Executive Development Program

- Industry Big Picture & Evolution -

By Steve Brown, PCBB January 2020

2

Session Timing and Purpose

Session schedule □ 8:30am to 12:00pm □ 20 minute break at 10:00am Exploring the banking industry □ Fundamentals □ Importance □ Changes □ Leadership □ Into the future

3

First - Smile & Say Hi

Source: adastra.fit.edu

4

What Brings You Here?

Source: chartcons.com

5

Part 1: Looking Back to Look Forward

Source: discoverhistoricaltravel.com

6

Historical Economic Growth

Source: fred.stlouisfed.org

7

Historical Unemployment

Source: fred.stlouisfed.org

8

Longest Expansion Ever – 126 Months (Jan)

Source: https://www.statista.com/chart/18513/length-of-us-expansions/

9

Business Activity Runs in Cycles

Source: coursehero.com

10

But Also Keep In Mind…

Source: azquotes.com

11

Cycle Example: Quick Story - In The Desert

Source: bo yoga

12

Part 2: Age Might Frame Thinking

Source: washingtonpost.com

13

Most Recent Recession

Source: coursehero.com

Great Recession of 2007 – 2009 □ Once in 100Y event □ Technically lasted 18 months □ Worst crisis since 1929 Great Depression □ Took almost 10Ys to fully get back to “normal” Typical Recessions □ Last 10 months on average

14

Great Recession Cause

Source: Tutor2U

15

Great Recession Timeline

Source: Business Insider

16

But Much Has Changed Since Then

17

Quick Story – An Elevator Ride

18

Part 3: America in Perspective

19

The World’s Top Reserve Currencies

Source: howmuch.net

20

US State GDP vs. Entire Countries

Source: howmuch.net

21

Top 10 Countries vs. US States - 2019/2020

Source: focus-economics.com

CA+NY = $4.4T

TX = $1.7T

17 states = $14.2T

CA+TX+IL = $5.3T

CA = $2.8T

IL+PA+NJ = $2.2T

24%

15%

6%

5%

4%

3%

3%

3%

2%

2%

Percent of the global economy

22

US GDP – A Closer Look

Source: Bureau of Economic Analysis

2.1 2.0

3.1

1.1

2.9 3.5

2.5

3.5 3.2

2.2 2.3 2.0 2.2

1.9 2.0

0.1

23

US GDP – Even Closer Look by State

Source: Bureau of Economic Analysis

24

FF 1.50% to 1.75% is Accommodative

Source: Federal Reserve

Flat for 7Ys +425bp in

2.2Ys

+350bp in

7.5Ys +200bp in

3.0Ys

-75bp in

4 mos.

+400bp in

2.6Ys

25

Quick Story – All American Fed Funds

26

Part 4: Banking Industry

Source: CSBS survey of community bankers

27

Starting Simple – How Banks Make Money

Loan Payment

Deposit Payment

Borrower

Depositor

$

$$$

Net Interest Margin (NIM):

Net Interest Income – Net Interest Expense Average Interest Earning Assets

28

NIM Decline from Lower Rates/Leverage

Source: Fed SF, as of Q3 2019

29

Slowing Loan Growth Led by CA, ID, WA

Source: Fed SF, as of Q3 2019

30

Core Funding Trails Loan Growth

Source: Fed SF, as of Q3 2019

31

So Banks Using More Noncore For Funding

Source: Fed SF, as of Q3 2019

32

ALLL Levels Steady

Source: Fed SF, as of Q3 2019

33

Capital Levels Remain Strong

Source: Fed SF, as of Q3 2019

34

Any Conclusions We Can Draw?

Source: bloggingx

35

Part 5: Consolidation

Source: FDIC, number of FDIC insured institutions 2009 to 2019

36

A Closer Look At Consolidation Trends

Growing!

37

Some New Banks Are Forming

Source: S&P Global Market Intelligence

38

Part 6: Competition

39

Big Banks Control Pricing Assets <1B

Assets 1-10B

Assets 10-100B

Assets >100B

Source: Institute for Local Self Reliance, FDIC, NCUA – Market share 2018

40

Customers Are Leveraging Mobile

Source: Business Insider Intelligence

41

So Banks are Closing Branches

Source: S&P Global Market Intelligence

Over the last 12 months, U.S. banks and thrifts have closed 2,889 branches and opened 1,187

42

Big Banks Are Investing in Digital

Source: Financial Brand

43 Source: Financial Brand

Competitors Are Chasing Banks

44 Source: Financial Brand

So Banks Are Working to Improve

45

Quick Story - Competition

46

Part 7: Regulatory

Source: CSBS survey of community bankers

Ranks #2

47

National Banking Agencies

Source: Fed, FDIC, OCC

Federal Reserve – Currency, Economy, Regulation • Created 1913 • Central bank of USA • Mandate: Max employment, stable prices, moderate long term rates

FDIC – Deposit Insurance, Charters, Receiverships, Regulation • Created 1933 • Insurance for bank depositors in USA

OCC – National Banks, Charters, Regulation • Created 1863 • National banks and federal savings associations • Branches and agencies of foreign banks

48

Broader Financial Industry Regulation

49

Banking Regulation = A Pendulum

50

Banking Regulation = Basis/Structure

51

Areas of Regulatory Concern

Source: Fed SF

52

More Areas of Regulatory Concern

Source: Fed SF

53

Part 8: Technology Drivers

Demographics Customer Behavior

Technology

Regulation

Competition

54

We Are In The 4th Industrial Revolution

Source: The Dualarity

55

4IR – What Does That Mean?

Source: shockoe enterprise mobile solutions

56

Technology Tipping Points

Source: World Economic Forum

57

Technology Hype vs. Reality

Source: Gartner Hype Cycle for Emerging Technologies

58

Impact on Banking Industry

Source: financialbrand.com

59

The Future Looks Different

Source: Everest Group

60

Transformation Is Underway

Partnerships/collaboration more common More data being used in more ways

5G networks rolling out w/scale by 2021

Blockchain is moving along

Cloud is mainstream

61

Transformation Is Underway

Humans working more and more w/machines Digital payments and greater online

More self service for customers

AI gaining steam

Voice is booming

62

And Looking To The Future

Source: PwC, Importance of Digital Technologies Perceived By Bank CEOs

Data Mining and Analysis 89%

Mobile Technologies for Customer Engagement 93%

Socially Enabled Business Processes 70% Internet of Things 67%

Cybersecurity 93%

Battery and Power Technologies 35% Cloud Computing 63%

3D Printing 12%

Wearable Computing 35% Robotics 19%

63

Quick Story - Landing on Blockchain Moon

Source: Nasa

64

14. Critical To Transform The Biz Model

65

Part 9: All About The Customer Now

66

Understand Change Is Happening

Source: i-scoop

67

Rip Out The Wires

Industry is hardwired toward old ways □ Structured in “pipes” by department □ Specific role to play can result in a narrow focus □ Departments not oriented around the customer

68

Work Within The Rules

Industry heavily oriented around rules □ Thousands of regulations since crisis □ Regulatory tone remains aggressive □ Mistakes can be costly to bank & employee

69

Increase Customer Information Now

Customer view is limited □ Industry upheaval has impacted data quality □ Heavily reliant on “peer” data □ Limited systems flexibility available in the industry

70

Focus On Balancing Both Human + Digital

Digitally enabled services

Fully digital, self-service

Improved human interactions

71

Appendix

72

Brain Complexity = 20 Human Biases

Source: erc.europa.eu

All 20 are described in detail in the appendix

73

Human Biases

Source: thejobnetwork.com

74

Human Biases

Source: thejobnetwork.com

75

Human Biases

Source: thejobnetwork.com

76

Bias Example: Quick Story - Picking A Name