Saturday, April 21, 2012

Banker Quotes: As Told to Me v3

I learn a lot from bankers as I visit their offices, speak to them on the phone or at industry events. Occasionally they will offer an insight that I think my Twitter followers would find interesting. Since I estimate my Twitter community only reads about 10% of their tweet stream, and so many of my blog readers do not follow Twitter, below are selected quotes that I tweeted so far this year.

Note that if the quotes exceeded 140 characters, I would have abbreviated or substituted some words to make them fit. So if you are a CPA and want to count, a few of the quotes may exceed the 140 here, but not on Twitter. I quote bankers anonymously to protect the innocent.

@JeffMarsico Bank head of branches: "All I need is time to sell, new shoes, and business cards."

jfb note: There are a lot of vendors out there selling the newest sales widget. But when it gets down to it, this banker gets to the heart of the matter. While typing this post, my bank called me from the local branch to tell me about their home equity lines! Third time my bank has called me in 16 years. Progress! But read the next quote.

@JeffMarsico Bank CEO: "People work at banks because they don't like to sell. It's how it has always been and still is."

jfb note: I think it is changing, though.

@JeffMarsico Bank Chief Risk Officer: "Not sure if ERM (enterprise-wide risk mgt) is theory or theology."

jfb note: Surprised that this came from the Chief Risk Officer because they are usually preaching the virtues of checking on the checkers that are checking on revenue generating bank activity. See my comments on ERM here.

@JeffMarsico Gas station attendant on free windshield inspection: "Sir your windshield looks great. To keep it that way, avoid highways."

jfb note: Ok, this has nothing to do with banking. But, seriously, this was his advice.

@JeffMarsico Bank analyst: "If there are such great returns to scale, then where are the Citigroup Inc. shareholders' yachts?"

jfb note: This was in a research note and not told to me directly. The economies of scale gang still can't answer this one. But a colleague of mine dubbed it "diseconomies of scale due to organizational complexity". I say I could have wiped out just as much shareholder value as Citigroup's Charles Prince for far less money.

@JeffMarsico Credit Union CEO: "The differences between CUs & community banks are inflated by trade groups. We should focus on big banks."

jfb note: This was told to me at a conference that was designed specifically to lobby the Federal government with the key issue being expanding CUs business lending. But, with the sum total of assets in CUs being less than JPMorgan Chase, it should make us wonder where community FIs should spend their energy. And don't count on your trade association to help you to target their largest contributors.

@JeffMarsico Bank exec: "If our regulator walked by our water cooler & saw that it was half full, they would write us up for it."

jfb note: Symbolic of the relationship between examiners and examined.

@JeffMarsico Branch banking exec: "We need to figure out how to give good service to rate sensitive customers & Nordstrom service to those that value it."

jfb note: Banks still struggle with the squeaky wheel philosophy of customer service... give the greatest service to those that make the most noise or are the most visible, versus those that are the most profitable.

@JeffMarsico Retiring Bank CEO: "I've been around (50 years) to see a few things. I've never seen an environment as difficult as this was for banks."

jfb note: Enough said.

@JeffMarsico Bank CEO: "If I don't know within 30 minutes of meeting w the borrower if the loan is a good one, I'm in the wrong business."

jfb note: I hope he meant in the context of the next quote.

@JeffMarsico Bank director on strategy: "I would like to make loans to borrowers that can pay us back."

jfb note: I agree with this strategy.

@JeffMarsico Bank director: "A great leader has empathy, sympathy, integrity, and consistency."

jfb note: I was impressed that a bank experiencing difficulties would speak about leadership instead of regulators, borrowers, lenders, etc. It inspired this blog post.

@JeffMarsico Mortgage banking specialist to me: "FNMA has $25B of pending repurchase requests outstanding."

jfb note: Well that's not comforting. One of my clients received a significant repurchase request from Fannie. If we sell them, but have to retain the risk, pricing and terms are going to have to change on residential mortgages.

@JeffMarsico Bank CEO: "In my 40 year career, it's never been easier to book loans." 

This is one of those counter-quotes... quotes that go against conventional wisdom. This bank is feeding off the castaways from large banks. I hope the castaways can pay the loans back.

@JeffMarsico Community bank CEO: "I'm fm a big bank and I was surprised I had to make holiday decoration decisions."

jfb note: Welcome to community banking.

@JeffMarsico Bank institutional investor: "Great banks have 1. Great asset qual, 2. Good IRR position, 3. Great efficiency ratio, and 4. Great sales/service."

jfb note: Always great to know because institutional investors own a significantly greater portion of community banks now than pre-2008, which leads to the next quote.

@JeffMarsico Bank analyst: "Attractive banks: have a lending niche and/or in strong economy; managed credit problems well; & have excess capital."

jfb note: I suppose if you asked 10 analysts and institutional investors you would get 10 different answers.

@JeffMarsico Bank CEO: "In a perfect financial year, you have done well if you don't have to think about your bank more than 10 minutes."

jfb note: The context was that banks should make it easy for businesses to perform banking chores.

Bank CEO: "We would have to be much bigger than we are to be a technology leader."

jfb note: Some still believe they can be a technology leader.

Bank CEO: "Ally Bank did an excellent job convincing the public that the opposite of the truth is true."

jfb note: This was in response to me citing a survey that showed Ally Bank one of the top recognized bank brands. Advertising saturation can work for those with the wallets.

Bank CEO: "We were surprised at quick adoption rate of our mobile banking app."

jfb note: Because bank customers used to be notoriously slow at adopting new delivery channels. Needless to say the turtle is making gains on the hare.

Bank CFO to me: "You were able to pronounce that branch correctly when you didn't have that beard."

jfb note: Wise guy CFO.

What have bankers been telling you?

~ Jeff

Sunday, April 15, 2012

Do We Care About Leadership?

On a recent plane ride I sat next to the Commander of the NCO Academy at Fort Jackson, South Carolina (see picture from one of last year's classes). He is a reservist, and had interesting perspectives on how the military operates versus private industry. In his "real life", he is a sales manager for a pharmaceutical company.

One form of training I fondly recall from my Navy days was Navy Leadership Development school, or NAVLEAD. We have acronyms for EVERYTHING in the military. I have not come across anything like it in my civilian life working with community financial institutions.

The commander, however, worked for a large company and said they do incorporate leadership, management, and supervisory training to employees. He spoke of the company hiring psychologists to develop the curriculum and provide instruction, and actors to do role playing.

When we talk of the cost of regulation, we often think of cutting back on number of personnel, technology, and branching to bridge the profit gap. But one fatality is likely to be personnel development. Community FIs do not have large training budgets to prepare future leaders to take the next step, to manage, to supervise, to lead.

Aside from the cost, part of the reason may be our attitude towards "soft" disciplines such as leadership and supervision. We promote top performers and assume they can also take on additional responsibilities, such as employee coaching, without effort. But in my experience, this is not so. Prior to me taking the NAVLEAD course, I will put to you that I was ill prepared for such a large responsibility of leading other sailors.

The Navy understood this, and prepared me to succeed so I may prepare those under my charge to succeed. See a portion of a 2006 message sent by the Chief of Naval Operations (CNO) as to the importance of leadership development to the effectiveness of our Navy. I do find it interesting that these Navy dispatches look very much like the ones I recall over 20 years ago.

In an era of uncertainty, increased regulation, and competitive pressure, do we have the foundation to lead us into the future? When I write foundation, what does it mean to you? Does it mean the technological infrastructure, the branch footprint, or the special niche? Or can it also mean that we are developing the type of leaders that ensures those under their charge are performing to their potential?

If people are important to your FIs success, what are you doing to develop your people?

~ Jeff

Thursday, April 05, 2012

Guest Post: First Quarter Economic Update by Dorothy Jaworski

The Fed Goes Too Far

First, let me say, we owe the Federal Reserve our gratitude. Their actions to ease in many ways during and after the financial crisis averted financial meltdown and produced results in an economy that is regaining its footing, albeit at a “frustratingly slow” pace.

The Fed lowered the Fed Funds rate to 0%, where it has stood for over three years. They purchased securities during the crisis and stepped up where they could as a lender of last resort. They embarked on quantitative easing, or “QE,” programs twice in 2009 and 2010, buying up $2.3 trillion of securities. Last summer, they went where no Fed has gone before and “promised” to keep rates low until 2013, then earlier this year extended the “promise” until the end of 2014. Last Fall, they embarked on “Operation Twist,” to sell shorter dated securities and buy longer dated ones in an effort to push long term rates down, especially to get mortgage rates lower to help the still struggling housing market. Ben Bernanke has been holding press conferences and the Fed recently published their first-ever rate forecasts—even though it was published on a scatterplot—that shows Fed members’ thoughts on where short term rates will go.

But we know that only three things in life are certain—death, taxes, and a Fed that goes too far. Despite the trillions of dollars used to buy securities and zero cost money, economic growth is struggling at 1.7% over the past year, which is one of the weakest recovery rates since the early 1980s. Of course, coming out of one of the worst recessions since the 1930s, any pace of growth has been nothing short of miraculous.

So what do we make of the latest idea that the Fed is floating? They want to go into a third round of QE, but they would purchase securities and borrow the money back short term. This latest idea would be a form of “sterilized” easing—allowing the Fed to buy long term securities (to push down long term rates) and borrow the money short term to keep the money supply from growing, and thus keep inflationary expectations under control.

So what will “sterilized” easing accomplish? In my opinion, nothing. It is not about money anymore, it is about psychology and a belief that we can do better as an economy without government interference and being flooded all over by money that will someday be difficult to pull out of the economy when the time to tighten policy arrives. Philly Fed president Plosser has stated recently that the Fed should only use its balance sheet as a crisis tool, not as a regular tool for monetary policy. For once, I agree with him.

Goodbye, Yield Curve

At this point, I believe this new idea would prove that they are clearly going too far. The sole purpose of such a move is to artificially push long term rates even lower than the unbelievable lows we have currently attained in an effort to manipulate the yield curve. This manipulation adds to their “promise” and “Operation Twist” and distorts the yield curve even further. The problem is that the yield curve has been one of our most reliable market indicators over the past several decades.

Generally, we use a yield curve to deduce whether inflation is an issue or the economy is expected to grow—through an upward sloping yield curve—or whether there is a poor economic outlook or recession coming—through a negatively sloping yield curve. Flat yield curves have typically resulted from Fed tightening and the creation of one from Fed easing will be highly unusual, but, alas, I think that is their plan.

From yield curves, we can calculate market expectations of rates in the future. Without such a reliable indicator, what objective signals will we get that the recovery is strong or weak? Fed “promises?” Scatterplots? I think we all know how this experiment is going to turn out.

A Fed That is Mad at Us

Chairman Bernanke has been on the warpath for the past several days. Apparently, he is not thrilled about the recent selloff in the bond market, that took interest rates up by .40% to .50% from the end of January into the third week of March; there was an especially nasty stretch of nine days from March 8th through March 20th, where rates rose continually each day before finally tempering their advance and falling back since the peak. Historically, the nine day streak is only the second of its kind since a similar streak in 1974—the other being during June, 2006.

Bernanke has been talking down recent economic good news and chastising the bond markets for allowing rates to rise, which could hamper growth. He must be angry that so many of us opposed his “sterilized” money scheme and are a little skeptical of his extended “promise” to keep rates low until the end of 2014. Maybe he was mad that investors were reallocating money from bonds into stocks. He didn’t mention the real villain—rising gasoline prices, which today stand at $3.90 per gallon, according to AAA, for the highest level ever recorded this early in the year.

The Tipping Point

Just when economic growth started looking better, with new job growth of 200,000 per month in four of the past six months, we run into the same old nemesis—rising gas prices. It is no surprise that growth slowed in 2011 as gas prices reached a “tipping point” of $4.00 per gallon in May that caused consumers to dramatically slow other spending.

The media keeps speculating that gas prices will reach $5.00 per gallon by Memorial Day. This doesn’t help with consumer psychology and, if gas does reach $4.00 or more, we can expect the same psychological reaction from consumers—reduced spending—just as they would react to higher taxes. Let’s hope that the rise in oil and gas prices this year will again prove to be “transitory,” as Ben Bernanke has been claiming once again. Every one cent rise in gas prices leads to $1 billion annually in extra consumer spending on this volatile liquid and $1 billion less spending on other goods and services.

Slow growth, slow improvement. That is what is happening in the economy. The recovery is at its most vulnerable. High oil and gas prices could push us to slow growth, no improvement, which could once again cause job losses. We do not want to see consumer psychology in this scenario.

Stocks Rock On

It is no surprise that stocks began to do much better as the economic data began to strengthen late in 2011 and into this year. Stocks were virtually flat in 2011 as the markets improved early, sold off in a horrible third quarter, and quickly regained the flat line. Year-to-date in 2012, the S&P 500 and Nasdaq indices are up 12.6% and 20%, respectively. The price-earnings multiple on the S&P is 13.4 times and the dividend yield of 2.1% is approximately equal to the ten year Treasury yield.

Stronger growth, with real GDP at record dollar levels, has been translating into stronger corporate profits. The S&P now tops 1,400 for the first time since late 2007 and Nasdaq now tops 3,000 for the first time since 2000. Momentum is clearly driving the markets, as well as Bernanke’s campaign to keep returns on bonds artificially low for a long time. But remember that the markets do not usually go up in a single straight line—especially during a presidential election year. Stay tuned.

Thanks for reading! DJ 03/27/12

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with First Federal of Bucks County since November, 2004.