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If your glass is only half full—or half empty—pour more water

4 points to get your head moving again

Sure, business is tougher than ever, says blogger Ed O’Leary. And it’s going to get tougher. That means it’s time to stretch your thinking even further. Sure, business is tougher than ever, says blogger Ed O’Leary. And it’s going to get tougher. That means it’s time to stretch your thinking even further.

This week I’m finishing up one of my ABA online classes. The lesson assignment I just finished reading asks the participants to create a table of principle non-interest income and expense categories and analyze their banks’ ability to improve net non-interest performance. It’s an interesting assignment and one that has drawn relatively predictable sorts of responses over the years.

What’s different  for this group and another earlier this year seems to be the relative bewilderment of more than a few of how to climb out of a very difficult hole.

They aren’t alone, because even their bosses are challenged.

Interest margins are razor thin and loan demand, while somewhat better, is generally not described yet as “robust.” 

What’s going on? And what should be going on?

Finding fee income without finding trouble

Some banks may have stretched out their investment portfolio duration for a few basis points of yield and are becoming concerned that a quick uptick in interest rates will create significant market losses in the investment portfolio. They and most others see that they need to improve non-interest income and expense performance but don’t seem to have the energy or imagination to do very much about it.

Twenty-five or so years ago, banking was still primarily a business of spread income—net interest income between interest income and interest expense. But change was in the wind. Banks were aggressively unbundling their services as net interest margins contracted and they moved aggressively to expand non-interest sources of income.

As an industry we did this so well (especially at the largest banks) that we overdid it in many ways and in many venues. It seems that the punitive aspects of Dodd-Frank are aimed at the worst of these excesses.

Big banks have enormous pricing power. Community bankers find that at times it’s all but impossible to compete effectively on a price basis. That means that since the answer to the “how” is not always to community bankers’ liking, community bankers need to change the question.

How to rethink your bank’s future

Here are a few ideas on what it’s going to take to make even nominal improvement.

Mind you, I’ve no short list of diversifications or efforts to take to improve performance. Rather, what follows is a list of cautions and encouragements as we negotiate the next several months with the prospect of continued political gridlock; possible government shutdowns; and national elections, with their controversy and uncertainty, only 12 months away.

1. The interest rate challenge.

Interest rates appear to be poised for an uptick. Whether it’s a big change or a modest one remains to be seen. Either way, though, the values of bank investment portfolios will be impacted to at least some degree.

This means that liquidity is going to be at a premium at some banks. After all, if the portfolios are being marked to market in a rising rate environment, values are falling and there’s a reluctance to sell and recognize securities losses. That means that banks need to have other liquidity sources to tide them over for the several months, at least, that this process of adjustment will take.

Are we thinking enough about protecting and increasing our core deposit sources?

2. Balancing product shifts and risk management.

Product expansions and diversifications, whether among loans or other fee-based services, generally alter risk profiles of the product line and by inference possibly the entire bank. More loans of a particular type or generated from a broader geography or new product offerings all together will have an impact on risk.

And remember that the balance sheet has to grow proportionately.

More loans means a larger allowance and more capital to support what sits on top of the sources of funds on the balance sheet. We don’t always seem to have a 360 degree perspective on these things.

3. Understand profitability—really.

We need to have a strong sense about what constitutes a profitable customer.

A basic? I know too many bankers who think they know. Yet they lack analytical tools to prove their assumptions. If your bank is not formally costing out the debits and putting a value on the credits, than you’re like the blind man describing the horse by feeling its rump or legs or head.

This process is called “account analysis” and virtually all banks do it to at least some degree.

I first became familiar with the process almost 40 years ago in Miami. We all had our marching orders on pricing using the account analysis information. What’s seems different to me today is that many frontline bankers seem unaware of the practical uses of such a tool.

If the comptroller’s office uses it for cost accounting purposes but the credit committee doesn’t for pricing on loans, the bank is flying blind.

Even a reasonably accurate sense of what a profitable customer looks and behaves like doesn’t necessarily mean that the information is put to practical use.

Are you appreciating your really good customers?

A thank you and a bit of attention, like a personal call at their places of business, is always a sensible thing.

If you know a customer is unprofitable, what can you sell to him or her to improve the value to the bank?  If you’re constantly waiving fees on an unprofitable relationship, what sense does that make?  Move that account into a profitable status or move it down the street to the credit union. There’s no entitlement that any customer has to be an unprofitable relationship with a bank.

4. Mediocrity means more than a bad year.

Consider this: The lackluster performance year-to-year of net non-interest income is a semi-hidden form of operational risk.

Banks that are going sideways in that category are not keeping their eyes on what matters right now—and that’s preserving and growing sources of revenue.

Try some fresh thinking

Strong cost control is always in fashion.

What seems elusive the last few years are imaginative ways to grow revenue. We need first-class thinking on the subject and not a “more work for less rice” approach or “we can save our way to prosperity.”

The next several quarters are likely to be among the most challenging most of us have ever faced. I don’t mean that in any existential sense. Banks are not likely to fail for want of a few basis points improvement in the ROE ratio.

But we are about to separate the best in breed from the merely average. This has enormous implications for our banks, our careers, and our financial security in years to come.

It’s time for performance to match the need.

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. His last job before retiring was as the CEO of a regional bank headquartered in Alburquerque, N.M. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses. You can e-mail him at [email protected]. O'Leary's website can be found at

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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