Wednesday, October 11, 2017

Bank Lending: Shifting Emphasis from CRE to C&I

Although bank commercial real estate (CRE) lending has been more profitable than commercial and industrial (C&I or Business Loans), both now AND immediately after the financial crisis, regulatory CRE guidelines are causing financial institutions to consider a switch of emphasis to Business Lending.

Here are my thoughts on how to do so.

Your thoughts?

~ Jeff

Sunday, October 01, 2017

Bank Products: Blah Blah Blah

At a recent banking conference, Ray Davis of Umpqua Bank took center stage to tell of his journey from a small, Oregon community bank to a regional powerhouse. He mentioned products only briefly. And product was not part of the bank's success. I thought, Why?

Stuck on the topic, I jotted down the products that I remembered from when I landed my first banking job in 1985 while Davis spoke. I never claimed to have a great attention span. And I used those hotel notepads. Someone has to use them. Here was my list:

Products Circa 1985
Mortgage loan
Car loan
Personal loan
Home equity loan (?)
Business loan and line of credit
Commercial mortgage loan
Construction Loan

Checking account (business and personal)
Savings account (business and personal)
Certificate of deposit (business and personal)

Merchant services (?)

Then I wrote down how that list has changed.

New Products: Circa Today
Money market accounts (although could be classified as hyped savings)
Sweep accounts/cash management

The hedging and options might be categorized as features of business loans, versus products in and of themselves. But let's not quibble over insignificance.

What do you notice about the above lists?

What I notice is there is little difference in the products of today and the products when MacGyver developed improvised explosive devices with his shoes.

Bank products, at their base, have not changed. So, perhaps, instead of developing complexity in our product set, we should look to develop simplicity. Wouldn't we all benefit from more simplicity?

What sparked this post was a recent article in written by Mark Gibson and Kevin Halsey of Capital Performance Group in Washington DC. It was a precursor to a presentation they gave at the ABA Marketing Conference in New Orleans titled "How to Build Remarkable Products". One of their slides from that presentation is below.

This slide, and another I was privileged to see, dubbed as one of the most popular by the authors, speaks nothing of product. In fact, I will confess to you that when I hear bankers talk about products, product management, product design, etc., I have no idea what they are talking about. Bank products have been the same since I've been in banking.

Yes, there are different features to products, such as high interest rates for checking account customers that engage in specific behaviors, or option-based CD's as developed by Neil Stanley of The CorePoint. Still a checking account. And still a CD.

Distribution is different. Back to my notepad, I penned the 1985 distro points as person-person, in-branch, telephone, and ATM. Today we could add online, mobile, and social (for customer service). As a list, not very impressive.

However, in terms of customer utilization, distribution has been massively disrupted.

Sure, bankers can tick off all of the new features added to that standard product list, as mentioned above. But new products? Hardly.

So why not simplify? Like Southwest did when they went with one airplane model. Why not have a personal checking account, that is non-interest bearing up to a certain average balance, which could differ based on customer utilization that could easily by solved by AI, and bears interest above that level. Same with business checking, now that we can pay interest on those accounts. 

Savings accounts could easily have sub-accounts. Like the proverbial envelopes in the night stand drawer that tucks money away for certain things such as Emergency, Vacation, and Holiday. I believe PNC did this with the Virtual Wallet account. To me, Virtual Wallet is nothing more than a practically thought out savings account. 

I recently commented to a bank's strategy team that I thought the days when bankers could rely on sleepy money are coming to an end. The 13-month CD special trick, where the CD reprices at the lower 12-month CD when it matures, is over. A business model that relies on the stupidity of your customers will die. Imagine a customer getting a text from a financial management app that says "your bank is screwing you". It may not say that, but it would say that a CD is maturing and the rate it will role into is below market.

No, we can no longer rely on sleepy money. But perhaps we should focus Marketing on touching the customer in every phase of the buying journey instead of concocting schemes to complicate products, tinker with pricing, and rely on Rip Van Winkle customers. This is what I believe my friends at Capital Performance Group were emphasizing.

If I were a marketer, I would focus on simplicity in product design. And sophistication in the customer acquisition or relationship expansion funnel.

But I'm not a marketer. 

~ Jeff

Sunday, September 17, 2017

An Open Letter Calling For The Establishment Of The Consumer Beverage Protection Bureau (CBPB)

I'm fed up and not going to take it anymore! So I am proposing to my state's Senators to submit legislation to form the Consumer Beverage Protection Bureau (CBPB).

Dear Senators Casey and Toomey:

I am a citizen of your fine state and am writing to strongly encourage you to submit legislation to establish a Consumer Beverage Protection Bureau. The establishment will serve to protect the citizens of our fair land from the aggressive and deceptive practices of the beer industry.

For too long, the beer industry has been praying on our citizens. Luring us into beverage centers with cardboard cutouts of attractive young women or the likes of Kevin Harvick and Dale Earnhardt Jr. Such marketing tactics have had a disparate impact on those that fancy attractive women and NASCAR fans. Note that I made no reference to the identity of those clearly in the beer industry's cross hairs as I now have adopted political correctness in my protest letters. And don't get me started on Busch beer clearly targeting plaid shirt-wearing mountain folk. smh

Once the beverage centers lure you in, past the attractive woman or Earnhardt Jr. cutout, what do they feature? Expensive, high margin craft beer. Not the more reasonably priced Busch. We are bombarded with images and smooth marketing schemes of Troegs, Harpoon, and Flying Dog. The deception gets worse. Anheuser-Busch fools us into believing craft beers such as Elysian, Breckinridge, and Goose Island are brewed in small batches by people with long, scraggly beards. Not so. They are owned by Anheuser-Busch, who is in turn owned by beer conglomerate InBev. From Belgium! 

Gentleman, this is our new Battle of the Bulge!

Here is what I propose. Form the CBPB, that is within the Federal Alcohol Administration, yet is not accountable to the FAA or the President of the United States. In addition to investigating such deceptive practices, the CBPB should have examination authority over large beverage wholesalers to ensure that their practices are "fair", whatever definition they drum up for that term.

Give the CBPB the power to:

- Rescind or reform contracts;
- Demand monetary refunds;
- Disgorgement of violators' assets;
- Return of property;
- Restitution;
- Compensation for unjust enrichment;
- Payment of damages or other monetary relief;
- Public shaming of a beer distributor's violation;
- Limits on the activities or functions of a person;
- Civil monetary penalties

In this way, the CBPB can stop the practice of beer distributors from upselling a Hoppy Ending Pale Ale to the college student that just wants a PBR. The added compliance costs may put the small beverage distributor out of business in favor of their larger brethren, limit beer drinker choices, and raise prices. But let's face it, those small operators are not likely to support lifer politications anyway, and who wants that?

No, creating a government bureaucracy accountable to nobody creates jobs, and is a great gig for smart people like Jeopardy winners that can solve complex problems in the form of a question, such as "What is Fair?"

This madness must end! Support the CBPB!

Sincerely, your faithful servant that believes the government can solve what "ales" us...

~ Jeff Marsico

Sunday, September 10, 2017

Bankers: Five Ways to Use Profitability Data to Move You Forward

Accountability is a dirty word. It evokes images of finger wagging, stern looks, and sheepish floor staring. I'm sure at one point of the word's evolution it wasn't this way. Words and phrases earn their reputation by those that use and receive them. In banking, it is what we made it to be.

On a recent Pennsylvania Institute of CPA podcast, Bob Kafafian from my firm was asked how to use management information. Bob's response resulted in a follow-up question by a Midwest banker friend of mine. 

And since I am scheduled to speak about it at a Financial Managers Society breakfast tomorrow, I'll answer it.

Here are my ideas on how to use Management Information to create a positive accountability culture.

1. Hold branch managers accountable for revenue growth. Revenue growth equals deposit spread (coterminous using funds transfer pricing, or FTP), loan spread less provision (for loans that the branch is responsible for generating), and fee income. Imagine if Wells Fargo branch managers were accountable for this, instead of number of accounts per customer. Fake accounts with little or no balance generate little or no spread. But draws operating expenses from support centers. Imagine if your branch managers were accountable for this instead of deposit dollar growth. Would you be getting that desperate phone call asking for a rate exception to keep the money at the bank?

2.  Hold lenders accountable for their portfolio ROE. You read it right. That's an "E", not an "A".
Lending is a risk business, and aside from the provision expense, and net-charge off rate, those loans require equity to support them. If you allocate equity by product based on your institution's risk experience, then you know how much equity your institution requires. It should be part of your capital plan. Drill that down to the loan level, you can create ROE hurdles when lenders price loans, and measure their pre-tax ROE on their entire portfolio using the coterminous spread, less provision expense, less operating expense per loan type, to calculate the lenders' actual ROE for their portfolio. Imagine!

3. Hold support centers accountable for a decreasing relative cost per balance sheet category. If measuring a deposit operations department, then the operating expense from deposit operations as a
percent of deposit balances should decline long-term in a growing institution. It is the very definition of economies of scale. Notice I say long-term, because you don't want to defer investment in personnel or technology in fear of causing an upward blip in your trend. That's managing by budget that has caused executives to reduce innovation so they can make their budget.

4. Rank. Nothing should be more motivating than ranking branches, lenders, and support managers in achieving their goals as measured by Management Information than seeing where they rank among their peers. Including a ranking report of your twenty branches by revenue growth, and profitability,  in a sales meeting should put smiles on the faces of those at the top, and a look of determination on the faces of those wanting to get there.

5. Reward. Incentivize your personnel for achievement. Let's turn that frown upside down when we talk of accountability. Deposit Operations costing 16 basis points of deposits three years ago, and 12 basis points today, is an achievement that should be recognized by the entire institution. The same for ROE improvement for lenders, or pre-tax profit improvement by branch managers. Let's not foster a culture of fear, recrimination, and public floggings. Let's raise up our achievers!

I frequently speak of financial institutions' over-investment in under performing branches. Those investments of our precious operating expense dollars could be used in more promising areas. Instead, we limit resources to the very things that could lead us to a more sustainable future. Using profitability information to incentivize the right behavior will create a culture of achievement, and help us make more efficient decisions to better serve customers, reward employees, and improve performance. 

How do you use Management Information to run your bank?

~ Jeff

Note: This is my personal blog and I mostly refrain from direct sales pitches. But since I firmly believe 1) every financial institution should do this, and 2) few have the resources to do this, I offer this...

My firm, The Kafafian Group, does profitability reporting on an outsourced basis because we recognize the challenge community financial institutions face in building their own model, and running it quarter after quarter. If interested, call Gregg Wagner, our practice leader, at 973-299-0200 x114 or reach him at 

Tuesday, August 29, 2017

Banks and Bungee Cords

Your relationships, your job, your life comes with baggage. I recently made the analogy that there are bungee cords affixed to your belt. Some hold you back. Some propel you forward.

And it applies to banks too.

In a traditional SWOT analysis, there are things within your control (strengths, weaknesses), and things outside of your control (opportunities, threats). But what are the forces that propel you towards your strengths and opportunities? Or towards your weaknesses and threats?

These forces are mostly within your control. Should you choose to embrace the challenge.

Do you?

Here are the forces I see for bankers that pull them back, toward their weaknesses and threats:

1.  Regulators. OK, I'm playing to the audience. But regulators don't want you to veer off the beaten path. Keep it plain vanilla. Build a bank that thrived in 1963. Ask those bureaucrats this question: "How many businesses have you run?" Because you would swear by their swagger they were Richard Branson or Elon Musk.  

2.  Seargents. If you have hired me, or have read what I have written, you would understand that I believe there are "old-schoolers" in your organization that cause tremendous friction to progress and change. 

3.  "No Mistakes" Culture. The amount of energy that banks commit to being 100% in compliance, find no audit findings, or, gasp, no Matters Requiring Attention on their exam, is monumental, in my opinion. Some operations managers' evaluations and, in some circumstances, variable compensation is dependent on clean audits. What does that get you? Hyper conservatism in compliance. And a whole lot of "we can't do it" from executives. It's killing our industry.

4.  He's/She's Not Ready. This is a common reason I hear why banks don't elevate forward thinkers to the executive suite. They fear those "crazy ideas" they have in management meetings, or the fact that they are willing to accept some risks old school bankers would not. Better to keep them suppressed deep in the bowels of our organization and let others pilfer our future customers than to risk innovation through calculated risk taking.

Here are the forces that I see can propel bankers forward:

1.  Allowing Experimentation. And, 'gasp', failure. I'm not talking "bet the bank" failure. But a failure that may bust your budget is not Armageddon. It is an opportunity to learn, and help you implement the next innovation. Not the reason to look back 10 years and think, 'we tried and failed 10 years ago and, dag nabbit, we are not goin' to try again!'

2.  Fire Seargents. They are not that important to your organization. In fact, they are destroying it. And when you give them their packing papers it sends a message to the masses... "We are a forward looking bank. Backward thinkers take notice."

3.  Continuous Learning. A bank that believes everyone, from the CEO to the newly hired loan operations clerk, should learn, will have a far better chance to being the one bank that survives the non-stop tide of bank consolidation.

4.  Run the bank by strategy, not by budget. Strategy forces banks to look far out into the future. Running by budget forces bankers to look to next year. Where is the puck going, versus where it is. We intuitively know that our industry would not have yielded so much market share to outsiders if we could think outside of our budget. 

So you have bungee cords hooked to your belt. Where are they pulling you?

~ Jeff

Sunday, August 20, 2017

Small Bank-Big Bank: Spending on People, Technology

I was recently slated to speak at an industry conference and I was diligently preparing when the organizer asked if I would be on a panel instead. Fine. But what about my diligent preparation?

I have a blog.

My remarks, should I have made them, were going to revolve around how much large banks spend on strategically significant resources compared to small banks. I took no bias into my search. I ran the data, and here are the results based on bank Call Report data.

The initial news was good. Smaller banks, either under $10 billion in total assets or the smaller group, under $1 billion, dedicate a greater proportion of their total operating expense to salary and benefits. The under $1 billion cohort spends nearly 9% more of their operating expense on employees. This would seem to be crucial, as I frequently hear bank strategy teams identify employees as a strategic advantage smaller banks have over larger ones.

Not so fast. I broke down salary and benefits per employee as well. And in that case, it appears as though the larger financial institutions pay more. The greater than $10 billion banks pay $103,235 per employee versus the under $1 billion banks at $76,411, a 26% difference. That explains why no hands went up at the Pacific Coast Banking School when the director asked how many students went to college to be community bankers.

To further the challenge for small financial institutions, the $1 billion to $10 billion cohort pays 12% more. So if the altruist wants to work for a community bank that is closer to its communities, they can make more with big brother. 

I understand that many, if not most under $1 billion banks are in rural areas, and therefore the salary and benefits disparity may be misleading. But we would be hard pressed to find a college senior that says they'll take a 26% pay haircut and work in Tombstone, Arizona. Although I'm sure there are exceptions.

I'm sure Tombstone is nice. I use as an example recognizable by all. Please refrain from angry comments and e-mails.

My second data search revolved around IT expenditures using the same asset size cohorts. Actually, the Call Report category is Data Processing expense. Although I've been poked for using this 70's-80's phraseology. You know who you are!

A note on the data. It does not include personnel.

The news looks good for smaller banks, spending a relatively larger proportion of their operating expenses on IT. But the larger banks are gaining ground, growing this line item at a compound annual growth rate of 10% over the past 10 years. The banks in the middle cohort spend relatively the least on IT.

What was alarming was how little this expense represented of total operating expenses. Reading industry literature one would think IT would dominate the expense ledger. Not so. 

But it will. 

Were there any surprises in the above tables?

~ Jeff

Saturday, August 12, 2017

Bank Loan Leading Indicators

I recently shared a long ride with a colleague discussing a Capital Plan project we were working on. In Capital Plans, you would typically use baseline projections, usually taken from the strategic plan, and apply adverse events that, based on the bank's balance sheet and strategy, can occur. Even if they are not particularly likely to occur. 

But it's planning. And planning for bad stuff is part of planning. Life isn't all sunshine and rainbows.

As part of our commute discussion, we talked about leading versus lagging indicators of adverse events in order to reduce the impact of such events. Many if not most adverse events are beyond the bank's control. Because risks don't typically come home to roost at the time the Board or Management decide to accept the risk. Lagging indicators are easy, such as the migration from 30-89 days past due, 90+ past due, and non-accrual loans.

But lagging indicators are history. It would've been nice to know that Lee Harvey Oswald was heading to the sixth floor of the Texas School Book Depository. Unless you're Oliver Stone. Then you're wondering who Lyndon Johnson is talking to. I digress. Stopping Oswald or diverting him likely would've ended in a different result.

Can banks identify leading indicators that can reduce risk at the right time?

I was never a lender. And my firm is not in Loan Review or other areas involved with the evaluation of credit. Nor are we an ALCO firm, estimating Interest Rate Risk or Liquidity Risk. But we do Strategic Plans, Capital Plans, Process Reviews and General Advisory that deals with how banks identify and mitigate risk. 

Credit risk remains the greatest risk to a financial institution by far, in my opinion. Not even close. Although examiners and consultants will tick off a laundry list of risks that could put your bank in peril, like reputation risk. The way reputation risk is likely to roost is through liquidity risk. Customers lose confidence in your bank and your liquidity position takes a nosedive. But has many financial institutions suffered as much reputational damage as Wells Fargo recently? And their liquidity ratio is over 40%. They have plenty of liquidity.

No, I'll stand by my credit risk statement. Take the IndyMac domino effect. They had credit problems that came home to roost, Senator Chuck Schumer wrote a letter to the OTS about the bank's problems, and due to the reputation risk customers made a run on the bank. Liquidity is what put them under. Credit is what pushed the first domino.

Identifying leading indicators for credit risk isn't particularly difficult. Finding research that makes the correlation is. But I will list what I think are common-sense leading indicators to credit risk that may very well be effective, and hopefully can be tracked and monitored automatically so we don't have seven risk management analysts on staff hunting and gathering data.

JFB's Credit Risk Leading Indicators
1.  Residential and Commercial Real Estate, and Construction Lending: Trend of days on market (by property type)

2.  Residential and Commercial Real Estate, and Construction Lending: Trend of the difference between initial asking price and actual sale price (by property type)

3.  Commercial and Consumer Lending: Trend of average balance per commercial checking (by NAICS code), and retail checking accounts

4. Residential and Construction Lending: Trend of price index for single family homes under construction

5. Residential, Commercial Real Estate, and Construction Lending: Average checking account balance trends for your customers in the Real Estate Development NAICS

6.  Commercial Real Estate and Multi-family Lending: Trends in occupancy rates.

These are a few that I have seen or make sense to me. Could they be downloaded into a dashboard so bank management could see the trends, and modify risk appetites to curtail new lending in categories that are showing yellow or red? And advise your bank's borrowers on how to navigate difficult times to preserve their business to fight another day?

Do you agree with the above indicators and what others should be considered?

~ Jeff

Monday, July 31, 2017

Are Banks Overvalued?

The S&P 500 Bank Index is up 41% in one year. US Regional Banks' price-earnings multiple was 16.6x and price to tangible book value was over 2x (see chart). So are banks over-valued?

It depends. One way to compare is to look at the p/e ratio compared to the market. The S&P 500 p/e currently stands at 24.6x. So it looks like bank stocks are not overvalued.

But hold on. One ratio that can help us out is the PEG ratio. Remember that in Finance class? It's the p/e ratio divided by the earnings growth rate. According to Peter Lynch's iconic book One Up on Wall Street, a stock is fairly priced if its PEG ratio was 1. Meaning if it's p/e is 16.6x, like the US Regional Banks mentioned above, then the earnings growth rate should be 16.6%. I know I'm comparing a multiple to a growth percent. But, hey, I didn't invent the PEG ratio.

The challenge with banks' PEG ratio, as the chart shows, is that it is way over 1, by a factor of over 5 (5.7). I checked it against other industries in the Financial Services sector. Insurance brokerage has a PEG of 3.4. Specialty Finance: 0.4. The regional banks' PEG ratio, if I do the reverse math, implies that earnings are growing around 3% for the banks in that index. Which is very close to the 3-year annual net income growth for all FDIC insured banks.

So by the PEG ratio, banks would appear to be over-valued. Which may be true. But I want to bring up two mitigating points about banks:

1.  Banks are capital intensive. We must contemplate that implicit in their p/e ratio is some level of their tangible book value.

2.  Banks are not, in general, growth stocks long term. Risk management and the legions of regulators work in tandem to limit growth. 

Relating to 1, I did a data run of all banks and thrifts between $1 billion and $10 billion in total assets that were profitable. I checked their median p/e ratio. I then took their market cap and deducted their tangible common equity to deconstruct their p/e between tangible book and their market cap over tangible book (see chart). 

It is true that other industries can deconstruct p/e in this fashion. But would such an analysis of other industries equate 56% of an industry's p/e to it's tangible book value?

Even if we deducted tangible book from p/e, the industry PEG would still be 2.53 (7.6x / 3% growth), more than double Peter Lynch's prediction of fairly valued.

Which brings me to 2. How long can a company, a sector, and an industry grow faster than its markets? Certainly not forever. And for many, earning their p/e's means stoking growth either through acquisition, or greater risk taking. One is risky, and the other can be deadly. 

For these reasons, bankers may want to consider more moderate growth objectives, maximize earnings, and pay a larger portion of shareholder returns in dividends. 

What is your opinion on bank valuations?

~ Jeff

Note: I make no investment recommendations in my blog. I have a difficult time with my own portfolio. 

Friday, July 21, 2017

Health Insurance: A Bank Problem Too

Bank health insurance premiums have escalated to the point of cutting back benefits. As a nation, our system is not working, whether it be Obamacare or pre-Obamacare. The cost continues to escalate.

An industry publication recently contacted me for some commentary on their "Best Banks to Work For" annual piece. Naturally, I had opinions. When I analyzed their list two years ago, I noted that the financial performance of those banks was similar to banks that didn't make the list. Greater investments in personnel and employee benefits did not result in inferior financial performance.

I also noted that the most cited benefit by employees of banks on the list was gym and health initiatives. And generous benefits was near the top, at fourth. Remember the days that employees would seek banks out for stability, fair pay, and employee benefits? Merger mania has nearly eliminated stability, and the rising cost of healthcare has led to many banks cutting back on generous benefits, removing another competitive advantage in the employee marketplace.

It should be noted that the data in the accompanying charts came from employers. Not premiums in the Affordable Care Act marketplaces so often cited by lawmakers. But the escalation of premiums continues to far exceed inflation and will continue to put pressure on banks' bottom line unless they prune benefits even more.

So I would like to chime in on the healthcare debate, because we can no longer rely on media outlets to provide us with the information to make informed decisions. They cover protests. And protesters are likely to be people that receive free or highly subsidized insurance. I doubt there are net payers to the health care system out there protesting that they should pony up even more for the net takers.

The media covers inflammatory political rhetoric. Like saying one proposal or another will kill people. Not fact-based debate. Too boring. As evidence, look for the oft-quoted CBO stat that one proposal will result in 20 million more uninsured people. The next sentence should say, "the vast majority of which would choose to not participate". Does the media coverage say that? There ya go.

Any health care proposal should be: 1) private, 2) widespread, 3) transparent, 4) favor freedom.

So here are my thoughts:

Health care is a group system. If someone gets sick and consumes more than they contribute, the cost is made up through a pool of people that are paying more than their consumption. That is truth no matter if it's private insurance or government paid. But single payer, or government paid insurance where it's a continual transfer from one group to another is a bad idea. Look at the VA. True competition will come when the payer of services is the consumer of services. Look at auto insurance. We're forced to buy it, and we do so privately. Bad drivers pay more than good drivers. And the Camaro owner pays more than the Camry owner.  

So the JFB health care plan would be private health insurers.

To give small business, the life-blood of our economy, negotiating leverage with private insurers, I propose we allow businesses to affiliate through trade associations, unions, etc. across the country, not state lines. This also applies to an individual market. Allow them to affiliate, through churches, trade associations, etc. 

I propose there be a required minimum basic coverage that keeps families out of bankruptcy should they fall ill and encourages preventative care. Such as a high-deductible Health Savings Account (HSA) plan that has a maximum out of pocket (MOOP) per annum per family of about $10,000, adjusted for inflation. There must be language to limit political influence in this law. One of the failings of Obamacare was putting in political wish-list stuff for social engineering. Such as birth control. To keep teenagers from making babies. Sort of like mandatory parenting. The Basic Plan should be simple and protect families from bankruptcy for extraordinary medical expenses and encourage preventative care. 

I like HSA plans because it puts individual skin in the game. You want to load the shopping cart with Oreos or smoke a pack a day. It will cost you much more than me. Skin in the game. Put behavior and cost of the behavior as close to the individual as possible so there is consequence. I'm an accountability type of guy.

States can have overlays to keep state control. Especially since the Federal mandate will be Basic. But regulation and enforcement of the national law would be national. Regulation of overlays can be state-based. So if California wants to jack up the prices of plans to include medical, recreational, and Cheech and Chong level marijuana use, it's on Californians. We're not going to charge Kentucky for it.

My apologies to the freedom lovers, but we must compel people to buy insurance. In 1985 we required hospitals to treat whoever came to the emergency room, regardless of their ability to pay. That is why you would have to wait so long to get your broken arm fixed. Someone checked in before you with a head cold. Remember those long wait lines in the emergency room? Free health care for those that chose not to buy health insurance. Free riders. No more. This also solves the adverse selection problem in health insurance. People that don't participate in a health insurance plan if they are healthy (i.e. net payers). Many wait until they are likely to be net takers.

Make insurance transparent through a pricing portal run by your insurance company. Insurance companies negotiate different rates for different services by provider, and by insurance plan. It is nearly impossible to make an economic decision. I remember my daughter being at the doctor and was diagnosed with hip dysplasia, a common problem for growing female athletes. The doc said he was 95% sure this was the issue. If we wanted him to be 100% sure, he would need an MRI. I asked how much that would cost. He was taken back by the question, but left the room and asked his admin staff, and they came back with somewhere in the $900 range. That would come out of my HSA. So I decided his 95% was enough. I balanced an economic and medical decision. If a third party paid for it all, I probably would have gotten the MRI. See the problem?

Under the JFB plan, there would be an app that prices out services and service providers so everyone knows the price of their decision, including the prices of local doctors.

Medicaid should be transitory. We are creating a lifelong needy class in our society. It's moving closer towards indentured servitude to the government. Which is dangerous. Check history. However, keeping with the theme of pushing things more local, states can keep ponying up for people that aren't employed, lack the basic plan, and have lots of protest time. Their choice.

Companies can compete for talent based, in part, on their additions to basic coverage. They have the option to make HSA contributions and premium contributions to the basic plan, add benefits, or all of the above. Making it easier for would-be employees to determine which insurance offering is better, and tilt the scales towards those that are more generous, and creating transparent competition for talent. 

That's it. Simple. Transparent.

What do you think?

~ Jeff

Saturday, July 08, 2017

Guest Post: Financial Markets and Economic Update by Dorothy Jaworski

Here we are in July already!  The markets continue to roll and bond markets continue to trade in a 25 basis point range, hitting the higher end when they think the economy is strong (why else would the Fed raise rates?) and hitting the lower end when the weak economic data smacks them in the face.  I usually write with a cautious tone.  Many of my economic views contain the word “weak.”  I do not take this lightly.  I believe that we are in this era of weak growth, now eight years old, for the long haul unless changes are made to regulation and we stop adding debt at break-neck speed.  In this environment, it has been an achievement for our economy to grow at 2%. 

OMG- The Phillips Curve!
Janet Yellen, like Ben Bernanke before her, is using the Phillips curve to shape policy.  Remember that the Phillips curve is based on a set of formulas where unemployment and inflation have an inverse relationship.  With unemployment going down, inflation must go up, right?  Well, it did for a while, and now it is heading down, too.  The Fed must think it will rise again and they are raising rates in anticipation.  They must not see falling oil prices, weak GDP growth, falling gold prices, a narrowing Treasury-TIPS spread, rising debt levels, lower consumer spending, a low labor force participation rate, low productivity, and consumer prices so weak that major retail companies are closing stores at a record pace.  Someday, we will all simply shop online at Amazon and Walmart.  We will not even have to drive anywhere, since everything will be delivered to our front door.

The Fed has raised rates by 25 basis points twice so far in 2017 and has promised one more increase.  They believe that inflation is coming and that is fine.  They believe that they should raise rates because they were too low and that is fine, too.  If the Fed was motivated by the data, or their moves “data dependent” as they always claimed, they would not have raised interest rates.  Weak readings on employment, housing data, and retail sales won’t stop them.  Rising debt levels will not stop them.  Household debt in 1Q17 totaled $12.73 trillion, crossing the previous high mark of $12.68 trillion in 2008.  They are moving ever closer to a flat yield curve and slowing down 2% growth.  For what reason?  Well, maybe the Phillips curve…

The Fed also announced at their June meeting that they would be “normalizing” their balance sheet “soon,” which means reducing it by letting bonds mature and not replacing maturities or cash flows.  Remember all of the quantitative easing, or “QE,” purchase programs?  All of those bonds are on the Fed’s balance sheet to the tune of $2.5 trillion in Treasuries and $1.8 trillion in Agency mortgage backed securities.  Their “normal” balance sheet size would be under $1 trillion.  It is expected that $50 billion will not be reinvested monthly.  They also stated that they will do this “normalization” provided that “the economy evolves broadly.”  Who has any idea what that means?  It is my belief that they will proceed with this “normalization” no matter what, regardless of the cost.  Longer interest rates will tend to rise after losing a buyer for longer term MBS and mortgage rates will rise as a result.  With housing weak, our economy will be weak, and no one should be surprised.  Incidentally, Chair Janet Yellen’s term at the Fed expires in February, 2018.  There is already speculation that she will not be re-nominated.  That may be just in time for the easing to begin.

Presidential Agenda
I am very surprised that the markets are not having fits over the lack of progress on the presidential agenda.  The promises included tax cuts to 15% (although a much less dramatic decrease is expected), repeal and replacement of ObamaCare (stalled in the Senate), regulatory reform (some energy rules relaxed, but not much else), infrastructure spending to repair and replace our crumbling structures, roads, airports, electrical grids, etc.  Patience, they say!!  I believe that the stock markets believe that eventually the agenda will be accomplished.  And some good ideas have been presented, including job training and increased education for those whose skills may not match available job openings.

The Pool of Available Workers
When Alan Greenspan was Fed Chairman, he always looked at “augmented” unemployment numbers which were calculated using the pool of available workers (sum of the unemployed plus persons who want a job but are not counted in the labor force).  The augmented rate for May, 2017 was 7.5%, compared to the headline rate of 4.3%.  The pool stands at 12.4 million persons, including unemployed of 6.9 million, at the end of May, 2017.  This level compares to 12.3 million at the end of December, 2007, before the crisis hit in 2008.  The level reached 16.7 million in December, 2008 and the peak occurred in October, 2009 at 21.4 million.  It took nine years to return to pre-crisis levels.  It seems we have achieved the recovery of employment.  But why does it not seem so?  Maybe it does not feel right because wages have not kept pace, meaning inflation remains low.  We shall see.

Company Expenses Seen Rising
Corporate expenses are on the rise.  For years, regulatory and compliance costs have been growing dramatically.  Physical security costs ramped up over the past 15 years; just ask the airlines and Homeland Security.  Now an even greater threat promises to raise costs even more- the threat of cyber attacks.  Recently, we have seen ransomware virtually cripple company’s networks and Internet access, as criminals exploit vulnerabilities in Microsoft’s Windows operating system.  Some of the ransomware even has names:  WannaCry and Petya Clone.  Thieves lock up computers by encrypting files and access and demand ransoms, usually small amounts such as $300 in bitcoin.  This is becoming an increasingly frightening scenario.  In the age of
“The Internet of Things,” where every appliance and device under the sun is connected to the Internet, someone should be losing sleep.

An Even Larger Hadron Collider

Where else can you get updates on our favorite machine?  There is some excitement about the plans to build a new Hadron Collider that will be bigger and better than the machine today.  The new one, called the Future Circular Collider, will be three times as long and ten times as powerful.  It is in the planning stages and will be ready by 2035.  Considering that the current Collider took 30 years to build, that’s not a long time to wait.  Expect digging to occur under the mountains of Europe in a few years.  Let’s just hope that they put covers on this one so that birds cannot drop baguettes inside!   

Thanks for reading!  DJ 07/04/17

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.

Friday, June 30, 2017

Book Report: The Unbanking of America by Lisa Servon

Let me start with the author's ending: "In order to repair the system, we need a shared understanding that access to good financial services is a right, not a privilege for the fortunate few. We need to demand financial justice."

That is how the book ended. If I read it first, I probably would have returned it to the shelf. But no, I made the commitment to read it when recommended by a colleague, and it was quickly on my Kindle. Something about it being on my Kindle compels me to read it. So I trudged through it to get to her takeaways, which, when I read them, I could have guessed her bio before I read it. Professor of city and regional planning at the University of Pennsylvania.

Didn't see that coming.

Without further anticipation, here are the book's takeaways with a little editorial commentary from me:

Amazon Link
1. Change the relationships between banking and government. She argues for renewed government involvement in the consumer financial-services sector. Stating the relationship has shifted to "favoring bank profitability and efficiency over public needs." She further argues the government doesn't hold banks accountable to serve all Americans equally well. 

There were ideas in the book to accomplish this that I must report to you: a) Subsidize banks to serve customers with financial instability who are not profitable. b) Enable mission-oriented banks and credit unions to extend their reach. She cited Amalgamated Bank (lost $5.8 million over past five years), Carver Federal Savings Bank (lost $4.9 million), and Lower East Side People's Credit Union (only $50 million in assets, yet profitable on a 5+% net interest margin). c) Have the Federal government provide banking services. She cited Post Office banking as an example. Saying it would be "not for profit, simply because it's the right thing to do."

JFB editorial commentary:  Not sure the author was fully aware of the impact government involvement has had on those in the lower economic ladder. For example, the securitizing of the residential lending business moved most of that business away from banks to mortgage bankers and brokers, that far and away were the culprits behind preying on the underbanked. Perhaps a little light reading on the FHA, then later FNMA and Freddie Mac are in order. Dodd-Frank, the CFPB, and regulators "disparate impact" doctrine are pushing community financial institutions out of consumer banking. The Durbin Amendment and Reg E reduced fee income in checking accounts, making low-balance accounts difficult for financial institutions to cover costs. Costs foisted on them by, you guessed it, the Federal government through various laws such as BSA/AML. This resulted in the reduction of "free checking" and the increases in required minimum balances. So forgive me if I am somewhat indignant about sending in the Feds to exact more carnage. Oh, and we already have subsidized financial institutions to serve the underserved. They're called Credit Unions. They pay no Federal income taxes.

2. Enable better decision making. Hold financial service providers accountable by requiring them to make it easier to compare products and make informed choices. Like a fact-box on packaged foods.

JFB editorial commentary: Funny that she talked about the reams of disclosures that confuse the public. These disclosures are required by law and bank regulators. *irony*

3. Create a sandbox for innovators. She admits that regulation stifles innovation. 

JFB editorial commentary: This is already happening, without government intervention. Even in spite of it. In a previous post, I offered that banks were slow to use alternative data for consumer loan decisions because of regulatory interpretation of the Fair Lending Act and the disparate impact doctrine. Alternative credit data to make loan decisions would benefit the underbanked. I fail to see how her clarion call for more government intervention sits with this recommendation. 

Alright, I've given you enough of this book. When reading some of this stuff I first thought that the author was simply a pen name for Elizabeth Warren. 

Are we doing the underbanked and unbanked any favors by pointing to a barely existent boogeyman behind the tree for their challenges? I Googled "free checking" and came up with multiple options. I once had very little in my accounts too. If I overdrew my account, I didn't write a tersely worded letter to my congressman. Yet this is how the author chooses to rationalize individual challenges. 

It's the systems fault.

In response to someone overdrawing their checking account, consider the following reactions:

Person 1.  The big bank screwed you! Something must be done!

Person 2.  Ouch! You shouldn't overdraw your account. Let me show you how I avoid doing it.

I ask you: Which person cares more about the long-term well-being of the underbanked?

~ Jeff

Tuesday, June 20, 2017

Why are banks slow to adapt alternative credit data? I'll tell you why!

Deposit insurance. 

In order to get federally sponsored deposit insurance, that is industry self-funded mind you, the Federal government and state governments set up a regulatory scheme to ensure the safety of customer deposits.

All have benefited. The banking system is stable, which is critical to national and state economies. Depositor money is safe. Also critical. And let's not forget about the thousands of employees that work for regulatory bodies, compliance personnel in banks, and consultants that help them comply.

So what am I talking about, that deposit insurance is why banks don't do like FinTech lending firms and use alternatives to the FICO score in underwriting consumer credits? 

Our legislatures did not limit themselves to safety and soundness when they created banking law. No, they dabbled in money laundering, terrorism, drugs, Internet gambling, and, oh yes, fairness.


What does that mean?

Whatever you want it to mean.

So when yesterday's American Banker asked why alternative credit data was a hard sell for small banks, running afoul of the Fair Lending Act was a key concern (see table).

I would argue that using alternative data to make consumer loan decisions scares bankers because it has not played out with the "fairness" laws and regulations out there, and the disparate impact doctrine used by regulators to determine if a practice is discriminatory. 

According to the FDIC, disparate impact occurs when a policy or practice applied equally to all applicants has a disproportionate adverse impact on applicants in a protected group. Even if it serves as a good predictor of a borrowers propensity to pay back the loan. If a financial institution uses payment of utilities in its credit decisions, and declines credit because prospective borrowers pay utilities late, this could have a disparate impact on a protected class. But bankers won't know that when they establish the criteria. They have to find out later, after a bureaucrat in Washington does a white paper.

This application of law will continue to be a challenge for financial institutions looking to compete with FinTech firms and mine other data sources to predict a customer's credit worthiness.

I got news for our lawmakers and regulators. I only know bankers that want customers to pay back their loans. And because deposit insurance is a national program, so should they.

~ Jeff

Tuesday, June 13, 2017

What Can Marc-Andre Fleury Teach Bank Boards?

It's a team sport.

Sure, he's a hockey goalie. I doubt he knows much about banking. Or how good Boards function. But he can teach us that a high performing Board works as a team for their constituencies. For professional athletes, it's for their team, teammates, and town. For bank Boards it's for their shareholders, customers, communities, and employees.

I recently attended the Maryland Bankers' Association annual convention. I attend many sessions for my own knowledge. And for the benefit of clients, and today, my blog readers.

One interesting session was The Importance of Board Composition and Succession to the Future of the Enterprise delivered by Regina Pisa and Matt Dyckman of Goodwin Law. I know. The topic title was a mouthful. Lawyers.

Interesting because an early point they made was that "strategic planning and board composition should be inextricably linked." Provocative because they recommended diversity, but not in the politically correct way, but rather "diversity of skills, knowledge, and viewpoint."

And I say Amen!

Last September I did an analysis of the Board composition of the best and worst ROE banks to see if there was any secret sauce to the best, and a recipe for disaster for the worst.  I could find none. All of the carping over CPAs or former bankers meant nothing to the bank's financial condition or performance. Possibly to the chagrin of regulators who suggest or outright tell banks to put this person or that person on the Board.

What does matter in my opinion, and seemingly the opinion of the good folks of Goodwin Law, was the interaction between Board members and the Board and Management, determines if a Board is high performing or not. Don't take my interpretation of their words. Look at their slides. Lawyers have lots of slides.

This is consistent with my experience.

If you want a high performing Board, consider it as a whole, deliberative body. If the body needs an arm, add an arm. Don't add another leg. This brings me to the other slide I'll swipe from their presentation (with their permission, mind you).

What you want is debate, but not for debate's sake or to hear those type A personalities talk. But debate to ensure management is following policy for safety and soundness. Debate that the Board reports are accurate, timely, and relevant. And debate to hold management accountable for pursuing the bank's strategy. Team players that build the team up and make the Board better.

What you don't want are yes men/women, gripers, or those that pursue self interest above all else. 

Which brings me to Marc-Andre Fleury. Last season he was the Pittsburgh Penguins starting goalie. He got hurt and his replacement did so well he took Fleury's job. This season, Fleury served as the second string goalie although he is very, very good. He stepped in when the other goalie got hurt and delivered two playoff series wins. One against my Capitals!

He never griped. Never brought the team down. In fact, he built the team up when called upon. And his team spirit played a key role in delivering a second straight Stanley Cup to Pittsburgh. 

That's why the Pens general manager called him "the best team player in sports". Because hockey is not an individual sport. It's the team that wins championships.

And so it goes with bank Boards.

~ Jeff

Wednesday, May 31, 2017

Fintech'ers Will Be Right on Branching. Unless Bankers Act.

Are branches dead? The conventional wisdom from the shouters would be yes. Look at transaction counts. Look at the decline in branches since 2009. Look at the surveys.

I read a recent interview of Members 1st Credit Union CEO Bob Marquette by S&P Global Market Intelligence (link requires subscription). When asked, Marquette said of the death of the branch: "I think it's bullcrap. I think banks are closing branches for one reason: to cut costs and prop up their earnings and boost their stock price." 

Clearly he is not attending FinTech conferences. 

Remember those predictions about the checkless society, and cash being dead? Yet both live on. Although the trend is decidedly in that direction. I sometimes quip that FinTech prognosticators are like futurists. They make educated predictions. And they typically miss the timing. Sometimes by decades or generations.

In Brett King's 2012 book, Branch Today, Gone Tomorrow, he called for a 50% reduction in branches while asking what would banking look like in 2015. Between 2012 and 2015, there was a 4% branch reduction. As Bob Uecker would say, "Just a bit outside." The decline between 2015 and 2016 was 1.5%. I'm not sure if Brett's intention was to make a prediction or a wish.

But I believe Brett's prediction will become truer by the year. I am not smart enough to make a prediction combined with the timing of the prediction.

I also believe that branches can be developed as competitive advantages for community financial institutions. Much like the credit union CEO thinks his branching strategy differentiates his CU. But, as our current strategy execution stands, there is much work to be done.

On March 6th, I tweeted one inconvenient truth for FinTech'ers (see pic). 

The green bar was all respondents. The red: millennials. The gold, Gen Z, which I didn't know was a Gen yet. They are under 21 years old!

And when my friend and fellow bank consultant Mary Beth Sullivan from Capital Performance Group in DC shared the post in the below pic on LinkedIn, it stirred a spirited rebuttal. I only hope my friend Ron Shevlin from Cornerstone Advisers still owes me a drink. Don't click on those links! They're competitors. :) 

I don't want to engage in a tit for tat on studies. Figures don't lie but liars figure, right? Note to Mary Beth and Ron. I'm NOT calling you liars (I would be calling myself one too). No alerting the press required. And would they cover consultants bickering anyway?

I digress. Back to the post. Perform this common sense test when there are a group of you in a room... a group of regular people. Not bankers. Not bank consultants. Not FinTech'ers. Ask for a show of hands how many people bank with a bank that has a branch in the town where they live. My guess, if you asked 10, eight would raise their hand. Common sense.

But perhaps it would've been nine in 2012. I will give the branch doomsayers that. And I think the trend would go down over time. So here is how I think bankers can slow branch decline. I don't think it will stop. Because the large banks look to branches for continuous cost savings, and I don't foresee that changing. Which is good if a competitive advantage is what you are after.

1. Identify what makes the branch important to your customers. I think if bankers asked this from the start, we could've avoided the WaMu Occasio experiment. Although I read a story today about a FinTech firm in Vietnam opening bank branches because the government requires an employee to verify the account holders' identity in-person. But the rest of the branch is essentially a customer hang-out. Like Occasios were supposed to be. If this is important to your customers, then perhaps a hang out is what you should build. But my "ears to the tracks" tells me customers want to open accounts, get loans, and solve problems at branches. Small businesses still want to drop off deposits. So take the pulse of your markets, and make the branches into what your customers want and will want them to be.

2.  Elevate branch employees. If your market wants business acumen from your branch employees, can they do it? Did you know the University of Toledo offers a Certified Business Advisor designation? And banking associations offer a host of certificates for increasing the knowledge base and skill sets of branch employees to meet the emerging needs of customers in a new-branch environment. The all-too-familiar approach of putting branch employees in a position to fail because we elevated them from teller-head teller-assistant branch manager-branch manager without giving them the skills to do what your market demands will doom the community banks' attempt to position branches as a competitive advantage.

3.  Make your branches look the part. Once you identify what customers want and set out to elevate employees, take a look around. I wrote about branch decor in these pages. In it, I wondered if customers would drink your brand Kool Aid if your branch manager had stacks of paper on her desk, or if your carpet had coffee stains from 1984. Cher got a facelift and looks pretty good. So should your branches.

4.  Pull the plug on poor performers. Where will you get the money to pay for those higher skilled branch managers (and perhaps all branch personnel), the training it will take to get them there, and a date with HGTV's Fixer Upper? By pulling the plug on those branches that were $18 million in deposits last year and grew to $18.3 million today. They are dogs. You're investing $500k (more or less) per year per branch to keep them open. And you will lose very few deposits by closing them, particularly if you have a branch nearby and good online banking technology. Stop it! Close them! Invest the savings.

Interesting that I call for branch consolidation when I'm arguing for the relevance of branches, no? I'm a modern-day consultant.

You can do the above or some variation of it. Or....

You can continue with business as usual, or some minor modification of it. And run the risk of proving the branch haters right. Your choice.

~ Jeff

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