Saturday, May 20, 2017

What's With Regulator Agita Over Bank Commercial Real Estate Lending?

Anxiety, anxiety, anxiety. The recovery from the Great Recession is eight years running. Ample time to look down the road towards our next recession. And regulators are getting anxious. Anxious about commercial real estate (CRE) concentrations. 

Last December, Astoria Financial Corp. and New York Community Bancorp called off their planned merger. Why? They couldn't get regulatory approval. Both institutions were over the CRE concentration guidelines, so putting them together would exacerbate this risk, so the regulatory thinking must have been.

Today, I read an American Banker article on how a multi-billion dollar bank is going to ramp up its business lending. Why? Reading between the lines, this bank is likely over the CRE guidance levels, and were probably getting grief from their regulators about it.

To remind readers, in 2006 the OCC, Federal Reserve, and FDIC issued joint interagency Guidance on Concentrations in Commercial Real Estate Lending. They need a marketing person to title their reports. Maybe sub out an economist or two.

To summarize, banking institutions exceeding the concentration levels should have in place enhanced credit risk controls, including stress testing of CRE, and may be subject to further supervisory analysis. Whatever that means.

The CRE concentration tests are as follows:

1.  Construction concentration criteria: Loans for construction, land, and land development (CLD) represent 100% or more of a banking institution's total risk-based capital.

2.  Total CRE concentration criteria: Total nonowner-occupied CRE loans (including CLD loans), as defined in the 2006 guidance (“total CRE”), represent 300% or more of the institution’s total risk-based capital, and growth in total CRE lending has increased by 50 percent or more during the previous 36 months.

The OCC did an excellent analysis of the impact of this guidance in 2013. If you have some free time to read it, I encourage you to do so.

The upshot of the analysis, in my opinion, is that the risk can be further limited to CLD lending, more so than straight, plain vanilla CRE lending that is so common in community financial institutions. See the chart below from the OCC report for net charge-offs during the Great Recession.



To be balanced, and not a news media outlet, it is true that banks that grew CRE fast, i.e. over the guidance levels mentioned above, regardless if in the CLD or straight plain vanilla categories, were more likely to fail during the period measured. But isn't fast growth by itself an indicator of increased risk of failure, regardless of the loans that fueled the growth? Risk mitigants tend to lag growth, especially fast growth. And success is the great mollifier to risk managers that wish to take away the punch bowl when the party's rockin'.

So, yes, fast growth leads to greater failures. But that's why fast growth is riskier, and tends to reap greater rewards for stake holders. Look at technology companies. Their shareholders are highly rewarded for fast growth. And they take on greater risk, because earnings have yet to materialize.

I would like to take issue with the implicit pressure on financial institutions for going over the 300% guidance levels for plain vanilla CRE. Note that the guidance says AND 50% growth over the past three years. But is that how it is being examined and enforced? Or are examiners, and perhaps bankers, pulling back on bread and butter lending, seeking loans where they have less experience or there is riskier collateral?

The below two charts tell a story. The Great Recession lasted from the fourth quarter 2007 through the second quarter 2009, according to the National Bureau of Economic Research.

For the below chart, I took every bank and savings bank, not federal thrifts because during this time they still filed TFRs versus Call Reports, and therefore their loan categories were different. But look at the asset classes that were on non-accrual during this period. How significant was CRE lending to the souring of bank loan portfolios?


The following chart is from my firm's profitability outsourcing service. It shows the pre-tax profit as a percent of the loan portfolios measured. We perform this service for dozens of community banks. CRE lending remained more profitable and stable then C&I portfolios, which seems to be the asset class banks try to increase to offset the risk of CRE concentrations and raising the ire of their examiners.


CRE not only remained profitable during the Great Recession, but more profitable and more stable than C&I. Indeed, even today, CRE is the most profitable community banking product. If you wondered why community banks feast on it, there ya go!

I don't want to suggest that banks continue packing on CRE and relegate C&I to the back burner. C&I loans are typically smaller than CRE, are more difficult to underwrite, and require more resources to monitor. Yet the pricing we see in our product profitability service does not show bankers getting paid for these challenges. C&I spreads were very close, and in some institutions inferior, to CRE spreads. Also, there are an increasing number of technology solutions that can reduce resources needed to more profitably deliver C&I loans to the market.

So, don't let this blog post motivate you to double down on CRE, and turn your back on C&I. What do your customers demand? What is the trend in your market? How can you reinvigorate economic vitality into your communities?

Don't let regulatory guidance or the inefficiency in your lending processes answer those questions. Let your markets and customers do the talking.


~ Jeff


Saturday, May 06, 2017

Who Am I?

Who I am is in the eye of the beholder, right?

Quick note: I mostly blog about banking. Today I blog about myself so you can have a better idea of the person behind the writing.

I am a recent member of my local Rotary Club. New members typically give what is termed a "Classification Speech" to the membership. I was no different, and was tapped to deliver mine last month. So I called the club president to ask what I should talk about.

"Anything you want" he said. He later regretted it. Giving me an open mic is ill-advised, as my wife would tell you.

I formatted my Classification talk in "Who Am I" format, much like how Admiral James Stockdale quipped in a 1992 Vice Presidential debate. I delivered it extemporaneously, so I don't have the exact words I used on that day, just an outline scrawled on a piece of paper.

But here is the essence of what I said.

Who Am I? I am John and Joyce Marsico, my parents. My dad died of Hodgkin's Lymphoma when I was six years old. Eleven months from diagnosis until death. He was the local McDonald's manager. My mom was a stay at home mom, which was more typical in those days. Work life was different then. If my dad took weeks off to get and recover from chemo, he wouldn't be paid for that time. So after chemo, no matter his condition, he went to work to keep the family money flowing.

When he passed, my mom was left with three boys, ages 8, 6, and 3. No income. And little life insurance. She went to work, and we lived off her wages and the social security survivors benefit. In spite of those tremendous challenges, she kept us in Catholic school for fear that without a father, we were at greater risk to getting into trouble or hanging out with some bad kids.

In today's society, we call people hero's for not so heroic things, like scoring a goal, or being in a film. Today someone called Kurt Russell and Goldie Hawn "inspirational". Try going to work the day after chemo. 

I am the husband of Jackie. We were high school sweethearts. I was working the charm on her since Mrs. McTighe's high school English class. Took three years. Got married when I was 21, she was 20. Everything we have we built together. Nothing was given to us. Today, if you saw us walking down the street together, you would think I was rich. Well I am. Not in the money way.

I am a sailor. I served in the Navy because my father, grandfather, and uncles served. And I could've used the funding to pay for college. It was a tremendous adventure. I remember being taken out to my first ship that was sailing into the Mediterranean Sea, the USS Coral Sea, an aircraft carrier. I was flown out on a C-2 Cod, the only cargo plane (at the time) to be able to land on carriers. It had one window on each side, and I got the window seat. Coincidentally (or not), the chaplain was in the seat next to me. Aircraft carriers are mighty big ships, but very small airfields. I survived. Many of my old Navy friends remain my shipmates.

I am the father of two girls. As I mentioned above, I grew up in an all boy household. Girls, as I entered adolescence, were awesome. I didn't know why I played ball with Jane all the way up to middle school, and suddenly I was ok with being her cheerleading base! As a dad, I knew. So God sent me two to test me! Ok, maybe that's exceedingly narcissistic. Raising girls was difficult for me because I had no frame of reference. And the emotional ups and downs of growing up is more pronounced on girls than boys, in my experience. It weighed heavy on me when my girls went through it. But they made it through with flying colors! So far. Fingers crossed.

When our first was born, my wife and I were stationed in Rota, Spain. Twenty one hours of labor, the last three pushing. My wife, not me. I just experienced a couple uncomfortable hand squeezes and a difficult glare when I ordered pizza. After those 21 hours, the doc decided on a c-section. After trying to push my daughter out for so long, she had a conehead when she was born. So my first words when she was born was not "beautiful", or "wow". It was "is that normal?". It was normal, by the way. 

I am a bank consultant. When I first started, I worked primarily on mergers and acquisitions, where my boss told me that my job was 20% math, 80% psychology. It hit home when we were negotiating a transaction that the handshake-creating concession was to allow the chairman to keep his Bentley. Psychology. 

My kids still don't know what I do. In simple terms, some of what I do can be described by example. I watched a banker in deposit operations reviewing checks. She was flipping them one at a time. I asked what she was doing. She said checking for fraud. I asked what fraud looked like. She didn't know. I asked how long she did that per day. She said one to two hours. I suggested she stopped doing it. 

Perhaps that's an oversimplified example of some of the things that I do. But it's true. 

I am a Rotarian. Truth be told, I probably wouldn't have joined Rotary if not for my friends Dan and Kevin. But I was getting to the point where I was growing tired of the excuse that I travel so much that I can't commit to much. Travel is the primary reason I had to hang up the whistle as a lacrosse coach. 

I was getting a haircut one day at Manny's barber shop. I call him the hip-hop barber because he was playing hip-hop the first time I visited. While getting my haircut, Manny took a call. After getting off the call, he explained that he had to schedule a haircut for a bed-ridden young man, who had a catastrophic accident years ago. He had been cutting his hair for years. What made Manny's generosity even greater, was the young man lived 30 minutes away. 

That's charity for your fellow man. And that's why I had to be more than the contributor to the family checking account.


~ Jeff


Did you know? That since Rotary's first effort to eradicate polio from the face of the earth in the Phillippines in 1979, polio cases are down 99.9%! How about that! *Mel Allen voice*

Monday, May 01, 2017

Cultural Conversation in Banking

Are your incentives consistent with your strategy and culture?

I was recently interviewed by the Financial Managers Society on this topic, and as a lead-up to my presentation on the subject at the upcoming FMS Forum in Las Vegas in June.

Here are excerpts from the discussion.



FMS: Why is measuring account openings such a misguided endeavor?


JM: If a bank measures product profitability, costs follow activity. Those that don't measure product profitability intuitively tend to believe that the number of accounts drives the work more than balances, even though balances, for the most part, drive revenue in banking.

So if customer A comes in with $10,000, an accounts-driven institution would try to split up that $10,000 between two or three accounts so they can hit their targets. The profit-focused bank, on the other hand, would do what the customer originally intended, and open up that checking account knowing full well that they would get similar or equal spread on the $10,000 in the single checking account, but have less back-office expenses to absorb than if they opened three accounts.


FMS: Which numbers should matter in the quest for better profitability - and why?

JM: Co-terminous spread and direct pre-tax profit - and the trends for both - would create an environment to drive profitability rather than activity. Bankers typically hold lenders accountable for the size of their portfolio and their production. What if they were instead held accountable for the spread (after provision), both in dollar aggregate and the ratio, and the trend for each?

So if Lender A had a $50 million portfolio at a 1.25% co-terminous spread, or $625,000, would that be better than the lender with a $35 million portfolio, with a 2% co-terminous spread? The math says no. But who reaps more reward in today's environment?


FMS: Bigger picture, how can the right incentives lead to a better culture?

JM: We look for the path of least resistance in terms of meeting goals and incentives - it's human nature. If I'm a branch manager whose incentive kicks in if I grow branch deposits by 10%, then I'm looking to do that with the least resistance. So I might call my regional manager daily for CD rate exceptions to get that $200,000 CD, even though with the rate exception, that CD might have a five-basis-point spread.

On the other hand, if I was held accountable for growing my branch's co-terminous deposit spread, would I still chase the CD customer? Or would I maybe seek the operating account at the tire and battery shop down the street, even though that might bring 25% of that CD balance to my branch? Multiply that logic to every profit center within the bank. Now you have a culture!





Sunday, April 23, 2017

Are Banks Different?

Does your financial institution need to be different than the five others in town or the multitudes outside of town?

If you believe the paradigm that a business model must generate low-cost solutions or differentiated solutions in order to build a sustainable competitive advantage, then my guess would be that your answer would be yes. Truth be told though, I still hear that "our money is no different than the banks' across the street" defeatism. 

If you believe that to be true, then the pair of Levi's jeans you purchase at the JCPenney in the mall, at Walmart, or on Amazon are no different, either. Yet one of those three has built a low-cost competitive advantage, the other a unique distribution network differentiation, and the third might go the way of the General Store.

It is annual report season. As a bank consultant, and bank stock investor, I review many of them. And my opinion is, I can't tell them apart by their "Letter to Shareholders". Chairmen and CEOs alike spout undifferentiated bromides that tells me their strategy in their markets must be low cost. Because I can't make out any difference.

Below are three such letters, taken from publicly available annual reports for three financial institutions headquartered in the same large U.S. city. I removed names, numbers, and geographies. But they are public companies, so these letters are available to the public in unedited form. No reason to call them out here, as it is beyond the point of the post.

Do these banks sound alike? Do they sound like your bank? 


~ Jeff


Bank A:

To our shareholders,

Since our inception, we have used the word ‘‘Absolutely’’ as a part of our brand. We believe this word reflects our customer centric and solutions oriented approach to banking. In 2016, we decided to ask our customers for feedback on their relationship with [Bank A]. Frankly, we couldn’t say it any better ourselves.

[Customer comments were here]

We are both extremely proud of, and honored by, this feedback. We also believe there is a direct correlation between these customer quotes and our bank’s performance, and we’re very pleased to report that 2016 was an outstanding year for tangible results at [Bank A]. Numerous milestones were achieved, including record earnings, crossing $x billion in total assets, and maintaining sound asset quality. Growth in interest and noninterest income outpaced declining accretion income, resulting in a significant increase in total revenue. Disciplined execution on our strategic priorities resulted in exceptional growth in organic loans and core deposits, which combined with effective expense management, collectively yielded net income of $xx million.

In addition to our financial success, we announced two bank acquisitions during the year: [Bank acquisitions]. Both of these acquisitions were completed on [date], providing us with well-known and talented bankers and an expanded statewide footprint into new strategically compelling markets. We now have a meaningful presence and efficient footprint in seven of the eight largest MSAs in [state].
[Bank A’s] results in 2016 demonstrate our commitment to grow low-cost transaction deposits, improve our noninterest income lines of business, maintain strong credit metrics while growing loans, prudently deploy capital, and become a more efficient company.

Our payroll, treasury services, and cash management product offerings continue to provide a competitive advantage in growing core funding and allow us to successfully compete with banks of any size. We had $xx million of deposit growth in 2016, including $xx million, or x%, growth in transaction deposit accounts. Noninterest-bearing deposits comprised xx% of total deposits at year-end 2016. Our long-term success is going to be primarily driven by the quality of our deposit base and having very deep relationships with our primary depositors.

We also generated organic loan growth of $xx million, or xx%, while managing our risks effectively and without compromising our high credit standards. Our credit quality metrics continue to be among the best in the entire industry.

Positive momentum in our noninterest income lines of business carried over into 2016 as all three of our key fee income initiatives—mortgage, SBA, and payroll—had double digit growth in 2016. In our SBA business, we added a team with a national market focus and completed major improvements to our operating processes that will significantly improve productivity and efficiency. We remain very pleased with the pace of growth in payroll clients, which in turn, delivers core funding and a solid recurring revenue source.

We are making measureable progress with our commitment to become a more efficient company. Total noninterest expense, excluding merger and credit-related expenses, declined nearly x% in 2016.
Expense reductions occurred across the board in nearly every category leading to a significant improvement in our efficiency ratio in 2016. In addition to the capital deployment through two acquisitions, we maintained an attractive dividend, with a yield of more than x% based on our year-end share price, equating to a dividend payout ratio of approximately x% for the year, and we repurchased over $x million of our common shares. We continuously evaluate our overall capital management strategy and remain committed to being conservative stewards of your investment in [Bank A].

In summary, we are blessed to operate in genuinely attractive markets with diverse growth drivers and positive economic trends, which make us very optimistic about the future for [Bank A]. Our existing markets represent a significant growth opportunity for our company. We continue to grow market share in the [metro] market, strengthen our number one market share in [region], and are excited about the tremendous opportunities we have in our new markets. 

As we reflect upon the successes of 2016, we are grateful for each client, board member, and employee that contributed to this success, and are ‘‘Absolutely’’ thankful for your continued confidence as a shareholder.



Bank B:

Dear Shareholders and Friends:

It seems the pace of change escalates as our business continues to expand. Integrity, intelligence, energy, sense of responsibility is more important than ever. The understanding that our role is to serve our customers – and each other – is critical. Attitude really is everything, and first experiences do make lasting impressions.

We try to run our businesses with these truths to guide us and our success, along with a dose of luck, indicates we are on the right track.

Mortgage grew both in production and in markets served, adding offices in [state], [state], and [state], as well as adding lenders in existing markets. Wealth Management added new product offerings and we are now building our marketing team. SBA increased production and expanded the lending footprint to include the [region] as well as the [region]. Commercial and Construction Lending continued steady expansion.

Our focus on retail branches shifted from expansion to one of efficiency and profitability for these new markets, though we remain open to new acquisition opportunities. To keep up with increasing production, we invested heavily in internal systems and software. Online Account Opening, when fully introduced, will give us another way to be accessible and user friendly.

Our financial results remained strong with net income of $x million or $x earnings per diluted share.
For you, our Shareholders, both cash dividends and book value per share increased again in 2016.
Some highlights are listed here to give a sense of our momentum:

[Financial highlights here]

[Name], with the team he has selected, is building a foundation to last and has the talent to meet our market opportunities. He will properly be named CEO of the Bank at the April meeting.
Our “Golden Rule” philosophy works. Increased Shareholder value from customer service is the result.

We thank you for your continued support and confidence in our Company.



Bank C:

For [Bank C], serving our clients means connecting with people. It means engaging at a deeper level than simply doing business or handling transactions. We are committed to leading and strengthening our relationships and serving the needs of others. For us, the best way to accomplish this is earning trust and investing in these relationships to grow our Company.

[Bank C] built its reputation by remaining firmly rooted and accessible in the communities we serve. We combined trust, loyalty and personalized relationship banking with the delivery of high touch service and life focused financial solutions. Our rich history and legacy has provided us the foundation and the inspiration to innovate and seek ways to continue to drive shareholder value.

Now, more than ever, we know that innovation paired with human interaction enables us to not only provide financial empowerment and guidance on a grander scale, but also sets us apart in the marketplace. By increasing our visibility and footprint in new as well as existing markets we are attracting, building, and maintaining a growing customer base and a more sustainable future for our internal and external stakeholders.

We launched our 95th anniversary year by remaining purposefully focused on building our brand with a deliberate charge toward the future. To make us even more agile to face and optimize new opportunities, we focused on four core strategic priorities: Bringing the Brand to Life; Defending and Growing the Business; Mobilizing the Brand across All Platforms; and Driving Organizational Excellence. As you will learn throughout this message, the successful implementation of our initiatives revealed our ability to execute and utilize technology to be responsive to our clients and grow our business.

[Financial highlights here]

[Separate discussion of each of the core strategic priorities mentioned above here]

Our legacy is who we are...Our future is what we are defining.

Lastly, we celebrated our 95th anniversary in 2016. This is a significant milestone of which we are extremely proud. I would like to thank our clients and community for supporting us all these years and for putting their trust in us, our board of directors for their encouragement to reach new milestones and our teammates who created the successes that we are reporting with their efforts and dedication.

To our shareholders, thank you for partnering with us by investing in our Company. We commit to you that we will continuously strive to build a better bank that will support our values, serve our clients and provide you a return.

We are looking forward to 2017 and the exciting opportunities it will bring.


Wednesday, April 12, 2017

Three Ideas for Banks to Reverse the "Silvering" of Their Customer Base

Are your customers older than your markets? A common theme among students that expressed concern about it during our Executive Development Program (EDP) sessions in Seattle, Montana, and Salt Lake City.

Customers leave their banks for the 4-D's: Death, Divorce, Displacement, or Dissatisfaction. Three of the four are life events outside of our control. And with switch rates that have persistantly hovered around 10% of total customers, how do we get 'em in, and keep 'em in?

Here are three ideas.



What other ideas do you have?

~ Jeff

Saturday, March 18, 2017

Bankers Bank: The Next Generation

Correspondent or bankers' bank is one of those monikers that the meaning is in the eye of the beholder. Like private banking. Or superior customer service. Whenever someone says it, I look at them with an inquisitive head tilt. Like a dog when a person talks as if the dog understands them.

I think correspondent bankers are finding their way and morphing into services that banks need. Their original purpose, as I understand it, was to use up operating, liquidity, and credit capacity in larger financial institutions to benefit nearby community banks. Need access to cash? Call the correspondent bank. Cash letter for nightly settlement, same deal. An underlying, yet important plot in It's a Wonderful Life was that Mr. Potter's bank served as a correspondent bank to the Bailey Building and Loan. He caused a liquidity crunch by not advancing Bailey credit, and offered to assume the deposits at "fifty cents on the dollar"!

Today, with the Federal Reserve, Federal Home Loan Bank, and technology that has all but eliminated paper "items", the traditional role of the correspondent bank is diminished. Not that the concept of developing scale to provide banking-related services at a lower cost than a community bank can achieve on its own is not lost. In fact, I would say it is needed now more than ever.

But they are provided by other service providers. Take my firm, that builds profit reporting models for community financial institutions based on how they are individually managed, and the products that they offer. We do this for dozens of banks. It would not be cost effective for us to do it for one bank, or even a few banks. Our investment in software and management reporting expertise would be underutilized, or the service would be too costly to deliver. The same with ALCO reporting firms. We use our scale to serve the many.

But couldn't banks use a scale-driven servicer, i.e. a correspondent bank, to provide needed services at a lower cost so community financial institutions don't see a sale as their only way to cost-effectively serve customers in a changing industry?

I think so. Let's call our little hypothetical correspondent bank Schmidlap Bankers' Bank. Here are the services I would foresee under Schmidlap's umbrella.


Many of the services identified above are already provided by firms, such as mine and ALCO firms in the form of Management Reporting. I know that bankers' banks currently specialize in Loan Participations, as bankers would prefer to share a credit with a service provider than a competitor, as many do now when they do bank-to-bank participations.

Loan servicing is another vendor driven service used by banks. In fact, there is a specialty bank in New Jersey, called Cenlar, that specializes in subservicing mortgages for financial institutions. When customers call with loan inquiries, they answer the phone with the originating banks' name, and live up to service standards agreed upon between the bank and the subservicer.

So many of these services exist under several vendor umbrellas, and financial institutions have demonstrated a willingness to outsource certain non-differentiating services. So why not have these performed by Schmidlap, a new-age correspondent bank?

This idea began germinating in my head when I spoke at the Kansas Bankers' Association CEO Summit a couple of years ago. At dinner that evening, I sat with the management team from a small, family-run bank. Very common in Kansas and across the Midwest. In fact, the average asset size of a Kansas-based financial institution was $99 million. The bankers described the difficulties in running a small bank in rural markets.

I suggested banding together, not in the form of a merger, but to form a service corporation to buy services, like identified in the diagram above, to reduce the cost of doing these things on their own. They were intrigued. I haven't seen one sprout up yet. But isn't it time?

Imagine the negotiating leverage with FIS, Fiserv, or Jack Henry if the contract for six or seven banks was struck by one entity? Sure, all of the banks would be on the same platform. But isn't that the way it is now? Except you all negotiate separately. That doesn't mean you can't set up your own product set, or your bank wouldn't be segregated with its own database at the data center.

And what of things like Marketing and Human Resources? Each bank should have their own professionals. But it is difficult for banks to have the level of sophistication in terms of systems, such as CRMs or HRIS, or the resources (or geography) to hire the very best professionals. Many view Marketing and HR as collateral duties of one executive or another. Both of these functions, in order for community financial institutions to thrive, must elevate their game.

For HR, provide the best talent, employee development, and compensation systems. For Marketing, financial institutions must implement more sophisticated approaches to attracting new customers, and better serve existing ones. It's no longer good enough to run an ad, order a tchotchke, or staff a booth at the trade show. Marketers must identify the most profitable customers for gold-tier service, and implement a plan for the next tier customers to turn them into gold-tier.

Those executives and systems might be more than a community financial institution can afford. But as part of Schmidlap, that level of sophistication can be yours! There could be a geographic limitation so Marketing and HR within Schmidlap could not serve two banks with, say, greater than 20% market overlap.

I've said enough! You get the point. Incoming ICBA chairman, Scott Heitkamp of ValueBank in Texas, said at the trade association's annual convention that he is concerned about the 30% decline in banks with less than $10 billion in assets since the financial crisis. He is hearing that community banks either can't afford or don't want to deal with the regulatory burden.

Can a re-invented bankers' bank inject newfound confidence into community banks, and up their game to compete over larger geographies with more sophisticated support functions?


~ Jeff

Friday, March 10, 2017

Which Bank Will Blink on Rate?

It happened. I received an e-mail this week for a 13-month CD special. The ad insisted it would make me happy. Instead, sadness. Sad that this bank thought I wouldn't notice they were front-running a likely Fed rate hike. Sad that the bank fell back on old tricks, getting customers to bite on an odd-lot CD term that will reprice at a lower rate when it matures. Sad that they got my e-mail address.

Staring down the barrel of a rate hike, and the specter of future and faster hikes, how does your institution feel about how fast you will have to reprice deposits? Because we are coming off of unprecedented times folks. Times that had the average balance of a money market account go from $47 thousand at the end of 2005, to $129 thousand today (data taken from my firm's profitability peer database). 

Why do you think that happened? And what will customers do with that money when deposit rates become more enticing?

I know your ALCO models predict what might happen. But if we dig deep, we know we don't know. That doesn't mean we can't look around us to predict pricing pressures applied by our competitors, like the bank that solicited me for the 13-month CD.

So I took a look at metrics, publicly available in Call Reports, that were indicative of a competitor's need for funding, and therefore will drive their pricing decisions.

I focused on the St. Louis MSA. Why St. Louis? I have friends that are getting married there in the next few months, and they work for one of the banks on the below list. Together. Same bank. I will defer to them on the wisdom of this. St. Louis also has a good baseball team. And they are not likely to win as many World Series as the Yankees in my lifetime.

I looked at the top 10 deposit market share banks that were not SIFIs. True, SIFIs had a 52% market share at June 30, 2016. But the below top 10 own 29%. Not an insignificant amount. And SIFIs' need for funding is much more complicated as they have greater access to the capital markets, and don't necessarily rely on drawing funds from St. Louis.

Here is the list, their St. Louis MSA market rank, in-market deposits and deposit market share at June 30, 2016.


Once I identified the community banks, my next task was to identify the financial metrics that highlighted their need for funding as rates rise, and therefore the likelihood that they would be early movers in the pricing game. Here are the metrics I used:

-  Deposit Growth minus Loan Growth (year over year)
-  Loans / Deposits
-  Securities / Assets
-  Pledged Securities / Securities
-  Time Deposits / Deposits
-  Borrowings / Assets
-  Cost of Funds

I ranked each of the above banks based on each metric, assigning the bank a "10" if they had the top rank, and a "1" if their ratios were lower. So, if UMB Bank NA had the lowest Loan / Deposit ratio, as they did, they received a "1" for that metric. If Central Bank of St. Louis had the highest Loan / Deposit ratio, as they did, they received a "10". That means that each metric received equal weight in my analysis.

I tallied all of the scores to determine which bank needed the funding the most, and were therefore most likely to be first mover in elevating rates and putting competitive pressures on other market participants. The results are below.


I predict that Midland States Bank will be the first to offer a compelling rate to raise deposits in a rising rate environment. They have a relatively small securities portfolio, high Loan / Deposit ratio, and their loans have been growing faster than their deposits, among other indicators.

Call this method the Jeff For Banks method to predict rate warriors. I can be a narcissist.

There are some tight scores immediately below Midland States, and upon looking through the data I believe Central Bank of St. Louis would be next, in spite of it having a slightly lower score than the three above it tied for second. Their Loan / Deposit ratio was 98% and their securities portfolio was similar to Midland States, at only 10% of assets. Reliance and Midwest, conversely, have securities portfolios of around 22% of assets to fund their growing loan portfolio. So the scoring system is not absolute, especially when there is clumping such as in the second through fifth ranks.

My friends' bank looks like it can sit on the sidelines during a rate war, a good position to be in. Unless they succumb to competitive pressures, and that parked money in money market accounts starts following rate around St. Louis. 

Who will blink in your markets?


~ Jeff