cfo committee meeting - njbankers.com committee...apr 20, 2017 · chief information officer...

CFO COMMITTEE MEETING

Thursday, April 20, 2017 – 9:30 a.m.

Grant Thornton MetroPark

186 Wood Ave. S., 4th Floor Iselin, NJ 08830

AGENDA

Conference Call Number: (800) 371-9219; Conference ID: 1575650

1. Call to Order

2. Approval of Minutes from September 28, 2016 meeting Exhibit A 3. Guest Speakers:

Andrew B. Zezas, Publisher and Host, CEO CFO Studio Prashant Nisar, Audit-Senior Manager-FS Exhibit B Markus Veith, Partner Grant Thornton Topic: Blockchain / Bitcoin Lindsey Piegza, Ph.D., Chief Economist, Managing Director Exhibit C Stifel Nicolaus & Co. Topic: Economic Outlook Discussion

4. Open Discussion:

5. Other Matters Next meeting date – To be determined; NJBankers office.

6. Adjournment

MINUTES New Jersey Bankers Association CFO Committee Wednesday, September 28, 2016 – 9:30 a.m. Holiday Inn – Clark, NJ Chairman Alan Bedner called the meeting to order at 9:30 a.m. A record of attendance is maintained in NJBankers files. Approval of Minutes (Exhibit A) On motion made, seconded and unanimously carried, the minutes of the March 30, 2016 meeting were approved. Speaker Presentations (Exhibits B; C) Chairman Bedner introduced the guest speakers for the meeting. First to speak was Joe Romanello, SVP, Strategic Resource Management. His topic was the most common vendor management mistakes and seven ways to help improve banks’ profitability. Next, Paul Cornell, Partner, Premier Capital Partners spoke. He discussed shareholder succession and its impact on capital planning. Both presentations were posted to the committee portal prior to the meeting. Open Discussion Chairman Bedner opened up the meeting for discussion. In particular, the committee discussed the upcoming CFO Conference with FMS which is scheduled to be held November 15, 2016 at the APA Woodbridge Hotel in Iselin, NJ. Next Meeting Dates The next scheduled meeting is to be determined and will be held at NJBankers Office in Cranford. Adjournment There being no further business, the meeting was adjourned at 11:15 a.m. Respectfully submitted, John McWeeney President & CEO

Exhibit A

and the Secured Transaction Revolution

In collaboration with the New Jersey Bankers Association

April 20, 2017

Exhibit B

2© 2016 Grant Thornton International Ltd. All rights reserved.

Discussion Topics

Overview of Blockchain

Impact on the Financial Services Marketplace

Key Risks and Strategies to Mitigate Risk

1

3

2

Exhibit B


"Fueled by speculation that a bitcoin ETF could be approved by the Securities and Exchange Commission in the next week or so, the price of bitcoin has risen steadily, finally surpassing the cost of an ounce of gold on Thursday [March 2, 2017]."

Forbes Magazine

1 Bitcoin: $1,279.35 (Bitcoin Price Index as of March 7, 2017)

1 Ounce of Gold: $1,228.90 (APMEX Index as of March 7, 2017)

Prices

Exhibit B


“Blockchain has ability to provide a "single truth" tothe many institutions that need to share informationon asset transfers”.

Donald J. Duet

Co-head of technology and managing director

Goldman Sachs

Blythe MastersJP Morgan§ Former head of

global commodities§ CEO Digital

Assets Holding

"Digital Assets has a revolutionary technologyplatform that eliminates the counterparty risk andlack of transparency that has hindered mainstreamadoption of cryptographic technology. Thepossibilities for reducing cost and risk in settlementare enormous."

"Distributed ledger technologies have the potentialto help governments to collect taxes, deliverbenefits, issue passports, record land registries,assure the supply chain of goods and generallyensure the integrity of government records andservices."

Government Chief

Scientific Adviser

Government of UKMark Walport

Oliver BussmannUBS GroupChief Information

Officer

"UBS is proud to contribute to the HEAL Bond on Blockchain and agreed to share the learnings of its 'Smart Bond' experiment with the HEAL Alliance.”

Sylvain Theveniaud

Managing Director Allianz Accelerator

“The idea is to work with Everledger andmake [proofs-of-concept] and use casesthat we can experiment with insideAllianz.”

Former executive director

David WalkerBank of England "Blockchain is an important advance in

settlement technology and Setl has a compelling proposition for its deployment."

Mark BuitenhekINGGlobal Head of Transaction Services

“All our business lines are involved here. The transaction services organization which I am heading for ING globally, our financial markets, our lending services department is involved. There are people from IT involved, people from operations, client coverage staff.”

Exhibit B


Blockchain Technology

Person-to-Person payments Artificial Intelligence Mobile Banking Online Banking ATM Technology Robo-Advisers Lending Services

BoA P P P P P

Barclays P P

Citigroup P P P P P

Deutsche Bank P P P

FIS P P P

HSBC P P

JP Morgan P P P P P

Nationstar Mortgage P P

Northern Trust P P

Wells Fargo P P P P P P

In a recent survey, seven out of ten Financial Services Companies identified Blockchain Technology as one of their top FinTech priorities

Exhibit B


Overview: What is Blockchain?

§ Blockchain is a distributed ledger that records transactions between two participants (peer-to-peer),without an intermediary verifying those transactions. Verifying the identity of the parties is made bycryptography. Information is able to be shared among the distributed network of computers. Transactionsare managed and recorded without the need for a central clearing party (e.g. bank or clearinghouse).

§ Foundations• The blockchain’s ledger is distributed and replicated along the whole network;• The information recorded is grouped through blocks and it is immutable once it is recorded;• Once the information is registered through a transaction it will be unforgeable;• The blockchain database contains every single transaction since the creation of the blockchain; and• A blockchain can be: public (fully decentralized), permissioned (partially decentralized) or private

(centralized).§ Blockchain is essentially a vast database of devices open to anyone where anything can be stored, not

just money.

Exhibit B


Overview: Virtual Currency

Blockchain technology was first introduced with the creation of Bitcoin, a virtual currency (not the same as e-Money or Digital Currency)

Digital Currency

Digital representation of either virtual currency or e-money and is used interchangeably with the term "virtual currency".

Virtual Currency e-Money

Digital representation of value that can be traded and functions as:

1) a medium of exchange;2) unit of account; and3) store of value.

but has NO legal tender status in any jurisdiction.

Digital representation of fiat currency (government-backed legal tender) used to electronically transfer value denominated in fiat currency.It is a digital transfer mechanism for fiat currency in that it electronically transfers value that HAS legal tender status.

"A digital currency would also be a prime target as a potential vehicle for global criminal activities, including money laundering. Central banks could face difficult trade-offs between strengthening security and enabling illegal activity."

- FRB Governor Jerome H. PowellAt Blockchain: The Future of Finance and Capital Markets (March 3, 2017)

Exhibit B


§ Distributed through multiple servers (nodes);

§ Allows participants to transact any assets between themselves;

§ Without needing a third party to verify those transactions;

§ Transactions are validated by the whole network; and

§ Transactions are grouped into blocks - Once a transaction isadded to a block, it becomes immutable.

Overview: Blockchain Features

Blockchain's structure is distinguished with several inherent key features:

§ Functions as a Ledger;

Exhibit B


Starting Point:

§ Trust

§ Information management

§ Security

§ Scalability

Permissionless Ledgers

Bitcoin Ethereum

Augur

Tendermint

NamecoinLitecoin

NXT

Darkcoin(Dash)

Clearmatics

Ripple Labs

Tembusu

Hyperledger

MultiChainTezos

Eris

Corda

Permissioned Ledgers

CryptoCorp

OpenChain

Public Blockchain Private/Permissioned Blockchain

1. Who manages the DataBase? Every user who wants to take part in the network

An entity or group of entities by agreement between them

2. Incentives for maintaining the network

Cryptographic Economy incentives for validators(i.e Proof-of-Work)

Reputation, punishment terms, etc.

3. Who is able to register information in the DataBase?Who is able to make transactions?

Any participant of the network

Entity of group of entities with permission

4. Who has access to the DataBase?

Any participant of the network

Entity of group of entities with permission

5. Where is the information located?

Fully distributed through nodes

Entities servers

Overview: Types of Blockchains

Blockchain may be created in various forms:

Exhibit B


Impact: New Approach To Banking

Blockchain derives trust in direct opposition of the traditional banking world:

Traditional: § Individual trust;§ Organization reputation; and§ Unknown counterparty.

Blockchain:§ Network derived trust;§ Ledger is the foundation of trust; and§ Logic and power are shared within the chain.

No single person or entity holds the ability to make a decision.

In the current environment, intermediaries can be

unknown, and transactions can take extended periods to

complete

Exhibit B


Impact: Banking with Blockchain

As transactions are validated, new blocks are added to the blockchain

Account Number: 1Eeg76fqciMWLyy67652dc48Private Key: 9jjlpWQILKJ89457sslwlk3y34lppw94yGTRPublic Key: RTL875ggk

MACHINE

Laura shares her bitcoin wallet address with Rob for him to send

bitcoins

Rob fills in the amount and fee and sends transaction

Signature: 598dklPSI823poorv84ssdrc3

A majority of nodes verify the result and propagate the block

Laura's Public Key: RTL875ggkBitcoins to Transfer: 35Computational Fee: 2

QR

Confirmation in about 10 minutes

Winning miner receives 2 bitcoins

§ Constantly updated public transaction log (ledger) which records ALL transactions between bitcoin wallets;

§ Stores data subject to "proof of work" approval via the network;

§ A transaction is irrevocable in that users cannot recall a transfer; and

§ Each block refers to a previous block such that all blocks are sequentially linked in the chain.

Exhibit B


Impact: Implications

Blockchain is relatively new, but it has implications that will likely transform various industries:

Financial Services§ Loan origination, servicing and

documentation;§ Interbank payments; and§ Transaction facilitation

Financial Services§ Loan origination, servicing and

documentation;§ Interbank payments; and§ Transaction facilitation

Government Services§ Tax collection;§ Property deed and registry; and§ Bond payment

Government Services§ Tax collection;§ Property deed and registry; and§ Bond payment

Rewards Programs§ Airline miles;§ Credit card points; and§ Collection and maintenance of

data

Rewards Programs§ Airline miles;§ Credit card points; and§ Collection and maintenance of

data

Shipping Companies§ Transfer of goods in transit; and§ Digital fingerprint

Shipping Companies§ Transfer of goods in transit; and§ Digital fingerprint

Exhibit B


TRADITIONAL BANKING INDUSTRY CHALLENGES§ Extremely complex system;§ Every company maintains its own separate

ledgers (databases); and§ Huge duplication of effort and cost

BLOCKCHAIN DISRUPTION IN BANKING§ Simplification of burdensome procedures;§ Standard adoption; and§ Costs saving

BLOCKCHAIN BENEFITS§ Reduction of fraud and increased security;§ More transparency;§ Building trust between counterparties;§ Reduction of transaction costs;§ Streamlining clearing and settlement of cash

securities; and§ Improvement of efficiency in Anti-Money

Laundering and Know Your Customer.

BLOCKCHAIN CHALLENGES§ Standards: A need of technical standards in the

implementation across companies and industries;§ Privacy: Must build use cases under regulation;

and§ Speed: Decentralization of network makes sharing

of information more secure but slower than oldprocedures.

Impact: Financial Services

Exhibit B



Blockchain will transform transactions and procedures to reduce cost and streamline processes for faster execution

Current State§ Loan origination: Retrieval of information can be

slow and cumbersome;§ Loan servicing: Customer complaints related to

selling loans, etc.;§ Documentation: Collateral, title, deeds, UCC, etc.

can be time consuming and costly to identify and perfect;

§ Audit: Time consuming process to identify underlying transactions;

§ Fraud: Current fraud identification techniques requires significant cost and time to identify related transactions; and

§ AML / BSA: Unknown related transactions and time consuming pattern identification.

Current State§ Loan origination: Retrieval of information can be

slow and cumbersome;§ Loan servicing: Customer complaints related to

selling loans, etc.;§ Documentation: Collateral, title, deeds, UCC, etc.

can be time consuming and costly to identify and perfect;

§ Audit: Time consuming process to identify underlying transactions;

§ Fraud: Current fraud identification techniques requires significant cost and time to identify related transactions; and

§ AML / BSA: Unknown related transactions and time consuming pattern identification.

Future State§ Loan origination: Retrieval of information is

seamless as authentication is verified through the network;

§ Loan servicing: Real time access to loan location, investors, etc.;

§ Documentation: Documentation is verified through the network, reducing cost and time;

§ Audit: Internal blockchain records transactions and verifies and keeps records;

§ Fraud: Reduce through identify identification and transaction matching through chains; and

§ AML / BSA: Chain records can be used to identify activity faster and maintain records.

Future State§ Loan origination: Retrieval of information is

seamless as authentication is verified through the network;

§ Loan servicing: Real time access to loan location, investors, etc.;

§ Documentation: Documentation is verified through the network, reducing cost and time;

§ Audit: Internal blockchain records transactions and verifies and keeps records;

§ Fraud: Reduce through identify identification and transaction matching through chains; and

§ AML / BSA: Chain records can be used to identify activity faster and maintain records.

Exhibit B


Blockchain can transform existing processes and procedures in the financial services industry


EntityBranch

A

BranchB

Branch A

BranchB

Swaps 2.0

Consolidation of cash-flows between entities

Clearing House

Securitizations 2.0

Financial assets trading

Private banking blockchain wallet

B2C B2BProvides more clarityto the archivesindicating all formerowners.

Strips out the inefficienciesrequired to settle a tradeopposed to 2 or 3 dayslater as it is today.

Simple way to managefunds when and whereyou want.

Digital agreement betweenmultiple parties. The thirdparty becomes a softwareagent for the terms of theswap.

Eliminates the "middle man".

Approved payablesfinance will allow forquicker agreed terms.

Exhibit B


Impact: Smart Contracts

Automatic pre-fixedrules (Ex ante)

No intermediaries

Unique Registry

Reduction of process cost

Custody of Assets Principle of neutrality

Blockchain can create smart contracts:

Automatic execution of contracts previously agreed by parties, eliminating risks related to the breach of the contract.

Benefits: § Large cost reductions§ Efficiency improvements§ Risk reduction§ Elimination of process layers

SmartContract

Old model:§ Extremely complex system§ Every company maintains its own separate

ledgers (databases)§ Huge duplication of effort and cost

Exhibit B


Impact: Key Players

Key Players in Blockchain Strengths/Key Focus Areas Type of platform used Applicability to Financial Services

IBM

One of the banking industry's most mature blockchain for private equity deals; in compliance with security and compliance requirements of the Guernsey Financial Services Commission (3rd largest private equity market)

Private distributed ledger used by known and trusted partners on an invitation-only basis

§ Streamlines settlement§ Improves liquidity§ Supply chain optimization§ Improved transparency § New products/markets

R3Have the largest number of market participants. However, recently lost important members such as Goldman Sachs, Santander, Morgan Stanley & National Australian Bank

Created an open-source distributed ledger platform to handle more complex transactions and restricts access to transaction data

§ Records, executes and manages agreements

MicrosoftOpenness: Microsoft blockchain permits organizations to choose technology that works best for them

Open platform approach, working to provide security, privacy,transparency, regulatory compliance, scale and performance

§ Transform and automate the processes for standby letters of credit

§ Improve customer experience and relationship§ Process automation

Hyperledger

One of the biggest and most diverse of such groups. An "umbrella" for communities of software developers to work together to build open source blockchain and related technologies.

Open-source platform designed to be used as a foundation to build distributed applications. Could be used by large businesses to build applications and plans.

§ 120 members include IBM, JPMorgan Chase & Co, Cisco Systems Inc and the Bank of England

§ Reduce complexity and costs of settlement of securities and international payments.

§ Project has yet to enter a performance-testing phase

Technology companies and industry groups are currently developing platforms that will help the financial services industry transform services via the blockchain.

Exhibit B


Risk & Strategy: Implementation and Operational Challenges to Adopting Blockchain

§ Cost/Benefit: High cost of building a blockchain system. Use must have a positive return on invested capital.

§ Evolving Standards: Users want to determine a standard ahead of any investment. Too many choices could slowdown adoption.

§ Scalability: Must be able to provide concrete future success, otherwise higher energy costs could eliminate thebenefits from lower personnel costs.

§ Simplicity: 'User-friendly' style to deliver better efficiency and interface with other parts of the tech food chainfaultlessly.

§ Regulation: Regulating digital identities and standards need to be accounted for during integration.

§ Security: Blockchain must be as resilient as their current cybersecurity infrastructure. The threats of CyberAttacks, Cyber Counterfeiting, and Cyber Theft could significantly exceed historical experience with papercurrency.

§ Governance: Governing body needs to set in place to decide access and maintenance. Trade-offs betweenstrengthening security and enabling illegal activity. Advanced cryptography could reduce vulnerability to cyberattacks but make it easier to hide illegal activity, such as money laundering.

§ Privacy: Records of digital currency issuance and individual transactions must be maintained to authenticatethose transactions and to combat cyber risks and illegal activity. However, such records in the hands of agovernmental entity could raise privacy concerns by users and limit public appeal.

Challenges to adopting Blockchain in the financial institution market

Exhibit B


Risk & Strategy: Key Legal Risks

The Bank for International Settlements' main area of concern is the legal risks involved in using Blockchain.

§ Since this technology is new, the legal framework may not be as well established such as identifying the applicablejurisdiction or relevant laws.

§ Proprietary rights and settlement finality need to be clearly set out, understood by participants and supported by applicablelaw:Ø For example, the legal basis regarding the ownership or transfer of assets or the rights and obligations of the relevant

parties may not always be clear.

§ Transactions that take place across borders or in multiple jurisdictions would complicate the legal framework:Ø The law governing the activity would need to be confirmed; orØ Adopted in multiple jurisdictions in ways that are mutually compatible.

Exhibit B


Risk & Strategy: Blockchain Regulatory Landscape

Regulators and industry groups have both addressed the need to evaluate distributive ledgers and the applicability to Financial Services, challenges and regulatory requirements

Unclear RegulatoryFramework

Confidential

Extra-Territorial

EasilyConvertible

Consumer Protection

§ Presence of unregulated participants;

§ Lack of a legal status and a regulatory framework for most virtual currencies;

§ No Know Your Customer (KYC) requirements to set up a virtual currency wallet;

§ Virtual currencies can increase money laundering and fraud techniques;

§ Transition from virtual currency to real currency is a critical step and anonymizing software is used to elude law enforcement controls; and

§ Consumer and investor protection issues.

Exhibit B


Smart Contracts• A smart contract is a protocol specially created to

program agreements between two or more parties without relaying on intermediaries but granting its correct execution

Digital Identity§ ID could be used for compliance matters§ Digital Identity as the key of Internet of things§ Blockchain enables secure voting systems

Registry§ Blockchain enables timestamp and

proof-of-existence and notarization of every transaction.

Insurtech§ Settlement between insurance

companies§ IoT and Digital Identity to reduce

insurance costs§ Smart Contracts applied to this field

Internet of Things§ Fractional Ownership§ Property Registration§ Inclusion of objects into the payment channels§ Blockchain enables contracts peer-to-object

Financial Services§ Securitization§ Tokenization of assets§ Cheaper settlements§ Traceability of transactions§ Transparency

Compliance§ Blockchain could save billions improving

compliance procedures, and removing duplicities between entities

§ Digital Identity could be linked to AML/KYC, Data Privacy or FATCA policies

Healthcare§ Sharing of patients’ encrypted

information through blockchain complying Data Privacy regulation

Areas of Research

atGrant Thornton’s

Blockchain Lab

Areas of research

Exhibit B


Blockchain’s multidisciplinary

approach

Economy & Finance

§ Capital Markets§ International Economic

Framework§ Private Banking§ Trading

Advisory

§ Knowledge of business model in different sectors (Banking, Risk, Insurance, Healthcare and Automotive)

Development </>§ Knowledge of blockchain

platforms (Ethereum, Bitcoin, Multichain, Chain, etc.)

§ Architecture§ Cybersecurity

Legal-

§ Banking Regulation§ Taxation§ Anti-Money Laundering§ Data Privacy§ Commercial Law

Our multidisciplinary blockchain team

Exhibit B


Thank You!

Markus VeithPartner-in-chargeNew York & New England FI PracticeT: 212.624.5370E: [email protected]

Questions???

Prashant NisarSenior ManagerFinancial ServicesT: 212.624.5245E: [email protected]

Exhibit B

mailto:[email protected]



Our Resources

Markus VeithPartner-in-chargeNew York & New England FI Practice

Markus is the Partner-in-Charge of the Metro New York & New England Financial Institutions Practice and an SEC, IFRS and blockchain technology specialists. He has over 20 years of experience in banking and public accounting.

Experience

§ Markus has led audit engagements of both public and private financial services organizations ranging from large multinational institutions to local FDIC-insured banks and federal credit unions. He also led consulting projects on loan reviews, operational process reviews, post-merger integration, due diligence and asset securitization. Other areas of concentration include capital raises and IPOs. He also works and assists other offices with IFRS audits, reviews and conversions.

Industry experience

§ He has worked with banks, securities and commodities broker/dealers, REITs, BDCs, private equity groups, finance and investment companies. His clients include companies with multistate and multinational operations.

§ Prior to joining Grant Thornton LLP, Markus worked for Deloitte and McGladrey. He began his career in Europe with a regional savings bank affiliated with DZ BANK AG – one of Europe’s leading financial organizations.

Education

§ M.S., Taxation and Accounting, Pforzheim University, Germany§ M.B.A., Fordham Graduate School of Business

Professional qualifications and memberships

§ Licensed as a CPA in New York, California, Massachusetts and North Carolina

§ AICPA Revenue Recognition Special Task Force§ Banking Committee of the New York State Society of Certified

Public Accountants§ American Institute of Certified Public Accountants (AICPA)§ Institute of International Bankers§ New York State Society of Certified Public Accountants

(NYSSCPA)

Presentations and publications

§ Markus presents frequently to industry groups and at internal training courses. He also regularly speaks to trade groups and the business press. Markus was quoted extensively on the Financial Reform Act in a recent article titled “The Shape of Things to Come,” in The Deal. One of his articles on the Financial Reform Act was also published in a recent industry newsletter.

Contact details

T: 212.624.5370E: [email protected]

Exhibit B



Our Resources

Prashant NisarSenior ManagerFinancial Services Practice

Prashant Nisar is an experienced senior manager in the New York Financial Services Audit Practice. Prashant started his career with Grant Thornton and he has more than twelve years of public accounting experience. He has worked for the National Professionals Standards Group for four years where he advised on complex accounting, auditing quality, internal control over financial reporting and risk management matters within the NPSG.

Banking and Securities Industry experience

• He has both private and public company experience, focusing on audits of community banks, clearing and settlement, broker-dealer regulatory reporting, internal control over financial reporting, banking industry regulation and compliance and public reporting. He currently services clients in the banking and securities industries and advices clients on accounting and strategic issues.

• Prashant’s banking industry expertise includes audits of community and foreign banks, advising clients on enterprise risk assessment, management studies for banks under MOU, loan reviews, helped banks implement controls for Sarbanes Oxley compliance and FDICIA reporting.

• Prashant has advised several clients on failed bank acquisition matters. Prashant has worked on consent order compliance consulting projects for large financial institutions.

• Prashant is a technical expert on complex accounting matters related to Banks and has reviewed and contributed to development of the AICPA’s Depository and Lending Institutions Audit and Accounting Guide.

• Prashant’s securities industry expertise includes retail and institutional brokerage, correspondent clearing, investment banking and prime brokerage.

Education

• Bachelors in Accounting, University of Mumbai

• Masters in Accounting University of Mumbai

• Chartered Accountant from India.

Professional qualifications and memberships

§ Licensed as a CPA in New York § AICPA Revenue Recognition Special Task Force – Broker-Dealers§ American Institute of Certified Public Accountants (AICPA)§ Institute of International Bankers

Contact details

T: 212.624.5245E: [email protected]

Exhibit B


0

Economic Outlook: Improved Forecast of Continued Moderation

April 2017

Lindsey M. Piegza, Ph.D.Chief Economist

Refer to the last page of this report for Stifel Fixed Income Capital Markets disclosures and analyst certifications.Stifel, Nicolaus & Company, Incorporated Member NYSE / SIPC.

Exhibit C

1

Labor Market Stable but Far from Robust

Exhibit C

2

Payrolls Positive but Growth Declining

78 consecutive months of positive payroll

growth

March payrolls increased 98k

Payroll growth averaged 180k in 2016 compared to 229k in

2015 and 251k in 2014

Exhibit C

3

Participation Rate Still Declining

Unemployment fell two-tenths of a

percentage point to 4.5% in March, a near-

decade low

Participation rate at a multi-decade low,

63.0% in March

20-55 year olds account for the

majority of the decline in the labor force,

8.0m Americans (only 59% of working age

population)

Exhibit C

4

Consumers Losing Momentum; Gas Prices Give Muted Boost

Consumption averaged 3.1% over

the previous 12 months, down from a

near 4% pace 12 months prior

March price of $2.33 near 2009 low

$2.28 six-month average vs. $3.55 long-

term average

Down $1.36 and 37% from a peak monthly

average of $3.69 in June 2014 (star)

Gas prices are up 18% from $1.97 a year ago

Exhibit C

5

Business Investment Sluggish

Exhibit C

6

Waning Investment Momentum

Nonresidential fixed investment fell 3.3% at

end of 2015, the first quarterly decline since

Q4 2009

Investment rose 5.1% in 2014,

0.9% in 2015 and0.1% in 2016

Investment rose 0.9% in Q4 2016

Exhibit C

7

Business Investment Weak

Orders ex-air, ex-deffell 0.1% in February,

up 2.9% Y/Y, the third month of reported gain

after 23 months of near-zero or negative

growth

Durable goods rose 1.8% in February and

are up 1.5% Y/Y

Ex-transportation, orders rose 0.5% and

are up 1.0% Y/Y

Exhibit C

8

Fiscal Policy Agenda

Exhibit C

9

Trump’s Key Agenda Points

• Simplified tax plan with reduced brackets (12%, 25%and 33% vs. current 10%, 15%, 25%, 28%, 33%, 35% and39.6%) and a reduced corporate tax rate to 15-20%.

• Reduce regulation, repeal Dodd-Frank and sweepingbank reforms, and eliminate ones that “needlessly killjobs.” Undoing the Obama administration’s policies onenergy and climate control.

• Repeal & reform the Affordable Care Act whilekeeping coverage for people with pre-existingconditions, and allowing Americans under the age of26 to stay on their parents’ plans.

Exhibit C

10

Trump and the Consumer

• Additional discretionary income resulting from a directtax cut or indirect cost reduction will help alleviatemounting pressure from moderate employmentopportunities and waning income growth, and reflatethe household balance sheet.

• A simplified tax and reduced regulatory burden willboost corporate participation in the market, helping toreverse the restrained activity of the past several years.

Exhibit C

11

Positive Market Reaction: Equities Rally on Optimism

After an initial fallout on election day,

equities have since rebounded, pushing the Dow to a record high as of March 1st

Dow Jones Industrial Average

Exhibit C

12

Positive Market Reaction: Pressure on the U.S. Dollar

The dollar fell from $125.78 to $125.59 in March, the second

decline following six consecutive months of

gains

2013-2014 Average: $102.57

2015-2016 Average: $119.95

Exhibit C

13

Limited Fiscal Impact: Crude Oil Prices Improving Modestly

Monthly prices for March averaged $51.59,

following a $54.87 monthly average in

February

The price of oil is down 60+% from 2008 high

Prices pushed above $55 for the first time

since July 2015

Oil prices up 68% ($20.89 a barrel) from a

low in January 2016

Exhibit C

14

Limited Fiscal Impact: Low Productivity in U.S.

“I’vecontinued to highlight

the importance of spurring productivity

growth, that I think that would be

something that’s beneficial for the

economy.”-Chair Janet Yellen,

December 2016 Press Conference

Productivity has hit historic lows since

2014

Productivity in Q4 was 0.7%, averaging

0.6% in 2016 and 0.6% over the past 5 years

Exhibit C

15


• International “fairness” and protectionist policies;immigration reform by building a “wall” (or fence insome areas) and deporting 2-3 million illegalimmigrants with criminal records.

• Withdraw from TPP and renegotiate trade deals thathave left the U.S. disadvantaged with technologies andpatents exploited or goods counterfeited.

• Proposed a 5-35% tariff or tax on imported goods intothe U.S. to disincentivize moving overseas.

Exhibit C

16

Subdued Inflation vs. Heightened Expectations

Exhibit C

17

Inflation Improves from 2015 Lows

The PCE rose 0.1% in February and 2.1%

year-over-year, the first above 2% reading since

March 2012

The core PCE rose 0.2%in February,

maintaining a 1.8%annual pace

Inflation expectations climbed to a more than one-year high at 2.2% amid expectations of

increased fiscal investment being

simulative and becoming reflationary

Exhibit C

18


• Infrastructure spending to build roads, bridges, schoolsand airports “second to none,” potentially totaling $1trillion.

Exhibit C

19

Debt Appetite Diminished

77% of GDP, thehighest level relative

to the size of the economy since 1950

1950s decade-long expansion posting over 4.5% GDP vs.

stagnant 2%

According to the CBO, financing the debt coupled with rising interest rates would result in a four-fold increase

Federal interest outlays totaled more

than $330b

Exhibit C

20

The Fed: Raising Rates with a Cautious Tone

Exhibit C

21

Historically Low Rates

Fed raises rates 25bps to 1.00% at latest March

meeting

Fed raised rates 25bps to 0.75% in December

2016 after seven consecutive meetings of

unchanged policy

Exhibit C

22

Fed Agrees to “Gradual” Rate Pathway

Lingering “uncertainties” could limit rate hikes over the next two to three

years

“...it might be appropriate to raise the federal funds rate again fairly soon if incoming

information on the labor market and inflation was in line with or stronger

than their current expectations..."

-February 1st FOMC Meeting Minutes

Exhibit C

23

Focus Shifts to “Normalize” Balance Sheet

From less than $1 trillion in December

2007 prior to the Great Recession, after three

rounds of quantitative easing plus Operation

Twist, the Fed’s balance sheet now

stands at $4.5 trillion

Policymakers "judged that a change to the

committee’s reinvestment policy

would likely be appropriate later this

year...”- March 15th FOMC Meeting Minutes

Exhibit C

24

Improved Forecast of Continued Moderation

Exhibit C

25

Still-Moderate, Positive Growth

Q4 GDP rose 2.1%, following an average 1.1% growth January to June, the weakest first-half since 2011

Average growth since Recession: 2.1%

2014: 2.4%

2015: 2.6%

2016 : 1.6%

Exhibit C

26

Interest Rate Forecast Grid

Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 2015 2016 2017 2018Growth indicatorsGDP, QoQ % 0.8% 1.4% 3.5% 2.1% 0.8% 2.1% 1.8% 1.6% 0.9% 1.1% 1.9% 2.0% 1.6% 1.5%Fixed Investment, % -0.9% -1.1% 0.1% 2.9% 0.2% 1.3% 2.2% 2.8% 2.6% 1.8% 3.5% 0.3% 1.6% 2.1%Housing Starts, k 1,113 1,195 1,052 1,275 1,235 1,225 1,190 1,185 1,120 1,115 1,129 1,159 1,209 1,118Car Sales, M 16.73 16.69 17.65 18.29 16.53 17.20 17.35 16.90 16.85 17.05 17.39 17.34 17.00 16.95Unemployment Rate, % 5.0% 4.9% 4.9% 4.7% 4.7% 4.9% 5.0% 5.0% 5.0% 5.1% 5.2% 4.9% 4.9% 5.1%Participation Rate, % 63.0% 62.7% 62.9% 62.7% 63.0% 62.8% 62.9% 62.9% 62.7% 62.6% 62.6% 62.8% 62.9% 62.7%Savings Rate, % 6.1% 5.9% 5.9% 5.6% 6.0% 6.2% 6.1% 5.9% 6.3% 6.5% 5.8% 5.9% 6.1% 6.4%Inflation indicators, YoY%CPI 0.9% 1.0.% 1.5% 2.1% 2.4% 1.8% 1.5% 1.3% 1.2% 1.2% 0.2% 1.5% 1.8% 1.2%PCE 0.8% 0.9% 1.2% 1.6% 1.6% 1.5% 1.3% 1.1% 1.0% 1.0% 0.4% 1.1% 1.4% 1.0%Core PCE 1.6% 1.6% 1.7% 1.7% 1.8% 1.6% 1.5% 1.2% 1.2% 1.2% 1.4% 1.7% 1.5% 1.2%Interest rate, %FF 0.50 0.50 0.50 0.75 1.00 1.00 1.00 1.25 1.25 1.25 0.31 0.56 1.06 1.253month UST bills 0.20 0.26 0.28 0.50 0.75 0.50 0.54 0.75 0.72 0.70 0.05 0.31 0.64 0.712yr UST notes 0.72 0.58 0.76 1.19 1.23 1.22 1.28 1.43 1.39 1.35 0.72 0.81 1.29 1.375yr UST notes 1.21 1.00 1.15 1.93 1.92 1.83 1.90 1.85 1.73 1.70 1.54 1.32 1.88 1.7210yr UST notes 1.77 1.47 1.60 2.45 2.39 2.25 1.95 1.90 1.89 1.81 2.15 1.82 2.12 1.8530yr UST bonds 2.61 2.29 2.32 3.07 3.01 3.00 2.95 2.85 2.65 2.55 2.88 2.57 2.95 2.602s to 10s Spread bps 105 89 84 126 116 103 67 47 50 46 143 101 83 48

Lindsey Piegza - Chief EconomistSource: Bloomberg, Stifel **Stronger economic conditions beyond fiscal policy makers’ expectations would warrant a second rate increase mid-year 2017

Please see Economic Insight, "Politics and Policy: An Improved Forecast of Continued Moderation," for further forecast analysis

Average Annual FiguresEnd of Quarter Figures

Exhibit C

27

Questions?

Exhibit C

28

Disclosures

Disclosures and Disclaimers

The Fixed Income Capital Markets trading area of Stifel, Nicolaus & Company, Incorporated may own debt securities of the borrower or borrowers mentioned in this report and may make a market in the aforementioned securities as of the date of issuance of this research report.

Please visit the Research Page at www.stifel.com for the current research disclosures applicable to the companies mentioned in this publication that are within Stifel’s coverage universe.

The information contained herein has been prepared from sources believed reliable but is not guaranteed by Stifel and is not a complete summary or statement of all available data, nor is it to be construed as an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of investors. Employees of Stifel or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. No investments or services mentioned are available to “private customers” in the European Economic Area or to anyone in Canada other than a “Designated Institution”. The employees involved in the preparation or the issuance of this communication may have positions in the securities or options of the issuer/s discussed or recommended herein.Stifel is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agent in private transactions. Moreover, Stifel and its affiliates and their respective shareholders, directors, officers and/or employees, may from time to time have long or short positions in such securities or in options or other derivative instruments based thereon.Stifel Fixed Income Capital Markets research and strategy analysts (“FICM Analysts”) are not compensated directly or indirectly based on specific investment banking services transactions with the borrower or borrowers mentioned in this report or on FICM Analyst specific recommendations or views (whether or not contained in this or any other Stifel report), nor are FICM Analysts supervised by Stifel investment banking personnel; FICM Analysts receive compensation, however, based on the profitability of both Stifel (which includes investment banking) and Stifel FICM. The views, if any, expressed by FICM Analysts herein accurately reflect their personal professional views about subject securities and borrowers. For additional information on investment risks (including, but not limited to, market risks, credit ratings and specific securities provisions), contact your Stifel financial advisor or salesperson.

Our investment rating system is three‐tiered, defined as follows:Outperform ‐ For credit specific recommendations we expect the identified credit to outperform its sectorspecific peers over the next six months.Market perform ‐ For credit specific recommendations we expect the identified credit to perform approximatelyin line with its sector specific peers over the next six months.Underperform ‐ For credit specific recommendations we expect the identified credit to underperform its sectorspecific peers over the next six months.

Additional Information Is Available Upon Request

I, Lindsey Piegza, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.

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Exhibit C

cfo committee meeting - njbankers.com committee...apr 20, 2017 · chief information officer...

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