Moving Money in Today’s Market with Steve Williams of Cornerstone Advisors

[00:00:00] Steve: And I think it really took a lot of our eyes off the ball in terms of what is it like to fight for liquidity. As an example, in the, say, the 10 years between 2010 and 2020, we did have challenger banks emerge. But we were in such a low rate environment that there was no room for price elasticity on deposits.

[00:00:24] Voiceover: You’re listening to 22 minutes in lending. Your go to podcast for insights on all things lending from lending practices, regulatory updates, how to enhance lending efforts, and more. In each episode host Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry.

[00:00:44] Steve: Let’s dive into the latest in lending.

[00:00:46] Vince: Well, welcome everyone to 22 Minutes in Lending. I’m your host Vince Passione, and I am delighted to introduce Steve Williams, partner,president and co founder at Cornerstone Advisors. Steve and his team have advised hundreds of banks and credit unions on how to become top performing and highly efficient financial institutions.

[00:01:04] Vince: Steve is an experienced private banker with background both commercially and consumer lending, and he and his team have worked extensively with over 1300 financial organizations. Steve is among the author of Cornerstone Performance Report and writes regularly for Gonzo Banker, which is a blog at Cornerstone Advisors.

[00:01:23] Vince: I know he has a lot of valuable information and insights that we hope to share with him and try to fit in the next 22 minutes. Steve, thanks for joining the podcast.

[00:01:30] Steve: Hey Vince, good to see you and it’s an honor. Great.

[00:01:34] Vince: Great. Steve, look, I always love talking to founders and hearing the founding story. So Cornerstone Advisors, over 20 years old to 1300 clients, 140 consultants, he’s done a couple of acquisitions.

[00:01:45] Vince: What was the vision when you started the company?

[00:01:47] Steve: We have been involved in banking for some time, all of us. I like to say, when you’re an entrepreneur, there’s sometimes vision and there’s sometimes just surviving and learning. And so, when we had done work in the 90s in banking, we kind of stumbled upon what we call the mid sized financials.

[00:02:03] Steve: Back then it was… A billion to 10 billion in assets today, we’d probably define that as a billion to 100 or 150 billion, but we found that our country has this very vibrant group of entrepreneurial financial institutions, whether that be a publicly or privately held bank or a cooperative credit union that we really starting to see they had some of the same problems, the same challenges.

[00:02:25] Steve: But really saw a lot of value, a lot of folks that created a lot of value being entrepreneurial, niched, creative. So when we started, it was really just to serve that marketplace and find ways to serve them. A few things that we found is they have some of the same issues as I mentioned, but they didn’t have a lot of good data about performance.

[00:02:43] Steve: So We set out to really be the authoritative source of performance data for this group that was below the big, too big to fails, but big enough where they were scaling and having challenges on efficiency and things. We also found they were buyers, not builders of technology. So we spent a lot of time helping them understand there’s this ecosystem of, say, several hundred vendors out there that they rely on.

[00:03:08] Steve: As their supply chain really to deliver financial services. So we wanted to be very knowledgeable in that area and kind of be their agent because they may not only look at a core system or a digital banking system every 5 to 7 years and there is no kelly blue book on pricing in terms in the marketplace.

[00:03:24] Steve: It’s very opaque. We wanted to set out to be a trusted advisor in some of those areas.

[00:03:29] Vince: So Steve, I’m a subscriber to Gonzo Banker, and this weekend I was going over the website, and I didn’t realize where it came from, that there’s a whole culture around it. Can you comment on that?

[00:03:40] Steve: Story is, I am a kind of a Reagan centrist Republican.

[00:03:44] Steve: My partner, Terrence Roach, who helped founded the company, is a Berkeley hippie, but we agree on about 99 percent of things. And so… This is before HTML. I wanted to get an email newsletter off the ground, and we felt it’d be fun to have kind of a truth telling, I’m a journalism major, so a truth telling blog about banking, but I wanted Terrence to support my idea, and I knew he was a huge Hunter Thompson fan.

[00:04:08] Steve: So in the snowy winter in La Crosse, Wisconsin, I said, what if we called it Gonzo Banker? And he lit up and said, that’s not a bad idea. So it was purely Machiavellian, but I wanted to get that over the top. But what we found is that the idea of a Gonzo Banker is a very gritty, we use that term a lot at Cornerstone, truth telling.

[00:04:26] Steve: Continuously learning banker or financial entrepreneur. And we just love when we meet smart people who are changing things, improving things. And I like to say Vince, in every organization there are quote gonzo bankers. And usually there’s a few dozen of them who kind of are the linchpin of the whole organization.

[00:04:45] Steve: And I like to joke, if I kidnap about 20 of your employees at say a large bank, took them to the Holiday Inn for two weeks, I could probably bring your bank under because those kinds of people are so important, so creative, and they don’t always have the most resources and they don’t always have the best vendor.

[00:05:01] Steve: They just get stuck, Don. That’s a gonzo banker.

[00:05:03] Vince:  No, I love it.

[00:05:05] Vince: Great. Thanks for sharing. So let’s get to it. Let’s talk a little about liquidity, right? It’s on everybody’s mind. I was going over one of your colleagues, Ron Shevlin’s article. The checking account wars over in the fintechs of one. And then I saw Tristan Green’s blog post, right?

[00:05:20] Vince: All eyes are on bank deposits. So what’s happened to bank deposits? What’s going on? Obviously we saw the collapse of Silicon Valley bank, but you and I discussed this. There were lots of different reasons for those deposits leaving. So what’s to say about it?

[00:05:34] Steve: We can short circuit the macro stuff, but the macro stuff’s important.

[00:05:37] Steve: We all got kind of comfortable and with deposits because we had. 15 years of QE and then we had a huge intervention around COVID to the tune of seven trillion dollars. And as you know, Vince, when things are going good, it’s always because we’re good leaders. So we’re doing a good job when things are going bad, it’s external.

[00:05:56] Steve: But there was an external wind at our backs in terms of liquidity. And I think it really took a lot of our eyes off the ball in terms of what is it like to fight for liquidity. As an example, in that, say, the 10 years between 2010 and 2020, we did have challenger banks emerge. But we are in such a low rate environment that there was no room for price elasticity on deposits.

[00:06:19] Steve: So, if Allied Bank was paying 0. 7 and we were paying 0. 4, we were okay. And then kind of the backdraft of all that quantitative easing and spending becomes inflation, and now the fastest, steepest short term rate hike in the history of the Fed, we now see price elasticity boomed overnight. And so that really was, to me, the big macro effect.

[00:06:45] Steve: Even the greatest modelers probably wouldn’t have gotten more than two thirds of this as an operator. No one could have predicted 500 plus basis points in this time frame. But we all should have been modeling the 250 300 pretty hard, and I think we were all still modeling the 150 200. So that’s where we got all caught a little flat footed.

[00:07:04] Steve: Where’s the money going? I think what’s interesting is SVB’s signature, First Republic, they didn’t necessarily cause a consumer deposit panic, but what they did do is they woke up everybody to the fact they were getting paid nothing on their deposit. So what we saw is right after SVB, Money had been moving into money market funds that were paying close to fed funds rate or treasury rates after SBB had ignited that price elasticity, especially for large depositors who they first, they looked and said, Oh, I may not be fully insured, but then they felt more comfortable and just said, this is about price.

[00:07:41] Steve: And so it’s less about panic and more about price now, and the money’s going primarily to the mutual funds, treasury funds, but it’s also consumers have woke up to treasury direct. They have looked now to challenger banks because now finally a challenger bank can start to differentiate on price. And some’s going to the big banks though I would say.

[00:08:01] Steve: The big story with the big banks has been that businesses are moving money over there as a hedge, as a risk management tool. The big banks have actually lost overall consumer deposits because of that same pricing dynamic I’ve mentioned.

[00:08:16] Vince: And so Steve, what advice do you give credit unions and community banks then?

[00:08:18] Vince: How do they get these deposits back?

[00:08:20] Steve: I think a couple of things. One is it’s clear if you’re going to be in the marketing and customer acquisition and customer retention game, it’s a digital first world. We all kind of went into this with, I’d say of C plus B minus digital front door, how we acquire new accounts, how we onboard, how we create that quote friction free experience.

[00:08:42] Steve: So that’s not easy. It’s hard work. You’ve got to add improvement to that experience every quarter, but you got to keep moving on that. What I would not do is shortchange that budget or that technology right now. We’ve got to have a great digital front door like the FinTechs do. And why Ron wrote about the FinTechs winning is They created that digital front door first, and now they’ve created consumer expectations around that.

[00:09:06] Steve: So we were on that journey. Now that journey’s gone to, you know, DEF CON 1 because it’s so important to have a great digital experience. Secondly, I had a CEO a week ago say to me, We’re really nowhere in terms of using our own customer or member’s data. I think digging into data right now is very important.

[00:09:25] Steve: Looking for… What segments are moving money and why, where is there some price differentiation we need to have? There’s debates going on, Vince, about do we pay more for new money versus existing money? Is that ethical? Is that part of customer service? Good debates to have, but I think product innovation and using data to find pockets of pricing elasticity is going to be really important.

[00:09:50] Vince: And Steve, how much of this is

[00:09:51] Vince: FedNow and the velocity

[00:09:52] Vince: at which you can move money now?

[00:09:54] Steve: I think the velocity even without FedNow being kind of all engines on today is a big thing. The idea of money movement and just the, we all created, you know, a friction free way to open an account and to move money.

[00:10:07] Steve: Even in the kind of one or two day Venmo world, people still are doing it actively. So yeah, I think that if we were going to model the perfect storm, we would have modeled The highly always on money movement capability with the backdraft of what occurred with the FedRide hikes. And we would have said, wow, that could cause the liquidity process.

[00:10:28] Steve: I think what we’re going to see is every exam I’ve talked to, regulators have said, you need to get better at liquidity management, liquidity stress testing. Every investor deck I see around banks reporting second quarter earnings coming out in the next few weeks is going to have not one, but six pages of deposit granularity and liquidity backstop.

[00:10:48] Steve: And. So it is the word right now. I think you need to have those plans be very visible I think you need to show your regulator. You’re more than on it at this point at the end of the day, though I think if you look at who we work for regional community banks and credit unions And you think about it, our market short is still very low compared to the large banks.

[00:11:09] Steve: The large banks are not paying up for deposits. They are proving themselves to be very safe and very convenient. We’ve just got to fight that marketing battle for the longterm in new ways. Yeah.

[00:11:21] Vince: Great. So Steve, I want to digress for a minute. So, were you surprised as I was by the number of financial institutions that weren’t familiar with this whole concept of insured deposits and taking that risk and offloading it to folks like Intrify?

[00:11:37] Steve: Yeah, I was. And again, we were like in a jacuzzi of liquidity. It felt great. And so yeah, it didn’t have people thinking about those opportunities. And I think now, essentially today, it’s looking at the balance sheet as a holding area. Where we’re doing things on the asset side and doing things on the liability side, and we’re always optimizing our risk position and our return.

[00:12:01] Steve: To me, what’s fascinating about Silicon Valley, back in the 90s, they were known for sweeping almost an amount equal to their whole deposit base off every night. It was part of their model. I think they must have started to enjoy those leverage earnings per share a little too much. And I think we all did.

[00:12:19] Steve: That exposure was growing and it wasn’t something we had thought about because we were in a long term economic expansion. We hadn’t had a crisis. I like to joke, the poor kid running the asset liability model was like the Maytag repairman during that time. There wasn’t a lot of shock to model. And then here it comes.

[00:12:37] Steve: So yeah, if you look at the data also, because of that deposit inflow, it was surprising how much the uninsured grew from say mid 2020 to when SVB occurred. Yeah. Pretty amazing.

[00:12:49] Vince: So we were chatting before the call. I was watching this video of Matt Harris, partner at Bain, successful fintech investor, and he coined this phrase, the fog of war, right?

[00:12:59] Vince: This uncertainty, right? That goes on in the battlefield. And he, it’s an interesting quote, right? He says, balance sheet crisis might be over. We may finally be approaching the end of thousands of regional and mid sized banks in the U. S. That could produce years of

[00:13:14] Vince: contracting credit, a credit crunch that would be severe and long lasting.

[00:13:18] Vince: How do you feel

[00:13:18] Vince: about that? That’s a pretty dire prediction about what’s going to happen to the banking industry.

[00:13:20] Steve: Yeah, I take it seriously because I think we’re in a new age for regional and community banks and credit unions. I take it very, very seriously. But when I was about 27 years old at Arthur Anderson in the early 90s, I was handed a white paper that said there’ll be 10 banks by the end of the decade.

[00:13:39] Steve: As long as I’ve been around, the prognosticators have wanted to say community banks, community institutions are dead. I think we’re going to see massive consolidation because a lot of folks just can’t transform fast enough to what it’s going to take to be that very agile, customer experience focused, data driven, highly efficient, and very balance sheet intelligent type of institution.

[00:14:04] Steve: We call that a cornerstone becoming the smarter bank. I don’t think most of the 4, 500 banks and 4, 500 credit unions. necessarily are ready to do that. But I think we are going to settle down through a massive period of consolidation and transformation. And I think you’re going to see, like we always see in this country, entrepreneurial creative folks modernize the model, use things like networks of liability partners, secondary market for assets, AI and technology digitization.

[00:14:35] Steve: I think we’re going to see modern regional. Niche institutions as well. And it may not just be geography. I think a lot of folks are building niches based on industry or capability or even banking as a service type niches. So it’ll be a very diverse group of institutions. Heck no. I don’t think it’s gonna happen and I don’t want it to happen because I think that concentration of economic power is not good for the country.

[00:15:00] Vince: No, I’d agree with you. I was sitting in Barron’s, the prior FDIC chair, I think it’s Sheila Bair, and you and I are both old enough to remember 2007 and she commented on, Hey, even at the last credit crisis, it was the regional banks, it was the committee banks, it was the credit unions that kept lending.

[00:15:15] Vince: And we just need to look to Canada and say, look, they’ve got 80 banks up there

[00:15:21] Vince: and does that work? And the

[00:15:22] Vince: answer is probably not, right? If we want to keep the consumer happy and keep lending.

[00:15:26] Steve: The regional community banks is they, they assumed a lot of say the commercial real estate, the construction, the small business.

[00:15:34] Steve: I think that a lot of that is good stuff. I think we have to be very sophisticated on the risk we’re taking and get paid for it as well in the future. I think the big guys would like to paint them as kind of the greater fool taking on that risk when we’ve shed it and now we have liquidity and we make money other ways.

[00:15:51] Steve: I think there’s some validity to that, but I think we can become smarter in a Rayrock kind of organization, risk adjusted, return on capital. And I think that if we do that, that’s going to keep that lifeblood of what we need. We need development, real estate financing. We need small business financing in the country.

[00:16:09] Steve: We can’t do it all from four metro areas with models. I don’t think it works.

[00:16:15] Vince: Was there anything that the community banks, credit unions, regionals could have done differently? I mean, you say earlier, right, it’s really hard to predict what was going to happen. And I think it’s easy to look back and say, should have quit it and would have, but what do you think?

[00:16:28] Steve: Well, I think that. If you look back, we should have always been asking the existential question, why do we spend so much money intermediating funds? And what I mean by that, in a digital first world now using data, we saw the challenger banks and then we kind of said to them, people don’t want that. They still want quote, quote, quote, service.

[00:16:47] Steve: We should always be attacking our own intermediation cost, you know, in the old days it was four percent now Maybe it’s two and a half to three percent in the future. I guarantee it’s one and a half to two percent So, how do we keep showing that efficiency while adding more value to be an intermediary?

[00:17:04] Steve: I don’t think intermediaries go away, but they’re really smart and they’re really efficient in the future. Agreed,

[00:17:11] Vince: Agreed, agreed. So we’ve got strategic planning season coming up. I’m sure the phone is ringing off the hook. What do you think the themes are going to look like this year?We’ve probably talked about one.

[00:17:21] Steve: Unfortunately, one of the themes is how do you hold on what you have? And I know that’s not as exciting as conquering the world. But in a time like this, if you protect the franchise and make sure, A, we don’t run into any Black of confidence with our investors or our regulator to that. We hold customer retention and liquidity retention in a meaningful way.

[00:17:43] Steve: I think another one’s going to be, how do we get more efficient? What is that next frontier of efficiency in the future as well? Because I think there are going to be brighter days for growth. One thing interesting to watch is the big banks have really moved to the efficiency model, the appointment setting and digital first.

[00:18:01] Steve: And that’s wonderful for them making 2 trillion more efficient of an asset site. But in the pockets there, there are going to be some service lapses where I see edgy folks can come in and take some of that market share. But I think it’s about preservation right now of confidence and retaining the very strong franchise and business we have, and then making sure we’re ready for kind of what is the new work look like, how are we going to acquire market differently, and of course, talent, despite all the great jobs, records and things, there is a struggle for the right kind of talent and designing the right kind of workplace for the future.

[00:18:39] Steve: So I think that will continue to be there.

[00:18:42] Vince: Uh, it’s great. It’s great. So Steve, I’m a big history buff and I love reading American history. I’m just preparing for this. I think about my favorite sort of founding father, Alexander Hamilton, right? Designed the Fed System and we know it today, probably created some of these problems.

[00:18:57] Vince: Who’s your favorite figure in history?

[00:18:58] Steve: Why? Gotcha. You know, this is a Steve Williams answer. I’m going to give you two, Vince, because I think right now I really enjoyed thinking back to Madison and the creation of the constitution. I strongly believe that if every American knew how hard it was to build the Federalist Papers and get a constitution, there were great arguments about how should we organize and be a civil society and where that balance of power, I think it should be required reading for high school graduation and we should know why it’s important.

[00:19:29] Steve: Madison did a lot of the hard work of getting a document forged that could really be powerful for hundreds of years. But one I want to mention that really is fascinating is a guy named Claude Shannon, computer scientist who created information theory. And with everything going on right now, with the AI boom and the chat GPT moment and large language models, it’s fascinating to see how much his original information theory from about 1948 Is influencing the entire world right now, and how much of that groundbreaking thinking is still in mobile phones and AI and big data today, including a great book I just read about by George Gilder about information theory being kind of the next wave of economics.

[00:20:14] Steve: So we had this great moment with our founders go back and read about Alan Turing and John von Neumann and Albert Einstein and Claude Shannon at MIT in the thirties and forties. Well, how did all this magic happen? Because there were people a lot smarter than me.

[00:20:33] Vince: Well put. Oh, look, that’s about all the time we have for today, Steve, I want to thank you so much for your insights.

[00:20:40] Vince: Listeners, I hope you enjoyed our conversation. Make sure you subscribe so you can join more episodes and I’ll meet you back here for 22 Minutes in Lending. Thanks again, Steve.

[00:20:48] Steve: Thank you, Vince.

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