Showing posts with label banking. Show all posts
Showing posts with label banking. Show all posts

Wednesday, April 25, 2018

Technology Credit Union (Tech CU) Annual Meeting (2018)

All of us suspect financial institution executives are SOBs, but most of them have the decency to act dignified in public. Not San Jose, California-based Tech CU. The annual meeting on April 25, 2018 was a doozy, with Mical Atz Brenzel, the Chairman of the Board, getting angry while flubbing questions and President and CEO Todd M. Harris making comments that unknowingly contradicted his colleague. 
The spread for members, which will be noteworthy later.
might have crossed a line by saying a "monkey" could have run a bank in the last four years because of record-low interest rates, but financial institutions, as stewards of our assets, are supposed to be conservative creatures able to withstand criticism, especially from their members. If you're part of an institution that refuses to stress-test its culture, you're going to have problems eventually. If you're part of a financial company so tone-deaf it decided to convert its member-based structure into a corporate banking entity without adequately vetting the move with its own members, humility ought to be your motto thereafter. Well, not if you're Tech CU. 

Regarding the failed conversion: "'Our members have voted and overwhelmingly indicated their preference to remain a credit union' ... there are no plans for executive departures as a result of the vote..." [Emphasis added.] In a nutshell, the same failed managers at the helm of a debacle so bad it will be part of an MBA textbook someday are still guiding the ship. They also seem convinced cultural cracks in their hull concealed by consecutive years of ultra-low interest rates are evidence of their own deft maneuvering. 

At least one of their own slides at the annual meeting indicates otherwise. One showed a loan-to-deposit ratio of 60% in 2013 that jumped to 87.79% in 2017. In other words, Tech CU, right after botching its conversion, might have taken a too-conservative approach with its loans, only to right its sails through low interest rates to a more balanced portfolio. 

In another example of hubris gone wild, Todd Harris said he was pleased with Tech CU's solar loan program, which has "12% national market share." I'm not an expert on solar power, but I know many solar companies and consumers rely on direct or indirect subsidies, and those subsidies can change overnight. In other words, the loan portfolio CEO Harris highlighted as part of his successful management might be its most risky. 

Update: seen in Singapore business newspaper, December 17, 2018
I was the only person at the meeting who asked questions or made comments. I mentioned being locked out of my ATM account while traveling internationally and being asked to call an American-based number, which anyone with travel experience knows is problematic. I suggested a simple solution involving secure email or secure messaging on the app. (How this team will screw up such a simple suggestion is an event I eagerly await.) 

I also asked why publicly available quarterly reports aren't available on the credit union's own website. Here's where it got really interesting, and by interesting, I mean shameless. Todd Harris told me Tech CU wasn't a public company and follows laws applicable to credit unions, which don't require making reports more accessible to members by putting them on its own website. 

No results found on gov website. It's a lil' clunky.
Let's back up a minute. No one is disputing these quarterly financial reports are available on some strange government agency's website. 
Found it!
No one is disputing these documents are harder to find if not disclosed directly on Tech CU's own website. No one is disputing greater transparency helps build trust, or that trust is important when competing for customers giving you money for safekeeping. Everyone agrees complying with a minimum standard in ways that reduce transparency isn't helpful to gaining clients or confidence. And yet, here we are, with Tech CU's management fighting to do as little as possible when it comes to transparency and simple convenience for their members. 

It gets even worse, especially if you, like me, believe banking culture is one factor in evaluating a country's ascent or descent. Most companies have rules relating to shareholder meetings that limit cranks, but they're written tastefully or at least in ways circumventing an accusation involving East German artillery. Here, Tech CU, blind to its cultural deficiencies, managed to outdo itself once again. Its rules for the meeting are so subjective and overbroad, they provide total control over any kind of direct questioning deemed unpleasant. From number 6 in "Rules of Procedure and Conduct of the Annual Meeting":

The Chancellor, er, Chair or the CEO will stop discussions that are: 

* irrelevant to the business of the Credit Union or the conduct of the operations;
* derogatory references that are not in good taste; 
* unduly prolonged (longer than two minutes); 
* substantially repetitious of statements made by other members; or 
* related to personal grievances. 

Remember: we are discussing a client-facing institution. If a member had an issue with an employee at a specific branch and wanted to alert the board in person at the annual meeting--the one and only time a year any member may do so publicly--the board doesn't have to listen. It could deem the comment a "personal grievance." Or perhaps it's derogatory or not in good taste. Who knows? Anything goes, comrade. 

After my final "monkey" and "low interest rates" comment, plus the fact the Bay Area had seen large inflows of private and public investment in the past four years, making it virtually impossible for Bay Area banks to fail, Mical Atz Brenzel launched into some angry gibberish. Still trying to temper her arrogance, I slipped in a question about whether any banks in the Bay Area had gone bankrupt in the last four years, to which she initially stood, jaw agape. After avoiding my question, she tried arguing banks don't really fail any more, they're absorbed into larger banks, which of course had nothing to do with my actual question. (I don't know of any Bay Area banks or credit unions requiring government intervention in the last four years to prevent bankruptcy, but if you do, please enlighten me.) 

Not satisfied with looking like a loon, Brenzel then argued lower interest rates made it more difficult for Tech CU to do well. I asked, "Are you denying lower interest rates encourage banks [and CUs] to make more loans [and therefore higher profits]?" It took her a few seconds to accept this Economics 101 fact, after which she advanced a spiel about Tech CU having to compete with numerous financial institutions in the Bay Area and still doing well. I let her have the last word, saying, "We'll agree to disagree." 

As I got up to exit the meeting room, a belligerent Todd Harris, a bowling ball of a man, approached and told me I was "frustrated." He continued trying to score points by telling me I mistakenly used the term "bank" instead of "credit union" in my comments. Pleased I'd gotten a Tech CU executive to mention a term relating to its largest management debacle without a sense of irony, I explained I wasn't frustrated, but we'd get to see how good he and the team really is over the next four years as interest rates rise. In addition, I told him his colleague can't argue that Tech CU's management did well because it successfully competed with numerous banking institutions, including public ones, while he favors a transparency standard far below all the public banks against which he's allegedly competing. As I left, I noticed employees bringing juices and mineral water into the meeting room, giving themselves a much better selection than offered to their own members. 

Tech CU's management didn't listen to their members in 2012, and they're still not listening. Worse, they're getting upset at a member trying to remind them to do exactly what a bank or credit union ought to do in an era of rising interest rates: be humble.

© Matthew Mehdi Rafat (2018)

Bonus: Gloomy Sunday (1999) is Netflix CEO's Reed Hasting's favorite movie. Consider the conversation below in light of Tech CU's Rules of Procedures and Conduct of the Annual Meeting: 

Schnefke: "But we must be careful not to stray too far outside the law." 

Hans: "Of course. But the beauty and vibrancy of the law lies in its flexible boundaries." 

[Two Nazis in Hungary around 1939 discussing their future.] 

Tuesday, January 17, 2017

Modern Capitalism, or How to Guarantee a Military-Industrial Complex

My uncle once told me, "In the future, there will be five companies, and they'll own everything."  We needn't go into the future to see such a reality--in most important ways, the aforementioned scenario is already here if you add two zeros to the end of the number above.

Where does innovation come from after a company achieves multinational status, starts paying a dividend, but still has to grow by x% annually to please Wall Street? Some people may know that such growth comes from buy-outs and mergers. Indeed, after a certain size, large companies succeed based on how adept they are at incorporating a newly bought company's products and remaining employees into their own pre-configured business and legal systems. In short, scalability, supply chain management, and risk controls drive value in a major corporation if it survives long enough. What about innovation?

Under the current merger-and-acquisition system, major companies will "buy" innovation and pay premiums--sometimes obscene ones--to avoid having large and unpredictable R&D budgets. In such a dynamic, large companies can pay a small percentage of their revenue to attract a smaller company, but without taking the risk of having larger or recurring R&D costs on the books that don't produce consistent ROI. Smart, right?

Yet, it is precisely the large companies, with their established products and revenue streams, that are best able to take the risks necessary to produce great ideas. If only smaller companies are taking bank loans or SBA loans to try new ideas, then the banks become the primary risk-takers and consequently demand greater influence and political power to take on such risk. If the big banks' investment banking, consulting, and M&A groups are the major players backing smaller companies or venture capital firms, then most innovation not linked to academia is supported by the banking sector.

Guess who supports the banking sector? The FDIC and your deposits.  In other words, under America's current capitalist system, taxpayers are back-stopping the risks of innovation under "too big to fail" because many larger corporations aren't investing enough in R&D, which is seen as an unpredictable cost by Wall Street. Today, only Tesla (TSLA) appears to be choosing innovation over steadily increasing share price. Other companies like General Electric have large R&D budgets, but as a percentage of gross revenue, they're actually minuscule--usually no more than 7%.

Seen this way, of course America's banking and insurance sectors will have the most influence in Congress--they're the ones driving innovation by funding R&D that larger companies should be funding but won't. Not only will large banks and insurance companies demand favorable tax policy for their risk-taking (witness Warren Buffett asking for and receiving a "terrorism" exemption post-9/11), they get their funding directly from the Federal Reserve or indirectly by convincing the Federal Reserve to lower interest rates. What are you, the taxpayer, getting in exchange for stricter personal deductions than businesses; receiving low interest rates on your deposits; and being the insurer of last resort?

You probably won't guess the correct answer: a military with a budget not subject to audits that does the R&D for you, but with the higher risk of pursuing war as a testing ground for new weapons and strategies, and with debt that could sink or split the entire country if mismanaged. If the larger companies have external checks and balances that mitigate R&D risk-taking, and the banks are being back-stopped by the government (and therefore taxpayers) when they make loans that support R&D, big banks and the military become the two groups not subject to checks and balances but necessary for innovation. Under such incentives, it's only a matter of time before the military and banking sectors dominate the entire country and become powerful enough to ignore President Eisenhower rolling in his grave.

And so it goes.

Matthew Rafat (copyright 2017) 

Bonus: "In the past 30 years, America has had 13 wars at a cost of $14.2 trillion...what if they [had] spent part of the money on building up infrastructure?" -- Alibaba CEO Jack Ma

Bonus: below are the numbers supporting the arguments above:

People don't understand the difference between budgetary outlays and discretionary spending, or appropriations/expenditures, which is responsible for the inability to see eye-to-eye on fiscal responsibility debates.

Mandatory spending is federal spending based on existing laws. This budgetary spending is mainly entitlement programs, such as Social Security and Medicare, whose spending criteria are determined by who is eligible to apply for benefits and not by Congress, and includes items supposed to be relatively predictable. Discretionary spending, on the other hand, is the portion of the budget that the president requests and Congress appropriates every year through legislation. In the past, such spending was supposed to be for one-off, unusual and unpredictable items but has now become a slush fund for military adventurism, as we'll see.

Furthermore, when discussing military spending, it's debatable whether to include VA spending as part of the national defense budget, which creates further confusion. Let's try to clear up these issues.

Spending on national defense is estimated to be about 15% of all outlays in 2017. This is less than average when compared to budgets from other years. (Average proportion = 22%). That 15% is about $516 billion, not including VA funding.

The President’s 2017 budget includes $182.3 billion for the VA in 2017. This includes $78.7 billion in discretionary resources and $103.6 billion in mandatory funding (for veteran's disability benefits). Including national defense and VA budgetary amounts together, we have a total of $698 billion spent on military-related budget items. Technically, that's less than what we spend on Health and Human Services (e.g., Medicare) and Social Security (almost a trillion projected in 2017). However, the above figures do not include discretionary spending, which causes annual deficits funded partly by issuing debt to foreign countries. Let's look at those numbers.

For 2017, 49% of total discretionary spending is projected to go towards national defense, or about $500 billion. That means we spend about $1.2 trillion every year on the military and military-related items. Thus, the largest spending items in America in 2017 are the military and the VA; Social Security; and Medicare. Why is that a problem?

In 2017, the government is estimated to have a total debt of $17.7 trillion. At 104.4% of GDP, this percentage is extremely high when compared to other years (avg. 59.0%). Spending on SS is fine--that debt is owed to Americans. Spending money borrowed from future generations on unnecessary or inflated medical expenses like pharmaceuticals and on unnecessary wars or wars of choice is unconscionable. It guarantees fewer opportunities for younger generations. It means our intelligence agencies work overtime trying to justify illegal military invasions or are tempted to engage in false flag or psychological operations to justify security spending. It means millennials are called lazy or immature when they're anything but. In short, when you're going in debt for unnecessary items, and you need the jobs related to that unnecessary spending to get votes and stay in political office, you have to resort to fear and outliers to maintain the status quo. Such an approach is inadvisable in any era, but especially so in an era of increasing competition worldwide and against countries to which you owe money.

Bonus: The local level creates no reason for optimism, either.  In most major American cities, 50% to 70% of all local tax revenue is spent on "public safety" aka cops and firefighters. Many of these taxes go to pension obligations, i.e., paying gov employees who no longer work and who haven't paid into the retirement fund in sufficient amounts to sustain it without higher taxes or cutting other local programs.  Consequently, America's military budget is not subject to any real audits due to the federal gov's ability to borrow almost unlimited debt, while even local entities are forced to divert their taxes into strengthening a police state because by law, pension interests are vested and therefore untouchable. What could possibly go wrong?

Well, this is the kind of activity required in such a regime: http://www.post-gazette.com/news/nation/2015/11/06/Department-of-Defense-paid-53-million-to-pro-sports-for-military-tributes-report-says/stories/201511060140

Basically, the gov spends taxpayer monies to normalize the abnormal, then demands the entities continue its show at their own cost or be called unpatriotic.

Both parties are complicit, and both parties are locked into unsustainable programs that require more debt because neither party wants to impose any fiscal discipline. Why should they, when they can rely on more debt to maintain the status quo and their jobs? In the case of California Democrats, their allegiance is to an unsustainable K-12 system, teachers' unions, and the teachers' pension plan, which guarantees a return of 7.5%--even though the economy is growing about 2% to 3% a year.

Rather than take a common sense approach and reduce benefits for existing retirees--who negotiated an 8% ROI under much different economic conditions--it appears govs will reduce benefits for incoming, younger employees and wait a generation to try to balance their books without relying so much on debt.  It remains to be seen whether any system that depends on achieving consistent 7.5% ROI can be sustained in the "new normal." 

Thursday, February 19, 2009

Bank Market Caps

Barry Ritholtz almost always has great stuff on his blog, The Big Picture. Here's one particularly interesting post, showing how much banks have declined in value:

http://www.ritholtz.com/blog/2009/02/bank-market-caps-then-now/

Oh, the lack of prudence.

Sunday, February 8, 2009

Banking Consolidation

The Winter 2009 Edition of City Journal has an interesting banking statistic. From Nicole Gelinas' "Can the Feds Uncrunch Credit?" (pps. 22-23)

Because of last year's [2008] flurry of bank mergers, the nation's top four banks now hold 36.2 percent of deposits in the country, up from 24.8 percent in 2007, according to SNL Financial. We thus may be setting up the next bubble-fueled crisis as we speak--and this time, it may be too big to recover from.

I am not sure what the author means. Is she saying that if the top four banks go under, the nation's savings will be toast? Perhaps she is warning that if the top four banks continue to lend recklessly, they will create another bubble. Neither of those scenarios makes much sense to me. The top four banks won't go under--they will be federalized before that happens. Moreover, banks are so scared, if anything, they're not lending enough.

Bonus: in the same issue, on page 58, Roger Scruton does his best impression of Samuel Huntington and writes about how Islamic and Western ideas differ. The problem with such generalizations, of course, is that they're generalizations--and it's nonsensical to apply them to billions of people. Still, Mr. Scruton had one particularly interesting paragraph that made much sense:

By living in a spirit of forgiveness, we not only uphold the core value of citizenship but also find the path of social membership that we need. Happiness does not come from the pursuit of pleasure, nor is it guaranteed by freedom. It comes from sacrifice: that is the great message that all the memorable works of our culture convey.

Unfortunately, Mr. Scruton makes an almost unforgivable mistake when he assumes that only Christianity favors such sacrifice and forgiveness. The idea that any religion has a monopoly on forgiveness is propaganda, pure and simple. If the three dominant religions believe in one G-d, then forgiveness must flow from the same fountain. A clash of civilizations may indeed occur in some form, but it won't be because one particular religion favors forgiveness more than any other religion. By creating false dichotomies, Mr. Scruton helps catalyze a clash of civilizations that need not necessarily occur.

Monday, July 14, 2008

Colonial Bancgroup (CNB)

Correction Note (on July 15, 2008): an astute reader from Seeking Alpha pointed I was misusing accounting terminology in my posting, namely how debt is characterized on a balance sheet. When a bank makes a loan, it becomes the creditor. As a result, its balance sheet lists the loan/debt as an asset.

In my article, I used Yahoo Finance's "total debt" and "total cash" figures, which do not appear to include loans as "assets." The "total debt" and "total cash" statistics provide some holistic insight into how much a bank might be over-leveraged. At the end of the day, the ability of debtors to pay their debts is paramount, not "total debt" or "total cash," and everyone is currently dealing with bankers' black boxes of credit quality. But I was able to call at least a short-term bottom--both FHN and CNB, jumped by around 30% and 16% (see full day's chart for July 15, 2008), respectively, one day after I called a bottom in well-capitalized banking stocks. My full article, published yesterday, is below:

I am calling a bottom in well-capitalized regional bank stocks. When the New York Times publishes an article titled, "Analysts Say More Banks Will Fail," (by Louise Story) we have a good contrarian indicator. But here's what makes me angry: the reporter cites Richard Bove in her article as support for her thesis that despite being better capitalized in general, more banks will collapse. Take a look at this Nightly Business Report link to an interview with Mr. Bove:

http://www.pbs.org/nbr/site/onair/transcripts/080714c/

He expressly says he believes regional banks are in good condition:

"I think that the regional banks are actually in relatively good condition...I think if you look a year from now, the prices of bank stocks will be considerably higher than they are today."

Of course, he also says it is risky to bet on bank stocks now, in a time of panic, but overall, the clear sentiment is that the overwhelming majority of banks are healthy. The article itself states that 150 out of 7,500 banks might fail--or just 2%.

I have been very disappointed in my own stock picking ability because I bet on Colonial Bancgroup (CNB). While I bought almost all of my shares at under 5 dollars, the market has decided that CNB is worth only 3 dollars a share. I continue to believe I am correct, and the market is being irrational. The question is whether I can stay solvent until the market becomes rational again.

Bank stock financial data are abstruse because they defy normal value analysis. Usually, value investors like myself look at a company's total cash and total debt. My own personal yardstick is to deem a company undervalued if its net cash exceeds 10% of its market capitalization. For example, Intel has a market cap of 108 billion. Therefore, I want its net cash to be at least 10.8 billion before I view it as undervalued. Intel has about 11 billion in net cash, passing my test (I own shares in Intel).

Banks, on the other hand, cannot be analyzed in this way, because they make money through loans. As a result, Shakespeare's advice, "Neither a borrower nor a lender be," doesn't apply. In addition, a bank having more debt does not necessarily denote irresponsible spending. Indeed, as an investor, you want your bank to have more debt, because banks make money by loaning to others, not by keeping their cash. The problem lies in evaluating whether a bank's debt (or, in accounting terms, its assets, because they are technically the creditor) is likely to be repaid by its debtors. As debtors default on loans, they cause an immediate downward spiral: the bank that loaned them money has to stop lending others as much money; perhaps raise the rate on its CDs to attract more money; and take other steps that decrease its ability to take advantage of normal business conditions. What we forget is in a non-panicked world, banks have the easiest job: they get money from the Fed Reserve or their depositors at 2.25%, and then loan out the money at 5.5% or more. They make an automatic 3.25% just for being a middleman. (You can see why online banks are even better--they eliminate the fixed costs of a bank, like its numerous tellers/employees, ATM machines, and physical structures, and just get paid for being a middleman, minus the normal overhead. That's why an online bank like ING can offer higher CD rates.)

Having established that a bank's financial data cannot be analyzed in the same way as a non-bank's, how do we ascertain whether a bank might go under? One informal measure might be to measure the amount of total cash vs. total debt. It's a similar analysis as above, except that in these precarious times, if a bank has too much debt relative to its cash deposits, it is more likely to collapse. All figures are from Yahoo Finance's "Key Statistics" pages as of July 14, 2008:

IndyMac, which has collapsed, had about 2 billion in total cash and 11 billion in debt. That's a 9 billion dollar difference.

Washington Mutual has 15 billion in total cash and 97 billion dollars in total debt. That's an 82 billion dollar difference.

Regions Financial has 5.5 billion in total cash and 29.5 billion in total debt, a 24 billion dollar difference.

M&T Bank, considered to be a healthy, well-capitalized bank, has 2 billion in total cash, and 16.8 billion in total debt, a difference of almost 15 billion.

US Bancorp has 7.3 billion in total cash and 72.6 billion in total debt, a 65.3 billion dollar difference.

Wells Fargo, considered to be a conservative lender, has 25 billion dollars in total cash, and 157 billion dollars in total debt, or a difference of 132 billion. This high level of debt is very surprising. Warren Buffett extolled the virtues of Wells Fargo in a recent annual shareholder letter, and Mr. Buffett is the classic value investor. Wells Fargo might have a high debt load because it didn't sell off its loans to Wall Street and held them on its own books instead, but I am just speculating. As a direct holder of the debt, Wells Fargo can hold it till kingdom come, and would have no external pressure to dump loans at a discount. In some ways, its refusal to spread its risk creates an advantage. (I own some shares in Wells Fargo.)

Now we come to Colonial Bancgroup, or CNB. CNB has 2.5 billion in total cash and 5.3 billion in total debt, a 2.8 billion dollar difference. It has the lowest total debt of any other bank above, and plenty of cash relative to its debt.

Whatever you may think of banks collapsing, CNB probably won't be among them--its debt load just isn't high enough to make a collapse imminent. At 3.36 dollars a share, if you have an iron will, you may want to consider buying 1000 shares and leaving it alone for a while. A prudent investor would probably wait until after July 21, 2008 to buy, because CNB reports earnings on July 21, 2008. I will hold onto my 1100 shares of CNB and be patient--like Wells Fargo, I can wait a long time, but I hope next week brings good tidings and immediate vindication.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.