Asset Based Lending
Chief Investment Officer
Commercial Loan Automation
differentiators in our industry? absolutely!
HEROES, GOATS AND TRUE CONFESSIONS
I recently heard of an excellent idea to facilitate candor, early warning signs and timely recognition, all great things that are challenging to achieve in most organizations. My friend Roger DiSalvatore, a commercial lending business executive with MidFirst Bank, calls it the Heroes, Goats and True Confessions agenda item that is placed on every staff meeting he holds. During this time Roger gets to recognize the heroes of the period, folks who excelled in a special way, very often days after their victory. Such timely recognition is much more powerful than stale congratulations months after the fact, especially when they are placed before peers. In addition, staff members share their goats and true confessions, often led by Roger himself, talking candidly about mistakes made that should never be repeated, or deals done that should not have been done. Leading by example, Roger has created an atmosphere where candor is rewarded and recognized, and, with it, early warning is most welcome. Lenders have grown accustomed to being the first to blow the whistle on a credit going south, well before it becomes troubled, thereby helping the bank and the borrower work out critical issues before they become emergencies.
One of the toughest things to achieve in an organization is candor, especially when one's own mistakes are at stake. Following the Heroes, Goats and True Confessions model will help you get there, but only if you don't chop the goats' heads off, and be the first one to sacrifice yours at the meeting's altar.
Also, I received an interesting comment from Greg Landsdowne, CFO of American Chartered in Chicago, on my Transfer Pricing article: "We just put a matched funding system into place. We struggled with some of these same questions and ultimately came up with a methodology we're happy with. We settled on using more-or-less spot rates for our non-maturity deposits... We felt spot rates, often criticized for their volatility, actually represent the real market conditions most fully... A moving average seems slower to "tell the truth" about our pricing and profitability and makes our decisions less informed. As far as deposit funding producing losses, we chose to establish a transfer pricing at a point (over wholesale funding) where we feel that is somewhat unlikely to happen, and that works to address your third point: there is much more value in deposits than simply the rate advantage over wholesale funding."
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The article below outlines my observations on banks that have done a good job of focusing themselves and clearly articulating their strategy and desired market position. Focus led to highly effective execution and that, in turn, to great total shareholder returns. As always, your comments and further insights would be hugely appreciated!
Differentiators in Our Industry? Absolutely!
Analysts and industry members alike have behaved for ages as if we are in a monolithic business where differentiation is both unlikely and unrewarded. I'd like to challenge both assumptions by describing some of the differentiators in our business today who are winning both top P/Es (if they are publicly traded) and current income, consistently outperforming others in our industry.
Consider the banks below:
SEGMENT FOCUS + OPEN GEOGRAPHY. Boston Private (MA) and Private Bancorp (IL) are examples of two companies that have practiced laser-sharp market focus. Both cater almost exclusively to the affluent marketplace in every activity they perform, from marketing to branch design and product line. Both companies perfected the execution of their unique business model in their home market, and achieved excellent growth and solid profitability in the process. The infrastructure included outstanding competencies in catering to their target market, including stronger investment management and product line for wealthy customers than most banks in their asset size. They then took the same strategy, buoyed by the special infrastructure and capabilities they built, and implemented it elsewhere, in geographies that are not contingent to their home turf, with great success. Uncharacteristically, this time the large centralized capability was effectively leveraged across assets elsewhere (whereas so often we see huge infrastructures go nowhere fast). In addition, both banks protected the local franchises they bought, often without compromising their strong local brand identity, thereby truly making the whole greater than the sum of the parts.
SEGMENT FOCUS + BOUND GEOGRAPHY. CVB (CA) and CoBiz (CO) are two banks that have concentrated on the small and middle market segments. They have done so both by intent and in practice, capturing disproportionately high market share in their specific geographies by marshalling their entire resource base toward one specific segment in a narrowly defined geography. They have both been tremendously successful, in part due to superb execution, in part due to excellent market selection (both banks serve hyper-growth markets). While management is considering migrating the strategy elsewhere (a-la Boston Private and Private Bancorp), their local effectiveness is undisputable as they continue to garner market share and grow rapidly without sacrificing current income.
GEOGRAPHIC DOMINANCE + GRAZING ON BOTCHED ACQUISITIONS. Mercantile of MI and Macatawa Bank of MI are two banks among seven start-up banks that were chartered in the Michigan market 5-7 years ago after the Michigan National Bank, Old Kent and First Michigan Bank's acquisitions. Five of the seven start-ups have already grazed $1 billion in assets, but Mercantile and Macatawa have led the way in focus, execution and clear culture and philosophy. As a result, both banks have grown faster than their peers, continue to be very profitable and exhibit high growth rates that go beyond the initial boost they received from market dislocation. Bring in the right place at the right time can help initially any bank, but consistency can only be achieved with effective execution, clear vision and other elements that go beyond customers' first impressions. Both banks have managed to retain customers well beyond industry averages both on the commercial and retail sides, and continue to expand share of wallet while building business with new customers every day.
HIGHLY DECENTRALIZED + ACQUISITIONS WITHOUT COST SAVES. Glacier (MT) and Mercantile (MD) are two banks that have been acquiring other institutions for years, often without paying outlandish premiums. They have done so, in part, due to their philosophy of little or no cost saves for out-of-market acquisitions, or, in Glacier's case, even in-market acquisitions. As a result, both companies have been buying banks at reasonable multiples and haven't missed a beat in integration, including minimal customer attrition. Both companies foster a revenue-driven model that works, and trade off deal pricing and higher revenue persistency and growth for lower cost saves. Due to strong leadership and discipline, both have avoided building large holding company structures that unnecessarily burden the member banks. The structure also facilitates consistency of performance by utilizing this portfolio approach to the member banks, such that as one falters others pick up the pace to truly optimize the franchise.
PERFECTING AGGREGATION. MB Financial and Sky Financial have both figured out how to acquire companies and integrate them without causing customer or employee dislocation, yet while changing the signs on the doors, consolidating the brand and bringing about some cost efficiencies. This is a balance that is extremely difficult to strike, since employee layoffs following the deal and brand changes often lead to high customer and employee attrition, lower-than-expected revenues, little revenue growth and short term expense saves that quickly refill to their original levels and more (highly reminiscent of any crash diet
). Both companies' CEOs are not only great leaders but also good dealmakers who create value to both the seller and the buyer through an effective integration process and certain non-negotiable elements that make it work under a variety of circumstances. Both have exemplified the theory that strong companies can choose their path any day, be it toward selling the franchise or continuing to grow it, since they manage in a going-concern mode day in and day out, creating value for all constituencies - shareholders, employees and customers - while becoming more attractive themselves with every passing deal.
RAPID, QUALITY ORGANIC GROWTH. This strategy appears to be an oxymoron: can you achieve high organic growth without any acquisitions and not compromise credit quality, especially when you are a strong lender? Texas Capital has shown that it is possible, although even this bank isn't beyond the periodic credit bites that all good institutions have experienced. This bank, wisely located in Houston, has grown through recruiting successful lender teams in market and growing the loan portfolio while resisting the strong temptation to go up-market and achieve growth through taking larger chunks of risk. While these results may not persist, since management needs to continue exercising prudence in its credit policies in order to maintain this stellar growth without penalizing shareholders, they are indicative of what IS possible when one hires the right people, sticks to their knitting and doesn't yield to temptation to make a quarter by mortgaging the future.
MAXIMIZING LOW GROWTH MARKETS. Not all banks have been destined to grow in Florida, Texas and California. Some, like City Holdings, is headquartered in West Virginia, or, like Chittenden, is based in Vermont (while growing by acquisitions in higher growth markets), and Bank of the Ozarks is located, well, in the Ozark. Nonetheless, these banks have successfully achieved organic growth in their markets by snatching share from competitors while perfecting execution, nipping at their cost structures and maintaining strong discipline as they manage the basics across the board. Neither bank has exciting go-go businesses, nor have they broken new grounds in product development, distribution or segment identification. They simply continue to tirelessly work on execution, expecting to get better and improve their business out of their core markets. While so many other bankers I know moan about their markets (too competitive; too pricy; full of market kamikazes; no growth), these institutions are prime examples of making a silk purse out of sub-optimal circumstances.
I hope you'll find the companies described so briefly above inspiring. I did. None of them is a huge innovator. They all adopted strategies that we have seen before, and often passed on due to poor execution by others. These banks demonstrate yet again that it's all about execution and doing, and little about strategizing. It's about the laser-like focus which is so hard to adopt and maintain, and to aligning products, people and process to make that focus and drive a reality. These differentiators demonstrate that such execution CAN be done in any market.