The Risk Management Association (RMA) just released 2009 Q4 figures showing that the downward slide of bank asset quality is beginning to level off.
The RMA is a nonprofit with 3,000 institutional members whose goal is to implement sound risk principles in the financial sector. Their Risk Analysis Service data report was released in conjunction with Automated Financial Systems, Inc., and is the self-professed only gauge of comprehensive credit risk. The data utilize figures from 17 top-tier banks.
Showing Signs of Recovery
From the press release: "The leveling off of the deterioration of commercial asset quality from the third to fourth quarter is a positive indicator that the economy is showing signs of recovery," said William F. Githens, RMA president and CEO. "However, the business banking sector continues to be a concern and is substantially underperforming the middle market and large corporate lines of business."
But while the rate of decline in asset value for big banks is only beginning to level off, specialty lenders are enjoying quicker successes. AmeriCredit, CapitalSource, Allied Capital Source, and CIT Group all posted 52-week high stock prices (TheStreet).
CIT GROUP
CIT Group, a commercial lender to small and medium-sized businesses, took its first bond to market on February 26 after emerging from a brief, month-long Chapter 11 reorganization in December. The bond, offered at $667.2M, represents a portfolio transition from commercial-paper-backed to equipment leases. Hopefully, this shift will lead the way to longer-term solutions to loan portfolio instability and vulnerability.
CIT's bond is issued through the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF), also known as "Bailout #2." CIT got in on the Facility just before its rapidly approaching final monthly application deadline of March 4.
It's a start, but CIT needs to secure other, low-cost funding that doesn't come from the government. Their bankruptcy had followed on the heels of nine consecutive losing quarters that totaled over $5B.
Whether CIT Group-and other lenders-will be able to remain solvent after TALF's discontinuation remains to be seen. What we know, though, is that small businesses are counting on the success of CIT and similar lenders.
Word on the Street
A recent CIT report-auspiciously titled "Lessons Learned-A Case for Greater Optimism" -surveyed owners and executives of 220 American small businesses (as defined by annual revenues from $1M to $15M) about the close of 2009 and their views of 2010.
Key findings:
- For 2009, 33% said their revenue "declined," and 26% said it "declined significantly"
- 64% said it was harder today to manage their company's cash flow than it was 12 months ago
- 90% agreed that current stimuli does not help them
- For 2010, a whopping 53% expected their revenues to "grow," and 8% expected their revenues to "grow significantly"
- 80% said they're now smarter about running their businesses
- 70% said the recession made them better leaders
Bankers should look at a systems to stress test their loan portfolios in an effort to better manage the risk. There are systems in the market place that will stratify/custom grade loan portfolios, stress test the portfolio along various key data points (not just interest rate stress), provide the probability of loss a portfolio will incur. These systems offer many other items of information that are essential to managing the loan portfolio and its risk, to both the bankers and the regulators.
Compliance. An issue most bankers don't relish. Often times it is explained away as a necessary evil! This approach makes difficult for the bank to stay on top of compliance issues and often leads to problems with examiners. This leads to compliance waves where the compliance officer works to get things ready for an exam or audit then the work load relaxes until the next exam or audit.
Based on the current state of affairs, most banks' find themselves overwhelmed with compliance workloads; they have limited staff and schedules, along with the increase demands from examiners, who want more risk management. Internal audits are conducted by just a few people, typically, they are reactionary, and they utilize outdated technology, if any technology at all. The workload is not slowing down anytime soon-if anything it is increasing.
What we propose is a complete rethinking of compliance-to what is called "Next-generation Compliance"-this is where banks are proactive with compliance rather than reactive. It smoothes out the waves and distributes the work throughout the organization, which makes the compliance load much lighter and much easier to manage. Such a change must happen on three levels: a bank's operational culture, their level of collaboration, and the technology used in audits.
I. Culture
- 1. Devise a compliance strategy
- Get executives onboard with the strategy
- Promote all team members to be proactive
- Create metrics to quantify the value of proactive compliance
- Does compliance result in an increased speed of reporting?
- Quality compliance management response?
- The larger scope includes overall compliance simplicity?
- Money and time saved?
II. Collaboration
- 1. Include people from multiple departments in compliance audits
- Standardize process across all areas of compliance audits
- Be flexible, and have reasonable expectations
- Make your auditors business-focused, independent, strategists
- They shouldn't be on an island
- Promote productivity
- Communication with regulators
- Involve them in the process early so they understand the improvements from the positive changes
III. Technology
- 1.Reassess your current compliance tools
- Is technology working efficiently for you?
- Break from the spreadsheet! You can't properly collaborate from a spreadsheet - there are easier ways
- Increase use of collaboration tools to centralize the compliance audit workflow
- With them, everyone can discuss and facilitate improved risk management
- Track the use of audit recommendations
- What good are recommendations if they aren't used?
- Provide continuous up-to-date analysis/status of risk management
Compliance and Banking
Regulators are asking for more risk management and compliance, but banks aren't able to address this increased workflow with more manpower. With tighter operating budgets, the solution is working smarter. Often times when a bank is not able, to deliver properly on compliance issues it results in the issuance of an MOU or a C&D to the bank. Restoration plans and strategies may be implemented and managed through continuous compliance.
If you're buying a bank, the regulatory hurdles are less. But modifying an existing bank's compliance processes requires a team effort; it's all about building a smarter bank!
If you're starting a bank, a culture of compliance can be built from the ground up as your institution evolves. A blank slate is easy to work with. But at the same time, new banks are subject to harsher regulatory scrutiny, which means compliance has to be a priority.
To learn more about Next-generation Compliance, click the link for more information.
If art imitates life, then the burgeoning market of art-as-loan-collateral is a mirror of today's financial sector, of asset-based lending.
Last year, venerable portrait photographer Annie Leibovitz called on Art Capital Group (ACG) for a $15.5M loan. Leibovitz's collateral? The rights to her entire photograph collection.
ACG only makes loans against an artist's or art patron's collection. Their website explains: "Unlike traditional sources of capital, we are comfortable utilizing fine and decorative art as the sole asset securing a loan or as a component of a collateral package."
And you thought the medical profession was specialized.
A preeminent photographer borrowing against her artistic catalog makes headlines (and blogs!), but asset-based lending and lending tailored to a business industry aren't new nor confined to the fine arts.
What is new is how popular this lending practice has become.
As Kyle Stock writes in the Wall Street Journal, "Asset-based lending, excluding mortgages, swelled by 8.3% to almost $600 billion in 2008, according to the Commercial Finance Association, an industry trade group. The association is still gathering data on 2009, but preliminary surveys show double-digit percent increases in lending. In comparison, syndicated lending in 2009 sagged by 39%, according to Dealogic Inc."
Interest rates for asset-based lending are typically higher than traditional loans, but still less than a credit card's terms. And if you can't persuade a bank to lend money through the usual channels-whether because of poor credit or the contracted credit market-then it's your best option.
Loans are made based on a business's accounts receivable, invoices, inventory, patents, and equipment. Most lenders require a detailed (and optimistic) business plan. But depending on the lender, businesses can use the cash for, among other things, acquisition, management buyout, recapitalization, growth financing, and turnaround.
Along with higher interest rates than traditional loans, asset-based loans also typically carry stiffer penalties for default, including a quick seizure of the collateral rather than a penalty. And if a bank has to liquidate assets, knowledge of the industry is very important.
Asset-based lending that matches a specialized lender with a customer-as with Leibovitz's loan-benefits both parties. The lender knows that what they're-literally-buying into, and the business gets payment terms that are tailored to their billing cycle.
Several banks around the country--both large and small--offer asset-based lending including, Bank of America, which offers several specialties, and is the asset-based lending industry leader.
According to the Wall Street Journal, the industry's biggest companies funded 23% more asset-based deals in 2009 as compared to the previous year.
And BOA, Wells Fargo, JP Morgan Chase, and TD Bank are all taking steps to expand their asset-based lending to stay competitive.
Whether this trend will continue remains to be seen. Much of it will depend on the default rate of these types of loans. Late last year, ACG accused Leibovitz of defaulting on her loan. Although ACG threatened a lawsuit, the issue was resolved last September without court proceedings.
Andy Warhol once said, "Being good in business is the most fascinating kind of art. Making money is art and working is art and good business is the best art."
What a great time of year - I am so grateful for the Holidays. For me, Thanksgiving, Christmas and New Years Day are my favorite holidays. It is a wonderful time to show gratitude to others for their kindness and help during the year. It is also a time of great reflection over the past year. As I think about the year I realize that I am truly blessed and I am grateful for those blessings. My hope is that my gratitude reaches everyone who has blessed my life, for you have made a difference, I am thankful for you, and I wish each of you the greatest success in your own life. I have been thinking of the peace this season brings and hope also that each of us are able to carry a little more of that peace with us throughout the next year. May God bless each of us as we strive daily to have more of His peace in our lives. To all - Merry Christmas and Happy New Year!
De Novo Strategy is a supporter of CREED and its nonprofit work; we invite you to participate in this project that CREED has just launched. It is a project that every entrepreneur should be a part of and enjoy supporting! Maybe a banker would catch the vision on and support this too!
CREED, a non-profit 501 (c)3 corporation, is launching a crowdfunding initiative to jumpstart small business in the U.S. Crowdfunding involves collecting small donations via grassroots marketing campaigns. The donations will be used to fund $5,000 in free start-up capital, awarded to the entrepreneur who sends in the most compelling business plan.
Crowdfunding or crowdsourcing programs have been run successfully by two organizations in Ireland,Outvesting and iQ Prize. The two entities raised an aggregate 15,000 euros, by way of 50-euro pledges, to fund small business start-ups.
CREED's effort will be similar. The non-profit is currently accepting $50 pledges, with a goal of accumulating $5,000. Once this pledge goal is reached, CREED will publish business plan submission guidelines and begin accepting business plan entrants. Everyone who pledges $50 to the effort receives one vote to help determine the best business plan among those entered. The plan with the most votes will be awarded $5,000 in start-up capital, with no strings attached.
Please visit Crowdfunding to learn more about CREED's this great American opportunity.
Follow us at CREED
The U.S. Census Bureau conducted a National survey this year on behalf of the FDIC to ascertain the level of Unbanked and Underbanked households in the United States. The survey was designed to help the FDIC understand who is outside the banking system. The study which is the most comprehensive to date, reveals that just over a fourth (25.6 percent) of the households in the U.S. are unbanked or underbanked and those households are largely low-income and/or minority.
The survey additionally collected more accurate estimates of the Unbanked and Underbanked Households, and reasons why the people remain unbanked or underbanked. The survey estimates, represent the first time this kind of data has been collected in large metropolitan statistical areas (MSA), states, and across the nation.
"Access to an account at a federally insured institution provides households with an important first step toward achieving financial security - the opportunity to conduct basic financial transactions, save for emergency and long-term security needs, and access credit on affordable terms," stated Sheila Bair, Chairman of the FDIC. "By better understanding the households that make up this group - who they are and their reasons for being unbanked or underbanked, we will be better positioned to help them take that first step."
Terms
Unbanked is determined by households who answered "no" to the question "Do you or does anyone in your household currently have a checking or a savings account?"
Underbanked households were determined by those who have a checking or savings account but rely on alternative financial services. Specifically, using money orders, nonbank check-cashing services, payday loans, rent-to-own agreements, or pawn shops at least once or twice a year or tax refund anticipation loans at least once in the past five years.
Key Findings of the Study
-
Of the households surveyed, 7.7 percent were unbanked, which translates nationally to 9 million households - approximately 17 million adults. An additional 17.9 percent - or 21 million households nationally (approximately 43 million adults) - were found to be underbanked.
- The proportion of U.S. households that are unbanked varies considerably across racial and ethnic groups with certain racial and ethnic groups being more likely to be unbanked than the population as a whole. Minorities more likely to be unbanked include blacks (21.7 percent of black households), Hispanics (19.3 percent), and American Indian/Alaskans (15.6 percent). Racial groups less likely to be unbanked are Asians (3.5 percent) and whites (3.3 percent).
- Certain racial and ethnic minorities are more likely to be underbanked than the population as a whole. Minorities more likely to be underbanked include blacks (an estimated 31.6 percent), American Indian/Alaskans (28.9 percent), and Hispanics (24.0 percent). Asians and whites are less likely to be underbanked (7.2 percent and 14.9 percent, respectively).
- Households with income under $30,000 account for at least 71 percent of unbanked households. As income increases, the share of households that are unbanked declines considerably. Nationally, nearly 20 percent of lower-income U.S. households - almost 7 million households earning below $30,000 per year - do not currently have a bank account. In contrast, only 4.2 percent of households with annual income between $30,000 and $50,000 and less than 1 percent of households with yearly income of $75,000 or higher are unbanked.
- Households with an annual income between $30,000 and $50,000 are almost as likely as lower-income households to be underbanked.
This survey goes hand in hand with a survey the FDIC conducted earlier in the year of bankers efforts to serve the unbanked and underbanked households in their community, see FDIC's Unbanked Survey. The survey is of such important information to the FDIC that they created a special website to display the findings at online at www.economicinclusion.gov.
It appears that the unbanked and underbanked households are close to the same number of estimates of those without proper medical insurance. Is there a correlation here? Is this something congress should be addressing - making sure that every American has proper banking and financial services?
FDIC member institutions' earnings improved this quarter to a modest $2.8 billion, which is significant over last quarter's net loss of $4.3 billion and third quarter of 2008 of $879 million. Loan loss provision continued to affect the profitability of the industry as banks continued to cover their bad assets. Growth in securities and operating income helped the industry realize the profit, with 43 percent of the institutions reporting higher profits this quarter over the same quarter last year. Just over one in four banks reported losses this quarter of 26.4 percent, which is slightly up from 24.6 percent a year ago.
Net Interest Margin, ALLL
Net interest was higher this quarter, rising to a four-year high of 4.6 billion. The average net interest margin (NIM) was 3.51 percent, slightly higher than last quarter. Most banks, 62.1 percent, reported higher NIM than last quarter; however only 42.2 percent had an NIM increase year over year. Provisions for loan and lease losses increased and total set aside, remained over $60 billion for the fourth straight quarter, rising to $62.5 billion. While the quarterly amount banks set aside was only 11.3 billion, $4.2 billion less than the second quarter, it was 22.2 percent higher than last year. Almost two out of three institutions, 62.6 percent, increased their loan loss provisions.
Net Charge Offs Remain High
Loan losses continued to mount, as banks suffered year over year increases for 11 straight quarters. Insured institutions charged off a net of $50.2 billion this quarter, a $22.6 billion increase or an 80.5 percent increase compared to third quarter of 2008. This is the highest annual charge off rate since banks began reporting this information in 1984. All major categories of loans saw significant increases in charge offs this quarter, but losses were largest amongst commercial and industrial (C&I) borrowers. While noncurrent loans continued to increase, the rate of increase slowed; noncurrent loans and leases increased $34.7 billion or 10.5 percent to $366.6 billion, which is 4.94 percent of all loans and leases. This is the highest level of noncurrent loans and leases in 26 years. The increase of noncurrent loans was the smallest in the past four quarters.
Eroding reserves
The reserve ratio increased as noncurrent loans increased, however the spread continued to widen. While the industry set aside 9.2 billion, 4.4 percent in reserves, which increased the reserve level from 2.77 percent to 2.97 percent. This increase was not enough to slow the slide - it was the smallest quarterly increase in the past four quarters and the growth in reserves lagged the growth of noncurrent loans, which caused the 14th consecutive quarterly decline in this ratio from 63.6 percent to 60.1 percent.
Loan Balances Decline Deposits Are Up
Loan and lease balances saw the largest quarterly decline since the industry started keeping track of these numbers in 1984; they fell by $210.4 billion or 2.8 percent. Total assets fell for the third straight quarter; assets at insured institutions fell by $54.3 billion, which follows a decline of $237.9 billion in the second quarter and a $303.2 billion decline in the first quarter. Deposits increased $79.8 billion or 0.4 percent during the third quarter, allowing banks to fund more loans with deposits rather than other liabilities. At the end of the quarter deposits funded bank assets was 68.7 percent, the highest level since second quarter 1997.
Troubled Banks Increase
The number of reporting insured institutions at the end of the quarter was down to 8,099 from 8,195; there were fifty bank failures and forty-seven bank mergers. This is the largest number of banks to fail since fourth quarter of 1992, when 55 banks failed. The number of banks on the FDIC's problem list increased from 416 to 552 at the end of the second quarter.
During the quarter, the number of new banks chartered was three. This is the lowest level since World War II. This begs the question on what is the best way to get new capital into the banking industry. Should we recapitalize the existing banks including those in trouble? Or, should we start fresh with a new bank that can build a new, clean loan portfolio?
Another Item
CREED - a 501(c)3 nonprofit has started a Crowdfunding project/contest to help a small business - Look at the opportunity to be a part of something truly great! We will follow this closely as we are strong supporters of CREED.
4M5EDCNY9JWB
As bank failures mount into a heap of moldering economic stimulus, and the FDIC's Bank Insurance Fund shrinks to its lowest level in many years, FDIC Chairman Sheila Bair tells the public that depositor have nothing to worry about, because, "The FDIC fully guarantees their insured deposits and provides them with seamless access to their money. For the insured depositor, a bank failure is a non-event."
This may be true for many depositors, however it is not true for the bank's "C" level management team, board of directors, and shareholders - they are the losers! In more ways than one! Not only do they lose their bank, but they lose their jobs, careers, and opportunity to associate with a bank in the future. With the FDIC there is no forgiveness, no bankruptcy court to "work out" the problems and reorganize the institution - the only option is failure.
The FDIC has a $100 billion line of credit with the U.S. Treasury - they can close a lot of banks with that much money. So far, all the banks that have been closed, the expense has been paid for by the FDIC's Member Banks through their deposit insurance premiums they have paid in over the years. We can only hope, the FDIC won't have to tap that line of credit. The law states that the FDIC guarantees deposits with the full faith and credit of the U.S. Government, which means borrowing from the U.S. taxpayers. We are the full faith and credit of the U.S. Government.
In most cases when a bank is closed the deposits are available the next business day. This is because the FDIC is usually available to help another institution acquire the deposits and make good on them. Often the FDIC has to give a lot of concessions to the acquiring bank - which costs the insurance fund money. The complexity of these transactions, even for a small bank, takes many hours to iron out - often taking upwards of ninety people from the FDIC two weeks to close a bank.
The amazing thing is that with all the flaws of the system, it seems to work - no FDIC insured depositor one has ever "lost a penny of their deposits" according to Ms. Bair, "and none ever will". Thank goodness for the full faith and credit of the U.S. Government.
Sheila Bair argued to Congress last week that the government should "impose greater market discipline on systemically important institutions." Her rationale for the argument was that those large firms have been funded by the market as if they were too big to fail, while their management teams depended on faulty risk management practices; these circumstances, combined with ineffective regulation, created a the bulk of our current economic problems. Bair's commentary indicates that we will ultimately have much more regulation throughout the financial industry, simply because what happens to large institutions will trickle down to impact the smaller community banks.
Bair went on to say:
In a properly functioning market economy there will be winners and losers, and some firms will fail. Actions that prevent firms from failing ultimately distort market mechanisms, including the market's incentive to monitor the actions of similarly situated firms. The most important challenge now is to find ways to impose greater market discipline on systemically important financial organizations.
Shareholders, creditors to take losses
It is true that we need to create an effective, bailout-free system to unwind large failing institutions - and to do so without creating a financial tsunami that wipes out the rest of the economy. But the reality is that everyone will feel the impact of a large institution's failure. It is impossible that a CitiBank, Wells Fargo, Bank of America or Chase failure could result in only a slight ripple through the economy. Those closest to the institution will feel the pain the most and people on the far fringe, the least -- but it will be felt by all nonetheless. The government needs to stop trying to make our lives pain-free in all aspects of life. We simply cannot be shielded from ALL risks.
In the current meltdown, for example, shareholders felt the brunt of the financial crisis pain. Investing is an inherently risky enterprise, and to devise regulation that would soften the impacts of investment failure runs contrary to the tenants of our economic system. Because shareholders voluntarily took risks with the companies they invested in and supported, they should absorb the repercussions when those firms fail.
Bair agrees with this argument. She advises:
Under the new resolution regime, Congress should raise the bar higher than existing law and eliminate the possibility of open assistance for individual failing entities. The new resolution powers should result in the shareholders and unsecured creditors taking losses.
Bair also addresses the current priority given to secured creditors. Such creditors have, in the past, made credit decisions based on collateral value without thoughtfully considering creditworthiness as well. This puts the creditor at risk of default and forced liquidation, while encouraging lack of discipline in the market. Addressing this issue can help to minimize costs to receivership and spread out losses related to failures more broadly.
Other key points in Blair's testimony included:
- Resolution of systemically important financial firm failures is currently managed through the bankruptcy process, where there is no protection for public interest.
- Holding company affiliates are often dependent on the ongoing operations of systemically important firms. Regulation is needed to require these affiliates to have greater autonomy. Holding companies should have wind-down plans.
- Open company assistance benefitting shareholders and creditors should be banned by Congress.
- A Financial Company Resolution Fund should be established and pre-funded through assessments against large financial firms.
- The FDIC should have authority to resolve "systemically important and non-systemically important depository institution holding companies, affiliates and majority-owned subsidiaries." This authority would allow the FDIC to maximize the value of the assets, particularly in cases where certain functions lie outside the FDIC's current authority.
- The FDIC supports the creation of a powerful Financial Services Oversight Council to monitor and manage system-wide risks. The Council should be given a minimum rulemaking authority "that must be met and could be exceeded." The Council should oversee a group of regulators, but also have its own power to act if the regulators do not.
The full text of Sheila Bair's testimony can be found at: http://www.fdic.gov/news/news/speeches/chairman/spoct2909.html
An insightful article I read in the Marriott Alumni Magazine stated that an organizations need to have three traits in their culture to thrive. First, a little background.
Growing Corn
Each semester Stan Fawcett, holds up a fresh ear of corn in his supply chain strategy class and asks, "Do farmers grow corn in Iowa?" The students with puzzles looks wonder why the professor would ask such a straightforward question. Fawcett's response is "No." Farmers don't grow corn, "the corn grows itself. Farmers clear the trees, remove the rocks, plow the fields and provide irrigation. Then they add pesticides, fertilizer and all those other things that lead to a bounteous harvest. The farmers' job is to create the environment where the corn can flourish."
This may sound simple, but as managers and leaders, our job is to create a work environment where our employees can grow and flourish in their jobs. By doing this can provide the right conditions to achieve maximum potential and productivity from each employee. The research team from the Marriott School Professors, determined that there are three critical ABC's - affirmation, belonging, and competence.
Affirmation
Creating opportunities to let all employees know that they are valued helps to satisfy the need in all of us for approval. Everyone wants to feel appreciated for their work and efforts to help the business succeed. Fawcett says, "Managers need to look for opportunities to express appreciation."
Professor Dave Whitlark says, "Employees also feel affirmed when they feel like problem solvers in their organization." As well as helping them "view criticisms as opportunities to help them succeed. One difficult job leaders have is to correct people when they are wrong." In addition, "create an environment where employees accept correction and even look forward to it because they know you want to help them."
Belonging
The second element of a thriving corporate culture is the sense of belonging; it refers to people's need to feel socially connected to coworkers and to the organization itself. Belonging leads to higher quality service and productivity.
Professor Gary Rhoads says, "You can scream at employees, and you can threaten them so they're productive, but if you want them to give quality service, you have to capture their hearts. When productivity goes up, quality doesn't always follow, but when quality goes up, productivity always follows."
Competence
The third element is competence. Rhoads says it this way, "You either lift people up, or tear them down; I'm always surprised how many people take the teardown approach. And the way supervisors tear down employees is they peck away at their competence."
Building confidence can come from simple things like providing extra training, and letting employees be in control of their work performance. In house training by other employees, utilizing outside consultants, helping employees go back to school or sending them to a conference, this investment in education strengthens their competence.
Another method is to have a newbie shadow a veteran for a short period. This tells the trainer that the company has confidence in their performance and it says, "you're a great role model ... and what does the new person learn? A lot from someone an enthusiastic employee. This arrangement actually accelerates the learning curve."
By building corporate culture that effectively uses the three traits, employees become more productive, quality improves and loyalty is developed.
Fawcett smiles when he says, "When ... a manager understands and captures the vision of the ABC's, makes people feel valued, creates a sense of belonging, empowers them through competence, and then unleashes them to solve the world's problems, it's awesome."
To download a full copy of the magazine article paper click: ABC's