Berkshire Hathaway’s annual shareholder letter is out and unlike that blue/black/white/gold dress (we really have no idea what color that dress is) meme, this letter is clearly in the color of packed insights and business lessons for all. We read all 42 pages of this 50th anniversary letter and boiled down the most important insights plus added analysis for your consideration.
Banker To Banker
One of the biggest assets a bank has goes untapped in probably 95% of banks. Everyday term sheets are produced on loans, customer problems are handled and new ideas arise. Unfortunately, management hasn’t put a system in place, and because bankers are busy it is hard to carve out 20 minutes to share their experience and knowledge with their co-workers. As a result, the collective knowledge of a bank is vastly underutilized and solutions to current problems take longer, cost more and produce higher opportunity cost.
If you want an eye-opening experience, at your next bank board meeting ask your board three questions: 1) What is your bank’s long-term strategy; 2) What is the current value proposition; and 3) What are the major changes that are currently taking place in the banking industry? Chances are you will be disappointed. Your bank is not alone, as we routinely ask the above questions to bank boards during strategic planning sessions all across the country and find the answers lacking.
In loan pricing and structuring, our loan trading and hedging desk often sees dozens of loans per day. We look at loans from banks all across the nation, including our own, and one area that could be improved is the quantification of lease risk in commercial real estate. Unfortunately, there is not an industry accepted methodology for quantifying the risk, but we would like to start to put forward a couple metrics.
In the quest for greater profitability, one strategy that we are employing here at CenterState Bank is the move to be less transactional and more relationship based products. While lots of banks say they are about the relationship, few banks can point to anything more concrete other than delivering “the personal touch.” Having good people and an accessible CEO is just the price of entry for relationship banking. True relationship banking requires products, process, culture and marketing in order to capture the hearts, minds and wallet of the customer.
As many of you heard, Charles Barkley got into a verbal battle with the General Manager for the Houston Rockets, Daryl Morey, last week. The money quote was Sir Charles’ Luddite-like statement that Morey is “one of those idiots who believes in analytics.” Part of that is Charles being Charles, but part of that is the all-too-common fear of the unknown and fear of anything new. Barkley should know that 75% of the NBA teams not only believe in analytics but have full-time statisticians on staff.
For many banks, loan structuring is a one size fits all effort. Like Henry Ford said about the Model T –Customer can have any color they would like in the car as long as it was black, banks say that their value proposition is service, yet offer few choices when it comes to loan structuring. The reality is, to best match the risk position of the borrower, banks first need to understand a borrower’s asset-liability position and then structure the loan in such a way as to mitigate a variety of risks including credit, liquidity and interest rate.
The war of corporate banking is being fought over cash management. Unfortunately, many community banks are at a disadvantage because they're under-armed. Most of the deficiency stems from strategy as it is rare we hear of a bank where building out their cash management offerings is a priority. That is a mistake, as dollar-for-dollar expanding your corporate cash management suite is one of the best investments you can make given its high return.
Sometimes here at CenterState, we feel like hamsters - $25mm of loans go on our balance sheet in a month and $20mm runs off. Of course, most all of those loans don’t have prepayment protection so the result may be our own doing. When banks originate a loan without a prepayment penalty or yield maintenance provision they are giving away economic value to the borrower – on average 7.2% of total loan value to be exact. For a $1.5mm loan, that is like giving the borrower a new Tesla P85D complete with “Insane” mode.