Observations from the APC Family of Banks

I’ve had lots of “What are you seeing in your other banks?” questions from clients recently.  Here are a few general observations:

1. NSF fee incomes are significantly lower than last year.  Some of the Q1 weakness may be related to tax refunds, but most of it appears to be driven by the amazing phenomenon of people not spending money they don’t have.  This is a good thing for our economy (in the long term), but it slows economic recovery and lowers bank profits.  And as an answer to the inevitable follow-up question, I don’t know of any good new sources of fee income.
2. Loan demand is still soft in most markets, although the I-10 corridor in LA and MS is beginning to show signs of life.  There is still too much product (money) chasing too little demand (loans), so price continues to fall.  Long term fixed rates (under 5% for 10 years) are being offered in some markets, and I worry a lot about the interest rate risk implications of these products.  If you can stay short on balloon date (three to five years, seven at most) on solid credits, the low rate won’t kill you.  If you can get an origination fee, even better.
3. Deposit volumes continue to grow, and most of the growth is in nonmaturity products.  This is a good mix trend, but bankers need to make sure their rates are not too high.  With overnight funds at 0.25% and extremely low securities yields, why are you paying north of 0.50% on any deposits unless loan demand is strong?  If deposit volumes are growing and you don’t have a good plan for deployment, think about lowering rates – again.
4. Several of our banks are already experiencing earnings and balance sheet performance well above or below plan.  If these variances are expected to continue, consider a mid-year plan revision to avoid criticism about the inaccuracy of your plan.

Dealing with Examiners

I want you to get up right now, go to your windows, open them and stick your head out and yell ‘I’m as mad as hell and I’m not going to take this anymore!’  Things have got to change.  But first, you’ve gotta get mad!  You’ve got to say, ‘I’m as mad as hell, and I’m not going to take this anymore!’  Then we’ll figure out what to do about the depression and the inflation and the oil crisis.  But first get up out of your chairs, open the window, stick your head out, and yell, and say it:  “I’M AS MAD AS HELL, AND I’M NOT GOING TO TAKE THIS ANYMORE!”  (Peter Finch as Howard Beale in Network (1976))

OK, so yelling at examiners is not a good idea.  I got your attention, though, right?  Now, you need to do the same with your examiners.  I’ve heard of and read too many off-the-wall statements from examiners lately to hold this in any longer.  A few suggestions for you as you prepare for your next exam:

1. Be prepared.  You need to know more about how your bank operates than the examiner.  Understand your liquidity, forward liquidity and contingent funding plans.  Understand your Earnings at Risk and Economic Value of Equity posture.  Call us if you want a refresher course on either one.
2. Don’t fall prey to the “Gotcha! Game”.  If an examiner interrupts your day with a series of rapid-fire questions on a technical topic, delay your response.  “I’m right in the middle of something – can I get back to you in 30 minutes?” is an easy escape clause.  Then, prepare your response (call in reinforcements as appropriate) and reverse the Gotcha! by catching the examiner off guard when you are ready to talk.
3. Do not accept inaccurate or unsubstantiated statements.  Stand your ground and argue (politely) for your position.  If you can’t resolve the issue, ask the examiner to put his concerns in writing (in the Report of Examination) so that you can respond.  
4. Be nice, but be firm.  Examiners are people, too.  Sometimes, emotions or opinions (or supervisors) override common sense and logical thought.  Don’t kill the messenger, but don’t accept the message if it isn’t reasonable.
5. Respond, in writing, to your Report of Examination.  Go on record with your side of the story.  The manager of a baseball game doesn’t expect to get a bad call changed by arguing with the umpire.  His performance is designed to rally the team and increase his chances on the next close call.  The exam is over, and you aren’t going to change the result, but you can make your case for the next exam cycle.  I was told recently that a client’s response letter had been widely circulated by examiners and was the “talk of the office”.  We would be glad to help you write a measured, appropriate response to your next Report of Examination (or other regulatory communication).

The Fiscal Cliff

Fed Chairman Bernanke told a group of senators yesterday that scheduled end of programs including the Bush tax cuts, the payroll tax holiday and extended unemployment benefits, as well as budget cuts that are set to take effect in January of 2013 would have a negative effect on the economy.  This statement is similar to one he made at a news conference last month: “It is very important to say that if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there is, I think, absolutely no chance that the Federal Reserve could or would have any ability whatsoever to offset that effect on the economy”.  Anyone up for a one year extension on some or all of the Bush tax cuts?  Might such an extension become an election year gimmick?  Eventually, we must deal with the unholy trinity – tax increases, entitlement reform and a significant reduction in government spending.  Or, we can just follow the lead of French and Greek voters and elect anti-austerity candidates.  Surely someone will bail us out…

Am I Giving Away My Secrets?

I has a client ask if posting my APC Client Commentaries on this blog was equivalent to giving away information to the world instead of sharing it only with paying clients.  A good question, I thought, from a financially astute banker who cared about my revenues, his expenses, or both.  The short answer is NO.  While I do post some good "client only" commentaries here, they are usually uploaded to the blog weeks or even months late (although I do put the original date on the post, for context).  And, there is a lot of good info that never makes it onto the blog.  So, if you like what you see and aren't a current client, please visit the following websites and learn what we can do for you and your institution.

American Planning Corporation

National Capital, L.L.C.

Curative Advisors, LLC

An Interesting Investment Structure

Currently, Qwickrate and other listing services are offering long term CD rates over 2.0%.  The top ten 120 month (yes, that’s a ten year maturity) offerings on Qwickrate average 1.97%, meaning you could deploy as much as $2.5 million and pick up 1.75% over Fed Funds.  At this point, you should be asking “Why in the world would I want to lock in that low a rate for ten years, Jeff?”  The answer:  because the early withdrawal penalty is usually only a few months of interest, allowing you to cash in at will without substantial penalty.
When this investment idea first came up, I was uncomfortable with the idea of a banker taking advantage of another banker and breaking the terms of a contract.  The more I think about it, however, the more I like it.  The counterparty is, through the terms of his contract, selling you a put right as a part of the CD.  The cost of the put is the early withdrawal penalty, set by the seller.  If you were to employ this investment strategy, you would have to contact each institution to get a copy of the CD agreement, as Qwickrate does not list each institution’s early withdrawal penalty information.  I would also recommend making note of your intent to make an early withdrawal in your ALCO minutes to avoid examiner criticism.  We will model your embedded put option in our IRR model if you buy any of these long CDs.