A PUBLICATION OF THE FINANCIAL MANAGERS SOCIETY
JULY/AUGUST 2017 | FMSinc.org
WHAT’S HAPPENING – OR SHOULD BE HAPPENING – ON THE BALANCE SHEETS OF COMMUNITY INSTITUTIONS TODAY?
In This Issue
Exclusive: FDIC Chairman Martin Gruenberg on the state of community banking Community Mindset: New FMS research study reveals opportunities, challenges facing industry
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The FDIC Chairman reflects on
the current environment and long-term outlook for community banks
16 SOCIAL CLIMBERS
What role should social media play
in your institution’s strategy?
20 BALANCING ACT
Six experts weigh in on the state of community institution balance sheets in a changing economic environment
8 MEMBER SPOTLIGHT
Get to know incoming FMS Chairman
10 FMS RESEARCH
Unveiling the results of our comprehensive
new industry study
27 CREDIT UNION CONNECTION Exploring contingency funding options
for credit unions
29 CHAPTER AND VERSE Highlighting the vibrant local
communities of FMS chapters
29 ON THE HORIZON Looking ahead to coming FMS
30 INDEX TO ADVERTISERS
FMS forward | JULY/AUGUST 2017 | 5
Contents JULY/AUGUST 2017 | VOL. 1, ISSUE 1
Don’t Fall Behind. Get more insight
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FROM THE CHAIRMAN AND CEO
BY JOHN WESTWOOD BY DANIELLE HOLLAND
WELCOME TO THE INAUGURAL ISSUE OF FMS forward, OUR NEW MEMBER MAGAZINE.
Throughout the nearly 70-year history
of FMS, the marketplace has necessitated that your Society remain nimble and vibrant, adapting to the evolving educational and resource needs of our diverse membership. Over that span, FMS has welcomed a
wide range of finance and accounting professionals as members, spanning various career stages and educational proficiencies.
In response, we have proudly delivered industry-leading content, setting the standard for premier education for financial professionals within community banks and credit unions.
Building on this rich history of developing new offerings to the benefit of members – both tenured and newer – and through the strategic leadership of its Board of Directors, FMS has launched a broad suite of new member benefits over the past year. Spanning original research and thought leadership, the new FMSinc.
org website and FMStv – and including our expanded membership offering FMS Plus – these benefits were developed with you, the FMS member, as the focal point, with the goal of further strengthening and expanding FMS’s value in an ongoing way.
Complementing this deep array of educational resources now available to you, we proudly present FMS forward.
Throughout the year, FMS forward will deliver compelling insight and must-read analysis on the news and events that matter most to you and our industry. Exclusive to FMS members, FMS forward will provide
an unmatched resource to further your
professional development and elevate the dialogue around the pressing issues you’re facing every day.
From consolidation in the marketplace to increased regulatory scrutiny, this is a dynamic time for our industry that demands a necessary rethinking and reimagining of the way our members manage and develop their businesses. FMS will be perceptive to these changing needs – by continuing to innovate, through
our educational and professional development offerings, and to be a trusted partner for our members and their organizations.
The vision for FMS – being recognized as the preeminent community for providing relevant
and timely content, education and networking
for financial professionals within the financial institutions industry – can be realized through your enduring support and advocacy. We are delighted to have your partnership on this journey. It is because of you that FMS has enjoyed such
a deep legacy of accomplishment, and it will be because of you that we remain strong and vibrant for the next 70 years and beyond.
We hope you enjoy the inaugural edition of FMS forward, and we look forward to developing and providing more educational resources for you in the months ahead.
President and Chief Executive Officer Financial Managers Society
First SVP, CFO, Treasurer Mansfield Bank
Board of Directors Financial Managers Society
FMS forward | JULY/AUGUST 2017 | 7
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Despite all of this “new,” however, one other thing that hasn’t changed here is our desire to make this publication
a dialogue with our members. In other words, we want to hear from you!
BY MARK LOEHRKE
Normally, on the occasion of introducing a brand new publication, it would be fitting to use this space to pontificate at length on our editorial goals or philosophical ideals. But as we hope to demonstrate, our commitment to member value through the education and information in these pages is not, in fact, all that different from what we’ve been practicing for the past several decades – only the packaging has changed.
So as you read through this debut
outing – from the thoughts and opinions
on balance sheet management from our reconvened roundtable of ALM experts to a terrific piece on what social media can (and can’t) deliver for community institutions
to a conversation about the significance
of community banking with FDIC chief Martin Gruenberg – we hope that you’ll come across something that you can use to better your institution and your professional career. You’ll also find a revived version of our Member Spotlight (featuring incoming FMS Chairman Darrell Blocker), a look at our exciting new FMS research on the challenges and opportunities confronting
community institutions, a piece on contingent funding options for credit unions and much, much more – all delivered in a bright, bold and compelling new format.
Despite all of this “new,” however, one other thing that hasn’t changed here is our desire to make this publication a dialogue with our members. In other words, we
want to hear from you! So be sure to get
in touch if one of the stories in this issue really speaks to you, if you agree or disagree vehemently with a particular point, if you have an idea for a topic you’d like to see
us cover in a future issue or if you just
want to share your thoughts on the new magazine and let us know if it’s heading in the right direction (which, hopefully, will always be forward).
This is an exciting new day at FMS, and we’re glad you’re a part of it. Thanks for reading.
FMS forward | JULY/AUGUST 2017 | 9
FMS MEMBER SPOTLIGHT
Bio in Brief
Title: SEVP, CFO
Institution: Springs Valley Bank &
Trust Company – Jasper, Ind.
Asset Size: $354 million
Years in current position: 12 Years as an FMS member: 20+
10 | FMS forward | JULY/AUGUST 2017
While not every member’s history with FMS goes back as far as Darrell Blocker’s does, his initial introduction to the Society more than two decades ago is one that is probably familiar to many – a referral from a friend and colleague, and a sampling of the unique combination of professional education and networking at the annual Forum.
“I was invited to become a member of FMS by Chuck Redman, an FMS member and the CFO of a thrift in a nearby city, and I attended my first Forum in New Orleans in 1997,” he recalls. “I have
only missed a couple since, and another member, Chris Cleven, and our wives all became friends. My wife, Jan, is also very supportive of my commitment to FMS, and we look forward to seeing friends at the Forum each year.”
I have served three different community banks in three different Indiana cities and have enjoyed the experience with each of them. I like the familial atmosphere we have with our team members and the customers we serve.
From there, Blocker’s membership deepened and grew, as he attended additional FMS educational presentations, spread the word about the organization’s many opportunities to his team at the bank and eventually decided to take on an even bigger role in FMS’s mission.
“I have taken several seminars and
sent team members to them as well over the years, and I thought it was important to give back as others before me have,” Blocker says of his eventual decision to serve on the Board of Directors. “The management at my institution has seen the benefits FMS provides, and has therefore been very supportive in allowing me to serve FMS.”
That commitment to service has led all the way to Blocker’s impending term as Chairman of FMS for the upcoming year. He knows he’s assuming the post at an exciting time for the Society, with plenty of new member offerings and initiatives to foster and develop, and he has some definite priorities in mind.
“My plan is to continue to follow our strategic plan and provide support for Danielle and our FMS team,” he explains. “One of the most important focuses will be to get the word out about the benefits of FMS Plus for community institutions. We’ll also be looking to expand our educational offerings to a broader base of financial accounting and auditing professionals so they can be in a position to be part of the succession planning at their institutions.
In addition, I’d like to continue to draw attention to our many free webinars and the benefits of FMS Connect.”
Of course, even as he takes on a
more significant leadership role within FMS, Blocker will continue to deal with the many challenges facing his bank in Indiana – issues that are likely familiar to many community institutions.
“While core deposits have been growing quickly since 2012, our loan growth is even more impressive so liquidity is becoming an issue,” he says. “We have partnered with a company to help with stressing our liquidity cash flow and capital, which helps us determine if we need to make changes in funding to better handle it. We’re also very focused on technology right now to determine how it can help improve our effectiveness and efficiency, all while keeping security firmly in mind.”
Blocker will also continue to manage the changing nature of his role as CFO. Like many other community institution finance leaders, he has seen a shift in his responsibilities over the past five years.
familial atmosphere we have with our team members and the customers we serve.”
In order to ensure that Springs Valley
continues to serve those customers
well into the future, Blocker expects to
be focusing on succession planning as
the current leadership ages and retires, but also expanding both the bank’s geographic and electronic footprints in the coming years.
“The industry is becoming more and more reliant on digital media,” he explains. “As a result, branches will become very focused on financial education. Customers will find most of what they want and need on the internet and social media, so we
as community institutions will need to be the experts they look to for their financial well-being.”
It’s a tall task for his and other small community institutions, but Blocker has never been one to run from a challenge.
As he gets ready to lead both his bank and FMS in the coming year, he hearkens back to a great bit of advice he received early on in his career.
“Always keep learning and looking
for ways to improve – the world is ever changing, and if we don’t change and improve along with it, someone else will pass us by.” ●
The FMS community wants to get to know you better! If you’d like to share your thoughts and insights in the Member Spotlight, let us know at [email protected]
FMS forward | JULY/AUGUST 2017 | 11
“My role has continued to evolve to a more strategic function, with the senior management level continuing to look for opportunities to grow the bank profitably,” he explains. “But I couldn’t focus on the strategic aspects without the support
of the accounting team I have. They are dedicated to continually improving the bank in order to stay competitive.”
In this respect, Blocker’s team is clearly following his lead, understanding the importance of pulling together for the good of the institution – and the community
“I have served three different
community banks in three different Indiana cities and have enjoyed the experience with each of them,” he notes. “I like the
Being a member of FMS means being part of something that every one of our members knows very well – a community. That’s why we’ve decided to carry this feature introducing readers to some
of their fellow members in the FMS community over from the FMS Update to FMS forward.
L K ON THE NEW FMS RESEARCH STUDY EXPLORES THE ISSUES FACING COMMUNITY INSTITUTIONS
From tight margins to regulatory burdens to competitive pressures, there are plenty of challenges confronting community institutions
in the current environment. Yet despite these concerns, community bank and credit union leaders are remarkably upbeat about the state of their industry.
In a recent survey of 400 such executives commissioned by FMS, a full 70% of respondents reported feeling either very or somewhat optimistic about the current state of the industry for community institutions, compared to just 15% who expressed any degree of pessimism (Figure 1).
FIGURE 1: FEELINGS ABOUT THE
CURRENT STATE OF THE INDUSTRY
Source: Community Mindset: Bank and Credit Union Leadership Viewpoints 2017 – Financial Managers Society
12 | FMS forward | JULY/AUGUST 2017
What is inspiring this optimism, and where does the outlook get a little less rosy? That’s what we set out to find in canvassing the opinions of CEOs, CFOs, board members and senior finance, compliance and accounting officers from banks and credit unions with asset sizes ranging from $200 million to $5 billion.
Their responses are compiled in the new FMS research report Community Mindset: Bank and Credit
FIGURE 2: CHALLENGES FACING
Union Leadership Viewpoints 2017, now available
for download at FMSinc.org/Research. This wide-ranging study
is the culmination of a substantial effort to take the pulse of community institutions all across the country on a variety of timely and strategic topics, including the major challenges facing their businesses (Figure 2) and the areas where they see opportunities for growth (Figure 3).
Respondents were asked to indicate how challenging they felt each of eleven issues were to their bank or credit union – the graph represents the percentage who rated the priority in question as either “extremely challenging” or “somewhat challenging.”
COMPETITION FROM OTHER BANKS AND CREDIT UNIONS
ATTRACTING NEW/YOUNGER CUSTOMERS
ATTRACTING AND RETAINING STAFF TECHNOLOGY
INTEREST RATE ENVIRONMENT COST MANAGEMENT
COMPETITION FROM NON-BANK ENTITIES CREDIT RISK
Source: Community Mindset: Bank and Credit Union Leadership Viewpoints 2017 – Financial Managers Society
FMS forward | JULY/AUGUST 2017 | 13
FIGURE 3: FACTORS
Respondents were asked to indicate the importance of ten factors to the growth of their business – the graph represents the percentage who rated the priority in question as either “very important” or “somewhat important.”
GROWING THE COMMERCIAL LOAN PORTFOLIO
ADDING NEW PRODUCTS/SERVICES
ATTRACTING AND RETAINING TALENT
GROWING THE CONSUMER LOAN PORTFOLIO
GETTING MORE FROM THE INVESTMENT PORTFOLIO ADDING/EXPANDING WEALTH MANAGEMENT SERVICES PURSUING M&A
Source: Community Mindset: Bank and Credit Union Leadership Viewpoints 2017 – Financial Managers Society
Delving deeper into some of the points outlined in these broader questions, our report reveals a handful of factors that are dominating the agendas of decision-makers in community institutions, including:
Most community institutions are looking to enhance their online and mobile offerings in order to keep pace in the tech race – two extremely popular customer areas that are in line for significant upgrades.
As they delve further into new technologies, many community institution executives cite information security as a top priority in the areas of both risk management and technological advancement.
Despite recent proposals to lighten their regulatory loads, community banks and credit unions still feel burdened by what many see as an outsized burden – and its attendant costs.
Most community institutions are expecting a sizable impact to their operations from the impending Current Expected Credit Loss (CECL)
model, and while many are well down the road toward preparing for the new standard, others have plenty of work ahead of them.
While they still value the opportunity to connect with customers that their branch networks provide, most of the focus on channel delivery in community institutions is trending in the direction of technology.
COMMUNITY MINDSET: BANK AND CREDIT UNION LEADERSHIP VIEWPOINTS 2017
Download the study at FMSinc.org/Research
The feedback we received from our field of executives in these
areas – as well as on topics such as succession planning and
M&A – provides not only excellent insight into the current state
of the industry for community institutions, but also the challenges and opportunities for which they’re girding as they stare down an uncertain future. How do they match up with what’s unfolding in your bank or credit union?
Building off of the full report, you can expect to find breakdowns and analysis of many of the big numbers and big topics in future issues of FMS forward, new white papers, pieces for FMS Perspectives and in quick-hit posts on our blog, The Daily Dividend, in the weeks and months ahead.
14 | FMS forward | JULY/AUGUST 2017
The Power of
The health of the community banking sector is a particular area of focus at the FDIC. We understand that community banks are critically important to meeting the financial needs of households and small businesses
in communities of all sizes.
While community banks may occasionally feel like they’re stuck at the kids’ table when it comes to being heard on the specific issues and challenges they face every day, Martin Gruenberg sees it quite differently. Throughout his five-year
term at the helm of the Federal Deposit Insurance Corporation, Gruenberg has consistently gone out of his way to shine a spotlight on the proud history of community banks in the United States and to argue persuasively for their continued strength and viability. Perhaps that’s why he was
so pleased by the opportunity to speak directly to the community bankers of FMS. In this exchange, Gruenberg explains why he feels community banks are so vital
to the fabric of the U.S. economy and what he thinks they need to focus on to make sure that remains the case.
Q: How would you characterize
the current state of community banking?
A: The community bank business model has proven itself to be resilient and adaptable in what has been a challenging post-crisis era.
As the FDIC has documented in our Quarterly Banking Profile, community
banks have been outpacing the industry as a whole in terms of both earnings growth and loan growth across a range of asset categories, including residential mortgages, commercial and industrial loans, and loans secured by commercial real estate. In 2016, community bank loans grew faster than those at noncommunity banks and at almost three times the rate of growth in U.S. nominal GDP.
Ninety-six percent of community banks earned a profit last year. But historically
low interest rates have taken a toll on net interest margins and have kept the return on assets below pre-crisis levels.
Community bank lending is critically important to the U.S. economy. Community banks account for 43 percent of the industry’s small loans to businesses, and in 2016 continued to grow their small business loans at a faster pace than the rest of the industry.
It is important that the narrative
about community banks be balanced and recognizes the critical importance and substantial strengths of community banks in the United States, while acknowledging the challenges going forward.
Q: Why do you feel the
continued health and viability
of the community banking
model is so important?
A: Community banks play a critically important role in the financial system and economy of the United States. As FDIC research has documented, while community banks today hold about 13 percent of
total banking assets in the United States, they account for more than 92 percent of
all banks. Community banks also make
about 43 percent of all the small loans to businesses and farms. Their success in small business lending is closely connected to their first-hand knowledge about the individuals and small businesses seeking these loans.
The FDIC also found that for more than 20 percent of the 3,100 counties in the United States, the only banks operating in those counties are community banks. That
IN AN EXCLUSIVE CONVERSATION, FDIC CHAIRMAN MARTIN GRUENBERG SHARES HIS THOUGHTS ON THE IMPORTANCE OF A STRONG COMMUNITY BANKING SECTOR
FMS forward | JULY/AUGUST 2017 | 15
means that for thousands of rural communities, small towns, and urban neighborhoods, the only physically present banking institution is a community bank.
The bottom line is that community banks matter in terms of access to basic banking services and credit for consumers, farms, and small businesses across the United States.
Q: What are your agency’s top priorities and/or concerns with respect to community banks,
and how are you addressing them?
A: The health of the community banking sector is a particular area
of focus at the FDIC. We understand that community banks are critically important to meeting the financial needs of households and small businesses in communities of all sizes. That’s why the FDIC
has pursued a long-term agenda of community bank research and outreach, so we can better understand the business model and so we can tailor our supervisory approach to this business model.
At the FDIC Community Banking conference last year, we addressed long-term strategies for success with panel discussions focusing on four core issues: the community bank business model; supervision; information technology; and ownership structure
and succession planning. A fifth challenge discussed during the conference was the economic environment in which community banks have operated in the aftermath of the financial crisis. The economic recovery we have experienced since 2009 has allowed the vast majority of community banks to address their problem loans, strengthen their balance sheets and increase their earnings. Yet, compared to previous economic expansions, this one has been marked by below-average rates of economic growth and exceptionally low interest rates.
One of the by-products of this economic environment has been
a steady and substantial decline in community bank net interest margins. During the ten years leading up to the crisis, the average net interest margin for community banks was 4.04 percent. But by 2015, the average had fallen to 3.57 percent. There also is evidence that downward pressure on margins in the low interest-rate environment has led to reduced interest by potential applicants to form new banking institutions. A recent paper by economists at the Federal Reserve suggests that economic factors alone – including the long period of zero interest rates – explain at least three-quarters of the post-crisis decline in new bank charters.
As we think about these challenges, we have identified three areas of activity in which we believe we can be helpful: tiered supervision, technical assistance, and the promotion of de novo, or new, community banks. By tailored supervision, we mean smaller, less complex institutions are supervised and regulated differently from larger, more complex banks. Our technical assistance program is designed to provide information that can help bankers and their board members address hot-button regulatory and accounting issues. We carry out technical assistance through in-person Directors’ Colleges in our regions and online video programming. To support the promotion of de novo institutions, we have
16 | FMS forward | JULY/AUGUST 2017
issued a handbook for organizers of de novo institutions to help guide them through the process and we have hosted roundtable events in four of our six regional offices, with the remaining two scheduled later this month. We are starting to see an increase in application activity.
Q: What do you see as the most significant
risks or challenges facing community
banks in the current environment?
A: As evidenced by the lessons learned from the recent crisis,
loan portfolios warrant close monitoring during a growth cycle. Underwriting standards, credit administration practices, funding sources, and external market factors should be evaluated as part of ongoing oversight of loan portfolios, particularly when portfolios are growing rapidly or are large in relation to capital levels.
The FDIC has always encouraged prudent risk-management practices and corporate governance processes that prepare FDIC-insured institutions for success through the economic cycle, including periods of falling and rising interest rates. As we move away from historically low interest rates, the FDIC continues to emphasize the importance
of a strong risk-management framework that considers interest- rate, liquidity, and credit risk. Banks must have comprehensive risk management and contingency programs in place to ensure they are appropriately prepared for risks as rates continue to rise.
Risk management should be viewed as an ongoing process that requires effective measurement and monitoring, strong governance and strategies for mitigating risk. A board and senior management team that are well informed can better position their bank to sustain profitability, manage liquidity positions, minimize credit losses and preserve capital when the interest rate environment changes.
Q: Talk a little about recent efforts by the FDIC and others to reduce the regulatory burden on smaller community banks. Do you feel these measures have been effective thus far? Where do you feel there’s still work to be done?
A: We recently completed our review of the rules affecting financial institutions as part of the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) of 1996, and submitted a report to Congress. EGRPRA requires the federal banking agencies, along with the Federal Financial Institutions Examination Council (FFIEC), to conduct a review of their rules at least every 10 years to identify outdated or unnecessary regulations.
Several important burden-reducing initiatives were taken, or
are planned, as a result of the review. For example, the agencies extended the safety and soundness examination cycle for certain well-rated and well-managed community banks to 18 months. This change also means that qualifying community banks will generally be subject to less frequent Bank Secrecy Act reviews. The FFIEC also implemented several burden-reducing changes to the Call Reports, including a streamlined Call Report available to most banks under $1 billion, and indicated further changes will be forthcoming
after the agencies complete a review. Going forward, the agencies intend to issue proposals to simplify the capital rules applicable to community banks and to raise the appraisal threshold related to commercial loans.
In addition to interagency actions, the FDIC has taken the following steps to reduce regulatory burden on community banks: • Reduced enhanced supervisory period for de novo
institutions, clarified guidance, and conducted outreach regarding deposit insurance applications. Notably, we rescinded FIL-50-2009, “Enhanced Supervisory Procedures for Newly Insured FDIC-Supervised Institutions,” reducing from seven years to three years the period of enhanced supervisory monitoring of newly insured depository institutions.
• Reduced the frequency of consumer compliance and Community Reinvestment Act (CRA) examinations for small and de novo banks.
• Made improvements to application, examination, and supervisory processes. For example, we implemented an electronic pre-examination planning tool to reduce information requests and onsite examination presence. We implemented a secure, transactions-based website, FDICconnect, to minimize paper-based processes. We also eliminated requirements for institutions to file certain applications under part 362 of the FDIC Rules and Regulations in order to conduct activities permissible for national banks through certain bank subsidiaries organized as limited liability companies.
• Provided support to community banks under the multi-year Community Banking Initiative. These efforts include establishing the FDIC Advisory Committee on Community Banking; creating a Directors’ Resource Center on the FDIC’s website, which among other things, contains more than 25 technical assistance videos designed for bank directors and management on important and complex topics; and pursuing an agenda of research and outreach focused on community banking issues, including the FDIC Community Bank Study, a data-driven analysis of the opportunities and challenges facing community banks over a 25-year period. While we feel that our efforts to reduce burden on community
banks have been effective, we recognize that we can do more. In particular, the FFIEC plans to jointly review the examination process, examination report format and examination report preparation process to identify further opportunities to minimize burden to bank management where possible, principally by rethinking traditional processes and making better use of technology. In addition, the banking agencies plan to review and, where possible, update and simplify interagency guidance, such as policy statements.
Q: What steps would you like to see community banks take to remain competitive and appealing to the next generation of consumers?
A: As the primary federal regulator for the large majority of community banks, the FDIC sees the continuation of a strong
community banking sector in the United States as essential to the functioning of our financial system and economy. In order to stay competitive, it is vital that community bankers make every effort to keep up with the rapid evolution in technology and the changes in the way the next generation of consumers will want financial services to be delivered.
For example, consumers are increasingly turning to mobile and online banking to access and manage their accounts. Consumers appreciate the control and convenience that these channels can provide. Although we know that mobile services are being rapidly adopted by a wide variety of consumers and institutions, it is
not clear if the technology’s full potential is being leveraged to expand inclusion in the banking system. Mobile banking likely will only recognize its potential for economic inclusion when that goal is thoughtfully designed and integrated into a bank’s overall strategy.
Additionally, community bankers will need to make sure they
have in place the right staff to carry out their business model going forward. Many traditional industries, including community banks,
are finding it challenging to attract employees. At FDIC, we have conducted a roundtable and discussions between academics and bankers encouraging partnerships between the two to demonstrate to the next generation that banking, and community banking in particular,
is a promising career path.
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WHAT SOCIAL MEDIA MEANS TO COMMUNITY INSTITUTIONS
Social channels are just part of our culture now. [Social media] has evolved into just another member service platform.
Shannon Huot, Senior Vice President – Marketing, Educators Credit Union
While more and more of the communication that unfolds in the everyday lives of their customers increasingly moves into the realm of social media, community institutions have, in large part, been staying on the sidelines. In an FMS Quick Poll conducted
in October of 2016, 44% of respondents said their institution was either not on social media at all or largely inactive, while 57% of respondents described their online interaction with customers as either nonexistent or rare.
..18 | FMS forward | JULY/AUGUST 2017
While the bigger banks and credit unions have fully embraced social media and are leading the charge, it remains a fraught topic for smaller institutions with fewer resources and bigger doubts. The question, then, is what will be the impetus for them to finally enter the fray?
RISK RUNS BOTH WAYS
“If your bank or credit union isn’t even on Facebook, you’d better be at least using the search bar to see what people are saying
about you, because that’s a regulatory issue,” says Megan Plis Knapp, the Social Media Manager at Plansmith Corporation. “Not only is this your responsibility, it’s an opportunity.”
The regulatory issue she references is outlined in recent FFIEC guidelines, which were intended to remind institutions
that they must properly address the risks inherent in social media. While it’s easy to consider avoiding social media as a way to dodge those risks, the guidelines
stress the importance of monitoring the conversation online.
“[A] financial institution that has chosen not to use social media should still consider the potential for negative comments or complaints,” the agency notes. “.[R]eputation risks exist when the financial institution does not address consumer questions or complaints in a timely or appropriate manner.”
Shannon Huot, Senior Vice President of Marketing at Wisconsin-based Educators
FMS forward | JULY/AUGUST 2017 | 19
AGREE TO DISAGREE: HOW TO MEASURE SUCCESS ON SOCIAL MEDIA
MEGAN PLIS KNAPP:
“If you’re running a really strong campaign, your goal is going to be conversions. You can’t use likes to measure success. Are likes and shares ever going to convert to dollars and cents? Why put dollars into something that’s never going to convert into dollars? You need a goal that’s actually going to turn into attainable dollar ROI at some point.”
“We measure our engagement rate, our total reach and our number of followers each month across all platforms, and we report these three statistics to our Board of Directors each month. Currently we’re reaching 700K-800K people per month through social, with an engagement rate (the percentage of people that like, share, retweet, etc. our content) of around 15%.”
“Sometimes I like to say there’s an ROR – a return on relationship – component to social media. We use Google Analytics to allow us to track what’s being clicked on, and I provide that information to our management and Board each month. We show how many likes, viewers, followers, subscribers, whatever the channel we’re using, the audience that’s following us – we share those numbers. We also analyze how social media then brings that audience over to our website.”
Credit Union, says she thinks many institutions stay off of social media because they’re frightened by the prospect of addressing complaints or customer criticism.
“That’s actually a great opportunity either to maybe help educate them, or to correct something you just realized your members weren’t happy with,” she explains. “Then you can use that information to go back and say ‘Hey, we heard you, and here’s what we’ve done to improve upon that.’”
Another risk that institutions can’t duck simply by abstaining from social media: the potential to have their online identity compromised. For example, if a community institution doesn’t have a Twitter account or isn’t monitoring Twitter, it’s remarkably easy for a fraudster to set up a fake account and pretend to be an official spokesperson of the institution. Perhaps the best case scenario in this situation is that it’s done as a prank simply to make the institution look foolish. But there’s a very real possibility that they will use the platform to gain account information from unsuspecting customers, fooled by the fake account.
The FFIEC guidelines note cite this type
of activity as yet another reason why institutions should have policies in place to monitor and head off this type of behavior. While the agency doesn’t necessarily expect financial institutions to see and respond to everything that involves them online, they do expect that the institution has taken steps to assess the risks and determine an appropriate plan of action.
“Banks are generally risk-averse, so when you’re talking about something as new and as young as social media, they’re going to tend to lag behind,” Knapp says, in noting that banking is one of the few remaining industries that has yet to firmly establish itself on social media.
A 2017 American Bankers Association report on the state of social media in banking pointed out that only 24% of respondents had been using social media for five years or more, leaving the vast majority as relative newbies. Even those institutions that have taken the leap and have policies and teams in place are often still in the formative stages of really working out their social media presence. Many others that are considering a move may not know exactly where to start.
For instance, limited resources often present an early obstacle for smaller institutions. In these cases, Knapp suggests pulling from one’s existing talent pool.
“If you’re a bank or credit union that can’t afford someone to work on social media full time, look to your current employees to see whose skills you may not be tapping into,” she advises. “With some training, a strong social media policy and a few hours a week outside of their normal duties, you can have an amazing social media manager, while at the same time helping an employee diversify and grow his or her career.”
That was the path that Educators Credit Union took in the beginning. The $1.7-billion institution has been on social media for around nine years now, and ranks high on
the Financial Brand’s list of the Top 100 Credit Unions Using Social Media. Shannon Huot describes their social media evolution as starting off small, with just her spending some of her spare time on social media. The institution now has an employee fully dedicated to social media strategy.
“Social channels are just part of our culture now,” she says. “It has evolved into just another member service platform.”
Arizona Federal Credit Union in Phoenix is another early adopter of social media that has, over time, worked its way into the top ten on the Financial Brand list.
“We’ve been on social media for at least eight or nine years,” says Jason Paprocki, executive vice president and COO of the $1.5-billion institution. “Our CMO and marketing team championed the idea, and our executive team and board of directors have always been supportive. For us it was really a no-brainer – if you want to stay relevant from a marketing and awareness standpoint you have to go where the eyeballs are.”
Having worked at various stages of getting community institutions onto social media, Knapp, Huot and Paprocki have a number of tips to share for those looking to take the plunge:
GO TO WHERE YOUR IDEAL CUSTOMER IS
“If your ideal client isn’t on Twitter, don’t post on Twitter,” Knapp advises, “If they’re on Facebook, post to Facebook.” Being choosy about the platforms you utilize
20 | FMS forward | JULY/AUGUST 2017
For us it was really a no-brainer – if
you want to stay relevant from a marketing and awareness standpoint you have to go where the eyeballs are.
Jason Paprocki, Executive Vice President and COO, Arizona Federal Credit Union
brings in online loan applications, for example. Paprocki says that at Arizona Federal, employee buy-in is a big part of the institution’s effectiveness on social media.
“We invite our people to star in our social media content,” he says. “For example, we post videos that include volunteer employees from all areas of the organization. We find that the more we invite employees to participate, the more likely they are to be excited about what we create and will want to share it on their personal accounts. We’ve gotten a lot more exposure and lift that way than simply asking them to like or share our content. Creating natural enthusiasm has been much more effective.”
Including employees and fostering a spirit of fun are has been the social media push at Arizona Federal for the past year or so.
“Beginning about midway through 2016, we started showcasing our employees a lot more with a focus on showing our members and the community at large that we’re a
fun group of people,” Paprocki says. “Let’s face it – there’s nothing inherently fun about financial services, so we think our fun employees can be a real differentiator.”
And that push has brought success. Even if some of the institution’s surveys and educational messages have proven less popular on social media – which Arizona Federal continues to offer because they
see them as an important service to the membership – some of the most effective, engaging posts have come out of the new initiative to focus on fun and engagement. That’s why Paprocki’s advice to other financial institutions emphasizes this aspect of social media.
“Don’t be afraid to just have fun with
it. If you’re too conservative, no one
will engage.” ●
PULSE OF THE MEMBERSHIP
In a recent FMS Quick Poll, 56% of FMS members described their institutions as being either highly or somewhat active on social media, while 21% noted that they maintain
a social media presence but don’t consider themselves particularly active and 23% reported not being on social media at all.
allows you to focus (although Knapp is quick to offer a reminder to monitor Twitter, even if you’re not using it). The most popular platform among community institutions tends to be Facebook, with 90% of ABA’s respondents saying they use it, followed
by LinkedIn (69%) and Twitter (52%). “We use Facebook the most, though we also use Instagram, LinkedIn, Twitter, YouTube and we’ve started using some Snapchat filters recently,” says Arizona Federal’s Paprocki.
MAKE SURE YOU’RE SHARING VALUABLE AND TARGETED INFORMATION
Knapp covers this point in five content questions. “Does it speak to your ideal client? Is it useful? Does it have value? Does it embody your brand? Does it have a potential outcome tied to a goal?” she notes. “If your content fits all of these five criteria, you’re in good shape.”
COMMIT TO REGULAR POSTING
Knapp recommends keeping a content calendar. According to the ABA report, only 33% of respondents had implemented a
plan for how frequently they would post on social media. Paprocki says that Arizona Federal averages 2-3 posts a week, though some weeks have more activity than others, while Huot notes that Educators Credit Union follows a looser schedule that feels more organic to them.
LISTEN AND RESPOND TO CUSTOMER COMPLAINTS AND COMMENTS
“People expect it nowadays,” Knapp says. “They expect that you’re going to be there because they’re there.” This notion is illustrated by a recent NM Insight report in which 47% of respondents reported
using social media to access customer service, and 33% said they’d recommend
a brand that offered an effective response quickly. Any response will build customer loyalty, even if it ultimately doesn’t solve their immediate issue. Customers simply want to know they’re being heard. “We maintain high response ratings, as we act quickly to resolve [customer] concerns,” Paprocki says. “Our Facebook page currently states that Arizona Federal typically replies within an hour.”
KNOW THE REGULATIONS AND COMPLIANCE ISSUES
Building your plan and putting it into action should involve a thorough review
of what the FDIC has to say first. “From a compliance standpoint, we view social as an extension of our general advertising so when we have content and copy approved, we do so with intended use for social along with email, web, direct mail or any other method at the same time,” says Paprocki.
WHAT SUCCESS LOOKS LIKE
“One of the biggest misconceptions when people think of social media is that they view it as a unicorn, instead of just another form of marketing,” Knapp says, in pointing out how important it is to set goals. “You can’t throw energy at random and expect insane results. It’s like vacuuming in the dark – you’ll miss all sorts of areas, and at some point you’ll
hit a wall.”
Arizona Federal measures engagement monthly, opting for a different approach than the one Knapp suggests (see sidebar). But it seems to be working for them. Educators, meanwhile, finds some middle ground by not only measuring engagement, but also using Google Analytics and data to track how often their social media
FMS forward | JULY/AUGUST 2017 | 21
BALANCING FROM DEPOSIT PRICING TO INVESTMENT PORTFOLIO RECOMMENDATIONS, SIX EXPERTS WEIGH IN ON THE STATE OF COMMUNITY INSTITUTION BALANCE SHEETS IN A CHANGING ECONOMIC ENVIRONMENT
Few market observers would dispute the notion that the economic landscape has shifted significantly over the past twelve months. And few community institution professionals would dispute the notion that those developments
have greatly impacted how they manage their ALM activities.
In March of 2016, FMS convened a panel of six ALM experts to get their thoughts on the most pressing balance sheet issues facing community institutions, including their ideas for boosting net interest margin, their opinions on deposit and loan pricing and their top investment portfolio recommendations. More than a year later, we were curious as to how their views on these topics had changed (or not), so
we decided to get the gang back together for a
1What’s happening – or should be happening – on
the balance sheets of community institutions today?
WHAT IS THE NUMBER ONE BALANCE SHEET CONCERN FOR COMMUNITY INSTITUTIONS IN THE CURRENT ENVIRONMENT?
Greg Garcia: I think the biggest concern
right now is the ability to attract deposits, and
the potential threat of migration out of low-cost non-maturity deposits into higher-cost retail CDs, or even just an outflow into money market mutual funds as a more attractive option as rates go up.
It’s not just rate movements driving this, though. There’s still a fair amount of small business optimism thanks to the pro-business agenda of the administration, which is spurring loan growth. So institutions are able to get the assets, but funding them is getting harder and harder. A good reference
22 | FMS forward | JULY/AUGUST 2017
While the potential for rising rates may incent some
investment managers to buy very short-duration instruments,
it is important to consider the shape of the yield curve
and break-even levels to understand the meaningful
trade-off of staying short in anticipation of rising rates.
Managing Director – Balance Sheet Strategies Chatham Financial
Todd Cuppia, Managing Director –
Balance Sheet Strategies, Chatham Financial
FMS forward | JULY/AUGUST 2017 | 23
point here is the listing-service CD market, where rates over the past two years have significantly passed the national rate
cap; in the past, they were always below that cap. More and more banks are using listing-service CDs and becoming more and more competitive, so people have to continue to increase their rates in order to get funds. That’s a very telling sign that funds are just becoming much harder to come by.
Bart Smith: In my view, the biggest concern community institutions face today is uncertainty. Will rates go up? Is the economy in a sustained recovery? Will regulatory
relief be enacted? Will tax reform become
a reality? It’s not that institutions don’t face some level of ongoing uncertainty all the time; it’s just that today, with the political and economic environments so unpredictable, it’s very difficult for them to generate long-term strategic goals for their organizations.
During periods of extreme uncertainty, there tends to be a wide variance in the
type of risk-taking that bank managers
are willing to accept. On one hand, many institutions become fearful and paralyzed
by the environment, reducing risk and forgoing opportunities for value. On the other hand, however, certain institutions are so anxious for improved performance that they latch onto any positive signal and possibly overextend their resources. We see this second scenario reflected somewhat today in the credit markets, where the push for yield has created risk-adjusted returns that are lower than what you might normally expect.
The bottom line is this – in the current environment, community institutions need to be much more disciplined about their overall decisions. How you measure risk and how you strategically make decisions in the face of those risks is critical. Ultimately, the key
to creating value in any environment, but even more so in the current environment, is to create a balanced risk position in which you take just enough of the right kinds of risk – no more or no less – to effectively pursue your strategic goals.
Michael Davis: We survey our bank and credit union clients each quarter and regulatory/political risk remains most concerning, followed by interest rate, credit and liquidity risks. I think depositories should shift their focus to interest rate risk, namely a flatter yield curve – since its post-election peak, the curve (2s to 10s) has continued
to flatten. A high likelihood of two more
rate hikes this year, coupled with sluggish growth (sub-1% 1st quarter GDP growth) and a surprisingly gridlocked Washington, could keep long-end rates tethered to a sub-2.50% level. So far, on the funding side, most institutions haven’t seen meaningful deposit cost pressure, but this could change later this year if the Fed raises rates. Rising funding costs without asset yield expansion will cause net interest margin pressures.
David Sweeney: Core deposit funding levels and rates are going to be key for financial institutions in the next twelve months. We have not seen any drastic movement in non-maturity deposit rates since the Fed started moving over a year ago. If – or better said, when – core
THE BALANCE SHEET ROUNDTABLE
President McQueen Financial Advisors
Executive Managing Director FinPro, Inc.
These are some
of the options out
there right now for
institutions to try
and maintain margin,
but the bottom
line is that margin
expansion in general
is going to continue
to be very difficult.
Executive Managing Director,
deposit levels begin to drop, it will force many institutions to begin to increase non-maturity deposit rates, and just as important time deposit rates, in order
to retain or attract depositors. The big question is how much will they have to move the deposit rates to retain and grow core deposits?
Charles McQueen: I have two concerns of equal importance – growing loan concentrations in certain asset classes and the pricing of risk.
For example, the growth in indirect auto loan concentrations has been dramatic. Historically, auto loan principal amortizations were somewhat close to the depreciation schedule of a vehicle. Today, loans are
the sort of risk that comes with unexpected interest rate volatility, but perhaps are placing less focus on the second and third derivative impacts of nearly a decade of Fed balance sheet expansion that has relatively no modern precedent. The nearly unlimited liquidity and credit availability afforded by the crisis era quantitative easing programs have undoubtedly distorted asset prices (spreads) and put credit in weak hands, as the recent issues in subprime auto and revolving consumer credit have illustrated.
It will be critical for institutions to carefully consider the spread risks on credit exposures in addition to the typical shocks to interest rates in ALCO modeling – even as the economy continues to expand. Additionally, as rates rise the mutual fund industry will likely move to normalize fee structures that had been reduced (or eliminated) during
the downturn, which will add to the list
being approved with significantly longer amortizations. Coupled with high advance rates, this has resulted in a significantly higher loss per loan rate, averaging nearly $10,000. This is expected to worsen as
the economy matures and the used vehicle market softens. Other concentrations that are concerning are in real estate lending, especially non-owner-occupied commercial real estate and development lending – both loan types that suffered greatly in the
My second concern is the pricing of
2of variables to consider when stressing deposit betas.
NET INTEREST MARGIN HAS CONTINUED TO STAGNATE FOR MANY COMMUNITY INSTITUTIONS. WHERE ARE THE BEST OPPORTUNITIES TO MOVE THE NEEDLE?
Garcia: Margins are going to continue to be compressed through 2017, because we’re not seeing the asset yields increase. But there are a couple of different areas where community institutions can try to pick up margin.
On the asset side, there are a lot of institutions right now that have CRE or construction concentrations that have maxed out their internal limits or risk appetite, but there’s still demand out there. So I think institutions need to be willing to try and take on some of that overflow as a way to increase their loan portfolio and maybe pick up some additional margin. Of course, they have
to make sure they’re not sacrificing credit quality to bring those loans in – construction and multi-family are performing really well right now, but when does the music stop and you’re left without a chair? So it’s important to stick to your underwriting criteria and your loan policies, but I think institutions need to be willing to look at those credits and look
at some different asset classes to help boost their loan volumes and help their margins.
risk. We have been in an extended ‘lull’
with low rates, easy money and excellent credit quality. Credit terms have eased significantly and competition has again heated up. Using indirect auto lending as an example, long-term success in that market today requires pricing risk with longer-loan terms, higher advance rates and a different economic environment. Knowing costs, terms and changing risk profiles is critical to future long-term success, so the correct pricing of risk is an imperative.
Todd Cuppia: Managing the balance sheet through the upcoming interest rate cycle will likely require a significantly more proactive approach than has typically been the case for management teams in past tightening cycles. It is easy to point out that the overwhelming size of the Fed’s balance sheet may cause market volatility in the coming months if the un-wind begins as forecasted, however carefully. Market professionals are accustomed to managing
24 | FMS forward | JULY/AUGUST 2017
On the liability side, I really think it’s all about knowing your customer. At the end of the day, you’re trying to keep your cost of funds as low as possible, and the best way to do that is to understand your customer base so you’re not pricing every customer
the same way. Some customers are more loyal than others – they’re not going to move regardless of what happens with rates – so understanding where those loyal customers are and knowing not to price them up with everyone else is important. You need to be able to offer different product segments
to keep the hot money and price it up incrementally while keeping the loyal money at a relatively low rate, which allows you to manage your cost of funds. Institutions that don’t know their customer base are just going to raise their product rates across the board, and that spells disaster.
Secondly, I think if an institution does want to offer higher rates it needs to offer special niche products, whether that’s a 13- or 14-month CD special, but also on the non-maturity side, it should also be offering new products with higher interest rates for new money only so they’re not re-pricing up their entire base. This gives the smart money a parking lot to move into another account, as opposed to pricing up the lazy money for no reason.
Finally, if an institution is going to go
out with some kind of special non-maturity product, it’s probably better to do it in a savings account. If you do it in a money market or checking account, all someone has to do to get those funds out is write a check and transfer somewhere else. With a savings account, the customer actually has to come into the bank and close out the account, which gives the frontline staff an opportunity to cross-sell and/or keep that money by putting it into another account.
These are some of the options out there right now for institutions to try and maintain margin, but the bottom line is that margin expansion in general is going to continue to be very difficult.
Smith: This is so difficult. The push for yield has really tightened credit spreads, and it is very difficult to identify strong risk-adjusted opportunities across different lending sectors. Despite this concern, the
answer for many institutions has been
to re-extend into the credit markets and seek margin opportunities through loans. Lending levels have certainly picked up, and in certain cases they now exceed pre-crisis levels. In a recent supervisory insights article, the FDIC noted that total CRE loans in September 2016 had reached $2.0 trillion, surpassing the peak volume of $1.9 trillion experienced in 2008.
On the funding side, rates have fallen about as far as they can go, and it seems that the industry is in a holding pattern waiting for a first-mover to begin a new series of rate hikes. However, because credit may
not have the most ideal pricing structure,
any increase in overnight rates could force margin compression and, in response, decreased credit quality. Again, this cycle
of uncertainty is creating an enormously difficult environment in which to formulate sound decisions.
So where do we move the needle? First off, I think it is important for institutions
to have a very good understanding of
their true interest rate risk position. Poor assumptions within interest rate modeling can often create false portrayals that force bad decisions. In many cases, institutions with high non-maturity deposit balances are much more asset-sensitive than they realize, and they actually have the opportunity for a more balanced mix of maturity versus credit risks to improve yields. Many institutions that are doing well today have tightly controlled cost structures and a good understanding of cost-adjusted returns. Yields that don’t fully account for production and carrying costs can mislead decision-makers in pursuit of improved performance.
Davis: Funding costs can’t really go lower, so depositories will need to expand earning asset yield. They can do this by going down the credit spectrum, extending duration or swapping low-yielding assets (usually
at a loss) into higher-yielding assets. Most institutions are hesitant to do any of these, but I think looking at the economics of taking a loss on low-yielding assets makes sense.
Loss trades are not typically done in the community depository space given the immediate impact to earnings. However, looking over a longer time horizon, these
Managing Director Performance Trust Capital Partners, LLC
Director of Strategies SunTrust Robinson Humphrey
As the cycle turns and loans become more difficult to source, it will be tempting to relax credit standards without increases in incremental credit spread. However, the crisis remains in the rearview mirror and
I think depositories will avoid mistakes of the recent past.
Director of Strategies, SunTrust Robinson Humphrey
FMS forward | JULY/AUGUST 2017 | 25
If – or better said, when – core deposit levels begin to drop, it will force many institutions to begin to increase non-maturity deposit rates, and just as important time deposit rates, in order to retain or attract depositors. The big question is how much will they have to move the deposit rates to retain and grow core deposits? David Sweeney, Managing Director,
Managing Director Chatham Investment Advisors
trades can be accretive to income, as the higher-yielding assets brought onto the books provide additional income over and above the loss taken on the trade. Additionally, these trades can be used to strategically position the balance sheet for a higher-rate environment or free up liquidity for future funding needs.
Sweeney: There is a positive coming this year for financial institutions, with the 5-year Treasury rate over 100 basis points higher today than it was five years ago; accordingly, commercial loans that re-price after five years will experience a reset to
a higher level during 2017. We have also noted that commercial real estate loan credit spreads have been slowly increasing over the past twelve months, which is another potential positive for financial institutions.
McQueen: Net Interest margin compression has been a ‘battle’ that community-based financial institutions
have been facing for several years. Asset diversification has been very important, as has risk-based pricing. With stiffer competition,
it is imperative to know your costs and be assured that you are being paid for the risk that is being taken. Once again using indirect auto lending as an example, lenders need to track the impact of dealer reserve payments, especially when prepayments or charge-offs occur. We continue to stress the need to
look for opportunities to grow non-interest income, which is the biggest differentiator between good financial institutions and great financial institutions.
Cuppia: Over the course of the last decade, financial institutions, in the
Chatham Investment Advisors
aggregate, have increased exposure to
long duration assets by about 10% of total earning assets. Over the same time frame, those institutions with less than $10 billion in assets have nearly doubled their exposure to municipal securities as a percentage of earning assets in a trade of liquidity for yield.
Against this backdrop, it seems that the low-hanging fruit with respect to margin expansion on the asset side has largely been harvested. However, there remains room
to optimize the return on the investment portfolio by carefully managing soft expenses. A recent analysis by Chatham Investment Advisors quantified, using actual market transactions, the amount of net interest margin that is lost in the process of trading the investment portfolio to be as high as three basis points per year for a typical community institution. Without changing
the overall composition of the portfolio, the opportunity to increase yields by negotiating more favorable commission charges
In our opinion, however, the greatest opportunity for institutions to expand margins in this environment remains in strategies
that reduce the cost of wholesale funding vehicles. Using recent market examples as a guide, savings of ten basis points of NIM per year have been achievable on plain vanilla
3wholesale funding optimizations.
WHAT IS YOUR TOP INVESTMENT PORTFOLIO RECOMMENDATION FOR COMMUNITY INSTITUTIONS RIGHT NOW?
Garcia: I still like the plain vanilla MBS market, probably in the 15- to 20-year range.
26 | FMS forward | JULY/AUGUST 2017
It’s not really exciting – it’s basic blocking and tackling for community institutions – but you know the cash flow structure, and if rates do go up you can always reinvest that cash.
From the investment side, there’s probably more that I don’t like, as opposed to really liking anything. I’m concerned about municipal bonds due to the potential tax code changes, because then those tax-equivalent yields go way down. So what happens to the value of those bonds if they’re in your portfolio? In a similar vein, I’m a little bit concerned about BOLI and how that’s being priced. As far as corporate bonds go, if you can find some decent yields, maybe there’s potential there. But on the adjustable side, with rates going
up, that might be a better play, as long as you do your due diligence and find strong investment-grade companies.
Smith: I wish I could come up with
a perfect, simple answer. Unfortunately,
for the investment portfolio, it’s important to remember that no single security will outperform all others in every scenario.
In my opinion, an institution’s investment philosophy should be focused on the risk/reward profile of the investment portfolio as a whole, not on each of its independent components. I also believe that a determination of superior risk/reward characteristics cannot be made intuitively, or even based on common measurements such as yield and duration. Instead, superior risk/reward securities should be identified through an analysis of their cash flows and potential cash flows, as well as their market value and potential future market value.
While various measures can be used to quantify interest rate risk, I believe that a prospective, scenario-based total return analysis is the best option for identifying superior risk/reward securities, both individually and in combination as a total portfolio. The use of total return supports sound decision-making by allowing for comparisons of unlike cash flows using common denominators of time, rate scenarios and assumptions. Income is simulated to
a time horizon (current income), then the projected market value (the then-present value of the remaining future income) at that horizon is added to or subtracted from that income. Thus, total return analysis
is equivalent to conducting an income simulation and combining that income simulation with an economic value of equity (EVE) calculation at the horizon.
By combining the benefits of income simulations and EVE for each investment scenario, total return analysis gives a
clearer picture of the overall risk/reward characteristics of individual securities and
of the portfolio as a whole. If community institutions want to make great investment choices and improve performance, total return analysis can really help to enhance the decision process.
Davis: While any recommendation should be institution-specific, I generally
like the barbell of SBA floaters and tax-free municipals. The short reset nature of SBA floaters will provide yield benefit as the Fed increases rates, while tax-free municipals provide a yield anchor, increasing the income benefit of the trade today. Should the
curve bear flatter, this trade will position institutions to benefit from rising short-term rates. Given the relative value in both SBA floaters and municipals, this blend can add incremental current yield with less price volatility compared with other traditional depository investments.
Sweeney: This is always a tough question, as it depends on the institution’s risk appetite, liquidity needs, interest rate risk position and interest rate views. Accordingly, I tend to focus more on the alternatives if
the institution needs to invest short or long.
For shorter investments, I would probably
be more inclined to stay in cash or, if you were comfortable with credit risk, short-term corporates would work. If you need to invest longer, current-coupon 15-year residential mortgage-backed or agency commercial mortgage-backed securities fit nicely into many portfolios.
The one asset class we are recommending to stay away from for a little while is municipal debt, until corporate tax reform
or corporate tax rate changes come into better focus.
McQueen: A strong earning bond portfolio is a key to financial success today. We projected low interest rates for ten years in early 2009, so we continue to expect relatively low interest rates for the next few years. To maximize earnings, a community-based financial institution needs to keep the duration of its bond portfolio properly balanced. This means the portfolio needs to be the correct duration based on the asset/liability mix as reported in the Asset Liability Management (ALM) report. In other words, the idea is to have the longest duration bond portfolio possible that fits the unique balance sheet of the institution.
In addition, we are fans of two market sectors today. First, by utilizing our internal credit process and credit reviews, we
are utilizing high-credit municipal bonds
to add yield and duration. Secondly, we
like well-structured mortgage-backed securities – both government agency pass-throughs and CMOs. Investing in these types of securities is a way to add duration, cash flow and yield.
Cuppia: My top recommendation would be to avoid the urge to take too much duration out of the portfolio. As
is always the case, it is important to maintain a balanced portfolio with respect to positioning for duration, credit and liquidity. While the potential for rising rates may incent some investment managers to buy very short-duration instruments, it is important to consider the shape of the yield curve and break-even levels to understand the meaningful trade-off of staying short in anticipation of rising rates.
HOW WELL ARE COMMUNITY INSTITUTIONS PRICING THEIR LOANS AND RETAIL DEPOSITS? HAVE THINGS IMPROVED?
worse, as competitive pressures have continued to push yields down in the face of rising rates. I think the structure of loans that are being put on balance sheets are also getting worse, in terms of how we’re seeing more interest-only structures over longer periods of time and non-recourse lending – things that I wouldn’t consider to be best practices in the underwriting world.
FMS forward | JULY/AUGUST 2017 | 27
On the deposit side, we’re starting to see rates go up across the board, although there’s a lag. The next rate rise will probably be the point of inflection, where you’ll really start
to see institutions increase their interest rates. But even with the rise in March, it takes time for institutions to get there – you really don’t see the impact until the following quarter’s Call Reports are in place. That said, I’m not seeing overly aggressive pricing on the deposit side. There are institutions in some metro markets that are offering 1% money market accounts, which are above the national rate cap and most would consider high. But those are the institutions that are lending it out and 4%, so they’re willing
to bring in 1% money because they’re still earning that 3% spread. Not every institution can do that, but the ones that can are trying to bring in that customer at 1% and then
lock them in with online bill pay and online deposits and other things.
It’s actually pretty prudent. Right now
is the great customer deposit acquisition time – get them now and try to lock them
in before rates really start to move. We do see rates continuing to move up in 2017 and you want to be prepared for that by having products ready so you can be proactive, because six months from now it’s going to take 1.25% or 1.50% to get those deposits.
Smith: From a credit perspective,
I believe competition (from a variety of sources) and increased pressure for yield have created risk-related pricing scenarios that are not ideal. The Fall 2016 OCC Semiannual Risk Perspective indicated that loan underwriting practices continued to ease
Garcia: I think loan pricing has gotten
through the end of year in both commercial and retail credit facilities. Commercial easing occurred most often in pricing, guarantor requirements and loan covenants, while retail easing was more pronounced in collateral requirements, loan size and debt-to-income requirements. In either case, if you increase risk without a change in price, your risk-adjusted yield position is degraded.
From the deposit side, I believe uncertainty over the sustainability of a rate rise has prevented significant rate
adjustment in most deposit categories. Some of the pricing risk that is being taken on the lending side is, in part, fueled by this historically low deposit rate environment that exists on the funding side. While rates going up could certainly impact deposit pricing, I believe the pace of that increase will be naturally slower than corresponding asset classes, and a fairly strong and sustained rate move would have to materialize to actually push deposit pricing to levels that would cause concern.
The key points across all of these questions are: control costs, make sure you are getting the right risk- and cost-adjusted yield for all of your asset allocations and be sure that your measurement systems allow you to accurately evaluate and manage the risk/reward relationships that exist across your organization.
Davis: I think most depositories have avoided paying up too much for incremental loan growth. As the cycle turns and loans become more difficult to source, it will be tempting to relax credit standards without increases in incremental credit spread. However, the crisis remains in the rearview mirror and I think depositories will avoid mistakes of the recent past. The deposit
side is where depositories are really shining, as the Fed has increased the target rate
75 bps with little material increase in overall depository cost of funds. This may be tested later this year if the Fed moves a couple more times, however.
Sweeney: Commercial real estate spreads have improved over the past twelve months and non-maturity deposit rates have not moved in many markets. Both of these items have accrued to the benefit of many community institutions. I expect non-maturity deposit rates and time deposit rates to start moving noticeably upwards after the next Fed rate hike, if
McQueen: Net interest margins are
10:15 pm at historically low positions due to the floor in deposit rates (nearly zero today) and
low loan yields. Loan pricing continues to be competitive, and we have seen overall loan yields decline even as interest rates rise a little. On the bright side, we are beginning to see clients having the ability to improve (increase) yields – especially in higher-risk areas.
Deposit yields have remained relatively unchanged. Near the end of 2016, we saw the demand for deposits grow as loans increased. Today, we are seeing a lower loan demand, and a corresponding lower deposit growth demand. Deposit rates have many influencing factors, including supply and demand, loan yields and alternative deposit rates, so even
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Be sure to stop by Booth No. 402 at this year’s conference to meet the BKD team!
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28 | FMS forward | JULY/AUGUST 2017 871853_Editorial.indd 1
a slight increase in the Federal Funds rate should not result in an increase in deposit yields.
CREDIT UNION CONNECTION
EXPLORING FUNDING ALTERNATIVES FOR CREDIT UNIONS
From lowering their cost of funds (without cannibalizing existing shares) to extending CD durations to regulatory pressure,
Tim Peacock says there are a number of reasons why credit unions today may be interested in exploring funding alternatives. And they have options.
The Senior Vice President of Multi-Bank Securities says that when he thinks of funding alternatives, four major possibilities stand out, each with its own pros and cons:
• FHLB advances
• DTC funding
• Borrowing from one’s corporate credit union
• Listing services
Peacock says that in evaluating which of these four strategies may be the right choice for one’s specific institution and situation, it’s important to consider the differences in the sources of the funding, the diversity of the funding and the settlement processes.
“The source of the liquidity is huge because it ties in closely to how reliable and how accessible the funding is over time – what we call cyclicality,” he explains. “Five years ago, the cyclicality of liquidity (provided by other credit unions) was really high, but as it heads back down the other way, a lot of those same institutions are now looking for their own deposits to fund loan growth.
ASKING THE RIGHT QUESTIONS
The key, Peacock says, is to determine the funding source or combination of sources that best addresses the specific needs of the institution. That means asking some very pointed questions before making a decision about things that might affect your line of credit or your ability to find liquidity through any one particular vendor over the next, including:
• Is collateral required; and what assets can be pledged?
• Are they any reoccurring costs?
• Are there limits to what you can borrow?
“The idea is to understand if there’s anything that can happen that could affect the availability of that liquidity,” he notes. “The other two equally important things to know are what terms and
FMS forward | JULY/AUGUST 2017 | 29
structures are available. There are certain programs that are more geared to short-end borrowing versus long-end borrowing, and thus have different strengths in that regard. Understanding what terms are available and what types of structures are available by any one particular vendor is another factor to consider.”
It may seem like a lot of questions to consider, but Peacock believes asking the right questions in advance can help alleviate problems down the line.
“I really believe that asking questions and doing your homework up front goes so far later on,” he says. “I tell my clients I’d rather you ask a hundred questions today then one question that didn’t get answered the day after you did it. So institutions should be asking not only the broker or whoever’s providing the service, but reaching out to other credit unions and their regulators as well.”
This type of research not only helps build a solid contingency funding plan, but bolsters compliance and regulatory knowledge
as well – growing areas of concern, Peacock says. In particular, credit unions should be aware of the regulatory guidance surrounding non-member shares and federal regulations that cap the non-member portion of outstanding shares at 20%, or $3 million, whichever is greater.
But there’s more at stake than just potential regulatory issues when it comes to contingency funding discussions. There are also risks that come with an economic environment in which rates are going up.
“I think one of the biggest things in a rate environment where rates may move upward is to understand what early withdrawal risk the credit union has on any share certificates,” Peacock notes. “A traditional share CD might carry a six-month early withdrawal penalty, and if rates on a five-year CD go from 2% where they are now to 4% a year from now, the credit union may run the risk of
the depositor taking the early withdrawal penalty and leaving the credit union to replace it at a higher rate.” He further noted that DTC funding and advances specifically limit this risk and, as such, can be the preferred method for those looking to lock in shares two to five plus years.
While funding programs have evolved to be able to support even very small institutions, Peacock says it’s more common to find credit unions asking what their limitations are as they merge and grow larger. For the remaining small credit unions, the questions surrounding contingency funding may be slightly different.
“I think what we find most often is really small credit unions pulling that liquidity off of their balance sheets,” he says. “If they’re just looking for $100,000, they’re probably going to run a local CD special for a day to grab it, or maybe sell a bond or CD to get there. But once they get into an effort to bring in new liquidity, I think all of these programs can be seen as possibilities.” ●
30 | FMS forward | JULY/AUGUST 2017
WHERE IT ALL BEGAN
CHAPTER AND VERSE
Like all great stories, it started with Chapter One.
Nearly 70 years ago, a man named William A. Giraldin first gathered a group of controllers from savings and loan institutions to form the pioneering Los Angeles chapter that eventually would grow to become today’s Financial Managers Society. Soon thereafter, local chapters began popping up in other locales, and by the beginning of 1949 FMS – then known as the Society of Savings and Loan Controllers – was on the road to becoming the national entity it is today.
Seven decades later, FMS still relies heavily on our active chapter network to help deliver regional education and networking events to our members. FMS chapters span the map from New England to the Midwest (with new chapters currently in development in the
South and Texas), offering educational programming via monthly dinner meetings and social gatherings, often featuring expert commentary on some of our industry’s most pressing issues. Many chapters also take the time to spearhead community service projects and scholarship programs designed to give back to their local communities, while also helping to enhance the profile of the greater community financial institutions industry.
The menu below is just a sample of some of the upcoming chapter events that may be taking place in your area. If you don’t see anything nearby, maybe it’s time to think about starting an
FMS chapter of your own! Director of Marketing and Membership Autumn Wolfer would be happy to explain how you can continue this fantastic local tradition in your community. ●
August 2017 September 2017
October 2017 November 2017
Milwaukee Brewers Outing
Capital / Strategic Planning Meeting – Milwaukee area
Topic TBD – Madison area
Annual Tax and Accounting Update – Milwaukee area
2017 Annual Chapter Golf Outing – Wayne, NJ
2017 Annual Chapter Golf Outing – Elverson, PA
2017 East Coast Regional Conference – Bethesda, MD
The FMS educational calendar for the late summer and early fall is coming together – including the popular Controllers Clinic in Philadelphia in August and 5300/Call Report sessions in the Chicago area in early September. We’ll also be adding some new accounting and regulatory-related programming this fall – so be sure to check FMSinc.org for the latest seminars, webinars and chapter events.
Among those offerings you’ll find one of our signature programs – the Financial Managers School, scheduled for September 10–15 on the campus of the University of Wisconsin-Madison
and co-sponsored by the school’s Graduate School
of Banking. This full week of lectures, small group discussions, computer simulations and an integrated case study in an immersive campus setting is designed to address the unique concepts and best practices of bank and credit union asset and liability management. Be sure to visit our education page to learn more!
ON THE HORIZON: FMS EDUCATION
FMS forward | JULY/AUGUST 2017 | 31
Please visit FMSinc.org/Chapters for up-to-date information on chapter events in your area.
New York/New Jersey
08/06/17 2:25 am
would like to thank our Gold Sponsor
Visit them at The 2017 FMS Forum in booth #306
or learn more at www.FARIN.com
6/8/17 1:35 PM
32 | FMS forward | JULY/AUGUST 2017
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