Thursday, May 30, 2024

We Need a New Funding Strategy

In December 2021, when the Fed Funds Rate stood at 0-25 basis points and prior to the Fed's tightening beginning in the first quarter of 2022, there were $18.2 trillion in domestic deposits, according to the FDIC's Statistics at a Glance. In December 2023, a full three quarters after the Fed paused its tightening of the Fed Funds Rate (QT continued), domestic deposits stood at $17.3 trillion. Nine hundred billion dollars, or 5% of deposits... gone. 

What happened?

Money market total financial assets, according to the St. Louis Fed, went from $5.2 trillion in total assets at December 2021 to $6.1 trillion in December 2023. Not so coincidentally, a $900 billion change.

Read this comment from M&T Bank Corporation's (MTB) fourth quarter earnings release:

"Net interest margin of 3.61% in the recent quarter narrowed from 3.79% in the third quarter of 2023 reflecting the higher costs paid on deposits amidst a continued shift of customer funds to interest-bearing products."

And indeed, MTB did grow deposits during this period. But the industry as a whole, not so much. Nationwide, depositors did switch to interest bearing accounts. But money market mutual funds seemed to be the benefactors of the switch. 

As far as community banks, I look to data gleaned from all of the banks where my firm does profitability outsourcing because we have a level of granularity that the FDIC and most readers do not have. Look at the two average balances per account charts below courtesy of The Kafafian Group.

It is true that the average balance per retail (non jumbo) CD account was higher in the fourth quarter 2023 than the fourth quarter 2021. But it was not materially so. In fact, if I multiplied the change in CD balances per account times the average number of CD accounts for all of our outsourcing clients, it would equate to a positive aggregate change in CD balances per bank of $65.7 million. For retail money market deposit accounts alone, the same math equates to an aggregate decline in those balances of $105 million. Of note there were 11% more CD accounts and 8% more retail money market deposit accounts. 

The outflow of deposits was not driven by a decline in the number of accounts. It was driven by the decline in the average balances of those accounts. The story is similar regarding business deposits (see chart above).

Although financial institutions cost of funds are now stabilizing yet still slightly increasing, it has been one year since the Fed paused its Fed Funds Rate tightening. This was similar to the tightening cycle between 2004 and 2006 when Fed Funds rose again to 5.25%-5.50%. But since the financial crisis came quickly on that cycle's heals, banks cost of funds rose two or three quarters after the Fed paused. Because the Fed then precipitously dropped the Fed Funds Rate to offset the negative economic impacts of the financial crisis. For this tightening cycle, the tail of increasing cost of funds amidst a Fed pause is lasting much longer. Higher for longer.

Most of our deposits are immediately callable. We believe we established relationships with our customers so they won't flee with every rate increase. A relationship is built on trust. And if our deposit strategy was to keep rates as low as possible so long as our depositors didn't notice, we have broken that trust. And they fled. Or we had to apologetically raise their rates to be closer to the market to keep their money. Something we continue to do.

What we can learn from this is there is value in a relationship, if we truly have a relationship where our depositors know our bankers and have someone to call to discuss banking matters. Some self-reflection might be needed here.

And secondarily, we have to assess the value of that relationship or other differentiated value we deliver. And by value I mean how much less than market deposit rates they will accept for that perceived value, which appears to be what they can earn in a money market mutual fund. Maybe it's 50 basis points. Maybe 100. But as we found out, it's not 300 or more.

Our cost of deposits will have to be managed by the strength of our differentiation and the mix of our deposits. Because this cycle proves that customers will flee. They may not close their account. But they will drain it. And we may not even notice it.

~ Jeff

Monday, May 20, 2024

Memorial Day Post: Honor Those Fallen During Our Afghanistan Withdrawal

On August 26, 2021, ISIS-K detonated a deadly bomb outside of the Abbey Gate of Kabul's international airport. The blast killed 13 U.S. service members and 170 Afghans. It occurred amidst the chaos of the U.S. withdrawal from Afghanistan.

The pullout was indeed chaotic and marked by a series of rapid events that unfolded unpredictably. 

Here's a sequence of events:

Initial Plans

The withdrawal was part of a broader plan initiated by the Trump Administration and continued by the Biden Administration. If we listened to representatives from either Administration, you would think it was the sole fault of the "other" Administration. Both have their fingerprints on it. As my former Navy division officer once told me, "Careful pointing fingers because the others are pointing at you."

Rapid Taliban Advance

As the withdrawal commenced, the Taliban rapidly gained ground across Afghanistan, seizing control of provincial capitals and major cities with surprising speed that was not predicted by U.S. forces nor intelligence. Afghan security forces that we trained struggled to resist the offensive. As provinces fell, the Taliban acquired U.S. weapons and equipment.

Fall of Kabul

The situation escalated dramatically when the Taliban entered Kabul on August 15th, leading to the collapse of the Afghan government. President Ashraf Ghani fled. Chaos ensued as panicked residents rushed to leave the city.  

Evacuation Efforts

The U.S. military, along with our allies, launched a massive airlift operation to evacuate American citizens, Afghan allies, and vulnerable Afghans from Kabul's airport. The scenes of desperate Afghans crowding the airport, clinging to departing planes, became emblematic of the chaos and desperation of the situation. U.S. troops stationed there and new troops shipped over to assist with the evacuation were concentrated at the airport. A ripe target for terrorists to indiscriminately kill to grab headlines.

Concurrent with the fall of Kabul and chaotic evacuations, there were heroes. Retired Green Beret Lt. Colonel Scott Mann assembled a group dubbed the Pineapple Express, so named because Afghan allies were instructed to display pineapples on their phones to gain access to the Kabul airport and eventual freedom. The group of active and retired military orchestrated the evacuation of those that helped U.S. forces during our time there. Mann's account of what happened can be found in his book, Operation Pineapple Express

Amidst the chaos, an explosion. ISIS-K is no friend to the Taliban. Although the Taliban would form an Islamic State, ISIS are generally more radical, believing only God can rule. From time immemorial despots have been using God's name to assume power over people. ISIS-K took advantage of the chaos surrounding the airport and at the Abbey Gate in particular to do their "Godly" deed. 

Those Who Perished

Below are those U.S. forces that perished in the blast outside of Abbey Gate while they were trying to establish security during the evacuation. Their photos are courtesy of NBC News. I ask that you remember them this Memorial Day.

David Espinosa, 20, Laredo, Texas

Nicole Gee, 23, Sacramento, California

Darin Hoover, 31, Salt Lake City, Utah

Ryan Knauss, 23, Corryton, Tennessee

Rylee McCollum, 20, Jackson Hole, Wyoming

Dylan Merola, 20, Rancho Cucamonga, California

Kareem Nikoui, 20, Norco, California

Hunter Lopez, 22, Riverside, California

Johanny Rosario, 25, Lawrence, Massachusetts

Humberto Sanchez, 22, Logansport, Indiana

Jared Schmitz, 20, Wentzville, Missouri

Maxton Soviak, 22, Milan, Ohio

Daegan Page, 23, Omaha, Nebraska


Kabul airport explosions: US Marines among troops, Afghans killed | CNN

Service members killed outside Kabul's airport remembered as heroes (

Timeline of U.S. Withdrawal from Afghanistan -

Ex-army generals testify on chaotic US Afghanistan withdrawal - BBC News

Two weeks of chaos: A timeline of the U.S. pullout of Afghanistan - The Washington Post

What Was Operation Pineapple Express In Afghanistan? (

Special op veterans carry out secret ‘Pineapple Express’ mission to rescue 500 Afghans | The Independent

Thursday, May 09, 2024

What is the ROI of a Banking Conference?

Are conferences more than a vacation? 

Last week I attended two back-to-back banking conferences and it was apparent that attendance was down. This is the likely reaction to banks' profit challenges resulting from net interest margin pressures that are due to slowly repricing loans accompanied by ever faster repricing deposits. Let's tighten our belts to offset revenue decline. By the way, I'm off to a warm and swanky place next week.

I wrote most of this article early on a Saturday morning during the business session at one of the conferences. During the prior break, I struck up a conversation with a person from Lendio, a small business lending platform, that was there to promote their white-label platform to bankers. Back in 2015, almost nine years ago, I wrote an article about banks building their own small business loan platforms. Getting much needed capital into the hands of small businesses that can lead their economies forward. 

I still find this to be a challenge at community banks. They want to grow small business deposits. But they will only lend what fits in their credit box. And the hypothetical loan to the expanding engineering firm that leases their office doesn't fit the bill. So the engineering firm ends up at "Big Bank", and the community bank wonders why.

I described the problem to the Lendio guy, and we had a back-and-forth on how community banks can solve it. Using the Lendio platform of course, but that doesn't decrease the value of the problem-solving discussion that happened only because I met him at the conference and we got to talking. 

Who should call on the small engineering firm: a lender, branch manager, or possibly a small business banking specialist? His platform would have the borrower enter the information and the loan could be routed based on the credit appetite of the bank, and its partners outside of the bank if it doesn't fit the bank's appetite. This makes it more possible that a branch banker could be the relationship manager, as I often hear that fear of credit discussions keep branch managers from being effective small business bankers. How do I calculate that ROI?

I talked about the concept of pulling into the pits in my 2021 book Squared Away-How Can Bankers Succeed as Economic First Responders. It goes like this: when a race car enters the pits, it is losing time. If not to recalibrate, refuel, and re-tire, drivers wouldn't do it. If you compare bank strategy to a 500-mile race, banks would also enter the pits. But if you compare bank strategy to a few times around the track, you would be foolish to do so. Is saving the money by skipping conferences short-term track thinking? That is, if the conference was purposefully leveraged to benefit the bank, help solve its challenges, strike relationships with other problem solvers (either bankers or suppliers), or further develop employees. 

Here are ways that I think banks can leverage conferences to deliver long-term benefits to a strategically focused bank.

1. Solving a particular challenge at your bank. When we identify weaknesses in a strategic plan, we encourage bankers to only identify ones they wish to solve. Pick one or two of these weaknesses that are most conducive to getting a variety of ideas of how to solve by engaging with other bankers, particularly ones that don't directly compete with you, or suppliers that are anxious to talk to you at the convention. Many bankers avoid the suppliers because they fear the barrage of post-convention sales pitches that sometimes follow. But there is a reason why they are often called "solutions providers." My ideas on how bankers can solve the small business banking challenges are more informed because I had the discussion with a solutions provider. Once you are focused on finding ideas to your greatest challenges, you can bring ideas back to your bank for discussion and debate with your leadership team and implement a plan to solve them.

2. Purposeful Education. The conference agenda is set and you know the topics and speakers. Perhaps you influenced the agenda because you are on the association board or you provided input via survey. You know the blind spots of your management team and knowledge gaps with your board. Put together a game plan where an executive can amass information that can be presented to the rest of management to help reduce your blind spots or have a board member attend the relevant sessions to help improve board education. A trade association could make it easy for executives with perhaps a "blind spots" presentation tool that could be easily built in the convention app or another tool so an executive could drop slides from multiple presentations to create something unique to their bank's strategy that could be taken back, shared, and presented. 

3. Reward for a job well done. I recall being in a Pittsburgh bank CEO's office where he said he sends the director with the most customer referrals to the state association's annual convention. This is aligned with banks that want to establish a positive accountability culture, where they visibly reward employees (or directors) for moving the bank forward. Expanding on the concept, perhaps consider taking a high-performing, high potential next-level employee to the conference charged with amassing information (see Purposeful Education above) to present to either executives or the Board (or perhaps both) when they return. It will give that next-level employee exposure to the association, suppliers and other bank executives so they plant the seeds for relationships, and builds their presentation skills, knowledge base and confidence. What a great succession planning tool!

How else can bankers leverage conferences so they pull into the pits to refuel and move their bank forward?

~ Jeff