Most community banks when filing their December 2014 Call reports in January or early February 2015 will need to determine whether they want to “opt-in to or out of” including Accumulated Other Comprehensive Income (AOCI) in regulatory capital. The new capital regulations issued in mid-2013 allow almost all community banks the option of including or excluding AOCI from the determination of regulatory capital. It is expected that just about every community bank will opt-out. This decision can have significant impact on a bank’s operation.
What is Accumulated Other Comprehensive Income?
AOCI is used to sum up unrealized gains and losses on items that have not yet been settled. In other words there could be a loss or gain in a certain financial instrument if liquidated immediately in the current market place, but if held on to, there is no direct effect on net income. The most important example is a security held in an “Available for Sale” (AFS) basis that has a current market value above or below the stated value on the books of the institution. If the security is sold, currently this gain or loss would affect net income, but if not sold the difference between book and market is simply an unrealized amount. Under current accounting standards, this unrealized level is considered part of AOCI, which can affect book but not regulatory equity. Continue reading
Our friends at American Banker posted some really interesting data today showing an increase in commercial & consumer loan pricing discipline over the last two quarters.
“…Loan pricing, which has been a challenge for banks of all sizes, seemed to reach an inflection point as the end of the third quarter neared. For the first time since December, index readings for both consumer loan pricing (50.1) and commercial loan pricing (50.7) indicated that banks showed more discipline negotiating with customers. Readings above 50 indicate a monthly improvement in lenders’ leverage with borrowers…”
Are you still taking a one-price-fits-all approach to deposits at your bank? If so, you’re leaving a significant amount of money on the table, and at the same time, pushing your cost of funds higher than it should be.
I was invited to speak again this year at the Retail Deposit Optimization and Strategic Management Symposium in NY on November 3-5. GFMI marcus evans is bringing together bankers from the deposit side of the bank, along with industry professionals and key members from the regulatory & oversight community. The event will include presentations, case-study analysis, discussion panels, and roundtable conversations. Continue reading
In recent years, Asset/Liability Management has shifted more and more toward the liability side of the equation, with the bulk of our ALM efforts focused on deposit pricing – primarily certificates of deposit and money market accounts. At many banks, it would be far more accurate to describe it simply as “Liability Management.” And even when we do focus on assets, we look almost exclusively at our securities portfolio… What should we be holding? How far out on the yield curve should we go?
Unfortunately, this shift may be causing us to lose sight of what drives the bulk of our profitability… correctly assessing the asset quality and pricing appropriately for the risk in our commercial loan book. That’s not to say that commercial loan pricing doesn’t come up in ALM meetings, it certainly does. It’s just that the conversation typically centers on the current “irrational” state of the market and how there really isn’t much we can do about it. At that point, yielding to market pressure (matching the competition) feels like just about the only valid approach to pricing the next deal. Continue reading
I’ve been speaking with the folks at Promontory Interfinancial Network quite a bit lately, and they recently featured an article of mine on making banking an information service in their Bank Expert Roundtable discussion series.
“…Today, most people don’t walk into a community bank thinking that they are going to engage a financial expert, especially in the retail deposit line of business. They think they’re just going to conduct a transaction. That may explain why some have expressed the idea that banking should be boring, or even reduced to a rote function within the post office. This type of suggestion clearly demonstrates how little expertise customers have come to expect from banks…” Continue reading
The most successful lenders seem to be those whose relationships are built on a foundation of trust and mutual success. They take the time to really get to know people and learn what drives them – both personally and professionally. When you think about it, being a great lender isn’t all that different from being a great friend, and in fact, many of the relationships I developed as a lender are still going strong some twenty-plus years later.
Unfortunately, building close relationships doesn’t always drive the bank’s bottom line. Why is that? In some cases, lenders are kept out of the loop and don’t really know where the bank is trying to go or how profitable the deal needs to be. And even when they do, they may not have the wherewithal to turn those goals into concrete actions. Continue reading
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…”