April/May 2016 Banking Exchange

1

MARKETPLACELENDERS –ALLIES?

RATE WOE, AND HOW TO MANAGE IT

Consolidation at a crossroads as M&A becomes core strategy

Competitive intelligence for bankers

or sell?buy

April/MAy 2016bankingexchange.com

http://www.bankingexchange.com

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April/May 2016 BANKING EXCHANGE 1

At a crossroadsMerger chatter is now a constant, even though the deal pace hasn’t surged. Many factors have all banks but the very largest weighing “Buy up?” or Sell?” By Steve Cocheo

Loan “frenemies”Marketplace lenders are surging. Are they foe or ally? Yes. Just don’t ignore themBy Melanie Scarborough

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Contents/ April/May 2016


/ contents /

2 BANKING EXCHANGE April/May 2016

32 Bank TechData analytics ... where to start? Ideas and lessons from two banks

34 Idea ExchangeThe case for mortgage e-closings (P.S. CFPB likes them)

36 CounterintuitiveHow many selfies has your bank been in?

34

4 On the Web8 steps to help stop hacks; Compliance meets Fintech; Red Sox pointers

6 Like it or NotOCC: If you want banks to be innovative, then step out of the way

8 ThreadsSocial engineering’s weak link? All of us; Deposits hit the road; Show us your capi-tal plan; We need more banker politicians

8

13 Seven QuestionsDon’t be a millennial wimp, and other surprises from fintech guru Chris Skinner

27 Compliance WatchWhy you must implement a TRID testing program and ten essentials to get it right

30 Risk AdjustedWill it be “one and done” with the Fed? Here are ways to help you and your ALCO manage rate uncertainty

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April/May 2016 Vol. 2, No. 2

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Designer Nicole Cassano

Editorial & Sales Associate Andrea Rovira [email protected]

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

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Editorial Advisory Board Jo Ann Barefoot, Jo Ann Barefoot Group, LLC Ken Burgess, FirstCapital Bank of Texas, N.A. Steve Ellis, Wells Fargo & Co 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

Subscription Information: Banking Exchange Magazine (Print ISSN 2377-2913, Digital ISSN 2377-2921) is published February/March, April/May, June/July, August/September, October/November, December/January by Simmons-Boardman Publishing Corp., 55 Broad Street, 26th Floor, New York, NY 10004Pricing: Qualified individuals in the banking industry may request a free subscription. Non-qualified subscription printed or digital version: 1 year, financial institutions $67; other business $93; foreign $508. 2 year, financial institutions $114; other business $155; foreign $950. Single Copies are $35 each. Subscriptions must be paid for in U.S. funds.Copyright © Simmons-Boardman Publishing Corporation 2016. All rights reserved. Contents may not be reproduced without permission. Reprints For reprint information Contact: Mary Conyers, (212) 620-7250, [email protected] Subscriptions, & Address Changes: Please call: (800) 895-4389, (402) 346-4740, or Fax: (402) 346-3670, e-mail: [email protected] Write to: PO Box 1172, Skokie, IL 60076-8172 Postmaster: Send address changes to Banking Exchange magazine, PO Box 1172, Skokie, IL 60076-8172

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/ ON THE WEB /


Subscribe to our free weekly newsletters, Tech Exchange and Editors Exchange at bankingexchange.com/newsletters

To suggest topics, new blog subjects, and other web ideas, contact Steve Cocheo, digital content manager, [email protected], 212-620-7219

@BankingExchange

Check out expanded mortgage, CRE coverageOur website now has increased cover-age of residential and commercial real estate credit, ranging from tech’s grow-ing role in mortgage lending to legal guidance to news, trends, and research.

Read more here http://www.bankingexchange.com/mortgage-cre

Compliance management meets fintech Eastern Bank finds itself at a turning point, becoming an award-winning fin-tech bank from savings institution roots. Helping sort it out is Steve Antonakes, top compliance officer—previously CFPB’s #2. Read more here http://tinyurl.com/fintechcompliance

What can your ALCO learn from the Red Sox? The Sox principal owner is known for “Carmine”—a computer that helps pick players. But Darling Consulting’s Jeff Reynolds says the owner’s recent change of heart has a lesson for bank-ers who rely on models. Read more here http://tinyurl.com/RedSoxALCO

8 steps to help your bank stop cyber hacking Don’t let software development expose your bank to risk. Do your software writers routinely forget to shut down “dev sites”? Do you know how an “https” web address can protect you? Anna Murray of emedia llc provides practical advice in plain language. Read more here http://tinyurl.com/8waystofightcyber

bankingExChangE.Com Popular Stories on


March 2015 bankingexchange.com

DON’T OPERATE LIKE A BANKThe 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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banking news, trends and analysis.



March 2015 bankingexchange.com

DON’T OPERATE LIKE A BANKThe key to dealing with disruption, says TS Bank’s Josh Guttau: Do some disrupting yourself

INSIDE EASTERN BANK’S

“SKUNKWORKS”

CLOUD MORE SECURE?

SUBSCRIBE NOW bankingexchange.com/subscribe

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/ like it or not /

The folks in the fintech universe must be gr inning ear to ear over the recent pronouncements from the Office of the Comptrol-

ler of the Currency about “responsible innovation.”

“Absolutely,” I can hear them saying, “you just make sure those banks keep their innovations in line with what you decide is okay. Meanwhile, we’ll just keep on truckin’.” Even other govern-ments must be gleeful. The U.K., for example, is actively encouraging fintech development.

The fact that OCC addressed the issue in public is commendable. Its recent white paper on the subject (tinyurl.com/OCCfintechpaper) promotes innovation in banking and addresses some of the uncertainties raised by bankers in that regard. It also keeps the agency squarely in the middle of the innovation process.

Here’s the problem with that: Vetting anything through a government agency takes a lot of time. It’s a very differ-ent time frame from the world in which unregulated startups operate.

The white paper addresses this, but it’s all couched as proposals and suggestions including, for example, creation of a cen-tralized office on innovation. That could prove helpful, but by the time it’s up and running, the f intech world will have launched at least another 100 products.

Regulators absolutely need to stay up on the latest trends. When it comes to innovation, however, most regulatory agencies are not built to unleash it. Can they change? Arguably that’s what OCC is suggesting, but the steps seem tentative, slow, and tied to political hobbyhorses.

Banks have been creating innovative new products at a more rapid clip over the last few years. Not only some of the bigs, but smaller institutions such as Eastern Bank. The $10 billion Boston-based mutual was named “Model Bank of the Year” by Celent for its Express Business Loan product for the small-business market (covered in the story beginning on p. 23). The product was developed in 14 months by the bank’s Eastern Labs operation.

If OCC is say ing, “We want to do everything we can to encourage that type of fast-moving, tech-driven innova-tion,” great. But if the message really is, “We need to vet this and be a part of this because we know best,” then this type of creativity will not become widespread.

A key focus of the white paper is risk. No argument here that risk assessment should be part of any bank’s efforts to innovate. But what we don’t need is the equivalent of an environmental impact statement for evaluating the risk of a new idea.

Arguably a far bigger risk to the future of individual banks and banks collec-tively is to be made irrelevant by failing to adapt to changes in technology and customer expectations. Comptroller of the Currency Thomas Curry acknowl-edged this in a recent speech, saying “If banks are to remain relevant in a chang-ing world, they have to be able to adapt quickly…”

Our message to OCC and to all regula-tors is: Don’t over think this. Give banks the freedom to try new ideas, approaches, and partnerships (including the freedom to make mistakes). In other words, you need to stay out of the way as much as laws allow.

One more thing needs to be said. The paper talks about the need to ensure “fair access to f inancial services and fair treatment of customers.” It actually lists six ways new fintech-type products could benefit low and moderate-income customers.

In his speech, Curr y spoke about sharing such success stories. Indeed, examples abound of how mobile access to financial products has greatly helped people in poor countries. But Curry also said, on the same point, “We may issue guidance on our expectations for banks to meet the needs of low- to moderate-income individuals and communities.”

Do we really need more guidance? Let oversight f lag problems. Don’t insist up front on forcing innovative ideas through the sieve of micro-regulation and addi-tional guidance before they even have a chance to be proven.

The real risk of fintech

BILL STREETER, Editor & Publisher

[email protected]

What we don’t need is the equivalent of an environmental

impact statement for evaluating the risk of

a new idea

Put your trust in a unique community of peoplewho listen and have a personal interest in you.

Fifty-three years of innovation and stability proves DCI is a relationship you can genuinely trust.

Trust needs more than words to be genuine.

We’re a core partner founded and still privately owned by bankers, with bankers as board members,user group leaders and employees. So you can trustthat we really do have your interests at heart.

You’re never ignored or alone at DCI. Direct accessto DCI executives, engineers and user groups makessure we deliver advanced technologies that are

meaningful for you. Not to mention live support 24/7 and regular face-to-face visits.

Winner 2015 BankNews Innovative Solutions Award • 2015 FinTech Forward Top 100 Technology provider

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BankingExchange.pdf 1 1/28/16 1:18 PM

Put your trust in a unique community of peoplewho listen and have a personal interest in you.

Fifty-three years of innovation and stability proves DCI is a relationship you can genuinely trust.

Trust needs more than words to be genuine.

We’re a core partner founded and still privately owned by bankers, with bankers as board members,user group leaders and employees. So you can trustthat we really do have your interests at heart.

You’re never ignored or alone at DCI. Direct accessto DCI executives, engineers and user groups makessure we deliver advanced technologies that are

meaningful for you. Not to mention live support 24/7 and regular face-to-face visits.

Winner 2015 BankNews Innovative Solutions Award • 2015 FinTech Forward Top 100 Technology provider

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BankingExchange.pdf 1 1/28/16 1:18 PM

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THREADS/


GUARD THE WEAKEST LINK . . . YOUWhy humans are vulnerable to social engineering—and what to do about it By Lisa Valentine, contributing editor

P2P ON THE MOVEVenmo—the mobile P2P (peer-to-peer) payment app owned by PayPal, which a year ago most bankers wouldn’t have heard of—did $1 billion in payments this January, as noted in a PYMNTS.com article. The article also noted that Venmo launched a pilot for in-app purchases called Pay with Venmo.

$7.5 billion2.1x 2014

Venmo’s payment $$$ for all of 2015

the proliferation of social media and

our trust instinct puts everyone at risk for

cyber attacksM o s t o f u s a r e h a r dw i r e d

to believe that our fel low humans are basically honest and trustworthy. And that

belief can put you, and your financial institution, at risk.

Social engineering is the act of inf lu-encing people to disclose information and to get them to act inappropriately, according to Mark Lowers, CEO of Low-ers Risk Group. Lowers, along with Elaine Dodd, executive vice-president, Fraud Div ision, Oklahoma Bankers Association, described what to do to protect your institution—and your cus-tomers—from social engineering cyber threats. They spoke at the ABA National Conference for Community Bankers.

“ You can ca l l socia l eng ineer ing manipulation. You can call it extortion. But it’s fraud,” said Lowers.

The proliferation of social media puts everyone at risk, he said, calling technology the “rocket fuel” of social

engineering. “There is no sacred infor-mation on sites such as Facebook and Twitter. In about three minutes, Elaine and I could find out your social security number, birth date, address, and maybe even retrieve your birth certificate.”

Fraudsters gather personal informa-tion for impersonation, perhaps calling a target and using this information to trick the target into thinking they are legiti-mate, explained Dodd. Or, they send a personalized email with information that includes the target’s last vacation destination or grandchild’s name, and request that the target click on a link to what looks like an authentic website. “Clicking on the link can be devastating for your institution,” added Lowers.

They also say or email things like, “I’m from the IRS,” or “I’m from the bank.”

Lowers and Dodd had seven recom-mendations for financial institutions to minimize the risk of fraudsters using cyber attacks for harm.


1. respect the smartphone“Most of us don’t deploy the same secu-rity to our smartphones as we do to our laptops, desktops, and mainframes, but we should,” said Lowers. Connecting to free Wi-Fi or turning on Bluetooth allows fraudsters access to your smartphone and possibly your institution’s network.

2. turn it offShut down desktops and laptops at the end of the workday. While it may be inconvenient to boot up each day, leav-ing computers on means that hackers can access them. Also, back up at least daily. If bad guys lock up your computer and you can’t or won’t pay the ransom to unlock it, you still have most of your data.

3. Use longer passwords Instead of short passwords that are a mix of numbers and letters, Dodd recom-mended using easily remembered, longer phrases (17 characters or more)—e.g. “IMarriedMyWifeinMaui.” Letters are more secure than numbers since there are 26, explained Lowers. The longer the string of letters, the harder it is to break.

4. make sure policies are easy to understand Since security policies and procedures are only helpful if employees read them, strive to make documentation as con-cise and easy to understand as possible.

2.9% + $0.30transaction fee per transaction

Venmo fees (merchants)

$1 billion2.5x Jan. 2015

Venmo’s Jan. 2016 $$$

Policies should cover social media and use of personal devices at work. The experts suggested prohibiting employee down-loading of apps onto company devices, and addressing the use of f lash (USB) drives. Protecting against social engineer-ing is all about education, awareness, and training, said Lowers. Dodd added: “If the top of the institution doesn’t think this is important, it won’t matter what you do.”

5. Work closely with itYour technology folks will likely be up to speed on the latest cyber vulnerabilities. Communicate with them frequently, and ask them to keep the institution apprised of scams or threats, suggested Lowers.

6. Develop relationships with law enforcementDodd encouraged institutions to get to know law enforcement, like the FBI. “Being on a first-name basis with your FBI agent can make all the difference in your ability to shut down wire transfers or retrieve money that has left the bank.”

7. Work with your partnersIf your ATM provider or armored car service aren’t secure, hackers can access your internal systems through a back door. Lowers recommended that institu-tions meet with third-party providers at least once a year to discuss what each is doing against cyber threats.

/ THREADS /


B usiness banking in Poland just got easier. To save its clients time and offer a safer way to make deposits, Idea Bank, a Polish

bank founded in 2010 to support entre-preneurs, has rolled out a mobile cash deposit machine (CDM). Small business owners use a smartphone app to order a car with a built-in ATM directly to their doors at a time of their choosing.

Author and entrepreneur Josh Linkner mentioned the Idea Bank innovation during a recent presentation to bankers (covered online at tinyurl.com/Linkner-speech), prompting this follow-up.

Idea Bank currently has a BMW i3 for cash deposits only and nine Ford Cou-riers, where the customer can deposit, withdraw money, and also check her account balance. The cars service about 80 clients a day in several Polish cities, including Warsaw.

The bank knows the location of the cars at all times, and the drivers have special permissions to escort money and also are professional bodyguards.

So far, the results of the free mobile CDM service have been positive.

“Nearly 60% of customers who once used the mobile ATM, do it again,” wrote Klaudia Klimkowska, commu-nication specialist at Idea Bank, in an email. “Mobile ATM users have a 3.5-times bigger account balance. Idea Bank becomes the main banking account for many entrepreneurs, which leads to an increase in transaction volumes.”

Could such a ser v ice garner sup-

port here in the United States? Mobile branches are not new, and banks are beginning to introduce ATM software to allow preordered withdrawals by mobile app, but an app-directed mobile ATM may be new.

Idea Bank says there is one U.S. bank interested in introducing a similar ser-vice stateside. Stay tuned.

DRIVING DEPOSITS Polish bank’s innovation leads to bigger accounts By Ashley Bray, contributing editor

G uess where the fo l low -ing statement comes from: “We promote competition

through disruptive innovation.”A fintech company? A consulting

firm? No, a regulator: U.K.’s Finan-cial Conduct Authority.

So writes compliance and fintech authority Jo Ann Barefoot in an arti-cle on BankingExchange.com, from which this article is adapted.

Regulators worldwide are realiz-ing their actions could inadvertently undermine upside potent ial of fintech—lower cost, greater trans-parency, inclusiveness, consumer empowerment, faster payments—as they pursue legitimate efforts to address downside risk.

FCA is pursuing strategies that range from directly nurturing prom-ising startups to adopting policies that foster innovation. It has an “Innovation Hub” and is consider-ing a formal “regulatory sandbox” for innovators to test new ideas.

The U.K. regulators are relying on “principles-based” rather than “rules-based regulation,” although they do have extensive rules there.

This is one area where U.S. regu-lators are moving quickly in the same direction. They shifted to a proactive stance on principles-based regs. This means the highest consumer regulatory risks for U.S. banks concentrate in areas where product terms and practices are viewed by regulators as deceptive, unfair, or discriminatory.

On the innovation front, U.S. reg-ulators are starting to shift gears, but they are not so far ahead as FCA. There is no shortage of meaty and critical topics. A key one is:

How can our bank-centric regu-latory system cope with innovation by nonbanks, from tiny startups with a new phone app, to a future Uber of finance, to mold-breaking services from Amazon or Google?

For more, visit http://tinyurl.com/regulateFintech

Should fintechbe regulated?

to save time, clients can order a car with a built-in cash deposit machine

directly to their doors

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http://tinyurl.com/regulateFintech


In the course of a discussion about the bureau’s enforcement of UDAAP and related legal provisions, Peggy Twohig, assistant director of the Consumer

Financial Protection Bureau’s Office of Supervision Policy, revealed that some bureau consent orders go beyond what the law requires. She characterized this policy as “fencing in”—putting a regula-tory fence around a company the bureau believes has violated regulations or laws.

“If you go over the line,” said Twohig, spea k ing at an A mer ican Bankers

Association gathering, “we are going to do a few things to be sure you not only remediate the harm, but to make sure it doesn’t happen again.”

Asked about CFPB’s practice of making policy via enforcement actions, Twohig responded in the context of deceptive practices. Deception, she said, being a qualitative matter, defied complete cap-ture in a formal rule. Above all, f lexibility is important in enforcing deception cases.

Read the full article at http://tinyurl.com/TwohigCFPB

Though the financial crisis was more than seven years ago, increased emphasis on capital remains a key focus. It made

headlines in March in Rep. Jeb Hensar-ling’s regulatory reform proposal. Less well known, perhaps, but of particular importance to community banks, is that regulators are asking to see robust capi-tal plans alongside a three-to-five year strategic plan and an enterprise risk management plan. And not a plan sitting dusty on a shelf, but one that’s been revis-ited within a year or less.

That was the message offered by Rob-ert Flowers during a session on evolving trends in capital at the recent annual con-vention of the Independent Community Bankers of America. Flowers, Dallas-based partner at the Hunton & Williams law firm, said a national bank examiner told him that having a good capital plan would be a component of a bank’s CAM-ELS exam within two to five years. That statement was made almost two years ago, Flowers noted, adding that banks he works with have said examiners are ask-ing to see their capital plans.

Without a plan, Flowers said, when a bank gets in trouble, the administrative order will instruct it to develop a capital plan to raise capital within a short time

period. “You’re staring into the abyss and need capital right then,” he said. A bank’s capital plan essentially “makes sure you’ve got enough fuel in your tank to drive your strategic plan and enough fuel to deal with the risks you may encounter to avoid just-in-time capital.”

The key element of a capital plan is “tolerances and triggers,” said Flowers. The plan “is a forward-looking mecha-nism, so you can take little steps as you go along, instead of huge steps when the

need for capital is imminent and dire.” The plan covers situations l ike a

decline in liquidity ratio or asset quality, but also anything that’s in your strategic plan, or a change to that plan—a bank or branch acquisition, etc.

“It’s a true planning tool, not a we-need-it-now tool,” said Flowers. “It tells you want kind of capital requirements you’ll need when certain thresholds are hit, and tells you what kind of capital alternatives to look at—equity, subordinated debt, shrink the bank, sell off a branch.”

He recommended reviewing the cap-ital plan once a year, but preferably quarterly to ensure that the strategic, risk, and capital plans all work together.

Flowers discussed sources and uses of capital for closely held community banks. One was subordinated debt, an option for banks with assets between $500 million and $1 billion, thanks to a change made in 2014 to the Small Bank Holding Com-pany Policy Statement. Those banks can use “sub debt” to engage in new activities. Another option: an Employee Stock Own-ership Plan (ESOP), which can be used to raise capital or buy out a shareholder.

A longer version of this article—the first of a series by Flowers and his asso-ciates—appears on BankingExchange.com at tinyurl.com/BankCapitalPlans

ENFORCEMENT ACTIONS ARE INBetter get used to this CFPB approach By Steve Cocheo, executive editor

MINDING TOLERANCES & TRIGGERSIt’s not if, but when, examiners will ask to see your capital planBy Bill Streeter, editor & publisher

a capital plan ensures you can fuel your strategic

plan and deal with risk

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CFPB’s Peggy Twohig describes “fencing in”

http://tinyurl.com/twohigcfpb

/ THREADS /


In an election year, it’s a safe assump-tion that politics are on the minds of everyone, including bankers. But are these same bankers interested in a run

for office themselves? Joseph Brannen, Georgia Bankers

Association president and CEO, finds fewer bankers are interested in elected office—even at the state level—due to demands on time, family, and business.

But that doesn’t mean bankers don’t serve. Brannen brings up Doug Barnard, a banker at the former Georgia Rail-road Bank and Trust, who held office as a Georgia congressman (1977-1993). A banker who recalls him says that fel-low members would listen closely to him whenever banking issues were under consideration. As for bankers currently serving, the list includes Blaine Luetke-meyer, the Republican U.S. congressman from Missouri, who worked for the Bank of St. Elizabeth in that state.

At the state level, the unicameral Nebraska legislature clearly is a mag-net for banker politicians. A trio of state senators now serving have banking con-nections: John Stinner, who serves on the board of $361 million-assets Valley Bank and Trust Co. and was a previ-ous chairman of the Nebraska Bankers Association; Kate Sullivan, who serves

on the board of $41 million-assets Cedar Rapids State Bank; and Matt Williams, who serves as chairman of the board at $144 million-assets Gothenburg State Bank and was a former chair of both the Nebraska Bankers Association and the American Bankers Association.

Run or support those who doMatt Williams took the plunge into politics after feeling a sense of respon-sibility to work for positive change, and he believes more bankers should seek

elected of f ice. “Because we’ve been bankers, we probably have some under-standing of school finance, we probably have some understanding of economic development,” he says. “Bringing those skills and the professionalism that our industry fosters to these elected posi-tions, I think, is very beneficial.”

At the very least, Williams thinks bankers should step up and support members and allies of the banking indus-try who do run. “If we, as bankers, aren’t doing it, we need to certainly help recruit people to these jobs and support them, which means financial and otherwise, so that we have that seat at the table,” he points out.

Williams didn’t leave banking behind after he was elected. He still works at Gothenburg in a reduced capacity. “I had handed off virtually all of my day-to-day type of activities here at the bank,” says Williams. “We’ve developed a young, aggressive management team here, and I think that if I had stayed, I would have been holding them back from reaching the potential that they had.”

Nebraska’s one-house legislature, with just 49 senators, requires more time and dedication than a typical state off ice would require. “It’s a commitment,” says Williams. “Would I have been able to do this when I was knee-deep into the daily operation of my bank? Probably not.”

In the legislature, Williams serves as vice-chair of the Banking, Commerce, and Insurance Committee. “My expertise in banking and understanding of finan-cials is useful all the time there because several of the committee members don’t have that same background,” according to Williams. “In fact, I’m the only person with hands-on banking experience on that committee.”

Dealing with a bigger worldThanks to his law degree, Williams also serves on the Judiciary Committee, which handles many divisive and con-troversial topics, such as abortion, gun laws, and the death penalty. Williams describes his role there as being a calm listener who can “bring people together to try to find areas of compromise to get something done.”

Despite this approach, Williams has still come up against some skepticism and negative perceptions of the banking industry. “But I think I’m bringing a per-spective there . . . of what banks really do, and the positive inf luence that banking has on communities all across the state,” he says. “I’ve had the opportunity to broaden my horizons from being focused just primarily on banking and economic development issues, to now seeing a big-ger world out there. And that’s been very fulfilling for me.”

FROM BANKER TO POliTiciANThe case for putting more bankers on the ballot By Ashley Bray, contributing editor

There’s still distrust of banks in government

today. Bankers turned politicians, like

Nebraska’s Matt Williams, are working

to change that.

A banker’s finance skills and understanding of

economic development are beneficial to elected

office positions

/ Seven QueStionS /


It’s not easy to describe what Chris Skinner does. Based in the U.K., Skin-ner has been writing, speaking, and advising on financial topics for many

years, particularly those related to the transformational changes taking place in f inancial technology. Earlier in his career he worked on financial services projects for several tech companies.

Skinner is the author of several books and a blog called Finanser. He also cre-ated the Financial Serv ices Club, a network that holds regular meetings in Europe. Skinner travels and speaks extensively, works social media, and con-sults with banks and vendors in many countries in addition to running the club.

His most recent book, just out, is Value Web: How Fintech Firms are Using Bit-coin Blockchain and Mobile Technologies to Create the Internet of Value. (You can read a banker’s review of it, as well as a free chapter excerpt, on BankingEx-change.com under the “Books” tab.)

In April, Skinner partnered with Sin-gapore-based venture capital fund Life.SREDA to establish the Banking on Blockchain Fund. The fund’s goal is to give all banks the opportunity to invest in and partner with the most promising blockchain startups. It plans to raise $50 million by yearend.

Skinner’s views don’t f it neatly into boxes. He makes clear that banking as we know it is changing radically, yet within that broad stroke are finer nuances about millennials and their need for face-to-face reassurance, for instance. Read the following dialog, edited for clarity and length, and you will see what we mean.

Q1. Given our tech-obsessed world, how do you view the importance of personal relationships in the context of how financial services is evolving?

That’s a four-hour discussion, but I’ll give you the four-minute view. Money is a con-trol mechanism, and because of that, we feel psychologically that there’s a very key relationship between us and our monetary stores. We need to feel comfortable with our money and who is looking after it.

That changes over time. Most peo-ple getting a first job or first mortgage want to have the ability to look someone in the eye and talk about it. But if you’re getting your sixth mortgage and you’ve had a job for 30 years, you’re very com-fortable with money, and so doing it all on an app without ever seeing anybody is okay. That’s why most digital banks are targeting people who are comfortable and confident with money. If you look at Fidor Bank [Munich]—the poster child of digital banking—60% of its customers are over the age of 35 and over half are over the age of 45.

I disagree with those who say, “You need to completely change the banking system because millennials hate banks.” For most millennials—and the genera-tions that come after them—the f irst people they talk to when they’re getting a

job and looking at money are friends and family. And typically friends and fam-ily will say, “I’ve had my money with this bank for years, and even though I don’t like banks, I have someone that I trust that I can talk to.” That aspect of life isn’t going to go away soon—it might do so in 60 years, but not in a couple years. Getting comfortable and confident with money takes time. When you’re not com-fortable and confident with money, you’re not necessarily going to feel you can put all your value store into a digital struc-ture, particularly if you’ve been burned by that structure like the guys who lost money on Mt. Gox Bitcoin exchange.

Some say you’ll never need a branch in the future. I think you’ll always need a branch in the future, and you’ll always need to be able to engage customers in a face-to-face conversation. Banks just

PROVOCATIVE WITHOUT THE RANTFintech leader Chris Skinner doesn’t mince words, but neither is he in lockstep with the anti-bank crowd By Bill Streeter, editor & publisher

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I disagree with those that say banks need to completely

change because millennials hate banks

/ Seven QueStionS /


need to work out how many of those buildings and humans they need.

Q2. You wrote a blog post, “Why Most Banks Fail at Transformational Change,” (tinyurl.com/skinnerblog) in which you pose the question: “How would we build this company if it didn’t exist?” What does it take to apply that?

Most CEOs fear doing such big change. A bigger bank that’s done it is BBVA, led by CEO Francisco Gonzáles, who started his career programming computers.

When I speak to people at banks sim-ilar to BBVA, they tell me, “Yes, we’re making all those [digital transformation] statements externally, but our problem internally is that culturally we’re not sure we can make the change.” So the press and PR looks fantastic; the actual truth is not necessarily living up to the dream.

If I hear someone talking about digital leadership and transformation, one word immediately makes me think, “You’re not doing it.” That word is “channel,” or any variation of it. Digital banks don’t have channels; they have access. You build a digital foundation and then try to work out how buildings and humans access that foundation. Traditional banks talk about functions and cross-functional teams. “Function” to me says you still don’t have an integrated view of the cus-tomer and the world. What you have is silo-based products and services.

A mazon doesn’t have f unct iona l teams. If they did, then the guys who sell you Blu-ray discs would be fighting with the guys who sell you books.

Many banks create a digital bank sub-sidiary, which is the easiest strategy to take. A harder model is to completely remake the bank as a digital bank. It’s really a challenging thing to do, because it’s not just creating a digital bank prod-uct service platform, but it’s creating a digital culture that goes with that. One example is Poland’s mBank, which I write about in my book, Digital Bank.

A third approach is where you take your existing services and put them into an app, an API, or into the cloud. You develop digital structures, but keep your existing culture and operations as they are. I question that one just because it’s what we’ve done for years and years, and when you’ve got new, nimble competition that’s digital to the core, just trying to add bits to your front end to make you look as cool as them is not really going to work.

It just comes down to that fundamen-tal question: How serious are you about change? Many chief innovation officers and chief digital off icers I encounter in banks tell me that after a year or 18 months, they realize the organization really isn’t serious about change because when it comes to the second budgeting round, they’re being nickeled and dimed. It’s the same with some of the technology incubators, accelerators, and tech labs that are operating in banks.

When you star t to create a dig i-tal culture and foundation, you end up challenging the lines of business and functions, so that the guys that sit on the executive ladder, in effect, are now going to cut off the steps of the ladder they sit on. That’s not a comfortable feeling for

the incumbent leadership team. Many of them think that digital is something that can be done as a project rather than as a fundamental transition.

Q3. You’ve stated that you think banks have about ten years to retool their core legacy systems. That actually seems fairly generous. How did you come upon that number?

Banks core operating systems haven’t really changed for a long time in most instances. This has become almost like having a house with faulty wiring. You’ve got to rewire the house at some point.

A few banks are trying, but it’s high risk because you’ve got live operational systems that you have to transition to something else. If there’s any downtime in the transition, then you’ve got a risk expo-sure reputationally and operationally.

What some banks have done [he cited Bank Australia, a former credit union], is separate content from processing—then you can make the transition. To separate content, you suck data out of

your existing operational systems into a cloud-based structure to which you then apply data analytics. Once you get the right analytics and enterprise view of your data, you can then feed that data into any processes through your private cloud such that you’ve made the content independent of the processing. But to make that transition would take about five years for most banks.

Customers don’t move quickly either. They have to change their methods and structures as well, particularly the corpo-rate community. That’s the reason for ten years. It’s about five years for the bank to make the transition and another five before the customers will walk because they think you’re so antiquated.

Q4. It’s often said that banks have massive amounts of customer data, which they need to put to better use. Is transactional data really that valuable?

It is if they know how to use it. Forrester found that most companies—not banks specifically—only tag 3% of the data they have and analyze 0.5%. So 99.5% is irrel-evant, redundant, and not used. Banks are slightly better than that.

The battleground in the future is going to be about data and using data to really leverage knowledge of the customer. And if you don’t have that capability, you can’t compete in the marketplace of the inter-connected internet world.

I’ll give you an example. It is Bank of America’s BankAmeriDeals program, where in real time they can identify where you are—based on your mobile phone—and send you a specific loyalty program offer as you approach a store they know you regularly shop in. So you can use a $50 discount card in your app if you walk into that store right now, because they’ve got a partnership with the store to promote it to you. That’s being relevant at the point of my reality.

Most banks are nowhere near that level of being relevant. But that’s where the battleground is—real-time analytics for relevance in the financial relationship, and the partnerships that go into that relationship that allow that to happen.

Q5. Bankers are highly concerned about cybersecurity. Can cyberfraud derail what we’re talking about here?

If you have real-time digital structures, then your cybersecurity is far more defendable than if you have fragmented

Core change is like having a house with faulty wiring. You’ve

got to rewire the house at some point

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structures that are not monitored in real time. A real-time monitoring struc-ture let’s you see the pulse of the bank, so you can easily lock down an issue as it happens rather than wait until you see it the next day. Many banks have prob-lems because they have systems across multiple platforms—some of which are batch, some of which are real time, some of which were implemented in 2015, some in 1995. That sort of fragmented structure at the back end is far more vul-nerable to cyber leverage than if you had the whole thing in an enterprise, real-time structure. And so it really comes down to: Do you have the right dash-boards to manage an effective level of loss? If you don’t, you really should be refreshing those systems.

Q6. Regarding blockchain, you’ve said, “This technology could fundamentally reinvent the banking system,” and also that it is the “Uber of finance.” That sounds like hyperbole. Is it?

No. It’s true. People think “Uber of bank-ing” is going to be a company. I don’t believe it’s going to be a company, but a technol-ogy—the blockchain. The reason: Uber and similar services are connecting peo-ple who have something with people who need something. I need a ride and Uber connects me with people who have cars and drivers. I need a room and Airbnb connects me with people who have spare rooms. It’s that middle connecting piece, and that’s what blockchain is—a shared structure. Blockchain isn’t one thing, it’s a technology applied to a problem.

R ight now, i f I ’m mov ing money through the banking system from some-body who has money to someone who needs it, the receiver or the sender has to pay quite a large fee depending on the size of the transaction, because there are so many counterparties involved in check-ing the institutions and the relationships, and the trust in those relationships.

Blockchain takes away all those layers of checking and of cost. Effectively you now say, “We don’t have to do any check-ing because once it’s on the ledger system, we know it can be trusted.” That to me is a little bit of banking, because now I can connect all the people who are trying to send money with all the people who need to receive money without anything in between except for a shared ledger.

Blockchain right now is like the inter-net was before the World Wide Web

showed up. So you need something on top of blockchain technologies to create a real ability to use this in mainstream markets. We haven’t got there yet, but it will come. We’re just at the start of a f ive-year-plus cycle of investment and growth. It’s going to end up with some real transformational change.

I don’t think any bank can sit back and wait to see what happens. You really need to be in the frame today investigating, learning, being part of the community that’s developing blockchain capabilities. That’s the reason why JPMorgan Chase, Citi, Wells Fargo, and Bank of America are heavily investing in blockchain use cases, proof of concepts, and patents.

Q7. How do you see the potential for mobile payments and mobile wallets?

Mobile is still a very important area, and in certain parts of the world, such as Africa, mobile wallets are a transforma-tional change. But I go one step further: The Internet of Things needs an Inter-net of Value to transact. The Internet of Things is really just saying, “I’ve got chips in my television, my fridge, my car, my house, my shoes, wherever, that enable them to become intelligent and transact on the internet when there is a need—without you consciously doing

anything.” That to me is going to be another transformational change over the next five- to ten-year cycle.

If you think of it that way, then mobile is actually just this transient moment where the mobile is a chip inside a com-munication device. Whereas quite soon, we’ll have chips inside all the machines that we use, not just our communication device. I already have them in my TV and my car.

That requires a very different way of thinking about how value is transferred, because machines transacting with machines using my identity to authorize that transaction can’t take days and cost dollars. It needs to be instantaneous and almost free, which is where blockchain ledgers and digital identity comes in.

I was in a bank recently that’s done a deal with gas stations in its country. As you drive in to refuel, you just open your app, which is linked like Uber to your bank account, and order the amount of fuel you need. It’s all within the app. But what I say is, “Why do I actually have to open the app?” I want my car to be autho-rized to do that, so when I drive in, the car orders whatever gas it needs, and I just drive out, so I don’t even have to do anything. Self-driving cars and self-refueling, too.

Like Uber, blockchain is a connector, removing lay-ers of checking and cost.

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crossroadsWaiting at the

Deal pace may be slow, for now, but M&A has become a core part of the business

By Steve Cocheo, executive editor & digital content manager


Bankers of a certain age may recall an original Twilight Zone episode called “The Rip Van Winkle Caper,” a play on the Washington Irving folktale. In the sci-fi story, a gang led by a scientist pulls a gold heist, hibernates for

a couple of decades, and wakes up to find that gold is worthless.Veteran banker Howard Jaffe thinks bankers, especially

community bankers, have been going through their own rude awakening, not from hibernation, but preoccupation. “The bank-ing model really changed during the financial crisis,” says Jaffe, president and COO of $1.1 billion-assets Inland Bancorp, Oak Brook, Ill. “Banks were so focused on basic survival skills that we weren’t paying attention to the fact that the model was changing.”

A major part of the shift concerns technology, and its expo-nential rate of change, but also the yin-yang relationship of the banking model vis-à-vis the customers bank seek and serve.

“It’s permanently changed,” says Jaffe, and that has put many bankers in the position of being open to considering acquiring other institutions or selling to another bank. Part of the stew-ardship for shareholders has become seeking the best deal for ownership. “It’s a responsibility for a banking organization’s man-agement and board to look at all opportunities that are available to bring some value to investors,” he says. “If that means acquisitions, one must look at those. At the same time, if that means the possi-bility of a sale, you should look at that as well. So we look at both.”

This puts today’s bankers at a kind of crossroads, where oppor-tunities for a change in direction will constantly be presenting themselves and demanding decisions.

EvEryoNE KNows tHE sCorETake the Chicagoland market where Inland does business. Jaffe says there are still many banks of all sizes doing business there. The level of merger-oriented chatter, and phone calls from invest-ment bankers and other deal makers, is constant. Discussions at some level are always taking place. “The pace of transactions is slow, and the discussions don’t always translate into deals,” says Jaffe, but M&A looms constantly. He says banking has become a small industry, in the sense that all players know or know of each other, at least in a given region, and everyone knows the score.

Further complicating the picture, says Jaffe, who has been through many mergers in a long career, is that real deal making defies the tables one sees about pricing and values.

“There’s a wide range of pricing considerations out there,” says Jaffe. “Price to tangible book is just one component.” He says every deal is unique and often hinges on the metrics of most interest to the potential buyer. For example, a prospective purchaser may most want deposits. But not all deposits are created equal, so the mix of funding that a target bank offers must be analyzed. “You have to look beyond comparisons with other deals,” says Jaffe. “This is not a black-and-white scenario, there’s a lot of gray.”

Overlay all this with the industry’s ongoing turmoil involv-ing all kinds of factors: new competition, including the fintech wild card; evolving strategies; clashing views on the value of geography in deal making and the importance or lack thereof of branches; sometimes uncertain readings of regulatory attitudes on bank size; the rise of compliance issues as a major poten-tial deal breaker or delaying factor—or deal motivator; and one of the most uncertain business environments seen in decades, Sh

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/ Buy Or Sell /

encompassing ultra-low interest rates and the ripple effects of low oil prices. “Headwinds” is how Jaffe sums up all of this picture.

MAttEr of MINdsEt, tIMING, CoNdItIoNsDeals are getting done. The numbers, talks with bankers who have done them, and interviews with players who help them get done, confirm that. But the tsunami of anticipated M&A has not materialized. “I’m not seeing an explo-sion,” says community bank advisor Jeff Gerrish of Gerrish McCreary Smith. “But it’s been a steady stream.”

The average of the total of first-quar-ter nonassisted deals from 2010 to 2016 is 48, including a 2010 low of 27 and a 2015 high of 67; 2016 comes in toward the higher end, at 60. Deal count came to 283 at the end of 2015, down a trifle from 2014’s 285. (Data is from SNL Financial, a part of S&P Global Market Intelligence.)

We asked consultants, investment bankers, and bankers what they’re hear-ing, seeing, and doing in regards to M&A.

Jay Brew of Seifried & Brew, LLC, who also is a community bank director, says while he hears frustration about regula-tory compliance burdens, he doesn’t hear much interest in selling. “There’s a lot of talk around,” says Brew, “but I’m not hearing, ‘We want out of here.’ Instead, they say they want to buy something. But I’ve heard some people say that for years, and yet they never do a merger.”

On the other hand, potential sellers tend to be very careful about what they say about their thinking, according to banker David Doedtman, president and

CEO of $345 million-assets Washing-ton Savings, Effingham, Ill. Doedtman, whose bank acquired a fellow mutual institution last year, explains that these institutions don’t want to risk word gett ing out ahead of any deal, and merger-averse depositors deciding to vote with their funds.

The aging of leaders, board members, and investors appears to be playing a part. This seems to go beyond the regula-tory fatigue that was talked about a few years ago. While regulators have been harping on management succession for years, even the die-hardest holdouts are beginning to come around. “The pace seems to have picked up, and I don’t think that anyone is going to run their bank until they are 90,” says community bank investor Joshua Siegel, chairman and CEO at StoneCastle Financial Corp. This factor of simple physical age dove-tails with two other trends.

“The role of being an empire builder can be fun,” says attorney Mark Kanaly, partner at Alston & Bird LLP, “but the time can come to monetize it.”

One is a less-discussed effect of the financial crisis. The crisis itself, and some of the damage done to the industry’s image, left a hole. “We lost a genera-tion of community bankers that moved into other industries instead of commu-nity banking, and that’s coming home to roost,” says Robert Flowers, partner, Hunton & Williams LLP. The attorney explains that while some C-suite officers can be replaced, such as CFOs, the avail-ability of seasoned but younger CEOs and COOs proves harder. This drives some thinking about selling.

Branch swap: New model or one-off?

Earlier this year, First Commu-nity Bancshares Inc., based in Bluef ield, Va., and First

Bancorp, based in Southern Pines, N.C., announced a branch swap to take effect in the third quarter. The deal calls for First Community’s bank unit, First Community Bank, to get seven branches in Virginia owned by First Bancorp’s bank unit, First Bank. In exchange, First Bank will pick up six First Commu-nity branches in N.C. All deposits and certain loans will transfer along with the buildings. read more at http://tinyurl.com/tradeyou

Is this a one of a kind deal? Or an idea with legs? Views are mixed.

“It ’s a very savvy idea,” says community bank investor Joshua Siegel. “It makes more sense than spreading yourself out across the map like in a game of Risk.”

“I think deals like that will become more common,” says Als ton & Bird LLP partner Mark Kanaly. The appeal lies in obtaining exactly what the bank wants. But such deals would not offer the benefits that consolidation and reduction of costs would bring. “Nobody’s really looking for new brick and mortar,” says attorney Jeff Gerrish of Ger-rish McCreary Smith. But a net-zero deal can have some appeal.

Sti l l , Collyn Gilber t of Keefe, Bruyette & Woods is skeptical: “It’s part of a last-ditch effort to make branches work.” read more about her views on branches at http://tinyurl.com/excessbags


More financially, there are signs when it is time to consider a sale. “If you have to completely redefine the bank, then the model has matured,” suggests Collyn Gilbert, managing director and ana-lyst of midcap banks in the Northeast at Keefe, Bruyette & Woods. A bank that has plucked not only low-hanging fruit but also mid-range apples should think about selling, she adds. Today’s f latten-ing yield curve facilitates thinking this way, she explains. “Not many bankers think that way,” says Gilbert, “but if I were running a bank, that’s what I’d do.”

tHE wAlKING dEAdA consideration that cuts two ways comes from StoneCastle’s Siegel. While he’s a booster of community banking and its future, he also is a realist where specific institutions are concerned. He says in some communities, there are more banks than viable business. Typi-cally, one banks owns most of the market share, one does well for itself, and the third is “walking dead,” says Siegel. Both he and Gilbert suggest one of the stron-ger players snap up the weakling.

“This lets you take out irrational com-petition,” says Gilbert, and potentially bring down deposit pricing.

Utilization of capital also plays into the thinking of potential acquirers, says advisor Gerrish. “People who have excess capital want more bang for their bucks,” he explains. The appeal of a merger is more revenue from the same fixed base of costs, and further deployment of capital.

A factor that hovers out there, often unresolved, is private equity investment. These players went in during or just after the crisis, and those who aren’t already out want to realize their returns and move on. They want to be bought out, though offers are not readily coming, says Gerrish, who notes that private equity isn’t making fresh investments in com-munity banks anymore. In some cases, private equity is encouraging banks to orchestrate their own takeout, perhaps by launching an initial public offering, but Brian Marek, partner, Hunton & Williams LLP, says the poor current IPO market doesn’t make this practical.

BuyErs froM wHErE?What about interest in acquiring banks by other, nonbank organizations? Given the increasing urge of fintech players, for example, to partner with traditional

banks, have any been interested in buy-ing one? “Fintech companies are waking up to the fact that they can have a fund-ing source that they can control,” says Gerrish, which they find appealing. But Gerrish and others who have explored such deals find that fintech players get spooked by banking regulation.

By contrast, mortgage banks, sub-jected to increased regulations in the wake of the Dodd-Frank Act, have been interested in bank acquisitions. “They tend to pay a little higher,” says attorney Flowers, “because they want a bank char-ter, and buying a bank is much easier than trying to do a de novo bank.”

Actually executing such deals, how-ever, proves a slow process, Flowers adds. Regulators have exhibited concerns about mortgage banks buying banks—they don’t want them “to blow up the balance sheet,” he explains.

Wintrust Financial Corporation

Bank of the Ozarks, Inc.

Heartland Financial USA, Inc.

IBERIABANK Corporation

Chemical Financial Corporation

Old National Bancorp

BNC Bancorp

First Farmers Financial Corporation

Olney Bancshares of Texas, Inc.

Peoples Bancorp Inc.

Horizon Bancorp

Pinnacle Financial Partners, Inc.

First Midwest Bancorp, Inc.

Seacoast Banking Corporation of Florida

CenterState Banks, Inc.

Ameris Bancorp

Pinnacle Bancorp, Inc.

BB&T Corporation

Glacier Bancorp, Inc.

HCBF Holding Company, Inc.

First Merchants Corporation

Home BancShares, Inc.

Simmons First National Corporation

Number of deals

5

5

5

5

4

4

4

4

4

4

3

3

3

3

3

3

3

3

3

3

3

3

3

Total announced deal value ($M)

139.9

1,711.2

261.3

765.3

1,420.3

767.1

389.7

NA

50.2

174.9

189.9

479.0

151.0

169.1

275.3

184.0

NA

4,683.5

87.0

60.4

129.8

179.3

516.7

Deposits sold ($000)

1,077,259

6,951,164

1,875,301

3,394,654

7,067,869

3,326,876

1,939,041

206,775

314,766

931,288

882,452

2,184,350

1,159,490

1,051,540

1,610,998

1,126,436

474,339

21,894,827

684,607

663,367

728,015

847,694

2,851,716

Most ACtIvE BANK BuyErs, 2014 oNwArd

Data compiled March 31, 2016. Includes thrift merger conversions and bank and thrift whole deals announced as of March 28, 2016. Excludes minority company deals, branch deals, and government-assisted deals, plus terminated deals. Source: SNL Financial, a part of S&P Global Market Intelligence.

Cross slowlySo we have lots of chatter and a laundry list of genuine reasons for deals. What we don’t have is that tsunami.

That M&A is now a core part of the business is acknowledged. “Many banks have spent time shoring up their capital and they have dry powder to buy other banks and jump-start their growth,” says consultant Peyton Patterson, a former banker with extensive experience with mergers. “It’s become part of the model.”

“There are still a lot of banks to buy,” says stock analyst Richard Bove, vice-pres-ident, equity capital markets, financial sector, at Rafferty Capital Markets, LLC.

But a consensus seems to be form-ing that no f lood of mergers will occur. Instead, says Patterson, “consolidation is going to be a slow, gradual grind.”

Part of the reason for this trend is that acquirers appear to be much pickier


/ Buy Or Sell /

the homeowner to begin offering the house at a price commensurate with the market. Once up for sale, the agent said, it ceased to be a home and became a commodity.

Selling a bank that a CEO, board mem-ber, or local investor has been involved with for a long time may bring a similarly neces-sary adjustment of perspective. While every deal is unique—a valid point from Inland’s Jaffe—consultant Gerrish says much of the basic price-setting for a deal is a mathemat-ical process based on the bank’s numbers.

Seller thinking may not start there, however, even in a post-crisis atmosphere. Emotion seems to govern much think-ing about pricing a sale. No one likes to see themselves or the fruit of their efforts as a mere commodity, and the smaller a bank, “the more special they think they are,” says consultant Patterson. “But I am 100% certain that the valuations of the past will not come back.”

Sellers holding off until the return of twice times book may wait forever, sug-gests attorney Flowers. Even some sellers who want to wait for 1.5 to 1.8 times book may be overly optimistic, he adds.

Bank investor Siegel sees the recent steady state of consolidation continuing for some years, and he believes the industry will settle out, for a time, at around 4,500 banks. Gerrish concurs. “That’s no good,” says Siegel, but he’s a realist. Banks that hold out until the industry’s population levels off may enjoy an incremental gain due to scarcity value—fewer targets to be bought. But there also is the risk that the bank’s franchise will not look as attractive.

What happens among larger banks is a backdrop to what happens among com-munity banks. While there is a question, in light of “too big to fail,” of when big gets to be too big, plenty of larger banks can still get together. “Anyone $50 billion or below can still do deals,” says Bove. “I think you’ll see some more large bank M&A,” adds Keefe, Bruyette & Woods’ Gilbert. “There aren’t a lot of earnings levers left for large banks to pull.”

Bove thinks talk of culture and cul-tural affinity in the big bank M&A space is mere lip service. Referring to one big

Speaking more generally about stock market conditions, analyst Bove asks, “When will the Fed realize that it needs to increase conf idence in the bank-ing system?” With stocks in publicly traded banks selling at fraction of their value—50% to 60%—he says, this is no academic matter, because indications are that many acquirers would prefer the currency of stock rather than cash, or at least a blended stock-cash deal.

PrICING rEAlItIEsIn a recent edition of a real estate bro-ker magazine, a veteran agent explained that one of the biggest hurdles to suc-cessfully selling a home was persuading

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300

300

250

200

150

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50

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20072008

20092010 2011

20122013

20142015

2016

Source: SNL Financial, a part of S&P Global Market Intelligence

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20142015

2016

NuMBEr of NAtIoNAl BANK ANd tHrIft dEAls

The consensus is that there won’t be a merger tsunami. Instead, consolidation

will be a slow, cautious, gradual grind

KEEP uP wItH MErGErs oN our M&A CHANNEl: www.BankingExchange.com/management-topics/m-and-a

Data compiled March 31, 2016. Includes thrift merger conversions and bank and thrift whole deals announced as of March 28, 2016. Excludes minority company deals, branch deals, and government-assisted deals, plus terminated deals. Source: SNL Financial, a part of S&P Global Market Intelligence.

than they once were. Hunton & Williams’ Marek says buyers used to have their top five banks they’d like to buy, but were willing to drop to one in their top ten or 15 if none of their favorites wanted to play.

Now, with fewer chairs in this game of musical banks, an uncertain economy, and other questions, Marek says that buyers proceed with more caution. “Now, they’d rather keep their powder dry for their top five, and not settle for some-thing lower on their list.”

For sellers, there is sometimes reluc-tance to sell at current prices, even if selling is what they want. “They just can’t justify selling at current prices, com-pared to what banks were getting 10 to 15 years ago,” says attorney Kanaly.

Marek blames buyer and seller hesi-tancy on low interest rates and the oil and gas situation. Overall, he says, “they are waiting for a market check, based on the first and second quarters, before they pull the trigger on any M&A deal.”


Looking to sell? Some expert tips

W hen you put your house on the market, you fix some things and you

may stage it. Some cleanup can be warranted with a bank, but should you work on efficiency ratio before putting up the “for sale” sign?

Consultant Pey ton Pat terson says the belief that a bank should have a great efficiency ratio to be a good target can actually hurt a deal. Why? “A buyer wants to take advantage of your inefficiencies,” she says. Having some fat that can be squeezed out actually appeals.

Not all experts agree. Alston & Bird LLP partner Mark Kanaly says that “some buyers would rather buy a bank that is lean.”

Some tips for sale preparation: • Look at a mirror. Go into any deal realizing that there’s a good chance a prospective acquirer has been mystery shopping the bank. • Look at your staff. Do your front-line people get the idea of sales and customer service? That’s appealing. • Look at your portfolio. Banks sell for higher prices than thrifts. The more your portfolio makes you look like a savings institution, the lower your price may be. • Look at your branches. A buyer will likely remodel, but does your branch network include features that make it look like a headache? • Look at your contracts. Players with lucrative change of control agreements want what’s due them. Is that what’s intended? It’s more a buyer’s concern, but it may come up.

bank that stresses cultural f it when it talks merger, he dismisses it as “baloney.” Says Bove, “Nobody cares about culture anymore.” Big players seek more custom-ers for more revenue.

That’s not so much the case with com-munity or midsize banks.

duE dIlIGENCE for AllIn bank M&A, the concept of due dili-gence is evolving. Once centered chief ly on credit and on the acquisition candi-date, now buyer and seller inspect each other, and this applies whether the pro-posed deal is for cash or for stock.

Beyond the traditional concerns, “com-pliance from a due diligence standpoint has really picked up,” according to Gerrish. Compliance surprises can be reputational trouble, and they can be expensive both for legal expertise as well as fines or pen-alties. Compliance issues involving matters like fair-lending investigations or CRA challenges can delay a deal by years, at the extreme. Regulators have been known to use a pending or possible deal as leverage to bring a bank to the table. And anyone who will hold the stock of an institution post-merger must be concerned about suc-cessor liability—an acquisition erases no compliance sin of the seller.

Today, increasingly, there is due dili-gence of the buyer by the seller even on financial grounds. No seller wants to find out that there’s some financial issue that’s going to make regulators delay or halt a deal, and, ultimately, sellers want to be sure that the buyer is good for the offer.

Overall, says Hunton & Williams’ Marek, if a deal falls apart these days, the cause more typically is an issue uncov-ered in reverse due diligence, and it’s typically a regulatory matter.

Leaders on both sides must bring the appropriate expertise to the table, and this includes IT, according to Patterson. Nasty surprises can arise in process-ing, and frequently, it’s helpful for the acquiring bank to bring its key IT ven-dor into the picture to assess what kind of conversion it’s in for. “Bankers have to understand that unanticipated merger costs can blow your deal,” she explains.

doEs GEoGrAPHy rEAlly MAttEr?Concentration on fintech as well as digi-tal banking has a way of overshadowing what is actually going on today. For all the zest of electronic finance, banking

consists of a lot of very basic, unsexy stuff that nonetheless makes our economic world go around.

So the question, “Does geography still matter?” in an M&A context is rel-evant, but easily answered. One banker’s response puts much in a nutshell.

“Digital is an important part of our delivery system,” says Bill Docking, “but it’s not the only part. It’s very important, still, to have relationships with your cus-tomers, and it’s hard to do that digitally.”

Docking’s family holding company, $477 million-assets Docking Bancshares, acquired Relianz Bancshares last year. Docking explains that the two banks had worked deals together and that manage-ment liked the other bank’s style. It made sense to buy Relianz as part of an effort to expand and solidify the acquiring organiza-tion’s presence in the Wichita, Kan., market.

The deal was very much about physical footprint, and in time, Docking sees fur-ther deals to fill in the company’s footprint and to judiciously expand its physical reach. “We want to continue to grow,” he says. “Some of that growth will come from acquisition. Fit is very important to us, so we are continually sifting and sort-ing what’s out there.” Docking expects to find more opportunities, explaining that “there’s a window of opportunity that may close soon for banks with aging manage-ments and aging ownerships that don’t have solid succession opportunities.”

You can’t touch on geography without branches coming up. From the viewpoint of a larger bank analyst like Gilbert, branch networks can be an expensive, increasingly less important asset for retail organizations. “More banks are saddled with real estate than there are banks look-ing for real estate,” Gilbert points out.

How space is used is evolving, and making appropriate choices is criti-cal, according to investor Siegel. But he warns against buying too deeply into the branchless concept. Consider Amazon and similar players, he says. Even if Ama-zon follows through on rumored plans to open many stores (one is open, so far), its main thrust will remain online. But that isn’t free, says Siegel. Such players spend as much on marketing to put themselves out there as physical stores spend on rent.

“You have to have a presence in peo-ple’s minds,” points out Siegel, and for the banks, that can st i l l be a well-designed, well-run, well-sized, and well-placed branch.

As online lenders proliferate, they are viewed as an irritant,

a foe, or an ally. Here’s why you can’t ignore them

By Melanie Scarborough, contributing editor

Frenemies in the Marketplace


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Marketplace lending is like a f inancial version of Match.com. Instead of connecting people looking for love, however, it links people looking for money with those willing to lend it—quickly. The process is

quite simple. And that, arguably, is the most important point for traditional lenders.

With marketplace lending, someone seeking a loan for per-sonal or business purposes goes to the website of an online lender, such as Fundation, Kabbage, or OnDeck, and applies for credit. An automated decision is made instantaneously, and, if approved, the customer is assigned a risk category that deter-mines the interest rate for his loan, which is then funded by an online investor. The borrower gets access to capital quickly—albeit expensively in many cases—and the lender, who pays a fee to the matchmaker, typically reaps a return rate between 5% and 12%.

Originally dubbed peer-to-peer (P2P) lending because trans-actions were between individuals, the process is more aptly referred to as marketplace lending now that institutional investors supply most of the capital. In the United States, mar-ketplace loan origination doubled every year from 2010 to 2014, when it reached $12 billion. For the first half of 2015, loan volume exceeded $16 billion. Growth is so rapid that Pricewa-terhouseCoopers expects marketplace lending loan volume to be $150 billion within the next ten years.

NOT A “LITTLE NICHE THING”Bankers who don’t see that as a threat may be missing the big picture, says Brad Smith, managing director of technology solu-tions for Cornerstone Advisors. “Community banks, more so than large banks, have been slow to react because they don’t see their niche coming under fire,” he explains. “They’re typically making commercial real estate and agricultural loans, and, for the moment, those aren’t being sold on online marketplaces—at least not in significant measures. But we’re not that far away from those folks figuring out how to do more specialized lend-ing online, and if we wait for that to happen, it may be too late to respond.”

Smith points to the success Quicken had capturing the online mortgage origination business, to the extent that it is now one of the top three mortgage lenders in virtually every market. “More people now get their mortgages from online lenders than from traditional banks,” says Smith. Marketplace lenders offering loans to small businesses could have the same impact, especially because of their speed. Imagine being a pizzeria owner who sud-denly needs $15,000 to replace a broken oven. Are you going to borrow from a lender who is one mouse click away, or are you going wait for a bank to let you know? “Online lenders are pro-moting a frictionless process—all they need is a revenue number and a FICO score,” Smith says. “Meanwhile, banks are still ask-ing to see tax returns.”

Some banks have adopted automated decision-making for business loans of less than $250,000, he says, but not all have. And as long as their sluggish process has to compete with online operations that make decisions instantaneously, it’s naïve of bankers to dismiss marketplace lending “as a little niche thing we don’t have to worry about,” says Smith.

That approach is reasonable only if your bank’s niche is one others don’t worry about, says Sam Graziano, CEO of Fundation,


/ Marketplace lending /

which makes online loans exclusively to small businesses. If small business lend-ing isn’t a core product for your bank, then his company poses no threat. “Sil-icon Valley Bank—they specialize in venture capital,” says Graziano. “Is tradi-tional, small business lending important to their strategy? Not at all. If small busi-ness is a core customer, banks should have their eye on marketplace lending.”

Graziano also doesn’t believe that online lending ever will replace bricks and mortar, citing statistics showing that a large percentage of millennials have gone into a bank recently. “Some trans-actions—those once-in-a-lifetimes—are emotional decisions, and customers want to be able to speak to someone,” he says. “Branches are not going to go away completely. The type of services they have there and the way those are transacted might change, but there will always be people there who can provide support because people will always want face-to-face.”

SHOULD YOU JUST JOIN ’EM?Yet the concerns of bankers who view marketplace lenders as serious com-petitors are well founded, according to Brian Graham, CEO of Alliance Part-ners, the umbrella of the BancAlliance consortium. “Some of these marketplace lenders started out with a goal of doing to community banks what Amazon did to the local bookstore,” he says. “Others

have set as their strategic goal to capture and own the customer and to cross-sell every possible product. If I were a banker, I would be concerned.” Yet those fears are eclipsed by what Graham says are the tremendous benefits available to small banks through partnerships with marketplace lenders.

“If you look at the community banks and compare their balance sheets 30 years ago to today, there are large swaths of traditional products and services they’ve lost,” Graham observes. “Con-sumer lending went from 85% held by community banks to 6% or 7% today, and that’s the same dynamic with credit card loans, auto loans—anywhere where technology and platforms and scale became important.” The concept behind the BancAlliance network, he explains, is to deliver the scale economy that each community bank lacks individually.

By partnering with Fundation for small business loans, and Lending Club for consumer loans, BancAlliance pro-vides its 200 member banks the means to compete for loans big banks have had a lock on for decades, according to Gra-ham. Through those partnerships, he adds, members can have, almost over-night, a digital loan platform.

“ They t y pic a l ly pa r tner w ith us because of our products,” Fundation’s Graziano says. “We offer plain vanilla products structured just like bank loans, but we’re willing to originate them with more customers than the bank can.”

Fundation inspires confidence, in part, he points out, because it has an expe-rienced group of data analysts, unlike many of its competitors, and strong financial backing.

The same factors also appeal to big regionals. Regions Bank, for one, decided to partner with Fundation to improve its small business lending. “They weren’t capturing all the market share they could because a lot of customers prefer to do their f inances online,” Graziano says. Working with Fundation, Regions can provide small business loans “through a cost-efficient venue and still serve their customers,” he says.

At Fif th Third Bancorp, Michael Crawford, vice-president, senior man-ager, Strategic Planning Group, says he is seeing, generally, “three different types of partnerships: banks acting as institutional investors, offering capital to marketplace lenders; banks acting as lead generators for marketplace lenders; and banks licensing underlying technol-ogy developed by marketplace lenders.”

WSFS Bank, a $5.2 bi l l ion-asset institution based in Wilmington, Del., formed a partnership with LendKey, a technology provider that works with lenders, to fill a niche outside the bank’s core products: tuition funding and the refinancing of private student debt. “We were interested in partnering because we didn’t really have a student loan pro-gram, and they have a very good one, as well as a good delivery method to get to

“Us” vs. “Them” isn’t the only option. Partnering is already underway

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borrowers,” says Lisa Brubaker, senior vice-president and director of retail strategy. “It helped fill our product gap.”

The f irst year was rather slow, says Brubaker, but last year brought “a lot of good, solid growth,” and this year, the bank is building on that—weigh-ing whether to expand the program into adjacent states, and considering whether to grow beyond private debt service into refinancing federal student loans.

The partnership allows the bank to enjoy the advantages of digitized effi-ciency while retaining control of its own criteria, Brubaker explains. If an appli-cant searching LendKey for a tuition loan has the right parameters of residence and school location, WSFS Bank will appear on his list of potential lenders. “From that point, it’s our credit criteria and our pricing, so we feel comfortable because we’ve established those criteria and have the final say,” Brubaker says. By perform-ing the initial credit review in much less time than the bank would need, LendKey helps WSFS make decisions more quickly than it could otherwise. “Our view is to take the best-of-breed from marketplace lenders to deliver to our customers with-out losing that personal touch that we value,” Brubaker says.

PEOPLE EXPECT FASTDan O’Malley was hired two years ago by Boston-based Eastern Bank, the nation’s largest mutual bank with $9.6 billion in

assets, to head its Eastern Labs division and create for the bank its own online lending platform.

“There is a void left by banks that alternative lenders are taking advan-tage of,” says O’Malley. “They provide fast service—something customers have gotten used to from other retailers and service providers, but not always from their banks.”

E a s t e r n B a n k ’s on l i ne l e nd i ng platform—Express Business Loans—officially debuted in March and allows the bank’s existing business customers to

receive approval on loans up to $100,000 in as little as five minutes. For new cus-tomers, on whom the bank has to collect data, the process may take as long as 20 minutes. “Customers are clearly respond-ing positively to marketplace lenders and the few banks that have rapid-loan pro-grams,” O’Malley notes, “so it just makes sense for more banks to provide a service that their customers are clamoring for.”

The response to Eastern’s express loans has been phenomenal, according to O’Malley, who wondered two years ago, when they began building the platform, how much demand there would be from customers. The answer became clear very quickly. “During our initial pilot, we saw a tripling of the loan volume we had been doing in the test branches,” he says. “We thought this might have just been an anomaly, but in test after test, we saw an incredible response from our small busi-ness customers. Now that the product is available to all our customers, this con-tinues to be the case. Customers do value a fast, easy loan process, and we figured out a way to deliver it while keeping the same strong credit policy.”

REGULATORS wILL REGULATEBanks may be happy, customers may be pleased, but regulators still have to be satisfied. When the Consumer Financial Protection Bureau announced in March that it would begin accepting complaints about loans f i led with marketplace

“Our view is to take the best-of-breed from marketplace lenders without losing that personal touch” — Lisa Brubaker, WSFS Bank

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“Alternative lenders provide

fast service—something

customers have gotten used to, but not always

from banks”— Dan O’Malley,

Eastern Bank


/ Marketplace lending /

NEVER BEEN TESTEDQuestions about the quality of online loans have been raised as well, especially since most of the companies are so new that they haven’t lived through a down credit cycle. But there, too, both bank-ers and marketplace lenders seem to feel confident in their products.

“The loans that our banks are mak-ing through these partnerships are loans that any bank would love to have—high-y ielding loans to very creditworthy borrowers,” Graham says about Banc-Alliance. “The average FICO score is

lenders, many interpreted that as a warning that the agency has online lend-ers in its sights. In another event some viewed as ominous, the Supreme Court last month asked the Obama administra-tion to weigh in on Madden v. Midland Funding, which, if upheld, could force online lenders to comply with state-by-state interest rate caps.

Yet neither bankers nor marketplace lenders say their partnerships create any undue regulatory burden. Brubaker says she expects regulators to have questions about their collaboration with Lend-Key, as they would about any third-party arrangement, but because WSFS Bank makes the final underwriting decision about those loans, she doesn’t anticipate any concerns.

According to O’ Ma l ley, the big-gest potential hazard is partnering with a technology company that wasn’t designed to work with banks and doesn’t understand the level of compliance, audit, and regulatory rigor.

Graziano, for one, does understand and built those factors into Fundation’s operation. “When you decide to become an integrated partner with the banking system, you invite many of the things that come along with being a regulated institution,” he says. For banks, working with an online lender imposes no more regulatory burden than working with any other third party, he says—it’s simply vendor management.

“If you compare community bank balance sheets of 30 years ago to today, they’ve lost large swaths of traditional products” — Brian Graham, Alliance Partners

roughly 720 to 730; credit quality has been very strong.”

Fif th Third’s Craw ford cautions, though, that “there’s still a lot of uncer-tainty in the space, particularly as it relates to customer acquisition cost, regulation, and performance through multiple credit cycles.” Among the best practices he has observed is “banks beginning partnerships through small purchases of assets, enabling their trea-sury and credit risk teams to evaluate this new asset class.”

The one thing that is not uncertain is that customers like the efficiency of marketplace lending. “It’s very customer-friendly and closing is really fast,” says Cornerstone Advisor’s Smith. That’s especially appealing to small business owners, whose main commodity is time. “If a business owner can get a capital line in eight minutes, that’s in less time than he can drive to a branch.”

The number that banks ought to be tracking and focusing on is their loan application turnaround time, he says, because customers are telling them it’s too long. The only way for many banks to improve that time is to partner with a marketplace lender, Smith believes.

“There are still a lot of community banks wanting to dig in their heels, but the market is forcing them to go that way,” says Smith. “The typical commu-nity banker hears Kabbage or OnDeck and tunes out, but can his bank approve a loan in three minutes?”

“Online lenders are promoting

a frictionless process. Banks

are still asking to see tax returns”

— Brad Smith, Cornerstone Advisors


/ ComplianCe WatCh /

T he blood, sweat, and tears that went into the initial implemen-tation of TRID last fall will, fortunately, not be needed to

implement a TRID compliance testing program. However, establishing such a testing program will not be without headaches and thorny issues to resolve. The sooner a round of testing is com-plete, the better.

Some regulatory agencies have indi-cated that they plan to start testing for TRID within the next few months, so it is important that your bank knows where it stands.

Regardless of the time and trouble necessary to set it up, a TRID testing program is an essential element of the required TRID CMS (compliance man-agement system). TRID compliance has too many high-risk issues that can cause real monetary loss to your institution. So it is imperative to have a rigorous testing system in place.

10 testing essentialsThere are multiple crucial elements to an effective TRID testing program. The most important factors follow.

1. Make sure the testing samples include all products and channels.Institutions often have different channels through which TRID-covered loans are made. Often, the channels use different loan origination systems (LOS). Include every channel in the testing sample.

Include every product as well. Differ-ent types of products carry some unique disclosure requirements. For example, construction loans are complicated. They require care to ensure that the disclosures are correct. Include these in your samples if your institution makes them.

2. Test for disclosure deadlines. A key motivation behind TRID rules is providing disclosures to consumers in a timely manner, thus allowing them to shop for loans. (Remember, these rules com-bine Truth in Lending and Real Estate Settlement Procedures Act provisions—TILA RESPA Integrated Disclosures.)

Therefore, providing loan estimates and closing disclosures w ithin the required deadlines is extremely impor-tant. Generally, loan estimates must be provided within three business days of receiving the application (i.e., when the

six application elements are received by the bank) and within three business days of a change of circumstances.

Always make sure that your institu-tion has verif iable methods to prove disclosure delivery within the required time period. • If you use the “mailbox rule,” make sure the mailing date is documented. • If you rely on alternative methods to confirm receipt, be sure that the bank’s records demonstrate clear confirmation of the receipt. And be sure that the con-firmation is applied consistently.

Also, keep in mind this rule (which can be easy to forget): When a loan is rescind-able, all parties with the right to rescind must receive their own loan estimate and closing disclosure documents. The insti-tution should be sure to show that all

parties were sent their own copies of the required disclosures in this case.

3. Make sure fees on the loan esti-mate are correct and complete.Fee disclosures will certainly be the focal point of regulatory exams. First, the fees must be in the proper categories: no-tolerance fees, 10% tolerance fees, and unlimited tolerance fees.

The following are some examples of these fees: • No-tolerance fee category: Fees must be exactly correct and cannot change later—except in the case of a valid change of circumstances.

Fees charged by the lender, such as

TESTING—ESSENTIAL TRID ARMORMistakes will be inevitable, so your bank had better catch and correct them before examiners spot them By Lyn Farrell, Treliant Risk Advisors

TRID compliance has high-risk issues that

can lead to monetary loss, so make sure testing is rigorous

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/ ComplianCe watCh /

points or loan origination charges, are in this category. • Fee changes in the 10% tolerance bucket are limited to 10% of the total of this category.

The 10% category includes fees for services that the lender requires, but for which the borrower is allowed to shop. If the borrower does not shop for the service, but instead uses the service pro-vider disclosed by the lender, the fees are in the 10% tolerance category. • The unlimited tolerance category includes fees for services required by the lender for which the borrower can shop for the service provider and for which the bor-rower did shop for the service provider.

In other words, if the lender allows the borrower to shop for a title com-pany and discloses ABC Title Company on the service provider list, but the bor-rower shops for and selects XYZ Title Company, then the fee will fall into the unlimited tolerance category.

• Another factor that is important to test is the naming convention for the fees on all loan estimate and closing disclo-sure documents.

Each of the fee names should clearly and conspicuously describe the charge that is being imposed on the consumer. The fee names also should be consistent from document to document, to avoid confusing the consumer.

4. Test that all subsequent loan estimates were issued for valid changes in circumstances.Loan estimates can be revised when fees have changed due to valid changes in cir-cumstances. However, if the institution claims that a change in circumstances occurred, the lender must include doc-umentation in the file to support both the change in circumstances as well as when the institution became aware of the information.

To review: There are four main fee-related categories of valid changes of circumstances. Here are some examples: • Changes involving settlement fees. Example: The property has more build-ings on it than originally represented by the consumer, and the appraiser charges are increased as a result. • Changes involving the borrower’s eli-gibility for the loan. Example: The consumer overstated income, and when income is verified, the consumer is not eligible for some or all charges that were initially estimated. • Changes requested by the borrower.

Example: The consumer decides to waive escrows, which comes at an additional cost to the consumer. • Changes related to interest rates. Example: The consumer decides to lock the interest rate after the initial loan estimate is provided, and the discount points associated with that rate are dif-ferent from what was initially disclosed at application. • Other changes of circumstances include changes to the estimate of charges when the borrower does not provide an intent to proceed within ten days of receiving the original loan estimate, or if the loan is a construction loan that is not expected to close within 60 days of the date of the original loan estimate.

5. Test the fee baseline for the closing disclosure to determine that the tolerances were met.Even under valid changes of circum-stances, a new loan estimate does not have to be provided unless there is a reason to reset the fee baseline. The chart below indicates when a new loan estimate is required and when it is not required because the baseline was not reset. Even if the baseline is not reset, the provision of a new loan estimate is not a violation of the TRID rules.

However, remember that the Con-sumer Financial Protection Bureau does not encourage providing new loan esti-mates when not required. The bureau believes that too many loan estimates will confuse the borrower. The correct

1. Changed circumstances involving settlement fees

a. Changes do not cause the fees to increase more than 10%.

b. Fee changes cause the total of fees to increase by more than 10%.

2. Changed circumstances involving the borrower’s eligibility for the loan

a. Changes do not cause the fees to increase more than 10%.

b. Fee changes cause the total of fees to increase by more than 10%.

3. Borrower requested changes (in any amount)

4. Interest rate dependent changes (in any amount)

5. Borrower intent to proceed is given more than ten days after the delivery

of the loan estimate (in any amount)

6. Loan is a construction loan that will not close within 60 days (in any amount)

No

Yes

No

Yes

No

Yes

No

Yes

Yes Yes

Yes Yes

Yes Yes

Yes Yes

FEE CHANGE REAsoN New disclosure required within three business days

Fee baseline reset permitted?

A TRID testing program is only as robust as the

documentation that goes with it

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fee baseline is crucial to determining that the closing disclosure is correct or whether amounts need to be credited or reimbursed to the borrower.

6. For accuracy, recalculate a sample of loan estimate calculations.Testing the calculations, such as the lender credits, cash to close, and total interest percentage can be challenging tasks unless the inputs for each calcula-tion are apparent in the loan file.

Lenders should document the calcula-tions so that auditors and examiners can easily find their components. In checking these calculations, remember that once lender credits are disclosed, they cannot be reduced without a valid change of cir-cumstances, such as a change in points due to a rate lock.

However, the bureau has stated that a reduction in fee amounts is not a valid reason to reduce a lender credit. The total interest percentage should include

prepaid interest, and the in-f ive-year calculations should include all borrower-paid loan costs and prepaid interest as well as mortgage insurance costs.

Checking the accuracy of the calcula-tions is important because these amounts are crucial to the consumer’s under-standing of the loan costs. Their accuracy will help demonstrate to a regulator that the bank is complying with one of the key points of the regulation; that is, allowing the consumer to properly compare loan terms between multiple lenders.

7. Compare the closing disclosure to the last accurate loan estimate.Loan estimates that are not provided within the three-day deadline will be considered to be null.

So it is critical that the last loan esti-mate that wa s t imely prov ided be compared to the closing disclosure to determine if the fees are within the appli-cable tolerances. The lender credits must

match the loan estimate, and the total of payments should include consumer-paid loan costs and prepaid interest.

8. Establish a TRID cure process.Mistakes will inevitably happen. So the lender should have a robust TRID curative process established to credit bor-rowers at closing or refund fees within 60 days after closing.

Making sure that there are controls in place to determine the accuracy and completeness of the closing disclosure as well as to refund the correct amounts when necessary are critical to the TRID compliance program.

A tester should select a sample of cured loans and recalculate the amounts to be refunded or credited. A tester must determine if the correct amounts were provided to the consumer within the 60-day time period after the loan closed.

9. Provide proper documentation of your testing efforts.A TRID testing program is only as robust as the documentation that goes with it. It is critical to provide a regulator or exam-iner with ample demonstration of your testing program—and its results—in order to support your good-faith efforts at TRID compliance.

In addition, you should make sure you have properly documented the correc-tive actions taken both in reimbursing individual consumers and to your TRID compliance program to remedy and help prevent these errors from occurring in the future.

Be aware: CFPB has set a precedent of imposing more severe penalties when it discovers an institution did not act in a timely manner upon discovery of errors.

10. Ongoing analysis is not optional.The final point about all compliance test-ing programs: They are not static, but f luid, and improve as they mature. An institution should be constantly analyz-ing the results of its TRID testing, and looking for opportunities to update its processes, procedures, and preventative controls commensurate with the data from the testing.

Lyn Farrell, a frequent contributor to www.BankingExchange.com, is manag-ing director at Treliant Risk Advisors.

Ongoing analysis of your testing results and updates to processes, procedures, and

preventative controls are important

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/ Risk Adjusted /


E xpect the unexpected” is a phrase often overused. However, when viewed within the context of the rate forecast for 2016, it seems to

fit like the proverbial glove.On Dec. 16, 2015, the banking industry

experienced a new move “heard ’round the world” as the Federal Reserve’s Fed-eral Open Market Committee made its first increase in rates in almost a decade. We stood on the precipice of a new rate cycle, and many bankers looked ahead to 2016 with great anticipation. Fast-for-ward, and bankers are now feeling like the victims of a bait-and-switch scheme.

The Fed increase has been met with a significant drop at the long end of the yield curve (with 10-year Treasuries down nearly 50 basis points). Spread is being removed from a spread business. It’s not exactly what we all had in mind in mid-December.

There are no easy fixes or true histori-cal perspectives to which bankers can turn that will help drive success. Bank-ers must now look to the old Boy Scout motto to successfully navigate the sea of uncertainty that 2016 poses to the finan-cial institutions throughout the country: “Be Prepared!”

Three areas to considerBanks can focus on three key areas so they can be prepared for the likely rate volatility ahead: • Identify earnings-at-risk exposure under various scenarios. • Gain better understanding of behav-ioral tendencies of deposit customers. • Challenge the Asset-Liability Com-mittee to look at strategies that may previously have been off the table—but which still fit your risk profile.

Now is not the time to sit on the side-lines and wait for your competition, or the examiners to dictate how you will run your bank. A well-prepared bank will have the luxury of being able to be proactive in its market and force others to react to its moves.

How quickly things change Back in December, banks were position-ing their balance sheets in preparation for several Fed rate hikes in 2016, all but ignoring what would happen if rates should fall. Today, we see many, if not most, banks facing their great-est exposure to a sustained f lat/falling rate environment, yet the focus at ALCO meetings has remained on rising-rate readiness. Now, bankers must ask them-selves, “What scenario causes us the greatest concern?”

When working with our clients to help them manage their risk profiles, that question often leads off each meeting. Understand this: Balance sheet manage-ment is not about betting where rates will go. Instead, it is about identifying expo-sure to an array of possible outcomes and determining if any of those outcomes require ALCO’s focus.

While most banks are now includ-ing rate ramps (movements of rates over time) as part of their risk manage-ment process versus instantaneous rate shocks, many are still not considering changes to the shape of the yield curve when modeling interest rate risk.

Yet we find it’s critical for banks to consider how differing movements to the long- and short-end of the curve could

NO BETS ON RATE RISK Rate scenario presents new challenges, requiring fresh thinking about ALCO By Mark Haberland, Darling Consulting Group

“


impact earnings. Look at the last quar-ter of 2015 for a glaring example: A Fed increase of 25 basis points to the short end of the curve was met with a 50 basis-point drop in the long end, resulting in a significant flattening of the curve. While few, if any, predicted that outcome, banks should still model the impact of a f lattening yield curve. This year also is forcing bankers to consider a variety of alternative scenarios, including delayed ramps and even, potentially, a negative rate environment.

Remember: Do not run scenarios just for the sake of running them. Choose reasonable scenarios that provide deci-sion-makers with useful information, and include their results as part of the ALCO reporting. You cannot rely on the old standard metrics for measuring earn-ings at risk. This uncertain environment is forcing bankers to look at things dif-ferently, and falling into old habits could result in a potential mismanagement of the balance sheet.

Deciphering depositor behaviorThe uncertainty of the rate environment for 2016 is further clouded by trying to anticipate the behaviors of the non-maturity deposit base, which for many has been building to levels never seen before. The stability of these customers will dictate ALCO’s ability to effectively manage the asset base, adding precious spread to balance sheets starving for earnings and exposed to a continued low-rate environment.

But how do bankers gain a better understanding of these customers and their expected behaviors, especially when we have no historical perspective upon which to rely?

Deposit studies do prov ide some perspective and suppor t for model assumptions, yet it is shortsighted (and ultimately dangerous) to rely solely on these historical studies to provide guid-ance on how these customers will behave as we move through 2016 and beyond.

You have undoubtedly heard the term

“big data” and have seen how getting into the details of your customers’ rela-tionships can provide a clearer picture of their “stickiness” or “coreness.” Many banks have seen an increase in what are known as “surge” balances and many of those balances are expected to migrate away from non-maturity accounts as rates begin to rise.

However, some of those accounts will remain, and the big question fac-ing ALCO is, “Which ones will stay and which will go?”

Here’s a place to begin: Strong bank-ing relationships (i.e. those with direct deposit, bill pay, loans, etc.) are more core than those with no other relation-ships. Being able to segment accounts by relationship, age, location, etc. allows

your retail and marketing departments to identify potential cross-selling oppor-tunities, and provides specific support for your interest rate risk and liquidity modeling of the potential migration of depositors as rates begin to rise.

Supporting the stability of the deposit base is the f irst key step toward pro-viding ALCO with the opportunities to discuss strategies for navigating this uncertain landscape.

Challenge your ALCO Looking ahead, nothing should be off the table for discussion: • Maybe you now reconsider loans at rates you previously dismissed. • If you’ve been building up liquidity in anticipation of rates rising, maybe it’s

time to put that excess liquidity to work. • A stable deposit base opens up discus-sions on alternative funding sources and extending loans.

Today’s ALCO meetings have grown more important than ever. If my bulleted examples are not the types of discussions your committee has been having, it is time to make some changes.

The focus should be on loans. Under-stand prepay ment and ref inancing activity in your existing portfolios and what your market is demanding. Can your balance sheet support longer-term loans? You may find that you have the ability to hold more than you thought, and you can put some of that excess liquidity and core deposit base to work to support growth in the loan portfolio and improve your margins within acceptable risk parameters.

The key is to utilize the tools that are at your disposal: • Run these potent ial st rategies through your rate risk and liquidity models to identify the impact and show your ALCO, board, and examiners that you can support these transactions, and that the effect on earnings will help get you through a very unpredictable year. • Know how to price fixed-rate loans so that you are not continuing to walk away from deals that would f it well within your balance sheet structure. • Look at wholesale funding alterna-tives and educate your stakeholders on derivatives so that you have the f lexibil-ity to act if and when the time is right.

Effective balance sheet management is implementing the right strategies at the right time to manage your risk and opti-mize your earnings. That philosophy doesn’t change with the uncertainty fac-ing us in 2016, so t a ke that sa me approach to each ALCO meeting and don’t be afraid to look at your bank a bit differently than you have in the past.

Mark Haberland is a managing direc-tor at Darling Consulting Group, www.darlingconsulting.com

Now is not the time to sit on the sidelines and wait for your competition or the examiners to dictate how you will run your bank. Be prepared

/ BANK TECH /


In 2013, leaders of First Tennessee Bank, Memphis, embarked on an ambitious project with a simple ques-tion: What percentage of all products

and services it offered were actually profitable? Simple question, but after an all-hands effort, the bank came to a gut-wrenching conclusion. Fewer than half its products actually produced a profit.

“We had a baseline of less than 50% of our products that were profitable, and we wanted to improve that,” explains William Losch, chief financial officer, during a recent interview with Bank-ing Exchange. “We wanted to figure out how to make them more valuable on their own and then complementary to business relationships.”

They did figure it out. How? Aggres-sive use of data analytics.

Data analytics—almost as big a buzz phrase as “big data”—has come a long way. More important, banks are find-ing ways to make use of it in tangible, practical, and efficient ways. Losch says

First Tennessee has used data analyt-ics—and its precursors variously termed business intelligence, data warehousing, and customer information systems—for many years. The difference now is that the technology has jumped out of the exclusive hands of the IT folks who could crunch the numbers, and is shared with the business-focused people in the orga-nization who can put the information to optimal use.

“We have really started to make more concerted and well-defined efforts to improve our data analytics and how we use that,” says Losch. “What we’ve tried to do is understand how we can use data for the benefit of our clients and for the company,” he says.

It is working. “Today, about 75% of our products

are profitable relative to that 50%. So we’ve used that type of information to make product changes that make sense for customers and for the bank,” Losch points out.

Where to start?For years, the sense that data analyt-ics could somehow make a real business difference for banks has lurked in the background. Jon Nordhausen, vice-pres-ident for bank solutions at Fiserv, relates that bankers have told him: “We know it’s important. We see the value from it, whether that value is to grow revenue, to mitigate risks, to drive efficiencies. Out of the collection of all the things we could do, where do we start?”

About two years ago, the company brought together volunteers from some 40 bank clients to address this issue. The group consists of CFOs, CIOs, CMOs, COOs, and others from banks rang-ing from $200 million to $12 billion in assets. The bankers discuss a wide range of topics related to data analytics in banking, but three main pleas from this group soon emerged, Nordhausen tells Banking Exchange:

1. Help us with the data problem to make it efficient, accurate, clean, and

Dawn of the Data-Driven BankCrunched, massaged numbers—presented in a business-friendly format—produce results By John Ginovsky, contributing editor

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easily distributable to the right people in the organization.

2. Help us understand what the new digital customer looks like and wants, particularly as technology evolves from a batch-oriented process to real time.

3. Help us with people who know how to get started and how to get the whole organization on board with it.

Broad, narrow possibilitiesLakeland Bank, based in Oak Ridge, N.J., jump-started its use of data analyt-ics in a big way.

“We use it on different levels,” says Carl Grau, senior vice-president, busi-ness intelligence and ebanking, in an interview. “We need to understand our customers. Primarily, we use a lot of it for that. We use it to identify growth oppor-tunities. We use it to grow revenue. We’ll be using it a lot, more recently, to become more efficient.”

As one example, Grau relates how the bank decided to open a new loan produc-tion office outside its traditional market area. Using a Fiserv business intelligence program, they did peer comparisons in various markets to see what would be a good fit. As a result, says Grau, they found opportunities a little south of their market in northern New Jersey as well as just across the border to the north in New York state.

First Tennessee’s Losch relates another example of how data analytics produced a real, tangible result—this time in the realm of customer experience.

“The way we use that particular data, for instance, would be understand-ing how many screens customers have to click through to finish a transaction. How much abandonment we had from customers . . . and how many ultimately opened a new account through the online process; how long it took.

“We were able to f igure out ways to streamline the application process of certain products that we had,” Losch continues; “clean up our back-end sys-tems for our online banking products so that customers have to go through

fewer screens; and make it a much more seamless visual experience for them that develops fewer disconnects.”

Simplify the formatTwo keys to translating code-heav y reports coming out of IT: dashboards and exception reporting.

“Dashboards give us an overview of our current status, and from there, we can look for anomalies,” says Grau. “We don’t have to waste time looking at the average branch. We have 53 branches. If a branch is producing a higher percent-age of income [than others], or another branch is producing a lower percentage of new accounts, what are those branches doing right or wrong? How do we correct them, or how do we replicate them across the other branches?”

Adds Losch: “If it ’s not in a user-friendly form, people who don’t work with data all the time aren’t going to find it very valuable. We’ve built our sys-

tem such that it can be reportable and customizable at various levels of the organization. Then, we’ve overlaid that with . . . graphs and tables and charts, and put structure around bullet points.”

It’s not all dashboards. Periodically, reports get issued from core systems about everything that has happened in a given day, quarter, or year. “What we’ve

done is taken those reports, scrubbed them down, and now all we’re providing is just the exceptions,” says Grau. “We’re making it a lot more efficient. Doing one page of exceptions a day, as opposed to perusing through 100 pages of reports. That’s one of the biggest boosts that we’ve gotten from analytics recently.”

Data analytics doesn’t have to be con-fined to big picture, back-office uses. “We have a lot of reports going out to our relationship officers, loan officers, branch managers,” points out Grau.

“We use a lot of the analytics and push it down to our financial centers, absolutely,” says Losch. “You have to be careful not to overwhelm them,” he adds, “because there is so much data that we could share with the front line. They wouldn’t have enough time in the day to actually do what they are best at, which is interact with customers.”

Two lessons learnedStay focused, urges First Tennessee’s Losch. “As with anything, you can spend lots of money and time and effort and resources to build your data analytics, but it can become a science fair project that doesn’t really get you anywhere. We’ve learned that taking it in stages and thinking about our endgame, so that all the puzzle pieces fit together, is impor-tant—making sure that we’re getting returns on the projects that we’re spend-ing time and money on as they occur.”

Get support from the top, adds Lake-land’s Grau. “We have some higher-ups in the company who have acknowledged that data is important, that it’s good, but it does nothing if you just let it sit there. You need people, you need resources, you need tools to work the data. Once you get that buy-in, it’s a lot easier.”

Don’t forget the human factor. “We think face-to-face, front-line interaction is the most critical piece we have as an organization,” says Losch. “We have a mantra here that says: ‘It’s the tool, not the rule.’ Don’t let [data] just drive how you serve a customer. Use it as part of your business judgment.”

“Data analytics can become a science fair project that doesn’t really get you anywhere. We’ve learned to take it in stages and think about our endgame”

– William Losch, First Tennessee

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/ Idea exchange /


Once you go paperless, you’ll more than likely never close a paper loan again,” says Neal Brodbeck, who has done about

300 e-closings as branch manager/senior vice-president at Sonora Bank, a $342 million-asset institution that serves the San Antonio, Tex., area. When the bank began doing e-closings almost five years ago, Brodbeck wasn’t looking to ride the latest technology wave; he was merely accepting the proposal of an investor who offered a 25 basis-point incentive in pric-ing if the bank would try the electronic process. “Little did I know when we started this that it would change the way I look at closings,” he says now. Brodbeck spoke on the subject at the annual con-vention of the Independent Community Bankers of America and in a follow-up interview with Banking Exchange.

According to Brodbeck, e-closings provide advantages for both borrowers and lenders. “Probably No. 1 is that bor-rowers anticipate and expect this sort of technology because everything else we do now is electronic,” he says. “Trans-parency is another big one. Borrowers get to see everything ahead of time and

ask questions, so there are no surprises. When they come to closing, they’re ready to sign.” Data consistency and accuracy are better, Brodbeck explains, because the same information f lows electroni-cally all the way to the end of the process. “It’s vetted as you go—confirmed and rechecked and triple-checked—so there are typically very few errors.”

E-closing adds efficiency to a cumber-some process. It eliminates, for instance, the need to make multiple paper copies to distribute to all parties. Banks are no longer dependent on couriers or postal carriers to get closing disclosures to bor-rowers three days ahead of the closing date, as TRID requires. Now, borrowers are notified within that time frame that their documents are available for review online. With sufficient time to answer questions and resolve issues beforehand, actual closings are very quick. “The whole process takes about 20 minutes,” points out Brodbeck. After the closing is complete, the bank can then e-mail the signed package as a PDF to the bor-rower, or Brodbeck can put the closing documents on a f lash drive and hand it to the borrower.

CFPB likes digitalMost of Sonora Bank’s e-closings are “hybrids,” meaning all the documents are signed electronically except for the actual note. “In Texas, some of the counties and courthouses do not accept electronic signatures on the actual security instru-ment,” Brodbeck explains. “They need a ‘wet’ signature.” If that qualifies as a reg-ulatory hurdle, it is the only one he has seen in the shift from paper to e-clos-ings. In fact, the Consumer Financial Protection Bureau seems to be a fan of the process. Sonora Bank was one of seven lenders chosen to participate in the CFPB’s eClosings pilot program in which it assessed digital delivery—and the agency came away impressed. “One of the key findings from our pilot study is that borrowers who review their documents before the closing meeting are less con-fused and are more likely to catch errors and ask for corrections in advance,” said CFPB Director Richard Cordray after reviewing the results.

To make the move to e-closings, smaller lenders likely will need a vendor that specializes in mortgage document preparation. Sonora Bank chose Dallas-based P&P Services, Inc., which is part of the PeirsonPatterson, LLP, law firm. Marketing Coordinator Blake Alexan-der says the firm’s Dallas office can offer a TRID solution electronically for final closing documents, and can sell directly to Fannie Mae, Freddie Mac or any investor approved for e-closings.

He adds that “consumers are not faced with a daunting stack of paperwork at closing, and can sign electronically one time instead of the 50 to 60 times during a normal paper closing.”

Despite such clear advantages, moving to paperless mortgage closings repre-sents a cultural shift for any bank, and Brodbeck recommends that manage-ment and staff commit to ten e-closings before making a final evaluation of the process. “Obviously, change is always dif-ficult,” he says, “but once your staff sees the benefits, they will come around.”

case for e-closingsDigital delivery of mortgage docs is a big plus for this bank By Melanie Scarborough, contributing editor

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/ CounterIntuItIve /


G eorge Blankenship’s resume is impressive. He’s worked with business legends Steve Jobs and Elon Musk—on top of 20

years at clothing retailer GAP Inc. Blan-kenship, whose current job is “director of smiles for the Blankenship family”—his third attempt at retirement—is an admirer of banks because they take care of people’s money. But he has a warning.

Steve Jobs lured Blankenship out of his first retirement because Jobs wanted to sell Apple products in the way that Banana Republic (a GAP brand) sold fashion—not like everybody else sold computers. About eight years later, Elon Musk lured Blankenship out of his sec-ond retirement because Musk wanted to sell Tesla automobiles like Apple sells iPhones. You see the pattern.

Speaking to an audience gathered for the American Bankers Association’s National Conference for Community Bankers, Blankenship delivered a triple shot across the bows of an industry known for uniformity: Be creative, be different, and don’t measure everything by ROI.

At Apple, Blankenship was the archi-tect of the company’s retail strategy. After the f irst two Apple Stores opened, he faced criticism in the press, despite people lining up around the block to get in. “An expensive and painful mistake” was the dismissive comment of one pundit.

“That’s when I realized, you can’t let anyone else get in the way of you doing what you know is right,” said Blankenship.

Critics are often internal, too. “What I hear a lot is, ‘George, that’s interesting, but here’s why it won’t work. . . .’ People are so focused on why it can’t be done,” said Blankenship, “that they totally lose focus on what is possible. As somebody said a long time ago, ‘It’s not impossible; it just hasn’t been done yet.’”

Most of his career has been about developing the best ways to interact with customers. He distilled this into three points:

First , design and deliver a great space—physical or digital. Next, hire people who a re g reat w ith people

and want to interact with them. Third, “train them well, fire them up, and turn them loose.”

In addition, to create long-term cus-tomer connections, Blankenship said bankers need to let people know: • They’re important. • They’ll be taken care of. • You’re available to help them.

At the Apple Store, he explained, they accomplished this with the Genius Bar (a counter manned by trained technolo-gists); workshops; and, for those who wanted one-on-one attention, an access plan for $99 a year, allowing them to meet with an Apple specialist once a week for a year. They also introduced an app that lets Apple Store customers scan and pay for a product with their iPhones and walk out without interacting with anybody.

Regarding Generation X and millen-nials, Blankenship said one common thread between them is they expect to be connected. “What’s the most important thing for a millennial?” he asked. “Expe-rience. And what do they do when they have an experience? They take a selfie.”

“My challenge to you is to figure some-thing you can do at your bank that would make someone want to take a selfie with it. That’s how you get to this group.”

At Tesla, Blankenship helped shape a unique buying experience. In Tesla stores, you design your car—colors, wheels, etc.—and then, with a f lick of your finger, an image of your car is pro-jected on a giant wall screen, with your name on it. It was different, unexpected, said Blankenship. “No matter how big or small your company is,” he said, “you can do something unexpected.”

Here’s Blankenship’s warning. “What if you read tomorrow that Apple will begin offering financial services to all custom-ers worldwide? It’s not going to happen, but what would you do? You have to think that way,” he said, “because your industry is going to go through massive change over the next ten years. It hap-pens in every major industry.” He ticked off the launch of Federal Express in 1973 and the iPhone in 2007 as examples.

It will happen in banking, he said. But will you be the one doing the changing?

experiences are keyImagemaker behind Tesla, Apple, and GAP retail success has pointers for banks By Bill Streeter, editor & publisher

Be different. Create the experiences that prompt people to take selfies, says George Blankenship

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April/May 2016 Banking Exchange

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Transcript of April/May 2016 Banking Exchange