With 4 of the 5 sessions complete in our inaugural community bank summit, I can tell you it's been a big success.
We've had over 300 community bankers on each session tuned in for a unique series of timely and on-point workshops covering almost every aspect of ALCO risk management.
Our guest faculty has really opened up for the community banking community. Personalized answers from the experts to specific bank questions has over-delivered, practically turning the workshops into a complimentary consulting call.
But now, it's time to plan our follow up summit, tentatively scheduled for late October. And this is where I need your help.
Please click the blue button above and tell me what topics you most want to see in the follow up summits. You'll know you're in the right place when you see the green check mark.
With your help, we can make the next summit even bigger, better and more in line with your needs. Thanks again.
Photo provided by Oliver Tacke
On September 16 Doreen Eberley, Director of the FDIC Division of Risk Management Supervision, testified on the status of community banks to the Senate Committee on Banking, Housing and Urban Affairs. You can read the full text here.
Here are a few highlights on the importance of community banks:
- While accounting for only 14% of industry assets, community banks account for 45% of all small loans to businesses and farms.
- Almost 20% of all U.S. counties would have no physical banking presence at all if not for community banks.
And a few updates (most obvious to us) about community bank financial performance:
- Net interest income has been squeezed.
- Regulatory expenses have increased.
- Traditional community banks (relationship lending funded by stable core deposits) performed well during the banking crisis
- Fast growth, risky assets and volatile funding were associated with higher rates of failure.
Current financial performance illustrates these points:
- Community bank loan balances grew 7.6% in the past year, outpacing the 4.9% industry growth.
- Over 75% of increase in small loans to business was driven by C&I and nonfarm, nonresidential RE loans.
- Community bank NIM was 3.61%, 46bps above the industry average.
- Noninterest income and noninterest expense were both down at community banks.
- Community bank profitability increased 3.5%, less than the industry overall 5.3% growth.
- Over half (57.5%) of community banks reported higher earnings than a year ago
- Community banks experiencing losses fell to 7.0% from 8.4% of all community banks
The community bank supervisory approach was also discussed. The FDIC emphasized that they tailor the supervisory approach to the size, complexity and risk profile of each bank, using the following factors:
- Pre-examination planning
- Extended safety and soundness examination intervals (over half community banks on 18 month schedule)
- Off-site monitoring and early warning associated with rapid loan growth and unusual levels or trends in...
- Problem loans
- Investment activities
- Funding strategies
- Earnings structure
- Capital levels
I'd encourage you to give it a read and to send a note to your Senator (and House members too) letting them know how you feel.
When I was in elementary school, I loved the fill-in-the-blanks worksheets we used to use. Something about writing the answers down helped me burn them into my brain.
We can do the same thing with ALCO and asset liability management. Here's a quick preview.
- ALCO is a ______ ______, not a regulatory compliance tool.
Or maybe this one.
You can get these answers and much more from Darling Consulting Group's Mark Haberland next week in our online community bank risk management summit.
Sign up here for all 5 sessions.
Here's another one.
- Critical model assumptions should be ______ ______ regularly.
Maybe you already know the answers to these questions. If so, you're doing great.
But if you want to be sure, and if you want to learn more, sign up for our online training. It's free to all community financial institutions.
The training starts Monday Sept 15, so don't delay. Our nationally recognized faculty has a great program waiting for you.
Photo provided by Chris Yarzab
If you've followed me for any length of time you probably know that I'm a big fan of model validation. In fact, I've written about it almost a dozen times recently.
And as much as I value model validation and its underlying components, there are a few aspects of model validation that I can't fully capture. I worked in a large bank, I've built a lot of models and I help community banks now. But I've never been a bank CFO and I'm not a CPA or auditor. And they have a lot to say about the nuances of model validation.
But what if I could get a nationally recognized CPA and bank CFO to give you the scoop on model validation? Wouldn't that be valuable to you?
The best news is that's exactly what I've done. Paul Allen of Saltmarsh CPAs is going to be our guest expert to give us those insider views on model validation.
Paul is not only a respected CPA, but he has been the CFO of 2 community banks. So he knows this topic like the back of his hand. And he'll be sharing it with us next week during our 5-part online workshop series.
The series is free to all community banks. We just ask 2 things.
- Community bankers only. No consultants or vendors.
- Use your bank email address to register.
Get ready to take notes. When Farin speaks on NMDAs, community bankers listen.
Funding mix has systemically changed from time deposits to NMDAs as community banks have worked hard to reduce COF. Yet this shift raises more questions.
- Will depositors act in the future like they have in the past?
- Can we accurately model our NMDAs?
- Will these low cost funds stick?
- What if they don't?
Dave Koch of Farin & Associates, guest presenter for the upcoming Best Community Banks Risk Management Summit, answers these and other questions in his fast-paced training.
Get the details and sign up here.
Photo provided by Ken Bosma
Our new training workshop series is getting started with a blockbuster ALCO and asset liability agenda September 15 - 19.
Click to learn more.
Join me as we host some very special guest expert instructors. In fact, our faculty is a veritable "Who's Who" of interest rate risk, including:
- Dave Koch of Farin Associates
- Mark Haberland of Darling Consulting Group
- Paul Allen of Saltmarsh CPAs
Our topics include almost every important and timely ALCO issue on your to-do list including...
- Interest Rate Risk Peer Data
- Model Validation
- Deposit Analytics and Core Funding
- ALCO Strategies for Success
- IRR Contingency Planning
You can imagine what you might be charged for 5 days of content and expertise like this. But here's the best news. We're all working together on a mission to help community bankers and we're going to bring this important workshop series to you at no charge.
That's right. It's free to attend all 5 live sessions.
So bring your management team and your directors.
There are just 2 requirements.
- Community bankers only. No consultants or vendors.
- You must register using your bank email address.
Also, seats are limited so sign up soon.
Click to learn more and to register for this groundbreaking multi-day ALCO training event.
Please let me know if you have any questions.
Photo provided by Ramesh NG
Over the past few months I've had the opportunity to deliver live training workshops to over 1,000 community bankers nationwide. And I've personally seen just how hungry community bankers are for good quality training.
In fact, I've had several bankers ask me about training topics just this week.
Well, here's a special "heads up" for you. I'm working on a great training workshop series including...
- Important and timely items of interest to community bankers
- Highly recognized expert faculty from throughout the industry
- Tips, tricks and pointers you can use in your bank
- Board of Directors training topics
- All content and no selling
Our first workshop session is going to focus on risk management, specifically interest rate risk and asset liability management. And we'll have the best experts and authorities in the business as our distinguished faculty.
Subsequent series will focus on...
- Investment portfolio management
- Stress testing
- Capital planning
- Loans and deposits
- Strategic planning
- Performance improvement
- And so much more!
I'll have more on the workshops soon.
Until then, please let me know if you have any particular workshop topics you might want to see covered.
Photo provided by Ramesh NG
Comments on community bank performance and regulation by Minneapolis Fed President Narayana Kocherlakota should be reviewed by all interested in community banking. Read the speech here.
Kocherlakota makes 4 main points on the state of community banking.
Community bank recovery in asset quality has been strong.
Lagging earnings and loan growth raise questions about the cost of new and enhanced regulation.
Low earnings combined with higher compliance costs raise concerns about community bank consolidation.
As a matter of public policy Kocherlakota supports tailoring supervision and regulation to reflects the risks and roles of community banks.
Kocherlakota goes further and offers two specific ways regulation could be further tailored in the future.
Congress and supervisors should exempt all community banks from certain regulations. In fact, he goes so far as to state that "Exempting is the best way to guard against regulatory trickle-down."
Narrow the focus of current supervisory methods that are too detailed across too many areas and apply to too many banks.
Instead, he suggests that regulators concentrate on the small handful of activities that are correlated with bad results.
Rapid loan growth.
High lending concentrations
Specific high-risk types of lending.
Specific wholesale funding strategies
These types of common sense approaches to overly severe regulation should be supported by all community bankers. In our society, the way we make our support known is through our elected officials.
Please call on your representatives to support even handed community bank regulation that focuses on actual risks associated with community banking, and not on nontraditional activities that larger TBTF banks pursue.
Photo provided by Joseph Friedrich
If you've read my NMDA deposit study materials you know I'm a big believer in thinking "average life" anytime someone says "decay rate". To me, average life is just a simpler concept where we already have a good frame of reference.
So when a reader recently wrote in discussing how to calculate average life I was secretly very pleased. No need getting bogged down in decay rate when average life is what we really want.
It seems that a consultant had taught this reader to calculate average life in a very simple and straightforward way. Here's what he said...
"To calculate our decay speed all we need to do is take all of our closed accounts and determine how long they were opened to determine average life."
I have very mixed feelings about this comment.
First of all, I really like the simplicity of this approach. After all, I'm all about taking complex things and making them simpler.
Second, on a very high level, this conceptually captures what we're trying to accomplish which is to see how long our accounts tend to stick around.
But here's where I run into a problem. We don't really care about accounts nearly as much as we care about dollar balances.
Consider your dormant or near dormant accounts. Do you really care about when they actually close, or do you care about when the balances run down from 100% to 5% or less?
Or think about the common situation where you might have a very few high dollar accounts and lots of smaller accounts. Do you really want to model your few high dollar accounts based upon what happened with the great multitude of low balance accounts?
Ultimately, what I'm saying here is that if you focus on when accounts close you miss the pattern of decay associated with when account balances run down.
I'd guess that account balances tend to run down faster than accounts are closed.
Why is this important?
Because if you focus on account closing dates, you're much more likely to overestimate your average life. And overestimated NMDA average lives leave you open to both unexpected interest rate risk and regulatory criticism.
Let me know if you're ready to document your bank's NMDA average life and beta numbers.
Photo provided by Colin
Here's the one thing you need to know: You can get a valid deposit study even if you don't have the data on hand.
Thanks to a change in regulatory priorities, I now get more questions about deposit studies than any other topic. And one that just keeps coming up is "What do I do if I don't have the data?"
If this is you, I've got good news. You may need to have someone at the bank do a bit of grunt work, but I will show you how to recover sufficient data to complete a basic deposit study.
I recently spoke with a banker that was getting some regulatory pressure to develop a bank-specific deposit study to support their NMDA assumptions in their interest rate risk model. The bank has been around for several decades so I expected they would have all the data needed in a nice neat IT report or extract from their core system.
There was just one problem. The bank had done a core conversion in 2012 and failed to keep the old data. This is a very common problem. I see this all the time.
The bank thought they were out of luck. In reality, they just needed to look at the situation differently.
As bankers, we've been trained to be decision makers. And the way that happens is that we associate certain behaviors or circumstances with particular outcomes. Using this frame of reference allows us to quickly make decisions based on our experiences.
Typically, that's a good thing. But it can also blind us to alternative solutions.
The way this trait shows up with deposit studies is that if we are familiar with them at all, it's usually from the perspective of having heard or experienced what I call a static pool deposit study.
Static pool relies upon tracking the ongoing changes in the same specific individual accounts (the "static pool"). These changes are tracked, for these select individual deposit accounts, month after month, year after year. This is done to develop a simple model of the lifecycle of your NMDAs.
So based upon the static pool, we need lots of IT help, monthly data and risk exposing the bank to privacy issues based upon individually identifiable accounts. Plus we run the risk of tracking the wrong account vintage years and ending up with a bad study.
The dynamic pool method, on the other hand, uses the change in all existing balances to derive the decay rate associated with your NMDA account balances. It has the advantages of being easy to calculate and understand, does not require extremely difficult IT extracts, and does not involve personally identifiable account information, so privacy concerns are minimized.
And best of all, it lets us use a different data approach to creating our deposit study.
The first secret to this approach is all about statistical significance and how we analyze our data. Here's the rule of thumb that it will all pivot upon:
You typically need about 55 data points to get a statistically significant result.
As the data points increase, our statistical relationships tend to strengthen. And sometimes you get lucky and can obtain a valid set of relationships with fewer data points.
That's a little more than 4.5 years with monthly data....But it's almost 14 years with quarterly data.
Just keep in mind that data is data, whether it's daily, monthly, quarterly or annually. And statistics don't care if your data is in any of these periodic terms. It simply needs some consistency in format.
So here's the lucky break for all you community banks that are worried about not having your data. It just so happens that FDIC and FFIEC retain all of your Call Reports that have been filed since 2001 online.
That's right, just exactly the number of quarterly data observations you need to be pretty much guaranteed to develop a statistically significant set of results.
This is really great timing because even if you have no data on hand, you can use the old Call Reports to extract the line item level data needed to do a basic deposit study.
I understand that recovering this data is a mind-numbing menial task, but you can get it done, and it won't cost you a penny. And it's better than facing your regulator with the news that you just won't be able to comply with their request for you to develop inhouse bank specific NMDA assumptions. But keep reading for another big insight.
The second big surprise is that you can mix and match data frequency.
So in the case of my community bank friend mentioned above, they have about 2 years of monthly data available via the new core system. So all they need to do is to combine those 24 observations with about 7 years of quarterly data and voilà they have all the data they need.
Finally, here's the third under-appreciated fact about deposit study modeling.
The data needed for modeling your decay rates (determining average life) is much less sensitive than the data needed for determining your beta (rate sensitivity) factors.
So even if you have less that the "ideal" minimum of 55 data points, it's worth taking a look to see what the data tells us.
You may find that your smaller data set is sufficient to get you started with a basic deposit study. Maybe you'll be able to only determine average life, but have less success with beta. It's still progress.
And the truth is you have to start somewhere, so why not here and now?
If you're interested in learning more, please let me know. Together we can overcome this challenge.
Photo provided by Steven Depolo