Monday, June 11, 2018

Branch Talk

"The legacy [of build it and they will come] is an inefficient allocation of resources dedicated to supporting a less relevant delivery channel..."

So went an informative branch research report put out by my old friend and excellent bank stock analyst, Matt Schultheis of Boenning & Scattergood. At lunch recently, he said that the battle for retail deposits has already been won. Won by the national banks. It is a very similar point I made in an article to soon appear in a trade publication. 

With all of our hubris about how great community banking is compared to national banks, we are not winning market share from them. 

Here are some additional points I made to Matt via e-mail after I read his branch research piece. Edited for your clarity and context. All comments are my own, as his firm is a broker-dealer which would require a monumental amount of compliance review and disclosures. To wit, the research report actually used the term "Flavor Aid" instead of "Kool Aid" because it is likely a compliance person wouldn't let them use the obvious. #AddingValue

↭ __________________ ↭

Point 1: Pricing is becoming more transparent and I believe it will be increasingly difficult for banks to maintain deposit betas of 12 to 25, as [the research report] demonstrated in Exhibit 2. It is much easier now to switch from a local bank money market account to a Goldman Sachs Marcus account than last year, and it will be even easier next year.

That is why I suggest banks build a cost of funds advantage by 1) having a relatively higher proportion of non-interest bearing checking, and 2) a relatively higher proportion of "store of value" accounts like interest bearing checking and special purpose savings. I define store of value accounts as those where depositors are looking for safety and ease of use/access more than rate. Such as having a real estate taxes savings account.

Point 2: I am not sure deposit market share is the metric for branch success [as mentioned in the research report]. I believe it is branch deposit size, growth and spread delivered by those deposits. The challenge with the 3,000 square foot to a 1,500 square foot branch transformation is that larger branches tend to have more deposits.

A former bank CEO, responding to my questioning one of his branch's multi-million dollar expansion, said he got $40 million MORE in deposits when he did it. The math looks good in that context. Great actually.

Over and over we see these tiny, cutesy, 1,000 square foot branches maxing out at $20 million in deposits. I say put in a big branch and get $60 million, which is the average branch size in our profitability outsourcing service. The deposits per square foot calculation works out marvelously. Perhaps lease part of the branch to a CPA or a small insurance agency or something that tends to serve the same customers you are targeting to recoup some of the build-out and real estate taxes that come with a larger branch.

Point 3: You can "spoke" from the larger hub, as the research report suggests. And if your spoke maxes out at $15 million over a reasonable time, then close it and transfer those deposits to your hub. At an 80% retention rate, Charlie Sheen would call that #winning. Another strategy would be to measure the profitability of the hub/spoke region, rather than holding every individual branch accountable for spreads and profits. Although either is better than total deposit or number of accounts goals.

Point 4: The median direct expense of a branch as a percent of deposits in our profitability database is 98 basis points. That's 98 basis points that a branch bank can't pay in interest to their depositors that Ally Bank can pay. Perhaps that's overly simplistic as Ally has elevated digital expenses, low pull-through rates, and higher back office expenses because they have no branches.

But let's say that accounts for 20 basis points on the margin. Still a 78 basis point beta. Banks have to figure out how to sell the advantage of their branch network, which by the way survey after survey says customers want, and figure out a way to lower the 98 basis points direct expense of branches or support center expenses. Preferably both in order to lower that 78 basis points. Because customers won't accept that size of a haircut for the convenience of having a branch. But I believe they will accept some haircut.

By the way, the 98 basis points direct expense is off of a $60 million average branch deposit size. That means it costs ~ $588k in direct operating expense to run a branch. If you go with a wee-little branch, perhaps you shave off $150k of that. If that branch maxes at $20 million, then your branch direct expense of the "branch of the future" is 2.17% of deposits, versus 98 basis points for the "branch of today". Which is better?

                                                        ↭ __________________ ↭

Thought you might enjoy our exchange.

~ Jeff

Monday, June 04, 2018

The Federal Home Loan Bank System: Lender of Next-to-Last Resort

"The FDIC recently has observed instances of liquidity stress at a small number of insured banks." So opened the Summer 2017 FDIC Supervisory Insights issue. And so went your exams.

At a recent banking conference an industry consultant said, matter of factly, that in times of stress your Federal Home Loan Bank (FHLB) borrowing capacity would dry up. Nobody challenged him, including me, by the way. But when I mentioned the comment to the attending FHLB rep, she was not particularly happy.

This has happened before. Regulators and consultants promulgate this untruth. And having heard it so much, bankers are beginning to believe it. 

This week I sat in a bank CEO's office where he complained, ranted really, about his latest exam and the regulators' perception of liquidity risk, driven by the aforementioned Supervisory Insights. He was confident in his bank's liquidity position, but felt regulators could artificially create a liquidity problem.

Their conversation goes something like this: pretend that your non-core and wholesale funding dries up, and you are unable to attract local funds via rate promotion because of our restrictions on rates paid above the national rate cap. What would you do? Prepare for that.

I recently wrote that I thought bankers would have to prepare to offer rates more in line with the market. I noted that there was a greater than 100 basis points difference between what a customer could earn on an FDIC-insured Goldman Sachs Marcus account than what they could earn in your bank's money market account. And that bankers are going to have to build the infrastructure that allows them to be closer to market.

The national average rate for a money market account at the end of last year was 0.09%. The Fed Funds Rate was 1.25%-1.50%. So, according to the FDIC rate cap "guidance", you could not exceed 84 basis points on your money market accounts at December 31, 2017 if you were under regulatory scrutiny. Sixty six basis points less than the Fed Funds rate at that time.

I monitor trends. I know loan/deposit ratios are going up, and liquidity ratios are going down (see charts). But what are the chances that your liquidity position plummets, you lose access to your
correspondent line(s), you can't attract local deposits, your municipalities withdraw, and your FHLB line "dries up", all at once? As the FHLB rep mused to me, it could happen if say, an extreme black swan event much worse than the 2007-08 financial crisis happened.

More to the point, she directed me to her FHLB's president's message on their website where he wrote: "As long as markets remain open, and a member has pledged sufficient qualifying collateral and is willing to purchase the requisite amount of capital stock, the Home Loan Bank will always continue to lend to our members to help you meet your community's needs." 

We need a smarter discussion on liquidity. Before we create an artificial liquidity crunch.

The consultant at the above mentioned conference did have some solid recommendations that I would like to share, even though he is a competitor. Pretty magnanimous of me, right?

1. Create detailed funding concentration risk analytics, that includes:
     -  Stratify funding using a liquidity matrix
     -  A deposit loyalty study (to classify what regulators consider non-core as core)
     -  Determine a local rate cap (to use vs. the federal rate cap)

2. Conduct forward looking stress tests that include realistic contingency funding strategies

3. Train board members

4. Update liquidity policy and contingency funding plan to be consistent with the above process

Are you feeling pressure internally or from regulators on liquidity?

~ Jeff

Saturday, May 26, 2018

Memorial Day: Two to Remember

Life is tough. It is difficult to step back and take perspective on tough. We have an inbox full of e-mails to attend to, meetings to prepare for, and customers to serve. We cherish the three day Memorial Day Weekend to step away from it all, if only temporarily.

But the reason for the day was given to us by those that cannot celebrate it. They signed their name on the line, and we sent them to the line, gun in hand. Right a wrong. Liberate another country. Protect us. And they did.

I would like to highlight two of those individuals so I can be reflective on this solemn day. And perhaps make it easier for you to do the same. At your Memorial Day cookout, I encourage you to feature one of these selfless countrymen to your family and friends. 

Cpl. Kenneth Stuck

In 2016, more than 65 years after he was killed in action in the Korean War and labeled missing in action, Corporal Kenneth Stuck came home in a flag-draped coffin to Hummelstown, Pennsylvania.

Cpl Stuck was with the U.S. Army's 1st Cavalry while involved in the Battle of Unsan, which was a devastating loss for American and UN Troops. Multiple engagements, beginning on October 25, 1950, resulted in heavy losses among the 1st Cavalry. 

Although likely injured, Kenny survived the onslaught but was taken captive by the enemy, and imprisoned in North Korea's notorious Camp 5 in Pyoktong. Testing revealed that Kenny likely died of starvation. He starved to death. In a POW camp. 

He was buried in a mass grave of 322 bodies. Where he remained for the next 65 years. Until the U.S. Army was allowed to excavate the site, and DNA identified his remains.

On this Memorial Day, remember Kenny Stuck, one of the greater than 36,000 American troops that perished in the Korean conflict that was fought to keep South Korea free from communist rule.

Private Mikio Hasemoto

Pvt Hasemoto, a Hawaiian Nisei (Japanese American), was part of the 100th Infantry Battalion (separate). Separate because Nisei were separated from the regular 100th as a result of their heritage.
These soldiers served with honor, even though they faced prejudice, and their families lived under the cloud of Executive Order 9066, signed by President Roosevelt to remand certain people of Japanese, German, and Italian descent to camps to reduce the risk of enemy infiltration. 

Mikio distinguished himself in Italy on November 29, 1943. His unit faced a force of 40 enemy soldiers that attacked the left flank of his platoon. While under heavy fire, he and his squad leader killed 30 of them, and injured or captured the rest.

The following day was a repeat of the prior day. Although, while under heavy fire, Mikio was mortally wounded. 

He received a posthumous Medal of Honor for his actions and heroism. Remember Private Hasemoto.

Feel free to share your Memorial Day memories in the comment section.

Happy Memorial Day everyone!

~ Jeff 

Thursday, May 10, 2018

Hot Rates - Swipe Left

Retail customers are not growing at community financial institutions.

According to my firm's profitability outsourcing service, branches have fewer retail checking accounts than two years ago. Deposit gains were made through growth in average balances per account. 

If you're a commercial bank, you may be fine if this trend is happening at your institution. So I ask you, what percent of your deposits are retail?

You should check. Because even the most commercial of commercial banks tend to have significant retail deposits. And if you are losing retail customers, how do you win them back?

Loan to deposit ratios have been on the rise over the past couple of years (see chart). Regulators are starting to ask a lot more questions about your liquidity during exams. Our ALCO meetings have done an about face from the 2012 "what are we going to do with all of this money?" to "how are we going to fund next month's loan pipeline?" 

And when you ask about funding next month, you rely on short-term, tactical fixes. We're not talking strategy here. 

In comes the rate promotion. It's like 2006 all over again.

And it's too bad. Because so many readers of this blog have done an excellent job "righting" their deposit mix to be less dependent on hot money. And we have had plenty of time to anticipate funding pinches, given the three year trend of loans growing faster than deposits. 

When I asked a community bank director of marketing about rate promotions and the success at turning them into loyal, core deposit customers, she was skeptical. The very premise of how you got that customer should tell you that they value rate above all else. And what is different today than 2006 is how easy it is to move money between financial institutions, and how transparent the rate environment is. A quick search on "bank rate promotions" gave me a trove of sites to compare offers, including this Nerd Wallet article.

It is difficult enough to turn retail customers into profitable customers, as so aptly stated in this BAI Banking Strategies article. Balances and spreads drive revenues. Winning a $100,000 account isn't much of a win if you can only drive five basis points of spread from it. Better to get a $10,000 account at a 300 basis point spread, right (math)? But to fund the pipeline, I would need ten of those accounts. That is why core deposit gathering is so strategic.

If you are struggling to fund loans, it may not be too late to avoid the 2%, 13-month CD promo. Here are some suggestions:

1.  Reward existing core deposit customers - In a recent conversation with a bank marketer, they spoke of the power of word of mouth marketing among one of their customer niches. Imagine the word of mouth marketing if you shared your institution's financial success with core depositors in the form of a special dividend to them. Execution is key. Use a long-term average balance as your guide, encouraging loyalty, and keeping more of their deposits at your bank. Better than paying non-depositors, right?

2.  Flash sale to core depositors - Along the same theme, reward your core deposit customers with a "flash sale" rate promotion to gain more of their deposit dollars. Execute wisely. Do those customers have a "real" core deposit account with you, that has direct deposit going into it, and the electric bill coming out of it? Don't fear mass promoting it, as non-customers may get the feeling "hey, I want to be a customer there". 

3.  Build relationships - I hear this a lot among bankers, but don't see it a lot. As I have said on so many occasions, I have not been called by my current bank. Ever. And I think my experience is not unique. I know nobody there. But if I have a relationship with a banker, and the bank does not conspire to "screw" me (see below), than I would be open to bringing more balances to them.

4.  Don't screw your customers - See my post A Time of Reckoning for Your Bank's Core Deposits?. Having products match market interest rates automatically is an ALCO nightmare. But paying 1/3 the market rates on a customers' savings, and then bragging about it in your investor presentations, can't be a way to strengthen relationships and increase the amount of business you do with them. Could this be a reason why customers spread out their banking relationships?

If you are reading this, and you are having some liquidity pinches, it might be too late to execute on the above and get funding for next month's loan pipeline. And perhaps some wholesale approaches would work to relieve the pressure. 

But, long-term, don't give up the core funding gains you worked so hard to achieve.

What do you suggest to get more short-term retail funding into your bank?

~ Jeff

Note: Many thanks to my ABA Bank Marketing School faculty and friends for fodder for this post, including it's title. Get a couple of drinks in a bank marketer... 

Sunday, April 22, 2018

Guest Post: Financial Markets and Economic Update by Dorothy Jaworski

The Long Winter
I’m writing this in April, during the winter that is taking forever to end.  We braved the cold of December and January, were teased with some warm days in February, and then found ourselves in March, with its four nor’easters, cursing the snow each week and shivering in the cold.  We have had quite enough!  And I’ve said it before, that snow covered roads and potholes destroy productivity.  I’m sure we won’t get much sympathy from places like Chicago, Buffalo, and Erie, but they signed up for winters like this, not us here in Philly.  Only one thing made winter bearable this year- the fact that the Eagles won Super Bowl LII and the celebrations began.  Now, if Mother Nature would cooperate…

The markets have been incredibly volatile in the first quarter of 2018.  This may be the understatement of the year!  The spike in volatility was a wake-up call to every investor and market participant that thought “vols” would stay historically low forever.  Welcome to 2018!  Stocks, bonds, and commodities spike up and down in large percentage changes almost daily, leaving investors wondering what is next.  Nearly everyone expects periodic market corrections, but no one expected to have whiplash!

What prompted volatility to rise so much?  The first sign that markets were about to be rocked was an inflation scare concerning wages in early February.  Wage growth was reported at +2.9% on a year-over-year basis.  Wow!  The Federal Reserve thinks unemployment is too low, which could lead to higher wages and inflation, and they are raising rates.  Aren’t they proven right?  Stocks fell dramatically, rose, fell, rose, fell, rose, well, you get the idea.  Hundreds of points in price changes in the Dow Jones Industrial Average got headlines every day.  Several unusual hedge funds that were based on market volatility levels collapsed, most notably funds from Nomura and Credit Suisse, leading to 90% losses for those “investors.”  Who even knew they were there? 

Alas, inflation was not to be- not yet, anyway.  The year-over-year wage growth fell back in March and April to +2.6% to +2.7%, closer to where it had been in 2017.  This only gives proof that the Fed is still looking at the Phillips Curve (unemployment-inflation tradeoff) to set policy.  During March, we also had the opportunity to see new Fed Chairman, Jerome Powell, in action.  He gave a press conference and was confident and concise.  He is a man with financial markets experience and should understand the effect of Fed policy on the markets.  His recent predecessors were academics.  During March, 2018, Powell and the Fed increased rates by .25% for the sixth time since December, 2015.  Chairman Powell reiterated continued slow and steady rate increases.  At some point, and I believe soon, the Fed will pause.

Tech stocks added to the volatile environment during the past few months.  Facebook continues to be whipsawed and other major names like Google, Amazon, Netflix, and Microsoft fell in sympathy with their social media favorite.  Volatility continued when the Trump Administration announced tariffs on steel and aluminum imports, mostly directed at China, who responded in kind by slapping tariffs on 125 products exported by the US.  The markets hate the idea of tariffs and the trade wars that can be a result and the market price action reflects it. 

The Economy
All indications are that the economy will continue to improve, albeit slowly and at a lesser pace than that of previous recoveries.  Tax cuts are adding stimulus and leading to improved business and consumer optimism, but there are some offsetting factors in the form of Fed tightening, low productivity, and large levels of debt, especially at the federal government as they fund what could be a $1 trillion plus deficit this fiscal year.  Fourth quarter GDP was +2.9% and was +2.3% for all of 2017.  In March, 2018, the Fed revised their GDP forecast for all of 2018 to +2.7%, which is hardly worth writing home about compared to growth in 2017, but is still at a level that I consider to be sustained.  When GDP growth is stuck in the 2s and overall inflation is around the Fed target of 2%, raising interest rates too much can lead to an unhappy ending.  Not only are short term rates rising, but long term ones did, too, in response to the inflation scare and the Fed unwinding some of their balance sheet investments.

Housing, construction, and the auto industry are projected to do well in 2018, as long as rates do not rise too much or too rapidly.  Don’t get me wrong, the US economy is doing well, given the environment and volatility and is expected to outperform Europe and Japan.  Consumer spending and retail sales have shown weakness since the fourth quarter of 2017 but we should see improvement.  Gas prices remain below $3.00 per gallon, adding to a positive consumer spending outlook; let’s hope prices do not rise too much into the summer travel season.  Businesses should do well as they bask in the lower corporate tax rate, which fell from 35% to 21% at the beginning of 2018.

National housing indices continue to rise by +6% on a year-over-year basis and are projected to rise at least +5% during 2018, provided that long term mortgage rates do not spike and cut off demand.  Locally, Bucks County has seen its best year-over-year increases in the last two quarters of 2017, rising +5% and +6%.  One factor that is impacting prices is limited supply compared to prior years.  In many cases, inventories of unsold homes represent three to four months’ worth of sales, compared to a more normal level of six months. 

The Federal Reserve Beige Book is released in advance of the Federal Reserve meetings.  The recent March, 2018 report for our Philadelphia Region was overall quite positive; the words “modest” or “moderately” were used 16 times on two pages.  The implication is that the economy here is okay and still growing.  The Philadelphia Fed’s Business Outlook survey confirms this, with most of the survey results positive.  And most of all, it is a great time to be a Philadelphia sports fan!  The Eagles won the Super Bowl, bringing joy to fans who were experiencing their first Super Bowl win for their city in their lifetimes.  Villanova won the NCAA title again, the Sixers just completed a 16 game winning streak to end the regular season and have made the playoffs, the Phillies have been hitting lots of grand slams and show promise, and the Flyers made the playoffs, however faltering in their first game but it is a long series, as they say… 

Thanks for reading!  DJ 04/12/18

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with Penn Community Bank and its predecessor since November, 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Thursday, April 12, 2018

Consumer Lending: Should Banks Do It?

We’re running out of assets.

When I first read Standards Needed for Safe, Small Installment Loans from Banks, Credit Unions by the Pew Charitable Trusts that encouraged financial institutions to get back into small ticket consumer lending, I thought “what are they nuts!”

Consumer loans for those banks that utilize my firm’s outsourced profitability reporting service lost (0.26%) as a percent of the average consumer loan portfolio in the fourth quarter. And it wasn’t an anomaly. Ever since we formed our company in 2001, this has been the case.

Sure, home equity lines of credit made 0.71% for the fourth quarter. But it was the only sub-product that showed a profit. Fixed home equity loans… nope. Indirect loans, unsecured personal loans? No and no. So why would banks expand small-ticket, unsecured personal lending?

Because we’re running out of assets. Pretty soon we’ll be left with small to mid-sized business loans and commercial real estate that isn't big enough for large banks or conduits. And there are FinTechs, loan brokers, insurance companies, and investment funds chipping away at them.

Mortgage lending is getting away from us. Mortgage bankers and brokers own a significant share of market (although less than prior to the 2007-08 financial crisis). And Quicken Loans is in the top 5 HMDA market share in nearly every market we analyze. Oh, and Quicken is hammering away at home equity lending too.

We lost auto loans to the indirect market. Who comes to our branch for a car loan today? If we don’t consider how we intend to defend our small business and CRE lending, and re-enter some of these other loan markets, we may end up as a balance sheet for hire. Which we already do via buying mortgage back securities and using loan brokers in metro areas.

Are you ready to be Web Bank, part deux?

So I reconsidered my knee-jerk reaction to the Pew Charitable Trusts report. Most community financial institution strategies has some sort of “community” focus. It’s implied whenever someone says “we’re a community bank”. Which nearly everyone does. Even the big banks. So maybe we should put some moxy behind those words. Profitable moxy, though. Not charitable moxy.

Why do consumer loans consistently lose money? Looking at our peer group numbers, the consumer loan costs a little above $1,100 per year in operating expense to originate and maintain. Expensive. This is a fully absorbed number. Meaning that all bank resources that are dedicated to the consumer loan function is fully allocated to the product, whether they are being used or not. And recently, they have not been used.

For example, there is a fair amount of branch expense in that number, because branches are typically responsible for originating those loans, and participate in their maintenance. If we got rid of consumer loans, that expense would migrate elsewhere. And if we are not originating new loans, then resources dedicated to origination, such as branch staff and credit, for example, are dormant but must be paid for by the existing loans in the portfolio.

Four Ways to Bring Back Consumer Loans, Drive Volume, and Increase Profits

1.  Make consumer loans more than an accommodation. Not many financial institutions consider consumer loans as a strategically important product group that will drive growth and profitability into the future. Perhaps it is because of the hurdles to achieving meaningful growth and market share. Or the competitors that wedged themselves into the dominant market position. But if executive management and the Board aren't committed to pursuing consumer lending to be more prominent on your balance sheet, then you will not succeed.

2. Align your credit culture and risk appetite to be successful consumer lenders. It is not lost on me that the last bastion of consumer lending at banks is home equity loans. Real estate secured. Hard collateral. Relatively low charge-offs. It is difficult to change that mindset when doing loans with little to no collateral, such as small ticket consumer or credit cards. Charge-off rates of 4%-5% with no collateral? Yes. Get used to it (other than home equity). Or don't do it.

3. Drive down costs. Regulation has driven up costs and made us gun shy. But we can't continue to put $1,100 of resources per year into a consumer loan. Especially if the loan balance is $2,500. How can we possibly make money on that? We can't. The ABA recently conducted a survey on the State of Digital Lending (see chart) that said that, although consumers were happy with how smooth and quick online lending decisions were made, online lenders only received a 26% approval rating, versus 75% for banks. Driving more volume will drive down costs by putting under-utilized resources to work, and digitizing end-to-end will reduce the amount of resources needed for consumer lending. 

4. Price right. Even if banks cut the cost of originating and maintaining consumer loans in half, to $550, what rate will they have to charge to make a reasonable profit? Let's say a reasonable profit is a 1.5% pre-tax profit as a percent of the portfolio. And the non-home equity portion experienced a 4.5% charge-off rate. And the cost of funds for such lending is 1%. If the average loan size was, say, $3,000, the bank would have to charge an effective yield of 25.3% (($550/3,000)+1%+4.5%+1.5%). Those rates get the scrutiny of do-gooders and "champions of the people" that could cause negative press. And keeps community financial institutions out of this business. Take note Pew Charitable Trusts. However, knowing this math, the bank can work at pressing the levers needed to do this lending profitably, at the right price, that benefits borrowers and the banks. And keeps those borrowers out of the hands of the sharks that prey on their misfortune.

Should we give up on consumer lending?

~ Jeff

Saturday, March 31, 2018

A Time of Reckoning for Your Bank's Core Deposits?

Bye-bye municipal deposits. 

So worries New Jersey Banker's Association CEO John McWeeney since state-owned bank advocate Phil Murphy was elected governor. The state's municipal deposits approximate $20 billion, $13 billion of which are in community banks. A significant source of liquidity.

I got news for you John. We might lose municipal deposits regardless.

And we might lose a lot more than municipal deposits.

According to the Investment Company Institute, money market funds stood at $2.8 trillion this week. And as the chart below shows, these funds are typically paying more than double the community bank money market account rate. 

These rates were at March 29, 2018. I used Wells Fargo because it is a money market fund that I use. By default. When they bought Strong Asset Management. Marcus is Goldman Sachs online bank. FDIC insured. And Mid Penn Bank is a $1.2 billion in assets financial institution based near Harrisburg, Pennsylvania. I had to call Mid Penn for their rate. It is a tiered money market, and the 0.55% is their top tier for accounts greater than $50,000. The next lower tier is 0.35%. 

Mid Penn boasted about their cost of deposits and funds in their 2016 annual meeting investor presentation (pages 21-22). They currently have a 0.58% cost of funds. Can they maintain it? Will their ALCO model betas prove true? Or will customers demand they bridge the rate gap, so vividly portrayed above?

My colleague recently sent me a link for, a soon to be released banking app that boasts a 2%-4% rate for your cash, FDIC insured (they are partnering with a bank). They haven't launched. But they have over 76,000 customers that signed up already. Could some be your customers?

In strategy sessions the past couple of months, I'm hearing more bankers talk about pressure from large depositors on rate. The old arguments are starting to play out. Not bringing large deposits with their loan deal because rates are too low. Municipalities hemming and hawing. Will the traditional retail and small business depositor be next?

There is an inflection point where our Rip Van Winkle bread-and-butter depositor will wake up to think "hey, I'm getting screwed by my bank!" What sized rate gap will trigger it? I don't know. I'm no futurist. The above rates are still below the inflation rate. So keeping money in any of those accounts will result in a real decline in value. Do you know where your customer inflection point is?

Because a business model based on the sleepiness of your depositors is unsustainable. 

Are you feeling the pressure yet?

~ Jeff