ceto and associates consultants to bank management mutual community banking: unprecedented...

Ceto and Associates

Consultants to Bank Management

Mutual Community Banking:Unprecedented Challenges, New Opportunities

NICHOLAS CETO, JR.CHAIRMAN AND CHIEF EXECUTIVE OFFICERCETO AND ASSOCIATESATLANTA, GEORGIA March 1, 2012

Massachusetts Bankers AssociationMarlborough, Massachusetts

A presentation to the

ROBERT MONTEITH, JR.VICE PRESIDENT

Ceto and AssociatesCeto and Associates

The Topic of increasing profitability is

• Extremely broad and very timely

• Discussion of three broad areasFirst: Current state of the economy and

Government’s attempt to fix itSecond: Current and historic profitability of

mutual banks in MassachusettsThird: Suggestions to increase individual

mutual bank profitability

Ceto and Associates

Current State of the Economy

Current State of Economy U.S. Unemployment Situation

Category Number Rate

Unemployed 13.7 million 8.5%

Underemployed 9.3 million 6.0%

Discouraged Workers 2.6 million 1.7%

Real Unemployment 25.9 million 16.8%

Current State of Economy U.S. Unemployment Situation

600,000 new jobs a month for 5 years

to get to 5% again!

Current State of Economy Housing Industry

Year(s) Number of Housing Starts

1980s 1.5 million/year

1990s 1.4 million/year

2000-07 1.8 million/year

2010 580,000

2011 590,000

2012 650,000

Current State of Economy Housing Industry

• Home Prices– Average home value down 40%– Wealth lost in housing bubble: 7.1 Trillion– Reality Trac

• Home prices will hit bottom late 2012 – early 2013

Current State of Economy Home Mortgages – 3rd Qtr 2011

52 million mortgages• 28 million in good shape• 24 million in trouble

– 14.6 million underwater– 3.7 million delinquent– 5.7 million foreclosed

There will be no housing boom in the near future

Current State of Economy Government Intervention

Dodd–Frank Wall Street Reform and Consumer Protection Act

• Signed into law on July 21, 2010• “To promote the financial stability of the United

States by improving accountability and transparency in the financial system, to end consumers from abusive financial services practices, and for other purposes”

• 2,319 Pages

Durbin Amendment• Gives the Federal Reserve the power to regulate

and put a cap on debit card interchange fees. This will cost the larger banks roughly $9.4 billion annually, according to CardHub.com.

Regulation E Modifications• Effective July 1, 2010• $38.5 Billion Revenue in 2009• 10% - 20% Projected Revenue

($3.8 Billion - $7.7 Billion)

Ceto and Associates

Current and Historical Profitability of Mutual Banks in Massachusetts

Non-Interest Income and Efficiency Ratios

Performance Metrics 2008 2009 2010 Q3 2011

NII/AA 0.50 0.57 0.61 0.57

Efficiency Ratio 80.28 79.91 76.52 79.64

Notes:Includes All MutualsSource: FDIC Call Reports

Massachusetts Mutual Banks

Performance Metrics 2008 2009 2010 Q3 2011

NII/AA 1.04 1.08 1.05 0.95

Efficiency Ratio 62.95 65.41 65.31 67.02

Notes:Includes Banks, Savings Banks, Thrifts, excluding Massachusetts Banks Source: FDIC Call Reports

All U.S. Banks

Conclusion

Community Banks have lower levels of non-interest income

Community Banks have higher

efficiency ratios than larger banks

Ceto and Associates

Suggestions to Increase Mutual Bank Profitability

Increasing Bank ProfitabilityThe Profit Improvement Process Continuum

Phase I

Phase II

Phase III

Increasing Bank ProfitabilityIntroduction

Initiative Ease of Implementation Cost of Implementation Durability of Initiative

Increase Earning Assets Very Easy Minimal Permanent

Increase Non-Interest Income Easy Minimal Permanent

Reduce Vendor Contract Expenses Moderate Very Minimal Duration of Contract

Increase Operational Efficiencies Fairly Difficult Moderate Semi - Permanent

Optimize Staffing Levels Very Difficult Minimal Semi -Permanent

Increasing Bank ProfitabilityIntroduction

A prudent, highly cost effective, incremental

three (3) phase approach that could result in an

increase of 20% or more in ROA…

Increasing the level of earning assets, and

non-interest and interest income…

Revenue OptimizationPhase I

Revenue OptimizationOverview

Description•A strategic review of core bank products, ancillary services, interest rates and fees on both the asset and liability side of the balance sheet, with the objective of maximizing revenue or product profitability.

Concentration•Non-Interest Income•Interest Income•Interest Expense•Non-Earning Assets

Organizational Units•Retail Banking•Commercial Banking•Commercial, Consumer, & Mortgage Lending•Deposit Operations, Loan Operations and Administration

Revenue Optimization Examples• Deposit Characteristics

• Deposit Rates, Fees, & Balance Requirements

– Checking Accounts

– Savings Accounts

– Money Market Accounts

– CDs

– IRAs

• Courtesy Overdraft Program

• Cash/Treasury Management

• Account/Commercial Analysis

• Electronic Banking

• ATM/Debit Cards

• Cashier Checks

• Money Orders

• Check Cashing

• Dormant Accounts

• Collection Items

• Stop Payment

• NSF/OD Fees

• Charge Back Fees

• Wire Transfers

• Night Depository Services

• Safe Deposit Boxes

• Waivers, Refunds, & Collection Rates

• Un-posted Debits/Credits

• Loan Processing

• Loan Rates, Fees, & Costs

– Auto/Motorcycle/Boat/RV

– CD Secured/Savings Secured

– Unsecured Term Loans

– Overdraft LOC

– Unsecured LOC/Credit Cards

– 1st Mortgages (secondary market)

– 1st Mortgages (portfolio)

– 2nd Mortgages

– HELOCs

– Commercial Real Estate

– Construction & Development

– Commercial & Industrial

– Commercial LOC

• Skip-a-Payment Programs

• Interest Rate Calculations

• Secondary Market Activities

• Miscellaneous Loan Fees

• ATMs

• Branch/ATM Cash Balances

• Vault Cash Management

• FRB Reserve Balances

• FR2900 Reports

• Correspondent Banking

• Wealth Management/Trust ServicesNote: This is just a partial list of the areas typically reviewed. The number of areas reviewed depends on the size and complexity of the bank. However, based

on experience, 300 - 500 areas are reviewed.

Revenue Optimization

Increasing earning assetsa couple of examples…

Revenue Optimization Retail Sweep Programs

What is it?How does it work?

• Change is completely invisible to the customer.

Before

Reservable

Non Reservable

Transaction Account

Checking Sub-Account

Savings Sub-Account

Revenue Optimization Retail Sweep Programs

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Before After

$5,500

$1,000

$3,000

$2,500 $2,500

Reserve Requirement Reserve Balance at FRB Branch and ATM cash

Benefits

FRB Balance Reduction of $3

Million

FRB Balance Reduction of $3

Million

Benefits in ($000)’s

Revenue OptimizationBranch & ATM Cash Management

Managing Costs: Order Cost vs. Carry Cost• Order Cost = Transportation Costs

– Delivery Schedules, Carrier Contracts• Carry Cost = Investment Costs

– Investment Rates, Order Frequency

On average, banks carry 15% - 25% excess cash, and could reduce armored car deliveries by 20% - 25%!

Opportunity to Reduce Cash

Customer Usage

$1,000

$1,500

$2,000

$2,500

Before After

$1,000 $1,000

$2,500

$1,875$1,600 $1,600

Reserve Requirement Branch and ATM cash Customer Usage

Benefits Cash Reduction of 25%, or $625,000Cash Reduction of 25%, or $625,000

Benefits in ($000)’s

Revenue Optimization

Increasing non-interest income

a couple of examples…

Revenue OptimizationLocal Market Analysis & Competitor Surveys

Revenue OptimizationHELOCs

Annual FeeClosing CostsOverdraft Protection TransferGrace Period & Late FeeReturned Loan Payment FeeOver the Limit FeeSubordination Agreement FeeRate FloorsRate Discount OptionsFixed Rate OptionsStop Payments

Revenue OptimizationAccount Analysis

Reserve RequirementEarnings Credit RateFDIC InsuranceHard/Soft Charge (NSF, Stop Payment, Wires, etc.)Waivers Negative Collected BalancesService Charges

– Monthly Service Charge– Debit per Check– Deposit Ticket– Deposit Item– Cash Processing– Cash Management

Revenue OptimizationDormant/Inactive Accounts

Account Types• Timing • Service Charges• Balance Thresholds• Escheatment

Revenue OptimizationWaivers, Refunds, & Collection Rates

Hard Code WaiversRefunds & ReversalsMiscellaneous Fee ScheduleFree ServicesCollection RatesBank Employees

Revenue OptimizationPhase I: Benefits

➢$1,000 - $2,000 per $1 million in assets For example, a $500 million bank should expect

$500,000 - $1,000,000 in new recurring revenue annually!

Other Benefits•No Funding Required•No Credit Risk•No Interest Rate Risk•Permanent and Recurring•Less Vulnerable to Economic Downturn

Decreasing non-interest expense with

vendor contract management andrenegotiation.

Contract ManagementPhase II

Contract ManagementOverview & Examples

Primary Vendor Contracts•Core Processing•Item Processing•ATM/Debit Card Processing•Internet Banking & Electronic Bill Payment•Check Vendor•Telecommunications•Armored Car Carrier

Considerations•Develop a System•Evaluate All Services•Evaluate Transactional Costs vs. Aggregate Costs•Consider Multiple Vendors•Negotiation Window•Market-based Target Pricing

Contract ManagementPhase II: Benefits

➢$125 - $250 per $1 million in assets For example, a $500 million bank should expect

$62,500 - $125,000 in new recurring cost savings annually!

Other Benefits•Reduce & Control Costs•Improve Service Quality & Vendor Performance•No Adverse Impact to Customers•Enhance Legal & Protection Verbiage

Organizational Effectiveness

Phase III

Decreasing non-interest expense with

organizational effectiveness and optimizing staffing levels.

Organizational EffectivenessOverview

Concentration•Non-Interest Expense

– Staffing– Marketing & Advertising– Information Technology– Legal– External Audit– Office Supplies & Postage

•Organization Strategy & Design•Management Process•Risk Management•Operations Strategy•Service Delivery Strategy•Channel Utilization•Technology Utilization

Organizational Units•Retail Banking•Commercial Banking•Deposit Operations & Loan Operations•Consumer & Mortgage Lending•Accounting & Finance•Trust, Insurance & Brokerage•Information Technology•Marketing•Human Resources

Organizational EffectivenessPeer Analysis

Organizational EffectivenessBenchmarking Study: Non-Interest Expense

Branch Metrics SAMPLE Bank Peer MedianPeer 75th

Percentile

Teller Transactions per Teller FTE/Per Month 2,276 2,550 3,490

Total Deposits Accounts Serviced Per Platform FTE 1,403 3,617 5,202

New Accounts Opened per Platform FTE/Per Month 17 81 111

Organizational EffectivenessBenchmarking Study: Non-Interest Expense

Non-Interest Expense Category SAMPLE Bank Peer MedianPeer 75th

Percentile

Advertising/PR as a % of Non-Interest Expense 3.12% 3.14% 4.23%

External Audit as a % of Non-Interest Expense .88% .48% .90%

Legal as a % of Non-Interest Expense 1.42% .89% 1.51%

Telecommunications as a % of Non-Interest Expense

1.37% 1.29% 1.60%

Postage as a % of Non-Interest Expense 1.37% 1.18% 1.59%

Organizational EffectivenessManagement Process ScoreCard

120 Best Practices7 Categories of Management• Organization Structure• Organization Objectives• Planning• Policies & Procedures• Performance Standards & Goals• Communications• Management Reporting

Board of Directors

CEOOREO Management

Internal Audit

MarketingFinance &

ERMOperations

Human Resources

Lending

Organizational EffectivenessRisk Management ScoreCard

250 Best Practices8 Categories of Risk Management• Internal Environment• Objective Setting• Risk Identification• Risk Assessment• Risk Response• Control Activities• Information Communications• Monitoring

Organizational EffectivenessPhase III: Benefits

➢$500 - $1,000 per $1 million in assets For example, a $500 million bank should expect

$250,000 - $500,000 in new recurring cost savings annually!

Other Benefits•Optimum Staffing Levels•Stronger Organizational Alignment & Management Process•Better Controls•Shorter Cycle Times•Reduced Operating Losses•Minimized Internal & External Risks•Improved Process & Productivity•Higher Levels of Customer Satisfaction

Increasing Bank ProfitabilitySummary

Phases Low Benefit High BenefitPhase I: Revenue Optimization $500,000 $1,000,000Phase II: Contract Management $62,500 $125,000Phase III: Organizational Effectiveness $250,000 $500,000

Total $812,500 $1,625,000

Notes:• Phase I, Revenue Optimization benefits of new revenue based on $1,000 - $2,000 per million dollars in assets.• Phase II, Contract Management benefits of cost savings based on $125 - $250 per million dollars in assets.• Phase III, Organizational Effectiveness benefits of cost savings based on $500 - $1,000 per million dollars in assets.

Summary of Potential Benefitsfor SAMPLE BANK

Potential Pre-Tax Benefits, by Phase

New Regulations & Costs• Reg E and Durbin Amendment alone will

cost almost $16 billion in lost income annually or 18% of bank profits of $87 billion in 2010!

• The Dodd-Frank bill (and others to come) will also add significantly to bank costs.

Banks desperately need to do everything they can to replace the permanent loss of this revenue and

look for new sources…

while at the same time… become more efficient.

Community Banking is a key element in our nation’s financial system and we must

do everything we can to preserve its unique place in our economy!!

* * * * * *I hope these ideas are helpful to you in

meeting these challenges!

Thank You!

Contact Us

Ceto and Associates3325 Paddocks Parkway, Ste 400

Suwanee, GA 300241.866.227.1361678.297.1151 (f)

cetoinc@ceto.comwww.ceto.com

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