The Biggest Changes in Banking Since 1993

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acquire-1-25-19.pngWhen Bank Director hosted its first Acquire or Be Acquired Conference 25 years ago, Whitney Houston’s “I Will Always Love You” held the top spot on Billboard’s Top 40 chart.

Boston Celtics legend, Larry Bird, was about to retire.

Readers flocked to bookstores for the latest New York Times best seller: “The Bridges of Madison County.”

Bill Clinton had just been sworn in as president of the United States.

And the internet wasn’t yet on the public radar, nor was Sarbanes Oxley, the financial crisis, the Dodd-Frank Act, Occupy Wall Street or the #MeToo movement.

It was 1993, and buzzwords like “digital transformation” were more intriguing to science-fiction fans than to officers and directors at financial institutions.

My, how times have changed.

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When we introduced Acquire or Be Acquired to bank CEOs and leadership teams a quarter century ago, there were nearly 11,000 banks in the country. Federal laws prohibited interstate banking at the time, leaving it up to the states to decide if a bank holding company in one state would be allowed to acquire a bank in another state. And commercial and investment banks were still largely kept separate.

Today, there are fewer than half as many commercial banks—of the 10 banks with the largest markets caps in 1993, only five still exist as independent entities.

It’s not only the number of banks that has changed, either; the competitive dynamics of our industry have changed, too.

Three banks are so big that they’re prohibited from buying other banks. These behemoths—JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp.—each control more than 10 percent of total domestic deposits.

Some people see this as an evolutionary process, where the biggest and strongest players consume the weakest, painting a pessimistic, Darwinian picture of the industry.

Yet, this past year was the most profitable for banks in history.

Net income in the industry reached a record level in 2018, thanks to rising interest rates and the corporate tax cut.

Profitability benchmarks in place since the 1950s had to be raised. Return on assets jumped from 1 percent to 1.2 percent, return on equity climbed from 10 percent to 12 percent.

Nonetheless, ominous threats remain on the horizon, some drawing ever nearer.

  • Interest rates are rising, which could spark a recession and influence the allocation of deposits between big and little banks.
  • Digital banking is here. Three quarters of Bank of America’s deposits are completed digitally, with roughly the same percentage of mortgage applications at U.S. Bancorp completed on mobile devices.
  • Innovation will only accelerate, as banks continue investing in technology initiatives.
  • Credit quality is pristine now, but the cycle will turn. We are, after all, 40 quarters into what is now the second-longest economic expansion in U.S. history.
  • Consolidation will continue, though no one knows at what rate.

But it shouldn’t be lost that certain things haven’t changed. Chief among these is the fact that bankers and the institutions they run remain at the center of our communities, fueling this great country’s growth.

That’s why it’s been such an honor for us to host this prestigious event each year for the past quarter century.

For those joining us at the JW Marriott Desert Ridge outside Phoenix, Arizona, you’re in for a three-day treat. Can’t make it? Don’t despair: We intend to share updates from the conference via BankDirector.com and over social media platforms, including Twitter and LinkedIn, where we’ll be using the hashtag #AOBA19.

Keeping Pace with Wages After Corporate Tax Cuts

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compensation-4-12-18.pngSince the reduction of the corporate tax rate from 35 to 21 percent, 64 banks nationwide have raised their minimum salaries to $15 per hour or given bonuses that range from $500-1,500, or both.

This number has increased by 50 percent since Jan. 1. Some have increased their 401(k) matching contributions. Some have made significant donations to nonprofit organizations in their communities.

Companies in the market at-large with whom financial institutions often compete for frontline talent are increasing their starting wage. For example, Target has announced it will raise its salaries to $15 per hour by 2020. Apple has announced it will reinvest $350 billion and add 20,000 jobs in the U.S. over the next five years. Companies with freed up capital are investing in the war for talent and in their communities.

All of this has caused concern for community banks and credit unions as they wrestle with whether they should follow suit and raise pay to $15 an hour. Here are our suggestions:

  • Know the market rate for wages. This requires examining external data and internal equity by a professional who is not bound to internal politics and long-term relationships between incumbents. You may need a midpoint that is 10 percent above the market as a competitive advantage.
  • Have a compensation philosophy and salary administration guidelines. Audit against those standards for consistency. If the next administration reduces the tax advantage, you would not need a knee-jerk reaction to adjust.
  • Don’t overpay for inexperienced new hires. We strongly recommend new employees with little or no background receive a starting salary of approximately 85 percent of the midpoint for most jobs and 90 percent of midpoint for “hot jobs.”
  • Develop a salary increase process that ensures that pay levels are getting to their midpoint in a reasonable period of time. Non-exempt employees with three years of experience in their job would have a pay level at 100 percent of the midpoint. Exempt employees with five years of experience in their job would get to their midpoint in five years. (This is where most salary administration programs fall down.)
  • Pay for Performance. The average salary increase differential by performance is 2 percent. If the difference between a high performer and an average performer is 1 percent, you are not differentiating the salary increase significantly enough to “pay for performance.”

When I review the pay levels of clients that have contacted us about an appropriate response to the market, it is easily to determine they were inconsistently applying their own salary administration guidelines. This should have been an obvious step even before the tax cut incented companies to offer more competitive pay.

If your competitive advantage is your people, then the war for talent is growing more heated. Have a well thought out compensation plan. Get out of the guessing game. Live up to your plan consistently. Update your salary ranges annually. Reevaluate and commit to your compensation strategies.

Optimistic About Loans But Worried About Deposits

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risk-3-5-18.pngThere are a lot of reasons why Greg Steffens is confident about the economy. As the president and CEO of $1.8 billion asset Southern Missouri Bancorp, which is headquartered in the southern Missouri town of Poplar Bluff, he sees that consumers are more confident, wages are growing, most corporations and individuals just got a tax break, and the White House announced a major infrastructure funding plan.

Steffens projects that a strong local economy will help Southern Missouri to grow loans by 8 to 10 percent this year. But he sees the potential for net interest margin compression as well, particularly because competition for loans and deposits has gotten so tight.

His thoughts about the future, a mixture of optimism and concern, are typical of bankers these days as shown by Promontory Interfinancial Network’s latest Bank Executive Business Outlook Survey. Although bankers report higher funding costs and increased competition for deposits, their optimism about the future has improved, and economic conditions for their banks are better now than they were a year ago.

Top-Lines-Q4-2017-long-version.pngAlong with a generally improving national economy and improvements in the banking sector, the passage of the Tax Cuts and Jobs Act shortly before the survey was taken likely influenced the increase in optimism among many bankers. The emailed survey, conducted from Jan. 16 through Jan. 30, included responses from bank CEOs, presidents and chief financial officers from more than 370 banks.

Some highlights include:

  • Sixty-three percent say economic conditions have improved compared to a year ago, while 5 percent say things have gotten worse, compared to 49 percent last quarter who said conditions improved and 9 percent who said things had gotten worse.
  • Slightly more than 58 percent report a recent increase in loan demand, up 7.5 percentage points from last quarter.
  • Bankers think the future will be even better with 64 percent projecting an increase in loan demand in 2018, compared to just 51.2 percent who projected annual loan growth in the fourth quarter 2017 survey.
  • The Bank Confidence IndexSM, which measures forward-looking projections about access to capital, loan demand, funding costs and deposit competition, improved by 2.4 percentage points from last quarter to 50.5, the highest rating for the index since the second quarter of 2016.
  • Regionally, the highest percentage of bankers expecting loan growth is from the South at 71.9 percent. But the biggest improvement in expectations for loan growth is in the Northeast, which climbed 27.1 percentage points from last quarter to 64.1 percent expecting loan growth in 2018.

Charlie Funk, the president and CEO of MidwestOne Financial Group, a $3.2 billion asset banking company in Iowa City, Iowa, says he expects the tax cuts will lead to higher commercial loan growth, although he hasn’t seen evidence of that yet.

He’s worried now about another factor on his balance sheet: deposit competition. “Deposits are going to be where the major battles are fought,’’ he says. The bank already is paying some large corporate depositors more than 1 percent APR on money market accounts, compared to 30 basis points just after the financial crisis. He expects the bank’s net interest margin to narrow somewhat this year as deposit costs increase faster than loan yields.

Other bankers report higher levels of deposit competition as well. In the Promontory Interfinancial Network survey, 80 percent of respondents expect competition for deposits to increase during the year, compared to 77.4 percent who thought so last quarter. The overwhelming majority have seen higher funding costs this year at 78.1 percent, compared to 68.4 percent last quarter who experienced higher funding costs. Nearly 89 percent of respondents expect funding costs to increase this year.

Representatives from larger community banks, with $1 billion to $10 billion in assets, were more likely to say funding costs will increase. The Northeast had the highest percentage of respondents saying funding costs will moderately or significantly increase, at 92.3 percent.

One of those Northeastern banks is Souderton, Pennsylvania-based Univest Corp. of Pennsylvania. With $4.6 billion in assets and a 100 percent loan-to-deposit ratio, the highly competitive deposit market is putting pressure on the bank to match loan growth with deposits. Univest Senior Executive Vice President and Chief Financial Officer Roger Deacon says funding costs have inched up, partly driven by competition for deposits. “The competition is almost as high on the deposit side as on the loan side,’’ he says.

The good news is that the bank is asset sensitive, meaning that when rates rise, its loans are expected to reprice faster than its deposits. “I’m cautiously optimistic about the impact of rising rates on our business,’’ Deacon says.

Capitalizing on Good Times

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With a strong economy, a corporate tax cut and more sympathetic regulators in Washington, banks have a lot to look forward to in 2018. But don’t confuse brains with a bull market—or a tax cut, says Tom Brown of Second Curve Capital. Happy days may be here again, but banks can’t afford to be complacent. In this interview with Steve Williams, a principal at Cornerstone Advisors, Brown offers four tips for CEOs looking to invest their bank’s expected tax windfall back into the business.

  • The Need To Transform
  • How CEOs Should Focus Their Attention