The Secrets of High Performing Community Banks. ICBA Community Banking Live March 16, 2018

Transcription

1 The Secrets of High Performing Community Banks ICBA Community Banking Live March 16, 2018

2 Greg Dingens EVP & Head of Investment Banking Monroe Financial Partners, Inc. Presenters Shawn O Brien President QwickRate Leads Monroe boutique investment banking firm serving community banks 25 years with CSFB, Merrill Lynch and Lehman Brothers Partner, Siena Capital Partners I, L.P. - $350 MM investment fund investing in community banks Leads overall strategy at QwickRate Partner, Monroe Financial Partners Co-founder, QwickAnalytics Director, National Bank of St. Anne Co-Founder - QwickAnalytics

3 What is a Community Bank? What is High Performing? Examine Hard Performance Data around Community Banks: What Are the Secrets? 3

4 What is a Community Bank? QCBI follows 2012 FDIC Study on Defining a Community Bank QCBI = QwickAnalytics Community Bank Index

5 What is a Community Bank?

6 High Performing : Bottom Line Capitalism: over the long run, capital will DEMAND acceptable returns Not just survive, but thrive: performance matters to long term viability Unavoidable Objective: earn a sufficient Return On Equity to continue to earn the capital of the owners Compared to OTHER INVESTMENT opportunities, not just other banks Banks, even community banks, compete for capital 6

7 Pop Quiz: Median U.S. ROE? All U.S QCBI banks only Taxaffected S- Corps Source: QwickAnalytics

8 Banking Cost of Capital? CAPM Model Current Normalized 30 Yr T-Bond at 3/1/ % 5.00% Equity Risk Premium 5.50% 5.50% Duff & Phelps Expected Equity Return 8.64% 10.50% Risk Premium for Size/Liquidity 3.67% 3.67% Duff & Phelps Equity Cost of Capital 12.31% 14.17% Banking Industry Risk Factor 2.00% 2.00% Subjective Equity Cost of Capital 14.31% 16.17%

9 But ROE is Noisy Performance Building Blocks Market ROA Business Plan Deposits Pricing Branch Asset Mix ROE People Capital Leverage Capital Plan Simple(r) Decision / Execution 9

10 But ROA Can Also Be Noisy Performance Building Blocks Market ROA Business Plan Deposits Pricing Branch Asset Mix People Tax variations S-Corp Other unusual items (e.g. 4 th quarter) Credit cost fluctuations 10

11 Best Yardstick: COE / Assets Net Interest Income Core Operating Earnings (a.k.a. Pre-Tax Pre-Provision, enhanced) Core Non-Interest Income Core Non-Interest Expense Core Operating Earnings Excludes: Securities G/L OREO Costs Excludes: Goodwill Write-offs 11 COE / Assets= The Ultimate Common Size Tool!

12 Two Masters: Return vs Safety Return / Profitability Safety / Soundness Management

13 Safety & Soundness: Critical to Generating Return! One bad loan = years of profits Banks DO NOT GET PAID FOR RISK UNLESS very well underwritten, documented and managed Safety / Soundness

14 Safety & Soundness: Critical to Generating Return! NCOs 2007Y 2008Y 2009Y 2010Y 2011Y 2012Y 2013Y 2014Y 2015Y 2016Y 2017Y Under $1BB $1BB-$10BB Over $10BB Credit Crisis Recovery? % of public banks with TBV/share LOWER than 2007? 21-33%

15 Safety & Soundness: Current Data = Canaries & Cushions Real risk locked in during underwriting years ago! Canary Warnings: Past Dues & NPAs Cushions: Capital Loan Loss Reserve Safety / Soundness

16 Today s Study / Analysis Focus Credit Quality = Operating Earnings

17 Core Operating Earnings Return / Profitability Core = Earnings Operating Fund Losses Drive Returns

18 Community Bank Top 5% Performers 18

19 Top 5% Performers: Results COE / Assets (%) PT ROA (%) Top Rest Top Rest 5% 95% 5% 95% 90th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile Average Average Source: QwickAnalytics Top 5% = 266 banks The Rest (Other 95%) = 5,056 banks

20 Top 5% Performers: Metrics NIM (%) Efficiency Ratio (%) NII / Assets (%) Top Rest Top Rest Top Rest 5% 95% 5% 95% 5% 95% 90th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile th Percentile Average Average Average Source: QwickAnalytics

21 Top 5% Performers: Size Bank Size Distribution Top 5% The Rest % Total Assets # % # % Diff. Under $100 MM % 1, % (5.59%) $100MM-$250MM % 1, % (4.84%) $250MM-$500MM % 1, % 1.61% $500MM-$1BB % % 4.32% $1BB-$5BB % % 3.56% $5BB-$50BB % % 0.95% Total % 5, % Average Assets $ 664,816 $ 506,154 Median Assets $ 276,624 $ 201,321 Source: QwickAnalytics

22 Top 5% Performers: States Distribution by State Source: QwickAnalytics Top 5% The Rest State # % # % Diff. TX % % 2.77% OK % % 6.27% CA % % 4.43% MN % % (0.40%) IL % % (3.96%) GA % % 1.01% WI % % (0.12%) IA % % (2.24%) KS % % (1.29%) LA % % 1.17% MO % % (1.64%) NE % % 0.12% % 14 States with No Top 5% banks: PA,WV,WA,CT,NM,WY,VT,DE,AK,HI, DC,GU,VI

23 Financial Posture: Book of Business Spread Income Other Revenue OH Expenses Balance Sheet Utilization Loans/Deposits Earning Assets / Assets Asset Mix Loans Investments Other Earning Assets Non-Earning Assets Asset Yields Investments Loans Key Types Funding Mix Deposits Other Funding Capital Yields & Costs Funding Costs Deposits FHLB Sub Debt Preferred Service Charges Mortgage SBA Trust Market Driven Deposit Related Other Lines of Business Opt-In Posture Drives Performance Operating Overhead Personnel Branches / Occupancy Other Overhead Operating Effectiveness Assets/Employee Revenue/Employee Net Operating Ratio Deposit/Branch Universal

24 Top 5% Performers: BS Posture Top Rest 5% 95% Difference COE / Assets % Assets 664, ,154 31% Loans / Deposits % Loan Mix 1-4 Family Resi % CRE (NFNR) % C&I % Total Comm'l % Loan Yield % Top 5% = 266 banks with highest 2017 Core Operating Earnings / Assets Deposit Mix Demand % Time % Cost of Deposits %

25 Top 5% Performers: BS Posture Top Rest 5% 95% Difference COE / Assets % Assets 664, ,154 31% Loans / Deposits % Loan Mix 1-4 Family Resi % CRE (NFNR) % C&I % Total Comm'l % The Rest: = All other 5,056 QCBI banks Loan Yield % Deposit Mix Demand % Time % Cost of Deposits %

26 Top 5% Performers: BS Posture Top Rest 5% 95% Difference COE / Assets % Assets 664, ,154 31% Loans / Deposits % Loan Mix 1-4 Family Resi % CRE (NFNR) % C&I % Total Comm'l % Loan Yield % Deposit Mix Demand % Time % Cost of Deposits % Compiled averages can be deceiving Correlation analysis can also help

27 COE Does Asset Size Matter? COE vs. Assets 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 Assets R-Squared Correlation: Not Alone! All QCBI Banks 2017; certain outliers excluded Source: QwickAnalytics

28 Does Asset Size Matter? U.S. Bank CHANGE in Size Distribution: 2007 vs Institutions Aggregated Assets Total Assets # % $MM % <$100MM (2,012) (15.58%) (96,331,007) (1.01%) $100MM-$250MM (763) 0.78% (118,011,782) (1.68%) $250MM-$500MM (103) 5.06% (38,143,340) (1.30%) $500MM-$1BB % 28,613,194 (0.96%) $1BB-$5BB % 199,897,679 (1.18%) $5BB-$50BB % 558,367,931 (1.59%) $50BB-$250BB % 1,029,829,250 (1.15%) >$250BB % 3,723,104, % Demographic trends clearly illustrate challenges! 28

29 COE Does Loan Leverage Matter? COE vs. Loans / Deposits Loans / Deposits R-Squared Correlation: A Little More All QCBI Banks 2017; certain outliers excluded Source: QwickAnalytics

30 COE Does A Commercial Book Matter? COE vs Total Commercial Loans Total Commercial Loans R-Squared Correlation: Not Really! All QCBI Banks 2017; certain outliers excluded Source: QwickAnalytics

31 COE Does A Residential Book Matter? COE vs. 1-4 Family Residential Loans Family Residential Loans R-Squared Correlation: A Little More! All QCBI Banks 2017; certain outliers excluded Source: QwickAnalytics

32 COE COE Does Deposit Mix Matter? COE vs. Demand Deposit Demand Deposit COE vs. Time Deposit Time Deposit R-Squared Correlation: Ouch! R-Squared Correlation: All QCBI Banks 2017; certain outliers excluded Source: QwickAnalytics

33 COE COE Loan Yield vs Deposit Cost? COE vs. Loan Yield COE vs. Cost of Deposits Loan Yield -8 Cost of Deposits R-Squared Correlation: Loan Yield! R-Squared Correlation: All QCBI Banks 2017; certain outliers excluded Source: QwickAnalytics

34 Top 5% Performers: Secondary Metrics Top Rest 5% 95% Difference COE / Assets % NIM % NII / Assets % NIE / Assets % Eff Ratio % Secondary Metric = Function of Book of Business Posture Pretax ROAA % Source: QwickAnalytics

35 Top 5% Performers: Secondary Metrics Top Rest 5% 95% Difference COE / Assets % NIM % NII / Assets % NIE / Assets % Eff Ratio % Pretax ROAA % Source: QwickAnalytics

36 COE Does NIM Matter? COE vs. NIM NIM R-Squared Correlation: A Lot! All QCBI Banks 2017; certain outliers excluded Source: QwickAnalytics

37 COE Does Non-Interest Income Matter? COE vs. NII / Assets NII /Assets R-Squared Correlation: No! (not in isolation) All QCBI Banks 2017; certain outliers excluded Source: QwickAnalytics

38 COE Does Non-Interest Expense Matter? COE vs. NIE / Assets NIE / Assets R-Squared Correlation: No! (not No! in isolation) All QCBI Banks 2017; certain outliers excluded Source: QwickAnalytics

39 COE Does Efficiency Ratio Matter? COE vs. Efficiency Ratio R-Squared Correlation: YES!! Efficiency Ratio All QCBI Banks 2017; certain outliers excluded Source: QwickAnalytics

40 Does Employee Efficiency Matter? Top Rest 5% 95% ($000s) COE / Assets (%) % COE / FTE $ 325 $ % Assets / FTE $ 5,848 $ 5,062 16% Salaries / FTE $ 89 $ 77 16% Obviously Pay Your People More! Premises Exp / FTE $ 13 $ 16-13% Source: QwickAnalytics

41 Top 5% Performers: NII? Top Rest 5% 95% Difference COE / Assets % NIM % NII / Assets % NIE / Assets % But still NII Seems to Matter Eff Ratio % Pretax ROAA % Source: QwickAnalytics

42 Top 5% Performers: N I I vs COE Top Top 5% 5% COE NII Difference COE / Assets % NIM % NII / Assets % NIE / Assets % Eff Ratio % Pretax ROAA % Best Recipe: Both strong Spread business + NII business 78 (or 19%) of the Top 5% COE performers were also Top 5% NII performers

43 A Word on Deposits 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% Cost of Deposits Recent low rate environment masks importance of good mix / low cost deposits 0.00% Source: FDIC Historical Banking Data

44 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% A Word on Deposits Cost of Deposits 0.00% % 45% 40% 35% 30% 25% 20% 15% 10% 5% % Time Deposits / Total Deposits 0% Elastic demand for rate-sensitive deposits: Banks that have a good mix will benefit more in rising rate environment Source: FDIC Historical Banking Data

45 An Aside: Holding Company Leverage Bank Bank HoldCo Assets $ 500,000 $ 500,000 Debt $ 15,000 Rate 4.0% Equity $ 45,000 $ 30,000 TE / TA 9.00% 6.00% Double Leverage 150% Fed Gift: leverage at the holding company >80% of banks have a BHC Magnify ROE and keep bank sub sound BHC loans: can get 5-12 year amortization and low rates 10 Year sub debt around 6%-7% Contributions into bank = equity Net Income $ 4,000 $ 3,610 ROA 0.80% 0.72% Improve ROE 8.9% 12.0% 35%

46 There Are No Secrets 1. Many Ways to Succeed And All Sizes Do 2. Balanced Offense: Spread Lending + Other Revenue 3. That Said Efficiency is King 4. Revenue Diversification Helps 5. Deposits Don t Matter (today) 6. Capitalize on Holding Company Rules

47 Thank You for Your Time! Go Forth & Be Efficient!