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PCBB Banc Investment Daily June 09, 2015
Banc Investment Daily
June 09, 2015

No Horsing Around When It Comes To Funding

There was a story of a horse that lived in a nice pasture in South Carolina with a couple of shade trees and green grass. It broke out of its enclosure and hoofed it down the city streets to the nearest Olive Garden. There it patiently allowed itself to be recaptured by local police, but alas, there were no bread sticks for the horse. It just goes to show that no matter what an individual spends the day doing, eating grass in a nice place or slugging it out over the books of the bank, there is always the desire to spend more time doing something else.
Along these lines, a recent American Banker survey asked 75 CFOs what they spent their time doing vs. what they would rather do if they had their druthers. While we found it odd sitting on a beach didn't make the cut, the CFOs nonetheless reported that they would like to spend more time thinking about the future and less time reporting on what has already occurred. Given all the changes afoot in the industry, it is refreshing to hear executives want to focus more time on strategic thinking!
Certainly, reporting on the past is inherently a part of a CFO's job. After all, most analysis relies on bank-specific historical information, whether it is to be used in calculation of ALLL, stress testing, board reporting, or for numerous other functions. This makes sense when you consider that most bank processes are designed around the past in order to try to predict what could happen in the future.
The CFOs reported in the survey that their primary functions (corporate governance, budget management, financial analysis, investor relations, regulatory compliance and strategic advisory) had mostly retained the same level of importance in their day's work as they had in the past. But two functions that the group said had increased in priority were regulatory compliance (68%) and budget management (48%) - although risk management was also cited as an increasing focus. The CFOs felt that risk management efforts were time well spent, in that their banks would be better prepared the next time an economic downturn or local adverse market conditions occurred.
One area that was not mentioned by the group (except in the context of liquidity stress testing and regulatory liquidity concerns) was deposit pricing. This was a little surprising to us, in that most banks have very little control over their loan pricing in the current competitive environment. Given that deposit pricing is clearly one of the most effective (and controllable) ways to improve earnings, revisiting this makes sense.
We work with lots of banks on improving their funding costs and have found that one area that can bring the most improvement to the bottom line is bringing down the bank's cost of funds through more intelligent management of deposit pricing and product sets. The deposit pricing committee in many banks reviews deposit rate survey reports and what is occurring with the competition. The problem with this is that competitor banks may not be managing these costs effectively, or may have a different business model, so this tactic could lead your bank to make decisions that are not in your best interest. The funding needs and pricing practices of other banks should not dictate what your bank does. Rather, a much more productive process is to establish your bank's funding and liquidity needs and then ensure that actions taken enhance the nature of your bank's business model.
There is help available. PCBB's Liability Coach is a consulting service designed to help community banks understand and optimize funding strategies. Many banks find it easier with outside assistance to be certain that funding and pricing decisions are based on longer term strategies and not just in reaction to competition. In addition, our approach can free up some time for a swamped CFO. Contact us for more information on the Liability Coach, before your CFO decides to wander away from the pasture to contemplate the future.