the lender with the underwriting of the loan, it is solely the bank that makes the credit approval decision. SBA outsourcing is very cost effective and allows a bank to begin participating and making money with these programs immediately, even if they only do a few loans.

Making a Profit
Let us look at the bank’s profits from a $1.0 million SBA 7(a) loan that is priced at prime plus 2.0 percent with a 25-year term.

Loan amount	$1,000,000
Guaranteed portion	$ 750,000
Unguaranteed portion	$ 250,000
Gain on the sale of the SBA guaranteed portion	$ 90,000	(12% net 14% gross)
Net interest income(5.25%-0.75% COF = 4.5%)	$ 11,250	(NII on $250,000)
Servicing Income ($750,000 X 1.0%)	$ 7,500
Total gross income	$ 108,750

Loan acquisition cost (assumed to be 2.5%)	$25,000	(BDO comp, etc.)
Outsource cost (approximately 2.0%)	$ 20,000	(per SBA guidelines)
Annual servicing cost (assumed to be 0.50%)	$ 5,000
Loan loss provision (2.0% of $250,000)	$ 5,000
Total expenses	$ 55,000
Net pretax income	$ 53,750
ROE ($53,750/$25,000 risk based capital)	215%
ROA ($53,750/$250,000)	21.5%

In this example the bank made a $1.0 million SBA loan and sold the $750,000 guaranteed piece and made a $90,000 gain on sale. The bank earned $11,250 of net interest income on the $250,000 unguaranteed piece of that loan that the bank retained. When an SBA guaranty is sold, the investor buys it at a 1.0 percent discount, so the lender earns a 1.0 percent ongoing fee on the guaranteed piece of the loan for the life of the loan. This example did not account for the amortization of the loan through the year.

I believe that the expenses are self explanatory, but you can see if the bank made $20 million of SBA loans using these assumptions, they would earn $1.075 million in the first year.

Conclusion
As you can see, SBA lending can add a substantial additional income stream to your bank; however, you need a certain amount of loan production and a high quality staff, or you need an SBA outsource solution to underwrite and process the loans. As you can see, the ROE and ROA for SBA loans is much higher than conventional financing, which is why you see community banks that have an SBA focus generate higher returns.

Saving Money as Part of Due Diligence

Posted on August 18, 2015 at 12:03 pm.

Written by ckellar

As acquisitions continue to play a major role in financial institutions’ strategic growth plans, management teams and boards are under increasing pressure to deliver results—with minimal surprises. Though due diligence often is seen as a necessary evil to completing a transaction, it can help identify opportunities to drive profitability and assess integration hurdles so an acquirer effectively can plan for and mitigate the risk of an unsuccessful integration.

Cost savings often are touted as a primary driver of acquisitions in banking. Many public filings show that estimated cost savings of a target’s expense structure run north of 25 percent. Preliminary cost estimates that are provided by management or investment advisers often are based on high level analysis prior to a letter of intent (LOI) being signed. Once an LOI is signed, due diligence should be performed to verify the extent, timing, and operational effects of the proposed cost savings as these are critical to recognizing the value in many acquisitions. Cost saving estimates should be continually adjusted throughout the due diligence process as new facts come to light.

Following are three areas of significant cost saving estimates and examples of how thinking through integration objectives throughout the due diligence process will help eliminate surprises.

Back Office Consolidation
Significant cost savings can be realized through back office consolidation. Consolidating back office operations can get delayed, however, due to vendor backlogs for conversion or de-conversion of data. Product mapping issues also might delay moving from one core processor to another. Such delays can have significant impact on the returns analysis as the savings are delayed and two operating structures remain for extended periods of time. While it might not be possible to fully address all factors that can potentially affect the integration, reviewing product mapping and starting the system conversion timeline discussions during due diligence will provide insights into timing and possible roadblocks.
Branch Rationalization
Eliminating branch overlap or consolidating unprofitable locations can be a source of cost savings. A branch profitability analysis can identify the product usage, transaction activity, and relationship value and should be performed during due diligence. However, the costs associated with exiting facilities as well as operational drag must be considered. Acquisition accounting requires recognizing the assets and liabilities at fair value upon the change in control, and operational costs to exit or restructure a bank generally are represented through the acquirer’s income statement post-combination.
Vendor Management
While combining core processing systems are a given for cost savings, comprehensive vendor management cost savings often are overlooked in the initial transaction value proposition. Again, considering integration while performing due diligence can help executive teams concentrate vendors across the combined organization. Thinking in terms of pricing power, service level expectations, integration support, and breadth of service, acquisitions often set the stage for new conversations with vendors. Taking the time during due diligence to analyze the future stable of vendors to eliminate overlap or consolidate platforms can be a significant value driver. Analyzing vendors early on allows acquirers to execute formal vendor selection processes shortly after the transaction announcement and realize cost savings soon after legal closing.

Best Practices to Follow
Here are best practice recommendations for achieving targeted cost savings:

Each cost savings assumption should be championed or assigned to a cost savings owner.
The cost savings owner should help establish the initial savings estimate and timeline to recognize cost savings during due diligence.
The cost savings owner should be able to affect the integration plan to achieve the cost savings objective.
The integration vision should be defined during due diligence to accomplish the cost savings.
Cost savings estimates should be revisited throughout the due diligence process to adjust for one time costs identified and for revisions to the plan.

This article originally appeared in Bank Director digital magazine’s Growth issue. Download the digital magazine app here.

Lessons Learned from Proven Growth Performers

Posted on June 12, 2014 at 10:53 am.

Written by ktweddle

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.

M&A Case Study: How Selling For Less Created More Value

Posted on March 21, 2013 at 3:31 pm.

Written by Bank Director Staff Writer

Selling for a premium is not the only strategy. Kevin Hanigan, CEO of ViewPoint Financial, and C.K. Lee, managing director at Commerce Street Capital, describe the creative strategy behind their 2012 M&A transaction in Texas that solved a management succession problem at ViewPoint and provided liquidity for Highlands shareholders.

Video Length: 45 minutes

Highlights include:

The problem facing the board at Highlands Bancshares Inc.
Thinking outside the box – three growth options to weigh
Key lessons learned from the deal

About The Presenters:

Kevin Hanigan is president and CEO of ViewPoint Financial Group, Inc. and ViewPoint Bank, positions he has held since completion of the merger of Highlands Banchares, Inc. Prior to ViewPoint, Mr. Hanigan was the chairman and CEO of Highlands Bancshares. His experience in Texas banking spans three decades and includes numerous leadership and management roles.

C. K. Lee is a managing director in the financial institutions group, capital markets division of Commerce Street Capital, LLC. In that capacity, Mr. Lee assists financial institution clients with M&A, capital raising, balance sheet restructuring, business plan development and regulatory matters. In addition, he provides regulatory advisory support to the private equity fund management team. Prior to joining Commerce Street in June 2010, Mr. Lee was regional director for Office of Thrift Supervision’s (OTS) Western region headquartered in Dallas, with offices in Seattle, San Francisco and Los Angeles.