By Jim Reber, President & CEO, ICBA Securities
Quick: What’re the most saleable assets on your community bank’s balance sheet? If you get this wrong, you need to be running a “not-for-profit depository financial institution.”
Bonds, of course. Most people I talk to consider the liquidity feature a close second (to safety) in importance when contemplating a purchase. That feature has come into play for thousands of community banks in the last several years, as loan demand has outstripped deposit growth. Between December 2013 and December 2018, investments as a percent of assets dropped from 23% to 18% for the community bank industry as a whole. While most of the decline was simply maturing bond proceeds being reallocated into loans, some portion was outright securities sales to fund new credits.
Assist: Federal Reserve
You may also have noticed that your bonds’ prices have risen in 2019. Since rates peaked last November, there has been a strong market rally across the entire yield curve, particularly beyond two years. For example, if you had purchased the new five-year Treasury note last November, you would now have a nearly five-point gain in that bond. Yields in that sector are down around 125 basis points in about seven months.
That has essentially wiped out unrealized losses in community banks’ bond portfolios. As of the end of June, the average portfolio was worth slightly more than the collective book prices of the bonds. What that means in practice is that you probably own some bonds at higher prices than they’re currently worth, and others at lower prices. And this is exactly what you should hope for.
If a community bank owns some winners and some losers, and it decides it needs to sell, it can manage the impact on current year earnings very easily. As 2019 progresses, it’s clear that industry earnings will be quite good, so it is entirely possible that a bank may choose to realize some losses on sales of bonds now, and push that income (and tax liability) into future years.
Priced to sell
Assuming for the moment that a community bank is ambivalent about booking any gains or losses, and is instead more focused on the creation of a liquidity pad, there is a basic rule of portfolio management that needs to be applied to achieve maximum benefit. This is the concept of the “take-out yield.” Take-out yield has several other nicknames like market yield or give-up yield, and what it quantifies is the yield that a purchaser of your bond would get, if you were to sell that bond today.
The lower the take-out yield, the more efficiently you have sold your bond. Economically, the seller will have to re-employ the proceeds at a return higher than the take-out yield for the sale/reinvestment to make sense. So a wise portfolio manager will resist the temptation to cash in gains, unless the sale item results in a low take-out yield. Your broker should readily identify the take-out yield on any security that you’re thinking about selling at the same time you receive a bid.
Keep these in mind
There are a couple of other variables that could impact if, or what, your community bank might sell. One is that you likely can’t sell a bond that was designated Held to Maturity on purchase date. That alone is a good reason to classify 100% of your bonds as Available for Sale.
Another widely under-reported fact of the bond market is that liquidity will dry up as we approach a quarter- or year-end. How much this affects prices is difficult to quantify, but I would recommend not bidding anything within two weeks of the end of a reporting period.
Also, you likely have other liquid assets on your balance sheet, besides your investments. There is a robust secondary market for most performing loans, beyond conforming residential mortgages. Government-guaranteed sectors such as SBA 7(a) and USDA loans can be efficiently sold. And even non-guaranteed loans can fetch attractive prices, especially in the current yield environment.
A final thought: usually, yield spreads widen as interest rates fall. They have not yet widened out noticeably from the peak in rates late last year, at least on many sectors that are popular with community banks. This includes callable agencies, munis and straight pass-through mortgage-backed securities. All of which makes the mid-2019 bond market an attractive time to consider targeted sales.
Bid thee well!
By Rachel Scheuerman, Director - Engagement Solutions, Harland Clarke
Voice search and voice-powered experiences are two of today’s hottest topics — and for good reason. According to a recent Yext webinar, the use of voice-enabled speakers will grow 130 percent over the next year. So, there’s no doubt voice recognition is shaping the emerging customer experience and will have a direct impact on businesses of every kind, including financial services (if it hasn’t already). So, exactly how does voice search impact your financial institution, and most importantly — how can you keep up?
Speak and you shall receive.
For starters, voice search functionality marks a seismic shift in how consumers get results. In fact, over 20 percent of all Google mobile searches are now voice-command interactions. Siri co-founder has even called voice search a “defining characteristic of computing” over the next 10 years. But, unlike a text search you do on your computer, voice search results provide just one answer at a time, meaning there’s only one best answer. This “one result only” model really puts the pressure on financial institutions when it comes to things like:
Now, back to voice.
It’s important to note how younger generations access and consume information through the internet. This might be a no-brainer, but today’s teens and children know of no time in their lives when they didn’t have access to the internet, and most have always had access through a mobile device. It’s critical to understand these behaviors when thinking about how a young person might interact with voice search and the result offerings. While it may seem like a leap for us, for teens this is just more of the same, and soon could be the norm for many industries.
Behavior-wise, consumers are being taught how to ask devices the right questions, which is a natural extension of their current behavior. People type questions differently than when they say them out loud. This is because we can speak more words per minute than we can type and also because we are less deliberate with our words when we speak. So, this has resulted in an increase in “conversational search.” Think about the rise of Alexa and Google Home, particularly with older people. These devices make it easier for people with growing, age-related challenges to accomplish simple tasks. Order more dog food, check the weather, understand their calendar for the day, and so on. There’s no reason why banking tools and search for financial-related help topics couldn’t become an everyday voice search all over your community and one day, the globe.
So, how is it powered?
“Intelligent services” triggered by voice rely on your financial institution’s structured data to provide “rich” experiences. This creates an importance to ensure the data about your brand is structured in a way these services understand. A program called Schema Markup helps your website speak the language of intelligent services, so they can understand, categorize, and structure the information about your brand. An enhanced, consistent, and accurate digital knowledge published everywhere can help offer a positive consumer experience.
By complying with these best practices, businesses become a part of that circle of trust around the content showcased to consumers via voice search. Yext puts you in control of all of the public facts about your brand. With Yext, you can be sure consumers find rich, accurate, and consistent information about your brand — wherever they are, in all the ways they search. Every time.
By Chris W. Bell, Associate General Counsel, Compliance Alliance
One of the most common types of questions that we get at Compliance Alliance concerns the deadline of particular regulatory requirements. While some requirements have a definite due date and a knowable trigger, the trigger for other requirements is a bit is more of a judgment call. The suspicious activity report (“SAR”) must be filed “no later than 30 calendar days after the date of initial detection by the bank of facts that may constitute a basis for filing a SAR.” You have to love any rule with a self-referential deadline. What can be clearer than the notion that you have to file a SAR within 30 days of knowing you need to file a SAR? A closer look at the SAR rules can help break this requirement down into a more manageable expectation and tune up your suspicious activity reporting system.
The first thing to keep in mind is what constitutes “suspicious activity.” The Bank Secrecy Act (“BSA”) tells banks, bank holding companies, and their subsidiaries to monitor transactions and file a SAR on any transaction that they deem suspicious. A transaction includes “a deposit; a withdrawal; a transfer between accounts; an exchange of currency; an extension of credit; a purchase or sale of any stock, bond, certificate of deposit, or other monetary instrument or investment security; or any other payment, transfer, or delivery by, through, or to a bank.” You must file a SAR when you have reason to suspect:
You must establish and follow suspicious activity monitoring and reporting systems to fulfill your duties under the BSA. Examiners look for suspicious activity monitoring and reporting systems that include five key components: identification or alert of unusual activity; managing alerts; SAR decision making; SAR completion and filing; and monitoring and SAR filing on continuing activity. This boils down to being able to identify unusual customer behavior, deciding whether that behavior is “suspicious activity” that triggers the reporting requirement, and fulfilling the reporting requirement. During an exam you may be asked to show, through policies, procedures, and processes, how your bank takes the necessary steps to address each component and the person(s) or departments responsible for executing those steps.
Through your transaction monitoring programs, you will identify many cases of unusual behavior on behalf of your customers. That does not mean that you will file a SAR on each case of unusual behavior. You must file a SAR within 30 days of identifying potentially suspicious activity, with the deadline extending to 60 days when you are unable to identify a suspect. “Initial detection” is not when you identify unusual behavior. That is only the first step to identifying suspicious activity. There are many cases where activity can be deemed unusual for a particular customer and generate a red flag, but where the activity, upon further review and investigation, is legitimate and perfectly reasonable. After identifying unusual behavior, you must promptly review the transaction or account to determine whether the unusual behavior suggests that the activity is consistent with one of the types of suspicious activity outlined above. If you determine that the unusual behavior is suspicious activity, the clock starts ticking.
There is no specific timetable for your investigation. While the FFIEC has said the investigation must be completed “within a reasonable period of time,” what is considered reasonable will vary according to the facts and circumstances of the particular activity being reviewed and the effectiveness of your SAR monitoring, reporting, and decision-making process. The examiner will be looking to make sure that you have “adequate procedures for reviewing and assessing facts and circumstances identified as potentially suspicious, and that those procedures are documented and followed.”
One question that comes up often during the review process is the extent to which a bank has to confirm the underlying criminal activity to support a SAR. While the BSA requires you to report suspicious activity that may involve money laundering, BSA violations, terrorist financing, and certain other crimes above prescribed dollar thresholds, you do not have to investigate or confirm the underlying crime itself. Law enforcement will handle the investigation. When evaluating suspicious activity and completing the SAR, you should, to the best of your ability, identify the characteristics of the suspicious activity.
Your bank plays a crucial role in helping the government catch people who are engaged in terrorist financing, money laundering, and other illegal activity. You must have systems in place to monitor for consumer activity that is designed to further such illegal activity and report the suspicious activity to the proper authorities. While your systems should flag all unusual activity, you will not be filing SARs on all of it. Your reporting requirement arises when you have reason to suspect that the identified activity is the kind of suspicious activity under the BSA. You should promptly review all unusual behavior to determine whether you are dealing with suspicious activity and must file a SAR and then file that SAR within 30 days (or 60 days if you cannot identify a suspect). Compliance Alliance members have access to our BSA toolkit, which contains many tools to help you fulfill your SAR filing requirements.