One of the classic mistakes that most of us made back in 2006 is not taking a forward looking view of credit. We underwrote credits based on current debt service coverage and current loan-to-values, instead of using forward values. This was a mistake, as had we looked ahead, we would have seen a large portion of the economic downturn.
As the last day of the Western Independent Bankers wraps up, we thought we would highlight one of the other top presentations that made us think. Joe Cady, Managing Partner from CS Consulting, presented his data on “The Best Business Models in Community Banking.” Given that 90% of banks are re-evaluating their business models, according to KPMG, Joe looked at 59 banks from 2006 to 2011 that had an average ROA of 2.2x and an average ROAE of 19%. The study excluded credit card and other specialty banks.
We are at the Western Independent Bankers this week and the most interesting presentation of the day came from Cort O’Haver, the Senior EVP for Umpqua Bank and new co-President of Sterling (their latest acquisition) on how their bank deals with uncertainty. In addition to looking like Ray Davis, tan and all, Cort sang from the same sheet of music as Ray as he talked about how Umpqua is positioned to deal with change.
There is a classic debate in banking of whether it is better to diversify your loan portfolio or to “stick to what you know.” The logic of the stick-to-what-you-know camp is that since you understand X (insert your specialty – real estate, doctors, residential, etc.) your return will offset any gains in diversification.
Yesterday’s blog on how little branch hours are correlated to revenue and customer satisfaction elicited a healthy dose of responses. If branch hours nutted some bankers up, just wait for the rest of today’s post, as this might really short circuit some guarded beliefs. The picture below is from our data and research and is a heat map of some selected factors and how revenue and satisfaction are dependent on those factors.
At a recent financial conference, after we presented on the bank customer experience, an attendee joked that she wished her bank was more customer friendly and had longer branch hours including be open on Saturdays. The funny part is that customers don’t want longer branch hours.
While much has been written about Quicken Loans and Warren Buffet’s billion dollar NCAA men’s college basketball bracket challenge, there are important lesson in both marketing, customer acquisition and data collection for bankers that we will get to in a moment. By way of a quick recap, you go to Yahoo, enter for free, pick all 63 games correctly (you don’t have to pick the winners from the play-in round!) and you get $1 billion dollars paid in 40 annual installments of $25 million each or choose the lump sum for $500 million.
If you are feeling unlucky every time a loan prepays early then this will help. 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. While banks don’t take a principal hit, the impact is the same because the bank could be as much as 7.2% more profitable if they were to utilize a reasonable prepayment provisions.
Knowing where we are in the business cycle is a key input into looking at projected probabilities of default for loan credit underwriting as well as future loan prepayment speeds. If done correctly, banks want to tighten underwriting standards as the economy inflates and loosens them during the troughs of the cycle. Unfortunately, most banks do it the complete opposite loosening standards due to competition when things are overheated and tightening them at the trough.
After four years of testing, Bank of America introduced its “Safe Balance” account last week that is targeted at low-income customers and is set to compete against accounts at competitors that are based on a prepaid card. The account is designed to target those that cannot meet minimum balance requirements, carries a $4.95 monthly fee that cannot be waived and gives customers the ability to utilize online banking, mobile and bill pay.
