Banker Quotes: As Told to Me v2

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. Below are selected quotes that I tweeted this year along with my brief insights or background regarding the comment.

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 attorney to me: "The only thing worse than training an employee and having them leave, is not training them and having them stay."

jfb note: I'm not sure if this was original, and I find it odd that an attorney said it. But this attorney is also an ordained minister... an interesting fellow to say the least. The context was a discussion surrounding how community banks used to pilfer previously trained employees of large banks. Once those training programs went away, community banks never filled the void.

@JeffMarsico Bank COO to me: "We must install headphones on our ATMs so visually impaired people can drive up and use them."

jfb note: Think about that for a moment. There should be a common sense-o-meter that sounds the alarm in every office where banking laws and regulations are made.

@JeffMarsico Community bank head of retail: "The transitional branch model will be to acquire consolidated branch buildings and get them open cheaply."

jfb note: This was said in a strategic planning retreat. The transition is from current branches and future branches. Much is being debated about the future role of branches. I think the guiding principle should be: nobody knows and be skeptical of those that claim to.

@JeffMarsico Bank fund manager to me: "Our investment criteria is great management teams, in great markets, with great core deposit franchises."

jfb note: This fund focuses on under $10B in assets community banks. This is his opinion of value creation. It may not agree with yours. But he has hundreds of millions to invest.

@JeffMarsico Bank COO: "We've stopped playing 'let's make a deal' with CD-only customers."

jfb note: Transitioning funding sources into core deposits hasn't been particularly difficult in this low interest rate environment. The true test of this COO's philosophy will happen when rates rise.

@JeffMarsico Behavioral psychologist: "When you pay people enough, they are motivated by autonomy, mastery & purpose."

jfb note: I would agree with the statement. But I doubt there is agreement on the definition of "enough".

@JeffMarsico Bank Chief Risk Officer: "Regulators focus is slowly moving from credit to data security."

jfb note: Data security may very well be the next great banking crisis. I can't help but wonder if those evil geniuses intent on hacking financial systems would dedicate themselves to doing good, they can make a pretty good living. They still can sit at home without showering.

@JeffMarsico CU CFO to me: "We installed a remote teller in one of our branches and customers refused to use it. We had to uninstall it."

jfb note: Remote teller stations, where the actual person is on a screen and transactions are accomplished through ATM-like or suction tubes, are getting a lot of buzz. I think I've been around banking enough to be skeptical of buzz. How about you?

@JeffMarsico TD Bank CEO: "Americans get almost as much pleasure out of crushing an opponent as winning."

jfb note: Ok, this one wasn't told to me in person but I read it. I think the Canadians might be on to something. I wish he got the message to Osama bin Laden earlier.

@JeffMarsico CU CFO to me: "Because we have low balance accounts and a no fee culture, we need to leverage technology to lower costs."

jfb note: Common sense that, occasionally, needs to be said, and tweeted.

@JeffMarsico Bank director: "A loan participation transfers risk from one who lacks courage to one who lacks knowledge."

jfb note: Said in a board meeting where the bank's senior lender was proposing plugging a budget gap in loan production with participations. Ever try to collect on a loan gone sour that was originated by the bank in the next town over?

@JeffMarsico Bank CEO: "Our examiners were simultaneously examining us and interviewing for OCC jobs, which can't be a good thing."

jfb note: Wonder what agency examined this bank?  Hmmm?

What interesting things are you hearing out there?

~ Jeff

Guest Post: Second Quarter Economic Update by Dorothy Jaworski

2011 started with so much economic promise. Jobs were being created, stock markets were rising. Interest rates were rising quickly too, in anticipation of strong economic growth. Then, oil and gas prices spiked over the unrest in Egypt and Libya. Gas prices reached $4.00 per gallon in May and everyone’s tipping point was reached. Enough!

Consumers cut back spending and continue to pay down or shun debt. The economy was creating jobs at a half decent pace in the first quarter and then job growth hit a wall in May.  The unemployment rate ticked back up above 9%. Housing, so very important to consumer confidence, resumed its downward trend after seeming to have stabilized in late 2010.

Japan’s earthquakes, tsunami, and nuclear accidents caused severe disruptions in the supply chain for manufacturers of automobiles and electronics; these disruptions are expected to ease in the coming quarters. Bad weather, including tornados and river flooding, also hurt the economy in the second quarter.

Debt problems in Greece and other European countries reared up again and caused a flight to quality as investors bought Treasury bonds and sold stocks in the second quarter.  Forward price-earnings multiples are down to 12 times, versus a historical norm of 15.5 times. Weakening economic data did not help either and led to further rate declines, albeit only halfway to the “crazy” low levels of last October and November.

Some of the factors that are causing this economic “soft patch” are temporary (including bad weather, Japan woes, and high oil prices) and some of the factors will linger, most notably stubbornly high unemployment rates and weak housing markets. Some of the forward looking indicators, such as unemployment claims, construction spending, and especially backlogs, have weakened in the last couple of months, signaling slowing growth.

Economists keep ratcheting down their projections for GDP for 2011 and 2012, probably as a result of the weaker forward looking indicators. The latest Wall Street Journal Survey of Economists shows projections of 2.7% and 3.0%, respectively. The Federal Reserve is a little more optimistic, at an average of 2.8% and 3.5%, respectively. These growth rates imply slow, steady recovery and relatively low interest rates as unemployment will be slow to fall from its lofty levels above 9%.

Last quarter, I wrote that I was surprised by the employment data. The total labor force kept dropping this year through April and the numbers of persons “not in the labor force” kept rising. People don’t exit the labor force during a recovery, at least not in any recovery since World War II, according to Chris Low of FTN. Well, finally in May, the situation reversed and people reentered the labor force, so, at least for now, we have found some of the MIA.

But we still have work to do. Since the Great Recession began in December, 2007, until May, 2011, we are still down a net of 6.5 million to 6.9 million jobs, based on household surveys and payroll surveys of employment, respectively.

Anonymous

It is one of the most frightening stories that I have seen recently, with the exception of the Casey Anthony trial’s not guilty verdicts. There is a group of computer hackers calling themselves “Anonymous” and who are referring to themselves as “hacktivists.” They are attacking Internet websites, while encouraging others to do so too, of companies and governments that they simply don’t like or don’t agree with. The hacking began last year with denial of service, or “DOS,” attacks on Visa, MasterCard, and PayPal for rejecting Wikileaks payments. They have hacked the government sites of Iran, Egypt, and Turkey and even the public sites of the CIA and the FBI. They recently attacked Sony PlayStation’s site, which was down for one month. The group left a file on Sony’s networks, called “Anonymous.” Inside the file, it simply said “We are Legion.” Sony spent the entire month and over $170 million getting its site reopened. The costs of protecting Internet data are escalating.

In early June, the group declared war on the Federal Reserve. I guess they don’t like Ben Bernanke. They are apparently moving from DOS attacks to stealing data to disclosing data online. Will they be able to hack the networks of the largest owner/creator of pure money? This has to be one of corporate America’s biggest fears and potentially one of our economy’s biggest expenditures in protecting online networks. For our economy’s sake, let’s hope the Fed can win this war.

Putting It All Together

In the understatement of the year so far, Ben Bernanke stated that short term rates will be lower for longer than we think. So the Fed has just told us that they are keeping rates low for an extended (really extended) period of time. I have contended for some time that the Fed will not raise rates until the unemployment rate is substantially lower. Government stimulus, for all intents and purposes, is over. The ongoing arguments over the debt ceiling and the likelihood of large reductions in government spending to reduce massive deficits mean that there will be no more fiscal stimulus.

Burdensome overregulation is all we will “get” from government. No extended tax cuts and business credits are in our future. The Federal Reserve’s stimulus is ending too. The $600 billion quantitative easing, or “QE2,” program, which injected those funds into the economy, ended on June 30th. Lower gas prices, lower being a relative term from the high of $4.00 in May, will be the only tax cut we will get. Slow growth will be the result.

Low short term rates are also supported by one of Keynes’ favorites – the “liquidity trap” – which is alive and well. Fear of investing in an uncertain economy and unknown market conditions is mostly to blame. Businesses have $1.9 trillion in cash on their balance sheets at the end of the first quarter. Banks currently have $2 trillion in excess reserves, or cash.  At the end of May, money market mutual funds totaled $2.75 trillion. All of this money earns next to nothing, so critical is the desire to avoid risk and preserve principal. As long as this money remains parked in cash, short term rates will remain near zero.

You may notice that I have not mentioned the word “inflation” up to this point. That is intentional. The higher inflation rates caused by high energy and food prices will be proven to be “transitory.” Not until we have truly defeated the evil of deflation – ask anyone trying to sell a house – will we have an inflation problem. It is a problem for another day. QE3 anyone? Stay tuned.

Thanks for reading! DJ 07/06/11

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.

How do you feel about a 30% capital ratio?

I try to keep myself abreast of the significant changes within the banking industry so I can perform research, form a reasonable opinion, and advise my clients. But some industry luminaries are throwing out some far reaching opinions that I think need refuting.

Take Simon Johnson, former chief economist of the International Monetary Fund, co-author of 13 Bankers, and commentator on the NY Times Economix blog (see photo). In his most recent blog post titled "Are Bank Examiners to Blame for Slow Job Growth" he refutes bankers assertions that regulators are unnecessarily forcing banks to put loans that are paying as agreed on non-accrual. There is a bill currently circulating around Congress that allows banks to classify these loans as performing. Mr. Johnson testified against the bill.

But in his post (see link below), he makes two comments that bears refutation:

1.  Bank equity is the primary buffer against loan losses.

In the post, Mr. Johnson states "The problem is that some community banks do not have big enough loss-absorbing buffers — the role that bank equity plays." Certainly equity plays the role. But Mr. Johnson's implication is that it is the primary or sole buffer. In fact, against loan losses, the main subject of the post, the bank has a loan loss allowance.

The loan loss allowance has received little attention in the financial crisis. Banks are supposed to set aside a certain amount of reserves for loans to go sour in bad times. But the Financial Accounting Standards Board (FASB) allows banks to reserve for losses only after there is evidence of loss. FASB is now considering allowing banks to reserve on expected losses. This would put them in sync with regulators, that are requiring banks to write down loans on expected losses. But this difference in the treatment of loan loss reserves left banks under-reserved and therefore elevated the need for capital to ascend to greater prominence in absorbing losses from loans.  I understand that putting greater amounts in reserve, or provisioning, reduces profits and therefore equity, so the two are linked. But lets use the loan loss reserve for its intended purpose, shall we?

2.  Banks should have a 30% equity to asset ratio.

You read that correctly. In the post, Mr. Johnson says, "If we had any kind of free market in banking, you would expect banks to have equity funding of at least 30 percent of total assets." The context was bank failure risk is mitigated by FDIC insurance. True for depositors, not shareholders. But requiring $30 million of equity for every $100 million of assets would not yield equity investment returns. If a bank earned $1 million on $100 million of assets, or 1% ROA, that would yield a 3.33% return on equity. That is investment grade corporate bond returns. How many new banks would we see if we require a 30% equity to asset ratio? What rates would we have to charge on loans to achieve a reasonable return?

Mr. Johnson has an excellent resume. But the things he wrote rather nonchalantly are disturbing. I'm not sure they were thought through to their rightful conclusions. 

While making fundamental changes that will dramatically affect how we finance families and small businesses in this country, we must stop elevating lifelong bureaucrats to industry sage status and beating down bankers in the trenches as self-serving idiots. In the end, we are all self-serving, and we have to ask ourselves how do bureaucrats serve themselves. 

What are your thoughts on a 30% equity ratio?

~ Jeff

Economix: Are Bank Examiners to Blame for Slow Job Growth
http://economix.blogs.nytimes.com/2011/07/14/are-bank-examiners-to-blame-for-slow-job-growth/

Article on FASB consideration of loan loss reserve guidelines:
http://www.bloomberg.com/news/2011-02-16/fasb-proposes-change-to-loan-loss-reserves-may-pinch-payouts.html

Brain Science Anyone?

I recently attended a client's all day strategy session. My firm had a small presentation, and were available for Q&A throughout the day. But most of the day we were in the audience, listening to presentations by the executives of the bank and other consultants.

Part of the program was a continuation of the leadership program for bank executives. The program was led by the consulting firm Dorrier Underwood of Charlotte, North Carolina (see link below). This particular presentation revolved around brain science. Now think of an audience full of no-nonsense bankers. I thought the consultants were in for a tough time.

But the presentation intrigued me. Part of it was based on research by David Rock, a doctor of neuroscience, author, and co founder of the NeuroLeadership Institute (see link below). Based on Rock's research on how a brain reacts, he identified the Five Domains of Social Experience as follows (with explanatory bullets provided in the Dorrier Underwood handout):

1.  Status

• Status is about relative importance, pecking order, and seniority.
• A reduction in status resulting from being left out of an activity lit up the same regions of the brain as physical pain. (Eisenberger 2003)

2.  Certainty

• The brain is a pattern recognition machine that is constantly trying to predict the near future.
• Without prediction, the brain must use dramatically more resources to process moment to moment experience.
• The act of creating a sense of certainty is rewarding.

3.  Autonomy

• The perception of exerting control over one's environment-a sensation of having choices.
• Working in a team necessitates a reduction in autonomy.
• Sound policy establishes boundaries within which individuals can exercise their creativity and autonomy.

4.  Relatedness

• Relatedness involves deciding whether others are in our out of a social group.
• Whether someone is a friend or foe.
• When someone is perceived as a foe, different circuits are used in the brain.

5.  Fairness

• Unfair exchanges generate a strong threat response similar to disgust.
• A threat response from a sense of unfairness can be triggered easily.
• A sense of unfairness can result from a lack of clear ground rules, expectations, or objectives.

Sum the five up and we have the convenient acronym "SCARF", developed by Dr. Rock.

The context of the SCARF portion of the presentation was to help bank executives become better leaders. To understand how their own and their employees' minds work.

But I began to think that SCARF is also powerful in a sales or relationship building context. For example, it is important that the seller has status in the mind of the buyer, and also conveys status to the buyer to create a positive selling experience.

Buyers want to have relative certainty about what they will receive. This is the basis for people selecting chain hotels or fast food restaurants. The buyer is relatively certain about what they will get.

Buyers do not like to have products or services shoved down their throat. They would like to maintain control, or autonomy, over their buying decisions.

People buy from those that they like, or relate to. And finally, buyers like to walk away feeling they have received a fair shake from sellers, and vice versa.

It would seem that in financial services sales and marketing, we need to create an environment where customers are ready to buy from us. The SCARF model provides a road map to creating that environment, in my opinion.

What do you think is the proper environment to maximize sales in financial services?

~ Jeff

Dorrier Underwood

http://dorrierunderwood.com/index.html

David Rock

http://blog.davidrock.net/

Don't let perfect be the enemy of very good in bank profitability.

When I began my journey as a bank consultant, my firm's top-notch cost accountant repeated this post title to me often. He was teaching me the mechanics of cost allocations from support centers to profit centers in FIs, and further down to products. The key, he told me, was to develop a rational allocation method that is understandable to those being measured and apply it consistently.

As FIs drill down to relationship and customer profitability, cost allocations become ever more complex and subject to greater challenges by those that disagree with the results. Usually those that disagree are responsible for relationships they once thought were profitable to the FI, but the data shows they fall short. It is easier to challenge the results than to ask "why?", and develop an action plan to improve profitability.

Even though the American Management Information in Financial Services (AMIfs) considers me a certified cost accountant, I put to you that I am not. I come from the line. I am on the line of my firm. I think more like a profit center than a management accountant. So I will not bore you with a discussion of standard versus fully absorbed costs, as I would find it incredibly boring to type, let alone ask you to read.

But there is a rational, middle ground method to drill fully absorbed costs to get an individual operating cost per account. My firm's current profitability software calculates fully-absorbed average costs per account. This means that if I have a checking account, and visit the teller 20 times in a month, I am charged the same cost for my account as someone that solely does 10 Internet banking transactions per month. Those responsible for customer relationship management (CRM) or other account-level profitability software cry foul. And they are right.

But to get to the most exact data takes a tremendous amount of effort that will yield results that are as near to 100% accurate as possible on the day the measurements were taken, and veer from the ideal thereafter. So how can we measure cost per account that rewards low transactions or usage of low-cost distribution channels? I propose developing an easily explainable and defensible fully-absorbed cost per account that differentiates based on account usage.

To do so, you must first determine the fully absorbed cost per account. For example, the average annual cost per retail non-interest bearing checking accounts for my firm's profitability customers was $396 during the fourth quarter 2010. Adding that cost times the number of accounts yields the aggregate operating expenses used to originate and maintain those accounts.

If we divide the number of accounts into quintiles based on number of transactions, we develop pools of accounts to assign different costs. We then can take the "moderate" accounts, and assign the average cost per account, and increase costs for those with greater than moderate transactions and less costs for those with fewer (or cheaper) transactions (see table).

 

Transaction counts can be weighted to differentiate between high-cost transactions, such as a teller transaction, to low cost, such as an Internet banking transaction. Your FI might estimate that one takes 3 times the amount of resources as the other, so one teller transaction counts as three, whereas the Internet transaction remains at one. In this way, the customer that does 25 Internet transactions is not charged the same cost as the one that does 25 teller transactions.

The results will not be exactly correct. But there is no management information that is exactly correct. It will, however, be what one CEO termed "directionally correct". It will tell the relationship manager what customers are profitable and need to be paid attention to, and what customers are unprofitable and action must be taken to gain more business from that customer or pay attention elsewhere.

This behavior, multiplied by every relationship manager and account service representative in your FI, will improve retention of profitable customers, generate positive action toward borderline customers, and focus attention on the right locations, products, and distribution channels to serve your most profitable customers. In short, it will improve your FIs profitability.

How do you measure profitability or how should you measure it?

~ Jeff

V-blog: Speaking of economies of scale to NY Bankers

I recently spoke at a New York Bankers Association senior management conference regarding the quest for economies of scale to improve earnings through positive operating leverage. I was the leadoff hitter for a tandem that included a JPMorgan Chase banker. I brought my 21 year-old daughter with me, and thought it might be a good idea for her to use our family camera to video and edit my remarks. See below.

Bottom Line:

Banks and thrifts have not reduced efficiency or expense ratios as they have grown... i.e. they have not achieved economies of scale.

I cited three possibilities why this is so:

     1. Culture/Bureaucratic Attitude;

     2. Fragmented Responsibilities; and

     3. Technology Utilization and We Have Always Done It That Way

The session was based on a white paper I recently wrote for the Financial Managers' Society. See link to the white paper below.

This is my first V-blog and I will get better at it, especially if my daughter provides me guidance.

~ Jeff

Lesson learned: We have to get better at camera positioning!

Link to FMS White Paper on economies of scale and positive operating leverage:
http://www.kafafiangroup.com/PDF/Marsico-Economies-of-Scale.pdf

How I use Twitter

I am no social media expert. The media is so relatively new, I'm skeptical of those that make the claim. But I was making a half hour presentation to a bank board of directors regarding their strategic plan two weeks ago. The plan called for the bank to evolve its marketing capabilities to include social media. When I mentioned I had a Twitter account, half of my allotted time was spent in a Q&A on how I used it.

I was surprised by this turn, but impressed that a relatively older Board was so interested and had detailed questions about social media. In my mind, I thought "oh no, they must think I'm a social media expert". But I pressed on to tell them how I, not knowing the right way from the wrong way, used Twitter. Here is the gist of what I said.

I signed up for Twitter about two years ago (@jeffmarsico), and have tweeted nearly 3,500 times. That is about five per day. Probably light compared to some, and moderate compared to others. I have no target regarding how many times I tweet. The reason I signed up was two-fold: 1) curiosity about the hype, and 2) as a replacement for a journal.

I have always thought of keeping a journal to remember things that occurred in my life. But I'm not one to sit down at night and jot down events and certainly not my feelings. So, at only 140 characters per tweet, I thought Twitter a decent substitute. So off I went with no strategy other than that.

I searched for people to follow using three themes: 1) local to my hometown; 2) banking-related; and 3) sports-related. Most that I follow have followed me back, either as a courtesy or judging that my tweets may interest them. I hope the latter, but am not foolish to believe this is always true. If you looked at the lists I have compiled on Twitter, you will note these three themes.

I am somewhat bipolar in how I use Twitter. Right or wrong, I typically tweet banking by day, and Yankees by night. This is an oversimplification, as I also like interacting with those that I have never met via Twitter, tweeting things happening in my personal life, and other sports teams that I follow.

Some may criticize how I use Twitter because while some tweets may be interesting to a segment of my followers, they may be irrelevant to others. For example, tweeting an interesting statistic I heard at a banking conference may interest @bankmarketing, but be a snore to @lennysyankees.

Although I still use Twitter with similar objectives to when I started, I have evolved in my thinking. Since joining, I started this blog. I use Twitter to update my tweeps (slang for your Twitter followers) that I just put up a new post. This week, the second-highest traffic source into the blog was from Twitter.

I now use Twitter as an education source. There is a whole universe of blogs and news sources that were unknown to me (see below for a couple good examples of very fine banking blogs). For example, my banking tweeps keep me updated via news links of what is happening in our universe. If I am working in the office, I read Twitter-fed articles that are of interest to me, in addition to my regular reading. When traveling and I see an interesting article or blog post in my Twitter stream, I "favorite" it for later reading.

I also follow sports via Twitter. For example, yesterday I kept apprised of how my favorite MLS soccer club, @philaunion was doing in their match as I was unable to watch it. Watching a Yankees game while following an #yankees hashtag stream and interacting with my tweeps is a whole different experience than watching alone. I would miss the snarky comments from @huntforringsnyy when AJ Burnett bumbles through a start.

I have made my Tweets private, which seems to be counter-intuitive to expanding a tweep-base. But I noticed that Twitter receives a pretty high ranking in search engines. For example, when searching "Jeff Marsico", my Twitter account appeared fifth on Bing and third on Google. If somebody Googles me, I'm not sure I want their first impression to be "The barber chopped off my sideburns, again" (actual tweet that showed up in a Google search). To follow me, a potential tweep need only send a follower request, 95% of which I accept (unless you are a porn site or serial marketer). Most of those I follow back. But I suppose I probably lose potential followers and therefore relationships by making tweets private. I accept the trade off.

I don't know much about establishing brand. For evidence look no further than my Twitter avatar (thumbnail picture, logo, or animation that comes up next to your tweets). I first started with a cartoon (see pictures), then moved to an image of myself after reading some blog posts on the subject, and I now use a simple photo. I suppose the evolution is because I would like to be viewed as a human being like everybody else, and not Shaggy from Scooby-Doo. See the @inking_media link below regarding avatars. Inkling Media is local to Central PA and I would not have known the owner, Ken, other than through Twitter.

This segways to the most important benefit I received from Twitter: meeting people I otherwise would have never met. I'm not saying that I know my tweeps in any material way (although some I do because @shannon_marsico is a tweep). But I never would have known @sharistorm, a credit union marketing executive, mom, blogger, and author from Washington state if I did not follow her. Just this past week I spoke on the phone with @mbartoo about possibly putting on an industry event. I first met Mike via Twitter.

Could Twitter be a short-term fad that goes the way of the Betamax? Possibly. Is it the answer to our industry challenges? Doubtful. But an industry marketing consultant told me last week that financial institutions must learn how to leverage the spheres of influence of their business development officers. If you believe what he said to be true, then social media, and yes Twitter, can be part of that conversation. See Susquehanna Bank link below to a well-done bank blog positioning BDOs as experts. But I do not know many other FIs that are doing this well or have received material benefit from their Twitter or social media efforts yet. We are still in the experimental phase.

But my experimental efforts have given me things that were unknown to me when I first signed up for Twitter... i.e. knowledge, interactions during sporting events, and relationships (if only limited relationships). Perhaps your experimentation can result in lessons learned, brand advancement, and relationship building success. I don't know, but in my experience it's worth a try.

How do you use Twitter?

~ Jeff

Banking blog links:

Marketing Tea Party by Ron Shevlin

http://marketingteaparty.com/

The Financial Brand

http://www.financialbrand.com/

Blog post on Twitter Avatars by Inkling Media:

http://inklingmedia.net/2010/10/25/branding-engagement-pt-1-whats-in-a-name-or-face/

Susquehanna Bank blog:

http://blog.susquehanna.net/