Tim Koch, Professor of Finance at the University of South Carolina and President of the Graduate School of Banking at Colorado. recently spoke at the TTU School of Banking.

1. 42nd Texas Tech School of Banking
August 9, 2015
Timothy W. Koch
President
Graduate School of Banking at Colorado
&
Professor of Finance, University of South Carolina
Community Banking:
Then and Now

2. Fun Facts for 1980
1. Average price of a new home $68,700
2. Price of 1 gallon of gas $1.19
3. Average price of a new car $7,200
4. Price of 1 lb of ground beef $1.39
5. Top new TV show Dallas
6. CNN was the only 24 hour news station
7. John Lennon was shot in NY
8. Queen released ‘Another One Bites the Dust’
9. Popular movies first release:
- Blues Brothers (with Jake and Elwood)
- Caddyshack (with Bill Murray and Rodney Dangerfield)
10. Pittsburgh Steelers won their 4th Super Bowl

3. Fed Funds Rate: 0-0.25%
Prime Rate: 3.25%
10-YR Treasury Rate: 2.238%
30-YR Fixed-Rate Mortgage: 3.98%
Number of FDIC-insured banks:
(5,570 Com. Bks; 849 Sav. Bks)-March ‘15
Industry average ROA = 0.98% in 2015 Q1
Almost 200 community banks reported
ROAs > 2.1% in 2015 Q1
Number of bank branches:
Commercial banks - 82,156
August 2015 August 1979-80
Now vs Then

4. Fed Funds Rate: 0-0.25%
Prime Rate: 3.25%
Fed Funds Rate: 11.375%
Prime Rate: 12.25%
10-YR Treasury Rate: 2.234%
30-YR Fixed-Rate Mortgage: 3.98%
Number of FDIC-insured banks:
(5,570 Com. Bks; 849 Sav. Bks)-March ‘15
10-YR Treasury Rate: 9.33%
30-YR Fixed-Rate Mortgage: 11.09%
Number of FDIC-insured banks:
(14,364 Com. Bks; 3,418 Sav. Bks)-Dec. ‘84
Industry average ROA = 0.98% in 2015 Q1
Almost 200 community banks reported
ROAs > 2.1% in 2015 Q1
Industry average ROA = 0.77% in 1980
Number of bank branches:
Commercial banks - 82,156
Number of bank branches:
Commercial banks - 34,900
Number of bank branches in Texas:
Commercial banks - zero
August 2015 August 1979-80
Now vs Then

5. A Bit of Texas Banking History . . .
• Texas did not allow physical branches until 1987
- no drive-up facilities because they were designated branches
• Texas legislature authorized interstate banking and permitted limited
branch banking effective January 1, 1987
- Price of one barrel of West Texas Intermediate crude oil (adj for infl):
$85.70 (Aug. 1979); $25.23 (July 1986); $16.42 (Dec. 1998)
- In Feb. 2014, the first Bitcoin ATM in the U.S. opened in Austin, TX
• From 1987 – 1990, 7 of the 10 largest commercial banks in Texas failed
- NCNB Texas National Bank absorbed First RepublicBank Corp.
(largest Texas-based bank) with substantial FDIC assistance
- Bank One Corp. absorbed 20 MCorp banks (now branches)
- In 1988, First City Bancorporation restructured after getting $1 billion
in capital assistance from the FDIC; it failed again in 1992

6. First City Bancorporation Marketing:
5-month campaign for new accounts in 1985
Customer who deposited at least the following amounts for 5 years
or more received the following bonus at the time of deposit:
• $100,000 - $499,999 Purebred Arabian colt or
Weekend trip to NYC + mink coat or
Trip to either China or South America
• $500,000 - $999,999 Steinway grand piano or
Scuba-diving vacation for two
• $1,000,000 or more Cessna 172 aircraft or
Porsche 928S sports car
The campaign raised $280 million

7. Traditional Community Bank Branch

8. Today’s Branch (for Millennials)

9. August 6, 2015
10-yr = 2.234%
30-yr = 2.909%

10. Reproduced with the permission of Mortgage-X.com
Long-term Trends in Interest Rates
30 Year FRM
=3.98% on
August 6, 2015

11. Themes
1. Many Community Banks are High Performers
2. Community Banks Must Pursue Strategies to Achieve a
Fortress Balance Sheet
3. Bank Managers Should Understand Market-Based
Performance Metrics
5. Demographics Mandate the Use of All Delivery Channels and
Changing Technologies
6. Bank Managers Should Emphasize Talent Management

12. General Attributes of a Community Bank
1. Management focuses on ‘high-touch’ relationships with bank
customers, employees and stockholders. Decisions are made
locally
2. Management pursues core financial strategies:
a. Capital adequacy
b. Reliance on core deposits
c. Originate and hold loans
d. Hold sufficient liquid assets
e. Net interest income is the primary source of earnings
3. Bank competes in limited geographic markets.
4. There is a strong link between ownership and
management.

13. How Important are Relationships?
• Community banks are the lifeblood of small towns and cities
( Compare rural banks with urban banks)
• They are often locally-owned and locally-managed (S Corps,
mutuals, etc.)
• Members of the boards of directors are typically small
business owners and public figures in the community
• Bank officers and employees often serve on community boards
and foundations and contribute time and resources to local schools
and non-profit organizations
• Loan officers personally know individual and business
customers and have seen the property, etc. the bank is financing

14. Implications
• Size matters – at some point, the firm becomes too large
and focuses on transactions efficiency. This is not ‘bad’; it
represents a different business model.
• Business strategy is important – focus on long-term
relationships. What is management’s/owner’s strategic
objective? Growing quickly in order to sell to a larger
organization is inconsistent with a focus on long-term
relationships.
• Closely-held organizations likely manage risk differently.
Differentiate between S Corp banks, mutual organizations,
other closely-held firms and other institutions.

15. Greatest Threats . . .
• Regulatory Burden
- Compliance costs (direct & indirect)
- Uncertainty regarding whether bank will be subject to
specific rules
- Mortgage Lending (QM vs Non-QM; servicing, appraisal, etc.)
- Truth in Lending/RESPA (TRID) – 637 page disclosure rule
- HMDA (increased reporting requirements)
- UDAAP (Unfair, deceptive, or abusive acts or practices)
• Lack of Strategic Focus
• Lack of Preparation for Rapidly Changing Customer
Demographics
• Lack of Attention to Talent Management / Management Succession

18. Profitability of Community Banks Employing
First-Time Attendees at the 2015 GSBC School
Session in 2014
ROE = ROA x Equity Multiplier (Assets/Equity)
ROE = 1.06% x 10.1X
= 10.71%

19. Quarterly Banking Profile, March 2015 at www.fdic.gov

21. Understand Market-Based Performance
Metrics
• Price / Tangible Book Value
• Price / Earnings (Cash) Per Share
• Core Deposit Premium

22. Economic Growth Varies by State According to
Market Orientation
• Business friendly policies toward labor and taxes are associated with higher state
GDP growth rates and higher employment
- labor policies measured by right-to-work laws and minimum
wage rate below the 50 state average
- tax policies measured by state marginal tax rates
Conclusion: GDP grows 1.5X more in right to work states with
below average tax rates (2000 – 2015 Q1)
Highest growth: Nevada, Utah*, Texas, Arizona & North Dakota
Slowest growth: Michigan, West Virginia, Mississippi*, Illinois & Ohio
• States that suffered the most severe recessions measured by employment growth
in 2007-2009, experienced the highest employment growth from 2010-2014
*Utah has above avg. marginal tax rates; Mississippi is a right-to-work state with low taxes
Source: Edward Lazear, WSJ, June 23, 2015

23. The concept of a fortress balance sheet involves having an efficient operating
structure and a balance sheet that is shock-proof. In terms of the regulatory and
market environment, management must focus on maintaining excellent CAMELS
ratings and credit ratings.
To ensure survival and create opportunities to take advantage of market
disruptions, do the following:
• Build a strong capital base
• Have a strong core deposit base
• Have a well-diversified loan portfolio
• Hold short-term, unpledged liquid assets
• Focus on net interest margin
• Manage the investment portfolio, but keep it simple
• Find and grow sources of non-interest income
Community Banks Should Build a Fortress
Balance Sheet

24. Strategic Checklist for Community Banks
• Be able to identify your most profitable customers and the source of profits
• Understand your customer demographics
• Research how many customers actively use multiple bank products and
services; know how much of a customer’s overall banking business is
conducted with your institution
• Deliver services to customers via multiple channels, including physical
branch, kiosk, interactive tellers, via online and mobile banking – Use
technology to operate on the leading edge
• Develop strategies to retain younger customers before they leave the local
community – for they shall inherit
• Have an effective calling program that touches key borrowers frequently
• Avoid loan concentrations, loans outside the local trade area and minority
positions in participations to the extent possible
• Price loans and deposits to ensure a minimum net interest margin
• Hold a meaningful amount of short-term, unpledged high quality securities;
structure pledging programs to provide as much flexibility with unpledged
securities (collateral for future borrowing)
• Invest only in securities that you understand

25. Strategic Checklist continued
• Establish credit lines with the Fed, FHLB and correspondent banks and test
them periodically; develop meaningful contingency funding plans
• Diversify the bank’s revenues to focus on increased noninterest income
• Consider partnering with other banks or bankers banks to jointly acquire
access to services or specific expertise
• Communicate regularly with bank regulators, particularly when key risks
change and when pursuing new strategic initiatives
• Have engaged directors who understand the bank’s business model and
effective corporate governance practices
• Manage the bank to enhance shareholder value, so understand the key
drivers of:
- cash earnings per share
- tangible book value of stockholders equity
- core deposit premium
• Have a comprehensive and effective enterprise risk management program
Source: Community Banking: From Crisis to Prosperity, Makawk Books, 2014

26. “The Battle to Bank Millennials,” January 20, 2015

27. Fry, Richard, “This year, Millennials will overtake Baby Boomers,” Pew Research Center, January 16, 2015

28. 0% 20% 40% 60% 80%
Facebook
Instagram
Snapchat
Twitter
Vine
Google+
Pinterest
Tumbler
Whatsapp
LinkedIn
% Use
% Use
Source: 2015 Internet Trends Report, KPBC survey by Mary Meeker; USA Today, May 28, 2015
Social Media Use by U.S. population, aged 12 - 24

29. How Many Times Per Day Do You
Check/Use Your Smartphone?
Consider checking time, messaging, voice call, music, gaming, social media,
camera, alarm, news & alerts, calendar, web search, etc.
1. 0 – 75
2. 76 – 150
3. 151 – 225
4. > 225

30. Update on Mobile Banking Services
Source: “Consumers and Mobile Financial Services 2014,” by the Board of Governors of the
Federal Reserve System, March 2014
• Number of Times the typical user checks his/her phone per day
- messaging (23); voice call (22), check time (18), music (13), gaming (12), social media (9),
camera (8), alarm (8), news & alerts (6), calendar (5), web (3), search (3) and other (14)
- total exceeds 150 (United States, March 2014)
- total: 221 (United Kingdom, Oct. 2014; Source: betanews.com)
• Mobile commerce will account for an estimated 24.4% of overall ecommerce revenues by
2017

31. 0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Text Messaging Social Media Instant Messaging Blogging
Millennials Generation X Baby Boomers
Fraction of Category Active with the Associated Media
Source: La Roche, Julia, “Goldman: Here’s how millennials will completely change the economy,”
www.businessinsider.com; Feb. 27, 2015

32. Millennials . . .
• 50+% actively play video games
• 30% live at home
• Are delaying marriage; thus waiting longer to have children
• Are reluctant to buy homes
• Are active participants in the sharing economy (cars, hotels, …)
• Want maximum convenience at the lowest cost
• Buy lots of stuff online
• Exercise more, eat better and smoke less
Source: La Roche, Julia, “Goldman: Here’s how millennials will completely change
the economy,” www.businessinsider.com; Feb. 27, 2015

33. What Do Millennials Look for in an Employer?
• Millennials want to work where they can grow with their employer
- Offer the technology, accessibility and transparency the today’s
‘connected’ customer wants
- Open environment where lower-ranked employees can walk into the office
of a higher-ranked employee to ask a question
- Define a clear path where a teller can become an officer
• The intangibles offered by the employer
- Entrepreneurial spirit
- Willingness to be flexible and collaborative (flexible work hours, PTO)
- Ability to change jobs within the organization
• Opportunity to make an impact
- Work should have a purpose
- Give them ownership of a project (branch of the future)
• Constant recognition
Siya Vansia, “What Millennials Want in an Employer,”
American Banker, April 30, 2015
Watch: Millennials in the Workplace Training Video – YouTube
Millennials: We Suck and We’re Sorry - YouTube

34. Brownstone, Sydney, “Millennials Will Become The Majority in the Workforce in 2015. Is Your Company Ready?”
www.fastcoexist.com; The 2015 Millennial Majority Workforce, study by Elance-oDesk & Millennial Branding

35. What Do Customers Want?*
• If they were to change banks, more than 25% of customers
would consider a branchless bank.
• Just under 75% of U.S. bank customers view their banking
relationship as transactional.
• A majority of customers want their institution to proactively
recommend new products and services
• Almost 50% of customers would like assistance with
budgeting analytics.
* The Digital Disruption in Banking, Accenture, 2014

36. How Will You Compete with . . . ?
• Square: accept debit and credit card payments via smartphones
or tablets via a ‘reader’ that plugs into an audio jack
- in early 2014, sellers could accept payment in Bitcoin
- in 2014 introduced Square Capital (small bus. lending)
• Dwolla: transfers $ instantaneously via FiSync (federally
approved) via member institutions at no cost to user
• PayPal: digital wallet allowing payments/money transfers
• Apple Pay / Google Wallet: mobile payment services (tied to
credit/debit card accounts;
• Bitcoin: a new type of money and a payment system with instant
peer-to-peer transactions and low processing fees; it is open-
source so no one owns it (Treasury labels it a virtual currency)

37. Christopher Mims, “Money Isn’t Free, but Moving it is Now
Cheaper,” WSJ, June 8, 2015
• B Crowd-funding via Bitcoin
• VENIMO: the Snapchat of money – peer-to-peer payment
system; $2.4 billion (2014) & $1.2 billion (Q1- 2015)
• Facebook Messenger: peer-to-peer payments
• TransferWise: international peer-to-peer payments
Almost instantaneous transfers; most are at no cost
Most use banks; what happens when most customers actively use
only mobile devices?

38. How Will You Compete with . . . ?
• Lending Tree
www.ispot.tv/ad/7Zpc/lending-tree-bank-speak
• Earnest – an online lender that markets to millennials
- the traditional credit industry “functions as an investment tool
for organizations that lend” rather than a system to help
individuals achieve financial mobility
Earnest uses “merit-based interest rates” that incorporate
the individual’s credit score plus information regarding
education, employment, personal income, . . . LinkedIn profile
• OnDeck – makes small business term loans online with loans
from $5,000 - $250,000 and maturities from 3 – 24 months;
offers lines of credit up to $20,000; Over $2 billion in loans

39. • Peer-to-Peer Lenders
Prosper.com
Individuals can invest (lend) or borrow; rates are fixed
ranging from 6.73% - 35.36% APR; amount available ranges
from $2,000 to $35,000; claims to have originated $1.6
billion in loans in 2014
LendingClub.com – Same format; can borrow up to $35,000
Returns to investors range from 4.74% - 7.98%
Borrowers get fixed-rate loans with no prepayment penalties
and no ‘hidden fees;’ quick access to credit ($4.4 billion in 2014)
Affirm – targets the financing of online purchases; it also
considers an individual’s Facebook account, cell phone activity,
etc. (non-traditional information); buy from approved retailers
(100+ signed up in 2014); plans to enter education and small
business lending

40. Wack, Kevin & Bailey Reutzel, “How P-to-P Lending Evolved into Different Animals in the U.S., U.K.,”
WSJ, June 8, 2015

41. • LendUp (payday lender – founder was a senior executive at
Zynga, which created ‘Farmville’ )
- Qualifying customers can get access to credit in 15 minutes
- Borrowers readily see their APR under different loan
scenarios; in CA a 15-day $250 loan requires interest of
$38.60 for an APR of 375%.
- Loans cannot be rolled over; if unpaid, the firm puts in place
a payment plan with payments allocated first to principal
- Borrowers that repay their loans qualify for ‘rewards’ that
include lower rates and higher credit amounts.
- To encourage repeat business, it has a Lender Ladder
program that allows borrowers to move from Silver to Gold
to Platinum to Prime status, at successively lower rates . . .
Prime status applies rates between 19% - 29% and will
report successful repayments to credit bureaus.

42. You Can Count on it . . .
• Financial innovation will produce more affordable ways for
consumers to access small loans (consumer and business)
• Financial innovation will remove or at least reduce existing
frictions that constrain the movement of money throughout
the globe – and will do so at a lower cost to consumers

43. VCs Invest $23.5 Billion in Fintech
Crosman, Penny, “Three Technologies That Could Keep Banks Relevant, Per Santander,” American Banker,
June 29, 2015

44. 0 10 20 30 40 50 60 70 80 90 100
Bank Branch
ATM
Telephone
Online Banking
Mobile Banking
% Accessing Banking Services by Source
2014 2013 2012
How Do Customers Access Banking Services?
Consumer and Mobile Financial Services 2015, Board of Governors of the Federal Reserve System,
March 2015 at www.federalreserve.gov

45. Banks and Bank Branches Will Not Disappear . . . Soon
Carney, John, “Mobile Finance Won’t Bring a Bank Ice Age,” WSJ, Jan. 5, 2015

46. Trends in the Number of Branches
“Where Branch Closures are Concentrated,” American Banker online, January 13, 2015

47. Management Succession Opportunities
• “I’m tired of battling with regulators, and I’m not having fun
anymore.”
• “If I could get 2X book and liquidity, I would sell . . . .”
• Is it that the bank hasn’t been proactive in addressing
competitive and regulatory concerns? And hasn’t adequately
planned for management succession?
• What does it cost to hire a senior executive for a community
bank and use an executive search firm?
• Would you be better served to develop known internal talent for
the C-level positions?

48. CEO School for Community Banks

49. Key Features of the Executive Development
Institute (EDI) for Community Bankers
• Emphasis on strategic thinking
• Focus on personal development
• Use of own-institution information
• Development of initiatives to improve the bank’s bottom
line
• Enhance personal network of peers

50. Program is 19 months in length; 4 on site sessions (Denver, CO)
beginning in April and ending in October 19 months later
• Each participant receives 10+ hours of executive coaching
• Each participants works with a CEO mentor from a similar
organization outside the participant bank’s trade area
• Extensive use of leadership, coaching, communication diagnostic
tools
• Completes three research projects using own-bank information:
- comprehensive internal risk assessment
- talent management assessment
- initiatives to increase non-interest income and/or reduce
non-interest expense
Specific Program Features

51. References
Banking Compliance Index, BankingComplianceIndex.com,
info.continuity.net/bci
Hall, Phil, “Community Banks Struggle Against Regulatory Burdens,”
National Mortgage Professional, October 15, 2014
Lux, Marshall and Robert Greene, “The State and Fate of Community
Banking,” working paper No. 37, Mossavar-Rahmani Center, Harvard
Kennedy School, February 2015
Peirce, Hester, Robinson, Ian and Thomas Stratmann, “How Are Small
Banks Faring Under Dodd-Frank?” working paper, Mercatus Center,
February 2014

52. Contact Information
Timothy Koch
timothywko@gmail.com
803-777-6748