Monday, July 25, 2016

Colin Cowherd Thinks Poor Reporting is Bloggers' Fault

Riding my exercise bike over lunch, I often watch The Herd, featuring Colin Cowherd and his co-host, Kristine Leahy. Both are sharp sports minds and I respect their opinions. And oh they have opinions.

What struck me today, and The Herd is supposed to strike a nerve, was Colin's seemingly random comment that the quality of news reporting has degraded as a result, in part, because of bloggers. Hmm, do I degrade the quality of bank reporting because of my blog?

His context was the poor reporting done by Al Jazeera America about the theory that Peyton Manning used PEDs. Al Jazeera America was formed in 2013 when the Qatar based Al Jazeera purchased Al Gore's Current TV. Both are/were news organizations, not blogs. So blame the blog for the poor reporting of a news organization? Reporters that dig no deeper on issues than reading celebrity tweets on the air comes back to bloggers? The irony about The Herd being a three-hour opinion show must be lost on him. 

I do not think blogs degrade news reporting. The Huffington Post, now considered a legitimate news organization, albeit quite left of center, started in 2005 as a blog. Current TV, started as a news organization aimed at a younger audience, was by all measures except one a failure. The exception being the $500 million of Qatar-financed consideration paid to it by Al Jazeera. Funny that their name starts with "Al". But I digress.

I don't want to be presumptuous. But I do not think my blog impacts bank industry reporting in the slightest. American Banker isn't worried about Jeff For Banks jumping them for a story. Or any other financial institution blogger for that matter. In fact, I wouldn't be surprised if some news story ideas emanate from industry bloggers. In that regard, industry news organizations may welcome our existence. But to think that SNL Financial gets a news story out quickly and recklessly so a financial industry blog doesn't get there first is nonsense, in my opinion. I can't think of one example where that was true.

Blogs have different reasons for existing. Some hone writing skills, or simply are hobbies. I do it to increase my knowledge of micro issues, engage with people I wouldn't otherwise know, and hopefully spur discussions among financial institution executives on the future of their institution and our industry. I don't own a fedora, monitor newswires, or watch CNBC, fingers at the ready for my next blog post. I struggle to post three per month.

So Colin, with regard to your theory that bloggers decrease the quality of reporting, your Herd is thin. 

~ Jeff

Thursday, July 14, 2016

Is That a Risky Bank Customer?

Customer risk assessments are a fact of life in banking. Banks must determine how a new customer will affect its overall risk profile. Most, in my experience, do it in the form of a Q&A form, to be filed with the rest of the customer paperwork. What I see as papering the file.

But let's think about how it could and should be.

It is prudent to determine the risk profile of a customer and how it will impact your bank. Taken alone, it is highly unlikely one customer will impact the bank in a significant way. But grouped together, customers with similar profiles that act similarly within the economy can elevate risk. Think loan concentrations. As a matter of course we measure loan concentrations by loan type, such as construction or non-owner occupied real estate.

And there are red-flag industries that elevate risk, such as check cashing or marijuana businesses.

I have written about banks determining their own well-capitalized by allocating capital to different balance sheet categories based on the bank's perceived risk of those categories. It is a top down approach. But what if this analysis starts at the most granular level... every customer? And the bank uses its customer risk assessment process to determine the amount of capital allocated to that customer?

If built appropriately, it could be a desktop app the lender, branch, or call center employee could complete in front of the customer. See a sample of what I am talking about in the accompanying table.

Multiply this times every customer and every account and you would be able to calculate the capital required to support your balance sheet from the bottom up.

You can integrate ROE hurdles to feed pricing models in order to meet or exceed the hurdle. You can calculate customer profitability in terms of ROE, and create actionable customer tiers, giving platinum service to top tier, active cross-sell to middle tier, and efficient service to lower tier. And when regulators review your customer risk assessment process, and see that it is integrated into your pricing and profit models, capital plan, and strategic plan, trumpets will sound.

Sure, there will be challenges. I'm no compliance or risk expert so I'm not sure what other risk information should be collected on the customer. And what if Joe's year over year profit picture changes, or reality determines that Joe is bringing in bags of cash twice per week. A well designed system could send ticklers to the relationship officer to revisit the customer risk assessment based on the new information.

A disciplined, yet simple design that is integrated into your systems and processes could yield more accurate capital needs based on the sum total risk by each of the bank's customers. 

Do you think this is how it should be?

~ Jeff

Wednesday, June 29, 2016

Banking Regulators Should Major in the Majors

The amount of agida being given to the Current Expected Credit Loss (CECL) standard mandated by the Financial Accounting Standards Board (FASB) reminds me of Chicken Little's claim that the sky is falling. It hammers home my belief that bankers dedicate significant resources, swerving to and fro, conforming to the myriads of standards, regulations, and exam practices that have little to do with their safety and soundness.

Rick Parsons, author of Broke: America's Banking System and Investing in Banks: Strategies and Statistics for Bankers, Directors, and Investors, drove this point home in Broke, stating regulators, directors, and bankers should major in the majors. Namely, focus on those risks that cause banks to fail. Rick recently spoke about CECL and other current banking topics on my firm's June podcast.

I should note that Rick is in favor of CECL, because it would improve loan risk-based pricing and elevate reserve levels. Point taken. When a bank tech vendor asked me about building a CECL platform, I said if it raised the reserve for commercial banks to 1.2% of loans, then bankers would buy it! That's the ALLL levels bankers defaulted to before all of this complexity surrounding loan loss reserve calculations, and now CECL.

Rick was spot on in his major in the majors commentary. We have diluted examiner resources to the point of ineffectiveness. Instead of focusing on what causes banks to fail, namely operational processes that lead to excessive risk taking, especially credit risk, they focus on everything. Meaning they focus on very little. 

Instead of examiners majoring in the majors, bankers spend countless hours responding to regulatory concerns over their search criteria within their Bank Secrecy Act (BSA) programs, and how many errors the bank had in SAR reporting. For the uninitiated reader, BSA was Congress' means to use banks to police their customers to ensure they weren't laundering money or funding terrorists. To my knowledge, there has never been a BSA violation that caused a single bank to fail. But bankers sure spend a lot of time on it. And HMDA reporting? Don't get me started.

One major law that Rick pointed out that has been a total failure was the social engineering pie'ce de resistance, the Community Reinvestment Act (CRA). To ensure banks lent money into communities where they took deposits, banks are required to report, and regulators are required to grade banks' efforts on this ridiculous law that did nothing to help the plight of inner city residents. 

But ample resources are dedicated to it. And banks must at least achieve a "Satisfactory" to be approved for many things, such as mergers. And there is no lawmaker that will propose its demise even though it has been a "Fail" at achieving their social engineering goals. The press might report the lawmaker is "against inner city residents". Stupid.

No bank failed due to having a poor CRA record. And how many communities were adversely impacted by a bank's "needs improvement" CRA rating?

These are the rabbit holes examiners jump into, and require bankers to dedicate human and financial resources to comply and improve them. 

CECL is another ridiculous concept foisted on banks by the FASB that, although at least focused on credit risk but in the name of financial transparency, will do little to nothing to make a bank safer and sounder against failure, in my opinion. 

Yet here we are. Diluting banker resources further. Have we lost our minds?

~ Jeff

Sunday, June 19, 2016

In Banking, Content Is Showing Results

Kevin Tynan, a regular American Banker contributor, recently penned an article: Digital Bank Marketing, It's All About the Content. He cited a recent survey that found content marketing ranks as companies' most significant digital marketing trend for 2016. 

He went on to say that at his bank, Liberty Bank in Chicago, pay-per-click mortgage leads cost $162 per lead, while content-related leads cost just $36. He said that there are even greater differences in lead generation for checking accounts and credit cards.

Content, in my opinion, is moving more from the wish list in the Marketing Department to front and center for bank customer acquisition initiatives. As with most digital marketing concepts, the talk surrounding using content to acquire customers is within the retail realm. See the ad in my Facebook feed today. A local supermarket. Clearly a retail customer acquisition approach.

But what about business customer acquisition? At a recent bank client strategic planning retreat, I pulled up my Twitter feed that had a sponsored tweet from Accenture Banking, directing me to a recent survey. Clearly this was a B2B marketing approach, as Accenture is a B2B consulting firm. If Accenture is working to extend its reach by using promoted tweets directing potential clients to their content, should banks consider it too?

There is friction within banks in considering such an approach. In most strategic planning retreats I moderate, the social media talk, including content, centers on retail. In senior management ranks, I do not think using social media for business client acquisition gets much consideration. But look at the sponsored tweet I just looked up in my Twitter feed?

Google Cloud. So if Accenture, and Google, think social media can promote B2B client acquisition, should your bank?

Read any sales book or go to any sales seminar and you will hear theories on number of touches and conversion rates. In my opinion, commercial bankers consider number of touches as phone calls or in person visits. Not a recent blog post, or information in the client's Facebook stream. 

If, at your bank, it takes seven contacts to turn a business prospect into a client, and reading a blog post or seeing content in their social media streams count, would you be more aggressive in your content efforts? Would this drive down your acquisition costs, as it did for Liberty Bank?

I think it's time to take content and social media marketing seriously for business customer acquisition, even if your "shoe-leather" commercial bankers think it's bunk.

Because what if it's not.

Do you use and have results from content marketing for business customer acquisition?

~ Jeff

Saturday, June 04, 2016

Fiserv: Give Your Clients a Test Bank

Community banks are struggling to build a training curriculum to develop branch bankers of the future. Aside from moving from a transaction to an advice, sales, and service culture, they also struggle with operational training.


The story of declining branch traffic, and the resulting reduction of branch transactions, is reducing the repetition of common and uncommon transactions alike, and therefore the opportunity to improve operational skills of branch employees.

When I was a branch banker over 20 years ago, I went to headquarters, stood at mock-up teller lines with a dozen of my colleagues, and a trainer drilled us on running common transactions with enough repetition to imprint the "how to" in our brains. Well, at least my colleagues brains. I never claimed to be an operational wizard.

Some banks still do this. But with branch turnover down due to a weak job market, and the industry moving to universal banker, these training test beds are on the decline, in my experience. As they should be. No reason to institutionalize what is quickly becoming an outdated model... tellers standing behind the rigid teller line anxiously awaiting for the flood of customers that no longer come.

So how do banks increase proficiency with transaction processing? Most accomplish through on-the-job training (OJT), in my experience. But with common transactions being done less frequently, particularly in smaller or more rural branches, and uncommon ones perhaps happening once per month or less, how are branch bankers getting the reps needed to become proficient?

Some are being deployed to a bank's busiest branch, typically the headquarters office, for some OJT before being deployed into the branch network. This is a natural reaction to get reps, and be productive once sent to their primary branch.

But how can your core processor be helpful?

Those that have been through the painful core processor conversion experience know that the Fiserv's and Jack Henry's of the world establish a "test bank" to get your people proficient at all sorts of interactions with your soon to be deployed core.

My question: Why give this up?

I reviewed all data processing expenses for Southeast banks with assets between $800 million and $1.2 billion in total assets. Community banks. The results of my analysis are in the chart below.

In terms of the Call Report, Data Processing Expense category, these banks spent on average almost $1 million in 2015. And the trend is decidedly up. Not a small sum.

In my firm's profit improvement engagements, we see wild fluctuations in core processing expenses. Telling me: 1) banks buy different services from their core processor, and 2) there should be negotiating flexibility given the dollars involved.

What I suggest is negotiating a "test bank" that remains open for continuous training with your employees. Not just branch employees, but everyone that interacts with the core. This will improve the effectiveness of your OJT program, increase transactional proficiency, and allow your bank to dedicate more resources to higher level employee development. It will also retire "Mickey Mouse" and "Donald Duck" as customers. Bankers know what I'm talking about.

There's enough margin in that Fiserv contract to make this happen. Make it so!

~ Jeff

Sunday, May 29, 2016

Just a Soldier

Memorial Day weighs heavy on me. Because I do not know what I would do if asked to stare down the barrel of the gun of my enemy.

My greatest danger in service to my country was navigating mined waters while on the USS Caron (DD-970) during Operation Desert Storm. I had supreme confidence that my shipmates knew where the mines were, and avoided them. So hitting the rack in my berthing located at the waterline on our destroyer gave me little concern.

But what of those soldiers standing in the front of the infantry line during the Revolutionary War, or those that were at the front of the landing craft when the door dropped on Omaha Beach? They knew. They knew that death was possible, even probable. They stared down the barrel of their enemy knowing they could be near to drawing their last breath. How would we be?

It is not as common as in the past to know death may well be imminent. During earlier wars, battles were fought differently, warriors were not as educated, and faith in God was powerful. If death was imminent, please God take me into your kingdom.

We've moved away from our beliefs because we think we know more, are more educated, enlightened, if you will. So facing down the barrel of our enemy means we are facing an uncertain, or non-existent future, in our minds. So, perhaps, it is more frightening to be that brave soldier, sailor, Marine or airman. 

So what would we do if asked to stair down the barrel of the enemy?

I don't know. And may never know. But I know in Arlington, in France, and in un-marked graves and battlefields all over the earth, lay young Americans that were asked and heeded the call for the freedom of countrymen they would never meet, and other countries they knew little of.

I remember them. And pray that I could muster the bravery that they did, giving their last full measure of devotion. For me. And you.

~ Jeff

Note: Want to read a story of such a soldier? Read banker Dorothy Jaworski's book, Just Another Good Soldier about her uncle, Pfc Stephen Jaworski who gave his last full measure of devotion during the WWII battle to cross the Moselle River.

Saturday, May 21, 2016

Should Bankers Pursue an Asset Driven or Core Funded Strategy?

My firm is 15 years old. And approximately every five years, we performed an analysis to determine how the stock market rewards financial institutions for different strategies. In particular, does the market reward banks that drive net interest margin through a high yield on earning assets, or a low cost of funds?

The first two times we did this, the low cost of funds banks won, hands down. So I assumed that this is the way it was, and therefore is the way it will be. But we recently revisited the analysis for an "asset-driven" client... i.e. one that focuses on loan production, and backfills with funding as they figure out how to pay for the loan pipeline. This strategy typically leads to a higher cost of funds as the bank turns to higher rate deposits, brokered deposits, or FHLB borrowings because it's quicker than winning deposit relationships.

The following charts show the results. Sorry for column overrun but wanted to make them bigger and I have no idea how to do that other than blowing them up. I digress. Fortunately, I have two daughters and am very familiar with being told I'm wrong. If not for my two angels, the below charts might have broken my confidence. 

The charts show the price/tangible book and price/earnings multiples of two sets of banks. As the Criteria states, we took banks with between $800MM and $3.0B in total assets with healthy net interest margins and profitability. The size range is consistent with our bank client. We then divided the result into the top 10 yield on earning assets banks, and the top 10 (lowest) cost of funds banks. And then charted their trading multiple trends. Yes, there were two cross-over banks that made both charts. Quite an accomplishment, in my opinion.

The low cost of funds banks are no longer the clear winner, as the yield on earning assets banks sport a greater price/tangible book multiples. 


What caused the shift that improved asset driven banks trading multiples to be comparable to core funded banks? I have my opinions. Note the next chart.

Yeah, I know. Charts again from Marsico. Hey, I'm a strategy-finance wonk.

My firm measures the profitability of products for dozens of community financial institutions. As part of that service, we roll up bank specific products to common products so we can compare each client's product profitability to that of a peer group. Think home equity and commercial real estate loans, business checking and personal money market accounts, etc. 

As a result, we can determine the spreads (using actual yields for assets and costs for funding offset by a funds transfer price) of all products on the asset and liability sides of the balance sheet. The trend of those spreads are in the chart. Notice in 2006, when the Fed Funds rate stood at 5.25%, and the yield curve was inverted, liability spreads exceeded asset spreads.

Then the Fed started dropping short term rates (quickly to 0-25 bps) and the yield curve went positively sloped. Loan spreads quickly exceeded deposit spreads. And loan profitability followed in quick succession. 

So for an extended period of time that includes present day, loan spreads exceed deposit spreads, and loan profitability has mostly exceeded deposit profitability.

Therefore, asset driven banks were rewarded with greater overall profitability than core funded banks, and trading multiples moved to greater parity.

But it won't always be so. 

I thought you would like to know.

~ Jeff