OPPORTUNITY 2017: A WINDOW OF - REGULATION: Novantas
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SPRING 2017 2017: A WINDOW OF OPPORTUNITY REGULATION: An Opportunity to Get It Right Commentary by CBA’s Richard Hunt STRATEGIC FUNDING OPTIMIZATION: A More Proactive Balance Sheet Management Tool for ALCO
4 REGULATION: AN OPPORTUNITY TO GET IT RIGHT
Commentary by Richard Hunt, President & CEO of CBA
As reforming the Dodd-Frank Act takes center stage in Washington, it is important
for federal lawmakers to hunker down and get this one right. Consumers and bankers
alike stand to benefit from reform, but balance is key.
6
FED INCREASES RATES AS EXPECTED: 14 | DEPOSIT PROMOTIONS AT WHAT COST?
MEASURING MARGINAL COST OF FUNDS
RATES STILL LAGGING, BUT STARTING
TO RESPOND 17 | RETHINKING BANK M&A — IDENTIFYING, PRICING AND
Adam Stockton and Chrystal Pozin, with CAPTURING VALUE IN TODAY’S ENVIRONMENT
Andrew Frisbie
22 | REGIONAL BANK CHALLENGES IN LAUNCHING
10
A DIRECT BANK
STRATEGIC FUNDING OPTIMIZATION:
A MORE PROACTIVE BALANCE SHEET 26 | ACCELERATING DIGITAL MIGRATION: NECESSARY,
MANAGEMENT TOOL FOR ALCO TOUGH AND REWARDING
Ryan Schulz and Pete Gilchrist 30 | REPLACING LOST SALES CONVERSATIONS WITH
MULTI-CHANNEL APPOINTMENT SETTING
2|
LETTER FROM THE EDITOR
EDITORIAL
Opportunities in a
Interim Editor
Katie Mockler
Promising New Environment
212-419-2562
kmockler@novantas.com
CONTRIBUTORS
T
Andrew Frisbie
Pete Gilchrist
he changes wrought by the election and by the improving economic Andrew Hovet
environment open up new opportunities in 2017 for banks to prosper. Richard Hunt
Finally, banks may earn enough to fund the transformation needed in an Ryan Schulz
increasingly digital environment. These articles discuss the opportunities Adam Stockton
and what the banks need to do to capitalize upon them in 2017. Michael Jiwani
Chrystal Pozin
CBA’s President and CEO Richard Hunt provides us with a view from Washington, Leo Rinaldi
Ryan Ritz
and the opportunity to come together and make balanced regulatory decisions for
Vladana Zlatic
both the industry and consumers.
We follow with our assessment of how banks need to manage funding in a rising rate DESIGN
environment. The remaining articles discuss the agendas for banks in the ongoing Art Direction and Production
digital transformation of the industry — from the opportunities for direct banks, to Adrienne Cohen
the implications for M&A.
Novantas believes the time to act is now. To be sure, the industry is still under stress. NOVANTAS, INC.
But 2017 represents a new phase for banks, as favorable conditions present new Co-CEOs and Managing Directors
opportunities following the financial crisis. Improved financial performance allows Dave Kaytes
Rick Spitler
banks to fund change, and picking the right priorities is an important management
agenda to meet 2017 goals, and create a sustainable path forward.
Corporate Headquarters
485 Lexington Avenue
New York, NY 10017
Phone: 212-953-4444
Katie Mockler Fax: 212-972-4602
Interim Editor info@novantas.com
Novantas
SUBSCRIPTIONS
marketing@novantas.com
212-953-2712
SPRING 2017 | 3COMMENTARY
REGULATION:
An Opportunity to Get It Right
BY RICHARD HUNT
President & CEO
Richard Hunt is president and CEO of
the Consumer Bankers Association, the
national trade association representing
the retail banking industry with a focus on
consumers and small businesses.
As reforming the Dodd-Frank Act takes center stage in Washington, it is
important for federal lawmakers to hunker down and get this one right.
Consumers and bankers alike stand to benefit from reform, but balance is key.
W
hen it comes to finan- it is important federal lawmakers hun- Wholesale repeal of Dodd-Frank would
cial policy, a balanced ker down and get this one right because undermine these efforts. Bankers would
approach to reform is a poorly designed plan could prove be left spinning their wheels trying to keep
essential to a healthy disastrous. Consumers cannot afford an up with evasive regulatory checkpoints.
banking sector, and preserving consum- overzealous or lackadaisical approach Once again, all at the expense of Ameri-
er choice and access to credit. These days to reform: balance is key. can consumers.
financial regulation is so convoluted it Don’t get me wrong, Dodd-Frank
rivals ObamaCare in its complexities, WHERE WE ARE is far from perfect. As is the case with
and navigating Congress is like finding To date, the banking industry has invest- all policy, financial laws and regula-
your way out of a corn maze. ed upwards of $40 billion dollars post tions must be periodically reviewed to
As reforming the Dodd-Frank Act Dodd-Frank in implementing internal ensure they are meeting their intend-
— a 2,300 plus page behemoth of a safeguards and compliance programs to ed purpose and the needs of those
bill — takes center stage in Washington, better the financial lives of consumers. they govern.
4|REGULATION: AN OPPORTUNITY TO GET IT RIGHT
WHERE WE MUST GO
To modernize and improve Dodd-
Frank, repealing a provision of the law If we want consumers to benefit
known as the Durbin Amendment,
which was snuck into the bill at the
from a balanced, deliberative, and
eleventh hour with no debate or study, thoughtful approach to regulation, a commission-
is a good starting point. This provision
promised consumers billions of dollars
based leadership structure overseeing consumer
in savings in the form of lower prices protection laws is in the best long-term interest
through a government-backed price
control on bank interchange fees. of the industry and consumers.
However, this provision failed to deliver
for consumers. deliberative, and thoughtful approach these leadership appointments. It is
According to a survey by the to regulation, a commission-based imperative President Trump promotes
Federal Reserve Bank of Richmond, leadership structure overseeing con- quality picks to fill these vacancies.
only 2 percent of merchants reduced sumer protection laws is in the best While regulatory appointments are
prices two years after passage of this long-term interest of the industry key, to truly achieve balance in regula-
regulation. Furthermore, 23 percent of and consumers. tion Congress must act. With Financial
merchants actually increased prices. Unlike the vast majority of other reform measures currently working their
Instead of providing consumers with federal regulatory agencies, the CFPB way through Congress, there will be an
an increase in cash flow, retailers saw is headed by a single individual who opportunity to advance policies that take
an influx of cash— having pocketed $42 has jurisdiction over 15,000 separate both consumers and the health of the
billion over the past six years — which entities — more than all other federal financial services industry into consid-
was originally promised to consumers. bank supervisors combined. Subjecting eration. While there is much to be done,
But wait, that’s not all. Consumers consumers, industry, and the economy full repeal of Dodd-Frank will cause more
have lost out on many beneficial bank to regulatory uncertainty, the CFPB’s harm than good. Repealing the Durbin
products as a result of this disastrous governing structure produces many Amendment and creating a five-person,
regulation, including free checking, pain points for those concerned about bipartisan commission at the CFPB
and debit card reward programs. Per the agency’s overall success. Shifts in would go a long way to restoring balance
the Richmond Fed, the availability political leadership are all too com- to our regulatory system.
of bank-sponsored free checking mon in Washington, which expose the
accounts dropped from 74 percent CFPB’s leadership and policy direction HOW WE BENEFIT
to 52.8 percent — a near 21 percent to a whipsaw effect. A newly installed Today, many consumers have a mixed
decrease — after the Durbin Amend- CFPB Director can upend entrenched view of banks. But as we know, banks
ment was passed. Not surprisingly, consumer protection laws with ease. provide millions of consumers with
bank interchange revenue, which As Senator Elizabeth Warren always products and services they want and
helped fund these accounts, fell by says, personnel is policy. A commis- need. From financing a family home
27 percent when comparing one year sion-based governing structure will to a graduate degree to a car to get to
before and after the law’s enactment. provide the industry and consumers work, banks help consumers realize their
Consumers deserve better, and with stable, balanced leadership for dreams. If Dodd-Frank is reformed in a
righting the ship on financial regu- generations to come. meaningful, balanced manner, banks
lation should include repealing the would be standing at the ready and be
Durbin Amendment. HOW WE GET THERE fully capable of investing additional cap-
While reversing the Durbin Amend- Consumers and bankers alike should be ital into their local communities. Con-
ment’s harmful effects is needed, encouraged by the Trump Administra- sumers would once more benefit from
establishing a five-person, bipartisan tion’s stated commitment to economic banking’s strong, robust presence in
commission at the CFPB is essential growth. His appointment of individuals the economy.
to maintaining fair and balanced with consumer-facing business experi- The time to act is now.
enforcement of consumer protection ence to high-level cabinet and regulatory
Richard Hunt
laws. Now, the issue goes much deeper posts is a breath of fresh air in Washing-
@CajunBanker
than the Bureau’s governing structure; ton, D.C. With the heads of the OCC,
it goes to the heart of how regulation FDIC, Federal Reserve and CFPB seeing For inquiries please contact:
is crafted, implemented, and enforced their terms expire in the next two years, Jacqueline Ortiz Ramsay
by regulatory agencies. If we want President Trump will have significant AVP, Media & Communications
consumers to benefit from a balanced, clout in shaping financial policy through (202) 552-6371 | jramsay@cbanet.org
SPRING 2017 | 5AS SEEN IN THE NOVANTAS REVIEW
Fed Increases Rates As Expected:
Rates Still Lagging, but Starting to Respond
BY ADAM STOCKTON AND CHRYSTAL POZIN, WITH ANDREW FRISBIE
Novantas has seen increasing deposit pricing shifts in direct banks,
Commercial exception pricing, and regional differentiation that signal
heightened competition.
On March 15th the Federal Reserve RETAIL DIRECT BANK COMPETITION: The apparent decision by many
raised its benchmark Fed Funds rate STRATEGIES SHIFT TOWARD CDS direct banks to pivot to CDs as a lead
by a quarter point, and signaled that After little response to the first Fed Funds product has generally muted liquid
the likely path for short-term rates increase, the Retail direct bank market has increases. The Top 5 Direct savings beta
continues to be two more one-quarter heated up over the last two quarters, with has remained constant at 16%, as direct
point increases in 2017. While Retail and increased competitiveness across both banks are largely lagging pricing for
Commercial deposit pricing trends have CDs and savings products. We expect liquid savings.
not shifted dramatically since the last these trends to continue, with additional A compounding impact on betas
Fed Funds increase in December 2016, new entrants representing the largest is the likelihood of new entrants in the
Novantas continues to see market shifts factor driving potential outsized moves. direct bank space. To gain share of mind,
that signal increased competition: There has been a marked shift toward new entrants have historically priced
1. Retail Direct Bank Competition: CDs across the direct bank market. headline products well above established
Strategies Shift toward CDs Six major direct banks that “led” with competitors — as much as 0.25% in a
2. Non-Operational Commercial savings rates prior to the first Fed Funds lower rate environment, and up to 0.50%
Pricing: Premium exception pric- increase have lagged savings and now when Fed Funds was above 3.00%. The
ing sometimes exceeding 100% beta have 1-year CD rates higher than sav- recent entry of PurePoint Financial may
3. Regional Differences: Beta differ- ings. Competition has crowded the top be an example of the typical strategy of
ences emerging more starkly of the CD market — the number of direct new entrants. Shortly after PurePoint
Given these pressures, banks must banks within 0.25% of top-of-market has entered the market at a 0.05% - 0.15%
revisit key elements of their pricing doubled from six to twelve. Ultimately, rate premium, multiple competitors
strategy, e.g.: CD vs. savings-led growth, both betas and top of market rates have increased rates to retake top of market.
Commercial exception pricing policies, increased significantly since December’s As we look at the retail direct banking
and leading vs. lagging market increases. Fed Funds increase. landscape going forward in 2017, we ask:
6|FED INCREASES RATES AS EXPECTED: RATES STILL LAGGING, BUT STARTING TO RESPOND
First, how quickly will consumer FIGURE 1: Average of Top 5 Direct Bank Rates
deposits shift back to CDs. The gap Direct Bank CD beta is currently 38% compared to Fed Funds.
between savings and CD rates has 1.40%
increased substantially — from 0.12% at
38% beta
the Top 5 Direct banks in 2005 to 0.24%
1.35%
today. Novantas’ Comparative Deposit
Analytics consortium indicates similar
shifts for brick & mortar banks — those 1.30%
who have grown CDs in the last 12
months have evidenced 0.24% higher 1.25%
rate paid on CD acquisition vs. on sav-
ings acquisition, suggesting that a shift 1.20%
toward CDs may be near at hand. Addi-
tionally, leading banks are analyzing 1.15%
whether leading with CDs might lower 16% beta
their marginal cost of funds relative to
1.10%
broad liquid product rate increases.
Second, how many new entrants will
join PurePoint. Given the lack of brand 1.05%
equity of any new entrant, a rush risks
pushing direct bank betas up, with knock- 1.00%
on effects to the brick and mortars. Savings/MMDA 1 Year CD
Pre Fed Increases (9/2015) After 1 Increase (5/2016)
COMMERCIAL NON-OPERATIONAL
PRICING: “PREMIUM” EXCEPTION- After 2 Increases (2/2017)
PRICING APPROACHES 100% BETA
Banks generally held standard com- Source: Informa Research Services
mercial deposit rates steady after the
first Fed rate increase in December 2015. FIGURE 2: Acquisition Rates for Banks Growing vs. Running off CDs
Deposit rate betas for standard earn- Banks growing CDs have typically priced CDs well above Savings.
ings credit rates on commercial DDA
1.40%
accounts were zero — median rates actu- 1.40%
ally declined by 0.02%. Earnings credit
rates had been at or above market rates 1.20% CD rates 0.24% higher Savings rates 0.16% higher
1.20% CD rates 0.24% higher Savings rates 0.16% higher
for several years, with standard market
ECR rates generally between 0.20% -
1.00%
0.30% when the Fed Funds rate was at 1.00%
0.25%. As ECR rates have held steady at
0.20%, they are now significantly lower 0.80%
0.80%
than the Fed Funds target of 1.00%. The
lack of rate movement is evidence that
0.60%
banks are not generally using rate to win 0.60%
operational deposits.
While rates for operational depos- 0.40%
0.40%
its remain steady, rate competition is
growing for non-operational commer-
0.20%
cial deposits — deposits that could be 0.20%
substituted with alternative short-term
investments. Prime money market funds 0.00%
0.00%
are offering rates of 0.55% - 0.57%, and Banks Growing CDs Banks Running Off CDs
Treasury and Government Institutional Banks Growing
(Average CDs
+7%/year) Banks Running
(Average Off CDs
-8%/year)
funds are offering rates of 0.32% - 0.33%. (Average +7%/year) (Average -8%/year)
Banks are increasingly competing with CD Savings/MMDA
money funds and non-banks for non-op- CD Savings/MMDA
erational deposits, and we see banks Source: Novantas Comparative Deposit Analytics
SPRING 2017 | 7Typical Exception 12%
8%
COMMENTARY
20%
Premium Exception 72%
FIGURE 3: Commercial Deposit Rate Betas (After First Fed Move in Dec 2015)
Banks are making a tradeoff as interest rates rise — retaining low rates where possible while using aggressive premium rates to win
rate-sensitive deposits. -30% -10% 10% 30% 50% 70%
- 8% ECR (DDA) MMDA IB DDA
Standard 12%
20%
Banks reported lower dollar
- 24% weighted average portfolio
Average Portfolio 0% rates, but reported much higher
- 24%
premium exception rates
0%
Typical Exception 12%
8%
20%
Premium Exception 72%
88%
-30% -10% 10% 30% 50% 70% 90%
ECR (DDA) BetaMMDA IB DDA
-20%
-10%
Note. Data provided by participating banks, rates reflect Commercial / Middle Market segment.
10%
20%
30%
40%
50%
60%
70%
0%
Source: Novantas proprietary U.S. Commercial Deposit Study, Dec 2015 and Oct 2016 data
starting to increase rates on MMDA and corporations deploy cash to optimize and community players, who are push-
Bottom 5 States
Top 5 States
and interest-bearing DDA accounts to yield. In higher rate environments, corpo- ing for deposit growth. As the envi-
40%
Savings/MMDA
maintain a competitive position. rates have historically held 30% of their ronment unfolds, a key question will
Novantas surveys banks with Com- cash in bank deposits. Today that number be whether aggressiveness from select
14%
mercial deposits on a regular basis and is artificially high at 60% and banks regional players continues to drive
divides the balances between standard can expect some funds to flow out of regional variances, or continued direct
-12%
rates, typical exception rates, and “pre- deposits and into MMF and other direct banking penetration begins to level the
Nationwide US Average
mium” exception rates. With that said, investment instruments. While holding geographic playing field.
banks have increased standard rates and these balances is comparatively more Regardless, banks will need to
typical exception rates only modestly. expensive, some players may have HQLA continue to hone regional pricing capa-
66%
1 Year CD
However, banks reported significant headroom to make this feasible, or lack bilities — down to a state level at a min-
the capabilities and discipline required to
31%
increases to the premium exception imum and increasingly at a sub-state
rates they are willing to offer to win these gather operational deposits instead. level. Tracking and elasticity modeling
deposits. Premium exceptions for these is of the utmost importance to ensure
0%
aggressive corporate rate seekers have REGIONAL DIFFERENCES: not only awareness of geographic dif-
risen such that the beta on some seg- EMERGING MORE STARKLY ferences, but also optimization across
ments has exceeded 100%. In addition, While rates appear to be rising rapidly markets to drive the lowest possible
banks report using exception rates on and converging in the direct space, there cost of acquisition.
bigger portions of their large corporate Rate regional differences
are still substantial
and public sector segments than before. in promotional rates and betas that are KEY DEPOSIT STRATEGY QUESTIONS
Given a general industry focus on increasing at the start of the rate cycle. AND IMPLICATIONS
securing operational deposits, which Regional macroeconomic and cus- Should retail growth be focused on CDs
have more favorable LCR treatment, tomer preferences play a role. However, vs. liquid products?
why would banks offer such high rates experience from last time suggests that While we expect re-mixing to term for
on non-operational deposits? Banks face the largest driver is the concentration the industry, banks may push for greater
disintermediation of deposits as rates rise of deposit-needy banks, often regionals term growth earlier based on:
8|FED INCREASES RATES AS EXPECTED: RATES STILL LAGGING, BUT STARTING TO RESPOND
FIGURE 4: 1 Year CD beta (Change since Sep 2015 vs. 0.50% Fed Funds increase)
CD betas by state vary dramatically, with no consistent regional trends.
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
AZ
NV
CO
GA
OK
DE
LA
AL
FL
MA
NM
WA
ID
PA
MI
OH
KS
OR
IN
NC
SC
NY
CA
TX
VA
NJ
KY
MD
MO
TN
AR
IL
WI
UT
CT
Source: Informa Research Services
• Market-by-market competitive • Be cautious with rate increases — if average, banks may find it cost-ef-
dynamics — growth may be less banks increase rates too aggres- fective in the long term to lock in
expensive in some markets vs. oth- sively, they will degrade spread deposit costs before competition
ers for banks with larger footprints. income, increase rate sensitivity, increases. However, to the extent
A few may find contrarian positions and reduce net fees. However, if that current market trends contin-
to grow less competitive products they increase rates too conserva- ue, banks may pay in anticipation
in certain markets. tively, they risk losing deposit bal- of competition that never arises.
• Existing portfolio dynamics — ances, and their ability to attract • Lag the market — while margin-en-
banks with difficulty in managing new deposits. hancing in the short-term, banks
promotional leakage in liquid • Segment commercial deposits who lag too long may find increased
products may look to CDs as a — banks need to segment their attrition of not only rate-sensitive,
natural “fence.” commercial deposit portfolios to but also relationship deposits
• Funding demands — as a gener- isolate and manage customers that will be much more expensive
alization, banks seeking larger based on estimated rate sensitiv- to replace.
incremental retail funding needs ity, but many lack the capabilities
may find CDs to be a more effective to segment and manage their port- Adam Stockton
growth lever relative to risking folios at this level of granularity. Director, New York
cannibalization in their low-cost Should we lead or lag the market in astockton@novantas.com
liquid portfolio. retail prices?
Where should we be more vs. less aggres- Absent a funding need that makes Chrystal Pozin
sive with commercial rate re-pricing? near-term pricing an imperative, banks Director, Chicago
Banks will face customer and compet- may choose either strategy, though each cpozin@novantas.com
itive pressure to increase rates with each will come with inherent risks:
Fed rate move, but need the right segmen- • Lead the market — in less expen- Andrew Frisbie
tation, profitability, and pricing tools to be sive markets, where growth may Managing Director, New York
more precise in their rate decisions: be obtained for under the national afrisbie@novantas.com
SPRING 2017 | 9AS SEEN IN THE NOVANTAS REVIEW
Strategic Funding Optimization:
A More Proactive Balance Sheet
Management Tool for ALCO
BY RYAN SCHULZ AND PETE GILCHRIST
For too long, funding has been a neglected cousin in the strategic planning
process. But there are storm clouds gathering — driven by rising rates,
competition and increased regulatory focus on liquidity. Going forward,
banks need an enterprise-wide strategic funding optimization approach.
Banks often short-change the liabil- FIGURE 1: The State of Strategic Planning
ity side of their balance sheets when Previously neglected, funding is becoming more fundamental to long-term success.
building out their strategic plans. In the
current environment, why not? Most US CURRENT STATE FUTURE STATE
banks have more cheap deposits than Determine asset growth target, Build the asset plan and the
they can deploy. This situation is rapidly which leads to required liability plan simultaneously
waning. Wholesale market rates are on funding growth
the rise and banks are likely to face more Set funding targets at granular
funding challenges than ever before. Set funding targets at the business business unit and product levels,
Competitively, the largest US national unit level, often using rough “back including all relevant deposit
of the envelope” allocations characteristics
banks are capturing most organic depos-
it growth (in all lines of business), while Ask each business to minimize short- Minimize all-in cost of funds
direct banks are pressuring traditional term marginal cost of funds across multiple time horizons
pricing levers for convenient access to and scenarios
rate sensitive savings and CDs. Mean- Manage to other constraints (e.g.,
while, regulation is requiring banks to liquidity) centrally in Treasury as the Proactively identify and plan
balance a wide range of liquidity, capital, loans and deposits are booked for implications on a range of
and interest rate risk constraints. Banks scenarios, constraints, and goals
must have better funding planning to
Re-assess performance against
excel in this uncharted territory. strategies as the year progresses
During the sustained low-rate
environment, banks could afford to be
Source: Novantas
10 |STRATEGIC FUNDING OPTIMIZATION: A MORE PROACTIVE BALANCE SHEET MANAGEMENT TOOL FOR ALCO
complacent about funding. Funding
plans tended to be simplistic, with
funding goals allocated to businesses
Banks are already seeing benefits
using ad hoc budgeting analysis and to both cost of funds and net
relying on minimizing short-term cost
of funds within the businesses. Now, interest margin (NIM) thanks to rebalanced
leading institutions have begun lever-
aging advanced deposit analytics to
liquidity profiles, which will only grow as
create more nuanced funding plans at wholesale market rates rise.
the customer segment level (Figure 1).
These plans consider the full range gets answered across the organization, sheet-friendly funds (sticky, low-beta,
of balance sheet constraints and do the results are added together, and regulator-encouraged), but ultimately
so across longer horizons and more only then does the liability side of the the businesses pass the baton back to
diverse scenarios. The result is a stra- balance sheet get introduced into the Treasury to assemble a balance sheet
tegic optimization of the liability side planning process. with the desired interest rate risk and
of the balance sheet. These banks are Once the target has been set, busi- liquidity positions.
already seeing benefits to both cost of nesses get allocated a portion of the Given recent rate history, this plan-
funds and net interest margin (NIM), funding goal and are asked to achieve ning process has not been especially
thanks to rebalanced liquidity profiles. it as cheaply as possible. They are problematic. The unprecedented “low
These benefits will only grow as whole- given leeway to find the deposits how- forever” rate environment gave rise to an
sale market rates rise. ever they can (occasionally with some equally unprecedented period of deposit
At their hearts, banks used to be high-level directives from Treasury). excess (Figure 2). In the years after 2011
asset-focused enterprises, meaning loan This leads to a bundle of deposits with — when wholesale market rates fully bot-
production was the driving force in a range of attributes from flighty high- tomed out — loan to deposit ratios across
planning. Even today, most strategic yield savings, to relationship-based US banks reached a new low of 69%. And
planning starts each Fall with the checking accounts, to locked-in term the low rate environment inspired apathy
question “How much are we looking to deposits. A well-crafted funds trans- in customers’ deposit decisions as well,
grow next year?”, with the implication fer pricing (FTP) methodology can leading non-interest bearing products to
being growth in assets. This question help direct businesses to balance grow to 25% of all deposits. (At the bot-
FIGURE 2: Impact of Sustained Low Rates on Funding Behaviors
Rate apathy has led to stockpiles of cheap deposits.
Non-Interest Bearing Deposits (% of Total)
100% L/D ratio 30%
NIB deposits
90%
Loan to Deposit Ratio
25%
80%
70%
20%
60%
15%
50%
40%
10%
‘92 ’94 ‘96 ’98 ‘00 ’02 ‘04 ’06 ‘08 ’10 ‘12 ’14 ‘16
Source: FDIC Quarterly Banking Profile
SPRING 2017 | 11FEATURE
tom of the last rate cycle, this figure was
19%.) In this environment, banks have
been able to survive on relatively simple A bank cannot let the liability side
and straight-forward funding plans.
But fundamental shifts in the indus-
of the balance sheet “happen” —
try, driven by the hastening rising rate it must proactively plan and be prepared for a
environment, are making simplistic
funding plans untenable. The stickiness
range of potential scenarios.
of newly found “core” deposits will be
tested and some banks will be painfully other hand, is worried about more than to change the way they think about
disappointed. If the non-interest bearing just the interest expense of the deposits. enterprise funding planning. This
deposit mix returns to pre-2011 levels Depending on the deposits acquired, requires an evolution of the enterprise
(19% of total deposits), banks can expect Treasury now must consider mitigating funding framework as well as the devel-
a quarter of these deposits to move into the new LCR outflows through the opment of the appropriate analytic tools
rate paying or non-deposit alternatives. securities portfolio, rebalancing key rate to perform strategic funding optimiza-
The funds that remain in deposits will durations, and hedging the interest rate tion in support of the new framework.
be subject to increased competition risk. Each of these actions could incur The basis of strategic funding opti-
from direct banks, which have proven additional costs, costs that were not con- mization is an expansion of the scope
they can pull hot money and even sidered when the deposits were being of the business-specific funding opti-
relationships from traditional brick-and- acquired. In our evolving environment, mization problem. A top-tier enterprise
mortar franchises as consumer senti- this ex post management can cause sub- funding framework considers:
ments trend ever more digital. On top of stantial harm to the bank’s balance sheet. • The various constraints the bank
these funding pressures, banks bear the Current enterprise funding plans faces, not just marginal cost of
weight of heightened regulatory scruti- also lack the granularity to optimize funds. This includes management
ny in the post-crisis environment: new effectively across businesses. Broad tar- targets (core funding ratios and
interest rate risk, liquidity, and resolu- gets make it difficult to capture the trade- segment concentration limits), eco-
tion/recovery planning regulations pile offs between products overall and their nomic constraints (interest rate and
additional constraints on top of existing marginal volume. The first incremental basis risk), and regulatory require-
economic and strategic considerations. $100 million in funding might be cheap- ments (LCR and NSFR)
Unfortunately, competing constraints est in retail MMDA, but what about the • The evolution of the bank’s posi-
often send different signals, making next $100 million? Determining where tion relative to these constraints
Treasury’s job of assembling the balance to draw these lines is challenging with over both a short term (≤1 year)
sheet exceedingly complicated. blunt enterprise funding plans. These and long term horizon (3—5 years)
Many of the challenges of current tradeoffs only become more compli- • A range of different potential sce-
funding plans are attributable to the cated as constraints such as liquidity narios including macroeconomics,
singular focus on near-term cost of funds. and interest rate risk are factored in wholesale market rates, and com-
While obviously a key component of a to cross-business and cross-product petitive dynamics.
bank’s profitability, it is too dominant in decisions. It may be cheaper to acquire These new dimensions of planning
a more broadly optimized funding plan. the next $100 million from commercial, allow the bank to see the true impact of
Because banks are not actively plan- but what knock-on effects will the higher enterprise funding decisions. The bank
ning around other funding constraints, outflow deposits have on LCR and what is no longer just answering the question
Treasury must optimize on these other will it mean for investment yields if “How much will it cost me to grow
constraints reactively as funding arrives. the bank has to rebalance high-quality funding by $X billion over the next 12
This reactive position increases focus on liquid assets? months?” It will also address how that
short-term funding levers and “flavor of Few banks currently have the capa- funding will impact the bank’s rate sen-
the day” tactics. Longer term, higher val- bilities to make these decisions efficient- sitivity, what position it will leave the
ue long-term funding levers are left in the ly and effectively. As external pressures bank in 2 years’ time, and what impact
lurch as the plans rarely provide the time grow, enterprise funding planning will that strategy will have if rates stay low
to allow slower moving relationship-driv- become increasingly necessary to build for another 6 months. This requires
en funding to be built and maintained strong NIM and shareholder value. shifting ALCO’s mindset and harness-
(e.g., commercial operating funds). Banks that master these skills will realize ing deposit analytics to support it.
Say Business XYZ gathers its next substantial advantages in a more dynam- The key analytic underpinning of
billion in deposits, and does it with ic macroeconomic, wholesale market this effort is the ability to estimate the
minimal impact to near-term interest rate, and competitive environment. impact of strategic, competitive, and
expense. Job well done. Treasury, on the To rise to this challenge, banks need macroeconomic changes on deposit
12 |STRATEGIC FUNDING OPTIMIZATION: A MORE PROACTIVE BALANCE SHEET MANAGEMENT TOOL FOR ALCO
FIGURE 3: Key Analytics for Strategic Funding Optimization
Understanding deposit behavior in different environments unlocks deeper strategic planning insights and options.
ACCOUNT DECAY ACCOUNT BALANCE
How many accounts What will the average
will attrite? account balance be?
ACCOUNT ACQUISITION CUSTOMER RATE
How many accounts will What will I pay for
I acquire and why? deposits?
STRATEGIC FUNDING
Typical Sources
Pricing Model Stress Testing (CCAR/DFAST) ALM Model Marketing Analysis Strategic Planning
Source: Novantas
balances and rates. Many of these ana- instrument-level ALM cash flow projec- try-wide betas for the first rate rises have
lytics are in place throughout the bank; tion software, they are streamlined and been low, but historically these catch up
unfortunately, they are rarely leveraged flexible to allow for rapid iteration of in the second 100 bps of a rising rate
for enterprise funding planning. The strategic options, which is difficult to environment. Purportedly, this cycle
first step is to inventory what exists achieve in ALM software. Products are will be different, with rates having been
already at the bank. Novantas sees four aggregated for simplicity, while main- lower for longer and banks starved for
primary components to estimating taining sufficient granularity to compare improved NIM. But different banks will
deposit behaviors (Figure 3). the differences across major product require different disciplines on deposit
Ideally, these analytics would be groupings and customer segments to rates. Banks that are still funding myopi-
integrated through an existing system. optimize across meaningful dimensions. cally will be forced to accept higher cost
However, existing software rarely has the The tool accepts assumptions on the deposits and liquidity positions. Perhaps
flexibility to quickly and intuitively run characteristics of deposit categories for the first time, the winners of the next
strategic scenarios. In working closely (e.g., LCR outflows, interest rate sensitiv- cycle will be determined by excellence
with banks, Novantas has helped banks ity) to provide a simple means of com- in liability management rather than
deploy a top-level tool that can aggregate paring across a myriad of constraints asset gathering.
these analytics and provide real-time and scenarios.
results in various scenarios for an array As banks look forward to the rising Ryan Schulz
of strategic decisions and initiatives. rate environment and the projected Principal, New York
These tools reside at the front end return of stronger yields, it bears remind- rschulz@novantas.com
of the funding planning process to ing that NIM often gets worse before it
provide early directional input to ALCO. gets better. Typically, loan books have Pete Gilchrist
While the results are less precise and been slower to adjust to new rates, while EVP, New York
granular than what is provided by full liabilities reprice more rapidly. Indus- pgilchrist@novantas.com
SPRING 2017 | 13Deposit Promotions at what Cost? Measuring Marginal Cost of Funds BY ADAM STOCKTON AND ANDREW FRISBIE, WITH VLADANA ZLATIC As rates continue to rise, it is critical to deploy a better metric to compare the costs of rate based deposit raising strategies against one another, and against alternative marketing or investment spending. As banks continue to grow loans, they PROMOTIONAL DEPOSIT PRESSURE must also be taken into account are seeking different avenues to maintain IN A MORE COMPETITIVE MARKET when analyzing deposit promotions. deposit growth at the same pace. Already In an environment where Retail deposits • Cannibalization: At the end of the we are seeing that the betas associated are more valuable and more expensive, long low rate environment, most with promotional MMDA accounts the competition for deposits continues banks have large books of low-cost are surpassing the historic industry’s to heat up. Banks lacking liquidity often deposits sitting in statement sav- experience early in the cycle. A deeper turn to promotional pricing to raise ings, grandfathered MMDA, and worry is that the Marginal Cost of Funds rate-sensitive deposits through promo- even checking accounts. As banks (mCOF) — the total cost of incremental tional rates on both MMDA and CDs. look to compete for rate-based deposit-raising after taking marketing, These banks are seeing pressure on deposits, they open themselves up cannibalization and changes in duration results from four areas: to significant repricing risk. into account — is for many banks • Acquisition: The continued shift • Duration: With banks’ increased unsustainable. The Marginal Cost of Funds in consumer preferences toward pricing sophistication, teaser rate in the current rising rate environment banking online, combined with new pricing has become more prevalent, threatens to render certain aggressive direct bank market entrants and but customers are catching onto loan growth goals uneconomic from a increased sophistication in region- the game. Banks doing aggressive funding perspective alone. Deploying a al pricing analytics, has put pres- teaser pricing have seen higher better metric to compare the costs of rate sure on interest rates required for balance decay levels and are paying based deposit raising strategies against acquisition. In addition, to achieve customers a high rate for the intro one another, and against alternative maximum acquisition, rate cam- period, only to see them hop to a marketing or investment spending, is an paigns must be supported by addi- different bank’s promotional offer emerging imperative. tional marketing expenses, which at expiration. 14 |
DEPOSIT PROMOTIONS AT WHAT COST? MEASURING MARGINAL COST OF FUNDS
• Opportunity cost: Offering promo- For example, one bank, with no need for tighter controls on new money
tional rates not only risks repricing constraint on where the pro- criteria and the difference between
the existing book of business, but motional funds came from, saw compliant and non-compliant regions.
also risks repricing BAU acqui- cannibalization comprise 75% of Others have moved to more targeted
sition — deposits which would the promotional funds. The result pricing to specifically seek balances
naturally have joined the bank at was an mCOF of over 3.00% for a from customers with low potential
existing rates. This may represent 1.25% promotion. repricing impact.
significant incremental interest • Aside from cannibalization, bal- Ensuring accuracy of mCOF is
expense, particularly for banks ance decay of promotional funds clearly of the utmost importance as
with strong core checking and con- after the promotion ends has an it is used to trade off investments.
venience-oriented savings growth. even higher impact on Marginal Consistency across the enterprise and
Without accurate measurement, Cost of Funds compared to the organizational buy-in are crucial to
banks are unlikely to avoid some or cannibalization effect. The 12 identify and correct tradeoffs. Bench-
all of these pitfalls. In a world where month decay of balances acquired marking is also critical to identify key
National banks continue to gain share, through promotions can range areas of underperformance and monitor
Regionals and Super Regionals cannot from 30% to 70% depending on the industry-wide trends.
afford to misallocate scarce resources. magnitude of acquisition rate, the
Maximizing efficiency of both interest differential between promotional INCREASED URGENCY AS RATES RISE
and marketing expense is critical. and base rate, and the frequency of In a rising rate environment, we expect
promotional activity. the Marginal Cost of Funds betas to
MARGINAL COST OF FUNDS: For any individual bank, a detailed exceed promotional betas. Put another
AN ALL-IN MEASURE understanding of the overall mCOF and way, the beta on the Marginal Cost of
Novantas has developed a Marginal the levers that impact it, along with a Funds is likely to significantly exceed
Cost of Funds (mCOF) calculation to comparison to benchmarks, allows the 100%, making banks that have historical-
measure the financial impact of pro- bank to diagnose potential issues. For ly relied heavily on promotional tactics
motional pricing. It empowers banks example, some Novantas clients have vulnerable to margin compression as
to trade-off rate-based pricing against used mCOF analysis to identify the rates increase.
other potential growth investments. In
addition to an all in acquisition cost,
which includes both dollars of rate FIGURE 1: PROMOTIONAL RATE BETA VS. MCOF (POINTS IN CYCLE)
paid and incremental marketing costs, Betas on funds raised at the margin may exceed 100%.
mCOF takes the expense of repricing/
cannibalization of lower-cost savings Fed Funds: 2.00% Fed Funds: 4.00%
into account, attrition after the promo-
tion expires, and the effects of ‘promo
160%
hoppers’ who reprice to a subsequent
promotional rate after their first
promotion expires. 140%
The Marginal Cost of Funds across
Novantas’s Comparative Deposit Ana-
lytics benchmarking consortium pro-
vides a number of insights into both typ- 120%
ical and outlying promotional deposit
100%
gathering performance:
• The Marginal Cost of Funds for a 90% 100%
typical bank using promotional 90%
pricing can be 2x to 3x higher than
80%
the nominal coupon rate — e.g., a
bank offering a 1.00% promotion
for 3 months might frequently
see annualized Marginal Cost of
Funds at 2.00% - 3.00%. Promotional MMDA Marginal Cost of Funds Promotional MMDA Marginal Cost of Funds
• Outlying results on any individ- (coupon rate) (coupon rate)
ual mCOF lever can significantly
worsen the metric for a bank. Novantas Comparative Deposit Analytics and Proprietary mCOF Methodology
SPRING 2017 | 15Novantas projects 90%+ betas to promotional and base rates will funding needs. For example, by shift-
Fed Funds increases for promotional increase the cost of repricing. While ing strategy between a mass Savings
acquisition rates in both MMDA and promotional rates will see betas of promotion, mass CD promotion or
CDs. While broadly in line with the last 90-100%, base rates and the ‘back targeted DM campaign, Marginal Cost
rising rate environment, promotional book’ may only see betas in the 10-30% of Funds can identify the optimal
betas could exceed 100%, especially range. For each 100 bps that Fed Funds time to grandfather a product, and the
in CDs, as rate information becomes increases, the cost of cannibalization correct cadence for increasing base
more transparent online and competi- will therefore increase by up to 90 and promotional rates. This dialogue
tion increases, including among banks bps. The cost of cannibalization enables the business and Treasury
that are currently not competing for and opportunity cost of acquisition to look beyond average spreads to
rate-based deposits. will begin to severely challenge the incremental impact of specific
Retention will also be impacted. promotional pricing. pricing decisions.
Novantas benchmarks demonstrate bal- Third, banks that have embedded
ance churn increases by 50% in a rising HOW MCOF INSIGHTS ARE DRIVING the Marginal Cost of Funds logic into
rate environment compared to a low ORGANIZATIONAL DECISION-MAKING their strategic planning and resource
rate environment, impacting both can- Best in class organizations have embed- allocation process are improving their
nibalization and decay. Cannibalization ded Marginal Cost of Funds in sever- returns by addressing issues proac-
rates will increase as more customers al ways. First, they have socialized a tively rather than opportunistically.
are attuned to rate-based offers and standard calculation for Retail in con- This approach, keyed to the annual
as the offers increase in magnitude — cert with their Treasury and Finance planning and resource allocation pro-
especially around handle round number colleagues. Often their Commercial cess, enables these banks to answer
rates like 2.00%. Decay rates will also colleagues undertake a similar exer- questions like “Should we allocate
increase as customers become less tol- cise, facilitating trade-off calculations more in marketing spend to support
erant of remaining at a base rate after across businesses. new balance acquisition, or instead,
promotions expire. Second, they are making better accept that we may need to price our
Finally, higher dispersion between informed spot decisions on near-term rate paid on promotional deposits
incrementally higher? Which approach
is more efficient overall?”
FIGURE 2: MMDA VS. CD MCOF (ALL PROMOTIONS >1.00%) Finally, the Marginal Cost of Funds
While many assume CDs are always a more expensive vehicle, on an mCOF basis can be used to influence decisions
CDs can sometimes be more attractive. well beyond resource allocation within
Marginal Cost of Funds: MMDA vs. CD Products Retail. As a part of an enterprise funding
4.5% planning exercise, the Marginal Cost
of Funds, in concert with metrics from
4.0%
other lines of business, can help a bank
Marginal Cost of Funds
3.50%
3.5% decide whether, on the increment, the
next $1B of funding should come from
3.0%
Retail promotional CDs or Commercial
2.70%
2.5% 2.10% non-operating deposits. The Marginal
Cost of Funds can also help deter-
2.0%
1.75% mine whether, on the increment, asset
1.5% 1.75% growth might be slowed down to avoid
1.35% spread disintermediation.
1.0%
0.5% Adam Stockton
Director, New York
0.0%
MMDA CD astockton@novantas.com
Andrew Frisbie
Legend Managing Director, New York
Highest 25% Average Lowest 25% afrisbie@novantas.com
Note: MMDA Timeframe: March 2015 — April 2016 (n=26), CD Timeframe: March 2015 — Vladana Zlatic
November 2016 (n=74) Lead Associate, Toronto
Source: Novantas PriceTek Database, Novantas Analysis vzlatic@novantas.com
16 |RETHINKING BANK M&A — IDENTIFYING, PRICING, AND CAPTURING VALUE IN TODAY’S ENVIRONMENT
Rethinking Bank M&A —
Identifying, Pricing and Capturing
Value in Today’s Environment
BY MICHAEL JIWANI AND PETE GILCHRIST
The value of M&A is changing. Traditional acquisition synergies are
giving way to new sources of value, and banks will need to adapt.
U.S. merger and acquisition transactions liability side has evolved. Traditionally, compete in-footprint with the nationals
involving larger community and region- acquisition justification was largely about and add fee generating options.
al banks are back on the table. Above the realizing scale and, more importantly, We see three new tasks needed in
continuing consolidation of some 10,000 expanding non-toxic assets, branches and the acquisition process to account for
smaller community banks and credit customers, with only limited focus on the the changes in value:
unions, and beneath the regulator-lim- quality, fit and longevity of deposits. In 1. Enhanced screening of the deposit
ited national banks, mid-sized banks are today’s environment, we see three major franchise for target identifi-
looking at M&A — not simply opportu- areas where underlying industry econom- cation, and in particular using
nistically, but now out of urgency. ics have altered relative M&A value: better analytics and benchmarks
The urgency arises from dual pres- • Core transacting customers with to find banks with higher quality
sures: (1) to restore long-suffering prof- “sticky” and growing deposits are deposits and customers, as well as
itability to support investing in digital now more valuable than ever. greater consolidation potential.
transformation; and (2) to counter the • Branch consolidation must be more 2. More focused due diligence of
dominant lead U.S. national banks have aggressive than ever before because the deposit base before provid-
opened up in acquiring new core cus- of the diminishing asset value of the ing an offer to better understand
tomers across all lines of business. For network in a digital age. the intrinsic customer and deal
brick-and-mortar-centric intermediaries • Finally, banks are in need of niche value, and price accordingly
that wish to survive, M&A is a necessary lending and fee businesses with 3. Use of “clean room” teams after
strategic consideration. However, in high ROE potential to improve a deal announcement to allow for
searching for the right deals, successful fee and spread performance over accelerated and optimal merger
acquirers appreciate that the under- traditional intermediation. integration decisions reflecting
lying value of target institutions has Acquirers must find ways to identify the new liability-driven sources
decidedly changed. and correctly price these sources of val- of value.
Credit quality is, and always will be, ue, and then single-mindedly seek and The costs and time of these additional
an integral part of deal economics, but execute deals that bring the right cus- efforts are clearly outweighed by the risks
the nature of the value created from the tomers and deposits. This will help them of an M&A “error”.
SPRING 2017 | 17ACQUISITION TRENDS
With the end of interstate banking FIGURE 1A: Bank M&A (2000-2016)
restrictions in the 1980s, M&A became Mergers continue to reduce industry bank count by 3-4% a year, while larger bank
an integral component of transfor- deals are picking up after a post-crisis hiatus.
mation for the U.S. banking industry.
6% Target Bank Assets 18
Since then, bank M&A has largely been
responsible for bringing the number 6% >$50 bil 18
Target Bank Assets
of U.S. banks down from over 15,000 $10-50 bil
5% >%50 bil 15
to under 6,000 (with credit unions
(bars)(bars)
seeing a similar reduction). Banks have 5% $10-50 bil 15
consolidated at a pace of roughly 3-5%
(line)(line)
4% 12
Mergers
per year, slowing down following the
financial crisis, but since recovering to 4% 12
% Merged
Mergers
historical averages (see Figure 1a). We
3% 9
expect this rate of consolidation to con- % Merged
# Large
tinue over the next several years. 3% 9
In terms of deal size, the real estate
# Large
2% 6
crisis saw a crescendo of large bank
mergers, which thereafter went into 2% 6
hibernation. Since 2014, larger bank
1% 3
transactions have returned. We expect
to see a return to regular M&A activity 1% 3
for larger community and regional
0% 0
banks in the next decade, leading to an 2000 2002 2004 2006 2008 2010 2012 2014 2016
increase in the number of banks with 0% 0
$200 billion and more in assets (subject 2000 2002 2004 2006 2008 2010 2012 2014 2016
Merger size measured by target bank assets
to regulatory asset threshold changes).
Source: FDIC, SNL, Novantas analysis
Looking at deal pricing (see Figure
1b), tangible book value multiples have
declined post crisis: median P/TBV
2.5 100%
exceeded 2.0 in 2003-07, plummeted to FIGURE 1B: Annual Median Deal Price Metrics (2000 — 2016)
1.1-1.2 in 2008-13, and then inched up to Deal pricing to tangible book value remains in the low ones though rising, while
1.3-1.4 by 2015-16. Part of the low multi- premiums are back to the low 30s.
2.0
ple reflects stunted industry profitabil- 80%
ity prospects and bottom basement
bank stock prices — both of which have 2.5 100%
(bars)(bars)
1.5
improved markedly of late. Despite
(line)(line)
these positives, we do not expect bank 60%
2.0 80%
Price/TBV
profitability to return to pre-crisis
Premium
1.0
levels; hence, while we have seen a
Price/TBV
significant increase in deal multiples
Premium
1.5 40%
60%
in Q1 2017, we do not expect a return to
0.5
prior multiples, except when it comes to
unique deals.
1.0 40%
Premiums over market price for pub- 20%
0.0
licly traded companies have returned to
roughly normal values post-crisis. The 0.5 20%
median 1-month deal value premium
0%
over market price spiked to around 60% 2000 2002 2004 2006 2008 2010 2012 2014 2016
in the slow recovery period of 2009-12, 0.0 0%
reflecting low trading multiples of that 2000 2002 2004 2006 2008 2010 2012 2014 2016
period. Since then, premiums have
dropped into the low 30s. We expect Deal Value to Tangible Book Value, Deal Value to Market Value for publicly traded targets;
premiums to fall slightly further into annual medians.
the high 20s, as both acquirers and Source: SNL, Novantas analysis
18 |RETHINKING BANK M&A — IDENTIFYING, PRICING, AND CAPTURING VALUE IN TODAY’S ENVIRONMENT
FIGURE 2: Median Cost and Branch Reductions, Ten Largest Deals by Year (2009 — 2016)
Acquirers now more aggressive in cost reduction and branch consolidation.
70%
Branch Overlap
60% Cost Takeout
Branch Consolidation
50%
% of Target
40%
30%
20%
10%
0%
2009 2010 2011 2012 2013 2014 2015 2016
Branch Overlap: target branches within 5 miles of acquirer branch
Source: SNL, Novantas BranchScape, research and analysis
sellers better appreciate reduced target shopping and purchasing, customers tribution realignment. Many regionals
prospects absent a sale. are increasingly shunning the branch are again looking to M&A for some of
and shifting to digital channels. Addi- the solution.
CHANGING VALUE OF BANK M&A tionally, liquidity regulation favors more The pitfall is that the sources of
Historically, M&A has reflected stable deposits — transaction accounts value from bank M&A have funda-
the centricity of the branch — to bank as opposed to savings accounts or large, mentally been altered. We see three
intermediation, as well as to the goal non-operating balances parked await- major changes to M&A value — some
of building franchises. Deal announce- ing better uses or rates. of which are quite difficult to discern:
ments, while typically first mentioning More ominously for regional and Core transacting customers and
the safety of assets, prominently touted local banks, these industry trends have their stable deposits are now far more
branches and to a lesser degree depos- downgraded the importance of local valuable. We believe the differentiator
its. Deal rationales typically split into: branches — giving the national banks of profitability for banks going forward
out-of-footprint franchise expansion to higher customer acquisition rates and is increasingly access to a growing
build a regional or national franchise creating opportunities for direct online base of “sticky,” transaction deposits.
versus in-footprint franchise expansion banks. Separately, industry profitabili- Payments-related, relationship-driven,
to increase share and build scale. The ty remains subpar, and large swaths of and other stable deposit balances incur
term “footprint” is itself a reference to banks are failing to meet their costs of lower interest expense and are less
branch networks. capital. Even with economic expansion likely to be “shopped” and switched to
But in the years since the Great and rising rates, profitability is unlike- another bank. In contrast, hot money
Recession, the combination of technolo- ly to return to pre-crisis levels. and balances acquired through promo-
gy, customer preference, and regulation Thus, all but the most successful tion will require higher rates or leave
has fundamentally altered industry regional and community banks are the bank.
dynamics — and along with it, the value caught in a vise: how to simultaneously Accordingly, acquiring deposits
of bank M&A. With technology enabling compete with the nationals, improve with limited regard to their source puts
mobile and online banking for both profitability, and invest in digital dis- M&A deal economics at risk — espe-
SPRING 2017 | 19You can also read
