Our organization posted a 20% return on equity for 2007, somewhat noteworthy when you consider that this is more than double our competition. Looking back over 2007, we have boiled down this success to the following:
First, we try hard to view ourselves as more of an "asset manager." Capital, people, loans, investments, deposits, products, services and even knowledge are resources to be managed and optimized. We strive for a diversified portfolio in each category and constantly evaluate and re-evaluate how we can improve.
In 2007, we increased the amount of analytical effort we deployed to determine loan, deposit and profitability value. The move paid off, as the markets were more volatile and competition fierce. Many of these same models were also deployed at our customers with impressive success. A bank can still produce above average returns without using an analytical framework to make decisions, but it is getting increasingly difficult. While we are against using arcane, overly-sophisticated analytics when it comes to banking, better utilizing transparent calculations and analysis allowed us to make better decisions in 2007. As we conduct our after action review of new products launched, businesses started, offices opened and people hired, it appears we are onto something.
As an asset manager, the goal for 2008, as it was for 2007, will be to buy low and sell high (or sell high and buy low for a short position). We will look for trends and then seek out 3 to 4 fundamental reasons that support that trend. We will then ask ourselves, what is the best way to optimize the risk/return profile? This applies to people and ideas, since both are more important to us than traditional assets and liabilities. If given the choice, we would rather spend money on a good employee than a good loan, any day of the week. For that matter, we resolve to spend more time and effort on training, as we are learning that this is the key to keeping good employees.
That said, when it comes to traditional assets and liabilities, the trend and fundamentals point to diversifying assets and better managing risk. We look to increase exposure to banks with solid management teams, increase holdings of longer-average life commercial loans, increase liability duration and create more liquidity in the balance sheet. In order to better make decisions, we resolve to take our risk management to the next level.
We also resolve to spend more resources on marketing. In difficult times, we believe we can better distinguish ourselves and we would like all banks to know about it. In particular, we revolve to do more niche marketing, seeking out those customers that can best utilize our products and services.
When it comes to customer management, we resolve to realize that we cannot be all things to all banks. The trick in 2008, therefore, will be to better identify and assist those customers that are interested in exceeding a 15% ROE.
While 2008 will be one of the most challenging years bankers have seen in the last decade, we are optimistic about the profitability and resiliency of our industry. Given that this is the first full week of the year, we would like to start by wishing you all a Happy New Year and tell you that we look forward to working with you in the coming 12 months.