Banks Are Letting Deposits Run Off, but for How Long?

In September, the CEO of Fifth Third Bancorp, Tim Spence, said something at the Barclays investor conference that might have seemed astonishing at another time. The Cincinnati, Ohio-based bank was letting $10 billion simply roll off its balance sheet in the first half of the year, an amount the CEO described as “surge” deposits.

In an age when banks are awash in liquidity, many of them are happily waving goodbye to some amount of their deposits, which appear as a liability on the balance sheet, not an asset.
Like Fifth Third, banks overall have been slow to raise interest rates on deposits, feeling no urgency to keep up with the Federal Reserve’s substantial interest rate hikes this year.

Evidence suggests that deposits have begun to leave the banking system. That may not be such a bad thing. But bank management teams should carefully assess their deposit strategies as interest rates rise, ensuring they don’t become complacent after years of near zero interest rates. “Many bankers lack meaningful, what I would call meaningful, game plans,” says Matt Pieniazek, president and CEO of Darling Consulting Group, which advises banks on balance sheet management.

In recent years, that critique hasn’t been an issue — but that could change. As of the week of Oct. 5, deposits in the banking system dipped to $17.77 trillion, down from $18.07 trillion in August, according to the Federal Reserve. Through the first half of the year, mid-sized banks with $10 billion to $60 billion in assets lost 2% to 3% of their deposits, according to Fitch Ratings Associate Director Brian Thies.

This doesn’t worry Fitch Ratings’ Managing Director for the North American banking team, Christopher Wolfe. Banks added about $9.2 trillion in deposits during the last decade, according to FDIC data. Wolfe characterizes these liquidity levels as “historic.”

“So far, we haven’t seen drastic changes in liquidity,” he says.

In other words, there’s still a lot of wiggle room for most banks. Banks can use deposits to fund loan growth, but so far, deposits far exceed loans. Loan-to-deposit ratios have been falling, reaching a historic low in recent years. The 20-year average loan-to-deposit ratio was 81%, according to Fitch Ratings. In the second quarter of 2022, it was 59.26%, according to the Federal Deposit Insurance Corp.

In September, the Federal Reserve’s Board of Governors enacted its third consecutive 75 basis point hike to fight raging inflation — bringing the fed funds target rate range to 3% to 3.25%. Banks showed no signs of matching the aggressive rate hikes. The median deposit betas, a figure that shows how sensitive banks are to rising rates, came in at 2% through June of this year, according to Thies. That’s a good thing: The longer banks can hold off on raising deposit rates while variable rate loans rise, the more profitable they become.

But competitors to traditional brick-and-mortar banks, such as online banks and broker-dealers, have been raising rates to attract deposits, Pieniazek says. Many depositors also have figured out they can get a short-term Treasury bill with a yield of about 4%. “You’re starting to see broker-dealers and money management firms … promot[e] insured CDs with 4% [rates],” he says. “The delta between what banks are paying on deposits and what’s available in the market is the widest in modern banking history.”

The question for management teams is how long will this trend last? The industry has enjoyed a steady increase in noninterest-bearing deposits over the years, which has allowed them to lower their overall funding costs. In the fourth quarter of 2019, just 13.7% of deposits were noninterest bearing; that rose to 25.8% in the second quarter of 2021, according to Fitch. There’s a certain amount of money sitting in bank coffers that hasn’t left to chase higher-yielding investments because few alternatives existed. How much of that money could leave the bank’s coffers, and when?

Pieniazek encourages bank boards and management teams to discuss how much in deposits the bank is willing to lose. And if the bank starts to see more loss than that, what’s Plan B? These aren’t easy questions to answer. “Why would you want to fly blind and see what happens?” Pieniazek asks.

What sort of deposits is the bank willing to lose? What’s the strategy for keeping core deposits, the industry term for “sticky” money that likely won’t leave the bank chasing rates? Pieniazek suggests analyzing past data to see what happened when interest rates rose and making some predictions based on that. How long will the excess liquidity stick around? Will it be a few months? A few years? He also suggests keeping track of important, large deposit relationships and deciding in what circumstances the bank will raise rates to keep those funds. And what should tellers and other bank employees say when customers start demanding higher rates?

For its part, Fifth Third has been working hard in recent years to ensure it has a solid base of core deposits and a disciplined pricing strategy that will keep rising rates from leading to drastically higher funding costs. It’s been a long time since banking has been in this predicament. It’s anyone’s guess what happens next.

Modernizing Your Retail Banking Business

The Covid-19 pandemic accelerated the decline of traffic in most banks’ retail branches, leading many organizations to reexamine the cost of their branch services and the ultimate viability of their branch-based services. Bank boards and executive teams must address the changing operating risks in today’s retail banking environment and assess the potential strategic risks of both action and inaction.

Speculation about the impending death of branch banking is nothing new: industry observers have debated the topic for years. As customers have become more comfortable with online banking, banks experienced a sizeable drop in in-person transactions. Regulatory changes, social trends and the growth of fintech alternatives exacerbated this development, leading many banks to cut back or centralize various branch-based activities. Between June 2010 and year-end 2020, branch offices have decreased by more than 16,000, or 16.7%, according to a Crowe analysis of report from the Federal Deposit Insurance Corp.

The pandemic also introduced important new challenges. Many banks had already shifted the focus in their branches, but greater consumer acceptance of remote and self-service options clouded the role of the branch even further. At the same time, pandemic relief programs produced a wave of liquidity, which hid or delayed the recognition of fundamental challenges many bankers expect to face: finding new ways to continue growing their core deposits at an acceptable cost.

So far, banks’ responses to these challenges have varied. Some banks — both large and small — have accelerated their branch closure plans. Others have notified regulators that they do not plan to reopen branches shuttered during lockdowns. But some banks actually are adding new offices as they reconfigure their retail banking strategies. What is the underlying strategic thinking when it comes to brick and mortar locations?

Developing and Executing an Effective Strategy

There is no one-size-fits-all approach, of course. Closing a majority of branches and becoming a digital-only organization is simply not appropriate for most banks. Nevertheless, many aspects of the physical model require innovation. Directors and executive teams can take several steps to successfully modernize their retail banking strategies.

  • Rethink branch cost and performance metrics. Banks use a variety of tools to attract deposits, sell products and build relationships, which means conventional performance metrics such as accounts or transactions per employee, cost per transaction or teller transaction times often are inadequate measurements.

A branch’s contribution also includes the visibility it provides as a billboard for the bank, access to and support for the specialized products and services it can deliver and the role it plays in establishing a community presence. Management teams need to develop tools to determine and measure the value of such contributions to the bank and its product lines, as well as their associated costs. Branches are long-term investments that require longer-term planning strategies and tactics.

  • Identify customer expectations. One factor contributing to the decline in foot traffic is what customers experience when they visit a branch. Although branch greeters can establish a welcoming atmosphere, such encounters often succeed only in a nice greeting — not necessarily in service.

Because customers can perform most banking business online, banks must ascertain why customers are visiting the branch — and then focus on meeting those needs. Ultimately, customers must leave the branch feeling fulfilled, having accomplished a transaction or task that would have been more difficult outside the branch.

  • Execute a coordinated digital strategy. Having a digital strategy means more than updating the bank’s website, streamlining its mobile banking interface or even partnering with a fintech to offer new digital products. Such catch-up activities might be necessary, but they no longer set a bank apart in today’s digital landscape or improve profitability and growth.

Beyond technology, banks should consider how their digital strategy and brand identity align and how that identity ties back to customers’ expectations. Traditionally, banks’ brand identities were linked to a specific geographic location or niche audiences, but brand identity also can reflect other communities or affinity groups or a particular service or product at which the bank is especially adept. This identity should be projected consistently throughout the customer experience, both digitally and in person.

Although most banks should not abandon their branches altogether, many will need to reevaluate their market approaches, compare opportunities for improved earnings performance and consider reimagining their value proposition for in-person services. Strategies will vary from one organization to the next, but those that succeed will share certain critical attributes — including a willingness to question conventional thinking and redeploy resources without hesitation.

A Rare Opportunity for Change

Jeff Rose believes there’s no rush to reopen his bank’s branches.

Davenport, Iowa-based AmBank Holdings’ eight branch lobbies have been closed since March, limiting physical interactions to drive-thru lanes and by appointment. Even then, the $373 million bank is exercising caution — customers who schedule appointments have to complete a questionnaire, have their temperature taken by an American Bank & Trust employee, wear a mask and socially distance.

“A lot of banks in our area did reopen their lobbies [around] mid-June,” says Rose, the bank’s CEO. “Many of those are now reclosing, some of them because of the spike in the virus.”

The Covid-19 pandemic has forced banks and other businesses to change their operations to remain open. But while the health crisis underlying the economic downturn may be temporary, it offers banks an opportunity to rethink the role of the branch in serving the customer.

For some financial institutions, Covid-19 has merely accelerated this shift.

Bank OZK, based in Little Rock, Arkansas, doesn’t focus singularly on branch strategy, explains Carmen McClennon, chief retail banking officer of the $26 billion bank. Instead, OZK considers how the combination of its digital, ATM, call center and branch channels can build a high-quality client experience. Its lobbies have remained open during the pandemic, but social distancing measures still limit in-person connection.

The reality is, we’re not face-to-face and having that critical contact with our clients on such a regular basis,” she adds. “What worries me is I’ve got to think about what we’re doing in these other channels so we’re at the top of the consideration when our client has their next financial need.”

An analysis of consumer traffic trends by the advisory firm Novantas finds weekly branch visits down by 20% as of July 14, since the pre-pandemic period of Jan. 30 through Mar. 4, 2020. An earlier survey found branch activity unlikely to recover, with only 40% of consumers saying they’d return to their local branch once the pandemic abates.

Separately, Fidelity National Information Services (FIS) reported that new mobile banking registrations increased by 200% in April, and mobile banking activity rose by 85%.

McClennon believes that personalization across channels will be important. “We’re looking at things like smart offers when they’re logging in to pay a bill,” she explains. Also, “how do we personalize an ATM experience so we’re maintaining that relationship with our client? I think we’ve got to challenge ourselves [to do that].”

OZK plans to unveil mobile app enhancements soon, and will thoroughly train branch and call center staff on its features. “We want them to confidently promote it” to clients, says McClennon.

Covid-19 doesn’t appear to be driving OZK to close locations. These decisions will be made by branch and by market, McClennon explains, based on OZK’s ability to serve its clients and meet its strategic objectives.

It recently sold four branches — two each in South Carolina and Alabama. “Candidly, we didn’t have enough density to deliver a strong client experience. That’s really challenging in a low-density market,” says McClennon. But she points out that the bank opened as many branches as it closed — three — in 2019.

Rose says AmBank will soon field surveys to better understand customer preferences and help the bank’s leadership team plot a path forward. While drive-thru transactions have risen 10% over the past couple of months — which Rose partially attributes to the warmer weather — mobile and online usage are back to pre-pandemic levels.

Data will drive AmBank’s reopening plans, but Rose believes that some lobbies will remain closed in less-frequented locations where customers have adapted to drive-up service.

When its lobbies reopen, Rose believes it will be a rare opportunity to change how customers interact with his bank. AmBank has invested in new technology, including DocuSign and improved payment capabilities; they’re also looking at self-service technology, like interactive teller machines. Rose is inspired by Apple’s stores and the hair salon chain Great Clips, which let customers schedule service appointments digitally.

“We’ve got one shot at modifying the client experience for the betterment of our customer,” he says. “We love our customers, we want to see them, but if they can self-serve and not have to drive to the bank, it’s going to be a better experience for them overall. How do we take advantage of the pandemic situation to permanently upgrade the client experience?”

Getting your Digital Growth Strategy Right from the Start


Digital growth is only as good as the metrics used to measure it.

Growth is one of an executives’ most important responsibilities, whether that comes from the branch, through mergers and acquisitions or digital channels. Digital growth can be a scalable and predictable way for a bank to grow, if executives can effectively and accurately measure and execute their efforts. By using Net Present Value as the lens to evaluate digital marketing, a bank’s leadership team can make informed decisions on the future of the organization.

Banks need a well-thought-out digital growth strategy because of the changing role of the branch and big bank competition. The branch used to spearhead an institution’s growth efforts, but that is changing as branch sales decline. At the same time, the three biggest banks in the country rang up 50% of the new deposit account openings last year (even though they have only 24% of branches) as they lure depositors away from community banks, given regulators’ prohibition on acquisition.

Physical Branch Decline chart.pngImage courtesy of Ron Shevlin of Cornerstone Advisors

Even in the face of these changes, many institutions are nervous about adopting an aggressive digital growth plan or falter in their execution.

A typical bank’s digital marketing efforts frequently rely on analytics that have been designed for another business altogether. They may want to place a series of ads on digital channels or social media sites, but how will they know if those work? They may use data points such as clicks or views to gauge the effectiveness of a campaign, even if those metrics don’t speak to the conversion process. They will also track metrics such as the number of new accounts opened after the start of a campaign or relate the number of clicks placed in new accounts.

But this approach assumes a direct link between the campaign and the new customers. In addition, acquisition and data teams will spend valuable time creating reports from disparate data sources to get the proper measurement, instead of analyzing generated reports to come up with better strategies.

Additionally, a bank’s CFO can’t really measure the effectiveness of an acquisition campaign if they aren’t able to see how the relationships with these new customers flourish and provides value to the institution. The conversion is not over with a click — it’s continuous.

This leads to another obstacle to measuring digital growth efforts: communication. Banks use three internal teams to generate growth: finance to fund the efforts; marketing to execute and measure it; and operations to provide the workflow to fulfill it.

Each team measures and expresses success differently, and each has its inherent shortcomings. Finance would like to know the cost and profitability of the new deposits generated, to assess the efficiency of the spend. Marketing might consider clicks or views. Operations will report on the number of accounts opened, but do not know definitively if existing workflows support the market segmentation that the bank seeks.

There is not a single group of metrics shared by the teams. However, the CEO will be most interested in cost of acquisition, the long-term profitability of the accounts and the return on investment of the total efforts.

But it’s now possible for banks to see the full measurement of their digital campaigns, from the disbursement of funds provided by the finance group to the success of these campaigns, in terms of deposits raised and net present value generated. These ads entice prospects into the account origination funnel, managed by operations, who open accounts and deposit initial funds. Those new customers then go through an onboarding process to switch their direct deposits and bill pay accounts. The new customer’s engagement can be measured six to 12 months later for value, and tied back to the original investment that brought them in the first place.

Bank leadership needs to be able to make decisions for the long-term health of their organizations. CEOs tell us they have a “data problem” when it comes to empowering their decisions. For this to work, the core system, the account origination funnel and the marketing channels all need to be tied together. This is true Integrated Value Measurement.

Engaging Branch Staff to Build Merchant Services Momentum


services-7-3-19.pngThe success of a bank’s merchant services program lives or dies by the support from branch staff.

While offering competitive rates and top-notch customer service is important, those things won’t make a difference if bank branch staff isn’t discussing merchant services with customers. Programs suffer without the support and enthusiasm of staff. Here are some best practices on keeping branch staff engaged in merchant services promotion.

Set Goals
A bank should employ a top-down directive from leadership that emphasizes the importance of cross-selling merchant services during customer interactions. It is imperative that the directive includes clear, attainable goals for branches and employees. “Goals are the fuel in the furnace of achievement,” writes development consultant and author Brian Tracy.

Goals help motivate branch staff to sell these services. Leadership also needs to track performance and offer recognition. If staff gets the impression that set goals are not followed up on, it can be incredibly demoralizing.

Empower Your Sales Staff
Employees may hesitate to sell products they have not been fully educated on. But the growing popularity of online banking means it’s important that branch staff capitalizes on every opportunity to cross-sell. It may be the only chance they have to speak face-to-face with a prospect.

Executives need to make sure that bank staff is trained up on all products and services. They can do this through role-playing exercises of different situations that focus on improving communication skills and preparing for curveball questions. This is one of the best ways to prime employees for productive conversations with prospects.

Implement an Incentive Campaign
Managers should encourage staff to stretch for sales goals through an incentive campaign. These campaigns can include referral bonuses, sold-product goals, raffle campaigns and more. Some merchant services providers may sponsor incentive campaigns for their partner banks. Additionally, incentive campaigns aren’t limited to employees; banks should consider incentivizing existing clients through referrals.

Provide Ongoing Training
Payment card technology is constantly changing. Executives need to provide branch staff with tools that will help them stay up-to-date on current trends and industry changes. One way to do this is through a portal that is regularly updated with new resources and information. It is vital that executives cultivate an environment where branch staff feels comfortable asking for additional training or information.

The success of a merchant services program rests on the shoulders of a bank’s branch staff. Executives must make sure they equip their front-line people with all the tools and knowledge they need. The investment of time and resources up front will pay dividends in the future. Every win for branch staff is a win for the bank.

Five Lessons You Can Learn from Tech-Savvy Banks


technology-9-20-18.pngFew directors and executives responding to Bank Director’s 2018 Technology Survey believe their bank to be industry-leading when it comes to how they strategically approach technology—just five percent, compared to 70 percent who identify their bank as a fast follower, and 25 percent who say their bank is slow to implement or struggles to adopt new technology.

While most banks understand the need to enhance their technological capabilities and digital offerings, the leaders of more tech-savvy banks reveal they’re seeking outside help, as well as focusing greater internal resources and more board attention to the technological conundrum faced by the industry; that is, how to make their banks more efficient, and better serve customers so they don’t take their deposit dollars or loan business to another competitor—whether that’s the local credit union, one of the big banks or a digital challenger.

Based on the survey, we uncovered five lessons from these banks that you should consider adopting in your own institution. At the very least, you should be discussing these issues at your next board meeting.

1. Tech-savvy banks see a primarily digital future for their organizations.
While innovation leaders and laggards are equally as likely to cite the improvement of the digital user experience as a top goal over the next two years, respondents from tech-savvy banks are less likely to focus on the branch channel. Just 14 percent plan to upgrade their branch technology in the next two years, and 14 percent plan to add new technology in their branches, compared to roughly half of respondents from fast follower or technologically struggling banks.

Goals-chart.png

Tech-savvy banks are also more likely to indicate that they plan to close branches—29 percent, compared to 8 percent of their peers—and they’re slightly more likely add branches that are smaller—57 percent, compared to 45 percent.

With branch traffic down but customers still expecting great service from their financial provider—in a digital format—many banks will need to rethink branch strategies. “There is a newer branch model that, to me, more resembles an office environment that you would go to get advice, to sit down and meet with people, but it’s really not a place where transactions are going to be taking place,” says Frank Sorrentino, the chief executive of $5.3 billion asset ConnectOne Bancorp, based in Englewood Cliffs, New Jersey. The branch still has a place in the banking ecosystem, but “people want a high level of accessibility, and the highest form of accessibility is going to be through the digital channel.”

2. Industry-leading banks are more likely to seek newer technology startups to work with, rather than established providers.
Seventy-one percent of tech-savvy banks have a board and management team who are open to working with newer technology providers that were founded within the past five years, to help implement new products and services, or create efficiencies within the organization. In contrast, 31 percent of their peers haven’t considered working with a startup, and 10 percent aren’t open to the idea.

“We in the smaller end of the banking space find ourselves constrained in how much investment we can make in technology,” says Scott Blake, the chief information officer at $4.3 billion asset Bangor Savings Bank, in Bangor, Maine. “So, we have to find creative ways to leverage the investments that we are able to make, and one of the ways that we’re able to do that is in looking at some of these earlier-stage companies that are on the right track and trying to find strategic ways that we can connect with them.”

Working with newer providers could require extra due diligence, and banks leading the field when it comes to technological adoption indicate they’re willing to take a little more time to get to know the companies with which they plan to work. This means meeting with the vendor’s executive team (100 percent of respondents from tech-savvy organizations, versus 62 percent of their peers) and visiting the vendor’s headquarters to meet its staff and understand its culture (71 percent, compared to 51 percent of peers).

“I’m a pretty big believer in trying to have these relationships be partnerships whenever possible, and that doesn’t happen if we don’t have a company-to-company relationship, and a person-to-person relationship,” says Blake. By partnership, he means the bank actively works with the startup to produce a better product or service, which benefits Bangor Savings and its customers, as well as the bank’s technology partner and its clients.

3. Tech-savvy banks dedicate a high-level executive to technology and innovation.
Eighty-three percent of respondents from tech-savvy banks say a high-level executive focuses on innovation, compared to 53 percent of their peers. They’re also more likely to report that their bank has developed an innovation lab or team, and are more likely to participate in hackathons and startup accelerators.

Strategy-chart.png

But Blake doesn’t believe that establishing an innovation unit that functions separately from the bank is culturally healthy for his organization, though it can be effective tool to attack select projects or problems. Instead, Bangor Savings has invested in additional training and education for staff who have the interest and the aptitude for innovation. “We want everyone, to some extent, to think about, ‘how can I do this task that I have to do better,’ and that will hopefully yield longer-term benefits for us,” he says.

4. The board discusses technology at every meeting.
Eighty-three percent of respondents from tech-savvy banks say directors discuss technology at every board meeting, compared to 57 percent of fast followers and one-quarter of respondents whose banks are slow or struggle to adopt technology. They’re also more likely to have a board-level technology committee that regularly presents to the board—50 percent, compared to 28 percent of their peers.

Larry Sterrs, the chairman of the board at $4.2 billion asset Camden National Corp. in Camden, Maine, says with technology driving so many changes, a committee was needed to address the issue to ensure significant items were reviewed and discussed. The committee focuses on items related to the bank’s budget around technology, including status updates on key projects, and stays on top of enhancing products, services and delivery channels, as well as back-office improvements and cybersecurity. It’s a lot to discuss, he says.

The board receives minutes and other information from the committee in advance of every board meeting, and technology is a regular line item on the agenda.

Technology committees have yet to be widely adopted by the industry: Bank Director’s 2018 Compensation Survey, published earlier this year, found 20 percent of boards have a technology committee. Bank boards also struggle to add technology expertise, with 44 percent citing the recruitment of tech-savvy directors as a top governance challenge.

5. Tech-savvy banks still recognize the need to enhance board expertise on the issue.
Individual directors of tech-savvy banks are no more likely to be early adopters of technology in their personal lives when compared to their peers, so education on the topic is still needed.

Not every director on the board can—or should—be a technology expert, but boards still need a baseline understanding of the issue. Camden National provides one or two technology-focused educational opportunities a year, in addition to written materials and videos from outside sources. If a specific technology will be addressed on the agenda, educational materials will be provided, for example. This impacts the quality of board discussion. “We always get a good dialogue and conversation going, [and] we always get a lot of really good questions,” says Sterrs.

Bank Director’s 2018 Technology Survey is sponsored by CDW. Click here to view the full results.

Protecting Elderly Customers from Financial Abuse


regulation-2-28-18.pngRegulators across the financial services industry remain keenly focused on protecting the interests of an aging population, especially where there may be signs of diminished cognitive capacity. Banks should consider various operational and compliance measures to guard against elder financial exploitation. While bank staff are on the front lines in protecting elderly customers, bank directors play a pivotal, top-down role in emphasizing a culture of vigilance, and in defining policy and strategy to combat elder financial fraud.

Be Aware of the Problem
Frontline personnel in branches and call centers are the first and last lines of defense to prevent elder financial exploitation. These personnel are the most likely to interact with elderly clients, many of whom are more inclined to conduct their financial transactions in a branch or over the phone, rather than electronically. Conducting periodic training that highlights real-world scenarios will help personnel recognize the signs of elder financial exploitation. An additional training element that may prove beneficial, but that often goes overlooked, is educating personnel on the psychological and emotional aspects of elder fraud. A customer’s diminished cognitive capacity or potential confusion, fear or embarrassment may be central to a perpetrator’s ability to prey on an elderly client.

Empower Employees to Speak Up
Identifying signs of potential financial exploitation of elderly clients is a great start. However, it is critical that personnel escalate suspicious activity through the proper channels within the bank. Personnel may be reluctant to follow through with escalating an event that is not blatantly fraudulent, perhaps out of fear of delaying a transaction or potentially embarrassing or even angering a client. However, speaking up is prudent, even when in doubt.

Develop the Three Ps
Banks should develop policies, processes and procedures that are easy to understand and follow.

Policies: Clearly define your organization’s views, guidelines and stated mission with regard to elder financial fraud.

Processes: Identify the mechanisms in place to effectively carry out the bank’s stated policies. This may include pre-set withdrawal limits (either daily or monthly), disbursement waiting periods or communications with external sources, such as a trusted contact person for the client, local adult protective services (APS) or law enforcement.

Procedures: Describe the precise steps that personnel should follow to execute the identified processes. What must a teller do in the event that a withdrawal request exceeds an established limit? Who does a call center representative contact in the event of suspicious activity, and what information should be provided? What information should personnel provide to a trusted contact person? What reports must be filed with authorities?

Report Suspected Exploitation
Banks are subject to various reporting requirements at the state and federal levels that relate to suspected elder financial fraud. National banks, state banks insured by the Federal Deposit Insurance Corp. and other financial institutions must file a suspicious activity report (SAR) with the Financial Crimes Enforcement Network (FinCEN) upon detection of a known or suspected crime involving a transaction. FinCEN has provided related guidance, and the electronic SAR form includes an “elder financial exploitation” category of suspicious activity. Several states’ laws and regulations also require that banks report suspected elder abuse to APS or law enforcement.

Banks may consider permitting clients to identify a “trusted contact person” that the bank may contact upon reasonable suspicion of potential exploitation. This is consistent with a March 2016 advisory from the Consumer Financial Protection Bureau (CFPB). Privacy concerns exist when disclosing customer information to a third party. However, the Gramm-Leach-Bliley Act (GLBA) permits disclosure of nonpublic personal information with customer consent. Regulation P under GLBA also grants an exception to the notice and opt-out requirements to protect against fraud or unauthorized transactions, or to comply with federal, state or local laws, rules and other applicable legal requirements. Additionally, 2013 Interagency Guidance “clarifies that reporting suspected financial abuse of older adults to appropriate local, state or federal agencies does not, in general, violate the privacy provisions of the GLBA or its implementing regulations.” A safe harbor from liability also exists for a bank that voluntarily discloses a possible violation of law or suspicious activity by filing a SAR. Bank personnel are also protected from liability in this situation.

Regulators at all levels of, and sectors within, the financial services industry continue to prioritize the interests of elderly customers, especially where there may be signs of diminished cognitive capacity. The banking community has gone to great lengths to support these efforts, and bank directors will continue to play an important role in defining internal policies and emphasizing the importance of vigilance in this area.

How Future Consolidation Will Change the Value of a Branch


consolidation-3-3-17.pngTwo long-term trends that have helped shape the banking industry as we know it today are consolidation and the shift from physical distribution built around branches to digital channels, including mobile. Although we tend to think of consolidation and the shift toward digital as separate but parallel evolutionary forces, they are beginning to interact in ways that could impact the bank mergers and acquisitions (M&A) market going forward.

The number of bank branches has been steadily declining since 2009, when they peaked at 89,775, according to Federal Deposit Insurance Corp. data. There was a glut of de novo branches from 2004 to 2007 when, according to veteran bank analyst Tom Brown, founder and CEO of the New York-based hedge fund Second Curve Capital, the popular deposit gathering strategy of many banks was to flood their markets with lots of new brick and mortar in order to sell free checking programs. “Before long, the landscape was littered with redundant, expensive, new bank branches,” writes Brown in his February 17 weekly newsletter. “All this at a time, remember, when consumer behavior was starting to move away from branch banking and toward online banking.”

The seminal event in 2008 was, of course, the collapse of the U.S. housing market and the advent of the sharpest economic downturn since the Great Depression. Since 2009, the number of U.S. bank branches has declined to 83,768 at the end of the third quarter of 2016, or by 6.7 percent. Brown has argued for years that the industry needs to reduce the size of its brick-and-mortar distribution system at a much faster pace. “[As] I’ve said many times, that’s still way too many branches,” Brown writes in his newsletter. “Consumer behavior toward online, non-branch banking isn’t growing at a slow, linear pace, but rather exponentially. A mere 7 percent reduction this decade after the reckless expansion the prior decade isn’t nearly enough.”

And this is where these separate trend lines of consolidation and distribution could begin to merge. For one thing, the quickening pace of the industry’s shift toward digital distribution—most banks have been seeing declines in branch traffic for several years now, which is the primary reason they’ve been closing branches in the first place—could have an impact on a seller’s valuations. If branches are a fixed asset of declining importance (and therefore declining value), how much will an acquirer be willing to pay for them? In an interview, Brown says this impact has already begun to occur. “In the ‘80s and ‘90s, when you did your due diligence on a target, you wanted to see that their branches were owned,” he says. “Today when you evaluate a target, the last thing you want to see is branches with long-term leases.”

It could also be that consolidation will hasten the reduction of branches because they offer a plum cost-takeout target in an acquisition. If a bank’s branch system is one of the most significant components of its cost structure, and if branches are of declining value as the industry continues its shift toward digital distribution, then one of the best ways that a buyer can reduce costs in the combined bank is by closing branches. Cost-takeout deals aren’t new in banking. They were very popular back in the ‘80s when they were the principal merger model. But branches were a much more valuable asset back then, and therefore did not bear the brunt of post-merger cost cutting. It’s a different game today. “It’s not going to be about PNC Financial moving out to the West Coast and buying Western Alliance,” says Brown. “It’s going to be a $20 billion bank buying a $5 billion bank and closing all sorts of branches.”

What Makes Umpqua Branches Unique


Umpqua Bank has one of the top branch designs in the nation, according to a recent ranking by Bank Director. Umpqua Bank’s Brian Read, executive vice president for retail banking, talks to Bank Director Editor Naomi Snyder about the company’s unique vision for its branches, which the company calls “stores.”

This video includes a discussion on:

  • What Makes the Stores Unique
  • What a Universal Banker Does
  • Whether Bank Branches Have a Future in a Digital Age

A New Dawn for De Novo Banks?


denovo-3-11-16.pngOn March 17, 2015, the Federal Deposit Insurance Corporation (FDIC) conditionally approved a de novo charter for the first time in several years. Primary Bank, based in Bedford, New Hampshire, opened its doors for business on July 28, 2015, after raising $29 million in capital.

And Primary Bank is not alone. There are two additional de novo applications awaiting action by the FDIC. Clearly, there are investors who see opportunities for new banks. Even the FDIC is speaking publicly to signal its openness to de novo activity. The FDIC recently noted that it “welcomes proposals for deposit insurance and staff are available to discuss the application process and possible business plans with potential applicants. In addition, former FDIC Chairman Sheila Bair noted earlier this year that the FDIC recognizes the importance of new institutions being formed, but wants to see very well capitalized banks with good business plans and managers that have diversified lending platforms.

The question is whether these recent de novo entrants will open the gates for other investors across the country.

A De Novo Drought
During the five years immediately prior to the start of the financial crisis in 2008 (2003-2007), there were a total of 629 de novo banks formed in the United States, averaging nearly 126 new banks each year.  That number tapered precipitously as the financial crisis began in 2008 and 2009, during which only 73 and 20 de novos opened for business, respectively. Since 2009, forming a new bank has been nearly out of the question, with only three new charters approved between 2010 and 2014 (compared to 15 new credit unions during that same period). This de novo drought, coupled with ongoing M&A activity and failures, has accelerated the decline in the number of bank charters in recent years.

Looking at the fate of many of the de novos formed just before the last recession, one can understand why regulators remain hesitant to allow new investor groups to enter the market.  Of the 629 charters in the five years prior to 2008, 238 no longer exist, either due to failure (75), M&A activity (157) or liquidations (5). Although a large portion of this decline was due to M&A activity rather than failure, no doubt many of those selling institutions were forced into a sale as the result of a deteriorating financial condition during the crisis. It is well documented that de novos formed during the years immediately prior to the financial crisis constituted a disproportionate number of the resulting bank failures and troubled institutions.

Why Start a De Novo?
Besides the traditional factors that have motivated bankers and investors in the past, there are a couple of unique reasons why now might be one of the best times for a group of visionary investors to form their own bank.

Community banks are in the midst of a once-in-a-generation inflection point with respect to their operations. The branch is being de-emphasized as a result of new technology, and branches of the future look more like interactive work spaces than traditional locations. Some new branches emulate coffee shops, Apple stores, or start-up incubators. Morphing a traditional branch location into one of these new conceptual branches requires a major capital investment and shift in culture and thinking. A de novo would have the luxury of creating its own culture, location, products, and services to take advantage of new technologies and branching trends, which would immediately distinguish it from existing bank franchises and position it for growth.

The next handful of de novos will enjoy tremendous publicity, both locally and, perhaps, nationally. That publicity drives more interest and opportunities from investors, talent, and prospective customers. Primary Bank exemplified this phenomenon. Due in part to all the attention it received, it exceeded its capital raising expectations and received national media attention. With the right people and message, the next few de novos could gain a similar strategic advantage.

What Will It Take?
In September of 2015, the FDIC held a joint training session with state bank regulators across the country to ensure such regulators are on the same page when it comes to de novo applications. It is safe to assume the application process will be more rigorous than in the past, including the need for more start-up capital and a superior management team. However, regulatory agencies appear to be preparing themselves to approve worthy applicants.

Conclusion
It is not a question of whether there will be another de novo bank, but when. Despite the challenges of running a community bank, a unique opportunity to start a new bank awaits the right investor group.