Brother Tripp and I were waxing poetic in the breakfast nook of a Courtyard Marriott the other night, sipping plastic goblets of top notch merlot and spinning fascinating yarns of banking, bank technology and our latest origami projects. Livin’ large. Bright lights, big city. That’s how Tripp and I roll.
Clearly with the free vino going straight to his head, Tripp goes off on another one of his rants about the 7-11 financial services kiosks. (Watch for them in almost unused condition on an eBay auction soon!!) So, to silence ol’ Tripp I had to bust out with one of my favorite stories of niche-focused success in the banking world – State Farm Bank (SFB.)
I gave State Farm Bank some highly coveted GonzoBanker pub over four years ago, with a focus on the then-upstart’s uniquely unabashed willingness to SELL and its chosen strategy that gave it a chance to thrive in a pecuniary pond full of drowning Internet-only banks. At the time, SFB was a scant $1.8 billion in assets and seriously in the red.
Time to follow up on one of my favorites and see how things are going. SFB is a great representative of the “affiliated” (with an insurance or brokerage company) national thrifts that are growing more popular than the Hate booth at a Minuteman rally:
Growth – Since early 2002, SFB has mushroomed to more than $12.2 billion in assets – an annual growth rate of 75 percent! Compare that to 13 percent for $5 billion+ thrifts and just over 4 percent for mid-size banks over the same period. Just for comparison’s sake, the median 12/31/05 asset size for de novo institutions that were established in 1999 (when SFB started) is $140 million.
Lending – Loan generation has not been nearly as problematic as many expected. According to State Farm’s annual report, SFB originated $1.9 billion in auto loans in 2005 and now boasts a $7.4 billion loan portfolio with a respectable 82 percent loan to deposit ratio. (Large thrifts now sport a semi-terrifying 139 percent LTD ratio, and mid-size banks come in at a more sober 92 percent.)
Auto loans now represent 36 percent of SFB’s loan portfolio, with 43 percent in first mortgages, 15 percent in home equity loans and a smattering of credit cards and other loans.
Accounts and Cross-Selling – SFB has amassed 1.4 million accounts in seven years. That’s right in the neighborhood of 200,000 net new accounts per year! (I did that calculation on the fly – all in my head, baby.) And keep in mind that State Farm corporate has nearly 76 million policies and accounts from which to chum, court and cross-sell. I can just picture those State Farm agents drooling on their stacks of free calendars over this opportunity to sell. ABC, baby!
Technology – One thing I really, really like about SFB is its steadfast lending focus on what it insures – cars and homes. It has some other accounts, but the numbers above show how focused a lender SFB is. With online loan applications and remote closings commonplace now, SFB really does not need to use technology to reinforce this focus.
However, on the deposit side, SFB wants the relatively service-free CD relationship. SFB offers checking accounts and other deposit accounts, but the easy, cheap-to-service CD is clearly what SFB prefers. SFB uses technology, and in some cases the lack thereof, to reinforce its preferences:
o The system is usable, but it’s not particularly user friendly, and it’s not pretty.
o It only allows balance transfers across SFB accounts.
o Users need to plan on a five-day float window to get bills paid on time.Of course, none of these online banking shortcomings is much of an issue for a CD holder, but the lack of advanced functionality just might shoo away a prospective checking account – probably on purpose.
Earnings – SFB continues to post sub-peer earnings. However, it’s fairly clear to me that, given its rate policies and limited (niched) product line, this operation does not have heavy duty profitability as Job 1 for now. Rather, the bank is in heavy growth mode and is being positioned as a value-add to State Farm’s massive insurance customer base. However, SFB’s earnings still significantly trail even its historically lackluster thrift peers. Some basic peer comparisons follow:
|
SFB |
$5B+ Thrifts |
$10B+ Banks |
|
| ROA |
0.19% |
1.22% |
1.31% |
| ROE |
2.29% |
10.90% |
13.07% |
| Net Interest Margin |
2.36% |
2.98% |
3.40% |
| Non-Interest Incomee / Earning Assets |
0.90% |
1.37% |
3.40% |
| Overhead / Earning Assets |
2.36% |
2.38% |
3.71% |
| Efficiency |
72% |
54% |
56% |
| Earnings Assets / Total Assets |
96.5% |
92.0% |
84.8% |
Even with overhead virtually in check, SFB trails its thrift peers by about 1.00 percent in ROA. More than half of that deficiency is explained by interest margin – an almost entirely CD-funded shop paired with a below peer LTD ratio. The remainder of the shortfall is low fee income caused mainly by the relative lack of fee-heavy DDAs and commercial loans.
SFB has room to improve earnings, but its high growth model is not going to allow the bank to be a high performer any time soon. Then again, try to find another bank that is even close to profitable while undergoing four years of 75 percent annual growth…For a different perspective, the median 12/31/05 ROE and ROA for 1999’s crop of de novos is 10.03 percent and 0.92 percent, respectively.
SFB is just one of many emerging affiliated thrifts that are popping up and growing like weeds. Some other affiliated national thrifts that should have already caught your eye if not your imagination:
These affiliated, Internet-only banks are absolutely thumping their non-affiliated Internet bank counterparts. A couple of the latter group that are still alive include:
Add to that list the myriad non-affiliated Internet-only players that have either failed outright, closed, been acquired, fizzled into thin air or otherwise underperformed versus expectations: G&L Bank, Wingspan, Claritybank.com, Security First Network Bank, etc. With few exceptions, only the affiliated Internet banks have found a way to succeed.
SFB (and its affiliated thrift counterparts) have some serious built-in advantages and disadvantages given their parents and business plans. They have tallied phenomenal growth, but have missed traditional earnings measures. State Farm Bank is one to watch from the perspective of what can be done with laser-beam focus, unashamed sales drive, niche-driven strategic planning and execution, and spending ONLY to support the niche. State Farm Bank does not get caught up in the technology or strategy of the week. SFB’s managers have probably never even read Good to Great. They thrive happily inside their $12 billion box.
Will SFB and the other affiliated thrifts hit respectable profitability in traditional banking terms – ROA, ROE, etc.? Maybe someday when they shed their growth mode, but I suspect that’s not #1 on their to-do list, or even in their Top 5 for now. They’re profitably adding value to an already fiercely loyal client base. Keep an eye on them. They’re not attracting the fear-based attention from their competitors that Wal-Mart is getting, but they probably should be. According to the Insurance Information Institute, the top five affiliated thrifts have quietly and quickly amassed more than $100 billion of our industry. Oof dah.
Respek.
-smh