Competitive intelligence for bankers
MAY 2015 bankingexchange.com
CHIEF DATA OFFICERS’ TIME HAS COME DON’T LET UDAAP RISKS HIDE
waiting on the Fed Bankers prepare for rising rates but wonder when the Fed will pull the trigger
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/Contents May 2015
16 Waiting on the Fed The end of rock-bottom rates, whenever it comes, has major implications for loans, deposits, and investment portfolios By Steve Cocheo, executive editor Cover image: Shutterstock
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CDO time Why PNC, Wells, and others have created Chief Data Officer positions By John Ginovsky, contributing editor
May 2015
BANKING EXCHANGE
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/ contents / 4 On the Web
May 2015, Vol. 1, No. 2
Now on BankingExchange.com: Rate impact on liquidity; Kabbage harvest
6 Like it or Not There are few new charters, but there are new banks, in more ways than one
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8 Threads M&A’s toll on small banks; Human side of rising rates; Thrift changes old habits
Executive Editor & Digital Content Manager Steve Cocheo scocheo@sbpub.com
26 Risk Adjusted
Creative Director Wendy Williams
Cyber threat insurance is more available now. Scoping out the options
Design Consultants Sarah Vogwill, Gal Dor
30 Bank Tech
Designer Emily Cocheo Editorial & Sales Associate Andrea Rovira arovira@sbpub.com Contributing Editors Ashley Bray, John Byrne, Nancy Castiglione, Dan Fisher, Jeff Gerrish, John Ginovsky, Steve Greene, Lucy Griffin, Ed O’Leary, Dan Rothstein, Melanie Scarborough, Lisa Valentine
34 Idea Exchange Nonprofit giving: Two out-of-theordinary approaches, plus tips
Director, National Sales Robert Vitriol bvitriol@sbpub.com
36 Compliance Watch Don’t let UDAAP hide in your bank. Empower employees to speak up
Lessons from Cinnabon’s leader. Guaranteed to make you hungry!
Editor & Publisher William Streeter bstreeter@sbpub.com
Webster Bank President Joe Savage on the strengths and challenges of “mid-size”
The Fed wants a faster payment system. Like it or not, you’ll have to be on board
40 Counterintuitive
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14 Seven Questions
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May 2015
Editorial Advisory Board Jo Ann Barefoot, Jo Ann Barefoot Group, LLC Ken Burgess, FirstCapital Bank of Texas, N.A. Mark Erhardt, Fifth Third Bank Joshua Guttau, TS Bank Jane Haskin, First Bethany Bank Trey Maust, Lewis & Clark Bank Earl McVicker, Central Bank and Trust Co. Chris Nichols, CenterState Bank of Florida, N.A. Dan O’Malley, Eastern Bank Dan Soto, Ally Bank McCall Wilson, Bank of Fayette County
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/ ON THE WEB / Popular Stories on
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Book Review: 24 hours is all any of us get, folks
As rate rise looms, are you watching liquidity?
Kabbage hopes to harvest more bank partnerships
Everyone gets a daily 24-hour budget to “spend.” That makes the premise of Elizabeth Grace Saunders’ How to Invest Your Time Like Money fascinating. Is the allotment of time like an asset allocation? Read more at http://tinyurl.com/24hourportfolio
Some bankers concentrate so hard on rate issues that they don’t focus enough on the liquidity impacts of rising rates. Darling Consulting’s Keri Crooks suggests key areas to review. Read more at http://tinyurl.com/ ALCOBeatliquidityplanning
Kabbage, advertised as the “#1 online provider of small business loans,” wants to partner up with traditional banks. Cofounder Kathryn Petralia discusses deals that illustrate potential for its tech platform. Read more http://tinyurl.com/KabbageGrows
Insurance beckons bankers again Acquisitions of insurance brokers or agencies by banks and thrifts in 2015 are on pace to significantly exceed 2014’s deal numbers, according to SNL Financial data. In the case of Pennsylvania’s Bryn Mawr Bank Corp., two recent deals built on experience gained over several years running a small agency. Read more at http:// tinyurl.com/beckonbanks
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/ like it or not /
The new de novos
P
eople are sentimental. Business is not. I found myself feeling a bit sad recently that 109-year-old Palmetto Bank of South Carolina had agreed to sell to Georgia’s United Community Bancshares. A f ter some reflection, I realized that of course there are always reasons for a deal, and that in any case looking to the past, other than to learn from mistakes, is simply the wrong perspective. Forward is the only worthwhile view. Palmetto Bank’s sale is another in an ongoing stream. While the current pace of consolidation is brisk—similar to 2014—the overall number of banks has been shrinking steadily for many decades. One difference is that in the past, the shrinkage was moderated by the many de novos that once “reforested” the land. In the recent era, however, there have been almost no new banks starting up, nor are there likely to be many for the foreseeable future. There are severa l rea sons for the dearth of de novos. A recent conversation with Fred Green, CEO of the South Carolina Bankers Association, shed light on several of the reasons, chief among them the inability of a new bank’s investors to earn an adequate return on the much higher capital hurdle now required by regulators. Naturally, the prolonged lowrate environment (discussed in detail in this issue’s cover story, p. 16) and the high cost of compliance—a burden that is particularly heavy for small institutions—are contributing factors. In reality, there are dozens of startups in banking every year. These are the “neobanks”—banks in function, but not in name or charter. These typically techdriven enterprises develop a solution to handle some aspect of banking in a less cumbersome, unregulated, and less costly way, most often using a mobile device. Dodd-Frank is often cited as pushing more and more of the financial services business back into the so-called shadow banking world as traditional banks pull back on what they can do. Rapidly evolving mobile and analytic technology is
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BANKING EXCHANGE
May 2015
having a similar effect. This trend is on regulators’ radar, and already CFPB and other overseers are beginning to focus on certain areas. Market lending (peer-topeer lending) is one example. But do you want to rely on regulators to keep your institution relevant? Putting it in sports terms, you don’t want the outcome to rest with the officials. What, then? Two things. Pushback and innovation. Ba nk s a re over reg ulated, per iod. Every bank simply must budget time and money to push back against excessive and unnecessary regulations. This effort never stops. Neither can innovation, but it takes a different mind set. Here, an institution needs to continually up its game and sometimes change parts of its game. That includes striking partnerships with (or acquiring) a neobank, as some banks are doing. It also calls for a willingness to change internally. Habits develop and take root that institutionalize practices no longer relevant or necessar y. In this month’s Threads, there is an article (p. 10) about how a 93-year-old thrift picked itself up by the collar and stepped fully into the modern world. Now known, appropriately, as Opportunity Bank, it went through a charter change, an acquisition, and a overhaul of how it conducts its business, with positive results. Likew ise, in the 7 Questions depa r t ment (p. 14), Web s t er Ba n k President Joe Savage talks about the Connecticut-based regional’s change in thinking regarding its large branch network. Points out Savage, “I don’t want to diminish regulatory challenges, but, to me, the far bigger challenge is making sure we’re competitive.” Small banks might disagree with that statement. But even for them, somewhat depending on their market, there are opportunities among all the changes.
BILL STREETER, Editor & Publisher bstreeter@sbpub.com
Neobanks are on the regulatory radar, but do you want to rely on regulators to keep your institution relevant?
Competitive intelligence for bankers
March 2015 bankingexchange.com
DON’T OPERATE LIKE A BANK
NEVER MISS AN ISSUE of
The key to dealing with disruption, says TS Bank’s Josh Guttau: Do some disrupting yourself
INSIDE EASTERN BANK’S “SKUNKWORKS” CLOUD MORE SECURE?
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/ THREADS M&A is gobbling up community banks A surge has been predicted ever since Dodd-Frank passed By Ashley Bray, contributing editor
T
he 2014 mergers and acquisitions market was any thing but quiet, with an average of 25 transactions a month for a total of 305 transactions for the year— 287 whole-bank deals. And that pace is
expected to continue through this year. New legislation was looked to set up 2015 as an active M&A year. H.R. 3329 was signed into law at the end of 2014 as Public Law No. 113-250, and it allows more bank holding companies greater
access to debt by raising the asset threshold from $500 million to $1 billion. However, some analysts think this legislation is addressing the wrong issue— making money, not borrowing it, has been the inhibitor for community banks. “I think the trend toward more bank mergers is being driven more by the stress and pressure on community banks to earn a reasonable return for their shareholders,” says David Baris, partner at BuckleySandler, LLP, and president of the American Association of Bank Directors. “That’s becoming more difficult as a result of compliance costs, competitive factors, the low interest rate, and lower margins.” A report released in February by Harvard University’s Kennedy School of Management, The State and Fate of Community Banking, found steep declines in market share held by community banks since the 2010 passage of the Dodd-Frank Act. Also, banks with no clear management succession plan are being driven to put out the “for sale” sign. On the other hand, banks looking to buy are in the market for the promise of growth. “There is a lot of movement and reconfiguration within the banking industry toward getting larger,” says Curtis Carpenter, principal and head of investment banking at Sheshunoff & Co. “It’s the thought that bigger is more sustainable; bigger is more profitable.” Buyers are becoming more strategic
Upward mobility: TEN-year trend in number of banks—’04 to ’14
$50mm-$150mm
$150mm-$500mm
$500mm-$5b
Group has shrunk by 1,124 (34%) through growth, sale, failure
Reduced by 68 banks (3%). As one grows or is acquired, another acquires a smaller bank
Group has grown by 285 banks (32%) in ten years
Source: Sheshunoff & Co.
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BANKING EXCHANGE May 2015
as well. “This is all for replacing organic growth, buying market share, moving into new territories,” says M. Patricia Oliver, partner and chair of financial services industry practice at Tucker Ellis, LP. “They’re battling like crazy for good loans, so they’re looking for markets where they can find business customers as well as retail customers.” Having buyers and sellers on the market is good, but does not necessarily mean more deals. One reason is the regulatory process has gone from a formality to a significant hurdle both parties must clear. Tying up the process can lead to fees and problems in the day-to-day operations of the bank. “Buyers want a long period of time to close transactions, but it’s in the seller’s best interest to close them relatively quickly after regulatory approval,” says W. Kirk Wycoff, managing partner of Patriot Financial Partners, LP. “It’s hard to retain employees and serve your customers well in the seller’s organization while you’re waiting to close.” Both parties also should be sure they are familiar with the stock purchase agreement, because any misunderstandings can lead to shareholder activist suits over price and management issues. Stock purchase agreements are common in bank M&A now since cash deals are rare. “ T he p er for m a nc e i n t he i ndu s tr y cont inue s t o improve since t he G r e a t R e c e s s ion a nd s t o c k pr ic e s
Four banks comprise 49% of industry assets JP MorganChase, 15.1% Bank of America, 12.7% Citigroup, 11.2% Wells Fargo, 9.8%
continue to increa se; that’s a g reat r e c ip e for b ot h buyer s a nd s el ler s to want to use stock in a transaction,” says Jeff Fickes, partner at Tucker Ellis. What’s the result? Consolidation on a level never seen before. Community banks are the fastest shrinking piece of the pie, with over 1,100 banks in the $50 million- to $150 million-asset range lost in the last ten years. “The problem we see is that once a community bank is sold, they’re not being replaced because there are so few de novo formations going on,” says Oliver. One last year, and one announced this year. This decline signals a few things. “If you’re looking at growing through acquisition, you better get on it. Because it may be that the bank that you want to buy is going to be gone,” says Carpenter. “If you’re looking to sell, you need to keep an eye on how many banks there are that are large enough in your area to buy you.” All this may seem to paint a dire picture for the future of community banks. But some have found a way to survive independently—offering more fee-based products and ser v ices; hir ing dedicated lending teams; or purchasing loan portfolios, bank branches, or nonbank lending companies. “I think there is an argument that size matters more than it used to, but I also see very small banks succeeding and doing very well,” says Baris.
49%
Advice for working up the ladder
E
d O’ Lear y worked many credit jobs before becoming a bank CEO. He saw all kinds try for the top, and he learned that a key ingredient for getting to the top, and staying there successfully, was not kidding yourself that you were making good things happen by yourself. In a recent BankingExchange.com blog, “Survival Advice for Bank CEOs,” O’Leary writes: Operations people can help you enormously as you work through customer issues. It’s literally on-the-job training and should be approached in exac tly that way. Often, the people who can help you the most may not have high sounding titles and may not be members of the bank’s official staff at all. Yet I’ve seen many lenders, especially those who have advanced quickly, disdain any involvement with back-office staff. They want their issues resolved immediately. So often their demeanor is downright disrespectful, whether they overtly try to be or not. I remember a colleague of some years ago, a 34-year-old VP, being fired over a misstep that would have been overlooked if he hadn’t had a long history of high-handed treatment of the back-office staff. It was a “gotcha” moment. Lenders of any age who don’t understand that they earn a large portion of their pay by their ability to get along with people are simply not earning their keep. They also don’t have a clue that banking in its fullest sense is a team effort. Read more at http://tinyurl.com/ CEOSurvival
May 2015
BANKING EXCHANGE
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/ THREADS /
Opportunity knocked and brought big change
A 93-year-old thrift grabbed a chance to expand, switch charters, and change its business model By Bill Streeter, editor & publisher change was approved, but required the bank to remove “Savings” from its name. “American Bank” was already taken, so management opted for Opportunity Bank. Currently, the bank—primar y asset of Eagle Bancorp Montana, Inc.— has $555 million in assets.
Time to change old habits
A
t one point during a management retreat about six years ago, a board member of American Federal Sav ings Bank, Helena, Mont., voiced the opinion of many by saying, “We’ve been talking about shifting to a commercial banking model for years; let’s get serious about it.” Nobody objected, so management developed a plan that initially called for a portfolio of 30%-35% commercial and commercial real estate loans, a goal that was quickly met. “We knew we would have to move away from a thrift charter to get away from qualified thrift lender restrictions,” says Peter Johnson, president and CEO, and a 33-year veteran of the bank. AFSB had already taken steps in that direction. In 2000, the mutual institution, founded 10
BANKING EXCHANGE May 2015
in 1922 as a building and loan, created a mutual holding company, selling 40% of its stock publicly. In 2010, the company went fully public, which brought in about $25 million in capital, says Johnson. Most of that was deployed two years later when the oppor tunity arose to acquire branches and several mortgage lending locations from Sterling Bank of Spokane, Wash. AFSB went from six to 13 branches—almost doubling its employees and tripling its mortgage lenders. The deal brought 1,400 customers, $180 million in deposits, and $40 million in loans. A s par t of the transaction, A FSB received a large influx of cash from Sterling, which, says Johnson, it needed to convert into loans. That’s when management approached regulators about switching charters. The
Momentous as the charter change was, it was just the beginning of an ongoing organizational overhaul. Sterling Bank had operated on a highly centralized, highly automated basis, whereas A FSB had been much more decentralized, with underwriting decisions still involving a large degree of individual attention. By the time Opportunity Bank had navigated the tricky waters of system conversion for its new branches, it realized two things: It needed to renegotiate its core system contract, and it needed to improve efficiency. “We’d been doing things a certain way for years,” says Johnson, “and our DP system dated from the mid ’80s,” all of which led to some bad habits. The bank had not had great experiences with consultants over the years, so it was willing to try someone new. It hired Vitex, a f irm known mostly for technology consulting. “ They approached us,” says Johnson, “and indicated they had a broader scope. I knew we would need help with our DP contract, so that was their foot in the door.” Senior Consultant John Muell and another Vitex consultant f lew in every Sunday night from the East Coast to spend the week with Opportunity Bank from Januar y to June of 2014. They employe d a t e a m-ba se d appr oa c h , meeting each week with “action teams” comprising seven to eight bank employees, ranging from front-line people to senior managers. “These teams unleashed a lot of initiative and creativity,” says Johnson. There
was a management oversight committee, he says, but “there were only a few ideas that we had to put the brakes on.” “People are more accepting of new ideas if they help develop them,” Muell says of the team approach. “Branches at American Federal were much more operations driven,” says Muell. “Sterling branches were much more sales driven.” It was decided to migrate more to the sales approach overall, and the consultants helped set up the reorganization to achieve that, including modeling every department to determine how many staff members were needed— currently, and as the bank grows. On the mortgage side, for example, AFSB had always used a salaried origination staff. “ We ’ r e s l o w l y m e l d i n g t h e t w o
approaches,” says Johnson, “but in the future, we will use the commission model more.” He notes that salaried employees were not forced to switch.
All departments modeled The bank knew it was overstaffed compared to peers, says Muell, and the depar tment models helped identif y where the excesses were. But, he says, “the organization was not in dire straits, so this was not a head-chopping exercise.” “We were up front with people,” says Johnson, “explaining that in order to be more prof itable and more in control of our own destiny, we needed a reduction in force, but that it would be through attrition. If you engage people early on, they won’t think, ‘I don’t want
my co-worker to get fired,’ and so [they] won’t be fearful of participating.” The bank is working toward a 24% staff reduction and moving its efficiency ratio from the mid 80s to the low 70s over the next three years. All these changes are intended to help continue Opportunity Bank’s long, successful run. (Short-term results aren’t bad either—the company tripled its net income in the first quarter over 2014.) The Sterling branch acquisition was a growth opportunity, but Johnson doesn’t believe that there is any particular “minimum” asset size to be viable. It varies by market. As a former Federal Reserve examiner, Johnson says of very small banks, “If they do a good job, they don’t have to be a certain size.”
Latest thinking on D&O Will protection be there for directors and officers?
J
oseph Saka is counsel in Lowenstein Sandler LLP’s Washington, D.C., office. He represents insureds in disputes with their insurance companies and helps clients maximize the value of their insurance assets. In a recent BankingExchange. com article, “What’s under the glass,” Saka writes: Directors and officers liability insurance provides coverage for loss resulting from wrongful acts committed or allegedly committed by directors or officers in the course of their duties. “Wrongful acts” is generally a broadly defined term in D&O insurance policies. For example, one policy defines wrongful acts as “any act, error, misstatement or omissions, neglect or breach of duty.” Given this broad definition, an insured director or officer may assume that he is protected for a wide range of exposures, including those arising out of a bankruptcy or insolvency. Unfortunately, D&O insurers have sought to limit the scope of coverage for directors and officers for claims following the bankruptcy of holding companies or the failure of financial institutions. Two of the more common defenses that are asserted by insurers are the insured versus insured exclusion and a late notice defense. Regarding the first, these exclusions became common in D&O insurance
policies in the 1980s, following several collusive lawsuits brought by insured companies against their own directors and officers. Following the financial crisis of 2008, several insurance companies have asserted the insured versus insured exclusion as a bar to coverage for claims brought by bankruptcy trustees of insolvent bank holding companies or by FDIC against failed f inancial institutions’ directors and officers. While the insured versus insured defense should not be an obstacle to coverage for directors or officers based upon the significant body of case law finding the exclusion inapplicable, it is beneficial to seek that clarification at the time of purchase or renewal. Regarding late notice, D&O insurance is commonly written on a claims-made
basis. This means that the policy provides coverage for claims made during the policy period—regardless of when the alleged wrongful acts took place. Because the definition of claim differs from policy to policy, it is important to be aware of how it is defined. Additionally, under many D&O policies, there are two important alternatives to providing notice of a claim during the policy period: a notice of potential circumstances, and an extended reporting period. The purchase of the extended period can be particularly important in the contex t of a bankrupt holding company or failed f inancial institution, because many claims may be submitted after the expiration of the policy period. Read more at http://tinyurl.com/ DandOwarning May 2015
BANKING EXCHANGE
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/ THREADS /
HUMAN SIDE OF RISING rates “Guy on street” ready for increase By Steve Cocheo, executive editor
B
a c k i n t he m id-1 980 s , S a r a Walker faced a generation gap. Wa l k e r ’s f a t he r -i n - l aw h a d a 6% mor tgage. She and her husband, meanwhile, had a 13.74% mortgage—“and I was a bank employee with a special rate,” Walker recalls, the high rate burned into her memory. Walker says she used to w istf ully wonder if the couple would ever see a mortgage rate of their own as low as 6%. Try getting a millennial to understand what life was like back then, when mortgage rates have been so low for so long and refinancing has been so common. “All that many people today know is a falling rate environment,” says Walker. “I’m hopeful that young people don’t get to know the high-rate environment that I personally experienced.” Walker wears two hats at $26.6 billion-assets Associated Bank, N.A., Green Bay, Wis. She is the bank’s chief economist, and, as she likes to say, her day job is senior vice-president and investment officer at Associated Wealth Management. Working that combination of jobs gives Walker the opportunity to not only absorb and process a huge amount of arcane financial data, but to hear across her desk—and from the bank’s lenders and others—the views of real people. As the likelihood that the Fed will raise rates sometime this year looms, she has gathered impressions of what people hope for. “The average guy in the street is expecting rates to go up—is wanting rates to go up in many respects,” says Walker.
Two sides of banking Walker says many people have grown exasperated with the pitiful returns they receive on deposits. “They will be looking for rates to start rising on savings accounts,” she maintains, “and I don’t think there is as much loyalty as there used to be.” According to Walker, bankers have come to realize that inertia is their friend when it comes to deposits. And people won’t move for a few basis points. “When rates are so low that they are close to 0%,” she says, “they are zero.” She anticipates 12
BANKING EXCHANGE May 2015
Banks will feel pressure to pay up, says Associated Bank economist Sara Walker
that once rates begin to rise, consumers will migrate in search of satisfaction of their pent-up demand for a decent return. In some markets, banks seeking additional retail funding have started paying up for deposits. Business accounts, tied to a bank by much more than a single deposit relationship, won’t be so apt to walk, she continues. But banks can expect some itchiness. The recession taught American business a renewed cost consciousness and ef f iciency, Walker believes, and “they’ve become more attuned to profitability. They want the best deal.” She says businesses will want higher rates, but beyond that, they will expect better payoffs on the quasi-interest that businesses at many banks receive on analyzed account relationships. As rates rise, they will demand higher earnings credits, which are typically applied to banking fees and related costs. “When I talk to our lenders, they tell me that the environment out there is brutally competitive,” says Walker. This will pressure banks to meet such demands. More than ever, banks and their customers face an env ironment that is uncertain, yet full of data and information. “People are trying to decode Janet Yellen’s messages,” says Walker, “but they are also cognizant that the whole
environment is more challenging.” Indeed, ref lecting on today’s “open” Fed versus the closed-mouth Fed of decades past, Walker observes that Fedwatching remains an active sport. For all the information the Fed and the Federal Open Market Committee puts out, she says, much effort still goes into sussing out what the Fed is actually up to. Cha ir ma n Yellen herself rema ins a contradiction in industr y opinion. Walker says she’s heard Yellen described as “a collaborator to the extreme,” but she also has heard the Fed chief described as “independent-minded.”
Banking under rising rates For banks themselves, Walker suspects that expectations for a rising rate environment will prove out differently than traditional thinking anticipates. One factor is that markets now tend to react to the news about an upcoming event moreso than to the actual event. Back in May 2014, for example, when the Fed announced that the final round of Quantitative Easing would end that September, the markets reacted to the news more strongly than the event later on. “When it happened, it was no big deal,” Walker explains. A constant in its influence has been the impact of the yield curve—simultaneously
a reflection of Fed activity and a monitor of the markets’ outlook and expectations. Who will be favored: the asset-sensitive bank or the liability-sensitive bank? “I’ve been wrestling w ith that,” says Walker. “We see the curve f lattening a bit. That doesn’t help banks, in general terms.” A fall in long-term rates would typically favor the asset-sensitive, she says, but some institutions have investment holdings that must be marked to market. “It’s a lot less clear than it used to be,” says Walker. (See cover story, p. 16.) R ising shor t-term rates, in a time of a f lattening yield curve, may have a quicker impact on banks’ deposit costs than on their returns on assets. Walker thinks some institutions may wind up
getting squeezed at both ends. She says there’s also the unknown of what the Fed will do later in its efforts to prevent inflation from picking up speed. And something of a wild card, in terms of the ultimate impact on banks, is the increased ability to sell loans—moving a rate-sensitive asset off the books, if need be. “I would say that right now, things are as unclear as ever,” Walker says. One thing Walker doesn’t expect to see change is banks’ post-crisis attitudes. “In general,” she says, “banks remain conservatively run. The regulators, in many respects, are insuring that. I think they [banks and regulators] are reading from the same page. For banks, there isn’t much reward for being on a different page.”
Friendly neighborhood target?
D
By Steve Cocheo, executive editor
id you ever have the feeling you were being watched? Today, if you are a senior executive of a bank, chances are you will be—if you aren’t already—by hackers, malware attackers, and others bent on harming your bank. Financial institutions offer the bad guys an open door, in some ways, and, to a degree, they can’t help it. American banks and other businesses tend to be very open about who’s who in the hierarchy. It’s rare that a bank doesn’t feature something on it s “About us” page about officers and board members. Of course, the intent is to put a face to the institution and to show that the bank wants to hear from customers. This infor mat ion is open to anyone w ith a web browser, including the bad guys. “This gives them a pretty good idea of who they need to attack,” warned Jeffrey Korte, director for community institution and associations at FS-ISAC (www. fsisac.com/about), a member-ow ned nonprof it orga ni zat ion t hat sha res
threats and potential responses to cyber attacks and related technology problems. (FS-ISAC stands for Financial Services Information Sharing and Analysis Center. More than 5,000 organizations now belong to the group.) Korte, speaking at the annual convention of the Independent Community Bankers of America in March, said that cyber frauds will attack an organization’s network at its weakest point. However, time is money for the criminals, too, so they target their efforts. The executives and key staffers, as well as the system and ne t w ork a d m i n i s t r a tors, and the third-party vendors represent highpriority opportunities. B e t w e e n a b a n k ’s ow n website and publ ic f i l i ng s, plu s ot her public on li ne sou rc e s ( ju st t h i n k about t he extensive information posted on LinkedIn alone) Korte said that a bank’s c y b e r a d v e r s a r y c a n b e c ome v e r y familiar with its target before launching the va r ious t y pes of at t a ck s. Read more at http://tinyurl.com/ friendlyTargetBE
TD Ameritrade’s social plunge
N
av igating the water s of social media can be daunting for many financial institutions. But in order to reap the benefits that social offers, a company must at least wade in. “I think the number one barrier to entry with most investment firms and banks out there is that they’re concerned about the regulatory environment,” says Nicole Sherrod, managing director of active trading at online broker TD Ameritrade. “But I feel strongly that digital and social have to be a big part of going-forward strategy because that’s where the people are.” Sherrod tweets officially @TDANSherrod TD Ameritrade has found a variet y of ways to harness the potential of social media, including integrating its trading platform, called thinkorswim, with Twitter. Thinkorswim users can easily share settings and charts on the social platform with one click. The company also became the first major online brokerage firm to tap into Twitter as a research tool. Under the new social tab in brokerage accounts at TD Ameritrade’s website, clients can view a variety of information from Twitter about specific companies, including tweets, social media sentiment, and social media volume. “Our strategy now is to really create tools for our clients that allow them to have a more meaningful dialog in social media,” says Sherrod. Read more at http://tinyurl. com/TDASocial
May 2015
BANKING EXCHANGE
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/ Seven Questions /
IN THE MIDDLE AND LIKING IT
So far, regional Webster Bank has managed to remain comfortable in its own skin, says Joe Savage By Bill Streeter, editor & publisher
I
t’s hard to imag ine Webster Bank being considered a SIFI. It ha s a ways to go, to get there, to be sure, but solid organic growth plus a sizeable acquisition or two could bring the $23.1 billion-asset company close to the $50 billion threshold of a “systemically important financial institution” in a few years. If it remains largely as it is now, however, it would be a stretch to consider the Connecticut-based regional as systemically important. That’s not a put down. It’s simply that Webster fundamentally is a meat-andpotatoes bank. Webster Bank began life in 1935 as a thrift, founded by the father of its current CEO, Jim Smith. It
came out of the crisis were appropriate for the five biggest banks and brokerages, not the rest.” He points to the Volcker Rule as appropriate for banks engaged in trading derivatives, but detrimental to the banks—and their customers—who engage in swaps and derivative transactions to protect their business. Though happy in its regional niche, Webster, like all banks, takes nothing for granted in this era of rapid, competitive change, including the scope of its network of 164 banking centers. Savage expands on this and other points in the following dialog, edited for space and clarity.
changed the look of our banking centers to be more open to work with the concept of universal bankers, who have been trained to encourage and engage in consultative conversations to uncover and match client needs with the products or services we have. It’s really the customers’ preference how they want to connect with us, and we are investing heavily so that any vehicle they want to use, we make available. But we think branches—smartly laid out, in key locations—are very important.
Q1. Has Webster reduced branch numbers or changed their role?
That’s a core principle for us. Any money we make in excess of our cost of capital—economic profit—over a period of time brings the true differentiated market value of equity. We’re acutely aware that we have not yet achieved the requisite cost of capital, but the great thing, from our perspective, is if you look at the financial results and the operating leverage for the community bank [the part of Webster in which the branch network falls], you see a nice uptrend. That team is working very hard to achieve our cost of capital. So as long as we think the trajectory is correct, we’re going to stay at it.
The number is down slightly, but what we’ve been doing is more of an optimization. In some markets, we’ve gone from having three branches to two, and we’ve been taking the size down when we can. We’ve reduced the square footage of our branches by 14% since 2010—including 5% last year. We do this by moving to different locations in the same community. With our f lagship banking center in Waterbury, for example, which had a very large f loor area, we moved it into a smaller space next door and installed our HR division in the former branch space. A ll this is in response to people’s evolving banking habits—using mobile banking, for example, which one-third of
“I don’t want to diminish regulatory challenges, but the bigger challenge is making sure we’re competitive in mobile and maintaining customer trust by dealing with cybercrime” switched to a commercial bank charter in 2004, and operates the largest health savings account provider in the country—HSA Bank. Says Webster President Joe Savage, “Ninety-nine percent of banks in this country are doing now what they were doing over the past several decades—making loans, taking deposits. The rules that 14
BANKING EXCHANGE May 2015
our customers do. But there is still a need for personal attention. Our business bankers believe our branch managers are integral to our success in business banking—particularly for businesses at the smaller end of the commercial market. We recognize that people visit a branch less frequently, so we want to be able to discuss a broader range of services. We
Q2. With all the brick and mortar, how do you get adequate return on capital?
Q3. How does the millennial generation differ from any emerging generation? I’m rocked when I see the frequent checking of mobile phones by millennials. But that is their vehicle for communication, and we are investing heavily to keep up with big banks and nonbank app enterprises. The branch network has an older demographic feel, and we’re trying to make it more relevant as part of channel optimization, but we understand people want to transact via mobile. That’s where our dollars are being invested, so customers get all the utility they expect. We believe we have a competitive advantage based on the ubiquity of our channels and because of the personal relationships we have with customers. We think when we get them using our app, we will get them into the branch also.
“HSA Bank makes Webster the largest HSA provider. It is an incredibly sticky deposit engine. If rates rise, we don’t think there will be a great deal of sensitivity”
Q4. You’ve been evolving from a traditional thrift to much more of a commercial bank. Given the regulatory changes, how important is the mortgage business to you now? Mortgage is part of our DNA and the totality of our consumer banking services. I’m not feeling a lot of regulatory pressure as qualifying mortgages are not a problem for us. We can’t think of a better point of entry into the heart and mind of retail clients than through the mortgage channel. A high level of first mortgage and home equity customers have checking accounts with us, and, if not, we work hard to get them. But our commercial business is growing faster. Commercial loans have grown from 45% to 56% of our portfolio since 2010. It’s really C&I and owner-occupied commercial real estate that’s driving business. Q5. Webster grew by acquisition during the 1990s, up to about 2005. M&A has once again picked up throughout the industry. Will acquisitions supplement organic growth again at Webster? Between HSA Bank and our commercial and business banking franchise, we’re seeing very significant organic growth. Putting that aside, if we could get a
transaction that would benefit shareholders over a reasonable period of time, with like-minded partners, we would consider it, but we’re not going to overpay. We’re more about organic growth now. Q6. Talk about the significance of HSA Bank. Is it a deposit engine for you? We have over a billion dollars in commercial loans in Boston, a billion-plus in metro New York, and another billion in the Philadelphia/South Jersey area. If we didn’t have HSA Bank, we’d be putting a lot of pressure on our deposit-generating businesses. We could not keep up with the strength of the franchise. HSA Bank is a national platform, making Webster the largest HSA provider in the nation. It is an incredibly solid and sticky deposit engine for us. When you think of the nature of the product—a tax-advantaged way to salt away dollars for medical expenses—if interest rates rise, we don’t think there’s going to be a great deal of sensitivity compared to money market deposits and the like. Some activist investors have taken the position that Webster should spin this out. We believe its best use is an incredibly liquid, stable, relatively inelastic source of deposit funding for the institution.
Q7. What are the strengths and challenges of being a mid-sized bank? One strength is you know how you get paid—taking care of customers. We eat and sleep client success. We’re of a size that we can recruit some of the best people and come up with useful products—like swaps or foreign exchange. Challenges? Developing infrastructure to fight cybercrime or offering mobility or the premier cash management system are significant capital investments. We have to say, “If we’ve got to do this, then we can’t do that.” It’s getting the capital budget in the right pews, so to speak. I don’t want to diminish regulatory challenges, but, to me, the far bigger challenge is making sure we’re competitive in mobility and maintaining customer trust by dealing with cybercrime. That takes a lot of capital and talented people.
Joe Savage is president of Webster Financial Corp. and Webster Bank, Waterbury, Conn. The $23.1 billionassets company operates primarily in four northeastern states. HSA Bank, a division of Webster Bank, operates nationally. Savage joined Webster in 2002 as head of commercial banking. May 2015
BANKING EXCHANGE
15
Bankers prepare for rising rates, but wonder if the Fed will pull the trigger. Strategies for loans, deposits, investments discussed
Waiting on the Fed
16
BANKING EXCHANGE
May 2015
By Steve Cocheo, executive editor & digital content manager
down to again should inflation return. Some bankers question the appropriateness of an increase, out of concern for the state of the national economy—or in recognition of local conditions. Some markets, even at this date, are only beginning to really emerge from the recession. For example, Luanne Cundiff, executive vice-president at $294.6 million-assets First State Bank of St. Charles, Mo., says in major parts of her markets, commercial loan demand has only begun to return. “We haven’t seen that in quite a while, and people talk today about ‘the new normal,’” she says, with businesses, until recently, sitting tight and staying liquid. Even where demand for credit has been stronger, skepticism and concern are heard. In Woburn, Mass., Frank Kenney, CFO at $1.3 billion-assets Northern Bank & Trust Co., notes that his bank has been growing its loan portfolio—mostly C&I loans recently—about 18% annually. But he’s concerned about the national picture. “It’s pretty clear that the Fed is poised to make a move on rates,” Kenney says. “But I wonder how fast and how much. Is the country’s economy strong enough to support a significant movement?” Jim Cornelsen, president and CEO at $1.2 billion-assets Old Line Bank, in Bowie, Md., says his company puts an emphasis on credit quality in all parts of the cycle. The intent is to insulate
We’re entering a period of a flat yield curve—not the best thing for banks Jim Cornelsen, Old Line Bank the bank from rate movements through the profitability that results from constantly, but carefully, making loans in all business environments. But Cornelsen worries about the impact of rising rates on business borrowers. Say a borrower has a f loating-rate commercial real estate loan, Cornelsen explains. The borrower may be able to absorb a small increase. But what if his loan rate should rise by 300 basis points over a short period? Bankers f ind themselves balancing prudence with the need to generate revenue in a time of margin compression. Now that the Fed has opened the door to a possible rate hike, maintaining that balance becomes more difficult for bankers, at least in the short term.
Yield curve shows signs of flattening U.S. Treasury yield curves
6
December 31, 2013 – December 31, 2014 Spot yield (%)
5
12/31/13
9/30/14
12/31/14
4
3
2
1
ar Ye 30
10
Ye
ar
ar Ye 7
5
Ye
ar
ar Ye 3
2
Ye
ar
r ea 1Y
th on M 6-
M
on
th
0
3-
W
hen asset-liability management consultant Jef f Reynolds talks to banker audiences these days, he often asks who carries an iPhone. Most listeners raise their Apple smartphones in response. Then Reynolds, managing director at Darling Consulting Group, springs the punch line: “The last time the Federal Reserve raised rates, the iPhone didn’t exist.” This makes an impression. The now ubiquitous devices arrived on the scene in late June 2007. The last time the Fed raised rates was in June 2006. They’ve been near 0% for more than six years. With the Fed’s announcement that it will slowly begin to raise rates again— maybe even “slowlier,” since indications are that the move will be later rather than sooner—many banks champ at the bit, hoping for a return of fatter margins. “It’s clearly taken a lot longer for the Fed to come back around to raising rates than was expected,” says Chris Niles, CFO at $26.7 billion-assets Associated Banc-Corp. For some time now, most banks have become shorter and shorter overall, in anticipation that rates would begin to rise again, says Niles. Reg ulators have been hammering banks for years to be ready for rising rates. People interviewed for this article point to an article FDIC published in its Supervisory Insights—“Nowhere to Go but Up”—that warned of rising rate exposure. FDIC published that in January 2010. Not surprising then, that even as banks prepare for rising rates in the wake of the Fed’s announcements, or point to strategies that have been in place for some time, that a degree of doubt emerges. “I’m pretty skeptical, because I feel like we’ve been ready and waiting for some time,” says Tracy Bacon, COO and CFO at $885.5 million-assets FirstCapital Bank of Texas, in Midland. “I’d be surprised if they do it in the summer.” If an increase comes at all, she says, maybe this fall or maybe even December. “I think the Fed has kind of wanted to get the process started, but I don’t think it will ratchet up as quickly as we’ve seen the Fed do in the past,” says Kim Davis, executive vice-president and CFO at $2.6 billion-assets Capital City Bank Group, Tallahassee, Fla. Associated’s Niles suggests that the Fed may advance rates in part so it will have somewhere to go
Source: Federal Reserve’s H. 15 Statistical Release. The quarterly average rates shown above represent a threemonth average of the monthly average rates published by the Federal Reserve.
May 2015
BANKING EXCHANGE
17
/ WAITING ON THE FED /
Up is good—with caveats
“The higher and steeper the yield curve, the better,” says Capital Bank of NJ’s Dave Hanrahan.
Middle market firms are savvy about rates and seek fixed-rate credit, says Jim Kivlehan, Blue Hills Bank.
18
BANKING EXCHANGE
May 2015
Most bankers interviewed want to see rates rise and generally feel prepared for it. “It will happen—this year or next,” says Sangeeta Kishore, senior executive vicepresident, CFO, and senior risk officer at $658 million-assets Kish Bank, Belleville, Pa. And when rates rise, Kishore anticipates that the bank’s net interest income will rise. “ T her e a r e s ome ba n k s t h a t a r e exposed to rising rates, and there are some that are poised to do well,” says Darling Consulting’s Reynolds. Most of the bankers interviewed felt upbeat about increases, in concept. “Net rising rates will have a positive impact on our finances because we stayed short,” says Capital City’s Davis. He notes that the bank kept its investment portfolio short, not stretching for yield and concentrating on instruments backed by the federal government. “We sacrificed short-term earnings, and we haven’t gone out on the yield curve and won’t lower our standards,” he says. “At the end of the day, we’re extremely well positioned for rates to go up.” David Hanrahan’s $374.4 millionassets Capital Bank of New Jersey has an unusual perspective on this transition. The bank opened in April 2007, so, Hanrahan, president and CEO, explains, its entire existence has been in a declining or flat rate environment.
I think the Fed wanted to get the process started, but I don’t think it will ratchet up as quickly as in the past Kim Davis, Capital City Bank Group
“Rising rates will absolutely be a good thing for Capital Bank,” says Hanrahan. “We bankers lend long and borrow short. The higher and steeper the yield curve, the better, and the sooner, the better.” Hanrahan expects some initial pain in the investment portfolio, but he is willing to take that for the greater potential. The bank has managed its cost of funds well enough to make money, says Hanrahan, but there are limits. “When I think of my cost of funds, I feel like I have been wringing out a wet towel,” he says. “But now that towel has gotten bone dry. The biggest threat to my bank’s income is that rates stay exactly where they are today.” At $202.7 million-assets First United Bank and Trust, Madisonville, Ky., Karen Glenn, president and CEO, says her bank is slightly liability sensitive. As a result, she expects to see some margin compression when rates rise, but says the bank is looking at costs in other areas to balance the initial impact. The bank’s investment philosophy will help. It emphasizes selecting investments with a “pay down” feature. Certain investments have periodic payments that are passed through to investors. First United reinvests those at current rates, so the bank will invest into higher-rate instruments as rates rise. What worries Old Line Bank’s Cornelsen is an unfriendly rate spectrum. “I think we’re entering a period of a very flat yield curve, which is not the best thing for banks,” he explains. He adds, as did other bankers, that the rate f loors many banks put in place on the way down will have a delaying effect as rates rise. Margins are only one side of the revenue puzzle cube, notes Luanne Cundiff.
Top: © Brooks Kraft/Corbis
Fed Chair Janet Yellen’s nod toward raising rates has many banks champing at the bit waiting for it to happen.
“There are people working in banks now that have never worked through a rising-rate environment, and that’s kind of scary,” says Greg Judge, managing director, liability and strategic coach consulting, at Pacific Coast Bankers’ Bank. “In fact, these are really tough times for banking, because no one knows where anything is going.” Chris Nichols, chief strategy officer and head of the correspondent division of $3.7 billion-assets CenterState Bank of Florida, N.A., travels extensively among bankers, and he’s concerned that many aren’t as well prepared as they think. In an article on BankingExchange.com, he recently noted that at his own bank, if the first Fed increase hits soon, only 17% of loan rates will reset upward, with deposit rates rising sooner. Some bankers interviewed acknowledge that there will be early additional margin compression at their banks. Nichols hopes all who will be affected know it.
“If banks compete [for loans] again like last year, margins will continue to suffer.” Beyond that, she expresses the view of others saying, “I’m not willing to make all my bets on the Fed and what their activities are going to be.” Indeed, Darling Consulting’s Reynolds believes bankers must keep in mind how, in the Peanuts comic strip, Lucy would offer to hold a football in position for Charlie Brown to kick—and then always whip it away at the last second.
W
e asked bankers about three key components of assetliability management in regard to rising rate potential: loans, deposits, and investments.
Loan impact Business banking remains a very local affair. For example, commercial real estate lending tends to be at f loating rates in some markets, whereas in others, there is a tendency toward fixed rates.
Businesses attempt to “read the Fed” as much as banks do, bankers report. So, in many markets, business customers try to lock in today’s low rates, sometimes for especially long periods. Darling’s Reynolds points out that many business loans are coming up for repricing and resetting. He expects to see some credithungry lenders go long to snap up share. Northern Bank’s Kenney, of Massachusetts, confirms that borrowers in his market understand rates and the rate curve as well as bankers. He says some business customers have been pressing for fixed-rate loans of seven to ten years, when the bank’s practice has been to go no longer than five. He says on C&I loans, the bank will now commit to as much as a 15-year term—but with a fiveyear rate adjustment. Old Line Bank’s Cornelsen, of Maryland, reports a similar approach, such that 84% of the bank’s portfolio is f loating rate. (Both Kenney and Cornelsen are in growth markets.) However, in many areas, “the growth
rate for banks isn’t that great,” says Greg Judge of Pacific Coast Banker’s Bank. “ They ’re ba sica lly pa ssing business around.” Still, banks’ willingness to accommod at e t h i s dema nd va r ie s. W h i le souther n Flor ida is hopping aga in, northern Florida, where Capital City is based, is a different world, according to Davis. However, while “there’s a lot of pressure to do ten-year fixed-rate loans,” he says, “we won’t do that—3.5% for the next ten years? We’re just not interested in that.” While correspondent banker Nichols believes the portion of banks that hedge against rate risk is small, several banks interviewed do some hedging. At FirstCapital, Bacon says, “I don’t anticipate that we’ll do a ton of that, but we will for some of our strongest customers.” Only a handful of borrowers have been served in this way so far, she adds, and the bank, not willing to take rate risk, sought protection by laddering Federal Home Loan Bank funding to offset it.
Bankers are unwilling to base all decisions on what the Fed might do—or when
May 2015
BANKING EXCHANGE
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/ WAITING ON THE FED / At $1.7 billion-assets Blue Hills Bank, Boston, Jim Kivlehan, executive vicepresident and CFO, has been guiding the former mutual as it becomes an increasingly active business lender. The bank has been growing aggressively, with the portfolio increasing by 35% in 2014, chiefly via C&I and CRE lending. Part of the bank’s strategy has been to go after middle-market borrowers, rather than to compete head-to-head with community banks for small business loans. Kivlehan says middle-market firms are sav v y about rates and seek fixed-rate credit. To avoid rate risk, Blue Hills makes extensive use of interest-rate swaps. “Without swaps, I don’t see how we could have grown the way we have,” he says. Blue Hills outsources for the swaps expertise, using a consulting firm. “This is a derivative, and it can get complicated,” explains Kivlehan. “You want to get the documentation right.” Some borrowers actually have their own swaps consultant, so the bank wants to bring the same strength to the table. Kivlehan says this costs, but the safety is worth it. Banks need to be aware of the baggage that comes with the prudent use of swaps, says Matt Pieniazek, president of Darling. Counterparty risk—the reliability of the institution providing the swap that enables the bank to turn a f loating rate loan for the bank into a fixed rate
loan for the customer, in this case—must be considered. Regulators want assurance the bank knows what it is doing. And there are accounting issues. “There’s no free lunch,” says Pieniazek.
Deposit effects These are “strange days, indeed,” as the John Lennon lyric goes. Capital City’s Davis notes that “banks are paying more than money market mutual funds—that’s not normal.” “If the Fed raises rates, just about every bank will have to revisit deposit pricing,” says Darling Consulting’s Reynolds. Initially, Reynolds sees higher-dollarbalance money market deposit accounts as the most vulnerable. Much depends on degree: “I don’t know that 50 basis points will be enough to cause movement.” If increases are more significant, he adds, there might be a broad return to CDs. For many banks, that would be a major shift, as customers have typically opted for short-term deposits and maximum liquidity. Davis, for example, says that pre-crisis, the bank had between 30% and 40% of deposits in CDs. Currently, CDs make up only 9% of Capital City’s deposits. Kentucky banker Karen Glenn says her bank went on a CD diet—to the tune of $30 million—in part to cool off part of its base that could otherwise have been hot when rates head back up. She points
Banks continue to build HTM portfolios AFS, HTM securities since Q1 ’12 HTM
700
AFS
7,000
650
6,500
600
6,000
550
5,500 5,000
500 HTM ($B)
450
AFS ($B)
4,500
Q 4' 14
Q 3' 14
Q 2' 14
2,000 Q 1'1 4
200 Q 4' 13
2,500
Q 3' 13
250
Q 2' 13
3,000
Q 1'1 3
300
Q 4' 12
3,500
Q 3' 12
350
Q 2' 12
4,000
Q 1'1 2
400
Source: SNL Financial Data compiled March 13, 2015. Represents aggregates for commercial banks a nd savings banks since the first quarter of 2012. Available-for-sale securities and held-to-maturity s ecurities are shown on a cost basis. Data based on regulatory filings.
20
BANKING EXCHANGE
May 2015
out that a NOW account is currently paying five basis points, and could rise, in an up market, to 15 basis points. The same amount of money in a CD might cost as much as 60 basis points. The big question for banks is what their current depositors will do as rates rise.
There are people in banks who have never seen a rising rate environment Greg Judge, Pacific Coast Bankers’ Bank Pacific Coast’s Judge suggests community banks look at their appeal beyond rate. He has stressed that in coaching banks about rate and types of deposits through the low-rate period: “It gets emotional. They feared if they reduced rates, they’d lose deposits. But what does that say about your bank? Are you renting your customers? Or do you own your customers?” Old Line Bank’s Cornelsen says his deposit base is heavily tied to lending relationships, a considerable advantage. This has kept the bank’s cost of funds relatively low in relation to other players in the D.C. market. Yet Cornelsen says he can appreciate the general attitude of savers about rates being so low for so long: “They are getting tired of holding their breath.” “I can’t tell you what the game is going to be as rates start to rise,” says Bacon. She says much of FirstCapital’s deposit base is relationship oriented—“the relationship between our customers and our lenders and front-line staff.” However, the bank can stand to raise deposit rates a bit, she says, because it has been able to keep cost of funds low. One tool some banks are using is the deposit study, an attempt, based on past behavior, to gauge how depositors will place their funds as interest rates change. It’s an effort to measure “stickiness.” While some bankers put much faith in these projects, not all do.
If the Fed raises rates, FirstCapital’s Tracy Bacon predicts the timing to be this fall or even December.
While her bank looks at deposit studies, Cundiff says they aren’t foolproof. “Quite honestly, anything any day of the week can affect nonmaturity deposits.” At Associated, the largest bank interviewed, “we are priced to attract funds,” maintains Niles. He adds that the bank wants to build longer-term CDs. As a result, it is offering 2% on five-year CDs. This rate, and other CD specials, have been offered to stop the erosion of CDs that Associated has seen. Mind you, that rate is not being offered to everyone, but to relationship customers, with a high relationship size requirement. “ Ther e h a s b e en some t r a c t ion ,” according to Niles, who adds, “Our CD balances have started to increase.”
Investment portfolio impact The final leg where rates are concerned are bank investments. Banker views not only consider the rate outlook, but also their philosophy on the role of the investment portfolio—a revenue source versus a parking place for funds. There also is the accounting treatment of instruments held available for sale versus those purchased to be held to maturity to be considered. Some banks are shifting assets to hold-to-maturity to insulate against a rate uptick (chart, at left). Portfolio liquidity, however, remains critical for a bank like Blue Hills, growing and looking for funds. The bank
classifies its entire investment portfolio as available for sale. “As rates rise, we will be able to manage our portfolio,” Kivlehan explains. At Hanrahan’s Capital Bank of New Jersey, there’s an effort to use the investment portfolio as a conservative means to keep net interest income within a certain target range. At Kish Bank, Kishore has strived to use the investment portfolio to gain a bit more return, without stretching too far for yield. Instead of keeping the entire portfolio short, she explains, the bank has made some longer-term investments, dipping out to seven years. She keeps much of the portfolio in short duration instruments “instead of putting everything into a mid-range duration,” relying on the longer-term holdings to produce a bit more return. In this controlled fashion, Kishore says, “I try to invest where the yield curve is steepest.” There’s another facet to bank investment , in a sense, a nd that ’s t a k ing advantage of investors’ interest in investing in banks. Associated’s Chris Niles points out that his company saw the oppor tunit y in low rates and raised $500 million in five- and ten-year debt in order to put subordinated debt into its capital structure. “So we went long at the bank level, because we saw that rates were low,” says Niles. 
Be aware of the baggage that comes with the prudent use of swaps, warns Darling Consulting’s Matt Pieniazek.
“We are priced to attract funds,” says Associated’s Chris Niles, adding the bank wants to build longer-term CDs.
May 2015
BANKING EXCHANGE
21
CDO’s time has It’s not good enough to have data. It has to all mean something
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BANKING EXCHANGE May 2015
L
ike many banks, PNC Financial Services operated a data warehouse into which it funneled vast amounts of data from disparate sources. The theory was that eventually the bank’s data scientists could sort out the relevant parts and make good use of them. It worked, but the problem was it took an excruciatingly long time to get results. “As an IT-driven initiative, we were really good about dumping a lot of data into the data warehouse, but really didn’t give a lot of thought about how it would be consumed,” said Michael Hernandez, PNC’s senior vice-president, data demand management and strategy, who spoke on the subject at Oracle’s recent Industry Connect conference. It was not unusual for people from the bank’s lines of business to come to the data warehouse for input on certain regulatory- or revenue-related issues and be told it could take up to 18 months to get answers—way too long to be of much use. “It was quicker and easier to go out and build your own [analytics] system,” said Hernandez. “As a result, we had a lot of 100% solutions for 10% problems . . . We had a proliferation of various single-use analytic tools in single-use analytic environments, which were very costly to maintain.” So six months ago, PNC reorganized its executive structure and created the chief data officer position and staff, charged
come
By John Ginovsky, contributing editor
with the responsibility to establish a holistic treatment of data across the entire enterprise. “We found that it required a full-time, dedicated focus to come up with a cohesive data strategy for the organization and really implement data governance within the organization,” said Hernandez. The CDO position is slowly being embraced by other banks and companies, one of which is Wells Fargo and Co., which hired A. Charles Thomas to that role a year ago. “Historically, particularly across enterprises like this, there has not been one single place that is accountable for the data and how it’s used,” Thomas observed during an interview with Banking Exchange. “People are starting to recognize more and more that there needs to be that accountability at a senior level to watch over, to harvest, to help inspire the enterprise to use data as a great way to drive customer experience, to mitigate risk, and to drive financial outcomes.”
data-driven decisions Two years ago, Anthony Goldbloom and Merav Bloch, writing in the Harvard Business Review, advocated strongly for the establishment of the CDO position: “Most enterprises grew up in an era before the importance of data was recognized, such that the part of a company responsible for collecting, storing,
and extracting data is often separate from the part responsible for using the data. This structural separation makes it difficult to implement data solutions across an organization.” Enter the CDO, who, they wrote, would be responsible for: • Identifying how data can be used to support the company’s most important priorities. “Companies don’t necessarily realize, for example, that they can use cross-selling algorithms to increase customer depth, or lead-prioritization algorithms to increase sales conversion rates.” • Making sure the company is collecting the right data. “For the CDO, this would mean ensuring that processes are being instrumented and that all necessary data is being captured and stored.” • Ensuring the company is wired to make data-driven decisions. “Data must be collected, stored, cleaned, analyzed, and, in some cases, visualized.” The authors give an example: “Imagine you’re a bank approached for a loan by an employee of AIG. It’s likely that your . . . lending department has spent a great deal of time analyzing AIG, such analysis having bearing on the customer’s prospects of getting a bonus, being promoted, or being terminated. It’s also likely that such information is hidden from the retail lending division tasked with rating the customer. Too often, mismatched technologies force algorithms to fly half-blind.” “With facts replacing hunches in more and more areas of May 2015
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business, data is the elephant that should be in the room,” they conclude. Earlier this year, a Gartner Co. analysis estimated that by 2017, 25% of large organizations w ill have CDOs; the estimate rises to 50% for those in heavier-regulated industries, such as banking and insurance. “Few organizations use a consistent, common language for understanding business information and the semantics around it,” Gartner’s analysis points out. “Instead, they generally maintain divergent and often conf licting definitions of the same data.”
CDO PLUS CIO So far there has been a distinct tendency to equate data interpretation with data collection—the latter of which is usually assigned to the chief information officer. That’s where a crucial distinction needs to be made. “CIOs do not own the CDO’s responsibilities. CIOs and CDOs should have distinct and separate roles in the digital era, and they will need different skills and capabilities,” says Debra Logan, Gartner fellow. “People use the term chief information 24
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officer. Actually, the title is chief information technology officer,” says Wells Fargo’s Thoma s. “ They are pr imarily interested in the infrastructure, the boxes, the software, the tools themselves. If you ask them about data, they’ll say, ‘Yes, data flows from point A to point B.’ “The chief data officer, on the other hand, for the most part is less concerned about the systems . . . but what do they generate? The systems generate data, but the data in and of themselves are irrelevant,” says Thomas. “Data must become differentiated, which is data within context . . . I’m more concerned about what does it mean, how is it being used, and is it right?” I n h i s pr e s e nt a t ion , He r n a nde z recalled a specific point when PNC leadership started to acknowledge the need to quickly access and analyze disparate data for specific purposes. “We did optimize that data warehouse to support the Basel risk-weighted asset calculations,” he said. “It was effective. This was the first time the business really took it over, and that’s the first point to make: Data as an asset needs to be managed by the business. If it is managed by IT, it’s not going to be effective.”
Silos belong on farms PNC’s leadership realized that multiple lines of business within the bank had already come to that conclusion, and, as touched on earlier, implemented multiple solutions to get the demanded results. “ We looked around the organization and just within the risk function there were probably 1,000 people who were doing some sort of data aggregation, reporting, and analytics . . . . There was no overall strategy to bind all those groups together, so they were all working in very siloed organizations,” Hernandez explained. Connecting silos also f igured into Wells Fargo’s decision to create the CDO position. “What you want to know,” says Thomas, “is that a particular customer owns product A from this line of business and product B from this other line of business, and that he’s used this channel, that he came in a branch at this time, and that he has indicated interest in buying some other product. “The next time he comes in, either digitally or in a branch, connecting those pieces together is critical. Customers don’t think of us as, ‘Well, now I’m moving from the credit card group over to
In the digital era, data collection and data interpretation roles are becoming distinct. CIOs manage data systems; CDOs differentiate and optimize data. Together, they reconcile issues across the bank
the mortgage group; now I’m moving from the mortgage group to the deposits group; and they all are different.’ No, they look at Wells Fargo as a company, and they expect those pieces to be connected,” Thomas says. Wells Fargo established an Enterprise Data Council made up of top leaders from different areas and departments as the primary means of reconciling data issues across the bank. Thomas is head of that endeavor. “We get together monthly and talk about business challenges and the data required; challenges and their impact on the business; and how we can work together to compromise and to find opportunities where we don’t try to solve these challenges independently. That’s the key,” he says. “The objective,” Thomas adds, “is to get it done once—one common way—so that when we talk about the word ‘customer,’ we are talking about the same thing and we’re talking about it from the same perspective.”
Top-down support Different organizations can structure their CDO positions differently. “I don’t think there is one particular model [for]
the CDO,” said PNC Bank’s Hernandez. Both Hernandez and Thomas emphasize that from the beginning, the creation of their CDO positions was backed by the highest levels of their organizations. “We have clear support from senior leadership,” Hernandez stated. “We were able to take a sizable amount of capital that we were planning to invest in various data and analytics projects in 2015 and move those investments into the centralized management of [data].” Says Thomas: “There was a demand for it [CDO], so it’s not like I had to come and prove why I’m here. The key is, there’s a lot of excitement around the possibility that we could be talking about customers in a different way, that we could be aggregating risk in a way that perhaps wasn’t done before.” Hernandez admitted that a holistic data view is still a work in progress, and an expensive one, but one that’s worth it. “It’s an expensive proposition to start up this enterprise data management group. It’s a lot of people, it’s a lot of revenues to tie up,” he said. “But I would submit that the cost is much greater if you don’t do this, because you’re already spending the money out there,” Hernandez continued. “You’re duplicating effort out there. The cost to aggregate data, to reconcile data, to monitor multiple data environments, it’s a hidden cost . . . for most organizations that’s going to far exceed the cost of coming up with a holistic enterprise data management strategy. “That’s where we are today. We don’t have it all figured out yet, but we’re making great strides.” What will confirm the value as well as the usefulness of a CDO organization likely will be measured by a fundamental change in the enterprise’s culture, according to Hernandez. “ The ultimate goa l of orga nizing around data,” he said, “should be that everyone owns the quality and integrity of the data in the organization in much the same way as we try to have everyone own risk management within the organization.”
PNC Financial’s CDO setup
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t Pittsburgh-based Regional PNC Financial Services, the chief data officer position over sees enterprise data management, which comprises several different offices. Briefly, these include: Data demand management and strategy Headed up by the CDO, Michael Hernandez, this unit ’s mission is to understand what the business data needs are among risk, finance, and revenue-producing lines of business, including the compliance requirements. Data science and innovation Charged with finding new ways to incorporate and understand specific issues, like those involving unstructured data. Data operations Responsible for running the data systems. Advanced analytics competence Creates ways to bring relevant data as close as possible to where it is actually used. Data quality center of excellence Finds ways to identify and mitigate issues related to data generated and stored in bank legacy systems, including identif ying and measuring the quality of data coming into the data warehouse.
John Ginovsky cuts through the tech hype in his weekly blog “Making Sense of it All” in the free Tech Exchange newsletter. Sign up at “Newsletters” on www.bankingexchange.com May 2015
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CAN YOU INSURE FOR CYBER RISK? The “good news”: Rising threat brings more availability, but with much variation By Shamoil T. Shipchandler and Patrick R. Hanchey
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w ide va r iet y of insura nce pr o duc t s t y pic a l ly f lo o d s the markets in response to catastrophic incidents. A n earthquake prompts earthquake coverage. Hurricanes prompt hurricane insurance. Fires prompt fire insurance. Cybersecurity—the newest frontier and the most serious threat facing banks today—is no different. According to the FDIC, “inter net cyber threats have rapidly become the most urgent category of technological challenges facing our banks,” and cybersecurity “needs to be engaged at the very highest levels of corporate management.” That obser vation is incontrover tible. Banks are obviously rich targets for cyber intrusions. Their information systems contain a treasure trove of account numbers and personal information for criminals to use or sell to obtain the profits that motivate the crimes. Cybersecurity expenditures by banks have grown exponentially as criminals have developed new and more intrusive tools. J.P. Morgan Chase, for example, will increase its expenditures on cybersecurity by $500 million over the next few years. But while proactive steps can mitigate the risks, the cost of responding to the inevitable breach remains prohibitively high. And that is where cyber insurance comes in.
Financial cyber nightmare A cyber intrusion can quickly become a costly disaster. Once a data breach has occurred, companies incur immediate costs in breach identification, forensic analyses, and security measure implementation. Additional costs come from state and federal notifications, consumer communications, and maintenance. That’s just the beg inning. A f ter a breach, banks may be faced with classaction litigation over potential violations of federal or state statutes; common law negligence, fraud, or breach of contract suits; or shareholder derivative suits and other litigation, such as contractual disputes with third-party vendors or 26
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disputes with other members of payment card systems or payment card brands. And now, more than ever, companies incur costs in responding to congressional and other federal investigations, as well as state regulatory inquiries. Target’s 2013 data breach, for example, has cost the retailer more than $236 million, with some analysis projecting that amount to increase to $1 billion. Home Depot’s recent breach has resulted in over 100 separate lawsuits against the home improvement retailer. [Editor’s note: Some of those suits have been pressed by banks.] The Ponemon Institute estimates that the average cost in the United States for a single data breach of fewer than 100,000 records in 2013 was $5.85 million. However, 33% of this total amount was deemed “direct” costs, which are generally insurable. That finding does
provide a ray of hope that some of these costs may be mitigated.
Where insurance fits A Treasury Department official recently u r g e d ba n k s t o c on sider pu r c h a s ing cybersecurity insurance in light of recent high-profile cyber attacks targeting financial institutions. But cyber insurance is not a replacement for basic proactive steps that financial institutions should take to mitigate their risks. It is merely a part—albeit an important one—of an information security plan. Each bank should create such a plan and regularly test its effectiveness to ensure that the bank can adequately prevent (and when necessary respond to) a cyber attack. The plan should: • Name an information security leader; • Require a systems assessment;
/ Risk Adjusted / • Implement an information security program; • Create and execute a crisis response plan; • Review third-party vendor relationships; • Evaluate and obtain cyber insurance. Performing a systems assessment is key. It provides understanding of where key information is located; who has access to that information; what system weaknesses exist; and what effect a breach would have on the bank. Without a plan, there is no way to properly evaluate whether a cyber insurance product will provide a bank with what it needs. So these proactive steps are a condition precedent for any consideration of cyber insurance.
Evaluating options At their core, cyber insurance policies are designed to cover three types of expenses associated with a data breach, depending on the type of policy chosen: 1. Response and investigation costs. 2. Litigation defense and damages. 3. Regulatory defense and penalties. Typical cyber policies in the current market provide “first-party” coverage, “third-party” coverage, or both. First-party coverage typically covers response costs, such as hiring professionals to assist in the investigation and response. Such experts can include attorneys to advise on notification and other legal requirements, public relations firms, crisis management firms, and computer forensic firms. This coverage also includes notifying affected customers; providing credit monitoring services; establishing call centers; creating security and incident response templates; and restoring lost data. Third-party coverage typically covers litigation expenses and damages. Certain third-party policies may provide coverage for costs of regulatory defense, fines, and punitive damages. There are many factors for a bank to consider when evaluating cyber insurance policies. These factors are largely specific to the business itself. Cost of premiums is certainly a driving factor, as are coverage options, risk complexity, and variance in carrier offerings. The lack of historical data and uniform coverage practices does not help ease any concerns that banks may have. Common areas for evaluation include: • What notification obligations a financial institution anticipates. 28
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Cyber insurance is not a replacement for basic proactive steps that institutions should take to mitigate risk. It is merely a part—albeit an important one— of an information security plan • Whether a bank should obtain retroactive coverage for undetected breaches that occurred before the policy’s effective date. Because data breaches are often undetected for long periods of time, a bank may not have confidence that its systems have not been breached. • Whether a policy includes coverage for reputational harm or lost sales and profits relating to harm caused by a cyber attack, and what methodology an insurer uses to calculate lost sales and profits. • Whether a policy extends to third-party vendors that have access to sensitive bank information. • Whether exclusions that typically apply to general insurance policies continue to apply to cyber insurance policies. Examples include exclusions, such as those for
employment practices, antitrust violations, or ERISA violations—and even intentional acts by directors or officers. W he n s e le c t i ng c y b e r c o v e r a g e , banks should take a cross-disciplinary approach. The executive or team directing the project should consult several different departments, including those responsible for information technology, privacy, compliance, human resources, business operations, legal, and risk. By gathering information from these different areas, banks will be better able to create a comprehensive cyber risk profile with a greater understanding of their cybersecurity needs. In addition, f inancial institutions should look to fill any gaps in coverage under their existing general commercial liability policies with the available cyber insurance coverage options.
Trends in cyber risk The cybersecurity insurance industry is evolving at a rapid pace, and banks should soon begin to benefit from reduced premiums as competition increases in the market. However, because cyber insurance is still in its infancy, policy terms are often specifically tailored to the insured’s unique risks as a result of negotiations between the insurer and the insured. A bank should thus negotiate the precise coverage that meets its needs. The cyber insurance market, which
included total premiums of approxim at ely $6 0 0,0 0 0 i n 20 09, i s now expected to grow to $2 billion in 2014, as more companies build their information security plans. Robert Parisi, network security and privacy practice leader for insurance broker Marsh USA, told CNBC that the firm saw a 21% increase in cyber insurance sales in 2013, and sales for the first half of 2014 doubled what they were for the same time in 2013. At AIG, approximately 18% of cyber insurance coverage is written for financial services firms. Nevertheless, cyber insurance appears to lag behind other types of insurance in the amount of coverage providers offer. As reported in a Wall Street Journal blog, AIG CEO Peter D. Hancock, said the largest coverage he is aware of is for a bank that has about $400 million in coverage. In the same blog, Marsh’s Parisi said he believes the largest amount of cyber insurance in the market may exceed $500 million, although most large policies are set at approximately $100 million to $200 million. The increase in sales activity has been met by a dramatic increase in the number of claims filed with insurers. Geoff White, the underwriting manager for cyber, technology, and media at Lloyd’s syndicate Barbican, said in a Bloomberg View column there was a 50% increase in the amount of such insurance submissions filed in the first three months of 2015, as compared to the first three months of 2014. Even as claims data against cyber insurance policies has become more developed, it has become easier to see where the costs arise. In 2013, for example, the average cost per
claim was $3.5 million. The average cost of legal defense was $574,984, while legal settlements averaged $258,099. Crisis services cost an average of $737,473, which included forensics, notification, call centers, credit monitoring services, and legal counsel. While the increase in market size and claim submissions are important data points, neither really indicates the extent to which insurance companies are fully covering the costs of cyber incidents under their cyber policies. Courts are generally examining cyber coverage under traditional insurance policies. There has not yet been signif icant litigation on coverage under cybersecurity policies. (Sony’s 2013 Playstation breach was determined to be not covered by a traditional policy.) So broad-based statistical information is not readily available. And even when litigation begins, there will be significant variability between each policy, because there are no real standards as to underwriting, encr y ption, crisis response, security technology, and other considerations that underlie scope of coverage. What we can only tell now is that without a baseline history of losses related to cyber attacks, it is nearly impossible to determine the appropriate amount of coverage—which is why only portions of the cost of the Target and Sony breaches appear to be covered by insurance.
What you can expect Cyber insurance does not, by itself, protect a bank from data breaches. However, according to Deputy Treasury Secretary Sarah Bloom Raskin, “qualif ying for cyber risk insurance can provide useful
information for assessing your bank’s risk level and identifying cybersecurity tools and best practices that you may be lacking.” Similarly, seeking and obtaining cyber insurance may serve to proactively assist the bank’s ability to handle regulatory reviews in this area. So banks applying for cyber coverage should thus be prepared to provide comprehensive and specific information regarding their cybersecurity practices, such as the composition and budget of their security departments; technical, administrative, and physical security measures; and data management and retention policies and practices. Banks also should be prepared to provide insurers with bank policies on privacy and data use; network security; training; record and information m a na gement c ompl ia nc e a nd d at a destruction; and incident response plans. In this way, the act of applying for cyber insurance will help a bank create an information security plan, and the act of obtaining cyber insurance will help a bank mitigate the eventual—and inevitable—data breach.
Bracewell & Giuliani LLP Partner Shamoil T. Shipchandler, a former U.S. Attorney’s Office deputy criminal chief for the Eastern District of Texas, represents clients in complex white-collar and cybersecurity matters. Associate Patrick R. Hanchey counsels and represents banks and other financial institution clients in matters involving state and federal banking laws, regulations, enforcement actions, and other corporate activities.
Cyber fraud assistance on BankingExchange.com
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yber risks represent one of the mainstays of the Risk Channel on our website. You can find articles under the Cyber fraud/ID theft tab on the Risk Channel at www.bankingexchange.com/risk-management. Among them: • “Neverquest trojan targets online banking”: Latest wrinkle in the malware’s evolution. http://tinyurl.com/neverquest • “FFIEC offers cyber attack resources”: The Exam Council issues a list of expectations and links to sources for obtaining relevant help. http://tinyurl.com/FFIECcyberaid • “Banking’s customer identity crisis”: Guardian Analytics suggests using customer behavior trends to ascertain if some-
one is who he says he is. http://tinyurl.com/guardianviewpoint • “FFIEC’s 7 cybersecurity priorities”: The Exam Council presents priorities based on a cyber readiness review conducted on 500 institutions. http://tinyurl.com/7ffiecpriorities • “Every two seconds—US ID fraud trend continues”: Javelin Strategy and Research study finds there is a new ID fraud victim every two seconds. http://tinyurl.com/every2seconds • “Cyber attacks tripled on Android in 2014”: Most came from three malware families. http://tinyurl.com/androidattacks • “Ransomware rising, FBI says”: Computers and smartphones can be hijacked. http://tinyurl.com/ransomware2015
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Fast-tracking Payments
Fed payment initiative seeks to pull/push industry to bring U.S. payment system into modern era By Dan Fisher, contributing editor
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here’s a long-held bias among large banks that the Federal Reser ve is a pay ment system competitor. And it is in some ways. Regardless of that perception, the payment system would not be where it is today had the Federal Reserve waited for the private sector to agree and take the initiative to change the status quo. As one indication of this, the Fed has for years focused on trying to move the automated clearing house system forward by creating the framework for a same-day settlement process between all financial institutions. These efforts were resisted by NACHA until recently. The Fed has a legacy of strong leadership when it comes to improving the payment system. Examples include innovations associated with electronic cash letters, electronic check presentment, image replacement documents, and same day settlement—all of which preceded the introduction of what is known as Check 21, the only legislation introduced by the central bank in its history. Now, the Fed is making another major push to take the U.S. payment system to the next level—a much-needed improvement. In 2012, the central bank realized that the current payments infrastructure would not keep pace with the emerging technological, consumer, and global trends. It also knew from experience that leadership was needed to focus the dialogue necessary to drive consensus in advance of taking the payment system to the next level. The Fed jump-started the process with a project called the Payment System Improvement Initiative. It is an extension of the Fed’s responsibility to maintain an efficient payment system and stay in touch with change.
Payments rapidly changing You would have to have been on another planet for the last 15 years not to have seen the changes impacting payments— not only here in the United States, but in other parts of the world, where the changes have been far more rapid. Although the United States has lagged, 30
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No longer will three-day weekends where transactions are posted, but not settled, be the norm. These periods of processing darkness will be eliminated even here the changes have been gaining momentum. It is hard to imagine a financial institution today that does not have an internet banking website. Check volume has dropped by two-thirds to below 20 billion checks written per year, down from over 60 billion checks in the ’90s. They’ve been replaced by debit cards, online payments, and, now, mobile transactions—still a small percentage, but growing rapidly. Even so, 20 billion checks is a lot, and they are not an efficient way to handle transactions. Quoting from the introduction to a Fed
paper, Strategies for Improving the U.S. Payments System, released in January: “The Federal Reserve believes that the U.S. payment system is at a critical juncture in its evolution. Technology is rapidly changing many elements that support the payment process.”
Future shock, no more batch The de facto payment standard is now electronic, and payment innovation is synonymous with this standard. The reality is that paper and innovation are not compatible with exception to cash
transactions. Furthermore, linked with electronic payments is the expectation that settlement be real time or near real time. Translation? The transfer of the money from buyer to seller is facilitated w ithin milliseconds or minutes, not hours or days. Future shock for traditional banking systems will be the extending of the banking day to 23 hours or more, and batch processing being replaced with continuous processing. No longer will three-day weekends where transactions are posted, but not settled, be the norm. These per iods of processing-system darkness will be eliminated. The current infrastructure, however, is unable to meet these changes, and processors that offer legacy batch-based platforms are very reluctant to change.
Timing is everything Absent a consensus, adoption has not been a priority. Case in point, the United States is the last country in North America (and one of the last in the world) to adopt the EMV (Europay, MasterCard, Visa) chip plus pin technology for debit and credit cards. Our increasing domestic card fraud numbers underscore the cost of delaying the adoption of EMV as more fraud moves to the United States from countries where EMV is fully implemented. The card security landscape,
however, is now finally changing due to the card brands changing the liability rules domestically. As most banks and an increasing number of merchants know, October 2015 is an impor tant milestone. A rules change goes into effect that is placing pressure on all players to adopt EMV capability—cards and readers. Chip credit cards are now rolling out in larger numbers, and most major processors have plans to begin issuing EMV debit cards in advance of the October retail liability shift. Why do people need a PIN if they have an EMV card? Simple. If you are going to use the credit card for a cash advance, you will need a PIN. This requires the card holder to enroll in the program with the issuer prior to use and be issued a PIN. With respect to a debit card, if you want cash back at the point of sale or withdraw cash from an ATM, you will need a PIN. It is not complicated; it is just an extra layer of security.
Emerging Global Standard Change never stops, and the internet represents the rails for much of the change in the payments space. XML , extensible mark-up language, is what makes the internet so efficient. Going beyond HTTP (hypertext transport protocol— primarily internet addresses), X ML gives the internet its power. Globally, the
ISO 20022 standard is an XML-based methodology for the financial industry that creates a consistent messaging standard across business platforms. What does this mean? It is a language that all financial institutions can use to speak to each other and facilitate financial transactions efficiently. Domestically, we are not ready for this standard, but the world is not going to stop and wait for us just because we are not ready. Like EMV, progress needs to be made domestically in adopting new technologies or two outcomes will be prevalent: a continued increase in fraud, and being left behind when it comes to innovation. Payments-wise, we will not be able to compete.
Fed’s payment strategy The Fed released a consultation paper in September 2014. Publication was followed by a series of town hall meetings throughout the country designed to provide a wide range of payment system stakeholders with the opportunity to provide insights and ideas. A second series of meetings occurred as a follow-up to the first with the same objective, and served as a forum to recap and present a summar y of the comments and feedback received from the earlier round of meetings. The result of these efforts culminated in the release
Dan Fisher appointed to Fed’s Faster Payments Task Force
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he author of the accompanying article, Dan Fisher, has been accepted to serve on the Federal Reserve Board’s Faster Payments Task Force, one of two payment task forces assembled with the aim of creating quicker, more secure payments in the United States. Fisher is president and CEO of The Copper River Group, Fargo, N.D., a community bank consulting firm he
founded in 2005. Fisher has over 35 years of experience in the financial industry, including being CIO of Community First Bankshares (now part of Bank of the West), a former director of the Federal Reserve Bank of Minneapolis, former chairman of the ABA Payment Committee, and a member of the ICBA Payments Committee. As part of an industry effort with the Fed, he worked to pass and implement Check 21.
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of the 58-page Strategies for Improving the U.S. Payments System paper on Jan. 26, also referred to by Fed insiders as the “road map.� Mov ing for ward w ith a faster and more secure payment system is central to the Fed strategy. Trying to renovate the existing system is absolutely not part of this discussion. A contempora r y pay ment s model designed using new technology and new standards is the only way the payment system in this country can keep pace with the next two decades of innovation in front of the industry, and integrate the ISO 20022 standard as the central theme to interoperability.
Next steps The c ent ra l ba n k ha s put for t h a n appr oa c h t h at eng a g e s s t a keholders seeking input and par ticipation. Included in the approach is the establishment of a Faster Payments Task Force. A second task force, called Secure Payments, is still being assembled. It will focus on a more secure payment system. Its intent, similar to the first, is not to fix the holes that we know exist today, but to leap over and provide an entirely new system altogether. The January paper included information 32
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Domestically, we are not ready for the ISO 20022 standard, but the world is not going to stop and wait for us just because we are not ready needed for stakeholders to apply to participate in one of the task force efforts. The Faster Payments Task Force membership is now complete. A faster payment system is not just about technology. Everything is on the table to be considered, and that could mean eliminating the unnatural stops that occur today, such as end-of-day posting and weekend posting. There are seven days and 24 hours in which payment transactions occur. Feasibly, with the right control, continuous updating and posting of payments is not out of the realm of possibility. In the context of leadership, the Fed will move forward with challenging the system to become more eff icient and improve the speed of settlement.
You need to get involved At the end of the day, the Federal Reserve will lead. It has a known track record of success in this regard. Like it or not, competitor or central bank, the Fed will
move the payment system forward. The key to success is participation from all stakeholders, and there is no time like the present to become involved in this important process. Industry and payment system stakeholders and innovators are being engaged to provide insight and input, and participate. The objectives: offer faster, but secure payments; reduce fraud risk; improve efficiency; and improve settlement and risk management services in the context of new technology, not existing systems. Standing still and waiting for the private sector to agree with itself is not an option now. At the end of the day, the Fed will issue preliminary rules related to these changes and, ultimately, f inal rules. Paramount to this process is providing comments to the Fed and to the task forces for consideration. The time line for payments 2015 and beyond starts now.
What the Fed has in Mind Highlights from the central bank’s payment improvement paper
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eleased in January 2015, the Federal Reserve Board’s Strategies for Improving the U.S. Payment System is a 58-page road map (more than half of it appendices) for migrating the United States payment system into the modern age. The paper’s introduction explains: “The Federal Reserve believes that the U.S. payment system is at a critical juncture in its evolution. Technology is rapidly changing many elements that support the payment process. Highspeed data networks are becoming ubiquitous, computing devices are becoming more sophisticated and mobile, and information is increasingly processed in real time. These capabilities are changing the nature of commerce and end-user expectations for payment services. Meanwhile, payment security and the protection of sensitive data, which are foundational to public confidence in any payment system, are challenged by dynamic, persistent, and rapidly escalating threats. Finally, an increasing number of U.S. citizens and businesses routinely transfer value across borders and demand better payment options to swiftly and efficiently do so. “Considering these developments, traditional payment services, often operating on decades-old infrastructure, have adjusted slowly to these changes, while emerging players are coming to market quickly with innovative produc t of ferings. There is opportunity to act collectively to avoid further fragmentation of payment services in the United States that might otherwise widen the gap between U.S. payment systems and those located abroad. Collaborative action has the potential to increase convenience, ubiquity, cost effectiveness, security, and cross-border interoperability for U.S. consumers and businesses when sending and receiving payments.” Elsewhere in the repor t the Fed notes that “recent stakeholder dialogue has advanced significantly, and momentum toward common goals has
increased. Many payment stakeholders are now independently initiating actions to discuss payment system improvements with one another— especially the prospect of increasing end-to-end payment speed and security. We believe these developments illustrate a rare confluence of factors that create favorable conditions for change.” The Fed payment paper identifies five desired outcomes in its executive summary. These are: Speed: A ubiquitous, safe, faster electronic solution(s) for making a broad variety of business and perso na l p ay m e n t s , su p p o r te d by a f lexible and cost- ef fec tive means for payment clearing and settlement groups to settle their positions rapidly and with finality. Securit y: U. S. pay ment s ys tem security that remains very strong, with public confidence that remains high, and protections and incident response that keeps pace with the rapidly evolving and expanding threat environment. Efficiency: Greater proportion of payments originated and received electronically to reduce the average end-to-end (societal) costs of payment transactions and enable innovative payment services that deliver improved value to consumers and businesses.
International: Better choices for U.S. consumers and businesses to send and receive convenient, cost- effective, and timely cross-border payments. Collaboration: The needed payment system improvements are collectively identified and embraced by a broad array of payment participants, with material progress in implementing them. Further on in the summary, the Fed lists five strategies to achieve these desired outcomes. They are: Strategy #1—Actively engage with stakeholders on initiatives designed to improve the U.S. payment system. Strategy #2 — Identif y ef fec tive approach(es) for implementing safe, ubiquitous, and faster payments capability in the U.S. (beginning in 2015). Strategy #3—Work to reduce fraud risk and advance the safety, security, and resiliency of the payment system (beginning in 2015). Strategy #4 —Achieve a greater end-to-end efficiency for domestic and cross-border payments (for 2015 and beyond). Strategy #5 — Enhance Federal Reserve Bank payments, settlement, and risk management services (2015 and beyond). To see the full paper, go to http:// tinyurl.com/FRBpaypaper-BE
May 2015
BANKING EXCHANGE
33
/ Idea Exchange /
2 TAKES ON NONPROFIT GIVING “No-bake cake sale” and school logo debit card program raise big bucks By Steve Cocheo, executive editor
Y
ou don’t usually hear banks a dver t i si ng t h at t he y g ive away money, especially not on New York City-area drive time radio. But there it was, a spot promoting the Community Alliance Program (CAP) of Boiling Springs Savings Bank of Rutherford, N.J. One community organization leader, accustomed to traditional fundraising efforts, calls CAP “the nobake cake sale.” CAP is less caloric, but pretty sweet. With no outlay at all, community groups can receive quarterly payments from the bank that can come to hundreds, even thousands of dollars.
Finding a new way Banks rank high among supporters of local community organizations. Often aid takes the form of outright grants, but as nonprofit groups began asking for more help, Boiling Springs ($1.4 billionassets) found a path to increase support in a way that benefitted the bank beyond goodw ill. In br ief, the ba nk ma kes donations based on deposit balances and other relationships maintained in accounts opened by supporters of a particular nonprofit group. Since its launch in 2006, through the end of 2014, the bank donated over $1.8 million to hundreds of charities. The organizations cover the gamut of community groups, ranging from scout troops to fire departments to shelters and food pantries to service organizations. In 2010, the bank received an ABA Community Bank Award for its efforts. When Boiling Springs began the program in 2006, $15,611 went to eight nonprofits in the bank’s five key county markets. In 2014, the bank donated $385,567 to more than 350 groups.
High balance, high donation Here’s more detail how CAP works. An eligible organization opens a checking or savings account for as little as $100, if it doesn’t already have an account at Boiling Springs that can be designated for receiving the bank’s donations. Then the nonprofit organization can ask its 34
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For banks that give to customer-selected nonprofits, based on account balance or debit card use, the results are sweet: community support and market share growth members or other supporters to designate that nonprofit as a recipient of donation credits ba sed on suppor ters’ banking relationships with Boiling Springs. (The bank will fund the opening of an account if required to get the nonprofit into the program.) Once 20 supporters so designate their existing accounts, or move business to Boiling Springs, the bank begins measuring and tracking the relationships to compute donations. Supporters can specify certain accounts for a specific participating nonprofit if they support more than one in the program. Or they can mark all accounts to a single group. The donations come str ictly from the bank, not from the organization’s
suppor ters. The bank donates at an a nnua l rat e of ¼% on CDs, ret ire ment CDs, and premium and money market checking. The bank computes donations at an annual rate of ½% for checking, savings, and money market savings accounts. (The computations are applied to average daily balances in a given period.) No fees are charged to the groups or the supporter-customers for participation in the program. To this original retail account framework, Boiling Springs added business accounts, with donations based on 1/10% of average daily balances. The bank also gives supporters the ability to count new mortgage and home-equity loans, as well as outstanding balances on home-equity
lines of credit. The bank computes these at a 1/10% annual rate also. Loans must be on the books for a required period before they will be counted, and organizations are asked not to solicit loans or help supporters apply for credit. The bank adds a kicker to CAP, according to Debra Cannariato, vice-president and marketing and sales manager: Community groups also receive supporter credit for their own balances—including donated funds still in their accounts. Kind of “interest on interest.”
Employees pitch in Cannariato says the bank doesn’t sign up a nonprofit and walk away. Extensive help is available to enable the group to make the most of its base of supporters. The bank’s staff helps with communications—writing newsletter articles for group publications, website assistance, mailings, f lyers, and more. In addition, bank staff takes to the field, attending fundraising events to present the benefits of the CAP opportunity. Another form of help comes through seminars offered on popular financial subjects and financial literacy outreach. Each of fers staf f the chance to add another mention of CAP. The bank’s “family” also pitches in persona lly. “ The mag ic of CA P ha s caught on from our directors and senior
management to loan servicing and office services employees as they continue to refer organizations that they belong to or support,” says Cannariato. “CAP truly has become a focus here.”
Web and social support To talk up the program online, the bank maintains a section of its website [http:// w w w.bssbank.com/begreat/] to talk about CAP and support nonprofits in other ways. A periodic blog talks about the program, spotlights participating groups, and more. Another section lists groups’ bios. “Great CAP Moments” promotes groups’ activities and events. There’s also word of mouth. Cannariato is an enthusiastic program booster, and refers to it in conversations as “The Not Too Good to Be True Program.”
Swipe, sign, raise funds A completely dif ferent kind of community support program can be seen at First Option Bank, a $285.9 millionassets institution based in Osawatomie, Kans. First Option launched a donation pr o g r a m f or a r e a s c ho ol s i n 2 0 0 7 based on signature debit-card usage by customers carrying the bank’s cards, with logos tied to the schools. The School Logo Check Card program currently has around 4,800 cardholders. (There are 8,300 students in the area’s
five public and one religious schools). The program is open to family, students, and anyone interested in supporting a particular school. However, this program isn’t just a matter of showing off your school spirit with its colors or mascot. (Several designs are offered for each school, and enrolling cardholders can walk out with their cards instantly.) Each time a qualifying transaction is made with the card, the school ear mark s a donation for that user’s chosen school. In 2014, First Option’s program produced $156,000 for participating schools. “The schools are struggling so much with funding right now,” says Dorothy Powell, senior vice-president and director of marketing. “So this has been great support for them.” The schools can spend the money as they see fit. Powell says one of the key ways the bank promotes the program is at football games, where promotional materials can be made available to many people. There’s been payoff for the bank in this, as well. According to Powell, the bank’s market share has been increasing. Currently it enjoys a 33.8% market share, as measured by deposits. While she says not all that can be attributed to the draw of the school logo c a rd prog ra m, the ba n k believes it accounts for part of the overall growth.
How-to help for creating charitable savings accounts
T
here are many ways of linking the needs of nonprofits to banking services. Recently, Chris Nichols, chief strategy officer of $4 billion-assets CenterState Bank of Central Florida, N.A., posted a LinkedIn blog offering how-to advice on setting up charitable savings accounts. Nichols—named to BE’s Editorial Advisory Board—makes his points in text and by video. From his introduction: “Community banks are usually big givers when it comes to charity, so it makes sense that having a permanent account offering that provides money to charity should be in the account line up. A charitable account is often structured
as a non-interest bearing account that accrues and pays interest to a designated charity. The other common alternative structure is to create a one-time donation should the account obtain a certain deposit balance. “In addition to helping the community, the best reason to have a charitable account is for the positive impact that the offering has on bank employees. The account serves to connect them to a more important mission than just profit . . . . ” Also: “A charitable account, if done correctly, also tends to attract households and businesses with greater net worth.” Read more at http://tinyurl.com/charitableaccounts
May 2015
BANKING EXCHANGE
35
/ Compliance Watch /
Get UDAAP early warning
Best judges of what looks like a problem likely already work for your bank By Lyn Farrell
F
ive years after the passage of the Dodd-Frank Act, it is safe to say that the Unfair, Deceptive, or Abusive Acts and Practices law has been the greatest challenge the bank compliance industry has faced. UDAAP is a completely different kind of compliance undertaking for financial institutions. Except for fair-lending laws, all other banking regulations that we deal with are based on technical, very specific rules. Developing a compliance program for these technical regulations is relatively straightforward, and compliance professionals have done a good job of identifying and controlling these risks. They formulate procedures to incorporate all the specific requirements; they develop monitoring and testing routines, train staff, and perform risk assessments. All the compliance program elements are based on these technical rules as well as any regulatory guidance that exists. However, in the case of UDAAP compliance, the prog ram must be built differently. UDAAP is a principles-based law, without any technical rules. Most of the compliance program elements must be substantially reworked to be effective. For example, checklists are very effective to help control compliance violations of technical regulations; they are much less helpful for UDAAP compliance. This lack of clear rules, coupled with the complexity of bank operations, makes UDA A P compliance dif f icult. For a UDAAP compliance program to be effective, bank staff must understand what UDA AP is, and each member should feel empowered to speak up if something looks like it could be a UDAAP risk. There are three emerging themes in UDA AP compliance. Understanding them will allow compliance professionals and executive management to guard against potential UDAAP issues.
Promises, promises First, bankers must understand that all information conveyed to a consumer about a f inancial product or ser v ice 36
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If people are empowered to speak up and management pays attention, it can save the organization literally millions of dollars in restitution. This can be achieved through consistent messaging and training should be treated as a promise from the bank to the consumer. This is true whether the information is found in bank marketing materials, on the institution’s website, on mobile devices, or in the formal product literature provided to the consumer when the consumer’s account is opened or the loan is closed. All information about how a product works must be true in every circumstance unless the exception is made clear in the consumer information. This is a difficult task. Not only are some products complicated by their nature (e.g., overdraft
protection), but often the bank’s systems are so complex or limited that it is hard to make sure a product works the way it is represented in all circumstances. However, the fastest way to a UDAAP claim is to have a product or service vary from the way it was sold to the consumer in a manner that affects the consumer adversely. Usually, this situation ends in a regulatory order, either formal or informal, where words like “deceptive” are used—and often restitution is required. Complaints are the quickest way to determine where there are unintended variances in the way a product behaves.
If a consumer did not get what he bargained for, that consumer w ill often complain. This will signal the bank that something is wrong. Monitoring complaints is the lifeblood of a UDAAP compliance program. Beyond those complaints, the next best way to assess your banking institution’s product performance is to dig down deeper into the operational departments. Question the employees who work with the product every day. They will almost always know where the “weak joints” of the operation are located.
When a rule gaffe is more In the past, a violation of Regulation E or RESPA was just that, a technical violation. Now, it can mean more. Many institutions are finding that a violation of technical rules can turn into a UDAAP violation as well if the bank’s conduct fails to meet UDAAP standards on fairness or transparency. As an example: Violations of the consumer’s right to have an unauthorized transaction investigated in a timely manner (under Regulation E) have been called unfair under UDA AP, and the institution has been fined for UDA AP violations as well as for technical EFTA errors. In addition to these f indings, violations of RESPA’s servicing rules have been found to be a n unfa ir or deceptive practice. To sum up, you could say that the second theme here is that keeping abreast of and v igilant on technical regulations is more than just good compliance management. It is smart UDA AP risk management also. Any technical rules that provide the consumers with rights or provide the consumers with the information necessary for them to understand how a product or process works should be treated as an extension of UDAAP.
No armor in tech compliance On the other hand, compliance with technical laws and regulations will not prevent a UDAAP violation.
So the third theme is a corollary to the second theme: Even when you successfully comply with all the laws and regulations related to a product, you can still violate UDAAP with respect to that product. For example, there are only a few technical rules that apply specifically to overdraft protection. There are Regulation DD disclosure rules and there is the Regulation E requirement to provide the consumer with an opt-in option for debit card and AT M overdraf ts. However, there have been many cases of UDA AP regulatory actions related to overdraft protection even when the financial institution has fully complied with these technical regulations.
Follow these prescriptions There is no magic bullet for UDA AP compliance. There are, however, four approaches that can help to mitigate a bank’s risks: 1. Rigorously review all product information given to consumers. Treat all representations made by the bank as a promise, and make sure that every statement in all written communications is correct for all circumstances. This rule includes information on all screens (website, mobile screens, etc.) and on paper. No information should be disseminated without a thorough review by a UDAAP compliance expert. 2. Develop a first-rate complaints management program. Complaints are the bank’s best friend for UDA AP purposes. Collect them as broadly as possible and design a process that can dig into the true cause. Then make sure that remediation of the consumer and the process are both fully complete. Monitor complaint trends to see where hot spots are located. 3. Risk-rate all technical requirements for UDAAP potential. While compliance with all technical regulations is important, some requirements have UDAAP potential and these should carry a higher risk rating. Requirements that could cause the consumer to have a
negative outcome are the ones with high risk. Additional resources (monitoring, testing, and training) should be devoted to ensuring compliance with the higher risk requirements. 4. Empower bank personnel to recognize UDAAP risks—and incent them for doing so. In nearly every case where UDAAP issues were found, someone within the organization knew that a problem existed. Such people are usually deep within the operations or customer service area and could see how the product behaved under all circumstances. These are the people who need to feel empowered to bring UDAAP issues to the attention of management. This can only be achieved through consistent messaging and training. When issues are brought forth, the person who speaks up should be rewarded in some way—even if it’s just with positive management attention. If people speak up and bank management pays attention and fixes problems, it can literally save the organization millions of dollars in future restitution. UDAAP is here to stay. All bank regulators have authority to enforce either UDA AP (in the case of the CFBP) or UDAP (in the case of the prudential regulators). Financial institutions have to continue to hone their principles-based compliance skills and programs to be ready to meet the challenge of UDAAP compliance as the law evolves.
Lyn Farrell is managing director at Treliant Risk Advisors. She has worked in financial institution regulatory compliance for over 30 years. She is a licensed attorney in the state of Texas and has functioned as in-house counsel and compliance officer to medium and large financial institutions. She has been in the field of consulting for the past 15 years. She is a Certified Regulatory Compliance Manager, a Certified Anti-Money Laundering Specialist, and an AntiMoney Laundering Professional. May 2015
BANKING EXCHANGE
37
/ Compliance Watch /
Applications: Still crazy
“Inquiry” vs. “application” questions will persist after Aug. 1
C
ompliance managers continue to devote an inordinate amount of time to what is and isn’t a mortgage loan application. It looks like this isn’t going to change, notes consultant and contributing editor Nancy Derr-Castiglione, as banks sail toward the Aug. 1 implementation of the TILA/RESPA integrated disclosures rule (TRID). One of the hardest concepts to explain a nd underst a nd (st i l l), Ca st iglione explains, is the distinction between an “inquiry” and an “application.” It’s important for purposes of Regulation B because of the notification requirements and for HMDA reporting purposes. An inquiry would not be an application
and subject to the notification requirements of Regulation B and would not be reportable as a HMDA transaction. Both Regulation B and HMDA have a similar definition of an “application.” A n application is an oral or w ritten request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested. These regulations leave it to creditors to establish their own procedures and definitions for applications. Then, if a customer request doesn’t meet that definition, it is only an inquiry and not subject to the regulations’ requirements. TRID provides yet another definition of an application:
For pur poses of con sumer credit, an application means submission of a consumer’s f inancial information for the purpose of obtaining an extension of credit. For purposes of a closed-end mortgage loan secured by real estate, an application is the submission of six items: name, income, social security, property address, estimated value of the property, and mortgage loan amount sought. A seventh catchall item—“any other information deemed necessary by the loan originator”—was removed, because CFPB believes it was being used to delay giving good faith estimated disclosures. Read Castiglione’s blog at http:// tinyurl.com/TRIDdebut
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BANKING EXCHANGE
May 2015
/ Ad index /
INTERACTIVE index of advertisers Welcome to Banking Exchange’s Interactive Service Center. This section has been created to allow you to interact with the advertisers who appear in this issue and to gain information on the products and services offered in the following pages of the magazine. Company Phone
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Appraisal Institute
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Cummins Allison D+H LifeLock, Inc.
877-511-7906
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The Advertisers Index is an editorial feature maintained for the convenience of readers. It is not part of the advertiser contract and Banking Exchange assumes no responsibility for the correctness.
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May 2015
BANKING EXCHANGE
39
/ CounterIntuitive /
Sweet smell of success
In the Kale Age, what lessons can Cinnabon possibly impart? Don’t alter successful recipes, build on them By Bill Streeter, editor & publisher
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40
BANKING EXCHANGE May 2015
“Those closest to the action know what the right thing to do is long before leaders do. The trick is to stay in touch,” says exec Kat Cole.
Another challenge aimed right at Cinnabon’s core product—its signature large cinnamon buns. People were often not eating all of them. No doubt inf luenced by all the focus on calorie counts, a plan had been hatched to reduce the buns’ calories from 800 to 600. Cole questioned whether that would make a difference to people who care about calories or just risk altering a successful recipe. “Leadership needs to ask, ‘If we go down this road, is it actually going to achieve the goal?’” she said. “Ask what matters.” For Cinnabon, said Cole, the product is about indulgence. “Never lose sight of what your customers wish,” she said, “and be true to what you stand for.” To counter the problem of half-eaten buns and boost growth, the company introduced Minibons—smaller buns, but with the same ingredients.
In her remarks, Cole told how she has been attacked, as she put it, for having worked 16 years at Hooters. Far from being apologetic, however, she is grateful for the opportunities the company offered her, along with the honest feedback she received there. “I was an advocate for my company,” she said. “If your employees are not that, you’re missing the boat.” To get that kind of commitment, she noted, people have to trust you. “Nothing in life is worse than the feeling of losing someone’s trust,” said Cole. She related how Cinnabon had launched a product franchisees did not like. “It was not a bad product, but we had handled it wrong.” To show support for the franchisees, she agreed to pull the product. “If you are there for people when it counts,” she said, “they will do incredible things for you.”
Photo Courtesy of FOCUS Brands
he fact that Cinnabon still exists when it seems to run counter to all consumer trends is noteworthy in itself. The fact that it is doing well is testimony to simultaneously sticking to its roots and changing. That hat trick was pulled off by the chain’s leader of four-and-a-half years, Kat Cole. Cole is currently group president of Focus Brands, the company that owns Cinnabon, Auntie Anne’s, and Carvel, among other food chains. A for mer Hooters waitress who began opening restaurants for that chain around the world at age 19, she is now a recognized management star. In a recent Business Insider web article, she shared her morning routine, which includes hydration, yoga, and shots of turmeric, wheatgrass, and aloe. No big, sweet cinnamon buns in that picture. But she knows they have their place. An engaging speaker, Cole took the stage at the ICBA Annual Convention in February, offering a mix of anecdotes and leadership tips. When she first took over at Cinnabon, she told bankers, she wondered how she would grow a company that seemed out of touch. One way, she said, was simple: She talked to her people and listened. “As a leader, sometimes we don’t have the same sense of urgency to change [as our employees do],” said Cole. “Those who are closest to the action know what the right thing to do is long before we do. The trick is to stay in touch with them.” She asked employees questions like, “What products did we used to have that we don’t anymore?” and “What’s not working?” One item she heard about was Chillattas. This formerly popular line of creamy, fruity beverages was no longer selling well. Employees told Cole that the company decided the ingredients were too expensive and had cheapened them. The product didn’t taste the same, and customers didn’t like it. Cole had the recipe changed back, promoted that fact, and within 60 days, sales were up 6% with no R&D.
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