Lending is a competitive business. While there are many good lenders, there are fewer good lenders that are superior salespeople in banking. We know one of the best that we reported on back in 2014 and thought we would update his production and techniques.
Over the weekend, Berkshire Hathaway released our (and everyone’s) favorite shareholder letter that never fails to serve as a World Class education in the high-art of capitalism.
Earlier this week (HERE), we covered the how the Growth Efficiency Ratio (GER) can be used to analyze how efficiently a bank can grow. We highlighted an aspect of the efficiency ratio that while it is descriptive as to how a bank’s overhead compares to its revenue, a bank could stop or slow growth to improve its efficiency ratio.
Most community banks are eagerly anticipating rising interest rates. The banking industry has historically fared well when interest rates rise, and banks’ cost of funding lags - net interest margin expands and banks’ profitability increases. However, in this particular rate cycle, there are a few unusual industry and market developments that community banks must consider. From analysis shown below, and anecdotal discussion with CFOs and CEOs, banks must be mindful of their strategic and balance sheet positioning for the next few years.
As we have said in the past, you have to “buy” growth past the normal expansion in the marketplace. If your regional economy, as measured by production, is growing at 5%, then to achieve growth beyond that you need to “purchase” the incremental business with marketing dollars, sales effort, and risk. Growth doesn’t come free. We have taken this concept to the next level and utilize the “Growth Efficiency Ratio” in addition to the “Growth Efficiency Differential Ratio” for looking at potential M&A transactions.
We get asked about best practices tips about building a better bank brand. Where banks go wrong is that they confuse marketing with branding. Advertising, creating a slogan, buying radio time and having new shirts for the branch staff is all about marketing. While it helps support the brand, it should not be confused with the brand. While there are lots of ways to create a remarkable bank brand, one of the simplest is to set out to start a cult - A cult of a bank.
The Three Elements of A Cult
Compared to larger lenders, community banks have faced significant challenges in generating non-interest income.
Happy Valentine’s Day! At the risk of being cheesy, since you are a customer, a reader or hopefully both, we do want to take this moment and express our love for you and your support. We meant to run in a post back in December about how effective Valentine’s Day cards can be for both retail and corporate customers, but we will do this in the fourth quarter of this year in order to set up for next year. Until then, we want to give you today’s gift of knowledge to improve your internal decision-making process.
When it comes to creating value through digital channels, online and mobile bill pay is one of the best products to do that. Marketing dollars spent on targeting new customer acquisition or bill pay routinely produces return on investment (ROI) of over 55%. Getting a customer on bill pay means a customer is almost two-thirds less likely to defect. This dramatically improves a customer’s lifetime value by increasing their lifespan as a customer.
In some of our presentations, we show a five-year performance chart (below). No matter what time period we choose, there are always more banks that underperform than over perform. Further, banks consistently produce under their cost of capital. For example, at present, return on equity performance is about 9.3% or the average bank. However, for the average bank, their cost of capital is between 9% and 12% depending on the bank’s equity liquidity. Why is that? One answer is that banks have the wrong strategic horizon.
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