BID® Daily Newsletter
Jan 9, 2012

BID® Daily Newsletter

Jan 9, 2012

7 RULES TO FOLLOW


People sometimes. study done in the Netherlands that found people are 61% less likely to litter when a sign is posted and the area is clean. That makes sense, but the weird part happens when do T ake funky things for instance a the area is dirty and the same sign is posted. Then, only 30% of people will not litter. While we all like to think we are good at following rules, the simple fact is that when we see large numbers of people doing something wrong, many of us will join the crowd and break the rules as well. So, while you can still see the sign posted on the wall and probably haven't yet had enough coffee to ignore any rules this morning, here are some worthy of following at your bank.
- Rule 1: Diversify the risk in your loan portfolio wherever possible. Do so by sector, loan type, amount, borrower and other factors. That way, if any one has problems, you are not going to be impacted as heavily. This is one of the lessons we have all relearned from the credit crisis.
- Rule 2: Don't accept or give business-related gifts above $100. Executives that can influence business should not accept or give gifts in excess of this to avoid any appearance of impropriety.
- Rule 3: Figure out a way to pay a dividend if you can do so and you cannot generate a return above your cost of capital. Studies show dividend paying stocks in a bear market decline on average about 50% as much as those that do not pay dividends. That is probably because investors have a higher degree of confidence in these banks, like the stronger balance sheets and see them as having a better business model. Obviously, this also depends on capitalization levels and loan performance, but the idea is a sound one.
- Rule 4: Tell your story to regulators when they come in. It will help get regulators up to speed and will ensure that everyone at the bank is on the same page. Be sure to break down all the CAMELS areas, prepare historical perspectives and provide information to examiners when they arrive. Who better than you can tell your own bank's story and update these teams on where you have been and where you are going? Make the effort, stick to facts and good things should follow.
- Rule 5: NIM is lower, efficiency ratios are higher and loan growth remains soft. The sooner your team devises a plan to deal with this and executes, the better off your bank will be and the more profitable it can become.
- Rule 6: Cut your deposit costs and do it now. Community banks still pay on average about 34% more for their funding than larger banks (FDIC, quarterly cost of funding earning assets). Talking about reducing funding costs is great, but actually doing so and moving forward could save millions if you get started early in the year.
- Rule 7: Lock in your small business customers to avoid having them stolen by the largest banks. Big banks are coming down market and targeting specific customers, offering them good rates on longer-term loans and refinancing those customers away from community banks. Remember that a loan is only one piece of profitability and locking a customer in with your bank for 10Ys gives you plenty of opportunity to cross sell additional products. That boosts profits and keeps important customers from moving to a competitor. No one likes to follow rules all the time, but in this environment, it can make sense to follow these and others in order to stay ahead of the competition as you wait for the economy to recover.
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