Pivoting to Offense to Endure the Covid-19 Economy

Banks must plan for the economic conditions looming on the other side of Covid-19.

Banks must simultaneously figure out how to weather the public health crisis and serve their clients in almost entirely remote environments while preserving their financial health for months of economic uncertainty. The depth and longevity of this crisis requires banks to strategically reassess the immediate negative impacts, project probabilities of further disruption and re-engineer their delivery models.

We believe that the banks that take bold and decisive action around these key issues will emerge from this period with more-durable relationships, greater agility and resilience, steeper market growth and better profitability compared to their peers. Banks should prioritize a set of five stabilizing actions that will set the stage for resilience in any potential downturn. 

Help Customers Confront the Crisis
Adversity contains implicit opportunity for customer outreach. Banks should contact customers to communicate that their bank is open and available for support. They should devise strategic outreach programs to solidify customer confidence and build long-term relationships.

Banks should then immediately focus on helping customers find ways to ease cash flow constraints and shortfalls in working capital and liquidity reserves. They should consider relief programs and creative, beneficial adjustments to loan structures such as permitting deferred payments, interest-only payments, re-amortizing payments or waiving select fees. Aligning their clients’ new needs with bank solutions and products will establish a foundation for post-crisis revenue growth.

Surgical Expense Reductions
Often, the immediate reaction during economic turmoil is to cut staff without strategic approach. While this can lower costs by the next financial period, this approach fails to strategically position the bank for post-downturn recovery and risks misaligned skill-sets or understaffing.

We recommend that banks understand which levers can be strategically pulled to quickly reduce costs. These levers range from identifying and evaluating paper-based processes, robotic process automation and aligning operations and personnel to the revised sales volume estimates. There are significant cost savings available even in credit risk management — simply by optimizing credit processes and better leveraging data.

Credit Risk Management Tailored to the Crisis
Banks had no visibility into the recession, and must assess not only the immediate impact on borrower financial and implied repayment performances but also the delayed impact on various segments of the economy. Ensure your risk management strategy reflects the new credit reality:

  • Consider proactively managing the portfolio renewal cycle by implementing mass short-term extensions on lines of credit, re-evaluating credit policy exception limits and increasing monitoring through frequently conversations with borrowers.
  • Leverage data to scale the identification of emerging portfolio risk and related triggers.
  • Consider creating a Covid-19 financial health assessment to facilitate financial relief and to identify potential credit downgrades.
  • Assess industry-based impacts on your portfolio to predict deteriorating credits in order to right-size loan loss reserves. 
  • Increase the frequency and detail of credit monitoring procedures for sectors that have been immediately impacted and those that will be impacted in the near term.

Align Resources with Client Need
Changes in spending will impact the creditworthiness of many loan applicants, so banks must take a hard look at realistic expectations for new business goals in 2020 and 2021. Realign banker-relationship manager priorities and shift from new business development with prospective customers to selling deeper into the existing portfolio, where possible. Client engagement will enable banks to manage risk while providing the client with much-needed attention, solutions and assistance. 

It will also be critical to scale up certain operational functions quickly to meet shifting client demand. Realigning  branch staff to handle call center volume and line resources to assist with spiking credit action volumes allow you to redeploy and scale your workforce to the new reality.

Create a Balanced Remote Workplace Strategy
Banks must leverage all available tools not just to maintain, but further, customer relationships and generate new business activity where possible. Empower customers to make deposits digitally by providing remote deposit capture hardware and services and consider waiving a portion of RDC equipment or service fees for a trial period.

Proactively run and distribute bank statement reports through digitally secure methods, rather than requiring customers to create and distribute these reports. Collaborate with bank customers to send check payable files to the bank for check printing and distribution.

We believe a bank’s actions in the next 90 days are vital to the survival, sustainability and long-term positioning for regrowth. Responding to customers with needed outreach sets the stage for new levels of customer loyalty. Shifting the bank’s focus inward toward operations with a keen focus on streamlining processes, proactively changing procedures and aligning the right people to the right tasks will ultimately lead to both a sustained and improved financial ecosystem.

Currency Rates Become Wildly Important

As we’re seeing with the COVID-19 crisis, very little in our economy is purely local.

Currency markets are one example. The markets are reflections of what is happening globally. They serve as the ultimate sentiment indicator, telling us what the future may bring for a country, region or the world at large.

But the sentiment can be costly — changes in currency rates can alter business costs in the blink of an eye. Still, many have no understanding of how currencies work, an opportunity ripe for your bank to offer some education.

While most would assume that the stock market is the biggest asset class on the trade block, it pales in comparison to currency trading volumes. Bloomberg reports that $6.6 trillion USD traded daily in 2019.

Since the 1920s, the U.S. dollar has enjoyed a long period of stability. This has allowed most business owners to go about their lives barely giving currency a fleeting thought, except perhaps when they’re traveling abroad or making a major international purchase.

But here’s another surprising undercurrent to this impression: Much of what we think of as domestic buying is an illusion.

Your business clients may buy a product from a local manufacturer, but where does that manufacturer buy its machinery? Where do they buy supplies to create their goods? Even local businesses tend to have international partners somewhere in their supply chains. Because of this, prices of the local goods are affected by currency rates.

Further, the world of currencies is surprisingly abstract. The U.S. dollar doesn’t have a single price. It has a unique price relative to the 200 or so other currencies in the world.

All of those prices fluctuate moment to moment because currency rates aren’t anchored by specific metrics. Instead, they reflect how buyers feel about the economic outlook of one country compared to another at any given time.

Buyers speculate about a country’s future inflation and interest rates, as well as intangibles like politics and socioeconomics. The pricing of currency is more art than science; more emotion than math. It’s enough to make heads spin.

The speculative nature of currency valuations makes them volatile. They are highly susceptible to world affairs; bad news can easily send them into an overnight tailspin. The global coronavirus crisis is the most recent example of this, sending currencies around the world reeling.

This is why your business clients can no longer be complacent. Outside the pandemic, previously stable countries have become unsettled by climate change. Once developing economies are maturing. It’s no longer the case that any particular currency is the safest bet. More and more, the name of the game is currency diversification.

But the good news is, your bank can help business clients protect themselves from currency fluctuations. The first step is to figure out how they’re at risk.

Advise business owners to figure out what percentage of their costs are in foreign currencies. If rates changed and suddenly those costs were 15% higher, could they absorb it? What about 20%? What is their back-up plan if they can no longer afford these suppliers?

Based on what they discover, your clients should consider diversifying their business costs through currency to help reduce the chances of over-exposure to any particular one.

Finally, advise your clients to increase their awareness of currencies. Suggest that they select a few that most affect their business and track them to see how their movements could affect their company’s well-being over time.

It’s true that uncertainty is always part of life, but preparation creates resilience.

Starting from Scratch: Reassessing Business Loans

Deposits are up, investors have shown signs of optimism and parts of the country are slowly reopening. But amid these positive signals, banks are only just beginning to see the signs of future trouble that Covid-19 may cause for their loans. Prudent banks are working to plan for the long-tail impacts the crisis will have.

One of the banks gazing into its crystal ball is PNC Financial Services Group. The Pittsburgh-based bank made headlines when it sold its 22% stake in BlackRock last month. Chairman and CEO William Demchack, explained in an early June company presentation that the institution was selling while it could, and preparing for the unknown effects that Covid will likely have on the economy.

“[B]ehind the scenes, what hasn’t played out, and will take some period of time to play out, is the deterioration we’ve seen in small business, commercial and real estate,” he said. Once the stimulus payments and deferrals run out,  “the pain shows up.”

That pain may be especially acute for smaller banks which, Demchack pointed out, tend to carry higher concentrations and exposures to small business and commercial real estate  than their larger counterparts. “[I]t’s the smaller end of our economy that’s really getting crushed here.”

With losses looming on the horizon, some banks are leveraging data and analytics solutions to essentially re-underwrite their entire loan portfolios in light of Covid-19.

Just after announcing the BlackRock sale, PNC was again in the news for a brand new partnership it struck with OakNorth, which licenses an AI-based underwriting platform it incubated within the company’s UK-chartered bank. OakNorth recently announced some of its first partnerships with U.S. banks, including Customers Bancorp, a $12 billion asset institution based in Wyomissing, Pennsylvania.

Customers’ Vice Chairman and Chief Operating Officer, Sam Sidhu, is paying close attention to the unknown outcomes of Covid and the effects the economic crisis will have on the bank’s “core” mid-sized commercial loans.

Sidhu explains that in the first 30 to 60 days of the crisis, banks encountered the known, obvious risks that social distancing and stay-at-home orders posed to businesses like restaurants, hotels and hair salons. “But where banks can become a little complacent is the areas that are unknown risks,” says Sidhu. That’s where it’s important to practice discipline in stress-testing the portfolio.

But how can a bank re-evaluate its loans at scale, in a way that doesn’t throw the baby out with the bathwater?

A generalist might point out that restaurants won’t perform well in this environment. But what about a pizza franchise that earned significant portions of its revenue from deliveries pre-Covid? These types of restaurants may be unaffected by the health crisis; in fact, they may be booming because of it.

To complicate the calculation, it’s not just immediate issues like an absence of demand that lenders need to consider. They also need to understand a business’ ability to restock and recover. To do that effectively, context is key. That’s what the technology that PNC and Customers Bank have licensed from OakNorth is designed to provide.

The OakNorth platform categorizes businesses into 1,600 sub-sectors so that they can be segmented into highly specific groupings. Then, the platform can be used to apply any number of OakNorth’s more than 150 stress testing models, including a new Covid Vulnerability Rating framework, to assess business borrowers.

Customers Bank is working with OakNorth on portfolio management and underwriting. Sidhu says a benefit of using the technology is that it’s “allowing a community bank to be able to have investment banking-type access to data” — an important factor in a world where old models have been rendered irrelevant.

“Everything that you thought when you underwrote a loan is no longer true,” says OakNorth Chief Information Officer Sean Hunter. Banks typically use previous years’ financial statements to underwrite a loan, but 2019 financials cannot predict how a business will perform in the 2020 world. Hunter says “you need to underwrite your whole book again, from scratch.”

OakNorth has been offering banks the opportunity to test drive its Covid Vulnerability Rating, running a forward-looking analysis on bank portfolios using 15 to 20 anonymized data points to identify at-risk loans.

No one knows what risks banks will be battling in the coming months. “Hopefully, these unknown risks will never become an issue,” says Sidhu, “but smart banks can’t really rely on hope. [They] need to be focused on trying to proactively address those risks, and get ahead of problems.”

A Bank Board’s Role During a Pandemic

Don’t just sit there — do  something!

This is probably the normal emotional reaction of many bank directors as the COVID-19 pandemic consumes large chunks of the U.S. economy, possibly putting their institutions at risk if the crisis leads to a deep and enduring recession.

The role of the board, even in a crisis of this magnitude, is still to provide oversight rather than manage. The board’s role doesn’t change during a crisis, but certainly the governance process must become more focused and strategic, the pace of deliberations must quicken and communication becomes even more important.

Bank boards are ultimately responsible for the safety and soundness of their institutions. While senior management devotes their full attention to running the bank during a time of unprecedented economic turmoil, the board should be looking ahead to anticipate what might come next.

“I think the challenge for [directors] is to gauge the creeping impact on their bank over the next few months,” says James McAlpin, who heads up the banking practice at Bryan Cave Leighton Paisner in Atlanta. “The board’s role is oversight … but I believe that in certain times — and I think this is one of them — the oversight role takes on a heightened importance and the board needs to focus on it even more.”

Many economists expect the U.S. economy to tip into a recession, so every board needs to be looking at the key indicia of the health of their bank in relation to its loan portfolio. “I’ve spoken to a few CEOs and board members over the past couple of weeks where there are active conversations going on about benchmarks over the next few months,” says McAlpin. “‘If by, say, the end of April, certain events have occurred or certain challenges have emerged, this is what we’ll do.’ In other words, there’s pre-planning along the lines of, ‘If things worsen, what should be our response be?’”

This is not the first banking crisis that David Porteous, the lead director at Huntington Bancshares, a $109 billion regional bank in Columbus, Ohio, has lived through. Porteous served on the Huntington board during the previous banking crisis, recruiting a new executive management team and writing off hundreds of millions of dollars in bad loans. That experience was instructive for what the bank faces now.

Porteous says one of the board’s first steps during the current crisis should be to take an inventory of the available “assets” among its own members. Are there directors whose professional or business experience could be helpful to the board and management team as they work through the crisis together?

Communication is also crucial during a crisis. Porteous says that boards should be communicating more frequently and on a regular schedule so directors and senior executives can organize their own work flow efficiently. Given the social distancing restrictions that are in effect throughout most of the country, these meetings will have to occur over the phone or video conferencing.

“You may have meetings normally on a quarterly or monthly basis, but that simply is not enough,” Porteous says. “You need to have meetings in between those. What we have found at Huntington that served us very well in 2008 and 2009 and is serving us well now, we have set a time — the same day of the week, the same time of the day, every other week — where there’s a board call. So board members can begin to build their plans around that call.”

Porteous says the purpose of these calls is for select members of the management team to provide the board with updates on important developments, and the calls should be “very concise, very succinct” and take “an hour or less.”

Porteous also suggests that either the board’s executive committee or a special committee of the board should be prepared to convene on short notice, either virtually or over the phone, if a quick decision is required on an important matter.

C. Dallas Kayser, the non-executive chairman at City Holding Co., a $5 billion regional bank headquartered in Charleston, West Virginia, says that when the pandemic began to manifest itself in force, the board requested reports from all major divisions within the bank. “The focus was to have everybody drill down and tell us exactly how they’re responding to customers and employees,” he says. Like Porteous at Huntington, Kayser has asked the board’s executive committee to be available to meet on short notice. The full board, which normally meets once a month, is also preparing to meet telephonically more often.

As board chair, Kayser says he feels a special responsibility to support the bank’s chief executive officer, Charles “Skip” Hageboeck. “I’ve been in constant conversations with Skip,” he says. “I know that he’s stressed. Everyone is, in this situation.” Being a CEO during a crisis can be a lonely experience.  “I recognize that, and I’ve made myself available for discussions with Skip 24/7, whenever he needs to bounce anything off of me,” Kayser says.

One of the things that every board will learn during a crisis is the strength of its culture. “The challenges that we all face in the banking industry are unprecedented, and it really becomes critical now for all directors, as well as the senior leadership of the organizations that they oversee, to work together,” says Porteous. One sign of a healthy board culture is transparency, where neither side holds back information from the other. “You should have that all the time, but it’s even more critical during a crisis. Management and the board have got to have a completely open and transparent relationship.”

This Is a Red Flag for Banks


yield-curve-7-5-19.pngThe yield curve has been in the news because its recent gyrations are seen as a harbinger of a coming recession.

The yield curve is the difference between short- and long-term bond yields. In a healthy economy, long-term bond yields are normally higher than short-term yields because investors take more risk with the longer duration.

In late June, however, the spread between the yield on the three-month Treasury bill and the 10-year Treasury note inverted—which is to say the 10-year yield was lower than the three-month yield.

Inverted Yield Curve.png

An inverted yield curve doesn’t cause a recession, but it signals a set of economic factors that are likely to result in one. It is a sign that investors lack confidence in the future of the economy. Or to put it another way, they have greater confidence in the economy’s long-term prospects than in its near-term outlook.

Long-term yields drop because investors want to lock in a higher return. This heightened demand for long-dated bonds allows the U.S. Department of the Treasury to offer lower yields. The historical average length of recessions is about 18 months, so a 10-year Treasury note takes investors well beyond that point.

Short-terms Treasury yields rise because investors are skittish about the economy’s near-term prospects, which requires the Treasury Department to entice them with higher yields.

It turns out that inverted yield curves have a pretty good track record of predicting recessions within the next 12 months. The last six recessions were preceded by inverted yield curves, although economists point out that inversions in 1995 and 1998 were not followed by subsequent downturns. And more than two years passed between an inversion in December 2005 and the onset of the 2008 financial crisis.

Still, an inverted yield curve is an economic red flag for banks. The industry’s performance inevitably suffers in a recession, and even the most conservative institutions will experience higher loan losses when the credit cycle turns.

An inversion is a warning that banks should tighten their credit standards and rein in their competitive impulses. Some of the worst commercial loans are made 12 to 18 months prior to an economic downturn, and they are often the first loans to go bad.

Ironically, if banks tighten up too much, they risk contributing to a recession by cutting off the funding that businesses need to grow. Banks make these decisions individually, of course, but the industry’s herd instinct is alive and well.

It’s possible that the most recent inversion presages a recession in 2020. In its June survey, the National Association of Business Economics forecast the U.S. economy to grow 2.6 percent this year, with only a 15 percent chance of a recession. But they see slower growth in 2020, with the risk of a recession by year-end rising to 60 percent.

This has been an unprecedented time for the U.S. economy and we seem to be sailing through uncharted waters. On July 1, the economy’s current expansion became the longest on record, and gross domestic product grew at a 3.1 percent annualized rate in the first quarter. Unemployment was just 3.6 percent in May—the lowest in 49 years—while inflation, which often rises when the economy reaches full employment because employers are forced to pay higher salaries to attract workers, remained under firm control.

These are historic anomalies, so maybe the old rules have changed.

The Federal Open Market Committee is widely expected to cut the fed funds rate in late July after raising it four times in 2018. That could both help and hurt bankers.

A rate cut helps if it keeps the economic expansion going. It hurts if it makes it more difficult for banks to charge higher rates for their loans. Many banks prospered last year because they were able raise their loan rates faster than their deposit rates, which helped expand their net interest margins. They may not benefit as much from repricing this year if the Fed ends up cutting interest rates.

Is an inverted yield curve a harbinger of a recession in 2020? This economy seems to shrug off all such concerns, but history says yes.

An Easy Way to Learn More About Banking


governance-5-24-18.pngEvery year when Richard Davis was the chief executive officer of U.S. Bancorp, he would travel to see Warren Buffett in Omaha, Nebraska.

“The meetings were always on the same day and always lasted exactly an hour and 15 minutes,” Davis once told me. “That wasn’t the plan. It just happened that way.”

Even though the meetings went over an hour, however, there were never people in the waiting room annoyed that the conversation went long. The tranquility was refreshing to Davis, who was accustomed to days packed with back-to-back meetings.

Buffett guards his time. He spends 80 percent of his day reading and thinking, he has said.

A student at Columbia University once asked Buffett, the chairman and CEO of Berkshire Hathaway, how to become a great investor. “Read 500 pages like this every day,” Buffett said, holding up a stack of papers. “That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

The same is true of banking, I believe.

But where should one start? What are the most important things to read if one wants to learn more about banking?

As someone who has been immersed in banking literature for nearly a decade, I recommend starting with the annual shareholder letters written by a trio of top-performing bankers.

The best known is Jamie Dimon’s annual letter written to the shareholders of JPMorgan Chase & Co.

“Jamie Dimon writes the best annual letter in corporate America,” Buffett said on CNBC in early 2012. “He thinks well. He writes extremely well. And he works a lot on the report—he’s told me that.”

In his letter this year, Dimon talks about JPMorgan’s banking philosophy. He talks about leadership. He talks about the things JPMorgan doesn’t worry about: “While we worry extensively about all of the risks we bear, we essentially do not worry about things like fluctuating markets and short-term economic reports. We simply manage through them.”

And Dimon comments extensively on an array of critical issues facing not just the banking industry, but the broader economy and society: “[I]t is clear that partisan politics is stopping collaborative policy from being implemented, particularly at the federal level. This is not some special economic malaise we are in. This is about our society. We are unwilling to compromise. We are unwilling or unable to create good policy based on deep analytics. And our government is unable to reorganize and keep pace in the new world.”

A second CEO who writes an especially insightful letter is William Demchak at Pittsburgh-based PNC Financial Services Group.

In his latest letter, Demchak delves into PNC’s retail growth strategy, outlining the bank’s expansion into new markets using a combination of physical locations, aggressive marketing and digital delivery channels.

Demchak also discusses the changes underway in banking: “It’s an amazing time in the industry—exciting, if you’ve been preparing for it, and probably terrifying if you haven’t. . . . [I]n some ways, it feels like we’re running through the woods with 5,400 other players and one big bear: retail customers and deposit consolidation. Some will be lost in the chaos; others will fall victim to bad decisions and the realization that they waited too long to start moving toward the future.”

Last but not least is the letter written by Rene Jones at M&T Bank Corp, a regional lender with $120 billion in assets based in Buffalo, New York. Of all the annual messages written by bank CEOs this year, Jones’ does the most to advance the industry’s narrative.

It’s crafted around two arguments, the first of which concerns the growing share of retail deposits held by the nation’s biggest banks. This trend isn’t simply a function of scale and technology, Jones argues. It’s also driven by demographic patterns.

“Historically, deposit growth itself is highly correlated to increased employment, income and population,” Jones writes. “The banks with the most scale have benefited from their outsized presence in the largest U.S. markets, which unlike past recoveries, have experienced a disproportionate share of the nation’s economic growth.”

Jones’ second argument concerns the need to refine the existing regulatory framework: “Regulation, like monetary policy, is a tool whose purpose is simultaneously to promote the economy while protecting those who operate within it. It is a difficult balance—especially so after significant events such as the financial crisis. The practice of implementing and adjusting regulation is both necessary and healthy, because its impacts are felt by communities large and small.”

Jones’ message will resonate with bankers, as M&T has long been an unofficial spokesman for the industry on regulatory matters, giving voice to their frustration with the sharp swing in the regulatory pendulum over the past decade.

In short, all these letters are worth the modest amount of time they take to read. They are three of the leading voices in banking today. There’s a reason someone like Warren Buffett reads what they write.

The Big Picture of Banking in Three Simple Charts


banking-3-22-19.pngOne thing that separates great bankers from their peers is a deep appreciation for the highly cyclical nature of the banking industry.

Every industry is cyclical, of course, thanks to the cyclical nature of the economy. Good times are followed by bad times, which are followed by good times. It’s always been that way, and there’s no reason to think it will change anytime soon.

Yet, banking is different.

The typical bank borrows $10 for every $1 in equity. On one hand, this leverage accelerates the economic growth of the communities a bank serves. But on the other, it makes banks uniquely sensitive to fluctuations in employment and asset prices.

Even a modest correction in the business cycle or a major asset class can send dozens of banks into receivership.

“It is in the nature of an industry whose structure is competitive and whose conduct is driven by supply to have cycles that only end badly,” wrote Barbara Stewart in “How Will This Underwriting Cycle End?,” a widely cited paper published in 1980 on the history of underwriting cycles.

Stewart was referring to the insurance industry, but her point is equally true in banking.

This is why bankers with a big-picture perspective have an advantage over bankers without a similarly deep and broad appreciation for the history of banking, combined with knowledge about the strengths and infirmities innate in a bank’s business model.

How does one go about gaining a big-picture perspective?

You can do it the hard way, by amassing personal experience. If you’ve seen enough cycles, then you know, as Jamie Dimon, the CEO of JPMorgan Chase & Co., has said: “You don’t run a business hoping you don’t have a recession.”

Or you can do it the easy way, by accruing experience by proxy—that is, by learning how things unfolded in the past. If you know that nine out of the last nine recessions were all precipitated by rising interest rates, for instance, then you’re likely to be more cautious with your loan portfolio in a rising rate environment.

You can see this in the chart below, sourced from the Federal Reserve Bank of St. Louis’ popular FRED database. The graph traces the effective federal funds rate since 1954, with the vertical shaded portions representing recessions.

Fed-Funds-Rate.png

A second chart offering additional perspective on the cyclical nature of banking traces bank failures since the Civil War, when the modern American banking industry first took shape.

This might seem macabre—who wants to obsess over bank failures?—but this is an inseparable aspect of banking that is ignored at one’s peril. Good bankers respect and appreciate this, which is one reason their institutions avoid failure.

Failures.png

Not surprisingly, the incidence of bank failures closely tracks the business cycle. The big spike in the 1930s corresponds to the Great Depression. The spike in the 1980s and 1990s marks the savings and loan crisis. And the smaller recent surge corresponds to the financial crisis.

All told, a total of 17,365 banks have failed since 1865. A useful analog through which to think about banking, in other words, is that it’s a war of attrition, much like the conflict that spawned the modern American banking industry.

A third chart offering insight into how the banking industry has evolved in recent decades illustrates historical acquisition activity.

Acquisitions.png

Approximately 4 percent of banks consolidate on an annual basis, equating to about 200 a year nowadays. But this is an average. The actual number has fluctuated widely over time. Twitter_Logo_Blue.png

From 1940 through the mid-1970s, when interstate and branch banking were prohibited in most states, there were closer to 100 bank acquisitions a year. But then, as these regulatory barriers came down in the 1980s and 1990s, deal activity surged.

The point being, while banking is a rapidly consolidating industry, the most recent pace of consolidation has decelerated. This is relevant to anyone who may be thinking of buying or selling a bank. It’s also relevant to banks that aren’t in the market to do a deal, as customer attrition in the wake of a competitors’ sale has often been a source of organic growth.

In short, it’s easy to dismiss history as a topic of interest only to professors and armchair historians. But the experience one gains by proxy from looking to the past can help bankers better position their institutions for the present and the future.

Take it from investor Charlie Munger: “There’s no better teacher than history in determining the future.”

Ensuring a Safe & Sound Banking System



One of the principal jobs of the Comptroller of the Currency—if not the principal job—is to ensure the safety and soundness of the U.S. banking system. After nine years of economic growth, are regulators looking ahead for a potential downturn? In this conversation at Bank Director’s Bank Audit and Risk Committees Conference, former Comptroller of the Currency Tom Curry shares his thoughts and advice on a variety of issues with Bank Director Editor in Chief Jack Milligan.

Highlights from this video:

  • Risks in the Banking System Today
  • Preparing for a Potential Economic Downturn
  • What’s Changing with Regulatory Relief
  • Developing a Good Regulatory Relationship
  • The Impact of Regtech and Fintech

Optimistic About Loans But Worried About Deposits


risk-3-5-18.pngThere are a lot of reasons why Greg Steffens is confident about the economy. As the president and CEO of $1.8 billion asset Southern Missouri Bancorp, which is headquartered in the southern Missouri town of Poplar Bluff, he sees that consumers are more confident, wages are growing, most corporations and individuals just got a tax break, and the White House announced a major infrastructure funding plan.

Steffens projects that a strong local economy will help Southern Missouri to grow loans by 8 to 10 percent this year. But he sees the potential for net interest margin compression as well, particularly because competition for loans and deposits has gotten so tight.

His thoughts about the future, a mixture of optimism and concern, are typical of bankers these days as shown by Promontory Interfinancial Network’s latest Bank Executive Business Outlook Survey. Although bankers report higher funding costs and increased competition for deposits, their optimism about the future has improved, and economic conditions for their banks are better now than they were a year ago.

Top-Lines-Q4-2017-long-version.pngAlong with a generally improving national economy and improvements in the banking sector, the passage of the Tax Cuts and Jobs Act shortly before the survey was taken likely influenced the increase in optimism among many bankers. The emailed survey, conducted from Jan. 16 through Jan. 30, included responses from bank CEOs, presidents and chief financial officers from more than 370 banks.

Some highlights include:

  • Sixty-three percent say economic conditions have improved compared to a year ago, while 5 percent say things have gotten worse, compared to 49 percent last quarter who said conditions improved and 9 percent who said things had gotten worse.
  • Slightly more than 58 percent report a recent increase in loan demand, up 7.5 percentage points from last quarter.
  • Bankers think the future will be even better with 64 percent projecting an increase in loan demand in 2018, compared to just 51.2 percent who projected annual loan growth in the fourth quarter 2017 survey.
  • The Bank Confidence IndexSM, which measures forward-looking projections about access to capital, loan demand, funding costs and deposit competition, improved by 2.4 percentage points from last quarter to 50.5, the highest rating for the index since the second quarter of 2016.
  • Regionally, the highest percentage of bankers expecting loan growth is from the South at 71.9 percent. But the biggest improvement in expectations for loan growth is in the Northeast, which climbed 27.1 percentage points from last quarter to 64.1 percent expecting loan growth in 2018.

Charlie Funk, the president and CEO of MidwestOne Financial Group, a $3.2 billion asset banking company in Iowa City, Iowa, says he expects the tax cuts will lead to higher commercial loan growth, although he hasn’t seen evidence of that yet.

He’s worried now about another factor on his balance sheet: deposit competition. “Deposits are going to be where the major battles are fought,’’ he says. The bank already is paying some large corporate depositors more than 1 percent APR on money market accounts, compared to 30 basis points just after the financial crisis. He expects the bank’s net interest margin to narrow somewhat this year as deposit costs increase faster than loan yields.

Other bankers report higher levels of deposit competition as well. In the Promontory Interfinancial Network survey, 80 percent of respondents expect competition for deposits to increase during the year, compared to 77.4 percent who thought so last quarter. The overwhelming majority have seen higher funding costs this year at 78.1 percent, compared to 68.4 percent last quarter who experienced higher funding costs. Nearly 89 percent of respondents expect funding costs to increase this year.

Representatives from larger community banks, with $1 billion to $10 billion in assets, were more likely to say funding costs will increase. The Northeast had the highest percentage of respondents saying funding costs will moderately or significantly increase, at 92.3 percent.

One of those Northeastern banks is Souderton, Pennsylvania-based Univest Corp. of Pennsylvania. With $4.6 billion in assets and a 100 percent loan-to-deposit ratio, the highly competitive deposit market is putting pressure on the bank to match loan growth with deposits. Univest Senior Executive Vice President and Chief Financial Officer Roger Deacon says funding costs have inched up, partly driven by competition for deposits. “The competition is almost as high on the deposit side as on the loan side,’’ he says.

The good news is that the bank is asset sensitive, meaning that when rates rise, its loans are expected to reprice faster than its deposits. “I’m cautiously optimistic about the impact of rising rates on our business,’’ Deacon says.

2013 Bank Board & Executive Survey: Rising Optimism on Banking


2013-Bank-Board--Executive-Survey.pngIn June of this year, Bank Director asked CEOs, senior executives, chairmen and audit committee members of the nation’s banks for their insights on the current state of the banking industry–and their thoughts on the future. The 2013 Bank Board & Executive Survey was sponsored by Grant Thornton LLP.

Bank leaders hold a rosier view of economic affairs for the coming year–although they remain wary of the impact of economic events on their institutions. Lending will continue to drive plans for growth, while banks strive for efficiencies that improve the bottom line in a continued low interest rate environment. Technology is also top of mind for respondents, who reveal what retail innovations they value and what cyber security risks keep them up at night. 

With fewer than half of the rules within the Dodd-Frank Act finalized, it’s not surprising that survey respondents remain deeply concerned about the implementation of regulations coming out of Washington. Nichole Jordan, national banking and securities sector leader for Grant Thornton, says that bankers see that things are getting better, but remain wary of competitive and regulatory challenges. “There’s still a great deal of uncertainty as a result of the evolving regulatory environment,” she says. “Banks are increasingly concerned that they will be unable to meet onerous compliance requirements and still be profitable.”

Key Findings

  • Forty-three percent of executives and directors surveyed expect the U.S. economy to improve in the next six months, a rise of 30 percentage points since last year’s survey. 
  • Margin compression was the top concern for 89 percent of respondents, followed by the regulatory compliance burden for 86 percent of respondents and loan competition for 78 percent. 
  • When asked about specific regulatory issues, respondents indicate greater concern about implementation of the Dodd-Frank Act and the regulatory and supervisory activities of the Consumer Financial Protection Bureau, and lesser concern about Basel III implementation and the Bank Secrecy Act. Most respondents describe the CFPB’s impact as more negative than positive, though they are split on whether the CFPB will impact their bank’s business strategy.
  • Executives and directors express less concern on the issue of capital than other issues, with 71 percent indicating that their bank’s capital levels are satisfactory. Of those that do plan to raise capital, half plan to do so through a private offering to existing shareholders, while 47 percent plan a secondary offering on the public market.
  • Cyber security risk is a growing concern for bankers, particularly for institutions with more than $10 billion in assets. When asked about specific aspects of cyber security risk, respondents worry most about online banking fraud, at 76 percent, and data theft, at 73 percent. 
  • Banks are willing to trim staff as a way to become more efficient. Forty percent of respondents indicate that their bank plans to reduce staff, and 34 percent plan to close branches. 
  • Banks remain wary of social media, with less than half of respondents saying their bank engages with customers via Facebook or Twitter.

About the Survey:

Over 130 senior executives and directors of U.S. banks with more than $500 million in assets responded to the 2013 Bank Board & Executive Survey. Sixty-three percent of respondents serve as board members; CEOs account for 18 percent of responses. Thirty-eight percent of respondents work for or serve on the board of a bank with between $1 billion and $5 billion in assets, and most , at 71 percent, represent a publicly owned institution. 

For full survey results, click here.