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
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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
Consultants to Bank Management
Current State of the Economy
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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%
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Current State of Economy U.S. Unemployment Situation
600,000 new jobs a month for 5 years
to get to 5% again!
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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
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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
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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
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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
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Current State of Economy Government Intervention
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.
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Current State of Economy Government Intervention
Regulation E Modifications• Effective July 1, 2010• $38.5 Billion Revenue in 2009• 10% - 20% Projected Revenue
Loss
($3.8 Billion - $7.7 Billion)
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Consultants to Bank Management
Current and Historical Profitability of Mutual Banks in Massachusetts
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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
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Conclusion
Community Banks have lower levels of non-interest income
Community Banks have higher
efficiency ratios than larger banks
Ceto and Associates
Consultants to Bank Management
Suggestions to Increase Mutual Bank Profitability
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Increasing Bank ProfitabilityThe Profit Improvement Process Continuum
Phase I
Phase II
Phase III
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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
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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…
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Increasing the level of earning assets, and
non-interest and interest income…
Revenue OptimizationPhase I
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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
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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.
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Revenue Optimization
Increasing earning assetsa couple of examples…
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Revenue Optimization Retail Sweep Programs
What is it?How does it work?
• Change is completely invisible to the customer.
Before
After
Reservable
Reservable
Non Reservable
Transaction Account
Checking Sub-Account
Savings Sub-Account
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Revenue Optimization Retail Sweep Programs
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
Before After
$5,500
$1,000
$3,000
$0
$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
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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%!
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Revenue OptimizationBranch & ATM Cash Management
Opportunity to Reduce Cash
Customer Usage
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Revenue OptimizationBranch & ATM Cash Management
$0
$500
$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
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Revenue Optimization
Increasing non-interest income
a couple of examples…
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Revenue OptimizationLocal Market Analysis & Competitor Surveys
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Revenue OptimizationHELOCs
Annual FeeClosing CostsOverdraft Protection TransferGrace Period & Late FeeReturned Loan Payment FeeOver the Limit FeeSubordination Agreement FeeRate FloorsRate Discount OptionsFixed Rate OptionsStop Payments
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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
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Revenue OptimizationDormant/Inactive Accounts
Account Types• Timing • Service Charges• Balance Thresholds• Escheatment
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Revenue OptimizationWaivers, Refunds, & Collection Rates
Hard Code WaiversRefunds & ReversalsMiscellaneous Fee ScheduleFree ServicesCollection RatesBank Employees
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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
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Decreasing non-interest expense with
vendor contract management andrenegotiation.
a couple of examples…
Contract ManagementPhase II
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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
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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
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Organizational Effectiveness
Phase III
Decreasing non-interest expense with
organizational effectiveness and optimizing staffing levels.
a couple of examples…
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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
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Organizational EffectivenessPeer Analysis
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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
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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%
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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
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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
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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
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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
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Increasing Bank ProfitabilitySummary
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.
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Increasing Bank ProfitabilitySummary
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.
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Increasing Bank ProfitabilitySummary
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!
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Contact Us
Ceto and Associates3325 Paddocks Parkway, Ste 400
Suwanee, GA 300241.866.227.1361678.297.1151 (f)
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