I was fortunate to publish an article on Price Differentiation for Enhancing Revenue and Profitability in Community Banking this week in the Journal of Product and Pricing Lifecycle Management.
“…Banking is, in many ways, a very simple business. Bankers seek to make a living by managing, and helping others manage, the ultimate commodity – money. Our industry helps people who 1. Need money they don’t have, or 2. Have money they don’t need. Those needs aren’t going away, but it’s becoming increasingly difficult to generate a profit in the banking business. Is that because our services are becoming commoditized? If that’s really the case, then ultimately the low-cost provider will end up winning. But, I don’t believe it has to be that way…”
Yesterday, Dallas Wells from Asset Management Group posted the most insightful article on the state of community banking I’ve read in a long time. In the article, Dallas points to a rather alarming trend… Over the last four years, smaller community banks (less than $10B in assets) have doubled their long-term holdings – moving from 18% to 36%, while the larger banks are holding fast.
“…Regulators are concerned that community banks are ill equipped to manage interest rate risk of this magnitude, and worse, they fear that small banks are victims of “duration drift.” In other words, the asset extension has not been intentional, but has instead happened over time without the banks necessarily even seeing it happen. Because of this, expect regulatory scrutiny of interest rate risk to not only stay high, but perhaps even increase…”
A rigorous method for evaluating software vendors based on a framework you know and trust
In the earliest days of society, “banking” was pretty straightforward. We loaned money to people we knew and trusted, and we had a pretty good idea if they were going to pay us back. But today, things are a bit more complicated… lenders and borrowers aren’t nearly as connected, but we still need to underwrite each borrower’s ability to repay. So how do we get to that same comfort level BEFORE we hand over the cash? The answer: The 5C’s of Credit… the modern framework for understanding the credit worthiness of each and every borrower.
The story isn’t so different when it comes to buying subscription-based software solutions. Today’s landscape is like the Wild West, and knowing which vendors we can count on is getting more and more difficult. So, how do we choose? How do we ensure that the vendor we select is going to “pay us back?” We already have a framework that we know and trust, so what if we took a credit underwriter’s approach to vendor selection? Enter, The 5 C’s of Vendor Assessment and Selection… Company, Culture, Customers, Churn, and Conditions. Continue reading
Our good friend Katie Kuehner-Hebert posted a great article on the uptick in commercial real estate lending on Independent Banker today.
“…According to the FDIC, community banks reported increases in loan balances across all loan categories in 2013 and the first quarter for 2014. Several commercial lending experts project the average total industry loan growth will be about 5 percent this year. For commercial and multifamily mortgage originations, however, loans across the banking industry this year could increase by 7 percent, to $300 billion, from last year, according to the Mortgage Bankers Association. By 2016, such commercial loan originations are likely to rise another 11 percent, to about $333 billion, the MBA forecasts…”
I received a really interesting email from a young commercial lender in western New York this week, and it touches on something we’ve been hearing a lot over the last 6 months…
How the heck do I compete with someone offering long-term, ridiculously low (fixed) rate deals?
I’ve had this question so many times I thought it was worth sharing. Here’s the actual email (the names have been changed to protect the innocent)… Continue reading
Janet Yellen, Federal Reserve Chair, gave an encouraging speech yesterday at the Independent Community Bankers of America (ICBA) – 2014 Washington Policy Summit. She highlighted the fact that community banks have started to increase the pace of lending, and she went on to reassure community bankers that future regulation would not be overly burdensome.
“…After several years of reduced lending following the recession, we are starting to see slow but steady loan growth at community banks … While this expansion in lending must be prudent, on balance I consider this growth an encouraging sign of an improving economy…”
What do retail banking customers want? The obvious answer… high yields on their deposits and low rates on their loans. As a customer, that’s what I’d ask for. But is it really what I want? When I hire a roofer or a plumber, I never choose the lowest bidder. I carefully consider who I’m about to do business with, and ask myself: Do I trust them to do the job right? What happens if something goes wrong? Will they stand by their work?
Why is banking any different? As bankers, we’re not just clearing houses for cash, we provide a service to our clients and to our communities. We provide our clients a safe place to keep their money, help them plan for retirement, and lend them money to start and build businesses that they’ll pass on to their kids. Continue reading
We have now passed the five-year anniversary of the Federal Reserve moving short-term interest rates to near zero percent, and the question that immediately arose in the wake of that monumental decision continues to weigh heavily on community banks five years later: “When and at what pace will the Fed begin to raise the Fed Funds target?” With the removal of quantitative easing at the top of the Fed’s agenda, market expectations in the form of the yield curve have become quite volatile as participants attempt to predict how aggressively the Fed will “taper” bond purchases. While the timing of policy changes remains uncertain, the ultimate direction of interest rates is clear-as in “nowhere to go but up.” Continue reading
Are you a small creditor?
The answer to this question could limit your margins on first-lien mortgages by as much as 250 basis points.
Earlier this year, the Consumer Financial Protection Bureau (CFPB) announced a change in Regulation Z that creates an elevated threshold on higher priced mortgage loans for smaller creditors. But before we discuss the change, let’s talk about how we got here.
I was fortunate enough to publish an article on The Increasing Value of Deposits in BAI Banking Strategies today.
“…The banking industry has run off $1 trillion, or one-third, of its time deposits since 2008, according to the Federal Deposit Insurance Corp. That was good for banks as long as interest rates were going south. However, since April 2013, we’ve seen a doubling of the five-year Federal Home Loan Bank (FHLB) advance rates, which represent an alternative funding source for financial institutions. Five-year rates at the FHLB of Des Moines, for example, have been over 2% for several months at a time when the average five-year bank certificate of deposit rate as reported by FDIC has been around 0.75%…”