Business Journal April B Section

8/9/2019 Business Journal April B Section

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April 2010 TheBusinessJournal 1B


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2B TheBusinessJournal April 2010

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Barack Obamas energy and environ-ment cabinet has a noble goal to replacefossil fuels with renewable energy genera-tion. His administration has realized thatcarbon is costly over the long haul. It is ap-parent that the incoming administration atthe White House knows too well that envi-

ronment, energy and economy are all tiedup with one another. Obama himself hasmade clear that his economic policy is alsodirectly connected to his renewable energyplan. He and his people want to eradicatecarbon from US economy.

This plan comes at a steep price with aninitial estimated budget of $150B. For thefirst time, the US power grid and energyinputs will be reengineered to fit a carbon-less economy. Anti-carbon funds will goas far as replacing light-bulbs, installing

solar panels, and constructing wind farms.It seems that biofuels will not be enjoyingthe same favorable allocations of federalfund subsidies. The strategy is clear: raisethe cost of fossil fuels and outprice themfrom the market so that they can no longerbe economically accessible.

The current US and global recessionmight just be auspicious for reducing car-bon dioxide emissions. Reducing carbonfootprint should be a responsibility of allindividuals on earth. A green US president,along with his green team, might just do

wonders with showing their commitmentand sticking to it, thereby influencing thepopulation. If Obama and his team can sus-tain this move, the US might just recoverfrom both a crippling recession as well asfossil fuel dependence.

Environment and Economy:The Ties that Bind


3/8


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4/84B TheBusinessJournal April 2010

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Business Banking

Community banks and the importance of lendingThis article examines the performing char-

acteristics of high performing banks in a uniquemanner. High performance banks have beenstudied by the American Bankers AssociationResearch and Planning Group and by indepen-dent researchers, as well as the several FederalReserve Banks, which publish profit statisticsfor banks in their districts. These studies, withsome exceptions, examine the data on a year-to-year basis and report their analyses of theannual changes.

This study approaches the problem of iden-tifying high performance characteristics ina different way. Average data for a five year

period was used instead of the year-to-yeardata for previous studies. This approach hasa smoothing effect on bank performance andconcentrates on the characteristics that identi-fy high performance in the long run. Addition-ally, this study concentrates on those bankingvariables related to lending and uses statisticaltechniques to identify those lending character-istics which are statistically significant in thedetermination of high performance.

The first step is to define high performancebanking. In order to make the study manage-able, the bank sample was limited to 251 Ten-

nessee community banks. Tennessee was cho-sen because of its diversified economy and itsdiversified banking community of independentand holding company operations. In a compari-son of bank performance in the region with theperformance of other Tennessee banks, it can beshown that banking results in Tennessee closelyresemble overall results for the Southeast U.S.[2,3,12]. In order to remove potential statisticalbias, large banks with over $1 billion in assetsand new banks less than five years old wereeliminated from the study group.

The Federal Reserve Boards reports of con-dition and income computer tapes were used as

the financial database for this study. The datawere averaged for the five year period from1983 through 1987. The banks in the study werenot publicly traded. Measures of stock priceperformance and risk-adjusted rates of returncould not be assessed to determine if the marketagrees with the findings of this study.

As a first screen, only banks with a fiveyear average return on assets (ROA) greaterthan the five year average ROA of all banksin the study qualified. The five year averageROA for the sample banks was 0.885. Thesecond screen used was the loan to asset ratio.

Only banks with an ROA higher than the fiveyear average ROA for the sample and a fiveyear average loan-to-asset ratio higher thanthe five year average loan-to-asset ratio (49.39percent) for all of the banks were designated ashigh performers. The dual screen divided thebanks into two groups: 65 high performers and186 other banks (referred to as All Banks inthe study). The banks were further subdividedinto three asset size groups: less than $50 mil-lion, between $50 million and $100 million,and greater than $100 million.

The study used a univariate test of meansto measure the statistical differences in perfor-

mance between the two groups of banks. Themeans of 54 banking variables were tested forsignificant differences. Ten of these provedto be statistically significant in evaluating theimportance of the credit function in high per-forming banks.

In order for a ratio to be designated verysignificant, a dual test was imposed. The ratiomean for the high performing group was com-pared to the ratio mean for the other banks. Ifthe mean was significantly different at the 99percent level of confidence for the All Banksgroup, then the mean was further compared for

each of the size groups. If the ratio mean wasstatistically different in all three size groups, itwas found to be very significant and designat-ed by an a superscript, as illustrated in Table1. If the ratio mean failed the significance testin one of the three size categories, it was heldonly to be significant and designated by a bsuperscript. If the ratio mean failed the signifi-cance test in more than one of the size groups,it was not considered.

Very Significant RatiosAverage Loans/Average Assets. This was

a fundamental ratio since it was one of the twoscreens used. A bank that was a high earner and

simultaneously a high lender was truly a highperformance bank. High performers loaned 57.8percent of total assets as compared to 46.4 per-cent for the other banks. This was a very largeabsolute difference and demonstrated clearly adifference in the lending policies between thetwo groups. The difference held for All Banksand for each of the size groups. The significancedeclined only slightly for the largest size group.

Net Charge-Offs/Average Loans. The key toprofitable banking is being able to lend moneyand to hold losses down. Usually, as loan vol-

See BANKS, page 5B


5/8April 2010 TheBusinessJournal 5B

Banksume increases, loan losses rise proportionally.The remarkable high performing banks wereable, on average, to reverse this relationship.Their higher loan percentage was coupledwith a lower loan charge-off. High perform-ers charged off 0.8 percent as compared to theother banks which charged off 1.1 percent. Themost significant difference in the size groups

was with the largest size. That group chargedoff only about one-half the amount as theirother counterparts. The smaller size groupscharged off fewer loans than the larger highperformers and proportionally fewer than oth-er banks in their group.

It is not possible to over emphasize theimportance of controlling loan losses. A re-cent article by David Cates [2] pinpointed theimportance of this ratio. Assume a $100 mil-lion size bank that is 60 percent loaned up.What is the impact of a 0.8 percent actual loancharge-off? Cates assumed that loan growth

would be 20 percent and that the loan lossprovision should cover both the anticipatedloan growth and the existing charge-offs. As-suming a net interest margin of five percent ontotal assets and a loan/asset ratio of 60 percent($100,000,000 x 0.6 x 0.008 x 1.20 = $576,000;$576,000/$5,000,000 = 11.5 percent), thenhigh performers needed only 11.5 percent ofnet interest margin to cover the loan loss pro-vision as compared to 15 percent needed bythe typical bank according to Cates. Relativelyspeaking, the high performers in this study didvery well, according to the Cates equation.

Average Past Due Loans/Average Net

Loans. This is the bad loans ratio. The nu-merator includes all past due and non-accruingloans reported by the bank. In the All Banksgroup, high performers had 41 percent fewerbad loans than other banks. High performershad a bad loan ratio of 0.70; others had a ra-tio of 1.18. The percent difference is: (0.70-1.18)/1.18 = 0.41 = 41 percent. The largestsize group had the least significant difference.That group had 0.6 percent of their loans pastdue, 33.7 percent fewer than their lower per-forming counterparts.

Average Real Estate Loans/Average Assets.All of the components of the loan portfoliowere tested for significance. Only the propor-tion of real estate loans proved to have a verysignificantly different mean. High performershad 23.4 percent of total assets in real estateloans as compared to 18.6 percent for the otherbanks. Real estate lending has great potentialfor being very risky. The fact that these highperforming banks were able to emphasize realestate lending and, at the same time, hold loanlosses down was a very considerable accom-plishment. The significance of this ratio wasvery high for each group of banks. Not onlywas the volume significantly higher for the

high performers, apparently the risk controlreferred to above was superior.

Average Liquid Assets/Average Assets. Li-quidity is one of the first of a series of anti-lending ratios - anti-lending in the sense thatit reflects an alternative use of liabilities thatwould otherwise be available to support thelending function. Liquidity was defined as the

sum of cash due from banks plus U.S. securi-ties and U.S. Government agency securities,net Federal Funds, and security repurchases.High performers maintained a lower liquid-ity position; 1.5 percent of their assets wereliquid compared to 19.2 percent of the assetsfor the other banks. High performers were ag-gressive lenders and were able to manage their

liquidity so well that they used fewer non-in-terest or low interest assets.

It was not surprising to find a lower volumeof liquid assets in the high performing banks.Liquid assets earn relatively less than the lessliquid loan portfolio. The other banks demon-

strated a lesser ability to control credit risk inthe loan portfolio. It seems natural that theirvolume of the more liquid and less risky as-sets included in this category would be higher.Lower liquidity undoubtedly annoys examin-ers but, all other things being equal, it doesshow better funds management.

Average Interest Income/Average Net

Loans. This is an interesting measurement.High performers earned a relatively lower lev-el of interest income than the other banks. Theasset composition shows high performers havemore loans and fewer liquid assets than theirlower performing counterparts. Apparently,

the liquid assets generate a greater percentageof their interest income for the low perform-ers than the more risky loans. Pricing strategymay also be a factor. High performing banksmay price their loans more conservatively thanthe other banks. A more aggressive (less con-servative) pricing strategy may have been usedby the lower performing banks. The ability of

the high performers to better control risk wasreflected earlier in this study. Although theother banks had significantly more interest in-come relative to loans, other factors preventedthis supposed advantage from being carriedthrough to the bottom line.

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(Continued from page 4B)


6/86B TheBusinessJournal April 2010

Private Wealth Management

MinsterBankYou have until April15, 2010 to make your 2009 tax year contribution. Contribute up to $5,000 to aTraditional or Roth IRA (Individual Retirement

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FDIC

Business banking is fundamentally a col-lection of account packages and financial ser-

vices that are particularly suited and focussedtowards businesses and companies. For thebusiness owner the choice of banking ser-vices is a vitally important decision that canhave major ramifications at a later date. Sub-sequently when choosing a bank care shouldbe taken, without a careful approach you canfind yourself in a situation where value is inno way apparent.

Opening a business account is simple enoughfor most people, naturally some legal issuesarise and previous convictions can become aproblem. Some banks differ in the amount of

personal information they will need in order toopen an account. Nearly all banks however willgive account holders some form of price incen-tive, typically a reduction in banking chargesfor the first few months of banking.

The first step is always to assess the needsof the business and bear these in mind whenmaking a decision over banking charges. Asmaller company, or one that is just staring op-erations will probably be able to take advan-tage of an account that simply allows chequesto be cashed and funds to be removed at will.

Additionally this type of operation should

not be overly concerned with interest rates andshould instead focus upon the cost of charges.At this stage businesses rarely make a greatdeal of profit and hence avoiding costs whenin the red is far more preferable.

Those who run an established companyhowever should undertake different consider-ations. In most cases this type of business willalready have an account but they may wishto change their banking services. If this is thecase factors such as the customer service pro-vided by the bank, the rates of interest and theamount of charges should be considered.

If any are inadequate then taking time tofind a new bank can be financially rewarding.

If changing banking services, taking time tostudy the interest rates of many banks whilstalso assessing their customer service is advis-able should a better level of service be found.

In the modern world account features suchas internet banking are now commonplace. Inaddition phone banking has arisen as a conve-nient way for business owners to study theirtransactions, the account balance and any oth-er issues in real time from the comfort of theoffice. If these services are not offered by thebank it must be considered why they are notand whether your company can really afford

the time of having to head to the banks branchtwice a week.

Many who are opening a first business ac-count are swayed to use the same bank thatholds their personal finances. This is unad-visable for a number of reasons. Firstly it israrely worth holding all of your financial eggsin one basket; particularly in these times ofeconomic strife, hedging your bets by storingyour company and private accounts in dif-ferent accounts can be beneficial should theworst happen.

Additionally not all banks are able to offer

the same incentives or services, if you are blin-kered into using your existing bank it shouldbe considered if they can work as hard for youas a bank that is actively trying to court yourbusiness?

Hopefully this article has made it clearthat research is the most important course ofaction when choosing banking services. Ulti-mately your business will suffer if the wrongchoice is made. Hence a conscientious, logi-cal approach that is based upon the facts willyield the best results for your company and itsfinances.

Business banking services,

the importance of research


7/8


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KeyCorp appoints Christopher Gorman

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Business banking

KeyCorp (NYSE:KEY - News) has pro-moted Christopher M. Gorman to seniorexecutive vice president and head of itsNational Banking business. He will alsobecome vice chairman of KeyBank Na-

tional Association.In his expanded role, Gorman is re-

sponsible for Keys corporate, investmentbanking, capital markets, commercial realestate and equipment finance businesses.He reports to KeyCorp Chairman and CEOHenry L. Meyer III and will be a memberof KeyCorps Management Committee.

Gorman, who was previously presidentof KeyBanc Capital Markets, was instru-mental in successfully integrating Keyscorporate and investment banking busi-nesses, something that few other bankshave done successfully. He has 27 yearsof experience working with large corpo-

rations and middle market companies. Hejoined Key in 1991.

Chris breadth of experience, businessacumen and proven leadership abilitiesmake him ideally suited for this new as-

signment, Meyer said. Were fortunateto have the depth of talent here at Key topromote from within to fill this importantposition.

He holds a Bachelors Degree in Financefrom Miami University (1983) and currentlyserves on the universitys Business AdvisoryCouncil. He is actively involved in variouscharities and not-for-profit organizations,including serving as past chairman of theKeyCorp United Way Campaign; boardmember, Business Volunteers Unlimited;president, Key Foundation; Cleveland Zoo-logical Society; Hathaway Brown Schooland MWV Pinnacle Capital Fund, L.P.

There are a number of differences be-tween the financial needs of an individualand those of a company, and having accessto a specialist business banking facilitiesis absolutely essential in the current eco-

nomic climate. For a business to grow andperform well in the long term, it is impor-tant to be able to rely on long term sta-bility from their bank, and to be confidentthat any savings or borrowing are flexibleenough to support your goals.

With a specialist business bank likethe few Commercial Banks looking afteryour needs, your company will be able totake advantage of a full range of servicesand access to a long term relationship thatpromotes stability and investment in thefuture.

Relationships are extremely importantin business, and for any business whetherlarge or small, the ability to develop a con-sistent partnership with their bank is im-portant, as this will pay dividends in thelong term growth potential that a companycan expect.

Business banking is very complex, andis a two way process that requires great at-tention to detail from all parties. Having astable financial basis from which to man-age funds on a day to day basis is essential

to promote growth and profits.With the support and advice available

from a specialist business relationshipmanager at your bank, you will be ableto get access to a range of business bank-ing services and products that will supportyour goals because they are tailor made

for use by companies.For more information about business

banking be sure to visit the Alliance & Le-icester Commercial Bank website.


8/8

8B TheBusinessJournal April 2010

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Business Journal April B Section