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Competitive intelligence for bankers

December 2015/January 2016

Ideas that Work 6 real-world ideas to jump-start 2016

Inside look at an SBA profit machine How to fix: “busy but not efficient�


SOLUTIONS THAT FIT. Whether you’re a mortgage, consumer or commercial lender, D+H lending solutions help you manage the lending process from application to origination & processing to compliant documentation to servicing. We offer flexible, secure lending solutions designed to simplify the lending process so you can focus on deepening your customer relationships.

Š2015 D+H USA Corporation. All rights reserved. D+H is a trademark of D+H Limited Partnership.

/Contents December 2015-January 2016

16 Ideas that work Just one good idea can make a big difference. Our annual “Idea Issue” highlights 6 in the cover story—from a better way to handle complaints to a midsize bank’s national health lending program. By Steve Cocheo, executive editor Cover: Chones/Shutterstock


SBA $$ machine Ditching traditional funding/ lending gives Seacoast Commerce Bank higher ROEs—as in 19%. By Bill Streeter, editor and publisher December 2015/January 2016



/ contents / 4 On the Web

Dec. 2015-Jan. 2016, Vol. 1, No. 6 Editorial and Executive Offices: 55 Broad St., New York, N.Y. 10004 Phone: (212) 620-7210 Fax: (212) 633-1165 Email: Web: Twitter: @BankingExchange

DOJ heightens fair-lending focus; Innovation Avenue’s a one-way street; Analysts size up fintech; Brett King’s Augmented

6 Like it or Not Fintechs aren’t the enemy. The enemy is comfort and startups help destroy it

8 Threads


5 paths for “social” success; Get hacked and enjoy it; Blockchain on a roll; Partner with a startup; On EMV’s front line


14 Seven Questions

Subscriptions: (800) 895-4389, (402) 346-4740 Fax: (402) 346-3670 Email: Chairman & President Arthur J. McGinnis, Jr. Editor & Publisher William Streeter

Former bank CEO Peyton Patterson on revenue, efficiency, and beating fintechs

Executive Editor & Digital Content Manager Steve Cocheo

28 Risk Adjusted

Creative Director Wendy Williams

Breaches can’t be prevented—but they can be contained. 3 ways to minimize risk

Design Consultants Sarah Vogwill, Gal Dor

30 Compliance Watch

Designer Nicole Cassano

CFPB clearly doesn’t like marketing service agreements. Until courts decide, be very careful how you use them

Editorial & Sales Associate Andrea Rovira 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

32 Bank Tech “Busy but not efficient.” Does that describe your bank? Four “diseases” are the likely cause. Several cures suggested

Director, National Sales Robert Vitriol

36 Counterintuitive It’s all about the numbers, right? Not really. Why two “Shark Tank” stars focus on presentation, heart, and expertise

Production Director Mary Conyers


Circulation Director Maureen Cooney Marketing Manager Erica Hayes

Subscription Information: Banking Exchange Magazine (Print ISSN 2377-2913, Digital ISSN 2377-2921) is published March, May, July, September, October/November, December/January by Simmons-Boardman Publishing Corp., 55 Broad Street, 26th Floor, New York, NY 10004 Pricing: 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 2015. All rights reserved. Contents may not be reproduced without permission. Reprints For reprint information Contact: The Reprint Outsource – Betsy White, 877-394-7350, For Subscriptions, & Address Changes: Please call: (800) 895-4389, (402) 346-4740, or Fax: (402) 346-3670, e-mail: Write to: PO Box 1172, Skokie, IL 60076-8172 Postmaster: Send address changes to Banking Exchange magazine, PO Box 1172, Skokie, IL 60076-8172 2


December 2015/January 2016

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

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/ ON THE WEB / Popular Stories on

DOJ heightens federal focus on fair lending

Innovation Avenue’s a one-way street

Stock analysts size up fintech

In a speech to bankers, Vanita Gupta, acting head of the U.S. Justice Department Civil Rights Division, made the case that lack of credit is a root cause of the recent urban unrest seen in Baltimore and Missouri. Read more at

Fintech people discuss regulation at their conferences, but compliance people don’t discuss fintech innovation at their conferences. They need to, says Jo Ann Barefoot, who lives in both worlds. Read more at http://

Banks and fintech. War? Cooperative venture? FinTech Revolution: When The Wind Of Change Blows, Some Build Walls & Others Build Windmills from Keefe Bruyette & Woods is a balanced must-read. Read more at

Banking futurist’s new book goes beyond money Brett King, pundit and founder of Moven, is probably best known as author of Bank 3.0. His latest book is Augmented: Life In The Smart Lane. It goes beyond finance, predicting how “radically embedded and personal technology” will augment our lives. Read a free chapter at http://tinyurl. com/KingAugmented

Subscribe to our free weekly newsletters, Tech Exchange and Editors Exchange at




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

December 2015/January 2016


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Follow us on Twitter for the latest banking news, trends, and analysis. We sort through banking news big and small so you don’t have to.

/ like it or not /

Thanks for rocking the boat


r e ba n k s f idd l i ng w h i le the industry is overrun by fintech barbarians? It’s popular in some circles to think so, but we don’t agree. There will be casualties, but overall the industry is up to the challenge. What the tech startups have done actually has been very healthy for banking. They’ve made the industry collectively quite uncomfortable. Bankers should thank them for that. And then beat them or partner with them—both of which are already beginning to happen. The biggest threat to business success, and the thing that leads most often to failure or selling, is … comfort. When you’re comfortable, you begin to think you’re infallible, and take success for granted. You get complacent and are less likely to recognize the need to continually change. Go back far enough and banking was a pretty comfortable business, leaving aside periodic credit crises. That condition had been changing gradually for many years, and then abruptly in 2008. The f inancial cr isis, ensuing recession, and the regulatory onslaught that followed made things far more uncomfortable. More recently the inroads of nonbank fintech newcomers have made that discomfort even more acute. Some observers view the fintech trend as more important than Dodd-Frank regulatory overload. You can argue it either way, but the challenges are interrelated in any event. (Note, however, that bad credit decisions and economic downturns quickly undo exciting new ventures—a lesson newcomers have yet to learn.) Given all that, the biggest controllable determinant of success for any bank is its people. For all the talk about seismic changes, banking remains a sales and service business centered on the financial needs of individuals and businesses. Blockchain doesn’t change that, nor does mobility. What they do (or will) change is how business is conducted. More importantly they change customer preferences and ex pectations. Bank s that ser ve



customers the way they want and need to be served will not have a problem with mobility and other developments. There is no question that speed counts more than it used to, which can stress the culture and budgets of traditional institutions. How they cope with that gets back to people—both staf f and management. To avoid being run over by change requires a willingness to learn—not something everyone embraces. Also helpful is bringing in “new blood.” New people— whatever their position or age—bring different ideas, attitudes, and experience. At family owned banks, for example, as parents retire, their offspring—like all offspring—want to try different ideas. At public companies, leaders retire or are asked to leave, periodically refreshing the idea pool. This is healthy. Even when an industry is faced with sweeping changes, always there are people who see the handwriting on the wall and begin to figure out ways to either do things differently, take advantage of the shift, or even, on occasion, move on to a completely different business. Those are the folks ever y bank—and ever y organization—needs. The comments of outsiders in this regard are always instructive. When asked by bankers at a recent conference, “How can we be innovative when we are so highly regulated?” and “How can we keep up with the pace of change?”, Robert Herjavec, entrepreneur and a star of ABC’s “Shark Tank,” equated the digitalization of banking with breathing—i.e., you have no choice but to adapt. He also suggested banks ditch the mindset of compliance being a burden. (See “Counterintuitive,” p. 36, for more of his and “Shark Tank” co-star Barbara Corcoran’s provocative points.) As a closing thought, new faces aren’t always required. You may find that, given encouragement, many of your existing people have untapped potential—or ideas they thought you didn’t care about. It’s management’s job to figure out how to tap that. Perhaps simply by getting out of the way.

December 2015/January 2016

BILL STREETER, Editor & Publisher

“Always there are people who see the handwriting on the wall and begin to figure ways to do things differently. Those are the folks every bank needs”

Competitive intelligence for bankers

March 2015



The key to dealing with disruption, says TS Bank’s Josh Guttau: Do some disrupting yourself



Subscribe to continue to receive the latest banking news, trends and analysis.

/ THREADS social success

To have social media work at your bank, don’t fear it, be bold By Ashley Bray, contributing editor


any banks continue to weigh the pros and cons of social media before jumping in, but Paducah Bank was an early adopter. The Paducah, Ky.-based bank was among the first in its area to get on Facebook over six years ago; the CEO saw social media as an opportunity. “Often it’s the opposite—it’s the leadership of the bank that doesn’t want you to get on,” says Susan Guess, marketing director and senior vice-president at the $546 million-assets bank. Since launching its social media platform, Guess handles most posts. The bank focuses on Facebook, but is on Instagram, Twitter, LinkedIn, and YouTube. It isn’t afraid to experiment with new platforms, either. Paducah Bank recently put together a high school social media team, which it hopes will provide new insights and platforms to explore, like Snapchat. “I want to gain some energy

and synergy around young people and for them to push me to look at other channels,” says Guess. “It’s important to hear other voices.”

DOWN, BUT NOT OUT The industry clearly seems over branched, yet FMSI, based on its latest survey, believes that average monthly branch transactions, at the current rate, will still be at about 3,500 in 20 years.



December 2015/January 2016

Guess added her own voice on the subject during a panel at the recent CSI Customer Conference. Her social media advice was broken down into five points.

ratio of population to branches Declined from 9,340 in 1970 to 2,970 in 2014

Average Branch monthly Volume

43.5% decline in volume since 1992

1. Don’t invest too much in land you don’t own

A bank doesn’t own social media platforms. It owns its website, which should be the main information hub. “We want to push people back to the website, but we certainly don’t ignore the value that those social media channels bring in terms of spreading that message,” says Guess.

2. Be bold and be brave

For banks, the biggest barrier to social media entry is usually fear of reputational risks. The real risk: missing out. “Reputational risk is greater when [banks are] not on social media, because people are talking about them anyway,” says Guess. “If you have social media channels, you control that conversation. You’re able to provide an outlet and to help those people that have frustrations.” There are compliance fears, too. But since the bank controls content and can edit its posts, they’re often unfounded. An overabundance of caution can derail the best intentions. “Sometimes the words get ‘pushed down’ so hard, [the message] becomes very f lat and loses a lot of the personality of who you are,” Guess says.

3. Tell your story

Personality is big when it comes to connecting with followers on social media. Guess urges banks to tell their stories. Rather than scheduling content weeks or

months in advance, “look up and around every day and see what’s going on at the bank, what’s going on in the community.”

4. Bring value and connect with customers

Relevant and engaging content will automatically bring value to social media user s, but Pa duc a h Ba n k ha s gone beyond this in an effort to help its small business customers, which often have little to no marketing budgets. In honor of National Cheeseburger Day, the bank created a Facebook post, instructing followers to like and comment on it for a chance to win a $50 gift card to a local burger restaurant, a customer of the bank. The impact was huge: 16,003 people liked it, 370 people shared it, and 691 commented on it, leading the post to reach a total of about 45,700 people. The customer was thrilled. The bank has run the same type of promotion for other local businesses. “It’s about us showing the value of being a customer at Paducah Bank,” says Guess, “and showing that we value their business.”

5. Have fun

Guess’ last piece of advice is to not take social media too seriously. The bank makes sure to post fun things on its page that engage customers and followers, including contests, community happenings, and Teen of the Week.

5 tips to improve branch efficiency


ince 1992, there has been a 45% decline in branch transaction volume, compared with an increase in branch staff salary and benefits costs of 90%, said Meredith Deen, president of Financial Management Solutions Inc., at BAI’s Retail Delivery Systems conference. W hen closing b r anches i sn’ t feasible, bankers who spoke during the same conference session offered these five tips to maximize branch staff investment. 1. Use transaction volume data. Bank of the West analyzes hours based on activity and the market. 2. Schedule idle time. FSGBank assigns sales calls and training. 3. Use part-time staff. Bank of the West also has “floaters” who move between branches. 4. Incent staff. FSGBank rewards staff for transactions processed over a minimum threshold. 5. Get bottom-up suppor t. All three stressed the need to gather feedback from branch staff. More at

Top 5 Most Common Branch Transactions


Deposit: check


Withdrawal: cash


Deposit: cash

Source: 2015 FMSI Teller Line Study,


Loan pymt.: check


Deposit: bulk

December 2015/January 2016



/ THREADS / New redlining risks emerge


he implications of recent HUD and CFPB cases have redefined redlining practice. Speaking at the Mortgage Bankers Association Annual Convention, Jeffrey Naimon, a partner at BuckleySandler, said, “Redlining used to be intentional. Banks drew a line around neighborhoods where they would not lend. Now, cases are brought on statistical comparison.” Banks can be accused of redlining, he said, if a federal agency looks at a minority census tract and sees that the bank made fewer loans in that area than its peers. “They’ll say you didn’t market hard enough in those areas,” said Naimon. “Think about what you have to do to protect your lending entity from being accused of this,” he said. “If it just turns out you didn’t get enough applications from minorities, you’ll be accused of redlining.” Naimon said it’s critical to have a statistical program in place to allay disparate-impact concerns. “If you show you’ve been trying to attract minorities, you’ll get more leeway.” Paul Hancock, an attorney with K&L Gates who spoke along with Naimon, added that what the gove r n m e n t d e f i n e s a s yo u r p e e r almost never is. Define that yourself, he said. Also, point out that percentages can be misleading. “Volume tells the true story.” — Melanie Scarborough



#Retweet the #CFPB

How social media impacts consumer advocacy By Amy Hanna, Baker Donelson


he Consumer Financial Protection Bureau is harnessing the power of Facebook and Twitter not only to create a platform for its educational services, but to gather complaints from consumers. Currently, CFPB has two Facebook pages— and—and a Twitter account (@CFPB) that its staff use to post material multiple times per week. (No Instagram account, however— at least not yet. There’s a Flickr account used chiefly for event photographs.) On Twitter, CFPB’s tweets are usually focused on the bureau’s educational goals, like making sure that consumers have the resources necessary to properly evaluate loan products and providing the answers to frequently encountered financial questions. Recently, @CFPB has been featuring a video message about Jorge, a man living in New York who encountered some

December 2015/January 2016

problems removing his bankruptcy from his credit reports. Most important, the page hosting the video includes several links to CFPB’s online complaint portal. Although it tweets frequently and has over 49,000 followers as of mid-October, @CFPB tends to be fairly passive and focused more on distributing knowledge than fielding complaints. On Facebook, on the other hand, the bureau tends to invite more active participation from consumers who follow CFPB’s page. Within CFPB, there is a team dedicated to military personnel and their families called CFPB Servicemember Affairs, and this team has its own separate Facebook page. Unlike CFPB’s main page, however, the Servicemember Affairs page does not receive significant traffic with only 1,802 users so far. Adapted from a longer article at

A good way to get hacked

Position your bank as a tech innovator—sponsor a “hackathon” By John Ginovsky, contributing editor


s ba n k ing lea ders look for ways to tap into emergent, but sometimes bewildering, technologies, one way to get a grip on it all may be through sponsoring focused “hackathons.” It’s impor tant to point out that a hackathon has nothing to do with illicit computer intrusion. It’s derived from the other modern definition of hack: to work on a specific computer problem. Therefore, a hackathon is an effort to find software solutions to stated problems, often in a competitive setting. Hackathons can position the bank in the community as a place that fosters innovation; potentially recruit young tech experts into banking; and come up with solutions to problems or unmet needs. In banking, First National Bank of Omaha is a leading expert, having sponsored three such annual events. “When we did our first one, we worked hard to explain what a hackathon really was. It’s a coding event. It’s a ‘codeathon’ that we’re hosting here at the bank,” says Angela Garrett, vice-president, Innovation and Enterprise Solutions. The latest event focused on ways to provide financial education online. M a n y d i f f e r e n t i n du s t r i e s h a v e embraced the idea of hackathons as a way to stimulate fresh thinking and come up with new solutions to issues. There’s even a subculture of professional hackathon participants, usually tech consultants, who travel the country specifically to participate in and win these events. It’s starting to creep into the financial services arena. Some of the very largest banks have sponsored or cosponsored such events, as have some larger foreign banks. But First National Bank of Omaha, with $19 billion in assets, stands out among regionals. Why did it start, and why does it intend to continue this event? “It really is a fun community event that truly showcases our technology talent and innovative spirit here in Omaha, Nebraska,” Garrett says. “It’s a way to demonstrate that you

don’t have to leave Omaha and go work at Google to have a really engaging job in the technology field,” Garrett adds. The bank has hired two individuals who competed and attracted another one who heard of the bank’s efforts. “It’s about the ideas. . . . Sometimes it’s best to ask the community to get involved in how they would solve a problem or capitalize on an opportunity,” Garrett points out. The bank is now researching how to use the online financial education solutions produced by the recent event. The

Coding events can help foster innovation, recruit young tech experts, and find solutions to problems winner came up with a “financial health rating” app similar to a physical health rating, showing where users stand and what they could do to improve. A nalysts also are warming to the idea that hackathons have a place in the banking industry. “Bankers are dealing w ith limited resources and trying to figure out how to make many things happen at once,”

says Mark Schwanhausser, director, Omnichannel Financial Ser v ices, at Javelin. “So having something like a hackathon is a way to let all those people in stiff white shirts and neckties unbutton and have a white-board session with people whose focus is on, ‘Tell me what the problem is; let me try to fix it.’” “Ba nk s need to f ind new ways to innovate,” says Stessa Cohen, analyst, Banking and Investment Services, at Gartner. “Banks are starting to f ind hacks that are relevant and that help them with their business problems. It’s a new way to bring that innovation.” Still, hackathon sponsorship involves a learning curve. “Mounting a hackathon can be a lot of work,” says Garrett, but she points out that there are plenty of examples available from which to derive a template. “I don’t think it’s a size [of bank] thing. I think it is a willingness and an understanding that technology is how we are going to enable our customers now and into the future.” Cohen stresses that there is no one way to host a hackathon. For example, smaller banks could collaborate. “You can’t get hung up on [the details],” the analyst says. Sums up Garrett: “You make small steps, you try something, you fail quickly, you learn, you adapt, and you pivot.”

December 2015/January 2016




Blockchain on a roll

A series of announcements at Sibos and elsewhere shows many people saying, “I’m in” By John Ginovsky, contributing editor


nce again, blockchain technolog y is prov ing ha rd to ignore. Witness its promin e n c e a t S W I F T ’s S i b o s technology conference held in Singapore in October, where about 8,000 financial industry professionals gathered. Blockchain—generally described as “distributed ledger” technolog y and k now n initia lly a s the ba ckbone of cryptocurrencies—managed to wield considerable influence at this event. Perhaps the most startling development is the fact that a blockchain company called Hyperledger won the 2015 Innotribe Startup Challenge. This is a big deal. Innotribe is an annual global challenge to identify and reward—to the tune of $50,000—the most innovative and disruptive companies likely to have the biggest effect in the industry. Orga nized by S W IF T, more tha n 370 companies from around the world



applied to this year’s startup challenge. A panel of more than 500 senior innovation executives at global f inancial institutions, venture capitalists, and angel investors selected 60 companies to participate in regional showcases in London, Cape Town, Singapore, and New

As interest grows in distributed ledger technology, banks are ramping up experiments to test it York. These were narrowed down to a final 12 that were judged at Sibos. L o a nd behold, Hy perledger won out. What is Hyperledger? As SWIFT describes, “Hy perledger is a distribu t e d l e d g e r pl a t f or m t a i lor e d f or reg u lat ed f i na ncia l i n st it ut ion s t o

December 2015/January 2016

eliminate reconciliation costs, prevent trade breaks, and reduce settlement times and risk.” Celent analyst Dan Latimore, who attended Sibos, noted that: “Two technology vendors I spoke to said that every single bank they met with asked about blockchain . . . While no one knows yet what the killer blockchain uses will be, banks are ramping up experiments along all facets of the value chain.” Hyperledger still is getting off the ground. Meanwhile, though, the U.S. blockchain provider Ripple is surging ahead with a number of strategic partnerships, which may shed some light on blockchain’s likely uses. In rapid succession in October, D+H Partners, CGI, and Volante Technologies Inc. announced their own relationships with Ripple. D+H will integrate its Global PAYplus payment ser vices hub (formerly Fundtech) with Ripple’s distributed ledger technolog y. Accessible only w ith permission, it will allow the connection of interbank networks; movement of money domestically and across borders in real time; and allow access to cheaper liquidity through a distributed network of market makers. According to CGI, it will team with Ripple to bring its distributed financial technology capabilities to the CGI payments solutions portfolio. Volante Technologies created an interface between its VolPay suite of payment integration, processing, and orchestration products directly with Ripple’s distributed ledger capabilities. Prior to the Sibos conference, financial technology innovation company R3 CEV announced that 13 large global banks had joined the original nine banks in the company’s partnership to design and apply distributed ledger technologies to global financial markets. According to an R3 statement, the project also will seek to establish consistent standards and protocols for the technology to facilitate broader adoption and gain a network effect.

On the front lines of EMV First-person view: At chip card rollout, some Target customers see red By “Elizabeth Harvey,” Target cashier


his is slow, isn’t it?” asked a nervous housewife of the 35-to40-second transaction. It was early September, and Target had just introduced its chip card payment process to customers, or “guests” as they are known in Target parlance, and the experience was proving more edgy than chillax. “This is much, much slower,” said a

middle-aged man wear ing a pained expression. “It’s ridiculous.” Another woman, seeking to be proactive, jammed her card into the reader before all her items were scanned, only to be informed by a sudden, rude beeping that she didn’t have a chip card yet. So writes a Target cashier, using a pseudonym, about her first-hand observations of the major payment systems

transition that is EMV. Further excerpts from the article: Cashiers were trained to guide guests through payment: The chip card was to go (chip side in) into the bottom of the reader and stay in place until authentication was completed. Messaging on the interface would indicate when authentication and payment processing had occurred and the card could be removed. This was simply a matter of providing the guest with clarification and guidance. Yet, even after being shown, plenty of guests who returned days or a week later wanted to slide their card—as if on autopilot—or push the card in and out of the chip reader quickly. Chip rollout had been discussed on TV news, and written up in newspapers and online. But for about half the people I’ve checked out since the launch, the chip was experienced as a big unknown or of no particular benefit. Another wrinkle: Target, like other retailers, measures the speed of its cashiers, and the chip card wreaks havoc with it. In other words, we don’t much like the wait, either. Read the full story at http://tinyurl. com/EMV-firstperson

Try partnering with a startup Small banks don’t have to miss out on fintech innovation By Paul Schaus, CCG Catalyst


ommunity banks seem to be at a disadvantage as digital disruption threatens to upend industry. They don’t have the resources to pour into innovation, like big banks. The catalyst for digital disruption, however, will come from fintech startups. They represent not just a threat, but an opportunity, as many are looking for partners to help shape the future of financial services. Community banks are just as able to partner with them as larger banks, helping to guide the startups through the maze of industry regulations.

Delaware’s WSFS Bank, for example, partnered with ZenBanx to offer a digital-only account for consumers who travel or send money overseas often. The bank helped ZenBanx navigate Know Your Customer regulations. In exchange, the bank was introduced to other startups. Small banks can also band together to work with startups. BancAlliance, for example, helped facilitate a partnership between member banks and P2P lending site Lending Club to offer consumer loans. Adapted from a longer article at December 2015/January 2016



/ Seven Questions /


With meaningfully higher rates way out in the future, local banks must try other tools By Steve Cocheo, executive editor view,” says Patterson. “But in the regulatory environment and interest-rate environment that we are in, community banks are clearly challenged.” New capital and liquidity requirements are among the headwinds they face. Not leaving money on the table, trimming expenses, and exploring new ways to make money are must-do’s, according to Patterson. Community banks, generally speaking, lack a diversity of revenue sources. “They do a few things really well, and they largely depend on interest income. Fee income hasn’t been a sweet spot for community banks,” says Patterson. “But you can’t be a one-trick pony anymore. You’ve got to be able to thrive in all kinds of interest rate environments.”


hen you last flew, you most likely paid for your baggage—both ways, a nd maybe even an extra fee for curbside check-in. You may have paid more for extra legroom, and you may have plunked down ten bucks more for the privilege of boarding early so you had a shot at fitting your rollaboard overhead. Then, once aboard, you probably paid for Wi-Fi to keep in touch with the office, and something from the snack cart. It’s a safe bet that most community bankers would never treat their own community bank customers that way. But is there a middle ground between “nickel and diming” people and free? “Community banks give away way too much,” says Peyton Patterson. “Everything is free. And it doesn’t have to be. If customers get the things they are looking for, within reason they are willing to pay for that. But generally, community banks have been afraid to charge fees, and even if they do, they will often waive them.” Pat t er son, he a d of New C a na a n, Conn.-based Peyton R. Patterson Consulting, is no theorist. She has been in banking for over three decades, most recently at the top of two community banks—Bankwell Financial Group and 14


To thrive in all rate environments, make fee income a “sweet spot,” says consultant Peyton Patterson. NewAlliance Bancshares, both of Connecticut—as well as much larger banks. She says community banks need to seek ways to bolster revenue, cut costs, and improve efficiency, because the pace of interest rate increases will likely be too slow to produce the buoying effect that many smaller banks are hoping for. Patterson believes community banks’ greatest strength remains high-quality customer service. Larger institutions have grown better, here and there, at this, but “if I had to put larger banks and community banks on a scorecard, community banks would still far exceed the big ones,” says Patterson. “They know their customers, and people still gravitate towards them because they fulfill a vital role in their community.” To stay in the game, she says, community banks must begin pulling every lever that will help their performance. Charging appropriate fees is one lever. “ The community banks that stood their ground and survived the f inancial crisis play an important role in their communities, from a lending point of

December 2015/January 2016

Q1. Community banks traditionally employed officers who did multiple tasks. And yet increasingly, individual bankers must deeply understand key specialties. But the need to contain costs is stronger than ever. How can management make this all work? Prompted by regulatory requirements, community banks have to invest in subject matter exper tise regarding risk management, controls, credit quality, and more. And, aside from offering the benefits of working in a smaller environment, that means attracting that talent financially. It’s the only enabler you have, but you can’t just keep spending more money on investing in people without cutting somewhere else—not unless you can find new revenues to offset the expenses. There a re ma ny oppor t unities in smaller banks to automate procedures and controls, and to squeeze out inefficiencies. You trade that off for good people in the front line and the back office, and the result is a more viable, growth-oriented company. Q2. Where should bankers be looking for greater efficiency? Account opening is one of the most inefficient processes in small community banks. Underwriting of loans, especially

small business loans, from origination to closing, can often be improved; collection practices as well. In both of the companies I ran as CEO, I found we were spending insane amounts of money on core operating systems that were way too expensive. You need to renegotiate your contract— or you need to find a new vendor. You have to cut your cost of functioning as a company. Understand that core systems providers face their own pressures. Many larger banks brought their systems in house, so the vendors have focused on regional and smaller community banks. In this regard, something that’s very helpful is to have a former big-bank person running your IT function. There’s a bit of naiveté among smaller banks. But, given their experience, these bankers can help you because they have a better idea of what you should really be paying. Often, they’ll see the bills and scratch their heads, wondering why you are paying so much. When I saw those overcharges, I told the vendors, “We’re going to negotiate the cost dow n or you’re going to lose my relationship.” Q3. What must a community bank do to move beyond a spread-based model? There’s no magic bullet, but communit y bank s need to focus on wea lth management and trust. This is a high maintenance business and demands a lot of expertise that makes it costly to start from scratch. Buying, versus building, is an option to get into it. Annuity sales can be an excellent cross sell against low CD rates. Bank-owned life insurance can be a nice fee-income generator. And originating loans for sale can be a good income stream. There w ill be some par tner ing by banks with fintech companies, where somebody else is building it. Private equity investors in those deals have returns they want to reap. My only caution is to remember what happened in the subprime business. A number of those specialized lenders

were bought by banks, and the end of the story wasn’t so great. Q4. At conferences, fintech companies often don’t talk very favorably about banks. Are they right? They’ve got a new niche to fill, and they are doing that on the backs of the banks that they feel abandoned the market. So they view things as the banks’ loss and their opportunity. Banks, typically, are not the Apples of the world. But changes in consumer behavior and how they want to interact with banks is forcing them to value what some have dubbed the “new agility.” They need to establish a culture that rewards innovation and that rewards timeliness—that rewards being on the cutting edge with alternative delivery. Banks have traditionally fallen down on that score. But having been a banker for 30 years, I can well appreciate why. There are lots of burdens that banks have that fintechs don’t. Q5. In the age of the app, does “community” mean what it once did? That’s a great question, because the traditional definition is geographic. But what is emerging is a much broader definition. The concept of “digital community” allows like-minded consumers to discuss their financial needs online and to have their product experiences online. I live in Connecticut, and my geographic community is Fairfield County. But digitally my community is much broader. I bank with a number of institutions, each relationship depending on the financial purpose of that relationship. Q6. What will the community banker of the future look like? Passion for the business itself is part of the current description, and that shouldn’t change. Likewise, communit y bankers need to be completely performance-driven. They need to be credit-savvy, client-focused, and concentrate on service. But there are also some newer, emerging attributes.

One is understanding how customers prefer to interface with us. And another is becoming savvy about marketing in the modern sense—especially social media. Similarly, familiarity with the growing role of technology is important. And overall, the community banking leader of the future must be someone who is innovative, comfor table w ith change, and, most of all, be someone who can also instill that kind of culture throughout the bank. Q7. We have talked a great deal about how bankers are changing and must change. But what about bank owners—must their perspective change as well? Capital is king in this env ironment. Banks are being required to maintain certain levels of capital, but having “dry powder” is critical for a communit y bank that would be successful. That dry powder entails having enough capital to be able to grow the bank organically; to ma ke investments in new prof itmaking business lines; and, also, to pursue acquisitions. Hav ing that dr y powder gives you

Banks must take on fintech’s “new agility” and establish a culture that rewards innovation and timeliness opt ion s. In sider s a nd b oa r d members may have to reach out for more c apit a l—pr ivate pla cement s a mong friends and family; hiring an investment bank to raise capita l among a small number of outside investors; or taking the bank public through an initial public offering. I’m a n a dvoc at e of IPO s. We d id them at both of my community banks. But raising capital in some fashion is critical for community banks, because it’s really what’s going to enable them to be around in the future.

December 2015/January 2016






In a complicated world, basic concepts still matter



December 2015/January 2016

WHAT’S INSIDE • Big bank on campus: Bank of the West makes longterm partnership with major university, p. 17 • “Bring us your complaints”: How Regions Financial learns from them, p. 18 • Good time to be a health-care lender: Why Sterling National Bank thought the medical field was the prescription, p. 19 • From commodity to commercial: How Reading Cooperative Bank rebalanced mortgage and business lending, p. 20 • Ag bank gives local lending a new twist: TS Banking Group looks for growth from old roots, p. 21 • Fintech can be beaten: Univest Bank and Trust sets out to build a marketplace lender of its own, p. 23 • ONLINE EXTRA: BIRTHDAYBASED FUNDING SHIFT 125th helps Federal Savings move to cheaper retail funding. birthdaybasedfundingshift

By Steve Cocheo, executive editor & digital content manager


a n k e r s t o d ay l i v e i n a cloud, and we don’t just mean “The Cloud,” though that is part of it. The pace of change, and the noise about it, outstrips anything seen before. Fintech competition and opportunity represent only one part of the miasma. But a recent report by Keefe Bruyette & Woods— FinTech Revolution: When the Wind of Change Blows, Some Build Walls & Others Build Windmills—assesses the future of the industry and finds it will be one of partnerships between old and new. The lead author of the report, Tai DiMaio, assistant vice-president, told Banking Exchange that: “It’s not as if traditional banks are moving towards different kinds of revenue streams. They are probably going to end up repackaging how their traditional products are sold and provided. At the end of the day, they still are going to be spread-based businesses. They are just going to be leveraging technology to execute on that spread business.” There is no new thing under the sun, as is written in the Bible, and that is true of financial services. We can make it faster, more accurate, more tailored, more everything, but the essentials are the same no matter where, how, and what size bank. Even peer-to-peer lending is really just a variation on a basic theme. What unites the case studies in this report, from the story about Regions Financial’s complaint program to the one about Sterling Bank’s health-care lending niche, is that each has elements that a bank of any size can emulate.


Bank of the West Big bank on campus

Bank of the West is the official bank of the University of California, Berkeley, representing a ten-year commitment that the bank is entering into with $17 million in support to the institution. The arrangement, announced in October, is an exclusive one that makes the $72.5 billion-assets bank the newest member of the institution’s University Partnership Program. The new of f icia l ba nk status is a

departure from transaction-based relationships. “ This isn’t an adver tising agreement,” explains Solly Fulp, executive director of Berkeley’s University Business Par tnerships and Ser v ices. “This is an investment in a long-term approach.” No commitments to account openings have been made, only the opportunity to offer products and services to students, faculty, and staff. No credit card marketing will take place, and student loans will not be offered. Students have been involved in planning the features of the relationship. This has ranged from input on the planned on-campus branch’s design to recognition of the needs of unbanked university employees. The program also will provide seven on-campus ATMs. The relationship builds on a 20-year sponsorship of Berkeley’s sports program by the bank. “We always had a sense we could do more,” says Andy Harmening, the bank’s vice-chairman of consumer banking. The planned support to the university community is extensive. This includes academic scholarships; internships; on-campus f inancial literacy education; and support for programs and pr ior it y student initiatives. A n example of the latter is support for the UC Berkeley Food Pantry Fund, which gives emergency food assistance to students who need it—one in five students requires such help at some point. Berkeley students will be eligible to open Bank of the West student checking accounts with no monthly service charges and no required minimum balance beyond an opening deposit of $20. Students also will be eligible for a special “student perks bundle” of services with a rebate on the $5 perks fee. Among the perks are rebates of up to $6 per statement cycle on ATM fees at other banks’ machines and free enrollment in the bank’s debit card rewards program, which usually carries a $15 annual fee. Faculty and staff will be able to obtain ba n k ser v ic e s at d i sc ou nt ed rat e s, including loans, and will have bonuses on money market and CD accounts. In addition, faculty and staff will be able to obtain retirement planning services, and the bank will be promoting wealth management services to alumni. The university population is vast. There are over 27,000 undergraduate students, over 10,000 graduate students, over 1,600 full-time faculty, and over

December 2015/January 2016



/ ideas that work / 600 part-time faculty members, in addition to many university workers. Fulp says the students involved in bringing the arrangement to Berkeley pressed for a program that would “not rely on student acquisition fees.” “There is no guaranteed business in this agreement,” says Fulp. “Bank of the West said that they would invest first in our relationship. It’s an investment-first, opt-in only program for students, faculty, and staff.” There will be co-branded marketing, but nothing involving the Cal 1 card that the university issues to its population for identification, transportation, limited debit usage, and other purposes. Harmening says that the bank preferred to form partnerships over time. As Fulp puts it, the intent is to produce the opportunity for “a long-term ROI.”

Fueled by Obamacare and other shifts, Sterling’s growing specialty lines now include health-care lending





“Bring us your complaints”

Prior to a major rethink of the complaints management program at Regions Bank, “it was a horse and buggy affair,” says Bill A skew. “We collected complaints in a bunch of spreadsheets and in reams and reams of files.” Askew, senior executive vice-president in the consumer services group, heads strategic initiatives and service quality for $120.9 billionassets Regions Financial Group. Askew says the process was under the company’s compliance function, until a wake-up call in October 2011. Askew and O.B. Grayson Hall, Jr., the bank’s chairman, president, and CEO, heard Elizabeth Warren, “inventor” of the Consumer Financial Protection Bureau, speak about how impor tant complaint processes would become. The pair decided the complaints function not only needed a major overhaul, but belonged under the customer experience team, part of Askew’s responsibilities. In August 2012, the Centralized Customer Complaint Program was activated. CCCP is a database produced in-house that enables Regions’ nearly 24,000 associates to load customer complaints and

December 2015/January 2016

enable the bank to identify complaints and track resolution. Management can analyze trends, common themes, and root causes to prevent recurring and systemic issues. The results also cycle into new product development. Employees receive annual web-based training in system use. A key issue is what constitutes a complaint. Askew says multiple categories of complaints are handled, but not everything has to be a counter-banging confrontation. “ There’s va lue in a ll complaints,” Askew says. In fact, if an employee goes to dinner with a friend, and the friend mentions he has had an issue with his Regions home equity line account, the employee is encouraged to upload a summary of the matter to the system. All product and service areas are covered. Employees are encouraged to find a resolution on the spot. “You can turn a negative into a positive that way,” Askew explains. The system is designed to route complaints to appropriate supervisory levels, to make sure nothing is missed. Askew adds that staff is instructed to put in exactly what customers’ complaints are and not to do any interpretation. With complaints entered, branch managers, customer service managers, and others review them regularly. Then there are “gatekeepers,” around 45 Regions officials with market-level responsibility, who review consolidated reports. Tangie Holland, the senior vice-president and fair and responsible banking manager who developed the CCCP program, maintains a staff of ombudsmen that rev iew what’s coming in. Each has been selected because of his or her experience with a specific area, such as branch banking or customer service. A lso, “I wa nt them to have g reat customer skills and the ability to understand customer issues,” Holland says. Complaints that come from an outside authority, such as CFPB, prudential regulators, congressional offices, and the Better Business Bureau, go directly to ombudsmen, who go right to the source to investigate and resolve. Holland’s area can run issues right up to top priority, telling people: “You’re on this” until the matter is worked out satisfactorily. Holland’s staff reports back to the regulator or other party to acknowledge resolution. “It sounds like so much work,” says Askew, “but it’s a lot more efficient than you might think. The key is to get your

People who bank with us expect to be treated well. If not, they will complain and tell friends. That’s why all complaints are entered into Regions’ system, reviewed, analyzed for root causes, and resolved people to enter complaints. That’s not natural for people. People don’t like to deal with complaints because they are negative.” Indeed, gatekeepers ask any unit not reporting any complaints why nothing’s being reported. Holland rev iews issues for quality assurance. She explains that complaints develop “tentacles,” reaching those who unhappy customers know, so it is important for her to be sure that staff is taking appropriate action to remedy problems. The bank applies another layer of analysis, a monthly, face-to-face “Root Cause Roundtable.” Holland chairs the group, and Askew sits in. Every business unit is represented—“and someone has to explain if their area shows a spike in complaints,” Askew adds. “We do this for the customer,” he explains. “That’s how you keep the energy on something like this.” Askew finds the meetings interesting, because matters often come up that are surprising. “I always get blown away by what people complain about,” he says. Complaint handling has improved Regions’ ratings in surveys about customer service, and this tends to up the ante. “People who bank with us expect to be treated really well,” says Askew. “And if they don’t get that, they will complain.”


sterling national bank Good time to be a health-care lender

Specialty f inance represents 22% of Sterling National Bank’s loan portfolio, surpassed only by commercial real estate lending, which accounts for 34% of the $11.5 billion-asset bank’s lending. Its specialty lines even exceed C&I lending, which accounts for 18% of the credit pie. St erling, hea dqua r t ered in Montebello, N.Y., has enjoyed signif icant organic growth as well as the benefit of a string of mergers and acquisitions. Specialty financial lines represent one of its strategies. As Thomas Geisel, executive vice-president and president of specialty finance, explains, the bank’s typical pattern is to develop an expertise locally. Then the bank will build it out regionally, typically by following expanding customers, and then nationally, taking advantage of both existing expertise as well as hiring teams that have specialized experience in the expanding activity. Geisel, a former bank president himself, says this has worked for Sterling in asset-based lending, factoring, trade

f inance, pay roll f inance, municipa l finance, equipment finance, and mortgage warehousing. The newest expansion f rom a New York-a rea ba se w ill be health-care lending, specifically targeting middle-market health-care firms. Sterling defines this as companies generating revenues of $500 million or less. Sterling announced the formation of a national team of health-care finance specialists in October, with the group to be headed by Dan Chapa, senior managing director. Geisel and Chapa see this as an opportune time to tackle health care. Roughly 20% of the U.S. Gross Domestic Product consists of health care, Geisel notes, and “that’s expanding at a pretty rapid rate.” Geisel says that aging baby boomers need increasing care, and several major factors will spur more demand for credit and related financial services. The centerpiece is the Affordable Care Act (“Obamacare”), which is driving significant shifts in how health care is provided in this country. Geisel says an evolution toward more preventative care, rather than care provided when someone already is unwell, is increasing demand and the need for facilities to handle it. Obamacare is creating requirements for increased recordkeeping and administrative capability. All these factors are

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/ ideas that work /

Reading Cooperative’s loan portfolio is about 60% residential and 40% commercial. Its goal for an equal split will up returns and relationships

driving a consolidation movement in the health-care industry. Sterling will expand nationally to provide assistance w ith acquisitions, recapitalizations, working capital, and growth capital. “This means a tremendous opportunity for growth in health-care finance,” says Chapa, a former CEO of Healthcare Finance Group, LLC, a specialty finance company serving the middle market. Geisel says Sterling will follow a twopronged expansion strategy. First, it will follow its existing health-care customers as they expand their own operations into contiguous markets, beyond the bank’s initial footprint. Second, it will rely on Chapa and his team to seek out national opportunities, something team members have all done for previous employers. Historically, middle-market healthcare companies have not been served by specialists, according to Chapa. Often, they have looked to business bankers at local banks. Some large banks do have specialists, but they bring the baggage of being very large providers. “We’ll bring them the best of both worlds,” says Geisel. While Sterling has surpassed the $10 billion mark, he says it brings the agility of a community bank, while also offering bankers with health-care backgrounds. The team’s background will give Sterling t wo complementar y inroads to f inding business. Ty pically, Sterling has approached this sector by working 20


contacts among “centers of inf luence,” like accounting firms, lawyers, consultants, turnaround experts, and others who advise health-care companies. But because of its specialized experience, Sterling increasingly calls on CEOs and COOs of health-care customers and prospects. Knowing the industry entails recognizing the risks of banking health-care providers. Geisel points out that Obamacare—a political football—will be a continual risk factor. Another risk is the role of government reimbursement to health-care providers, a shifting financial factor that requires understanding to apply it to client relationships. Gover nment reimbursement inf luences private-sector financial dealings, such as private insurance payments, as well. “It’s more and more difficult for a generalist to be good at this,” says Chapa. This will favor a related activity for Sterling: syndications of health-care credits. While the main focus will be on generating loans for the bank’s own portfolio, management intends to serve as the lead agent for larger transactions. The bank has already done some of this locally. Sterling doesn’t publicize portfolio details beyond those given earlier. Geisel, asked about growth expectations, allows that the slice of the portfolio pie for specialty finance is expected to grow in size, and that the health-care portion of that slice w ill likely g row more quick ly.

December 2015/January 2016


reading cooperative bank From commodity to commercial

Sometimes improv ing per for ma nce means changing your stripes. Over the last few years, Massachusetts’ Reading Cooperative Bank, nearly 129 years old, has been going through a transformation at both the staff and portfolio level, designed to squeeze greater profitability out of the mutual’s capital base. When the bank began its business shift, the loan portfolio was running at 70% residential and 30% commercial, according to Julieann Thurlow, president and CEO of the $486.3 million-assets bank. Right now, the split is closer to 60% residential and 40% commercial, with the goal being to reach an equal split in the near future. Commercial includes C&I, CRE, and construction lending. The transformation has been going on at two levels. First was a staff reorganization that occurred two-and-one-half years ago. A key element of this was a bolstered credit function, both in terms of its analytical capabilities overall and its commercial lending element. The bank rebuilt its commercial lending team from top to bottom, according to Thurlow. She adds that management worked to establish a clear credit culture, as well,

including a formalized risk-rating process and more monitoring. The bank’s intent was to support the renewed focus on business lending to increase returns. “Business loans represent shorter-duration assets made at higher yields,” says Frank Farone, managing director at Darling Consulting Group, the bank’s asset-liability management consultant. Commercial loans are less of a commodity than mortgages, says Farone, and they come with a broader array of cross-selling and fee-generating opportunities. By contrast, he says, mortgages grow cheaper and cheaper to the consumer and increasingly represent a single-product sale, not a relationship. Thurlow says that beyond higher yields, increased commercial activity helps bring in additional core deposits at a low cost. Management stresses the need for credit relationships to include deposits. In 2015, Reading Cooperative introduced cash management service. A greater emphasis has been put on sales, too. “Community banks do a poor job of calling on customers and asking for their business,” says Thurlow. Being known in their market is not enough, because other providers that pursue the business aggressively fill the vacuum. Having built a structure and a system to support the shift to higher-earning credits, the second part of the bank’s revamp was making major shifts in the loan portfolio. Earlier this year, the bank sold off a $10.5 million block of 30-year fixed-rate mortgages—substantially all of that type of loan. It produced a onetime gain on the sale and an improved return when the proceeds of the sale were redeployed into commercial loans. More recently, management has been looking into the sale of a block of 15-year fixed-rate loans to free up additional capital to move into business lending. Thurlow notes that the ba n k ha s enjoyed low-cost core deposits for many years. “It’s because we’re so close to the community,” says Thurlow. “Once deposit customers come to Reading Cooperative, they tend not to leave.” The bank’s transformation continues to be a work in progress. Farone, whose company has assisted the bank through the post-crisis period and the transition, acknowledges that commercial lending poses a higher credit risk than mortgages. “However,” he says, “Reading Cooperative’s credit standards are pretty strict.”


ts banking group Ag bank gives local lending a new twist

Is it possible to respect and continue the tradition of the family-owned agricultural bank serving local customers and communities while implementing farreaching new strategies? Decades of bank w isdom has counseled against reaching beyond what you know, and pointed to usually bad results that follow. But what if the world—including the rural ag world—is changing to the point where old models are no longer successful, or in gradual decline? Wouldn’t you

TS Ag Finance is combining the bank’s growing loan capital with partner banks’ local knowledge for an ag win-win

consider doing something about it? So it was that Joshua Guttau, second generation head of Iowa’s Treynor State Bank has implemented changes and plans that push the envelope. Guttau, CEO and CFO at $592.8 million-assets TS Banking Group, and its TS Bank, and a part-time farmer himself, has seen American farms going through a period of generational change and consolidation. This presents challenges and opportunities. Guttau prefers to focus on the latter, a point on which he and his parents, still active in the bank, agree. “The capital is in the land,” says Guttau, and if the retirees want to realize some of their wealth, even if the next generations want to stay on the farm, there’s need for help from a banker. If a sale is in the cards, that requires aid and advice from qualified bankers, as well. The Guttaus saw an increasing need for expertise as not only the older generation of farmer, but the older generation of ag banker, began to leave. The result is a renewed focus on and commitment to farm banking through a new division, TS Ag Finance, which launched in June. The new division builds on the local ag lenders in each of TS Banking Group’s affiliate operations in Iowa and North Dakota, with both a regional team and a national team of bankers, who both work

December 2015/January 2016



/ ideas that work / with outside representatives. What sets the effort apart is Guttau’s preference, wherever possible, to partner with local bankers as TS Ag Finance moves into new territories. He has told his ag players that he wouldn’t mind if every deal the division made involved partnership with a local bank. “We’ve proven over the years that we are a friendly competitor and willing to partner,” he says. “We believe that two bankers on a deal are better than one.” Part of what TS Ag Finance will bring to such cooperation is a growing loan limit. As the company has expanded, it now has a $10 million limit, and in time, as the bank’s growth continues, Guttau anticipates reaching $20 million. Meanwhile, many local banks have seen their ag customers’ needs outstrip their own loan limits. TS Bank has the capital, says Guttau, and their prospective community bank partners have local knowledge: a winwin. Indeed, Guttau’s ag bankers are expected to ask prospects for permission to contact their present banks so partnership can be explored. Besides the division’s credit and other

banking services, TS Bank offers the help of its large wealth management division. Guttau sees this as a leg up during a period when farms will be changing hands, and farmers approaching retirement consider succession planning. The reach of the ag effort will vary with each part of the operation. Head of the TS Ag Finance team is David Buman, senior vice-president, who previously served as director of credit operations at Farmer Mac. Farmer Mac runs the secondary market for farm real estate loans. Two TS bankers, based in Ames, Iowa, have a national focus on long-term fixedrate ag real estate lending intended for the secondary market, chief ly Farmer Mac. These bankers serve as underwriters for real estate credits brought to TS Ag by a network of originators plus participating banks. Guttau expects this operation to grow to an annual volume of loans sold reaching $100 million-plus. Guttau also hopes that this operation will, in time, serve as a training ground for ag bankers through internships. Real estate lending is based in the same city as Iowa State University, which offers one of the world’s largest ag programs.

A nother tea m, consisting of four regional ag banking relationship managers, focuses on markets within TS Bank’s existing footprint and the Midwest—primarily its western half. A specialty for this effort will be beef, including feedlot operations and cow-calf operations, although the bank also is experienced in lending to row-crop farms. Looking at the division overall, Guttau points out that the company is already doing business in 20 states. Conceivably, he adds, it could, in time, work with banks and customers nationwide. The company will aim for a mix of one-third ag real estate, one-third row crops, and one-third cattle, and within five to seven years, Guttau is hoping to see operating loan outstandings averaging $200 million-plus. Most TS Ag Finance employees work from home offices and on the road—or are originators who are not on the payroll—so the outlay for the expanded organization has been comparatively small, mostly added staff expense and one office. As a result, Guttau projects that the operation should be in the black w ithin 12 months f rom it s sta r t.

We should be attacking the fintech guys because they are vulnerable. They don’t know what they’re doing. But they’re not going to be this dumb forever



December 2015/January 2016


UNIVEST BANK AND TRUST CO. Fintechs can be beaten

Much talk has been heard of late about banks partnering with fintech lenders. Some bankers worry about the impact of P2P lenders on the small business market. Hugh Connelly likes the idea behind some of these players, but he thinks bankers should be taking a more realistic view of these comparatively new entrants. His viewpoint isn’t a knee-jerk traditionalist’s reaction. Connelly dipped more than a toe into P2P partnership and found fintechs wanting. Connelly is president of small business lending at $2.8 billion-assets Univest Bank and Trust Co., and president of the bank’s Univest Capital, Inc., a smallticket commercial finance subsidiary. He has been experimenting with new ways of serving the small business market on several fronts. The Pennsylvania banker found his foray into P2P eye opening. His conclusion: fight them. “Everybody and their brother is talking about fintech,” says Connelly. “Right now is the time we should be attacking these guys, 24/7, because they are as vulnerable as they ever will be. They don’t know what they’re doing.” From the get-go, according to Connelly, the P2P designation has been “a joke. It’s really ‘P2W’—they are really funding most of their loans with Wall S t re e t mone y. We don’t ne e d t hat , because we’ve already got deposits coming out of our ears.” Connelly says the bank, through Univest Capital, tried partnering with some P2P players and found them out of touch with what small businesses really need. A key revelation to him: The partners didn’t want to provide lines of credit, a staple of sma ll business bank ing. Instead, they wanted to offer borrowers a series of unsecured term loans, in lieu of credit lines, a mix of structure and purpose that Connelly found odd. “That’s not lending; that’s a joke,” says Connelly. “But they aren’t going to be this dumb forever.” Instea d of pa r tnership, C onnelly has resolved that Univest will build its own competitive online structure. “We are in the process of building our own

marketplace,” says Connelly. “That will keep fintech players out of our zip codes.” Univest isn’t starting from scratch. It is basing its development effort on a decision engine built in-house, originally for Univest Capital, that’s already being used by the bank, as well. The bank can feed in customer data, and the engine will produce a yes or no decision. However, unlike an online marketplace, the decision engine has always been subject to human review. Connelly says that 98% of the time the decision engine recommendation is accepted. “Our advantage is that people control the machines,” says Connelly. “You need

Unlike fintechs’ online marketplaces, the advantage of Univest’s competitive decision engine is that people control it to worry about the customers whose analytics don’t fit the mold.” He says in some cases, consultation with a customer who is not approved by the decision engine reveals aspects of their business that argue for approval, and sometimes this has been granted. “We’re a full-service provider,” and will be even as the marketplace goes live, says Connelly. “These fintech guys are onetrick ponies.” Long-term, Connelly thinks that banks could band together to offer platformbased borrowing opportunities playing off their knowledge of lending. He thinks some model of cooperative structure, like the original blueprints for MasterCard and Visa, could work. To find out how to better serve small businesses, Univest has long had informal talks with small business owners. This has been followed up by formalized research conducted by an outside firm. A key line of research came down to this question: What are your pain points? The bank found that the answer ranged well beyond the demand for credit. Specifically, overdrafts were a challenge to small firms both because of the costs

of bank charges as well as the embarrassment should their checks and other payments bounce. This mix of liquidity risk and reputation risk was part of another pain point: an overall concern about the risks of running a business. One cited by many respondents was ID theft. Another common aggravation with banks was slow decision-making. “Small business owners make decisions all day long,” says Connelly. “They get frustrated when they have to deal with ‘runners,’” that is, bankers who must run to someone else for a decision. A s m a l l e r b a n k l i k e Un i v e s t b y structure and size can minimize this objection, and can enhance that using tools like the decision engine, which is used now for credits up to $1 million at the bank proper. (The engine has been used by the commercial finance arm for about a decade.) However, Connelly found himself looking at the Netf lix model as a strategy for banking. Part of what has fed the growth of Netf lix is its “all you can eat” proposition. For one fee, you can stream all day if you like. The bank launched Univest Prime, an effort to package banking services as a flat-fee arrangement. Initially, the package was so broad that it included features like a set number of hours of access to an accountant and an attorney, in addition to lines of credit ranging from $3,000 to $100,000. On finding that most customers already had sources of such expertise, the bank opted to “skinny it down,” says Connelly. This helped with acceptance of the concept in test marketing. Currently, the Univest “monthly subscription plans” are available at three levels. The highest tier, called Prime Professional, offers customers a wide range of banking services, including credit lines plus various forms of protection, including two ID protection services from LifeLock. The package program continues to evolve. An initial effort to do much of its promotion through branch managers didn’t produce satisfactory results. “They already had too much on their plates,” says Connelly. The bank recently put the promotion in the hands of business bankers instead. These bankers car r y tablets, which enable them to sign up customers right at their place of business.

December 2015/January 2016



Bank of niches Like the sound of 19% ROE? Seacoast Commerce Bank earns that with its SBA and specialized deposit strategies By Bill Streeter, editor & publisher


ou could call Seacoast Commerce Bank the “non-relationship community bank,” but you would only be half right. The non-relationship part applies just to lending. The San Diego-based bank is a transactional lender, but it funds those loans largely from a pair of deposit 24


niches that are highly relationship based. Needless to say, Seacoast Commerce is not a typical community bank—although it once was—and its CEO believes that the traditional model still works . . . in the right place. Over the last seven years, Seacoast Commerce has transformed itself from

December 2015/January 2016

an unprofitable bank with limited prospects into the number ten Small Business Administration lender in the country, returning 18.94% on capital (third quarter). Even among SBA lenders, the $520 million-assets bank is a specialist—it does 7(a) loans almost exclusively, not 504 loans.

Can the bank’s model be replicated? The basic strateg y can. About 3,000 banks do SBA lending, says Seacoast Commerce CEO Richard “Rick” Sanborn, but the majority have one lender who handles the business. That person typically generates about $10 million a year in loan volume. Seacoast Commerce’s SBA lenders average between $12 million and $13 million, but the bank’s formula for SBA success is straightforward: It focuses on this business almost exclusively, and it sets up experienced SBA lenders in different cities or counties— loan production offices, in other words. Currently, it has LPOs in seven western and southwestern states.

Why “classic” didn’t work

Seacoast Commerce began life in 2003 in Chula Vista, Calif., as a traditional community bank serving the greater San Diego market. In its attempt to be all things to all people, the bank found it could not generate adequate returns competing against the big banks, other community banks, and credit unions. It made a wide variety of business loans—construction, multi-family, C&I, etc.—many of which began to degrade in 2007. The bank’s ow ners hired Sanborn as CEO in 2007, the third CEO in four years. He had turnaround experience, had worked at other community banks wearing various hats, and had big-bank sales experience as well, including three and a half years at Wells Fargo. Sanborn and two other investors took ownership positions in the struggling bank. When he arrived, the bank had just $63 million in assets and $11 million in capital. The initial idea was to use the charter as a “roll up”—do a few acquisitions and then sell. That changed as the bank charged off $3.5 million in the first quarter Sanborn was there ($9 million over the next two years). A quick capital raise in 2008—predominantly among directors, management, and friends— raised $4 million, and by mid-2009, they had stabilized the problems. But they knew the model had to change. While still viable in many smaller markets, traditional community banking, in Sanborn’s view, doesn’t work in large markets—at least not in San Diego. The combination of big bank and credit union competition and Dodd-Frank regulatory costs and restrictions makes traditional

Seacoast Commerce: Number ten SBA lender in the country No longer an unprofitable bank with limited prospects, Seacoast now focuses on 7(a) loans almost exclusively, with expert lenders in seven states pricing and margin levels unsustainable. “In a big market,” says Sanborn, “you need to offer a full suite of consumer products and business products. However, the consumer market today is so commoditized, it’s diff icult for community banks to compete in auto, home equity, and mortgage lending.” Compounding the problem, competition for business loans in large cities also is problematic, Sanborn says. Every day, he sees ads from big banks, community banks, regionals, and credit unions offering 10-, 15-, and 20-year fixed-rate mini perm loans at 4% or sub 4% rates. “We don’t see how that’s sustainable as a business model,” he says, “especially when rates are going to go up.” In urban markets, he believes, community banks need some kind of specialization to survive and thrive long term. Sanborn, a recent past chairman of the California Bankers Association, does believe that traditional banks in smaller communities—where the bank “is really engrained within their community”— still works. Although even there, he notes, most banks tend to find some niche. Given all that, Seacoast Commerce’s management team decided that they needed to change direction. Easier said than done. “With an institution that has limited capital, there are very few products you can offer where you can make good

money without growth,” says Sanborn. “The SBA program is one of them.” He explains: “When you do an SBA loan, you sell the [guaranteed portion] so you’re


recap • Troubled, urban-market community bank shifts to SBA specialty • Concentrates on 7(a) loans and a “non-relationship” loan production office approach • Origination fees help preserve capital while cleaning up problem credits • Shift to “hold” strategy brings growth and higher profits • Low-cost funding comes from two specialized areas

December 2015/January 2016



/ SBA / 2009 and total assets of around $100 million, to a profit of $300,000 in 2010 with total assets just under $150 million. Management’s goal was to get to $250 million a year in production. The current tally is 16 salespeople (“business development officers”) and production is on track to break $200 million this year, according to Sanborn. At present, the bank has 12 LPOs in seven states: Arizona, California, Colorado, Nevada , Oregon, Texa s, and Washington. Sanborn says they only hire people with a proven track record—“good producers who may be frustrated, or may be in an environment where the ‘credit box’ doesn’t fit for what they do.” The bank hires one to two business development officers a year.

Core plus a “kicker”

“The real value for shareholders is building an institution that produces consistent recurring income. That only comes from spread income” — Rick Sanborn, CEO not growing as quickly as you would with a traditional loan, and you’re generating a pretty healthy fee, which is what we needed to fix problems.”

Enter the rainmaker

Earlier in his career, Sanborn had met David Bartram, who ran the SBA program at another San Diego institution, Bank of Commerce. Bartram went on to become president of U.S. Bank’s SBA division after the large bank acquired Bank of Commerce. Sanborn convinced Bartram to join Seacoast Commerce to help build its program. The timing was fortuitous. As Sanborn recounts: “The marketplace was in complete disarray in 2009 as banks were going under and others were getting out 26


of lending.” Seacoast Commerce was able to cherry pick the best SBA producers, many of whom had worked for Bartram at one time or another. With the veteran Bartram aboard, the bank set up its new SBA unit in three months and booked its first SBA loan in October 2009, doing $11 million by year-end. In 2010, says Sanborn, Seacoast did $94 million in SBA loans, adding two more salespeople to the initial group of four. A big boost that year was passage of the Jumpstart Our Business Startups Act, which bumped up the SBA loan guarantee from 75% to 90%. Seacoast Commerce generated $9 million in pre-tax gain on sales revenue, taking it from a net loss of $5 million in

December 2015/January 2016

By 2012, problem loans were no longer an issue and Seacoast Commerce had “tons of capital” and great liquidity, says Sanborn. So management decided to move away from the gain-on-sale model and begin to retain the guaranteed portion of SBA loans they originated. “There’s a lot of money to be made in [gain on sale],” Sanborn says, “but it’s ‘one and done.’” Plus, there’s a risk element. He explains: “If you sell 100% of your production, what happens if premiums go down? We would potentially lose money and have to stop production or lay people off. We don’t want that. “The real value for our shareholders is building an institution that can produce consistent, predictable recurring income. That only comes from spread income.” Here’s the math to back that up, per Sanborn: At current premium rates, when Seacoast Commerce sells an SBA loan, it earns an approximate 10% premium on the guaranteed portion, pretax, day one. If instead it holds the loan on its balance sheet, at the bank’s average loan yield of 5.5%, minus 50 basis points cost of funds, it has a net spread of 5%. It’s actually a little less than that, Sanborn says, but for the sake of example, at a 5% margin, the bank’s return in two years will equal the 10% gain if it had sold the loan. Sanborn says SBA loans typically run six-to-eight years, so over the life of the loan, “I’m making three to four times as much money.” The decision was made to build up the loan portfolio for three years, selling only enough loans to break even. Following

that plan, the bank’s balance sheet grew from $80 million in 2012 to $520 million currently. Here’s the really neat thing: The spread produces the core earnings, but for the last six quarters the bank has begun selling about half its production again. The gain on sale is an earnings kicker, says Sanborn, and takes the bank’s ROE up to nearly 19%.

“You keep the relationship”

How does Seacoast compete with the big guys? Speed. Average SBA loan turnaround: 30 days, with some done in just ten

“We lend all over the western U.S., but we don’t bank any of our borrowers,” says Sanborn. “We’re not a traditional relationship bank,” he adds, referring to borrower deposit account relationships. If Seacoast Commerce isn’t relationship driven, then it must be a rate lender, right? Actually, no. “Our sales people know that if Wells Fargo, Chase, or U.S. Bank is in the deal, don’t pursue it because we are not going to compete with them,” says Sanborn. “The big banks do fixed-rate financing, and the only thing their salespeople focus on is rate,” he says. “We don’t do fixedrate funding.” So how do they compete with the big guys? Speed. Let’s say a small business customer wants to buy a commercial building, but prefers to do it as an SBA loan because of the low 10% down payment. If the customer goes to a large bank, says Sanborn, it will probably take somewhere between 60 and 90 days to close the loan.

“Our average turn, from start to finish, is 30 days. We’ve done deals in as few as ten,” Sanborn states. His biggest competitors are banks between $200 million and $2 billion. In a c tua lit y, Sea coa st C ommerce receives referrals from money-center banks. Explains Sanborn: “Say you’re a commercial lender or relationship manager at a money-center bank and your client is trying to buy a building and do an SBA loan. You’ve signed a 60-day escrow and you’re 45 days in but don’t have a commitment letter. We get a phone call: ‘Can you do this deal in the next two weeks?’” They call, says Sanborn, because “they know we just do the SBA loan. We don’t take the relationship. So now the moneycenter banker has saved his relationship, and we’ve provided the loan.”

Veteran SBA program builder Dave Bartram is on track to help break $200 million in loan production this year.

Property management firms and HOAs provide Seacoast with “sticky, low-cost core deposits,” says CEO Rick Sanborn.

Where relationships do matter Bankers may be wondering about Seacoast Commerce’s cost of funds, especially because the bank has no significant retail presence. According to Sanborn, currently about 37% of the bank’s core deposits are noninterest demand deposits. Much of the rest are money market deposit accounts. Because Seacoast Commerce is a niche lender, it sought to f ind comparable deposit niches where the relationship is not based on credit. The most significant is the homeowner association and property management industry. HOAs typically don’t have borrowing needs, explains Sanborn, just deposit needs. “Our typical property management client manages 50 associations,” he continues. “And each association typically has an operating account and a savings account for reserves.” On average, each association has about $100,000 split between these two. “So if you have 50 associations, that’s $5 million.” It’s not a slam-dunk business. Property management firms expect a certain level of expertise, says Sanborn. Describing it as a “high-touch, long-relationship industry,” he says it requires the right people with the right connections, and the kind of systems support that these clients need. The bank even has a “deposit production office” to facilitate both sales and service for this group of clients. Summing up the homeowner association/proper t y ma nagement deposit niche, Sanborn spells it out this way: “If you can get in, you get very sticky, lowcost core deposits.”

December 2015/January 2016



/ Risk Adjusted /

Cyberfraud: Not if, but when You won’t prevent a breach, so here are ways to minimize the risk, exposure, and damage By Melanie Scarborough, contributing editor


omputer analysts say the term “cybersecurity” is outdated. The more accurate word is “cyberinsecurity” because it is no longer a question of if your database will be breached, but when. Given the inevitability of hackers breaking into your system, the principal challenge is trying to limit the damage they can do. That task becomes increasingly difficult with the progression of technology, according to security experts who spoke at the Mortgage Bankers Association’s a n nua l c onvent ion. Roger Cre ssey, a counter ter ror ism ex per t who ha s appeared on NBC News and a partner with Liberty Group Ventures, told the bankers to consider how many of their



employees probably conduct company business on their private mobile devices. A recent survey found that 50% of government employees download work on their personal phones and computers. If that many are doing it in the government, Cressey said, how many are doing it in the private sector? Another major concern is that your security is only as good as that of your electronic correspondents. “Everyone in your supply chain touches your corporate network,” Cressey said. “What are their policies?” Anthony Johnson, vice-president and chief information security off icer for Fannie Mae, said the company looks at its partners’ security credit ratings,

December 2015/January 2016

which demonstrate commitment to due diligence. “If you try to solve cybersecurity as an IT problem, you’re going to miss the relational aspect that is the biggest threat,” Johnson said. Target, for instance, was breached by hackers accessing the system of its HVAC provider. “The danger of interdependencies cannot be overestimated,” added Cressey. What also can’t be overestimated is how cunning cybercriminals can be. Cressey, who held senior cybersecurity positions in both the Clinton and Bush administrations, told the bankers about an oil and gas company targeted by hackers who couldn’t crack its system’s “front door.” After some reconnaissance, the hackers noticed that company employees often got their lunches from a nearby Chinese restaurant. Assuming correctly that workers preordered their meals online, the hackers installed malware on the restaurant’s take-out menu that allowed them to inf iltrate the utility company’s computers. “The bad guys are playing chess, while most of us are playing checkers,” Cressey said. And no one knows how to fight back effectively. If you launch a cruise missile, it detonates, explodes, and goes away. “When you launch the equivalent in cyberspace, it lands but it doesn’t go away, since nothing goes away in cyberspace,” Cressey said. “So the risk is that if we counterattacked with our own malware, the enemy might take the code, tweak it, and send it back to damage us.”

Minimize your risks The common lang uage of cyber risk management doesn’t include the word “prevent,” said Cressey, “because everyone accepts the reality of successful attacks.” To minimize the damage when they are breached, he recommended that bankers understand three things: 1. Cybersecurity isn’t an IT issue. It’s a C-suite issue. “The Federal Trade Commission has prosecuted more than 50 companies for malfeasance in handling people’s personal data, citing them for failing to take reasonable measures to

protect clients’ data,” Cressey said. “If you do a better job managing your cyber risk, you create a narrative, so that when you’re breached, you can show that you took reasonable measures to prevent it.” 2. Not all data is created equal. Ask yourself what you can least afford to have violated and build your thickest firewalls there. “If you don’t manage the threat yourself, the government will tell you how to do it,” said Cressey, “and they will tell you to do it in a way that’s wrong for you. That’s how government works.” 3. Although you cannot eliminate the possibility of being hacked, you can make it harder for the attacker to gain traction in your system. “Change administrative passwords so that no one password gains access to the whole network,” Cressey suggested. “Maybe put different administrative passwords on every desktop.” It may lessen your level of convenience, he acknowledged, but it raises your level of security. Johnson said cybersecurity can be boiled dow n to this basic principle: “Don’t talk to strangers.” You may not have business in China, but if your partners are in communication with that part of the world, you’re exposed to their risks. Extricate yourself from that line of communication, and you eliminate a substantial threat, he said.

Johnson said four organizations in the housing sector have lost a combined $20 million in wire transfers to hackers in other countries. James Deitch, CEO of Teraverde Financial, suspects one of the reasons attacks on the mortgage industry are rising is because they’re a profitable crime. “You can be an entrylevel hacker and still figure out how to get $10,000 of closing cost money trans-

especially when salespeople use Wi-Fi in unsecured areas.” Johnson argued that it’s easier to protect a small company simply because fewer people can enter the system. He compared the situation to giving out keys to your house. “If only one other person has a key to my home, then I know who has access.” Yet Johnson conceded that 77% of all e-crime targets are small- to medium-sized businesses

You may not have business in China, but if your partners communicate with that part of the world, you’re exposed to their risks — Anthony Johnson, Fannie Mae ferred to your account,” he said. Linglong He, CIO of Quicken Loans, said the mortgage industry is particularly attractive to cybercriminals because it’s one of the few places where all an individual’s data, financial and personal, is held— and must be kept for many years. Panelists debated whether the size of a company affects its risk of being breached. Deitch said the base-level risks are the same, regardless of a company’s size. “Your sales force is typically taking mobile devices into the field,” he said. “Those laptops expose your technology,

because hackers perceive them as soft targets—and the businesses often don’t think they’re at risk. Cressey said bankers must not expect any help from the government. Johnson noted that industry has taken the lead. He described how the card industry is a great example of how the private sector addressed the problem very successfully, referring to the development of the EMV chip card standard by Europay, MasterCard, and Visa. “The technology was changed, and credit cards are becoming less of a target,” he said.

Maximize your awareness Johnson also urged bankers to update their concept of the enemy. “We used to think of hackers a s teenagers in basements. Now they have corporate structures,” he said. “There are complete websites where you select software and select whom you want to hack. It’s that easy.” Also keep in mind that not all cybercriminals want to steal data. “There’s a new kind of hacker who just wants to see the world burn,” Johnson said. “If one of them successfully destroyed all your servers, do you have your information in backup files?” Mortgate lenders must be particularly vigilant because hackers are focused on the mortgage industry. Since September, December 2015/January 2016



/ Compliance Watch /

Are MSAs verboten?

CFPB clearly does not like marketing services agreements—period. Until the courts decide, be very careful By Melanie Scarborough, contributing editor RESPA” and reiterated most recently in 2010 that MSAs are permissible. But in 2011, oversight of RESPA was transferred to CFPB, and the safe harbor became shark-infested waters. “The language didn’t change, but the CFPB says 8(c) isn’t an exemption,” Kider said. “You can pay someone for services rendered or space provided, but if the CFPB finds out you are getting referrals from that business, you’re in trouble.”


The bureau’s Compliance Bulletin describes MSA monitoring as “inherently difficult,” which puts mortgage bankers in an untenable position as they try to assess their marketing success

t t he Mor tgage Ba n kers A ssociation (MBA) annua l convention held in San Diego this fall, Consumer Financial Protection Bureau Director Richard Cordray fired a warning shot across the bow of lenders who use marketing service agreements (MSAs). He confirmed what many had deduced from the agency’s recent enforcement actions: The bureau views MSAs, which allow mortgage and title companies to pay for marketing services, as potential violations of RESPA’s prohibition on referral fees. “The bureau is concerned about MSA s’ ability to evade RESPA,” Cordray said. Many lenders and their legal advisers say CFPB’s view sets aside four decades of precedent, with harrowing implications. Mitchel Kider, chairman and managing partner of Weiner Brodsky Kider, told conference attendees that RESPA Section 8(a), which bans kickbacks in real estate settlement services, “is a dangerous



statute for everyone in this room because you’re not only liable for civil penalties if you’re deemed to have violated it; you actually committed a crime.” At lea st that section of R ESPA is clear—stating that no one can give or accept any thing of value pursuant to anyone referring business. But Section 8(c) recognizes that real estate professionals provide services for which they’re entitled to be paid, and says that the ban on referral fees shall not be construed to prohibit payment of a salary or compensation for services actually performed. Since the law’s enactment in 1974, that section has consistently been interpreted as a safe harbor. The Depa r t ment of Housing a nd Urban Affairs reaff irmed in its 1999 Policy Statement that ‘‘Congress never intended payments by lenders to mortgage brokers for goods or facilities actually furnished or for services actually performed to be violations . . . of

December 2015/January 2016

Historically, the way to demonstrate that payments weren’t kickbacks was to pay fair market value for all goods and services. But CFPB says if there’s a referral, it doesn’t matter if fair market value is being paid. “Their analysis is questionable, and one court has already rejected it,” K ider said, “ but lenders must be aware of the CFPB’s interpretation and assess their MSAs accordingly.” Panelist Matthew Sheldon, a partner at Goodwin Procter, said the case of Lighthouse Title was CFPB’s first enforcement action regarding MSAs and an indication of its aggressive stance. CFPB alleged that Lighthouse Title entered into MSAs because it believed if it didn’t, counterparties would refer their business to other companies, and that more business was referred when they had MSAs. “But what it doesn’t do is tell how any of these factors should be weighed,” Sheldon said. “For Lighthouse, there was a $200,000

civil penalty, immediate termination of all current MSAs, and a prohibition on any new MSAs.” In enforcement action brought by C F PB a g a i n s t PH H Mor t g a g e , a n a d m i n i s t r a t i v e l aw jud g e f ou nd a RESPA violation and assessed $6 million plus certain equitable relief. Cordray increased the award to $109 million. “The ultimate decision always goes to Cordray,” Sheldon explained. “He said the administrative law judge got it all wrong, because if there are payments being made—even for legitimate services at fair market value—you can’t do it if referrals are happening. That changed 40 yea r s of R E SPA int er pret at ion. According to Cordray, payment must be solely for service actually being provided on its merits and cannot be tied in any way to a referral or business.”

No guidance on compliance Perhaps most disconcerting, there is essentially no guidance from CFPB on how to operate an MSA to the bureau’s satisfaction. The Compliance Bulletin issued on Oct. 8 provided no additional guidance on Section 8(c). Indeed, it stated that “while some guidance may be found in the bureau’s previous public actions, the outcome of one matter is not necessarily dispositive to the outcome of another.” To be told that you can follow the bureau’s precedent and still not have your MSA deemed compliant “is not exactly comforting,” Sheldon said. Part of the problem, he explained, is that you can align your MSA with today’s best practices, but CFPB isn’t just going to look at what you’re doing today; it wants to know what was going on when the MSA was created. Sheldon said it is also troubling—and revealing—that the Compliance Bulletin describes MSA monitoring as “inherently difficult.” He added: “That’s scary when the regulator is openly doubtful that you can monitor this program adequately. Read that as, ‘This work [of taking action against MSAs] is not yet done.’” Mortgage bankers are in an almost untenable

position because businesses judge their marketing success by how many referrals they get. “You want to judge how effective your marketing is,” Sheldon said, “but you must be very careful in how you do that.” Burton Embry, executive vice-president and chief compliance officer for Primar y Residential Mortgage, Inc., sa id t hat e specia l ly for sma l l- a nd mid-sized companies, MSAs serve an essential function. How else can lenders that aren’t behemoths like Chase or Quicken get their name out to potential homebuyers? “I want to put my dollars in a Realtor’s office or a builder’s office,” Embry pointed out. “People are there because they’re looking to buy a home. So there are business considerations.” Yet the legal concerns are daunting. Embry said he asked a CFPB regulator why lenders can’t get guidance on how to run a compliant MSA. “He told me—and I’m paraphrasing—‘Well, if we don’t like them and don’t think they’re necessarily legal, how can we give you advice?”

Best practices—for now In the absence of clear guidance, mortgage bankers can derive from CFPB’s

actions some practices to avoid, Sheldon said. Among them: • Don’t enter into MSAs to prevent referrals to competitors; • Don’t pay for MSAs without independent fair market value calculations; and • Don’t evaluate MSAs’ continuation or payments based on past referral volume. Kider advised knowing what your capture rate is from your MSA partners. “That’s how the CFPB builds its cases,” he explained: If you’re getting referrals, you must be giving kickbacks. “What the CFPB has done is wrong,” Kider maintained. “You don’t just change something after 40 years. I believe this will be set aside in the courts, but what do you do in the meantime?” Ken Markison, v ice-president and regulatory counsel for MBA, said the association is encouraging companies to reconsider MSAs, as well as any plans to establish new ones. “The CFPB’s position essentially is that MSAs serve to disguise kickbacks and referral fees,” he said, “and it offers not one example of a properly constructed MSA.” The risks are ver y high, panelists agreed. Be sure the rewards are worth it.

While “the bureau is concerned about MSAs’ ability to evade RESPA,” Richard Cordray said recently, CFPB hasn’t provided guidance on running compliant MSAs.

December 2015/January 2016




busy, but not efficient

Does that describe your bank? Knowing the causes helps you to know what to change By Eric Weikart, Cornerstone Advisors 3. 60% of financial institutions still use a paper-based new-accounts process. 4. Over 70% of statements are mailed. These results are symptomatic of the problems the banking industry faces. They will need to be tackled head on by implementing a culture of accountability—curing the diseases that cause inefficiency. Cornerstone has identified four key diseases that all banks should avoid (infographic, below). These diseases create many of the inefficiencies that lead to poor performance and create busy work that adds no value. Let’s tie these diseases to the four statistics that were discussed earlier on:

1. Bankers spend 75% of the time during the new customer/account process on the computer, versus building relationships. CAUSES:


ow did we arrive at a point where it takes over 30 minutes to open a new account, and where paper and manual processes litter our banks? Short answer: We didn’t need to be that efficient in the past, so we didn’t focus on it. Interest margins were strong, regulators were relatively passive about process, and there really weren’t any

outside competitors vying for a slice of the pie. Well, that world has changed, and banks need to stop the bleeding. Here are four statistics that will blow your mind: 1. 75% of time spent with new customers involves computer input, versus building relationships through a conversation. 2. Over 50% of banks still originate commercial loans manually.

“Control patrol” disease

“Frankenstein” disease



• Numerous verifications, checklists, sign-offs • Checkers checking checkers • Cost of controls > cost of abuse

• Complex processes • Lengthy procedure guides • Forms, forms, forms



• Process fragmentation

• Bolt-ons • One-size-fits-all process design

Cure • Reduce the number of hands touching the work • Implement aggregate or deferred controls


• Double double data disease. The biggest reason for spending so much time on the computer is related to a lack of system integration. Systems like chexsystems, check order, credit reports, debit card, and online banking enrollment require reentry at many banks, because vendors haven’t made clients aware of integration or banks don’t feel they should pay for it. By going cheap or getting lazy, bankers oftentimes subject


December 2015/January 2016

Cure • Return to the simple for 90% • Separate processes for the 10% exceptions

customers and employees to unnecessary pain and suffering. And it’s a waste of time. Many bankers are accountantanalyst types, who pride themselves on squeezing pennies, but this is one area where going cheap costs the bank more and leads to a lot of unintended consequences. Frankly, vendors should price the integration of new account systems into their base products and not make it optional, but I don’t see this changing anytime soon. • Frankenstein disease. Lack of capable workf low functionality creates manual processes and affects processing times. Vendors tout “integrated workf low” in their systems. While that sounds great, most don’t have system capabilities that allow for dynamic workf lows to be customized by product. Lack of integrated sales tools also adds to the frustration. • Control patrol disease. The risk pendulum has swung too far. This often leads to requirements like signatures for every transaction, which creates paper and then creates manual processes and checkers checking checkers. Other examples include: supporting bank’s Customer Identification Program requirements that go overboard, like requiring a paper Social Security card or risk rating of consumer accounts in the branches. It could stem from an overreaction to a regulator or an overzealous compliance employee with too much power.

2. Over 50% of commercial banks still manually originate commercial loans via point solutions that are typically not integrated. CAUSES: • Do-over disease. Loan officers are typically sales- rather than process-driven individuals, and because their pay is typically tied to production, they do whatever it takes to get deals done. Automation conflicts with their “scream-the-loudest” technique that has worked for years. • Frankenstein disease. Many banks have allowed loan off icers a creative license to reinvent the wheel for every deal, so terms can get very complicated and exceptions are the rule.

3. 60% of financial institutions still print, sign, index, and manually scan new account documents, receipts, and loan documents. CAUSES: • Do - over disease. Technolog y and lack of understanding are to blame most times. Many platform applications haven’t been upgraded, or financial institutions aren’t aware of functionality that’s available to them. Because many vendors have punted here and rely on third parties that cause the process to be cumbersome, banks often view

“Double double data” disease Symptom • Same data rekeyed over and over • Same image stored many times Cause • Process fragmentation • Poor technology design Cure • Reduce the number of hands touching the work • Share the same data

improvement as not worth the hassle. • Control patrol disease. The risk department says we still need a wet signature.

4. Over 70% of statements are still printed and sent via mail. CAUSES: • Product design disease. While the trend continues to rise, many financial institutions still don’t design products to drive behavior. For example: not designing a statement product with features or fees encouraging customers to switch to electronic statements. (This and the following disease are not among the “big four,” but do affect processes.) • Greedy vendor disease. Vendors want a piece of the pie and charge more than they should for sending customer notifications and housing the statements. Oftentimes, e-statements can be almost as expensive as traditional ones, as vendors charge per page, per statement, etc. (Often, greedy vendor disease can be cured by healthy contract negotiations.) Now, let’s look at some of the cures for these diseases as well as the process inefficiencies that they create.

Lack of accountability You can’t manage what you can’t measure. All banks want to be more efficient, yet many departments don’t have the

“Do-over” disease Symptom • Completed work has to be reworked • The same work is done more than once Cause • Feedback loops too long • Underutilized technology Cure • Immediate validation • Share the same data

December 2015/January 2016



/ BANK TECH / right data to measure how they’re operating, which is the first step in gauging ef f icienc y. W hi le t he f ina l score is important (ROA, efficiency ratio, etc.), understanding what’s behind the score and making improvements are where high performers spend their time. Successful sports teams, like the Ohio State Buckeyes, win for a reason. They constantly look to improve. After a game, you can bet they study film and practice harder than ever. A s banks look to develop an accountability culture and implement departmental metrics/scorecards, following these six best practices will help:

1. Don’t overdo benchmarks. Every department should be working with three to seven (not 20) easy-to-track metrics. Too much detail can cause confusion and create more work than it is worth. For example, tracking the average time that customers wait in line in

branches is next to impossible, but tracking call center hold times is easier and the data likely already exists in a report. Note that time and motion studies are typically a waste of time and too detailed. Stick to easily attainable measures.

2. Take a balanced approach. A mix of profitability, customer service, and risk benchmarks provides a good balance and should be factored into each business unit’s scorecard. For instance, a contact center agent can take 100 calls a day but not be effective, because of long hold times or abandonment rates. The same methodolog y applies across all business lines. It’s impossible to be a high performer in every benchmark, because of this balanced approach.

3. Look to multiple data sources. Firms like Cornerstone track various benchmarks (we track 300), but we recommend banks look to their core, loan

origination, online banking, and call center solution providers for additional data. Also, groups like Mortgage Bankers Association are good resources.

4. Goal setting. Setting goals is more art than science. While it is important to know what peer banks are doing, it is more important to align benchmark targets to your bank’s strategic plan and mission. One of the best practices is not to take a top-down approach. Rather, allow managers to plead their cases on appropriate goals and debate them. As a bank begins to set goals, it can expect to hear excuses as to why some goals may be unattainable. The following circumstances should be kept in mind when setting goals: • Small branches will typically underperform peers as the minimum staff needed f rom a secur it y perspective does not match the transactions and/ or new accounts opened. Many banks

Sample dashboard for monitoring performance-to-goal Category Branch Monthly teller transactions per teller FTE Monthly new accounts opened per platform FTE Annualized teller turnover New loans opened per branch






60 30% 40

55 20% 60

59 15% 35

Call center Daily calls per service agent Daily chats per chat agent Average hold time (minutes) Abandoned rate

75 30 1.2 5%

70 25 <.5 <3%

75 30 .90 4.5%

Consumer lending Loans closed per origination FTE Loan applications per underwriter Auto decision rate Loan pull-through rate

30 417 18% 52%

30 400 15% 55%

29 450 18% 50%




17 70 40

18 80 40

17 80 40

Mortgage lending Loans closed per origination FTE Loans closed per mortgage loan officer Loan applications per underwriter Loan applications per processor



December 2015/January 2016



last quarter, actual

have gone to a universal employee model and shared branch manager duties to increase efficiencies in these situations. • Scale can affect support groups, such as technology, ERM, accounting/finance, human resources, marketing, and operations. A bank that is below $500 million in assets should not expect to perform as well as a $5 billion-plus bank. • Updating goals is ongoing. Benchmark targets should be tweaked over time as the bank’s business model evolves and the benchmarking culture matures. Senior leadership must understand the targets and agree with the methodology that managers use to establish them.

5. Monitor performance. Once a scorecard has been built and goals are set, it is time to monitor performance and use this information to manage the bank. Call center and branch metrics can be measured and reported daily. Other metrics, such as for the back office, are more likely to be measured on a monthly or quarterly basis as ebbs and f lows can occur. The following design

principles can assist in the establishment of an effective performance dashboard: • Measurements should always be shown against both a goal and a historical comparison, such as what the bank did last quar ter or last year. Understanding trends can help identify issues before they become real problems. • Goals should be tied to performance incentives for both the front- and backoffice functions. • Automation will save this effort from being a one-time process. Dashboards/ intranet technologies are a bank’s best friends. Also, a strong data warehouse will prove useful as data will need to be gathered from systems such as core, loan origination, teller, and general ledger. (The chart on the opposite page is an example of a few of the areas represented on a bank’s dashboard.)

for differences. Sometimes, variances can be the result of a personnel issue, but usually there are explainable reasons like training, manager challenges, and technology issues. Identifying outliers is as important for sales functions, such as investment brokers and mortgage loan officers, as it is for branches and other FTE-based metrics, where individual performance can be tracked. In the short term, every bank should solve the four challenges discussed earlier, and begin to instill accountability in managers by implementing a numbers-based culture. A key to success when tackling the diseases outlined is to not take on too much at once. Experience has shown that dividing larger, complex projects into shorter-term quick hits is the way to go to increase your odds of success.

6. Make Improvements.

Eric Weikart is managing director at Cornerstone Advisors and can be reached at Portions of this article were originally published on

As a bank reviews its results (especially trends over time), it should look at outliers, including high and low performers within an area, and determine reasons

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December 2015/January 2016



/ CounterIntuitive /


Yeah. Sorry. Digital stuff matters, too. Just like breathing—you have no choice By Bill Streeter, editor & publisher


f you don’t breathe, you die, right? Same with the “digitalization” of banking. It’s happening, and it’s seismic. If you don’t like change, good luck. That sums up the views of two stars of ABC’s popular Shark Tank reality program, who spoke at this fall’s BAI Retail Delivery Conference. They didn’t dismiss the impact of technology, but emphasized the human equation in business. It was a welcome counterpoint to the steady stream of breathless commentary on digital doings. The duo were asked how they determine who they want to invest in among the various startups appearing on the show in hopes of a capital infusion. Robert Herjavec said, “I know it’s very old school, but it’s how people present themselves. It’s that ability to make a human connection.” In a world of internet and email, he said, “we have so little time for human connection. So when you’re physically there, you’ve got to make it count.” Fellow panelist Barbara Corcoran said that when you’ve been in business for a while, you realize that all business success depends on individuals—their skills, how hard they work, whether they’re a team player, if they can be trusted. Both stars are entrepreneurs who built successful businesses. Corcoran founded The Corcoran Group, a major New York City real estate company, and Herjavec started Herjavec Group, a leading information security firm. Both began their careers at the bottom—Corcoran waitressing at a diner; Herjavec as a refugee from Communist Yugoslavia. On the show, they both look for intangibles in the presenters, not just the facts. “Nobody star ts a business just to make money or make a living,” Herjavec said. “You’ve got to have a purpose that’s greater than yourself.” In his case, he is motivated by the desire to honor his parents’ efforts and sacrifices. Corcoran gave credit to something few successful people acknowledge: good luck—factors beyond a person’s control. In her case, a boyfriend loaned her $1,000 to start a company, which she 36


“Nobody starts a business just to make money or make a living. You’ve got to have a purpose that’s greater than yourself” did, building it into a $6 billion business. Corcoran observed that all the successful entrepreneurs she knows have been through a setback. As an investor, she views this as “an insurance policy,” because the person is “out to prove something.” She “never invests in rich kids.” Herjavec disagreed, saying he thought people from successful backgrounds are as motivated as he is. Corcoran countered that they may be motivated, but when the chips are down, having had the experience of getting back up after being knocked down is “hugely useful.” Herjavec also said that the show is similar to what anyone in business has to do when seeking resources, where success depends on their ability to present ideas. An investor once told him: “It’s not my responsibility to listen; it’s your responsibility to make me hear.” A common mistake, he said, is to speak the same way to everyone. When talking to the CFO, use financial language.

December 2015/January 2016

When talking to the CEO, talk strategy. Corcoran agreed, but said what she looks for, “whether it’s from my investment advisor, or a sales pitch, or even my kids,” is something to make her believe. With the show’s presenters, she looks for heart—“Can this guy make it to the finish line?” Also, she’s not impressed by fancy MBA phrases. Herjavec added that credibility and trust aren’t necessarily about liking the person. He said he learned from a visit to an Army Ranger training camp that the definition of a high-powered team isn’t a group of people who like each other, but people who respect each other’s skills. “I want to invest in someone who has subject matter expertise,” he said, “and who will live and die for what they’re doing.” For more points and a different take on the presentation, read contributing editor Lisa Valentine’s piece, “7 lessons from the Shark Tank ” at http://tinyurl. com/7SharkLessons

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December 2015 January 2016  

An information resource for commercial and savings bank managers and executives. Website, print publication, e-newsletters and conferences f...

December 2015 January 2016  

An information resource for commercial and savings bank managers and executives. Website, print publication, e-newsletters and conferences f...