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PCBB Banc Investment Daily April 16, 2013
Banc Investment Daily
April 16, 2013


Before we begin today, we take a moment to send our thoughts and prayers to those in Boston impacted by the horrific bombing attack that injured 144 and killed 3. We are saddened with the rest of the country by these events and know law enforcement officials are doing everything they can to catch these terrorists and bring them to swift justice.
As we seek normalcy, we will try to return our focus today to issues facing the banking industry. In particular, we wanted to help community bankers set goals as you seek creative ways to generate earnings. The age-old objective here is to generate fee income in addition to NIM.
Our first goal is to deepen customer relationships. Over time, great relationships reduce rate sensitivity and give you an opportunity to compete, as these customers are also more likely to give you a chance to keep their business when they are inevitably approached by competitors.
The next goal is to improve business customer stickiness and profitability. One way to do this is to layer in products outside of loans and deposits. These could include foreign wire transfers, lock box, repo, sweep and other services. While the data shows many customers still make their primary banking relationship decision based on lending activities, keeping these good customers closely tied to your bank through other products means you are always involved no matter what happens.
Our third goal is to give the customer what they want without taking on too much risk. This is driven by the low interest rate environment, which drives many business owners to seek out long term loans at fixed rates. As a business that makes perfect sense, but taking the risk on a bank balance sheet does not. Lending long and funding it short may generate much needed NIM right now, but it also carries substantial risk and it isn't necessary. You can accomplish the same thing by offering a fixed rate loan to your customer, but swapping the rate and keeping a fixed rate loan on your books for the next 1 or 2 years, but then having it float thereafter at an agreed upon spread to Libor. This bridges the low rate environment, allows your bank to capture more NIM now, but also protects you from rising rates in the future. There is no reason to take such substantial mismatch risk and we can teach you how to do this with a quick call.
Our final goal is to improve profitability by focusing on efficiency. For the typical community bank, salaries, benefits and premises expenses (branches, offices) account for around 75% of non-interest expenses. To compete with larger banks, community banks need to bring their efficiency ratio down from the 70% level to 60% (or even 55%). This takes a focused effort, but it is crucial to longer term profitability and performance. Set up an efficiency team, remove all road blocks, support the efforts as an executive team and embrace change. This will get you started and once things are moving they will be hard to stop.
Banking is a tough industry right now, but there is still room for improvement, so keep trying. Set goals, measure them as you go, tinker with things to make them better and keep moving. Be sure to track results, review them as a management team and report them to the board. Over time, you will eventually look back and see you have made tremendous progress.