Don’t be too alarmed by the title. I’m not suggesting the Marketing Department take over
your organization’s ALM reporting and investment functions. However, I am suggesting that
the focus of ALM switch from “risk management” to “winning the business.” All too often,
the ALM function consists of an ALCO meeting each quarter to discuss some “really complicated
stuff” that isn’t truly necessary for everyone in the organization to understand. This
really needs to change.
I want to encourage our clients to bring their ALM knowledge and insights “out of the closet”
in order to assist your customers as well as preserve your organization’s interest margins.
By the way, we’ve been doing the same thing here at MHA. Over the years, we’ve quietly
developed an ALM practice that now serves 47 institutions ranging in size from start-ups
to $3.8 billion in assets. (I’ve been providing ALM consulting services since 1993.)
You’re probably a little skeptical, so let me offer a couple of examples. I’m guessing many
of your customers are asking about fixed rate loans. I’m also guessing many of your loan
officers are telling prospective borrowers they just can’t do it given this low rate environment.
The result is either a less-than-satisfied customer or the loss of potential business.
Now here’s how an organization that integrates its ALM and marketing efforts approaches this
same situation. The same loan officers would tell customers they can consider a fixed rate
loan for any term desired. In fact, really good lenders would assist customers in determining
the best solution given the loan’s purpose and customer cash flow considerations. They might
even go on to explain the cash flow consequences given various rates and terms. In addition,
rate reductions might be possible if core deposits are maintained and/or fee income services
are utilized (e.g., merchant processing). Compared with the first example, this approach is
far more likely to result in satisfied customers, maybe one so satisfied that they might refer
Here’s the really great part. All of the options I described can be accomplished while reducing
interest rate risk. From a marketing perspective, I’m suggesting a strategy of product bundling
and customer consultation that results in loan products that are competitively priced and add
value (which sure beats having the best “giveaways”). From an ALM perspective, I’m suggesting
you engineer the terms and pricing of your loan products so your organization meets its duration
and margin objectives while also meeting your customers’ needs. You see, ALM and marketing
strategies are interdependent and these interdependencies can be exploited to improve your
Oh, by the way, core deposit growth and better margins also will create bigger Stakeholder
payouts. (You knew there would be a link.)
The first step in the process is getting your organization’s ALM and marketing staff to begin
communicating with each other. The goal is not to make ALM experts out of your marketing staff
or vice versa. The goal is to ensure your ALM staff understands what’s needed from a marketing
perspective (and why), while also ensuring your marketing staff understands your organization’s
ALM goals (and why). Most importantly, this communication must be ongoing because spreads and
yield curves change all the time as do customer needs and sales strategies. One more thing,
don’t hesitate to contact us if you need help bringing these two worlds together.
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Introducing Brian Côté, Director - ALM Services
Please join us in welcoming Brian Côté to the MHA team as Director – ALM Services. Brian brings over 30
years of financial services experience, which includes his most recent experience as the CFO of a publicly
held institution with over $17 billion in assets. As a CFO, he specialized in building dynamic PC-based
models to forecast interest rate risk, liquidity, profitability, financial performance, and credit losses.
He has a successful track record of implementing these tools in a variety of domestic and international
environments, including entrepreneurial start-ups as well as very large banks. Although Brian’s specialty
is in analytics and forecasting, his diverse background also includes raising capital, launching IPOs,
managing investment portfolios, and leading M&A activities.
Paul Homan, former head of the OCC’s bank examination staff, recently said this about Brian, “I know him
to be highly competent and a natural leader with the technical and communication skills, the work ethic and
good judgment to excel at his job. His character and integrity are of the highest order and beyond reproach.”
Brian resides in Southern California with his wife Tammy and their six children. Both he and his wife are
avid bicyclists and they both ride competitively on a local cycling team. We’re excited to have Brian on
our team and offer his expertise to our clients.
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Do you have a silver lining in 2009?
By Mike Higgins, Jr.
The year 2009 has not been favorable to
the bottom line of many financial institutions. Regulatory
demands for higher capital ratios, special assessments and
credit losses have put many organizations into an operating
loss for the year.
To those who only look at the “bottom
line” (a huge mistake, by the way) it is easy to assume that
management teams have done a poor job this year. Oh
contraire. The most important number on your financial
statement is not net income. In fact, the most important
number does not even show up on your income statement. The
most important number, which should be reported on
your income statement, is net revenue. Net revenue is
defined as follows:
Net Revenue = Interest Income minus Interest Expense plus Non-Interest Income
Net revenue is the only thing that will
offset special assessments. Net revenue is the only thing
that will replenish credit losses. Net revenue is the only
thing that will add to capital. In short, miss your net
revenue budget and you miss your net income budget
(guaranteed … see the analysis below).
Peer group data shows that for
every 1% shortfall in net revenue, a 3%-4% shortfall in
pretax net income will result. Miss net revenue by 5% and
pretax net income will be short by 15-20%. The relationship
between net revenue and net income is very strong.
Here is another perspective on why this
number is so important:
- 100% of employees can influence
net revenue (loans, deposits and non-interest income) in
either a direct sales role and/or a sales support role.
- 15% (or less) of employees can
influence non-interest expense in a material fashion.
In financial services, about 90% of your costs are
fixed, so that leaves only 10% that can really be
influenced, and if you could do without 10% of your cost
structure, you would not budget it to begin with.
- 3% (or less) of employees can
influence provision expense (e.g., credit losses).
Underwriting standards, credit policy and loan approval
is managed by a small committee of individuals. The
other 97% of employees follow the directives of the 3%.
- 0% of employees have anything to
do with special assessments and regulatory demands for
higher capital ratios.
So where is the silver lining? It is
in your year-to-date results. Compare your budget net
revenue to date versus your actual net revenue to date. If
you are ahead of budget on this “gross profit” figure, then
you have a silver lining. Your organization is producing
net revenue that will ultimately offset demands for higher
capital ratios, special assessments and credit losses.
Furthermore, since 80% of net revenue comes from the balance
sheet, and a significant amount of non-interest income is
related to the balance sheet, most net revenue is recurring
in nature (because you have an effective ALM strategy in
place; call Dennis and Brian if you need help here).
Recurring revenue is effectively a run-rate of earnings
momentum to carry you into the next year. If you are
exceeding budget on net revenue, your sales, marketing and
support processes are working to their planned affect (and
thereby should be rewarded).
So, the next time a board member or
shareholder hammers you about net income, be sure to look at
net revenue. It might be the silver lining that shows how
effectively over 90% of your employees are really
Lastly, in desperate times, organizations take desperate
measures. If your employees are hitting their net revenue
numbers, the best way to keep them from your competition is
by compensating them in a manner that creates loyalty to the
organization; not one that looks for greener grass on the
other side of the fence. Feel free to contact me at
email@example.com if you would like to
discuss this topic further.