Tuesday, August 08, 2017
What about the Fed Balance Sheet should concern you?
I learned about supply and Demand the hard way. When I was in college, my tuition was paid by the profits of feeding Cattle in feedlots. Along comes inflation and the Nixon administration decided the best way to stop inflation is for the government to say you can’t raise prices anymore. Welcome in price controls! The price controls were in for 60 days as I remember. We had just put a very large lot of cattle into a feedlot. The futures price of feeder steers went up as ranchers held cattle off of the market. After all prices would go up after the freezes were gone, right? My dad knew what was going to happen so he asked the banker to let him sell the cattle in the futures market. The banker refused because everybody knew the price would go up more than what the futures market had gone up. Well the cattle had not been in the feedlot long enough to sell before the freeze went away and the price fell five cents a pound when the freeze expired and all the ranchers and feeders started unloading their cattle. We lost a fortune.
Thursday, January 12, 2017
I remember my first real job like it was yesterday. My boss gave me a raise and I couldn’t wait to see that next paycheck! Wow, look at all that extra money I got to take home! Well to tell the truth, it wasn’t that much extra, because 5% of not much was even less, but in those days I was rich. Everything was paid for and my share of the rent and utilities was just about $125 a month. Boy was I rich and boy was that a long time ago!
Well, the Federal Open Market Committee (FOMC) has given each of you a raise in the interest rates you charge or have they? Many bankers, I know, put in a floor in their variable rate loans when rates started getting so low. Does that sound familiar? So the prime rate will have to get to the 5.0% area before most variable rate loans become variable again. That could be over a year from now, maybe even two years. So what does that mean, you ask. That means you really didn’t get a raise even though your customers think you did and they expect you to pass that on in higher interest rates on deposits. Some of the big boys will be raising their rates, but many of them were so low to begin with, that you still can compete with them very effectively. Your staff will be getting a lot of calls right now shopping rates, so be prepared to hear from some big depositors. They want a raise too.
Thursday, June 04, 2015
When you were a kid did you pick up coke bottles to take to the store for their deposit? This practice went away many years ago except for a few states like California and Michigan. When you bought a Coke, you paid the price for the Coke plus a nickel for deposit. They collected the old bottles and reused them. You could look on the bottom and see where the bottle originally came from. It was one of my favorite memories, because I got to see where all the bottles came from and after saving up a while I got a bonus when I took them to the grocery store.
Are your employees waiting around for their bonus and then moving on to the next job or bank? Do you have more turnover in January than the rest of the year? And have you noticed it is always the one employee you really want to keep that is moving on? I have seen great employees escape right after they got their annual bonus, but I seldom see the employee you wouldn’t mind moving on give their letter of resignation especially in January! Why is this happening? Have you done this yourself? Psychologically, an employee does not want to give up that bonus that they deserve. They also want to collect on those vacation days. They don’t see anything else coming their way for another twelve months! They might as well leave now.
Tuesday, March 24, 2015
Do you remember writing papers in high school, college and maybe graduate school of banking? Do you remember that moment when you were running late with your preparations, you had about half a paper written and you just went blank? God, what a horrible feeling! Your first reaction is to panic and just figuratively run around in circles screaming. You couldn’t go to bed because the paper was due in a few hours or days! You had to keep on writing but nothing is coming out. What I ended up doing, especially with my thesis at SWGSB, Was get up and talk to someone else. See how they are doing with their paper. I am not talking about getting material for my paper, but to totally get my mind off the paper for a short while and then come back to it with a fresh eye and a new outlook. Yes, there was someone else in just as bad shape as me! Cindy and I got to do that with Anna last night. She had an economics paper due and she just went blank! We told her to go to bed and wake up early and come back at it. We gave her a few helpful ideas and she took them and ran with the ball this morning. It ended up being a great paper!
Sometimes we get that way in our bank. I know I got to that point on several loans at different times. Just like with the paper at some point you have to step back from collection efforts and get a fresh view. You need ideas from other people in the organization, especially if you have a collections group in the organization. If you are in a smaller organization, it is sometimes helpful to get some outside help with someone who specializes in that work. I am not talking about turning over the credit to a collection agency, but talk to someone who has done a lot of workout credits. This is an area where you can use contacts you have established in your banking organizations like TBA or IBAT. Or you can reach out to friends from your days at graduate banking school or loan school. Just remember no one person can have all the answers and fresh eyes can point out the obvious which has been staring you in the face, but you could not see the forest for the trees. Be careful about putting this type of required hand-off of troubled loans in a bank policy, because an examiner can turn that against you if you don’t hand-off the loan and there is a large loss. If you write it down, put it in a procedure and document in loan committee that this loan will have a variance from the procedure. That protects everybody. Just remember to report on the collection efforts regularly.
Tuesday, February 24, 2015
I can remember like it was yesterday going on my first snipe hunt. Do you remember your first snipe hunt? When asked later what a snipe looked like it was really hard to describe! A snipe defies description for everybody I know, how about you.
It seems that describing a classified loan is about as easy as describing a snipe don’t you think? What does a classified loan look like? In our previous blog, we talked about impaired loans. They are easier to describe! I can tell you that an impaired loan would almost always be a classified loan. All you have to determine is what level of classification. We have always used the traditional: Pass, Special Mention, Substandard, Doubtful and Loss. Some people also use a classification of watch which they use to denote that it is a loan they need to watch closer for a possible later classification. As watch would indicate you need to cut the time in half (or even shorter) between your internal loan reviews. You should spell out in your loan review policy how often you do these loan reviews for each classification level and dollar amount of outstanding balance.
Thursday, December 04, 2014
When I was a kid, the rules on what needed to be on the report card changed as I grew older. And as I recall my Little sister had totally different rules on her report card, but don’t get me started on that giant soapbox! It seemed like as I grew and matured (or should I more properly say got closer to a theoretical maturity) (thank you Cindy for that change), the rules became more rigid and the consequences became greater.
It seems like the regulators are doing that regularly with new requirements. As most of you are aware, the AICPA Guidance on Allowance for Loan and Lease Losses (ALLL) has changed. The regulators are working their way down the size chart on enforcing the requirement. If you have had this talk with your regulator or Auditor, you know there are two parts to the calculation. This is similar to but different than the old reserve for classified loans and the reserve for non-classified loans version which has been around for several decades. You now test loans for an impairment which is separate from a loan classification. Essentially a loan can be classified, but not impaired. Even though when you read the definition of Sub-standard, Doubtful and Loss, they seem to pretty much line-up with an impairment rating. This is an argument you can’t win with an examiner. Remember, it is their rules!
Sunday, September 07, 2014
When I was a kid, it was a big deal to go to the bank. Do you remember those days when you dressed up to go to the bank? It was usually down town. It was usually in a big imposing building with granite and marble in a time when no one had granite or marble! The banker was dressed in a three piece suit, except in the summer when the dress code was loosened to allow only a two piece suit or maybe even a blazer and dress slacks in smaller towns! The banker seemingly wielded the power second only to God! You feared the banker! Now if you are lucky, the banker is wearing khaki pants at the Walmart branch!
Back then the number of banks was still growing and the process to get a bank was a lot easier! Almost anybody could get a bank charter if they had some money, a good smile and a fairly clean criminal record. The number of commercial bank charters maxed out in the mid-80s at about 14,500, and the number of savings institutions maxed out at almost 3,700 during the same timeframe. That is a total of over 18,000 charters. The number is down to 6,730 as of March 31, 2014 and declining. There has not been a positive change in the number of charters since 1985! And the total is down by almost 63% since then.
Friday, August 01, 2014
When you were in High School did you drink a beer or two? Were you ever at a party that got raided? In our day, the cops made you pour out the beer and called your parents! Things got handled with a wink and a nod and maybe just a little compassion! Today they throw the book at you.
A friend of mine had his kid picked up the week before the kid turned 21 and the cops gave him an MIP even though he did not have a beer in his hand and had consumed only one beer over an hour before and the only proof the cop had was the kid’s admission before the cop read him his rights! The police make under-age drinking, AND drinking and driving a big deal now, not to minimize them, but law enforcement is really aggressive right now. Your regulators and Congress have declared you to be the eyes and the ears of law enforcement and they want you to follow the example of your local police in drinking violations. They want you to follow-up on everything questionable!
Saturday, July 19, 2014
When you were a kid, did you think your mom and dad were the best ever? I remember thinking my parents were the best ever except for my mother’s cooking! She thought the smoke alarm was a timer. What can I say? I learned how to cook out of self-defense! Do you have the same feeling about your bank? Is your bank the best bank money can buy? Do you think you provide the best service in your market?
Every bank, I know, says they provide the best service in their market. I have heard that over 80% of banks feel that their service is superior to other banks. Now I was a math major for a while and did well at statistics, but it seems impossible for 80% to be above average. There was something in Statistics that I recall about the average being pretty close to the 50% mark! So how can all of these banks provide superior service? Maybe some of them only think they provide superior service and their customers don’t agree!
Wednesday, June 18, 2014
When I was a kid, there was always a kid who had the latest and greatest on the playground. Whether it was new running shoes or a new top (one that spins, not one that you wear) or a new watch, I was always jealous and I wanted one, too; but my parents told me that I couldn’t have everything. Do you remember those times? More and more we look around and a neighbor has a new car or a big new grill, and we want that, too. Do you find yourself coveting a new customer that the bank across the street stole away from you or another bank? How about when you look at a UBPR and see you are below peer in interest income on your securities or below peer in Other Non-Interest Income. How many times have you said to yourself, ”I want some of that!” Maybe your bank needs every advantage that is affordable. What can you do about that?
Loan demand is not there and is not showing any sign of heading up anytime soon to help you pick up additional yield. NSF fees are a bad thing according to your regulators and are taking a lot more effort than before. Have you checked your other fees? What are your fees compared to your competition? Have you got everybody on account analysis that you should. Many banks have picked up 10 to 20% in fee income by adjusting fees or implementing account analysis. These are pretty basic fees and most people do not object to a reasonable charge. If you do get objections, I have found that these are usually customers that you needed to lose anyway.
Wednesday, May 07, 2014
When I was a kid, I swear there was a new rule on the playground every other day! You can't pull the pigtails of the girls (even the one you really secretly liked)! You can't chunk rocks at the other kids on the playground. You can't cut in line at lunch. Now days the kids can't even play cops and robbers with their fingers, (that was always my favorite)! It just seems the rules changed every day without notice!
Well, that may sound familiar at exam time! Every time the examiners show up the rules have changed! The policies and procedures you have used for years are not enough. You need three more policies and another employee to keep track of some obscure new "suggested" best practice. Is there any other industry where the government comes in and sites you for a violation of law for a suggested best practice? Congress did not write any new law for that and no new regulation is out there which would have allowed for public comment. This is strictly a recommended best procedure. This is like the appraisal that you have used for years that all of a sudden is not acceptable because they don't like your comparables or the "independent review" took the wrong factors into account. This is not a law or regulation. This is something that some bureaucrat dreamed up to increase the work load of examiners and therefore allow the agencies to build a bigger empire. Does that loan under $250,000 with an LTV south of 50% really need three or four comps and an outside review? The way I read the LAW and the REGULATION, I would say no! But, it is the regulators game and they get to make their own rules.
Monday, April 21, 2014
When I was a kid, you went down to the local bank and talked to your favorite banker to get that loan you needed. More times than not, you never filled out an application and your banker certainly didn't go get a credit score. You shook hands over the deal until you needed the money and then signed a one page "note" which probably was a note envelope which held copies of the transactions and had a posting ledger sheet on the back. Do you remember those days? If you don't you are much younger than me or you grew up in a big city with big banks!
Those big banks had "real notes" and loan specialists who analyzed your loan application. Like it or not, that is the reality of modern banking, but that's not what I want to talk to you about today. You may have heard in the news lately that the 18 largest banks are going to have to raise additional capital to meet the latest Basel Capital Standards. Some people in government are talking about changing that or not honoring those standards, but I think ultimately the big banks will have to meet higher capital standards. Have you looked at their leverage capital numbers recently? Your examination team would skin you alive if you had leverage capital ratios like they have historically shown. But I guess the examiners operated on the theory that they were much more diversified and didn't need as large a capital base and besides they were too large to fail.
Sunday, March 23, 2014
When I was a kid, my dad brought home a piggy bank for each of us to save our pennies. I bet you had one too when you were a kid. I still love to see the little plastic pig at trade shows and at banking conventions. I guess it's that urge to get back to those simpler days of my youth. But, those days aren't coming back and things are going to only get more complicated.
A deadline is looming that may get your bank back into the piggy bank business. As of April 8, 2014, Microsoft will no longer support Windows XP. What? You don't have any PCs that still run XP? Well, have you checked those devices that don't get any attention? How about your Fedline or wire room machines that have been plodding along for years and those ATMs? How old are your ATMs? If they are still running XP, you won't have any further support for their operating system and the new vulnerabilities that pop up everyday! You see those pesky updates from Windows every month that stop new potential threats to your PC - well, they will now stop for XP. What if that threat was aimed at your ATM or Fedline? A hacker could turn those machines into their own personal piggy bank and we are not talking about pennies!
Monday, February 03, 2014
Do you need more income? What a silly question! Who doesn't need more income? I am amazed at the number of UBPRs that I look at that show banks with earning assets below 95%. I have seen some lately that were even below 90%. I am sure if I asked the CEO of these banks, they would say they were waiting on interest rates to increase. Wow! The rates will rise slowly, but it could take a while for them to start increasing. And yes, I know that fed funds are not paying very much, but other investments are available that can help you out some. I can tell you that putting that money to work for 2 to 3 years will give you return now plus if you "ladder" the bonds you will have money to put either into loans or into new higher rate bonds in the future. I have found that some of the smaller Texas Muni bonds have a decent return when compared to Treasuries or Agencies. I also have found that some seasoned Texas Muni bonds with a call date out at 2 years or less can give you a decent return until the call date and you have two potential outcomes at the call date. If the bond is called, you have money to put out at potentially higher rates or you end up with the higher coupon rate until called or matured. It is like having a step-up bond without the stigma associated with a step-up in the examiner's mind. In a potential rising rate environment, these can be very positive.
I know a lot of you are saying to your computer that you do not want to risk the loss of interest rates in the next two years because of locking in a low rate now. I know that the rates are really low, but how long have you been waiting for the rates to rise? I can tell you that I thought that the rate increases would start sooner than they have. How much have you lost over the last few years waiting for rates to increase? We have seen news several times that seemed to indicate the rates were about to start rising. And what happened? The rates started up only to fall back down. Who knows when they will the increases will hold. Quit losing that yield. Also, if you buy those callable bonds a year or two before the call, they could show a gain because of the increased yield if they are not called. You could end up with a double win. It can give you increased income now and a possible offset to some of the unavoidable unrealized losses in your existing portfolio when rates eventually rise. The key here is to keep the maturity (or call date) very short.
Wednesday, January 15, 2014
What next?
I remember as a kids going around the neighborhood collecting coke bottles to take to the store to collect the deposit. It cost a nickel to buy a Coke and a nickel deposit. Now that doesn’t sound like much today, but in the late 50s, that was a bunch of money. Then sometime in the early 60s the deposit dropped to three cents. I felt cheated and betrayed. I guess that was the bottle bubble! Well, we bankers have lived through five years of the interest rate bubble!
Monday, December 23, 2013
I can remember as a kid that it was unbearable waiting for Christmas. Time would crawl along. I knew I was going to get that new bike or the air rifle that I needed. As a child, I had a hard time differentiating between what I needed and what I wanted. Fortunately my parents knew the difference. Can we as bankers determine what we really need as opposed to what we would like to see happen.
I hear bankers (and the associations that represent them) ask for things they had to have. Everything from taxing credit unions to repeal of most of the banking laws passed in the last 30 years. Maybe we should sit down with a few key congressional leaders and talk about what the real impact of these laws on the average "community bank". We need to be sure that congressional leadership and the public understand that any additional cost HAS been and WILL continue to be passed onto the customer. When I speak to students, I always try to point out how much a bank spends complying with the multitude of laws. If we use the most obvious law which is the BSA and related add-ons, I estimate the average small community bank in Texas can spend as much as $10 to $25 per customer to comply with the BSA and KYC provisions. FINCEN cannot point to one criminal investigation originated because of CTR filings in over 40 years. They defend the collection of information and the army of regulators that collect, catalog and examine CTR filings because prosecutors and investigators have used the database for some investigations. We have no way to know who the investigations covered and how they originated or even how many, but I suspect that most of them originated because of an SAR filing. That means that the bank that filed the SAR has a file with all the information already organized. I think this would also save the government money, but then we might have to downsize the government and reduce the deficit, and we can't have that. They need more tax money and more employees to enforce the law!
Thursday, October 31, 2013
Time Cures All Ills (Well Almost)
Have you ever been really sick? Remember how weak you felt – so weak that you just thought you could never get out of bed again. The doctor gave you medicine, but it only seemed to make things worse. Your head hurt worse and your stomach felt like it was going to fall out or maybe come back up. You thought you were going to have to die to feel better. I think most of us have been there. You see the same thing in the economy and in individual banks. If you have been in banking long enough, you have seen it too!
Sunday, October 27, 2013
Do you remember the most popular kid in your high school? They probably were the head cheerleader or the quarterback. They seldom did anything really controversial. They were leaders. They got the best out of everybody usually. It was all about PR. They kept their image as the trend setter. They were the model that most people wanted to be like. Twenty years ago the local bank and the local banker were in that same position. Now, I see a different world where bankers are demonized as the ones who killed the goose that laid the golden egg or is that the golden age!
It seems to me that it is time to rally bankers to start setting the example again. I don't know about your town, but here in Big Spring everything was dominated by the bankers twenty years ago. The service clubs were full of bankers. The city boards were full of bankers. When there was a big project in town, it was a safe bet that it was headed up by a banker and other bankers were pitching in to help. When did we become "too busy" or too important to help out? Anytime we are seen out in the community helping make things better, people remember it longer than you think and much longer than any commercial you can run.
Tuesday, September 03, 2013
My Mother was probably a lot like yours if you were born prior to the late 60s. She told me that I could catch a lot more flies with honey than with vinegar. You probably reacted just like me and told her that you really didn't want to catch any flies! Well, I can tell you when you come to a problem loan sometimes the honey approach can be the best approach for everybody involved. What does that mean?
Let me tell you a story about one of the credits I was allowed to liquidate. Let me just say up front that I did not originate this credit, but if you lend very long, you will ultimately have a credit like this. I know I did, just not this one. The borrower, let's call him Fred, had bought out a long time business and had tried to expand way too fast and way too hard. The loan officer finally got Fred under control and told him no more loans. Fred struggled along for 10 years and made very little progress on the balance of the line. Finally, we had a small downturn in the local market and Fred started to get behind. The inventory started to dwindle while the loan balance didn't. We decided to bring a merciful end to the relationship and estimated we had a $250,000 loss in the line due to the deterioration in the collateral and the slow market. I volunteered to liquidate the line. At first we were just going to march in seize all the assets, but something in the back of my head reminded me of what my mother said.
Thursday, July 25, 2013
Okay, I have to admit that I am a shameless Boomer! All the stuff that was new in the 50s and early 60s were great! Hula Hoops, Frisbees, Slinkys were the best! But nothing was more fun than playing with bubbles. Heck, my daughter still loves playing with bubbles, but don't tell her friends at TCU! Having said that, bubbles are not always fun, just ask those who played in the .com craze or ask people who have been in the oil industry for very long. We call these cycles "booms" and "busts," but it is just another form of a bubble.
My professor in the Economics of Cycles said there have always been cycles and there will always be. Think of the classic cycles like the "corn-hog" cycle and the oil industry "boom to bust" cycle. I don't care what they say about ethanol production and the impact on the corn-hog cycle. It will return as we have seen with recent downturns in the corn prices. Every time we have a boom in the oil industry we also hear industry experts explain why we will not have a bust this time! We have heard that OPEC will control the market so we will not have another bust (1980s). We have heard that declining world production will stop the cycle (1990s and 2000s). Now we hear that Chinese and Indian growth in demand will fuel a never ending increase in the shortage and therefore price growth for the long term.
Sunday, March 31, 2013
Where are you going?
In this time of increasing regulation, it is a good time to sit down and assess where you are going. Think of this as a road trip. If you don’t know where you are going, how do you know when you get there?
Thursday, December 27, 2012
As many of you have guessed, I am an active Rotarian. I really enjoy what I do with Rotary. Almost every banker had to be in a service club not that many years ago. You were expected to show up at all the meetings and go to all the projects wearing a bank shirt. You were also expected to go play golf with customers at least twice a week. (You can substitute tennis, hunting, fishing or what ever for different types of bankers in the different parts of the country.) Do banks just not care anymore? Has the great heartless corporate beast taken over American banking?
Don’t get me wrong, there is a real crisis in American charities with fewer people to help at charities and fewer people to help with fund raising. It is not as noticeable at the national level since state wide and national charities can now hire one of the many fund raising firms which will do the fundraising for them. Or they can promote a celebrity to headline the fundraising. Local charities are really starting to feel the pinch. Even here in West Texas where most companies and their workers are flush up with money, local charities are shutting their doors or cutting back services at a record pace.
Thursday, December 27, 2012
When I was a kid growing up in Pecos, Texas, my father always told me that we really had three banks in town. Those of you familiar with Pecos may question that. We had Security State Bank and First National Bank, but who was the third? Yes, there was Pecos Savings and Loan, but that really wasn’t the equivalent of a bank at the time. The Leader Grocery and Hardware was effectively the third bank, and some would say the biggest. Customers would bring in their paycheck and apply it to their account and carry a credit balance. They could pull out money against their account and actually pay their electric or water bill from the Leader! Sounds like a bank to me!
Why am I talking about a store that closed 30 years ago and discontinued that practice over 40 years ago? Have you seen the Bluebird display at your local WalMart? We prevented them from getting an ILC charter from Utah, but they are coming in through the back door with this process. They want to take over your payment process and they now have the vehicle, but do not have your regulatory burden. How long will it take them to do to you what they did to the corner drug store and the local toy store? They are doing this with American Express, but how long until they are doing all themselves? Go look at Bluebird at Bluebird.com and look at the features. The account comes with a debit card, free direct deposit and consumer (or Commercial?) remote deposit capture from an IPhone, but it does not feature a service charge (with direct deposit I suspect). Also, if you have direct deposit, they refund your ATM Fees at selected ATMs. They also will accept a deposit at any WalMart check out stand. Do you see any of the dozens of disclosures you must display? Do you offer your customers anything equal to or exceeding that? American Express and WalMart are out to take over your market.