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Hamrick Discusses FP&A In Banking in FP&A May Edition

Hamrick Discusses FP&A In Banking in FP&A May Edition

Up Close: FP&A in Banking    |    By John Hamrick    |    April 30, 2013

Margin Maintenance

Traditionally, banks derive most of their revenue from their margin, which is the net difference between what they earn on money lent or invested (interest-earning assets) and what they pay deposits or other sources of funds (interest-bearing liabilities). Therefore, pricing, measuring and projecting that margin is of crucial concern to the financial analyst. Banks price their products to cover their operational costs and expected losses and still provide reasonable profit to the owners. An increasingly competitive market dictates the price, however. To compensate, banks manage their margin more by manipulating the mix and types of assets and liabilities on their balance sheet.

There is an additional problem of concern down the road, which is stability of rates over time. Very often there is a mismatch between the re-pricing characteristics of a bank’s interest-earning assets versus its interest-bearing liabilities. Deposits tend to be short-lived—from checking and saving accounts that can be instantly withdrawn to CDs with up to five years life—while loans tend to be longer-lived, from commercial loans of around two to three years to mortgage loans of 30 years and beyond. If rates begin to rise rapidly, banks are locked into their yield but have to pay more for the re-pricing borrowings, and the margin compresses (or may even go negative).

This problem is further compounded by the change in consumer behavior as rates change. If rates fall a sufficient amount, loan customers will increasingly take advantage of options to pay off or refinance their loans. If rates rise sufficiently, they will tend to hold onto the loans longer than normal. Bankers generally prefer a steady rate environment, since they often lose value whenever rates move up or down, sometimes losing value on old business faster than new business can replace.

In the marketplace, banks try to mitigate this interest-rate risk by offering (at lower rates) adjustable rate loans that re-price in shorter cycles, but consumers prefer fixed-rates. Banks then turn to their treasury department to find ways to offset remaining interest-rate risk through a variety of means, such as interest-rate swaps and other hedges, or selling off originated loans and buying into other investments with preferred characteristics. In many ways, issues with bank margin control are analogous to any industry dealing with commodity pricing differential, e.g., electrical energy.

FP&A and/or the bank’s treasury department, with increasing sophistication of analytical tools, closely and constantly monitors and projects the bank’s margin over a range of interest rate scenarios, to spot exposures, particularly against likely rate environments, and recommend changes in pricing, product structure, hedges or other actions to protect against margin compression. The analysis will often look at two elements, a projection of annual net interest income and a projection of net market value, over a spectrum of rate changes, up and down.

Asset Quality

Another major concern to most banks is the quality of their earning assets. Either FP&A or the bank’s credit department, again with increasingly sophisticated analytical tools, will constantly review its portfolio of loans and borrowers to estimate the probability of default and loss. Banks make provisions for these potential losses to the income statement, and carry a reserve against loss on its balance sheet. The provisions are usually split into general reserves reflecting the nature of the loan-type and current economic/rate environment, and specific reserves that reflect new assessments of the financial health of the particular borrower.

In monitoring the health of the loan portfolio, bank analysts will look at a variety of measures, particularly the ratios of non-performing loans (for which payments are late but the loan not yet written off) to total loans and net charge-offs (loan charge-offs during a period less recoveries) to total loans. They will also consider the adequacy of the reserves by looking at ratios of loan-loss provisions and loan-loss reserves to total loans.

John Hamrick (john@seamansandassociates.com) is a member of the FP&A Newsletter Editorial Advisory Board. Hamrick has been a director of FP&A in community banking for over 20 years. He is co-founder of the Houston FP&A networking group and currently is an FP&A advisory consultant with Seamans & Associates, LLC.

This article appears in the May edition of FP&A.

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Seamans & Associates Expands Offerings With The Addition of Human Resource Expert Robyn Brend

Seamans & Associates Expands Offerings With The Addition of Human Resource Expert Robyn Brend

(December 3, 2012) HOUSTON, TX – Seamans & Associates announced today that Human Resource expert Robyn Brend has joined the firm as Senior HR Consultant and Benefits Director. In this position, Brend will utilize her extensive knowledge and expertise in Benefits, Payroll, HR Systems Implementations/Conversions, Mergers/Acquisitions, SOX Compliance and Budget Management to advise and support Seamans clients in efficiently and effectively leveraging their human capital.

According to Libby Seamans, CEO of the firm, “I am thrilled with the addition of Robyn to our team, and how her expertise will position Seamans as a full service management firm. With today’s uncertain climate, businesses are looking to firms such as ours to gain access to experts without having to add to their payroll. Robyn’s knowledge gained through years of experience in the areas of Human Resource Management is exceptional, and will add tremendous value to the work we do for our clients.”

Brend has 30+ years’ experience in human resources with specific expertise in benefits and payroll management of over 15 years.  She has worked with both Regional and Super Regional banks in critical HR management positions. Her accomplishments includes the creation of a comprehensive employee benefits program, and a payroll and HRIS system for a workforce that grew from 300 to 2,400 employees, as well as the successful integration of benefits and payroll from six acquisitions in Houston and Dallas markets. Additionally, she developed and managed the benefits and payroll Sarbanes Oxley control environments resulting in high internal control scores which exceeded federal reporting standards.

Prior to joining Seamans & Associates, Brend was Manager of Employee Benefits and Payroll at COMERICA BANK (FORMERLY STERLING BANCSHARES, INC.)

About Seamans & Associates

Seamans & Associates LLC is a management consulting firm that helps companies achieve the new definition of success-operating at optimal efficiency: generating the greatest amount of revenue possible while maintaining the highest level of client and employee loyalty.  They provide the tools, training, and action needed to support a stronger and more sustainable business model. Seamans’ is led by founder and CEO Libby Seamans, and is headquartered in Houston, TX. They can be reached at www.seamansandassociates.com or 281.993.4898

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Seamans & Associates Expands Offerings With The Addition of Financial Expert Debbie Hankins

Seamans & Associates Expands Offerings With The Addition of Financial Expert Debbie Hankins

HOUSTON, TX – Seamans & Associates announced today that financial expert Debbie Hankins has joined the firm as Senior Regulatory and Compliance Consultant and Audit Division Director. In this position, Hankins will utilize her extensive knowledge of regulatory compliance and audit to advise and support Seamans clients on compliance adherence, audit preparation, accounting, and financial reporting.

According to Libby Seamans, CEO of the firm, “Being keenly aware of the increased regulatory and compliance pressures on banks and businesses alike, I am constantly looking for ways to extend our offerings to add support in these areas, and am thrilled that Debbie has joined our firm to help our clients navigate these trying times. Debbie’s knowledge and years of experience in the areas of financial reporting, accounting, and SEC regulatory compliance and audit is outstanding. The value she will add to the work we do for our clients will be remarkable.”

Hankins has twenty-nine years’ experience in financial reporting, statement preparation, accounting, compliance, budgeting, and audit, with specific expertise in understanding and adhering to regulatory policies and procedures for mutual funds, and REITs. As Senior Finacial Analyst, and Funds’ Compliance Officer for a $20 billion Insurance Company and an Investment Advisory Company with 19 mutual funds, Hankins prepared Annual Statements (including 10-Ks & 10-Qs), Prospectuses, and Statements of Additional Information for Variable – Separate Accounts. Additionally, she had oversight for filing the Funds’ regulatory documents (prospectuses, N-SAR, N-CSR, N-Q, etc.), as well as oversight of audits, and all regulatory examinations by the SEC. Hankins holds a Bachelor of Science in Accounting from University of Houston at Clear Lake, Clear Lake, TX

About Seamans & Associates

Seamans & Associates LLC is a management consulting firm that helps companies achieve the new definition of success-operating at optimal efficiency: generating the greatest amount of revenue possible while maintaining the highest level of client and employee loyalty.  They provide the tools, training, and action needed to support a stronger and more sustainable business model. Seamans’ is led by founder and CEO Libby Seamans, and is headquartered in Houston, TX. They can be reached at www.seamansandassociates.com or 281.993.4898

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