Ceto and Associates
Consultants to Bank Management
A presentation to the
Mutual Community Banking:
Unprecedented Challenges, New Opportunities
NICHOLAS CETO, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
CETO AND ASSOCIATES
ATLANTA, GEORGIA
March 1, 2012
ROBERT MONTEITH, JR.
VICE PRESIDENT
Massachusetts Bankers Association
Marlborough, Massachusetts
Ceto and Associates
The Topic of increasing profitability is
• Extremely broad and very timely
• Discussion of three broad areas
First: Current state of the economy and Government’s
attempt to fix it
Second: Current and historic profitability of mutual
banks in Massachusetts
Third: Suggestions to increase individual mutual bank
profitability
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© 2012 Ceto and Associates
Ceto and Associates
Consultants to Bank Management
Current State of the Economy
Ceto and Associates
Current State of Economy
U.S. Unemployment Situation
Category
Unemployed
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Number
Rate
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%
© 2012 Ceto and Associates
Ceto and Associates
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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© 2012 Ceto and Associates
Ceto and Associates
Current State of Economy
Housing Industry
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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
© 2012 Ceto and Associates
Ceto and Associates
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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© 2012 Ceto and Associates
Ceto and Associates
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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© 2012 Ceto and Associates
Ceto and Associates
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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© 2012 Ceto and Associates
Ceto and Associates
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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© 2012 Ceto and Associates
Ceto and Associates
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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© 2012 Ceto and Associates
Ceto and Associates
Consultants to Bank Management
Current and Historical Profitability of
Mutual Banks in Massachusetts
Ceto and Associates
Non-Interest Income and Efficiency Ratios
Massachusetts Mutual Banks
Performance Metrics
2008
NII/AA
Efficiency Ratio
2009
2010
Q3 2011
0.50
0.57
0.61
0.57
80.28
79.91
76.52
79.64
Notes:
Includes All Mutuals
Source: FDIC Call Reports
All U.S. Banks
Performance Metrics
NII/AA
Efficiency Ratio
2008
2009
2010
Q3 2011
1.04
1.08
1.05
0.95
62.95
65.41
65.31
67.02
Notes:
Includes Banks, Savings Banks, Thrifts, excluding Massachusetts Banks
Source: FDIC Call Reports
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© 2012 Ceto and Associates
Ceto and Associates
Conclusion
Community Banks have
higher efficiency ratios
than larger banks
Community Banks
have lower levels of
non-interest income
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© 2012 Ceto and Associates
Ceto and Associates
Consultants to Bank Management
Suggestions to Increase Mutual Bank Profitability
Ceto and Associates
Increasing Bank Profitability
The Profit Improvement Process Continuum
Increase
Earning Assets
Optimize
Staffing Levels
Phase I
Increase NonInterest Income
Phase III
Increase
Operational
Efficiencies
Reduce Vendor
Contract
Expenses
Phase II
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© 2012 Ceto and Associates
Ceto and Associates
Increasing Bank Profitability
Introduction
Initiative
Ease of Implementation
Cost of Implementation
Durability of Initiative
Very Easy
Minimal
Permanent
Easy
Minimal
Permanent
Moderate
Very Minimal
Duration of Contract
Increase Operational Efficiencies
Fairly Difficult
Moderate
Semi - Permanent
Optimize Staffing Levels
Very Difficult
Minimal
Semi -Permanent
Increase Earning Assets
Increase Non-Interest Income
Reduce Vendor Contract Expenses
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© 2012 Ceto and Associates
Ceto and Associates
Increasing Bank Profitability
Introduction
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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© 2012 Ceto and Associates
Ceto and Associates
Phase I
Revenue Optimization
Increasing the level of earning assets, and
non-interest and interest income…
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© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Overview
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
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•
Non-Interest Income
Interest Income
Interest Expense
Non-Earning Assets
Organizational Units
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•
•
•
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Retail Banking
Commercial Banking
Commercial, Consumer, & Mortgage Lending
Deposit Operations, Loan Operations and Administration
© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Examples
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Deposit Characteristics
Deposit Rates, Fees, & Balance Requirements
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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
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Checking Accounts
Savings Accounts
Money Market Accounts
CDs
IRAs
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Loan Processing
Loan Rates, Fees, & Costs
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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 Services
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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
Note: 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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© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Increasing earning assets
a couple of examples…
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© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Retail Sweep Programs
What is it?
How does it work?
Before
After
Checking SubAccount
Reservable
Transaction
Account
Reservable
Savings SubAccount
Non Reservable
• Change is completely invisible to the customer.
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© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Retail Sweep Programs
Benefits
$6,000
$5,500
$5,000
FRB Balance Reduction
of $3 Million
$4,000
$3,000
$3,000
$2,500
$2,500
$2,000
$1,000
$1,000
$0
$0
Before
Reserve Requirement
Reserve Balance at FRB
After
Branch and ATM cash
Benefits in ($000)’s
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© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Branch & 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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© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Branch & ATM Cash Management
Customer Usage
Opportunity to
Reduce Cash
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© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Branch & ATM Cash Management
Benefits
Cash Reduction of
25%, or $625,000
$2,500
$2,500
$1,875
$2,000
$1,600
$1,600
$1,500
$1,000
$1,000
$1,000
$500
$0
After
Before
Reserve Requirement
Branch and ATM cash
Customer Usage
Benefits in ($000)’s
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© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Increasing non-interest income
a couple of examples…
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© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Local Market Analysis & Competitor Surveys
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© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
HELOCs
Annual Fee
Closing Costs
Overdraft Protection Transfer
Grace Period & Late Fee
Returned Loan Payment Fee
Over the Limit Fee
Subordination Agreement Fee
Rate Floors
Rate Discount Options
Fixed Rate Options
Stop Payments
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© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Account Analysis
Reserve Requirement
Earnings Credit Rate
FDIC Insurance
Hard/Soft Charge (NSF, Stop Payment, Wires, etc.)
Waivers
Negative Collected Balances
Service Charges
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Monthly Service Charge
Debit per Check
Deposit Ticket
Deposit Item
Cash Processing
Cash Management
© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Dormant/Inactive Accounts
Account Types
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Timing
Service Charges
Balance Thresholds
Escheatment
© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Waivers, Refunds, & Collection Rates
Hard Code Waivers
Refunds & Reversals
Miscellaneous Fee Schedule
Free Services
Collection Rates
Bank Employees
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© 2012 Ceto and Associates
Ceto and Associates
Revenue Optimization
Phase 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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© 2012 Ceto and Associates
Ceto and Associates
Phase II
Contract Management
Decreasing non-interest expense with
vendor contract management and
renegotiation.
a couple of examples…
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© 2012 Ceto and Associates
Ceto and Associates
Contract Management
Overview & Examples
Primary Vendor Contracts
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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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© 2012 Ceto and Associates
Ceto and Associates
Contract Management
Phase 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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© 2012 Ceto and Associates
Ceto and Associates
Phase III
Organizational Effectiveness
Decreasing non-interest expense with
organizational effectiveness and
optimizing staffing levels.
a couple of examples…
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© 2012 Ceto and Associates
Ceto and Associates
Organizational Effectiveness
Overview
Concentration
Organizational Units
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Non-Interest Expense
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•
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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
Retail Banking
Commercial Banking
Deposit Operations & Loan Operations
Consumer & Mortgage Lending
Accounting & Finance
Trust, Insurance & Brokerage
Information Technology
Marketing
Human Resources
© 2012 Ceto and Associates
Ceto and Associates
Organizational Effectiveness
Peer Analysis
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© 2012 Ceto and Associates
Ceto and Associates
Organizational Effectiveness
Benchmarking Study: Non-Interest Expense
SAMPLE Bank
Peer Median
Peer 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
Branch Metrics
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© 2012 Ceto and Associates
Ceto and Associates
Organizational Effectiveness
Benchmarking Study: Non-Interest Expense
SAMPLE Bank
Peer Median
Peer 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%
Non-Interest Expense Category
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© 2012 Ceto and Associates
Ceto and Associates
Organizational Effectiveness
Management Process ScoreCard
120 Best Practices
7 Categories of Management
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Organization Structure
Organization Objectives
Planning
Policies & Procedures
Performance Standards & Goals
Communications
Management Reporting
OREO
Management
Lending
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Operations
Finance & ERM
Board of
Directors
CEO
Internal Audit
Marketing
Human
Resources
© 2012 Ceto and Associates
Ceto and Associates
Organizational Effectiveness
Risk Management ScoreCard
250 Best Practices
8 Categories of Risk Management
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Internal Environment
Objective Setting
Risk Identification
Risk Assessment
Risk Response
Control Activities
Information Communications
Monitoring
© 2012 Ceto and Associates
Ceto and Associates
Organizational Effectiveness
Phase 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
•
•
•
•
•
•
•
•
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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
© 2012 Ceto and Associates
Ceto and Associates
Increasing Bank Profitability
Summary
Summary of Potential Benefits
for SAMPLE BANK
Potential Pre-Tax Benefits, by Phase
Phases
Phase I: Revenue Optimization
Phase II: Contract Management
Phase III: Organizational Effectiveness
Total
Low Benefit
$500,000
$62,500
$250,000
High Benefit
$1,000,000
$125,000
$500,000
$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.
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© 2012 Ceto and Associates
Ceto and Associates
Increasing Bank Profitability
Summary
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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© 2012 Ceto and Associates
Ceto and Associates
Increasing Bank Profitability
Summary
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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© 2012 Ceto and Associates
Ceto and Associates
Increasing Bank Profitability
Summary
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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© 2012 Ceto and Associates
Ceto and Associates
Contact Us
Ceto and Associates
3325 Paddocks Parkway, Ste 400
Suwanee, GA 30024
1.866.227.1361
678.297.1151 (f)
cetoinc@ceto.com
www.ceto.com
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© 2012 Ceto and Associates