Will the Decreasing Unemployment Rate Allow the Fed to Raise Rates?

The July 2 release of the U.S. employment numbers show that the published unemployment rate hit a seven year low at 5.3%.  New jobs created were 223,000.  The Federal Reserve Bank tends to attempt to balance full employment, which is usually defined around 5% or less with keeping inflation inside their target range.  When full employment is reached, some economists believe that this will begin to push wages higher, causing inflation.  The Fed would step in to cool off the economy by raising interest rates or contracting the money supply.

But does these employment numbers mean the economy is improving?  The answer is there is weakness in the employment situation once you drill down into the numbers.  First, I noted that new jobs for April and May were adjusted down from their initial estimates, so the previous months’ numbers are not as rosy as initially reported.

The big driver for the decrease in the unemployment rate in June was that nearly 640,000 people left the labor force.  The Commerce Department’s measure of unemployment which is commonly published is called “U-3”.  Once one leaves the workforce, they are taken off the numerator of unemployed and the denominator of those that are in the workforce.  This will tend to drop the unemployment rate.  Now it is also probably safe to assume that more people gave up on finding a job than those who retired with their gold watch.

A better measure of unemployment is what the Commerce Department calls “U-6”.  It counts unemployed, those marginally attracted to the workforce, and those who are employed part time but really want a full time job.  This number is divided by the workforce.   In June 2015, it rose slightly to 10.5%.  Now here if someone dropped completely from the work force, they are out of the ratio.  But this captures more of those who cannot find a job that will employ them full time.

Another measure to look at is the labor force participation rate.  In June, it fell to the lowest level since October 1977 at 62.6%, the time when the disco version of Star Wars topped the charts and the big box office was George Burns in Oh, God!  At this time, over 90 million Americans are not part of the labor force.  That puts extra strain on those who are in the labor force for any benefits they receive from the taxes on those who work.

The Commerce Department also reported wage growth as flat.  Average hourly earnings have remained virtually unchanged from the previous period.  So it appears there is no real wage inflation that is pressing at the moment either from wage growth statistics or from high demand for jobs.  When this is coupled with the current sovereign debt crisis in Greece, the free fall in the Chinese stock market, and the general slowing down in the world economy, it would appear there may be fewer reasons for a tightening monetary policy.

What is the Secondary Market?

We are all familiar with the idea of a “market,” which is a place where things are bought and sold, or in a more basic sense, where a transaction occurs. When we go to Wal-Mart, the car dealership, or even the supermarket, we are going to a “primary” market. In other words, we are the first owners of a product which has been manufactured for consumption.

A “secondary” market is where people go to purchase products that have been previously owned by someone else. Examples of this would be a flea market, garage sale, or even a used car dealership. Secondary markets exist for highly valued items too, such as homes or even stocks and bonds. Just because an item is sold on a secondary market doesn’t mean it is necessarily “secondhand” quality!

Often times in banking, we talk about secondary markets too. We can make loans, and then resell them to a different owner too. The best example of this is home mortgages. Investors like pension funds and insurance companies like to buy-up home mortgages, because they typically have a steady repayment stream and are well-collateralized. But, their primary function is not lending, of course, so it is easier to allow credit unions and banks to make the loans, and then later buy the loans from these financial institutions.

An interesting aspect of the secondary market for home mortgages, is that insurance companies and pension funds are looking for long-term investments. They will even buy loans that have rates fixed for as long as 30 years. This is further fascinating, because a bank would not ordinarily do a fixed rate loan for so long, but will make the loan only if it is certain it can later resell that loan to an investor! Thus we get the concept of “conforming” loan, which is a loan that conforms to the standards required to by a secondary market buyer.

Home mortgages are not the only type of loans bought and sold on a secondary market. Student loans are also sold into the secondary market, as well as farm mortgages, car loans, and even credit card receivables. Hypothetically, any loan could be sold on a secondary market, as long as there is a willing buyer.

Some of these secondary markets were originally established to help banks manage their liquidity. Being able to sell long-term fixed rate loans has been a great innovation for financial institutions, because it has become increasingly hard to attract long-term fixed rate deposits to match-fund those loans. The government even helped to initially establish these secondary markets by creating the companies that would purchase these loans. This was the reason behind creating Fannie Mae and Freddie Mac for home mortgages, Sallie Mae to buy student loans, and Farmer Mac to purchase farm mortgages.

Some of these secondary market actors received negative attention and blame for the last recession. Some have criticized the fact that secondary markets even exist, and questioned whether it was fair to buy and sell loans, with the borrower having no say in the matter. However, when a loan is sold into the secondary market, the terms of the contract do not and cannot change. And, many of the problems that resulted in the recession had to do with poor policy and auditing standards. We need to be careful not to throw out the baby with the bathwater, and acknowledge that the secondary market has been a wonderful innovation that benefits consumers and banks immensely.

American Exceptionalism and the Independence Day

This Saturday is Independence Day.  And while most of us will be enjoying time around a BBQ, watching a baseball game, or at the beach, many will end the day watching a firework display.  Most of this comes with little thought of what and why we are celebrating.

This year is the first year of my life that I can remember hearing some leaders in our culture state that we should not be celebrating the 4th of July, that our national flag is a symbol of oppression and should be eliminated.  They say there is nothing special about America and that American Exceptionalism does not exist.

But American Exceptionalism does not mean that we are better than other people in the world.  Exceptional can be found throughout the world.  To understand American Exceptionalism, one must first look at the governments and rulers since the beginning of time.  History is filled with leaders who are tyrants, oppressing people who struggle to free themselves.  The majority of history and the current world status is marked with this battle.

Then, a country appears on the scene with a different basis for its government.  It is not based upon might, lineage, or privilege.  It is based upon individual liberty.  This country’s Declaration of Independence states that, “all men are created equal and are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”  The founding fathers realize that people are naturally wired this way and the most successful government will not be one that imposes its iron will upon people but will be one that bows to the will of the people.

So our founders set up a system that makes the government ultimately subject to the people.  Boundaries are set as to what rights must be preserved for the individual and what actions the government can take.  They set up a culture that allows for opportunity for people to improve their lives for those who come here and who are willing to work hard.  Because of how we were founded, America becomes the land of opportunity and many seek to come and begin a life here.  (Think about that.  What other country do you know that has been called a “land of opportunity”?)

The USA is not exceptional because it is perfect.  We have made mistakes since our founding and at times seem to lose our way.  Our country is exceptional because of its founding and basis.

Tyrants are people who can only obtain a following by force and not win in the free market of ideas.  Tyrants from outside our country have fought against this country and how it was founded.  Some tyrants from the inside attempt to force their will upon the people.  But whether outside or inside, tyrants do not rest, and will always need to be opposed in order to protect liberty and freedom.

So this Independence Day, spend some time reflecting upon our country and its founding.  Take some time to read the Declaration of Independence and the Constitution.  Realize what we need to do to continue to celebrate the 4th of July.

The Screwdriver, the Saw, and the Hammer

I remember growing up that I was not allowed to touch my father’s tools. The reason being, I would probably lose them or destroy them. Imagine giving a small child a toolbox full of tools. While the child probably has an idea what each tool is used for, they probably don’t care too much about using the tool the right way. I recall it was just plain fun to use metal tools to thrash objects and alter their shape by any means necessary.

For some people, it seems old habits die hard. In banking, I see the wrong tool being used for the wrong job constantly; just because it is there to be used. The issue with most modern training programs is they give you a toolbox full of tools, but they fail to explain how and when to use those tools. Current ratios have little use in real estate, just like NOI cash flows miss a whole host of issues in C&I lending. What the heck am I talking about?

Let’s look at the world of commercial lending this way: we have a hammer as a tool that helps us in commercial real estate (CRE); we have a screwdriver that is a tool that helps us in commercial and industrial lending (C&I); and we have a saw as a tool that helps us in agricultural lending.

A hammer’s primary use will always be to pound nails, and do some occasional pounding of other items. But, you wouldn’t use a hammer to drive in a screw, and you certainly wouldn’t use a hammer to cut down a tree. And yet, I see people using hammers to accomplish these tasks. Why? I think the issue is our tools are not tangible. It is hard to envision an analysis technique as a tool, and then be trained as to when it makes sense to use this tool and when it makes sense to get a different tool.

Are you using the wrong tool for the job? Often, people try to put real estate loans into spreading software, like Suntell or WebEquity. Spreading software is a screwdriver, but remember for CRE, we need a hammer! Is there special real estate software that exists? Yes, there is! But it may not be worth the expense until you have very large CRE portfolios (say over $250 million).

And, in the same fashion, people will try to calculate leverage and liquidity ratios for real estate. Again, you are using a screwdriver when you actually need a hammer. You should rather be focusing on loan-to-value (LTV) and rental markets or leases when it comes to real estate.

I see these issues arise all the time, and I think I’ve seen almost every tool used incorrectly, when a different one was called for. Saws instead of hammers, hammers instead of saws, and a screwdriver used for everything but a screwdriver! At the end of the day, you need to make sure you have a good person teaching you how and when to use the tools in your toolbox, because a training program that simply gives you the tools is not enough!

New Changes on the Horizon for Credit Union MBL Policy

The Board of the National Credit Union Administration voted unanimously in its June Board Meeting to drastically change the member business loan rules.  The overall spirit is to move from a prescriptive approach, as outlined in current regulations, to a tenor that focuses on sound business lending policy and procedures.  This new approach will help eliminate the unintended consequences of credit unions managing their lending practices to regulatory restrictions instead of focusing on sound risk management principles.

This new approach will allow credit unions more flexibility in how they serve their business members.  Some of the areas the new proposed regulations would impact would be:

·         Allowing CUs to decide when to waive a personal guarantee

·         Removing LTV limits

·         Remove the waiver process altogether

·         Lift limits on construction and development loans

·         Clarify that participation in loans to non-members do not count against the statutory MBL cap

·         Change MBL limits from the standard 12.25% of assets to 1.75xs applicable net worth

·         Modify limits on unsecured MBLs

·         Change the restrictive definition of the “associated borrower”

·         Increase the 15% limit of loans to one borrower to 25%, if the additional 10% is backed by readily marketed collateral

This proposal would allow CUs to write their own loan policies and place their own limits on collateral and security requirements, equity requirements and loan limits.

In many ways, the proposals are a welcome relief and will allow CUs to compete directly in the market place with banks and will eliminate some of the burdensome complexity the current regulations promote.

What the regulation will require is that the business department of CUs now are required to be better.  Loan decisions are not to be structured to meet regulations, but sound business lending practices.  The responsibility for finding those sound practices and putting them into place falls where it should, with the individual credit union.

The regulation should also encourage the use of experts, such as a business CUSO, to provide some sound support to any CU MBL department that may lack experience in a particular area.  I would think the requirement to shift responsible lending back to the CU will encourage CUs to use whatever tools that would be at their disposal to manage risk in an insightful and prudent manner.  The new proposals are not an excuse to allow wild lending that ignores all sound credit judgement in order to put deals on the books.  That is a recipe for disaster, delinquency, and depressed earnings.

It Takes a Committee to Kill Creativity and Accomplishment

Some of the most dreaded words that can cause progress to grind to a screeching halt are, “Let’s form a committee.”  Now, in this case I am not discussing the power of good collaborative efforts where all people in the group are valued and listened to for their opinion.  Firms need good creative brainstorming sessions, off-site retreats, or the frequent golf game to generate ideas to help the company grow.

Often, an organization will constantly form committees to solve problems and generate new ideas with the result of nothing being solved or no new ideas really ever being generated.  Sometimes, these groups value the process over actual progress.  They would rather have a tidy series of meeting minutes to show they met, instead of pointing to a series of actual accomplishments.  This is like a football team that meets in the class to go over the playbook, but who never actually runs a play on the field.

This reminds me of a conversation I had with a neighbor whose company performed services for highway monitoring in a state in the Midwest.  His customer was the state highway department.  They had a quirky characteristic he had to get used to.  They did not value getting to the goal in the most inexpensive and quickest manner.  Most companies have the boundaries, like a football sidelines, and a goal line.  It doesn’t matter how you get this to the goal, just do it as quickly as you can.  This state department valued the step-by-step process and did not care if they ever reached the goal.  In fact, they had meetings on how to properly hold meetings!  Maybe this is common for a governmental entity.  But does your institution truly value achievement or just the going through the motions of the process more?

Another possible characteristic of the committee-forming junkie leader, is a strong commitment to the status quo or a belief that no good ideas are generated from anyone in the organization but he and his close confidants.  This can effectively kill good ideas from Frontline Frieda, by running these through a committee structure.  This works especially well when the committee filled with others committed to the status quo.  Additional bonus points are awarded if some on the committee have an ax to grind against Frieda.  By the time they finish pouring water to douse out Frieda’s flickering embers of an idea, she will learn in the future, to never speak of any idea she has again.  It is unfortunate, but this is often the goal of a short sighted leader.

Some leaders form committees out of the fear of making decisions on their own.  They think it takes them off the hook to blame a poorly executed or ill-thought idea on a committee.  Yet, in true leadership, someone has to shoulder the blame when the other shoe drops.  A true leader is more willing to share the success with the team but take responsibility for the failure on his own.

Other leaders take tasks that should be delegated to an individual and place it in the hands of the committee because they do not trust members of their team with the job.  Allowing people to make decisions helps increase their leadership capacity.  As the leaders grow underneath the head leader, the whole company will be able to accomplish more.

It is interesting to note that the use of a committee meeting to kill progress is not new.  In fact, an event recorded in the Old Testament book of Nehemiah deals specifically with a committee meeting.  Nehemiah is leading the rebuilding of the walls of Jerusalem.  In those days, to not have walls around a city meant that you had no defenses against an enemy attack.  Some people had opposed Nehemiah at every step of the way as they did not want to see the walls built.

In the 6th chapter, they made the final plea to Nehemiah.  Four different times, they asked to have a special committee meeting with Nehemiah.  And each time, Nehemiah answered the same, “I am doing a great work, so that I cannot come down.  Why should the work cease while I leave it and go down to you?”  If you find yourself in an organization that values the committee meeting more than accomplishing really great things, perhaps the focus should be on continuing the great work instead of attending another committee.

Fallacies in Banking

A fallacy is a “mistaken belief, especially one based on unsound argument,” and there are plenty of them in banking!

A common fallacy I have often encountered is the belief that quantity equals quality. Some lenders feel their most important credential is how many years they have spent in the industry of banking. But, just because someone has spent a long time doing something doesn’t mean they have been doing a good job at it. Other lenders like to brag about the size of their portfolio. Again, if they are mostly bad loans, does it make sense to brag about an exceptionally high number of them?

The most frequent fallacy I must address is the belief that collateral is the only thing necessary to justify a loan. Collateral is important to making a good loan, but it shouldn’t be the only reason someone is given a loan. Often times, it is tempting to give someone a loan just because they have a huge piece of land or ample equity in their home. But, this can turn into a disaster unless there is a source of cash flow. Without cash flow, the loan will quickly default and the lender will be forced to foreclose. Nobody wins with a foreclosure, which becomes a very expensive process for the lender.

The next fallacy is that you need to jump on the bandwagon. Just like your mother used to say, if all your friends jump off a bridge, would you do it too? Some lenders think they need to. Other competing lenders may offer more attractive deals to the borrower, but it may be at the expense of poor credit quality. Or, there is the belief that if we can’t give the borrower what they want, the borrower will find someone else to get it done. An honest discussion with your borrower may help them understand the reason for your lending requirements. Step back from the edge!

The most challenging fallacy to explain to people is that every great investment opportunity is not a bankable asset. What do I mean? There are risks we are willing to take with our own money that are not acceptable risks to take with depositors’ money. If I am offered a bet where I know there is a 75% chance I’m going to win, then I’m going to make that bet, if it’s my own cash! But if there is a 25% chance I’ll lose depositors’ money, then risk of loss is unacceptably high. We need the odds to be 99% in our favor before we can open the bank vault. Just because it is a good idea doesn’t mean the credit union should fund the idea. In other words, all good opportunities are not necessarily bankable assets.

I think most of the fallacies tend to snag people when they are in the heat of the moment. It's good if we get excited about someone's idea, experience, or the fact they have something significant to bring to the table. But, we need to calm down and follow standard underwriting procedures, and not let the excitement be the reason for making the loan.

Staying Competitive in the Mature Industry of Banking

The concept of lending and borrowing money must be as old as civilization itself. And, in our modern time, I can’t imagine there was ever another time in history when it was so easy to gain access to credit. Not only do consumers have a wide array of banks and credit unions to choose from, many companies will now finance their own products they manufacture, or retail centers are willing to finance the products they sell. In fact, it has become so easy, that we need credit counseling and other services to help educate people not to abuse this easy access to credit!

This same world of ample credit opportunities applies to business owners too. The field of banking was already a mature business, but the deregulation of interstate banking has led to strong banking competition in every market. So what sets your institution apart when a business borrower considers your institution, especially when so many offer the same thing? Why should a business owner come to you for a loan, and not another financial institution in town? If you cannot readily answer this question, you may have a problem.

I recently had a business owner thank me for helping finance his project. He said he likes working with my company, because we both understand the industry, and we helped him take advantage of a federal program that would save him millions. He then noted that no other banker he worked with ever mentioned this program. It is my personal belief that the other bankers probably had no idea the program existed!

This is an issue I’ve run into constantly throughout my finance career, and it is still an issue I deal with weekly. There are several programs that exist that can help borrowers save money or enhance their credit strength, but lenders are not making use of them. Part of it is ignorance, which is unfortunate. To maintain your competitive edge as a lender, you should know about these programs and educate your borrowers about them.

Some lenders know about these programs, but refuse to use them. Why? Often, it is because they have never used them, and that is the way it has always been done around their shop! Some don’t make use of them because they label these programs “exotic”. Anything exotic is considered scary, if not foolish, and they mock the people that make use of those programs. All the while, they are probably losing clients to a lender down the road who is willing to be innovative and adopt these programs!

Dismissing the great benefits of things like Farmer Mac, tax credit equity and state economic development loans is like complaining about people using the internet or cell phones to do business; you can complain all you want, but the smart people learn how to use them to remain competitive.

In an industry as mature as banking, your loan will not be all that different than your competitors’ loans, so you need to set yourself apart. You, as the lender, need to add value. Treating your borrower like every other banker in town is giving him the same indistinguishable service. Helping your borrower understand there are innovative lending programs out there and multiple ways to get the deal done, you become more relevant than your peers, and it helps you win by becoming an expert who can adapt.

Why I Can't Play the Trumpet

When I was in fifth grade, I took up the trumpet in school.  My parents bought me a shiny new instrument on monthly payments.  I began in band with great enthusiasm and for several years of school, worked diligently and practiced hard. 

In my seventh grade year, we did a school trip to hear a Marine Corps Brass Band that came through our town.  The band featured trumpet players.  When the first trumpet soloist hit the first note, a startling revelation hit me.  The note rang proudly through the auditorium and sounded like it came directly from the horn of angels.  I realized that no matter how hard I tried, I would not play that well.

My desire to continue working hard plummeted.  Eventually, I slid down the rankings until I was at seventh chair out of ten.  Our band needed a baritone player, so I switched to that in my eighth grade year.  I played one year at that until quitting band altogether.  Actually, I quit the trumpet during the Marine Corps concert.  It just took me a couple of years later to officially put it down.

I still have my trumpet, packed away inside some closet or a corner of the garage.  So the question is why did I not sound like the Marine Corps trumpeter?  Why could I play a million notes and not have all of them combined worth listening to the one single note from the trumpeter?  Because I did not care enough. 

I had another circumstance similar to this when I was a senior in high school.  One of my favorite courses was physics.  I loved solving the problems and having the ability to figure out things.  So I decided to become an engineer.  After my first year of college and struggling through two semesters of college physics, calculus, and other advanced math, I decided to hang it up.  Could I have worked hard even though I thought I was at the bottom of the class in really comprehending the subject matter?  Sure.  But I did not care enough to do it.  I eventually after several changes ended up studying economics and finance, subjects I grew to love.

Celebrity worship seems to be rampant in our world today.  We look at those successful in movies, sports, or business and hold them in high esteem.  They all play notes that are worthy for others to hear.  We spend obscene amounts of money to watch and study these people.  Some of these have overcome tremendous struggles and have triumphed bravely.  Many times, we ordinary folks think that the success and characteristics of bravery they display are only for them.  But we are wrong.  It is for us.

Every one of us has the ability to play a note that is worth listening to; something that can turn the head of everyone and create an actual change in the world.  These change agents, or difference makers often are ordinary people with a dream and the desire to see something through till the end.  It was two ordinary brothers who saw their dream of flying through till they invented the airplane.  It was an ordinary lady who saw her dream through to sit at the front of the bus instead of at the back where people of her race were supposed to sit.  It was an ordinary man who led England and kept their spirit of never, never, never, never giving up in the darkest days of Nazi attacks. 

So the starting point in order to making a note that is truly worthy of others listening to, is to go “all in”.  If I were committed to the trumpet, I would have looked at the Marine player as something I could become and not an obstacle that I could never achieve.  If I had the desire, I could have worked hard enough to make it happen.  As it is, my trumpet sits in a dark corner somewhere in the house.

Going all in sometimes may mean eliminating the path of retreat.  Cortez the explorer, is famous for scuttling his ships once he brought his party to the new world in order to eliminate any possibility of retreat.  The only options came to succeed or die.  When those are your only options, that is the starting place where you can begin to create a note that is worthy for all to hear. 

So the question is what will it take you to go all in?  What changes do you need to make to your job, your character, or your life to set the stage for the world to hear a note they are starving to hear?  Or do you not care enough, like my trumpet playing, to be great?

The Fallacy of Chattel and Account Security

This week, I turn to a lending issue that we seem to have seen a rash of recently.  Many deals we have seen recently, seem to have a heavy dependency upon chattel and accounts as collateral.  Chattel in this case is any type of property that is not real estate and can be moved that is not a titled vehicle.  It can be equipment, fixtures, furniture, inventory, or such items.  I use accounts to speak of any accounts receivable.  I also am not discussing using a single asset that is purchased, such as a crane, forklift, or friction stir welder.  I am speaking of a lien on what may be called “general business assets”.

These items usually have their collateral perfected by a UCC filing.  This presents some challenge as some institutions do not even execute a proper search to see what other lenders may have already used these as collateral.  Occasionally when we review existing files, we find loans where the lender believes they have a first lien on said assets, and sadly, they don’t.  The next challenge is if the UCC filing was perfected correctly.  The final issue is if proper extensions have not been filed for UCCs every 5 years, your filing has expired and you have no collateral.

One factor the lender must consider is how much reliance is placed upon business assets, what kind of assets make up the chattel, how the chattel is valued, and possible loan advance rates.  As the lender first looks at the amount of reliance that the loan relies upon chattel, any other collateral that is available to the loan is also reviewed.  If collateral that tends to have more stable marketable value is available for collateral and that constitutes the overwhelming portion of the collateral, then a lot of scrutiny on the chattels may not be warranted.  If a large portion of the loan is tied to the chattel and other available collateral is skim, a closer inspection of the chattel is needed. 

The asset composition of the chattel is important.  Is there any way to determine an actual market value of the equipment, machinery, or crop outside of what is provided you from the borrower?  How marketable are the assets?  Do you have specialty assets that may not be easily sold to someone else in a liquidation or is the equipment in high demand with an easily determined market?   A specialty asset may provide problems with liquidating the property upon foreclosure.

Valuation of the chattel is the next issue.  A key factor is how this is determined for a large loan having a heavy reliance upon the equipment.  In many cases, we have seen lenders just use the value as presented by the borrower without any third party appraisal.  In some cases, the gross asset value without any consideration of depreciation, is used.  We have also seen cases where not only is the gross asset value used, but no inspection was made by the lender to see what chattel is actually owned. 

Again the appraisal issue is determined if the loan is larger and has a very heavy reliance upon the chattel or the accounts.  Some options may be to check auction houses or get market values from different sources.  In some cases, an equipment appraisal, whether on site or desktop, is necessary.  The value the lender is most interested in is an “orderly-liquidation value”, or the value that would be most likely seen in the case of a structured sale by the lender.  In some cases if the loan is large enough and the structure requires it, inspections may be needed throughout the life of the loan and the ability for the lender to rebalance the loan if there is a collateral shortfall should be in the loan agreement.

Loan advance rates are determined by answers to the first three questions and also loan policy.  It is not always wise to run an advance rate up to the highest acceptable by policy.  For a loan on equipment, generally the highest one will want to advance is 75%.  This number may be lower if the equipment has limited marketability, is special in nature, or would require substantial cost to the lender in a foreclosure.  The age and type of the equipment should also be assessed.  Furnishings, signage, etc. should be at a much lower advance rate, perhaps around 25%.  Inventory advance rates may range from 25-50% depending upon the marketability, valuation method, and inventory turn days.  If there is a heavy reliance upon the inventory, a borrowing base may be used. 

Accounts receivable based loans should be tied to a borrowing base factoring out issues such as concentrations, ageings, retentions, and receivables from sister companies.  Generally, A/R under 90 days old would have an advance rate max at 75% after eliminating the other factors. 

A lender must take a holistic approach to lending on chattel and receivables.  The strength of the company, size of the debt, reliance upon these assets, availability of other collateral, are all some of the factors that go into properly structuring a loan to help best manage the credit risk.   To deceive yourself into thinking you are adequately collateralized on a chattel based loan where the value comes directly from the borrower without any third party valuation or even a lender inspection, is dangerous lending.  If the loan fails to pay, you may see how exposed you are in the end.

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.