The Risk your Member Takes with You

When we lend money, we only focus on the risk of not getting repaid by the borrower. We don’t just focus on the financial capacity of the borrower to repay us, but also, we take into consideration their character too. This is all well and good, but should your borrower or member be doing the same due diligence on you?

Sometimes we forget that we, on the banking and lending side, also present a risk to the borrowers and depositors. It wasn’t until the Great Depression that deposit insurance was created to provide depositors with a basic level of comfort that the government would help honor some deposits. Today, that deposit insurance covers balances up to $250,000. While that may sound like a lot of money to me and you, there are people and organizations that need to keep more than that on deposit, and they do so at their own peril. Those large depositors are betting that your institutions are safe and sound and can pay back those large deposits on demand. And, they are assuming your institution won’t fail in the meantime!

Even when we lend money, the borrower is taking a risk with us. Just like there are dishonest borrowers in the world, there can be dishonest lenders as well. Some lenders may not be upfront about certain loan fees and conditions. When lenders fail to communicate the true cost of the transaction, the borrower may grow upset and feel as though the lender was intentionally misleading them. Some lenders make loans under narrow, specific conditions, hoping that the borrower defaults so the lender may charge higher fees or even repossess collateral, like a prized piece of real estate.

One of the worst situations is when a lender promises a loan will be funded, but then later retracts the offer. Imagine how upset you would be to have a car loan or home loan pulled away from you after your lender said you were good to go. Now the borrower may be in an embarrassing position, where they will fail to honor a contract, or they have already spent money on closing costs, only to not wind up with a loan.

In the business lending world, this is especially important. I once witnessed a bank promise a construction loan to a borrower to build a commercial real estate project. As it turned out, the construction loan was over the legal lending limit of the bank, and that bank failed to find another bank to help participate. Unfortunately, the lender started advancing the loan anyway. When the loan hit the bank’s lending limit, the bank stopped advancing funds to the borrower. Construction would have halted had the borrower not had extra money to help finish the construction process himself, but he was very disappointed with the bank, and that bank had a potential lawsuit on its hands.

It is important to keep in mind we need to exhibit high character standards and professionalism, just like we expect from our borrowers or members. They take a big risk by working with us, and assume we can honor what we promise too.

Annualizing is Nothing More Than Guessing

To use a single data point to determine where a future data point will lie is really nothing more than a guess. It isn’t scientific, and yet, we see this practiced in areas of finance and economics reports to which people tend to pay a lot of attention.

Financial institutions see this problem constantly when they file their call reports. Anything reported on your first quarter call report will automatically be multiplied four times to assume this is the trajectory of the entire year ahead of you. Did you charge of a loan in the first quarter? Now your regulator might assume you will be charging off four times this amount over the coming year. Did you have an unforeseen expense? It will be multiplied by four, and your financial performance report (FPR) assumes it is recurring over the next three quarters. Of course this could work to your advantage if you also realized a significant gain or recovery in the first quarter.

This problem with annualizing data was recently pointed to the Bureau of Economic Analysis (BEA) by CNBC. The reporters at CNBC caught on to a recurring issue where first-quarter GDP numbers continually seemed subpar when annualized, which caused panic and policy concerns on a regular basis.

In April, CNBC released a report showing that first-quarter GDP was consistently lower or “weaker” than the following three quarters for the past 30 years. Economists noted that they attempt to adjust out seasonal variations, which might cause this anomaly in the data, but still a “residual seasonality” exists.

The BEA, a government office, responded directly to CNBC noting it was “aware of the issues” and “is developing methods to address what it has found.” Read more about it at http://www.cnbc.com/id/102695676 .

If our government’s economists cannot effectively forecast the future, then who can? Nobody, that’s who! The problem we must accept is that a single data point cannot enlighten us to where the next data point will lie. At best, we can look at a trend using several data points, but that itself will still only give us a guess; albeit, a more informed guess.

If we want to dabble in the art of financial fortune telling, it behooves us to at least take a logical approach towards forecasting. We want a good span to our data, meaning we want it to cover several relevant periods. One way in which this is approached is to use a trailing twelve-month (TTM) analysis.  This means no matter what month you examine data, you are getting a snapshot of the last 12 months, giving you a true annual year-to-date picture.

Another method to assessing a trend is to look at data points only from the same period.  This is why we might always look at just year-end results. If we want to look at the most relevant month, say May in 2015, then we should not compare it to other year-end numbers, but rather to May 2014, May 2013, and so on.

To summarize, we understand that annualizing data is desirable and well intentioned, but it is a poor tool for forecasting and is a random guess given the unscientific nature of the method. We should pay more attention to groups of previous data points that correspond with the same period. This means seasonality will naturally be adjusted for and will not require complicated adjustments that further mystify a murky guess.

Blame it on ENSO?

We know the Dakotas experience some of the most unpredictable weather in the country (see http://www.mwb-s.com/blog/2014/12/8/dealing-with-the-unpredictable), and this spring has not disappointed us with those surprises. South Dakota had the driest start to 2015 through April based on historical standards, with less than 2 inches of moisture over that period (https://www.ncdc.noaa.gov/sotc/service/national/Statewideprank/201501-201504.gif). And, in Rapid City, we had a high of 84 degrees on March 14. I should probably also mention it snowed two days after that.

Now it appears someone has flipped the switch on us, because our highs can’t climb out of the 50s and 60s in mid-May. On Mother’s Day, May 11, we had over 13 inches of snow. Our month-to-date rainfall is now 6 inches, well ahead of the 3.86 inches we average in May. Climatologist are now indicating this has to do with the onset of El Niño, which is the cyclical warming of the Pacific Ocean that tends to impact the climate on every corner of the Earth.

Formally called the El Niño Southern Oscillation (ENSO), it typically leads to warmer and drier winters and wetter and cooler summers for the upper Midwest. Starting to feel familiar? While these effects are not always certain, they are statistically much more likely during an El Niño.

It is believed the effects of ENSO’s cool-wet summers causes lower corn yields, lower winter wheat yields, and reduces tilling (http://growingsouthdakota.com/features/2015/04/el-nino-will-impact-field/).

Andrew Freedman, science editor at Mashable.com, noted on PRI’s The World that extreme weather is expected with El Niño events, and it is hard to chalk it up entirely to climate change (see the May 26th interview at http://www.pri.org/programs/the-world).

Freedman eloquently explains the media may be quick to link stories of extreme weather events to climate change because it may make for an entertaining news story, but climate has always been variable, both in the short-term and the long-term. He points out that climate change certainly plays a role in some of these events, however, we can’t directly measure how much an extreme event can be attributed to climate change, because these events are typical with El Niño.

What is most important to understand with El Niño it provides a basis for forecasting, so people like ag producers should be well aware of how it will affect them. If producers aren’t heeding the forecast, by now they should start considering it.

And we should remember, each coin has two sides. El Niño isn’t bad news for everyone. While the tragic flooding in Texas is likely a consequence of El Niño, the silver lining is this is quenching a region that had been in a severe drought.  In the Dakotas, we can always appreciate a warmer winter, although it will likely be tough on the skiing industry in the Black Hills.

Another point to remember is all climatologist say that no two El Niño are the same. So while there may be some general patterns that emerge each time ENSO fires up, it doesn’t mean it will be exactly like the last time we may have experienced this.

Creativity Killers in the Workplace

In an earlier post, I defined creativity, as the process by which we solve problems.  Creativity is not confined to those who spend all their time in the laboratory inventing new widgets or those wild artists whose appearance may be way outside the mainstream.  Since part of growing our companies is a constant struggle of finding and solving problems, creativity becomes an essential trait that must be present throughout all successful organizations. 

But, creativity is very fragile and can be easily killed in a company.  It can be killed very silently, often without leadership realizing what is happening.  Killing creativity means we are doomed to be stuck in the same ditch without any ability to reach the highway. 

There are several characteristics of people who enjoy killing creativity in an organization.  These killers are especially lethal if exhibited by the leadership of the group.  The first may be from someone we call “Self-Absorbed Seth”.  Now, this person has to make everything about himself.  If you talk to them, you would think the entire organization cannot function without their efforts.  Teamwork is absent from Seth’s vocabulary and meetings often become about how to advance his importance.  Any creative idea that is worth doing can only come from Seth. 

The challenge here is the organization will only solve problems to the extent of Seth’s ability, since he kills any other idea outside of his own.  This seriously limits the growth of the company.  I once heard a preacher say, “A man, centered in himself, creates the smallest universe possible.”  An antidote to this self-centered attitude can be found in a sign that was on President Ronald Reagan’s desk, “There is no limit to what a man can do or where he can go if he does not mind who gets the credit.” 

Another killer is a person called “Negative Nell”.  This person always throws cold water on the warm embers of a fledgling creative idea, snuffing out the possible solution as quick as possible.  Now, pointing out roadblocks that need to be overcome when a creative solution is advanced is good, but building negative blocks to kill all creativity is unhealthy for the organization.  Often, the attitude a Nell shows, permeates throughout her entire life and being; it is not just confined to the office. 

“Stu Stuck-in-the-Mud” can be another creativity killer.  Stu often prefaces the importance of his opinions with giving a history of his time with the organization or in the industry.  This is to intimidate the idea-giver into discounting his/her thoughts since Stu has more experience than they do.  But allowing Stu to rule puts the organization in a rut and is sure death knell for mediocre performance.  Stu also discourages any big-picture thinking or dreaming since that is out of the norm of the rut he is in.

“Drama Drake” can also kill new ideas.  There is only so much time and energy available to us and Drake siphons off as much as he can with various crises and self-inflicted wounds created by himself.  Molehills become mountains, and mountains make it impossible for adequate time to be spent creatively solving problems. 

“Organization Ozzies” snuff out creativity with the belief that all new ideas must originate from the upper echelons of management.  Those outside the “mothership” or the “ivory tower” could never advance any possible solution of any worth.  After all, the most talented and deserved people are those leading the company.  This outlook first misses most of the problems in the first place as most will be identified by the front line people.  It also minimizes the talent on the front line and squashes the worth and ideas those people have.  Sometimes, solutions that may change the course of a company are within those who do not have a “C” or “SVP” in their title.  For a company to reach outstanding new heights, the value of all of the team should be emphasized and a forum for everyone to express their thoughts should be present.

Ozzie will often cut people off in meetings who do not have the proper title behind their name.  By doing so, brainstorming meetings often become a small shower of those in upper management, when it could become an earth moving thunder and lightning from the entire team.  Ozzie would be better to not advertise an idea generating meeting, unless he is open to everyone sharing an idea. 

Another creativity killer is “Silent Sally”.  Sally will solicit ideas and may even have a suggestion box available for anyone to deposit into, but the ideas will go nowhere.  It is as if the suggestion box has a shredder attached to it.  Eventually, those giving ideas will just quit in frustration. 

“Take-Credit Tim” eliminates creativity by not giving proper praise to those who actually come up with the solution.  He may take credit for himself, or if he is a suck-up, may give credit to those in the company that may help him advance. 

If a leader wants to foster an environment for creative problem solving, he must first see if these various characters are presently killing ideas throughout the company.  He also must look in the mirror and see if he is one of the causes of eliminating creativity. 

Growing Creativity in the Workplace

Many organizations, especially those in the financial area, treat creativity with much disdain.  Many would be happy with just continuing to crank in the deposits and churn out loans much like an assembly line factory.  But we live in a world where creativity is honored and can command a higher premium than the mundane. 

Creativity is not just what comes from those with the wild hair and weird clothes.  Creativity is the process by which we solve problems.  So it is imperative that to succeed, we must find ways to be creative, because if we can’t be creative, we can’t solve the problems staring at us. 

I recently heard Ed Catmull, the co-founder of Pixar Animation Studios and president of Pixar Animation and Disney Animation.  Pixar produced 14 consecutive #1 box office hits, which have amassed over $7 billion in combined ticket sales.  Their films have won 30 Academy Awards.  It is interesting to see the wild success of Pixar in its early days with movies like Toy Story, compared to the struggles at Disney Animation before Ed took over.  A lot of this history is shared in his book Creativity, Inc.

So since Pixar is well known as a creative powerhouse, what are some of the things that were done to allow creativity to grow in that company?  One of the themes throughout Ed’s talk was that creativity is fragile and need to be protected.  It can easily be killed and it can be stopped from silent forces and attitudes that are often unseen.  Thus, to unleash creativity requires effort. 

Pixar is famous for developing its “brain trust”.  This is a key group of individuals from various sides of the animation world who gather together as a new film is being made.  Some members of the trust are leaders in Pixar and some are just the average worker.  The key take-a-way I see here is to nourish creativity in your organization, a CEO should not discount the views of those on the front lines and only listen to the small group of VPs around him or her. 

This does pose challenges, as growing creativity requires the fertile soil where new ideas can spring up.  That is sometimes difficult whenever you have people of different pay grades in the room.  Even the actual room set-up could help set the stage.  When Aja Brown, the Mayor of Compton, California, wanted to meet with various gangs to work together ending violence in her city, she had a meeting and sat everyone in a large circle.  Her message was that everyone had a place, and no one was more important than the other.

So to nourish this creativity, the power structure had to be removed from the room and the meeting members were peers talking to peers.  Pixar then had the film director who made the final decisions, and not those in the creative brain trust.  The members also had a shared ownership in each other’s successes.  The environment also allowed people to express opinions.  Honest “no’s” were given and listened to.  When this environment was promoted, eventually magic occurred.  Ed referred to the magic as the place where the egos left the room and everyone focused on the problem to solve it.

This attitude that permeated the company, made Pixar rethink the very basis of the concepts of failure and errors.  This attitude was that it is better to fix problems than to avoid them.  We often think of failure in terms of an academic short-falling.  There, failure is from being dumb or too lazy.  Because of this, new ideas are stifled because we don’t want to appear to be either of them.  It is better to have tried, than to sit on the sidelines and not try at all.

To encourage creativity, we must make it safe for people to express themselves, no matter how crazy the idea may actually seem at the time.  I love when someone on my team pops in my office and begins with, “I have this crazy idea…”  I always try to stop what I am doing because it is some of those moments that the real keys for growth are born.  

We must also try some of the ideas that may not have every angle well thought out or contingency planned for.  That is not to say we do something sloppy.  But we have to not be afraid to plunge forward when we may not necessarily have the answer for each problem that may come up along the way.  We often refer to over-analyzing a situation as “paralysis analysis”.  In our world, anyone can always eventually talk themselves out of approving a loan. 

Sometimes the creativity just requires you point in the right direction and go when you don’t know all the details.   Nathan Whitegard saw stray dogs and cats being captured and euthanized by local shelters.  It broke his heart and he wanted stop it.  He expressed his passion to others and told them, “I’m not sure how to actually do this, but follow me and we will.”  Now scores of no-kill animal shelters exist around the world because of a crazy idea fueled by passion.

Creativity is difficult to get in an organization and is often very fragile.  But when the proper environment of openness to new ideas, not being afraid to try, a new attitude toward failure, the death of egos in favor of a team success, and a common passion are present, great things can be accomplished that the world will beat your door down to get to.

What Makes a Good Business?

As you well know, I can drone on all day about financial ratios and collateral and why they are important in assessing repayment. But stepping back from the technical analysis, what is it that really makes a business good? Are there certain qualities that you can tell right away separate a good business from a bad business?

The first quality that makes a business opportunity shine is certainty. If a business has a predictable flow of revenue and a predictable cost structure, then you are dealing with a business on solid footings. In these instances, you are often asking how do we find a way to work with this business instead of why should we bother?

The key factor for most certainty comes from obtaining contracts that can be enforced and are collectable. Take for example someone who wants to open a restaurant. Your stomach may start to churn, because there is little, if any, certainty in such an industry. The barriers of entry are low, so anyone can open up a competing restaurant with relatively little money, and the fickle tastes of customers are subject to change depending on new fads and trends. As we see, restaurants open and close all the time.

Now, let’s take that same person who wanted to open a restaurant, but say he/she also notifies you they have obtained several contracts with reputable businesses to cater several of their meetings and functions. These contracts last a couple years, and provide reasonable payments on a recurring basis. Now this restaurant idea doesn’t sound as bad, since a considerable part of their operations will be devoted to honoring contracts that provide a steady stream of revenue.

Even in this situation, you may be saying to yourself that this only seems reasonable if you have effective managers running the operation too. This brings us to the second quality of a good business, which is good management. Quality management is a tough thing to assess. In this case, history is often the best indicator. A track record of success is always ideal. In our example, we may be asking if our aspiring restaurateur has previous experience running his own establishment. If he/she does, then what brings them here? Have their past ventures failed? Did they sell off and cash out of performing restaurants? A resume would also be helpful in assessing the manger’s experience.

While a successful business must be profitable, math and statistics cannot tell us the full story. This is why it is important to know business owners and managers on a personal level, and even meet them onsite. A good operator will have done a successful job at creating a predictable stream of revenue and has expenses under control. Solid experience, accompanied with a level of certainty about the future, is what makes for a good business in any industry.

When Experience is Over-Rated

Albert Einstein once defined insanity as doing the same thing over and over again and expecting different results.  I know that to some extent, this practice is prevalent in any workplace, but it seems to be more rampant in some fields than others.  One is in sports, where coaches seem to be recycled from one team or school to another.  Now sometimes coaches who are failures, actually grow and become a glowing success.  At other times, we fans wince at the poor dinosaur who was brought in to lead our favorite team.  We continue to watch in horror the team sink to the bottom of their division.

Financial service is another area where insanity can be witnessed.  Some in this industry seem to hold such high esteem those who just have experience in the industry, without any regard to their success in their positions or if the experienced have become so myopic in their approach that they are not relevant to the customer.  In doing so, they tend to bring all their poor programs, ideas, and decisions into the new job.  Often this is a great detriment to the success of a credit union or bank.

I have seen this firsthand at several times in my career.  One bank where I worked hired a head of retail from another institution.  One of the first things he did was to begin a small business line of credit program that required no underwriting at all, just some sort of score he created.  The commercial lenders were told that if we underwrote these small loans, there would be no profit in them.  Besides, this genius had “successfully” run this program at other banks so what could go wrong?

So my bank plunged headlong into the program, booking tens of millions of dollars of unsecured business lines of credit that were sold by retail folks who had no commercial experience.  Two years later, the program was beset by fraud, nearly $5MM of losses, and many more substandard loans.  Our retail king had moved on to another institution to provide the same program to that bank that he had done for ours and just as he did for the one before us.  Only this time, he could pad his resume with more experience in the industry, even though the industry experience had been a failure.

So the question is if you want an organization to be successful and if you want to create something truly great in your company, what type people do you need to bring on board as leaders to make this happen?  Now experience is valuable, and the gray-beards of the industry can bring in much wisdom and knowledge.  But just to hire people because of longevity in the industry without any real understanding of their commitment to excellence and ability to cast a vision and lead folks toward the promised land, may not yield the results you desire for your organization.  Hiring people who have been in the industry so long their senses are dulled to the outside world, tends to make the company look through a tunnel and fail to see other opportunities around them.

So a wise leader will ask several questions when seeking for new leaders to run parts of their organization:

1.       Is the person I am looking at really exceptional and has the ability to help propel us to the next level, or is their industry experience really confined to their ability to hold on longer to their job than others?

2.       Does the candidate have the ability to look outside the box and see the changes in the culture and industry?  Can they make and execute on relevant plans to move the company in a direction to better meet those changing needs?

3.       Does the prospective leader have the ability to inspire others to come along the journey toward greatness with them? 

4.       Is the candidate passionate about their work?  Do they have an obsession to be truly remarkable?

5.       Do they have the ability to build real connections with people around them?  Do they show real compassion for others?

6.       If you could talk to other institutions they have worked for, would they speak in longing terms of them as a person and their accomplishments?

If you can’t get positive responses to these questions, then you may be bringing people with industry experience on your team, who have no vision, ability, or willingness to help lead you out of your present situation.  You may be bringing a person on who will help you race to the bottom!  The issue with that is you may actually win the race!  And if you don’t win, second place is not a position you want to be in! 

It is such a temptation to just look at industry experience without looking at the total education, ability, aptitude, and attitudes in the candidate field.  Some of the most successful institutions are those who will look to find the best people, even those who may not have the required “industry” experience.  I know my organization is richer and better from the people we have who came to us with no industry resume’.  Yours may also be that way as well if you bring in some passionate leaders who have a different perspective.

Economic RoundUp

One of the sites I use often to assess the health of a community is the Bureau of Economic Analysis at http://www.bea.gov/. There you can find great information about states and metropolitan statistical areas (MSA) throughout the country.

Let’s take a look at how the Dakotas are doing in terms of population and economics. As of the last Census, North Dakota reported 672,591 people and South Dakota reported 814,180; giving a combined population of almost 1.5 million people.

The Dakotas have five MSAs, which are communities centered on cities with populations greater than 50,000. The five MSAs are Fargo, Bismarck, Rapid City, Sioux Falls and Grand Forks. Together, they had a combined population of 723,515, which is roughly 49% of the total population throughout the Dakotas. This suggests we are still a predominantly rural area in the early 21st century!

As of 2013, North Dakota’s economy was $56.3 billion a year, with 13% of economic activity devoted to agriculture and 28% devoted to exploiting and mining natural resources. South Dakota’s economy was $46.7 billion in that same year, with 14% of activity related to agriculture and 11% of output coming from government spending and payments, including military installations.

When compared to the 2010 Census, the GDP per capita in South Dakota was $47,827 and in North Dakota it was $52,754. To break that down by MSA, we can see that Fargo recognizes a GDP per capita of $54,613; Bismarck reports $47,738 per capita; Sioux Falls reports $65,329 per head; and Rapid City reports $43,562 per person. This suggests that Sioux Falls has 50% more economic output per person than Rapid City! Grand Forks comes in the lowest in 2010 at $40,503 per capita; although 2013 data suggests it may have bounced as high now as $47,594 per person.

North and South Dakota have a combined economic output of $103 billion, which is roughly the size of the economy of Morocco or Ecuador. The MSAs have a combined economic output of $49.7 billion, meaning the Dakota’s five largest cities together have the economy of roughly Panama or Serbia.

In terms of who became an MSA first, Sioux Falls crossed over the 50,000 mark in the late 1940s, followed by Fargo in the 1960s. Rapid City came next in the 1980s, and Bismarck arrived in the 1990s. Grand Forks was a late bloomer, crossing the 50,000 mark between 2000 and 2010.

Should the oil boom in western North Dakota sustain, we could see two additional communities in the Dakotas join the MSA “city” status. Minot presently has an estimated population of 46,300, and it is already designated a “micropolitan” statistical area with roughly 70,000 people living in the vicinity.

Williston could potentially be a second contender, although its population is challenging to estimate. While its population is believed to be roughly 20,000+ people, some estimates have placed it as high as 40,000. How the chips fall will all depend on how many people in the area chose to elect Williston as their permanent residence.

Even at 1.5 million people, the Dakotas make up less than 1% of the total US population which has now surpassed 320 million. And our economy of $103 billion is less than 1% of the total US GDP of $17 trillion. On the whole, our GDP per capita is slightly above the national average (which was around $48,000 in 2010), and our cost of living is substantially lower than the rest of the country. Primarily, it is this low cost of living and abundance of space which contributes greatly to our prosperity and better purchasing power.

When Does an Employee Quit?

Here is a question to ponder.  When does an employee quit?  The easy answer is the day they turn in their resignation letter.  Yes, that is the easy and most obvious sign an employee has quit.  But answering the exact moment an employee quits is impossible to do when just looking at the externals. 

You see, many employees, even some in your organization, may have already quit.  Oh, they may show up to work every day and put in their time.  They may even look at doing some extra work over and above the bare minimum requirement.  Heck, they may even be in this position for year and decades.  But the fact is that they have already quit either the leader or the organization already.  They have resigned themselves that they do not matter in the grand scheme of things to the business and therefore will begin to pour their soul and energies elsewhere.

The first job I quit was when I left the bank I worked at as a teller through high school and college.  The day I quit was in the spring of my senior year, after I had several good job interviews.  I knew all along that once I had my degree, I would leave to do other things, but those final few months I spent having already “checked out”. 

It would be years later before I quit another job.  I was with this organization for nearly 15 years and grew from a branch manager and mortgage originator to a commercial lender.  I handled the largest transactions in the market.  But after the second merger, management changed.  The people who I learned so much about credit from and who believed in me had left.  Now the leadership consisted of seasoned bankers who had found ways to skate by and yet get promoted all throughout their career instead of really being exceptional.  The credit structure had crumbled and instead of smart lenders on the front line, it was now order takers and credit administration that sat hundreds of miles away.

I began to have to make excuses for my bank and attempt to shield the customer from their poor decisions and delays.  The final straw for me came as I was driving to see my largest customer, I was informed the company was being reassigned to another lender who was closer in proximity, even though I had handled the relationship for years.  It was at that moment when I turned the car around, that I wrote the resignation letter in my heart.  Oh, I lasted half a year longer, but it was as if I had been a zombie. 

In this case, I quit my leaders, before I formally quit the bank.  Typically, people quit people before they will quit the company.  It may be for many reasons:  leader ineptness, unequal treatment, lack of growth opportunity, lack of reward or recognition, or breakdown in trust.  Any of these items can snuff out the innate desire of every one of us has to accomplish great things with their work.  

The last time I quit a job, the root causes were the lack of being able to move up in the organization and the limited opportunity that comes from that position.  In this case, I did also quit my leadership months before leaving. 

So as a leader, do you have any “dead men walking” in your company?  Are there just people going through the motions and collecting a paycheck?  Perhaps the most dangerous place you could be is when you have a worker who was very energetic and ready to make a real difference in the organization, but after repeatedly being shot down, now has resigned herself to passing time until better and brighter opportunities come up.

The most important resource in your organization is people.  People who are motivated and believe their work matters and can make a difference, who are allowed to use their creative talents, and who believe in themselves and the cause of the company, can make amazing and great things happen.  Throwing money at a problem will often just give you a bigger problem and less money.  Throw motivated people at a problem, and this can make a mountain into a manageable molehill. 

Rural America : A Land of Opportunity Once More

Many people view those living in rural America as simple folk, who probably have a limited education, let alone a need for such. While it is true that there may have traditionally been less of a need to be educated to find wellbeing outside major urban centers, that is increasingly changing.

The appeal of the heartland was that settlers could acquire land for next to nothing (often for nothing at all), and they could work the land to feed themselves and sell off a surplus of crops or livestock for some marginal profit. No college degree was required to join this program.

These settlers were hardy and hardworking, and so were their offspring. Farming seemed a challenging way of life full of great work and little reward, but it offered independence and personal enterprise. Eventually, the third and fourth generations started to encourage their children to leave the farm for better pursuits. Encouraged to go to college, these farming kids could finally do something other than toil in the countryside where it was becoming ever more challenging to make ends meet. The children could go to college and gain professional expertise which would be rewarded with higher pay, and they could work 9 to 5 instead of 24/7 on the farm.

The countryside began to empty out, and the farms consolidated to become bigger, allowing them to achieve better scales of profitability. Likewise, technology in farming improved and added to the profitability of the land. With improved technology in pest management and yield management, the value of ag land soared. Single farms became worth millions in terms of land alone, and it would take expensive sophisticated machinery to work the land too. This meant operating the farm required managing millions of dollars, and it led to greater use of contracts to hedge outputs and lock in profits to provide certainty for such large scale operations.

While farming had never been for the faint of heart, it was no longer a place for the uneducated. Several state colleges had always offered education that focused on agriculture, but now more than ever they had to focus on creating well rounded producers that could understand chemistry, engineering, and finance. Running a farm was becoming big business, and now the tides were turning. While the children of farmers were once encouraged to leave the countryside for an education that could provide them opportunities elsewhere, they were now encouraged to get an education so they could return to the farm to be better entrepreneurs.

An unforeseen consequence of bigger and more lucrative farming resulted too. The rise of agribusiness resulted in value-add production facilities like ethanol plants and enormous cooperatives to operate elevators and transportation facilities. There was even a need for larger financial institutions to accommodate both the farmers and growth of agribusiness. Soon, it wasn’t just the farmers who needed an advanced education, but anyone supporting them, selling to them, or financing them would need a college education to keep up.

In many ways, the plains are still the frontier full of hardworking people, but the people are no longer the poor farmers or uneducated country folk that they were once thought to be. And best of all, even children from the countryside may not need to go far from home to have a fulfilling career, and they might even do it working their traditional family farm.

Seeing With Your Other Eyes

My younger son has a part-time job as a movie critic.  It amazes me how one could get such a gig, where you can sit down for two hours in a theater with a big bucket of popcorn, write about the show, and get paid.  Because he often sees movies before they are out, he can tell me what is good or bad when the show is released.  Because of that, we often don’t go to the movies together. 

Last weekend, when  all of the women in our family were on a trip, and my oldest is away at college, Josh and I found some time to see a show that he did not have to review which allowed us to spend some rare “movie theater time” together.  We chose to see the film “Little Boy”. 

The movie is set in the early 1940s at the time of World War II in a small town in California.  It focuses on a family and especially the relationship between a father and a young boy who had his dad as his best friend.  The dad is drafted into the war and the boy is heartbroken.  The lad is determined he will do whatever he has to do to bring his father home safely, which involves believing and acting out on that faith with the guidance of a local priest.  It is a heartwarming and heroic story that I recommend.

I bring up the story in this blog, because it struck me how much of a role that faith plays in building a company, a credit union, or even a life.  Look at your business clients who started from nothing.  Consider the small, local credit union that grows to be the biggest financial institution in the area.  Think about every important relationship that you have, whether it be with God, family members, friends, or business clients.  What is a common denominator among all of these?  They all require faith.

The writer of Hebrews tells us that faith “is substance of things hoped for and the evidence of things unseen”.  You may know of people who have ancestors who came to America with a few dollars in their pocket, clothes on their back, and the belief they can make a successful life in this country.  You have also heard of successful businesses that have started out with smart people, a dream, and faith.  In each case, despite overwhelming odds, these folks saw something that did not exist—a successful company, a growing community, or a profitable ranch—to name a few.  These items did not exist, but they could clearly see them with their eyes of faith. 

This issue hits home with me.  Every day, I see our company as it will be and not as it is.  I then have to see where we are presently.  The path between the two requires faith to clearly see.  This faith is the starting place to turn dreams into attainable goals and steps where everyone can see what you already know. 

This principle applies to whatever you are doing in life or relationships.  The important thing here to remember are words that my Aunt Lil used to say, “Both the person who thinks he can’t and the fellow who thinks he can, are both right.  Which one will you be?”

Increasing the Regulatory Burden

The other day I was reading a study commissioned by the SBA and completed by Nichole and Mark Crain of Lafayette College in 2010.  The executive summary begins with stating that the annual cost of complying with federal regulations in the United States totaled $1.75 trillion in 2008.  If this were to be divided up evenly among households, it would total $15,586.  Compare that to the average household cost for health care in that year of $10,500.  It is interesting how there has been an uprising about the high costs of healthcare, yet you do not hear the same clamor over regulatory costs!

To give you the idea of the enormous size of this, in 2014, according to the International Monetary Fund, the entire GDP of Canada, the 11th largest on the planet, was only $1.788 trillion.  So, if we could take the regulatory costs in 2008 and make it a national economy to itself, it would be the 12th largest in the world.

To depress you even further, the cost of regulatory compliance has definitely not slowed down since 2008.  We still have not even scratched the surface with items such as Obamacare or government agencies like the EPA.  So where do most of these rules come from?  They come from a new 4th branch of government called the bureaucracy.  In 2011, federal agencies issued 3,807 final rules, yet Congress passed and the president signed only 81 laws.  In 2012, federal bureaucrats issued 212 federal rules which each were projected to cost more than $100 million. 

Another problem here is these rules are not passed as a laws are as outlined by our Constitution.  These rules, which often impose monetary or criminal penalties, are created as explanations of laws or enforcement actions of various agencies.  Consider one of the favorite laws in the financial realm, the Dodd-Frank Act.  This was supposed to protect the consumer from risky decisions of financial institutions.  The law is an offense to the Constitution.  An example here is the establishment of the Consumer Financial Protection Bureau (CFPB).  This agency has far reaching power from preventing financial transactions that are considered “unfair,” “deceptive,” or “abusive” in regarding a consumer financial product or service.  The statute has no definition of what these acts are, so the CFPB has exclusive authority to create rules with little recourse by those impacted by its decisions.

No doubt, if you are in a financial institution, you are feeling the impact of these dictates today.  What makes matters direr is that the CFPB was set up by Congress for Congress to have no appropriating authority over the CFPB, as the law allows the CFPB to claim funding directly from the Federal Reserve.  So this would appear to violate the Constitution’s establishment of how funding for the federal government agencies is handled. 

The head of the CFPB is given a five year term and can only be removed “for inefficiency, neglect of duty, or malfeasance in office” by the president.  Congress gave up even more of its authority by establishing a 15 member oversight council and granted it broad executive powers.  The council has open-ended discretion to designate nonbank financial institutions as systemically important, which should have a wide range of regulatory authority over these businesses.  I recently ran into this from some of my real estate friends in Colorado who were putting on classes for other realtors dealing with the new impact of the CFPB to their firms.  But these items cannot be challenged as the law prohibits aggrieved parties from challenging the legal status of the council’s actions in court.

So we are left with a Congress that has surrendered its own power to the executive branch entities, and the president to grant his power to an administrative state.  Statists have, for the past century, contended that these agencies are necessary to provide a progressive government required by a modern society.  Yet, delegating power to an administrative state is a violation of the separation of powers doctrine of the Constitution where the authority is granted to the three branches of the government.  The ceding of such power would seem an illogical act that is completed over and over again by each branch of government, yet it make perfect sense when elected officials and appointed judges share the view of an ever-expansive administrative state that runs the lives of the people of our country.

There is a saying that power corrupts and absolute power corrupts absolutely.  The consolidating and granting of such power to a group of people places us on a fast track to totalitarianism.  It is important that brakes be placed on our journey as I doubt the American people are intending to sign up for this trip in the first place.  We need elected officials and appointed judges who operate from the standpoint of limited government.  We may even need safeguards in our Constitution that would force significant federal agency rules that would impact the economy by $100 million or more to be forced to a congressional vote or some provision that would create sunsets for all federal agencies that are not outlined in the Constitution. 

There is an old story about the producers in a society being the ones that are pulling the cart while there are some who cannot produce, for no fault on their own, and thus sit inside the cart.  Today we find many more in the cart who choose to be there.  We also find another group in the cart, telling the pullers of the cart how to do their job.  One wonders when the pullers will just give up.

Member Business Loans and Government Programs

Credit unions occupy a unique space in the world of finance. CUs exist to help their members when banks ordinarily wouldn’t provide services or will be a more expensive option, because they must generate a return for the bank owners.  Credit unions can also provide member business loans to small business owners who are typically overlooked, because they are not seen as a source of enough business. However, CUs need to be careful to not provide an MBL to a member, simply because they aren’t ordinarily credit worthy. But, there are various programs that exist, which help members with limited resources or those that find themselves in unique situations.

The Small Business Administration (SBA) is probably the most well-known government program that exists to help small business owners. There are two major products the SBA offers, which are known as the SBA 7(a) program and the SBA 504 program.

The SBA 7(a) program typically provides a 70% guarantee on all existing debt. A credit union which partners with the SBA to obtain this guarantee will find it is really more of a loss share agreement. The SBA doesn’t guarantee a fixed amount for repayment, they promise to take 70% of the loss if losses occur. This program is especially helpful when a business has acceptable income and cash flow, but an unacceptable collateral situation.

The SBA 504 program provides an extra loan to help business owners buy their owner-occupied real estate. Say a dentist wants to buy his office for $1 million. The credit union could make him a loan for $500,000 and then the SBA would give him a loan for up to $400,000, which would be secured with a second mortgage. This means the dentist would only need to provide a $100,000 down payment; whereas, ordinarily he would have been required to have a $250,000 down payment.

With respect to agriculture, CUs can obtain guarantees from the Farm Service Agency (FSA). In this case, the FSA has guarantees up to 90% of outstanding principal. Like the SBA, the FSA guarantee is really a loss share agreement. FSA programs also can help subsidize interest payments. The FSA programs tend to be helpful with ag members who have accidently gotten themselves overly leveraged, or are young producers that are starting out with limited resources.

Other great programs exist which may not be as well known. USDA Rural Development may guarantee loans up to 80% for commercial projects in rural areas. The Bureau of Indian Affairs (BIA) may provide a 90% guarantee on loans to businesses that are 51% owned by Native Americans. Also, many states provide their own economic development programs, where the State government may provide a guarantee, subordinated financing or interest subsidy for various situations.

By being knowledgeable in these programs, a credit union can give its members a great advantage. Members who have a strong business plan that would ordinarily be credit worthy, but are lacking some type of key credit enhancement, are those that benefit the most from programs like these. And, when a CU takes the time to learn these programs, they can carry out their mission of better serving the member and help them in situations where banks might ordinarily pass over them.

What is Solvency?

You may have heard the word “solvency,” but never given much consideration to what it means. While sometimes it is associated with liquidity, it can mean different things.

One idea of solvency has to do specifically with a business’s ability to pay its short-term obligations. In other words, a business has short-term liabilities on its balance sheet that need to be paid within 12 months, and so long as current assets and cash flow meet or exceed the amount of current liabilities over the same period, the company can remain solvent.

Another way insolvency is interpreted is when total liabilities exceed total assets, leaving the company with no net worth or negative net worth. The company may have liquidity to operate, but due to a lack of net worth, it may be more desirable to declare bankruptcy. Insolvency, due to a lack of net worth, can happen instantaneously. Say a company has $100,000 in assets, and $50,000 in liabilities. A company in this situation is relatively okay. Now say that same company has an unfavorable legal ruling, and now they have a $200,000 lawsuit they must pay. Now total liabilities are $250,000. The company actually has a negative net worth of -$150,000. The owner may find it easier to declare bankruptcy than try to satisfy the lawsuit. This single action leads to company insolvency.

If a business can remain solvent and is expected to remain operational for the next 12 months, it is referred to as a “going concern.” If a business has circumstances that call into question the ability of it to remain operational in the next 12 months, it is not a going concern. This comes from an older usage of the word “concern” which meant “business.” If you receive an audit or information that says the business you are financing is not a going concern, you should be very concerned!

If a business fails to remain solvent, then bankruptcy may be inevitable. Bankruptcy is when the justice system intervenes to provide an orderly way to repay creditors or discharge debts. There are different types of bankruptcies for individuals and businesses. Chapter 13 is when an individual tries to restructure their debts in a way where they can better repay them. Chapter 11 allows a similar situation, except it applies mostly to businesses. Chapter 12 is similar to 11 and 13, except it applies more specifically to families engaged in agriculture. And then there is Chapter 7, which is best described as liquidating all assets to satisfy debtors, with the intention of discharging most debts.

Part of business lending is to assure we only lend to businesses that can remain a going concern, which typically means they show the strong ability to remain solvent. Events that can lead to insolvency can be quick and unpredictable, so it is important the business is well capitalized and carries the appropriate insurance. Insolvency can lead to bankruptcy, in which it will be challenging to be repaid timely, if at all.

What to do when a Loan Covenant is Broken

Spring is here, the time when a many commercial and agriculture loans have current financials turned in from borrowers.  Oh, what wonders await the lender who has to gather all this information, carefully inspect all the data, and make judgements on the current risk inherent in the credit! 

At the same time annual information is required, often loan covenants need to be tested.  This is assuming that you have put financial performance covenants in your loan agreement, which is the subject of another blog.  So the question is what do you do when your customer has broken a loan covenant?

Loan agreements usually spell out a variety of remedies that are at the lender’s disposal when a covenant is broken.  Some of these options may be to assess a default interest rate, charge additional fees for breaking the covenant, or even accelerating the remaining principal balance of the note.  Sometimes, any of these remedies are available, but the lender will choose to use none of them.  What actions should the lender take regarding loan covenant violations?

One course of action that is often done by lenders is to just ignore the covenant with no notification to the customer.  This can create a problem since courts have determined that a lender ignoring loan covenants may cause him to forfeit possible remedies that he has since he is establishing a precedent on how violations are handled.  In other words, if you decide to ignore your customer failing to meet his debt service covenant several years in a row, you may give up your ability to enforce it when you need to.

So, what is the proper actions when covenants are broken but the lender decides to not enforce a remedy?  A covenant violation letter should be drafted and sent to the borrower.  The letter should state what the loan covenant standard is, when the covenant was tested, how the covenant was calculated, and the result of the calculation.  The letter should outline any remedies that are being taken. 

If no remedy actions are being taken, the letter should also outline what possible actions the loan agreement places at the lender’s disposal and that the lender not electing to utilize a particular remedy today, does not set any precedent wherein the lender cannot select that remedy that is outlined in the loan agreement in the future. 

Another benefit of utilizing covenant violation letters is that it proves to the customer that you are indeed paying attention to his performance.  It opens up discussions to help deal with possible greater problems before they become terminal to the borrower.  A covenant violation letter can provide good grounds to allow the customer to see what problems you see in the company.

It also is a good tool to show your examiner or auditor that you indeed are looking at the credit and properly monitoring it.  What better way to show that you are properly monitoring the credit, than to have both your calculations and also correspondence with the borrower in the file when it is inspected? 

Covenant violation letters are an essential tool in properly managing a credit when the financial performance has failed to meet expectations, but is not troublesome enough yet to require utilizing more severe remedies. 

What is Liquidity?

We all have a sense of what liquidity is, which relates to how easily something can be sold or converted to cash. When evaluating a business loan request, we look at liquidity in a slightly different context. For the purpose of underwriting and analysis, we consider liquidity the ability to satisfy current obligations. Of course, those current obligations will need to be paid for with cash!

Consider the following example: Is $10 million in cash a lot of liquidity? We want to say “yes” because $10 million can purchase a lot of things! However, what if the same business with this cash has $20 million in bills to pay? Clearly, that $10 million in cash is not enough, and we may argue the company actually lacks adequate liquidity.

A common way we assess liquidity is by dividing “current assets” by “current liabilities” to produce a “current ratio.” Current assets are assets we expect to convert to cash within 12 months, and current liabilities are obligations which must be paid within 12 months. Ideally, we would like to see a current ratio greater than 1.00x, which indicates there are enough current assets to produce the cash needed to pay all current liabilities. In our example above, $10 million in cash divided by $20 million in bills gives a current ratio of 0.50x.

Part of the credit analysis process is determining whether current assets are truly expected to convert to cash in the short-term. For example, inventory assets do not come with a guarantee that they will be used or sold within 12 months, so they must be given special consideration. However, accounts receivable are generally paid within 30-90 days, but there may be a need to do some analysis to assess their collectability. Several different assets can be classified as current assets, and it is the analyst’s job to convey how they think any of these significant items may ultimately affect liquidity or the current ratio.

Different industries may have different standards for current ratios. Generally speaking, we like to see a current ratio of at least 1.25x. Some businesses can function with a current ratio of less than 1.00x, if they have an especially high and consistent cash flow. A good example of this is fast-food operators, who can fund most of their working capital directly from their strong predictable cash flows from month to month. But, this is only acceptable in select situations like fast-food.

The main point we need to consider when evaluating a business’s liquidity is, liquidity does not exist in a vacuum.  Even though a large amount of cash or receivables may appear to be an ample amount of resources, we have to consider what bills need to be paid too.  $10 million may be a lot of money, but when compared to $20 million in bills, it is much less significant!

The Right People in the Right Places on Your Team

Frequently, writings about business and leadership deal with making sure you can attract the right people for your team and get them in the right position where they can maximize effectiveness.  I have heard many analogies comparing a company to a sports team, a bus, or a military squadron.  Any one of these can apply.  The ultimate goal is to win.  If you have your star lineman playing quarterback, you will have some problems with peak efficiencies.  If you have a wide receiver blocking at left tackle, you also open up your backfield to all sorts of heck from very large defensive linemen bent on destruction.

Often, the leader can get so involved in the day-to-day operations of an organization that he misses gaining an insightful overview of his staff and potential players.  This will lead to mediocre performance as players are overlooked because of what is perceived as their talents or placed in positions that they are not very effective in.  This blog will look at some of the common mistakes.

The first is when people in leadership positions are there just because of their longevity in the organization or in the industry.  Yes, I do believe that the gray-haired of us can coach excellence in those younger on the team.  But, sometimes, one has achieved longevity because all the talented people above him/her have left.  Companies that have these people in leadership may also be dominated by strategies that resulted in successes in the middle of the last century, but are completely irrelevant today.  This requires the leader to evaluate their contribution.

The converse of the first mistake is to grossly underestimate people who have not been in the company or industry for a long time, but who have good leadership skills, other business experience, or education.  These folks catch on to the corporate systems like a fish to water.  They also bring a wealth of knowledge to the company with a different perspective than those who are already entrenched.  These new ideas can be used to help the company grow.  Without those with an outside view, you may get the same results as we do with government, when we only elect career politicians with no outside real world experiences. 

A problem with those who enter the organization with little experience is that there is a tendency to look at those people as if they are still in that beginning place, even after years have passed with the company.  Leaders can fall into the trap of looking at how people were, not how they are today, or most importantly, where they can be in the future.  Vision is essential for good leadership and people development.

The majority of our staff had no experience in commercial lending before joining our team.  The technical knowledge only accounts for 10-20% of their success.  The rest comes from a constant thirst for learning, attitude, and critical thinking skills.  I would select someone who can think well with no technical knowledge over someone with all the industry knowledge, but who cannot go outside of their limited experience.  Our firm is better because of the varied background of the high thinking people on our team.

Another issue is when you have a right team member in the wrong position.  One bank I worked at had a gentlemen who led commercial construction management.  He had little construction knowledge and managed projects from an excel spreadsheet.  When something went outside of the boundaries of his sheet, he drove the customers and commercial lenders crazy.  The bank’s leadership was able to assess his talents and moved him to a position managing commercial collections, where he excelled. 

Certainly, a leader is required to challenge traditional methods of thinking when assessing the talents and abilities of his team.  But, ignoring some of the folks who on the surface may not have the typical characteristics that is considered necessary by conventional wisdom, is the same as missing the hall of famer who was drafted in the late rounds or the star who was not drafted as all.  Sometimes, these people, can make the largest difference in your company. 

Selling from the Front Porch : Persistence

Every time we would go down to Uncle Allen and Aunt Barbara's house, it would mean one thing to me--a chance to fish!  Allen had two farm ponds that were stocked with fish.  One had a nice dock and you could throw fish food over the water and watch swarms of fish come to the surface.  Yet another learning experience popped up one night on the porch when I looked up from a pile of beans that seemed higher than how tall I was on tip toes.  I did not have time to snap beans, I wanted to fish! 

So I dutifully snapped and threw beans into the buckets all the while glancing at the water from the pond down the hill.  I felt trapped and knew at the rate I was going, we may be there all night and halfway through the next day before the pile was gone.  To make matters worse, Allen had gone back to another few rows of the garden that we did not pick and piled yet more unprocessed beans into the pile.  Fishing would never happen this day!

Aunt B asked me, "Phil, do you want to go fishing?" 

"Yeah, I would rather do that than working on the mountain of beans we have here," I replied. 

Barbara's response made me almost fall out of my chair.  "You will never get to the pond if you continue to mope at the task at hand instead of just getting in there to conquer it!"  I had never thought of beans as something to conquer, but at that time, I did consider them my personal enemy. 

And so, I began to dutifully snap beans and engage in the conversation of the evening.  It did not take long before the bean snapping mission was accomplished and it was then time to grab a pole and some worms and head to the pond.  It happened the summer heat had cooled down enough to allow for the fish to become more active.  I was not as thankful for all the hard work at that moment, but I did learn in the winter how good a pot of home canned green beans and bacon were!

The lesson here was in persistence.  Good sales and leadership require it.  You can be snapping beans or building a relationship with your biggest commercial prospect; either of these requires you to press on and complete the task.

At my last banking job, I spent five years calling on a large contracting business before I won their accounts.  Many times I would respond to more retail-minded, transaction-oriented, what-have-you-done-for-me-lately bosses who questioned why I would periodically visit the company and its key leaders.  It proved they were focused only on the small business today, instead of working to build larger business tomorrow.  Yet to be successful, both now and future time-frames must be worked.  After five years, I won a solid customer and a relationship of tens of millions of dollars. 

Persistence is what keeps you pressing on when times get tough.  It follows a discipline of what needs to be done each day and every hour.  It drives the actions that need to be done in private times when nobody sees in order to have the excellent performance in public.  It is what forces the football player to get up in the wee hours of the morning in order to workout.  It is what makes the professional golfer hit ball after ball on the driving range to perfect his swing. 

One of my favorite persistence quotes came from President Calvin Coolidge.  I have the saying posted by my desk.  “Nothing in the world will take the place of persistence.  Talent will not; noting is more common than an unsuccessful men with talent.  Genius will not; unrewarded genius is almost a proverb.  Education will not; the world is full of educated derelicts.  Persistence and determination alone are omnipotent.  The slogan ‘Press on’ has solved and always will solve the problems of the human race.”

So no matter if the task in front of you is a big pile of beans, the largest customer you have landed to date, or reaching the top in your field, persistence is necessary to ultimately succeed. 

The Treadmill Desk

I couldn’t believe my ears this morning when I heard NPR report the successes and failures of the treadmill desk. If you are like me, you probably first thought of a metaphorical conveyer belt that keeps dropping piles of paper on your lap that you struggle to keep up with. But, it turns out there is an actual treadmill desk, which seeks to combine the need to exercise with the need to work!

The treadmill desk is available at Wal-Mart.com for a starting price of $619.99. As you can imagine, the price only goes up from there, depending on the quality and features you desire. Most standard models have a treadmill below to walk on, and a desk at chest level with enough space for a monitor, keyboard and mouse. The most common complaint is sweating while working and coworkers complaining about heavy breathing.

Workers’ health has long been known to have an impact on productivity, and the treadmill desk is just one of the latest attempts to encourage workers to stay healthy. The State of South Dakota encourages its employees to take two fifteen-minute breaks throughout the day, and to use the time to take a leisurely walk outside. Some places pay for or subsidize a gym membership for their workers. These strategies may have just as good of results as the treadmill desk, without some of the craziness the invention will likely introduce.

For those of us that work in cubicles, I think mental health is also important. Working in a cubicle means being confined to a drab space without natural light and with limited privacy. I like to think I have a colorful personality, and I like to surround myself with pictures of landscapes and my family. That way my cubicle doesn’t depress me, but feels more like a place I hang out to get some work done.

When starting in a new office, I am always surprised to see how little cubicles are decorated. I usually decorate my space, and afterwards, I find many of my coworkers start to bring in pictures of their family or other decorations as well. It’s nice to see a good trend catch on!

When working in a cubicle, I think it is important to get out and get some natural light at least once a day. I have always found my lunch break works well for this. It feels good to go outside, no matter the weather, to have a break in the feel of the office environment. Even sitting down for a cheap lunch away from the office feels like a nice way to step away from everything momentarily and collect your thoughts.

While the treadmill desk may seem like a clever solution to improving office health, it is reported to have a mixed success rate. I would be surprised if it were any more successful than conventional ways employers encourage better physical health. Although less discussed, employees need to make an effort to keep their mental health in good standing too. Taking regular breaks and finding time to clear your mind can do a lot to increase both your physical and mental health, which in turn should improve your work performance all around.

What is Leverage?

We often hear the term “leverage” in finance, but what is exactly meant by it? Generally speaking, it means to multiply your results by using a limited amount of capital. For example, say you want to purchase an office building for $1 million, but you only have $250,000. You can leverage your $250,000 by obtaining a $750,000 loan, therefore, having enough money to buy the building. Thus, in finance, leverage typically means assuming some amount of debt!

How we assess leverage is different depending on the situation. In business lending, typically loans are either commercial real estate (like an office building), or something unrelated to real estate (like a line of credit). With real estate, we measure leverage with a loan-to-value (LTV) ratio. For example, many home loans are done with 20% to 5% down payments, resulting in 80%-95% LTV.  Now that is high leverage! In commercial real estate, we try to cap most projects at an LTV of 75%.

For non-real estate transactions, we focus more on the business’s balance sheet. We like to compare the net worth of the company to the total amount of loans and bills due; or in other words, their total liabilities. We again look at this as a ratio of debt-to-net worth. This tells us how much capital is funding the company compared to how much comes from borrowings. Say a company has $5 in net worth and $2 in debt. Their total assets will equal $7, most of which is funded by the company’s own capital. The debt-to-net worth ratio is 2/5 = 0.40x.  We consider that low leverage. Now assume that same company goes out and borrows $8 to buy new equipment, and net worth stays the same. Now the combined debt comes to $10, and the debt-to-net worth ratio is 10/5 = 2.00x. We consider that high leverage, since they have to virtually borrow $2 for every $1 in capital!

How much leverage real estate or a company can assume largely depends on details. Like we saw, residential real estate can have higher leverage than commercial real estate. Companies that require a lot of equipment and fixed assets generally do better with low leverage; whereas, contractors and service providers can operate more successfully with higher leverage.

You might be surprised to find that banks and credit unions are very highly leveraged companies. Most of them have roughly $10 in liabilities for every $1 in capital. That is a debt-to-net worth ratio of 10.00x. This is why failing to get paid on loans quickly leads to failure. Consider capital of $1 and liabilities of $10 equals $11 in assets, and if only $1 in loan assets goes bad, then the institution has run out of capital and the regulators will shut it down!

Hopefully, you understand by now that leverage is a double-edged sword. It helps people and businesses do more with limited capital, but assuming that leverage makes problems more serious if they occur. Where regulators and the government feel they should draw the line on the maximum acceptable leverage for everyone is a matter of constant debate, as well as whether they should have the right to make that decision at all.