WEDNESDAY JANUARY 15, 2020 VOL. 185 No. 10 AMERICANBANKER.COM Follow us on Twitter @AmerBanker Wells Fargo CEO Charlie 5 Scharf kicks off tenure Year-over-year 3Q loan with more legal costs Wells Fargo & Co. may have a new leader, but portfolio changes the work of reinvigorating the firm after years of troubles is far from over. Page 5 See story on page 2 Expensify launches 6 corporate card that donates Construction 3.6% to homeless charity The new Karma Points card donates 10% of Multifamily 3.1% revenue to charitable funds established by the company that help people living on the CRE 2% street. Page 5

C&I 1.7% Visa’s $5 billion Plaid 7 deal takes a possible Consumer 1.5% rival off the table In the battle to control consumer data, Visa Mortgages -0.8% has made a major score by agreeing to acquire Plaid, a technology company that it could have Agriculture -1% seen grow into a competitor. Page 6

-1%0%1%2%3%4% Auto loan delinquencies 8 hit eight-year high Source: FDIC ( with less than $20B in assets) The percentage of consumers who are past due on home equity loans, RV and other personal loans also rose in the third quarter, data released by the American Bankers FHA wants banks back. Association showed. Page 6 dailybriefing 3 Updating servicing could be the answer. Citizens names new CEO of Loan payoffs likely to Despite changes by the Federal Housing 9 private wealth subsidiary 1 accelerate in 2020 Administration, bankers remain reluctant The Providence, R.I., said that Rick Lower rates and more nonbank competition to join the program for fear of legal liability. Suarez would succeed Rob Clarfeld as head will make it harder for banks to keep loans But that could change if it revamps servicing of Clarfeld | Citizens Private Wealth. Page 7 on their books as business borrowers have processes, experts say. Page 3 plenty of opportunities to refinance Open banking’s three elsewhere. (See chart above.) Page 2 Activist investor pressures 10 biggest pitfalls 4 Virginia bank to sell Financial institutions need to be aware Manafort’s banker seeks Driver Management wants shareholders of of the platform model, strategic and rep- 2 to move his trial from Community Bankers Trust to push the Rich- utational hazards that come with granting New York to mond company to find a buyer. Page 4 access to their networks, Jacob Kosoff of Stephen Calk and the bank where he for- Regions Bank and two co-authors write in merly served as CEO are both arguing that BankThink.Page 7 his bribery trial should be held in . Prosecutors oppose the move. Page 2 WEDNESDAY JANUARY 15, 2020 AMERICANBANKER.COM PAGE 2

but many of them are more nervous about loan applications. COMMUNITY BANKING an eventual shift in the economy than most “The China trade issues need to come to probably say publicly.” a final resolution soon to take this stress off Business owners also remain concerned our farmers,” Lonnie Clark, president of the Loan payoffs about a protracted trade war with China, $48 million-asset State Bank of Chandler geopolitical tensions in the Middle East, un- in Chandler, Minn., said in response to the likely to certainty tied to the looming presidential survey. election and, simply, a sense that the cycle is bound to turn, industry observers said. accelerate in A Stephens survey of 100 bankers in De- CRIME AND MISCONDUCT cember found that nearly a fifth expect 2020 lending to decelerate due to increased pay- downs. Another 22% pointed to borrowers’ Manafort’s By Jim Dobbs macroeconomic and political worries. January 13, 2020 On the consumer side, bankers and econ- banker seeks Intense competition and lower interest omists said confidence remains strong and rates could spur more refinancing and re- credit is still being used to finance purchas- sult in higher payoff levels for consumer and es. But with rates low, banks will see elevated to move his commercial loans in 2020. levels of refinancing and possibly more com- A number of bankers have been warn- petition when homebuying season revs up trial from ing about decelerating loan growth in areas this spring. such as energy and agriculture. Accelerated Should the job market remain solid, more payoffs will only put more pressure on loan consumers could pay down credit card bal- New York to balances and underwriting in coming ances and use cash for more purchases, said months. Scott Brown, chief economist at Raymond Chicago “Payoffs are elevated and loan growth is James. challenging,” said Kevin Cummings, chair- “Just like a business, if a person gets to a By Kevin Wack man and CEO of Investors Bancorp in Short point where cash levels are fairly high, it can January 13, 2020 Hills, N.J. “Competition is tough and banks make sense to carry less debt,” Brown said. The former bank CEO who faces a bribery have to be selective to protect credit quality More banks are bracing for a cycle shift by charge in connection with multimillion-dol- and maintain margins.” tightening underwriting standards in certain lar loans to President Trump’s disgraced While the $26.7 billion-asset Investors sectors, economists said. campaign chair is seeking to move his trial continues to benefit from a strong economy A December survey of bankers across the from New York to Chicago, and so is the bank and steady loan demand from growth-mind- Midwest by Creighton University’s econom- at the center of the case. ed commercial clients, nonbank competition ics department found that two-thirds of par- Stephen Calk was chairman and chief has heated up, Cummings said. Those lend- ticipants increased collateral requirements executive of The Federal Savings Bank un- ers are willing to refinance loans at lower for farm loans last year. Roughly a third til he was indicted in May. He still holds a rates and longer durations. had rejected a higher percentage of farm 67% ownership stake in the Chicago-based Expect more banks, especially those that have lower-than-expected loan growth and high payoff levels, to get pressed by analysts Established 1836 One State Street Plaza, 27th floor, New York, NY 10004 during their fourth-quarter earnings calls. Phone 212-803-8200 AmericanBanker.com Pricing by nonbanks tends to fall below what makes financial sense for banks, leading Editor in Chief Rob Blackwell 571.403.3834 Copy Editor Neil Cassidy 212.803.8440 to loan runoffs, industry observers said. Managing Editor Dean Anason 770.621.9935 “No question, especially following the Reporters/Producers Executive Editor Bonnie McGeer 212.803.8430 drop in rates, [pricing] is going to be an issue Laura Alix 860.836.5431, Kate Berry 562.434.5432 Washington Bureau Chief Joe Adler 571.403.3832 for more banks,” said James Bradshaw, an Jim Dobbs 605.310.7780 Senior Editor Alan Kline 571.403.3846 analyst at Bridge City Capital. John Heltman 571.403.3847 Some commercial clients are paying down Editor at Large Penny Crosman 212.803.8673 Will Hernandez 212.803.8731 in anticipation of an inevitable downturn. BankThink Editor Rachel Witkowski 571.403.3857 Hannah Lang 571.403.3855 Others have taken advantage of the ongoing Community Banking Editor Paul Davis 336.852.9496 Ken McCarthy 724.996.2188, Andy Peters 404.500.5770 recovery by selling their businesses — and Technology Editor Suleman Din 212.803.8738 paying off loans as part of the process. Contributing Editor Daniel Wolfe 212.803.8397 John Reosti 571.403.3864, Gary Siegel 212.803.1560 “A lot of banks’ commercial clients are Digital Managing Editor Jackie Stewart 571.403.3852 more cost-conscious now than a year or so Christopher Wood 212.803.8437 Kevin Wack 626.486.2341 ago,” Bradshaw said. “Nothing is inevitable,

For up to date and complete coverage go to AmericanBanker.com WEDNESDAY JANUARY 15, 2020 AMERICANBANKER.COM PAGE 3 bank’s holding company, federal prosecutors Prosecutors have portrayed Federal and credit unions will be sued by the Justice have said. Savings Bank as a victim of Calk’s corrupt Department under the False Claims Act if the Calk, who lives in Northfield, Ill., said in a scheme. But on at least one occasion, the loans later go bad. court filing Thursday that a large majority of bank has portrayed itself as a victim of fraud- Despite the changes HUD and the FHA the conduct at issue in the case took place in ulent conduct by Manafort, who is currently made, however, “banks remain very cau- the Northern District of Illinois. He also ar- in prison after being convicted of a slew of tious about the FHA market because of the gued that a trial in Chicago would be far less financial crimes. risks related to the origination side,” said disruptive to the bank’s operations than one The loans, which totaled more than $15 Bose George, a managing director at Keefe, held in Manhattan. million, defaulted after Manafort was indict- Bruyette & Woods. Federal Savings Bank echoed the latter ed in October 2017. The bank has written off “From the bank’s perspective, they want argument, with the bank’s chief operating more than $12 million as a loss, according to to wait for a while because they don’t know officer stating in court papers that at least the Calk indictment. what the next administration will do. Things 13 current bank employees are potential U.S. District Judge Lorna Schofield has could change unless something is actu- trial witnesses, and that nine of them live and scheduled a status conference in Calk’s case ally kind of codified, and that hasn’t hap- work in Chicago. for Feb. 27. pened,” he said. “So in the short term, what Prosecutors oppose the request to move they’re trying to do is just steps to make their the trial. The case is being prosecuted by the servicing easier for more investors.” U.S. Attorney’s office in Manhattan, which SERVICING Currently, the servicing rules and process- has noted that Federal Savings has an office es at the FHA are outdated and expensive, within walking distance of the New York said Pete Mills, the senior vice president of courthouse. FHA wants residential policy at the Mortgage Bankers Prosecutors also argue that key events that Association. led to the criminal charges against Calk took banks back. “Their servicing requirements are sort of place in New York. For instance, the loans anachronistic. They haven’t been updated to Trump’s onetime campaign chief, Paul recently, and [they’re] not aligned with the Manafort, were extended from Federal Sav- Updating industry standards that we use in servicing ings Bank’s New York office. One of the loans loans for the GSEs, in particular,” he said, was secured by a brownstone that Manafort servicing using an abbreviation for government-spon- owned in the Carroll Gardens neighborhood sored enterprises. of Brooklyn. For one, Fannie Mae and Freddie Mac have Prosecutors allege that Calk approved the could be the a much more favorable foreclosure timeline loans to Manafort in exchange for a potential for servicers than the FHA, said Sara Singhas, high-ranking job in the Trump administra- answer. the mortgage banker group’s director of loan tion. administration. In opposing the motion to move the trial, By Hannah Lang “Not only does [FHA] have these three sep- the prosecution has noted that Trump’s pres- January 13, 2020 arate distinct timelines, but it says if the ser- idential campaign was based in Manhattan, WASHINGTON — The Federal Housing vicer misses the first one … then you have to and has said that Calk was seeking an in- Administration has been trying to woo banks curtail the interest that you would receive on terview in Manhattan with the presidential back to its program with the promise of light- your claim, and even if you missed the dead- transition team. er False Claims Act enforcement and other line by just one day,” she said. “It’s really, re- In January 2017, Calk was interviewed for steps, but to really make the case, the agency ally heavy penalties associated with at times undersecretary of the Army, according to the may need to update its servicing processes, extremely minor delays, and many of which indictment. He did not ultimately get a job in some experts say. are unavoidable.” the administration. In October, the Department of Housing While the GSEs also have penalties for Calk has entered a not guilty plea and is and Urban Development announced it had missing deadlines, they’re structured in free on a $5 million bond. His lawyers note entered into an agreement with the Depart- “more servicer-friendly ways,” George said. that the loans to Manafort were overcollater- ment of Justice to state that HUD will deal The resulting process is very punitive for alized and approved by the bank’s loan com- with False Claims Act violations — involv- administrative mistakes and can even dis- mittee with high interest rates and large cash ing FHA lenders — mainly through admin- courage lenders from servicing FHA loans, prepayments. istrative proceedings in an effort to provide said Brian Chappelle, a partner at Potomac “Those loans were not a bribe for any- more legal certainty to banks looking to make Partners and former FHA official. thing,” Calk attorney Jeremy Margolis said in FHA loans. “Right now FHA has their own rules that a statement in May. According to HUD Secretary Ben Carson, are very frustrating to servicers, and they After Calk was indicted, Federal Savings before the financial crisis, about 50% of loans drive up the cost of servicing,” he said. “So Bank said in a statement that its former chair- insured by the FHA were originated by de- I think we’re going to see FHA make some man and CEO no longer had any control over pository institutions, but that number is now improvements this year, and I think that or involvement in the bank. closer to 15%, largely because of fears banks servicers will view them very positively.”

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FHA Commissioner Brian Montgomery Currently, 19 out of the 20 top lenders in said in a recent interview that the agency has the FHA program are nonbanks, according to COMMUNITY BANKING already made “real progress” on modernizing Inside Mortgage Finance. its servicing requirements. Ginnie Mae — which guarantees almost “Last month we accepted the first digital all FHA loans in its mortgage-backed secu- Activist supplemental claim through our new lender rities — has particularly expressed concern portal. The new process eliminates all paper about the proportion of nonbank lenders, investor and shortens the time for FHA to pay claims said Chappelle. from months to literally a matter of minutes. “The return of large banks to FHA servic- All servicers are being transitioned to the ing would have the benefit of addressing pressures new process,” he said. “Stay tuned as there is Ginnie Mae’s concerns about the growth on much more to come in 2020.” nonbank issuers as the large bank servicers Virginia bank In its housing finance reform report pub- would also likely return to the Ginnie Mae lished in September, HUD said that a cru- program,” he said. cial part of modernizing the FHA in general Ginnie Mae’s concerns have also been a to sell would be to improve its servicing processes, catalyst for the FHA to re-examine its ser- policies and technology. vicing processes, said George, who added By Ken McCarthy “Independent estimates indicate that the that a rise in delinquencies has led to an in- January 14, 2020 FHA’s servicing costs for nonperforming crease in servicing advances — loans offered An activist investor wants Community loans are now multiples above the costs of by servicers to cover missed payments from Bankers Trust in Richmond, Va., to sell. servicing conventional mortgage loans,” the borrowers. Driver Management, which owns about report said, noting that the increase in ser- “What [Ginnie Mae] requires of servicers 1.5% of Community Bankers Trust’s stock, vicing costs has likely brought about a higher essentially results in servicing advances be- said in a letter to shareholders that it ques- cost of borrowing. ing outstanding for an extended period,” said tions the $1.4 billion-asset company’s ability While Montgomery said in December that George. “In the past, that wasn’t as much of to deliver value on its own. all of the proposals in the September report a problem because if you’re a bank, you can Rex Smith, the company’s president and were important, he singled out five in partic- advance the servicing and then finance it on CEO, did not immediately respond to a re- ular that his agency had prioritized, includ- your balance sheet, so it was less of an issue.” quest for comment. Community Bankers ing one to strengthen the FHA’s single-family One of the things the FHA is looking at to Trust is the parent of Essex Bank. default servicing processes. address this is a way to help servicers finance Abbott Cooper, Driver’s managing mem- Aside from modernizing FHA as a whole, the servicing advances, he said. ber, said in the letter that he believes Com- updating the servicing program “could also There are several other outdated provi- munity Bankers Trust could garner a “signif- be the vehicle to attract large financial in- sions in the servicing processes that the FHA icant premium” to its market value by selling stitutions back into the FHA program,” said may look at revising, including the “face-to- itself. Chappelle. face requirement,” which mandates in-per- “We further contend that a value-maxi- So far, it remains to be seen if the changes son meetings with borrowers once they are mizing sale can be reached expeditiously if ... HUD made last year intended to ease its False 60 days delinquent on a loan, said Mills. Smith is not an impediment and the board is Claims Act enforcement will indeed attract “That’s almost impossible to do if a bor- able to explore all alternatives without being banks back to the program, but those chang- rower is in a rural area,” he said. “It’s a very, colored and influenced by a conflicted gate- es combined with updates to the servicing again, anachronistic process when you’ve got keeper,” Cooper wrote. processes could seal the deal for depository the types of communication vehicles that we Cooper claimed that Smith has “unrealis- lenders. have today that people rely on and actually tic sale price expectations” and would only “Those two factors will go a long way to- prefer to use.” accept a deal in which he would remain wards bringing some of the banks back,” part of senior management. “We believe the said Mills. “I think it’s a complex decision for board has fallen into the trap of remaining them. I think a lot of larger institutions are overly-deferential to a CEO whose interests looking at this being sort of a board-level de- appear to conflict with those of sharehold- cision, but the more FHA can get done in the ers,” Cooper said. servicing space, I think the more banks will Stephens analyst Brody Preston wrote in come back in.” a Jan. 6 note to clients that he believes the The renewed push to get more banks to company could receive $13 to $14 a share if it make FHA loans comes just after the Finan- was sold, or 46% to 58% more than its current cial Stability Oversight Council published its stock price. annual report in December, warning for the first time of the growth of nonbank mortgage origination and servicing is a risk to the U.S. financial system.

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likely to remain elevated through 2020 as the funds it has established to reduce homeless- EARNINGS lender works through its myriad legal and ness and address other social issues. regulatory issues. Expensify founder David Barrett said that Net income totaled 93 cents a share in the his original motive for starting the company Wells Fargo fourth quarter, excluding the legal costs, less was to help people who for one reason or an- than the $1.14-a-share average estimate of 11 other are living on the streets. CEO Charlie analysts in a Bloomberg survey. “When my last company got acquired, I Wells Fargo shares fell 2.4% to $50.85 at was living in the Tenderloin [neighborhood] 8:06 a.m. in New York. Analysts have issued in San Francisco and passed the same home- Scharf kicks a flurry of downgrades on the stock in recent less folks on the street every day,” he wrote in weeks, pushing their collective outlook to a blog. off tenure the worst since the financial crisis. The stock Barrett said he was uncomfortable hand- has climbed 7.6% in the past year, compared ing out cash for fear it would tempt some re- with a 22% increase for the 24-company KBW cipients to buy drugs or alcohol, which would with more Bank Index. be counterproductive since sobriety was More about Wells Fargo’s fourth-quarter often a requirement for being accepted into legal costs results: shelters. • The bank’s efficiency ratio, a measure “So I wanted to help, but I wasn’t sure how By of profitability, worsened to 78.6% from to do it without doing more harm than good January 14, 2020 69.1% in the third quarter. The firm had — and I figured the most obvious place to Wells Fargo & Co. may have a new leader, been targeting 55% to 59% in the long term, help was not with cash, but food.” but the work of reinvigorating the firm after excluding litigation costs, though Scharf Initiatives that help the homeless have years of troubles is far from over. may set a different goal. become trendy among tech CEOs in recent In Charlie Scharf’s first quarter at the helm, • Period-end loans and deposits both in- months. Salesforce Marc Benioff donated $30 Wells Fargo reported $1.5 billion in expenses creased from a year ago, and the number million to a research project aimed at finding for litigation as the lender works through its of primary consumer checking customers solutions to homelessness in May. In Novem- problems, the second straight quarter where rose for the ninth consecutive quarter. ber, Jeff Bezos announced that Amazon will earnings were hit by major legal costs. That be housing a homeless shelter in its Seattle drove a 53% drop in net income from a year headquarters. earlier, missing analysts’ estimates. MOBILE BANKING Barrett experimented with different strat- “Wells Fargo is a wonderful and important egies before settling on his current approach. franchise that has made some serious mis- For example, he thought of designing a takes, and my mandate is to make the funda- Expensify system that loaded gift cards on demand with mental changes necessary to regain the full an amount equal to the cost of a meal pur- trust and respect of all stakeholders,” Scharf, launches chased on a credit card at a restaurant; the the company’s new chief executive, said in a gift card was to be created in the few milli- statement Tuesday. seconds while the server was authorizing the The San Francisco-based firm’s lon- corporate transaction. The system would have limited ger-term strategy has been in flux since for- the recipient to one purchase per day, for at mer CEO Tim Sloan stepped down in March. card that most $10, and restrict it to restaurants that do Scharf, who took over in October following not serve alcohol. a six-month search, has been conducting a “Voila! A secure platform for feeding the wide-ranging review of the firm, and inves- donates to homeless, funded by my personal credit card, tors are keen to learn his conclusions. Col- with cards I could give to all the regulars I saw leagues have said his top priority is fixing homeless in my neighborhood,” Barrett wrote. relations with regulators. The bank still faces But when he brought this idea to lenders, a bevy of probes and consent orders, includ- they raised numerous compliance issues, ing a Federal Reserve-imposed cap on asset charity and difficulties with money transmission li- growth. censing. They also pointed out that there was Net interest income, Wells Fargo’s biggest By Penny Crosman no clear business model. source of revenue, fell 11.4% to $11.2 billion January 13, 2020 Then he started pitching the idea of a in the quarter. Analysts predicted an 11.1% Expensify, the expense management app company that automated management of ex- decline as lower rates continue to hit results. provider, has launched a corporate card, pense reports. That idea was popular. Revenue fell 5.3% to $19.9 billion, missing the Expensify Card, that offers Karma Points Today, more than 8 million people and analysts’ estimates of a 4.3% decline. aimed at socially conscious cardholders. 85,000 businesses use Expensify. Noninterest expenses climbed 17% to With each customer purchase, the company With the new Karma Points card, Expensi- $15.6 billion. Executives have said costs are will make a donation to any of five charitable fy says it will donate 10% of revenue to a new

For up to date and complete coverage go to AmericanBanker.com WEDNESDAY JANUARY 15, 2020 AMERICANBANKER.COM PAGE 6 charity it set up called Expensify.org. Mastercard in 2019 battled Visa to acquire Expensify.org will manage five funds: Earthport, which gave Visa the opportunity AUTO LENDING Homes, which covers the costs of reuniting a to expand its reach into cross-border trans- person experiencing homelessness with their actions for e-commerce. Mastercard would family; Youth, which sponsors weekly meals up acquiring another company, Transfast, Auto loan for young adults who have aged out of the fos- to accomplish the same expansion. The im- ter care system; Reentry, which reimburses portance of open technology development to delinquencies the cost of a journey home for people just re- support fintech/bank partnerships suggests leased from incarceration to help them tran- a new wave of acquisitions may follow Visa’s sition back into society; Hunger, which pays Plaid deal. hit eight-year off a child’s school lunch debt; and Climate, Plaid uses application programming in- which supports the purchase and planting of terfaces that connect financial institutions to high a tree. developers to support consumer payments, Companies using Expensify can choose lending, business finance, personal finance, By Kevin Wack to enable Corporate Offsets, which will auto- banking and brokerage services. In addition January 14, 2020 matically donate $2 to Expensify.org for every to Venmo, Plaid also works with Transfer- The percentage of U.S. consumers who are $1,000 worth of approved expenses. Individ- Wise, Paysafe, Current, Simple and Acorns, as late on their car loan payments has risen to its uals will also have the option to donate out well as challenger banks such as Chime. highest level in nearly eight years, according to of pocket for the same amount with Personal Plaid’s functionality is at the core of open new survey data from the American Bankers Offsets. banking, and other initiatives that tie banks Association. The company did not respond to ques- to third-party fintechs such as payment apps. In the third quarter of last year, 2.43% of bor- tions about who will manage the charity and By gaining access to Plaid’s client network, rowers with indirect auto loans were at least 30 whether it will have independent oversight. Visa will be able to more easily add digital days overdue, according to the ABA data, which financial services and gain revenue from its represented the highest delinquency rate since own payment rails, and support its issuer the fourth quarter of 2011. FINTECH banks who will be making deals with fintechs. Indirect auto loans are arranged for consum- “Plaid’s APIs give Visa a new pathway to ers by auto dealers, rather than directly through data-driven revenue streams,” said Richard banks. Delinquency rates on those loans peaks Visa’s $5 Crone, a payments consultant. “The popu- at around 3.5% in 2009, fell to 1.45% in 2016, larity of embedded banking is seen in Goo- and have since been on the rise again. billion Plaid gle Cash, Libra and other forms of ‘head- “Indirect auto loan delinquencies have less banking’ where banking companies steadily increased as cars have become more are underneath someone else’s brand or expensive and some consumers have taken on deal takes a letterhead.” longer loan terms,” ABA Chief Economist James Traditional financial institutions have Chessen said Tuesday in a press release. “Any possible rival been at odds with Plaid and other aggrega- bump in the financial road can create problems tors over data access. An upgrade at Capital for people who may have stretched their budget One cut off the data aggregator, for example. to buy a car.” off the table In a typical scenario, users enter their on- The 30-day delinquency rate on direct auto line credentials and Plaid authenticates their loans climbed to 1.15% in the third quarter of By John Adams account. It also works with ACH processors 2019, according to the ABA data, a level that it January 13, 2020 such as Stripe and Dwolla. Plaid also recent- reached only once in the previous eight years. In the battle to control consumer data, ly entered a data aggregation deal with Wells The ABA’s quarterly delinquency report, Visa has made a major score by agreeing to Fargo. which is based on a nationwide survey of banks, acquire Plaid, a technology company that it “Perhaps with ownership by Visa, both showed mixed trends across various consumer could have seen grow into a competitor. banks and consumers will feel more comfort- asset classes. Plaid provides a range of user experience able about handling over financial account The late-payment rate on credit card loans services and works with partners such as details,” said Sarah Grotta, director of debit fell to 2.96% in the third quarter of last year, Venmo, Betterment, and Coinbase, among and alternative products advisory service at its lowest level in five quarters. But an index of more than 15,000 financial institution part- Mercator. “Visa can also have some control eight closed-end loan categories had a 30-day ners. over future development of new products, delinquency rate of 2.03%, which was its high- Plaid was recently valued at $2.65 billion, some that without Visa’s ownership could est level in seven years. according to . Visa and have competed with its core card business.” The latter trend was driven by higher delin- Mastercard both were part of a $350 million This article originally appeared in quency rates in not only auto loans, but also strategic investment in Plaid in September, PaymentsSource. personal loans, mobile home loans, recreation- a funding round that included Amex, Citi, al vehicle loans, marine loans and home equity Mary Meeker, Index Ventures, NEA and 16z. loans.

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rate environment this year. bank partners use these models appropri- WEALTH MANAGEMENT Suarez joined Clarfeld out of Pace Uni- ately by closely monitoring performance and versity, where he earned an MBA in finance that external applications are implemented at its Lubin School of Business. He is also a correctly. Citizens Certified Financial Planner. This requires model risk groups to be- come more sophisticated, enhanced through names new technology and nimble to enable the bank’s BANKTHINK open-banking strategy. The second risk to be mindful of is stra- CEO of private tegic risk. The decision of whether or not to Open become an open bank has vast strategic im- wealth plications. If a bank moves toward turning banking’s its products and services into a platform for third-party partners to develop on top of it, subsidiary it’s critical to find the right partners and the three biggest right networks. By Laura Alix Banks will have to create a strategy for in- January 13, 2020 pitfalls creasing both their development and their Citizens Financial Group in Providence, customer networks. The number of third par- R.I., announced a changing of the guard at its By Jacob Kosoff, Aaron Bridgers ties that develop on top of bank APIs will im- private wealth subsidiary on Monday. and Henry Lee pact the quantity and quality of innovations, Clarfeld | Citizens Private Wealth said that January 13, 2020 which draws in customers. Rick Suarez will succeed the firm’s found- Moving to an open banking system comes Additionally, the number of bank custom- er Rob Clarfeld as CEO. Previously, Suarez with both costs and benefits that each bank ers will also impact the number of third-par- was co-chief operating officer and a mem- will need to weigh before diving in. ty developers that a bank attracts. In oth- ber of Clarfeld’s executive committee and The benefits are clear: an ability to focus er words, banks need customers to attract investment policy committee. on core financial services, a better line of developers; and developers to attract new “Rick and I have worked together since sight into the overall financial picture of a customers. 1996 when he first joined us as a financial client, new revenue opportunities and better This classic chicken-or-the-egg problem planner,” said Clarfeld, who will remain with risk-based pricing. However, there are also will necessitate plugging into existing ecosys- the firm as executive chairman. “Rick is wide- costs: An open bank carries strategic, oper- tems and networks, such as online merchant ly respected for his leadership and execution ational, model, conduct, financial crime and platforms to interest both customers and skills and I have complete confidence in his reputational risks. developers. ability to steward the firm in the coming These risks will be magnified due to the The first-mover banks will also have to bal- years.” amount of change needed to open the bank’s ance bringing in new relationships through Robert Varriano, who has been with processes to third-party partners. Yet, the open banking and maintaining existing rela- Clarfeld for 29 years, was also named sole strategic risk by doing nothing could prove to tionships that are built on the tenets of tradi- chief operating officer on Monday. be the greatest risk as customer and strategic tional banking. Conversely, banks that do not Citizens announced in late 2018 that it partner expectations continue to evolve in an move toward open banking run the risk of would buy the Tarrytown, N.Y.-based Clarfeld increasingly connected world. becoming obsolete. Financial Advisors and the deal closed early That being said, there are three main risks Third, all banks are managing the reputa- last year. John Bahnken, the CEO and presi- that banks will need to assess before opening tional risk posed by data breaches and sim- dent of Citizens Bank Wealth Management, their network. ilar negative news events related to strategic said the bank and the firm “are now serving The first is model risk. An open banking partners. However, open banks will have to clients as a combined team.” business model is heavily dependent on mitigate and monitor additional dimensions Clarfeld was one of a number of nonbank models in the form of decision engines and of reputational risk. acquisitions the $164.4 billion-asset Citi- artificial intelligence. These models are fun- Open banks will have to actively monitor zens has made in recent years. Citizens has damentally different than traditional models online developer communities to ensure that also bought Bowstring Advisors in Atlanta, in that they perform calculations in real time, their platform remains competitive. They will Franklin American Mortgage in Franklin, interact with streaming data, reside within also need a continuous feedback loop with Tenn., and Western Reserve Partners, a merg- a cloud environment, are accessed through the development community to ensure that ers-and-acquisitions adviser in Cleveland. external application programming interfaces their platform provides the features needed Those deals have helped Citizens boost its (APIs) and are regularly used by outside par- by developers as well as a software develop- fee revenue and offset margin pressure. In an ties. ment kit that keeps up with the evolution of interview last fall, CEO Bruce Van Saun said Additionally, these models may be inter- technology. that Citizens would continue to focus on fee nally developed or externally developed. A bank’s reputation with application income in what’s expected to be a flat interest Model risk groups will need to ensure that development communities will impact the

For up to date and complete coverage go to AmericanBanker.com WEDNESDAY JANUARY 15, 2020 AMERICANBANKER.COM PAGE 8 quantity and quality of partners. This rep- fixed-income business. utation will also impact a bank’s ability to EARNINGS The corporate and investment bank, led attract the internal talent needed to support by Daniel Pinto, has been investing in tech- the platform. nology to shift more trading of fixed-income Open banking has significant benefits, but JPMorgan’s assets such as currencies and commodities the transition will create new risks that could to electronic platforms. It’s also been hiring shock the culture and processes of an orga- trading investment bankers to boost the bank’s mar- nization. Banks must strengthen their model ket share in select regions and sub-sectors, risk infrastructure, decide strategically to be and is experimenting with blockchain tech- a first mover or not, and better monitor the surge helps nology to try to speed up payments between developer community to manage these risks. corporate customers. Banks must be thoughtful during this fuel most Still, after the best year for bank stocks in transition. more than two decades, investors are starting to question how much longer the era of re- Editor’s note: This BankThink is the third in profitable cord profits can go on. Analysts at UBS Group a four-part series on open banking, the poten- AG last week cut their outlook on shares of tial risks and how to regulate it. The first -ex year ever JPMorgan to neutral, citing a “high bar for amined the process to becoming an open bank further outperformance.” and the second looked at common pitfalls By Bloomberg News JPMorgan, which plans to host an investor with third-party vendors. January 14, 2020 day next month, didn’t provide any annual The opinions expressed in this article are JPMorgan Chase & Co. just posted the best targets for 2020. The company said it expects those of the authors, intended for information- year for any U.S. bank in history. net interest income of about $14 billion in the al purposes only, and should not be attributed Fueled by a rebound in trading, especial- first quarter. to Regions Financial Corporation or any of its ly in fixed income, the company said profit Fourth-quarter net income rose to subsidiaries or affiliates, including Regions jumped 21% in the fourth quarter, pushing $8.52 billion, or $2.57 a share, from Bank. Any representation to the contrary is annual earnings to a record $36.4 billion. The $7.07 billion, or $1.98, a year earlier. That expressly disclaimed. announcement led off this week’s round of beat the $2.36 average estimate of 23 analysts industry profit reports on a high note, though surveyed by Bloomberg. Jacob Kosoff is the head of model risk man- analysts are predicting results for 2020 will The firm’s consumer-banking unit posted agement and validation at Regions Bank. He come back down to earth. a 3% increase in revenue as investments to serves on the Alabama Commission on Artifi- Fixed-income trading revenue came in open up branches in new states started to cial Intelligence and Associated Technologies. $1 billion higher than analysts predicted as yield returns. Aaron Bridgers is a senior vice president and the bank benefited from an active final few Net charge-offs surged 21% to $1.49 billion the head of risk testing optimization at Re- weeks of the year and gains in securitized from $1.24 billion a year earlier. gions Bank. Henry Lee, Ph.D., is a senior risk products and rates. It marked a stark come- The bank generated $14.2 billion of net and financial intelligence consultant at the back from last year’s fourth quarter, when interest income, bringing the full-year met- SAS Institute. wild market swings kept clients on the side- ric to $57.2 billion, slightly below the bank’s lines and JPMorgan’s bond-trading unit guidance of $57.5 billion. posting its lowest revenue since the financial crisis. “While we face a continued high level of EARNINGS complex geopolitical issues, global growth stabilized, albeit at a lower level, and reso- lution of some trade issues helped support Citi fixed- client and market activity towards the end of the year,” Jamie Dimon, the bank’s chief income executive, said in a statement. The biggest U.S. bank generated $4.95 bil- lion in trading revenue in the quarter, a 56% trading increase that was better than analysts expect- ed. That marked the best fourth quarter for surges 49% the firm’s trading desks in more than a de- cade. By Bloomberg News In December, JPMorgan Chief Finan- January 14, 2020 cial Officer Jennifer Piepszak told investors Inc. cut traders — and got its to expect better performance for the last mojo back. three months of 2019, thanks to gains in the Revenue from fixed-income trading shot

For up to date and complete coverage go to AmericanBanker.com WEDNESDAY JANUARY 15, 2020 AMERICANBANKER.COM PAGE 9 up 49% in the fourth quarter — more than 5% to $8.46 billion, signaling a potential turn- Corp. and the National Credit Union Ad- double the increase predicted by analysts — around. That was the strongest fourth-quar- ministration to testify before lawmakers on a after a slump that rattled the industry a year ter in half a decade. regular basis. ago. The rebound, combined with surpris- Here are other key metrics from the “These agencies are responsible for moni- ingly strong earnings from debt underwriting quarter: toring the safety and soundness of our finan- and consumer banking, pushed net revenue • Net income rose 15% to $5 billion, or $2.15 cial system, as well as compliance with feder- for the period to the highest since 2015. a share. Excluding a one-time tax benefit, al banking laws approved by this Committee,” The finale puts the trading division on the bank earned $1.90 a share, topping said Phillips when he introduced the bill to stronger footing heading into a new decade, the $1.84 average estimate of 21 analysts the House Financial Services Committee in as executives pursue a series of profitabili- tracked by Bloomberg. October. ty targets that have led to dismissals when • Expenses climbed 6% to $10.45 billion, The Cybersecurity and Financial System revenue faltered. On Tuesday, they vowed to higher than the $10.22 billion analysts Resilience Act of 2019 was introduced by Rep. keep zeroing in on costs. estimated, as the bank spent more on Patrick McHenry, R-N.C., the ranking mem- “We enter 2020 in a strong competitive po- compensation and continued investing in ber of the House Financial Services Commit- sition,” Chief Executive Officer Michael Cor- operations. tee, and would require regulators from the bat said Tuesday in a statement announcing • Citigroup has been reducing the number Fed, the OCC, FDIC and NCUA to provide results. He credited both “increased revenues of promotional offerings on its card prod- an annual report and briefings to congres- and disciplined expense management.” ucts in a bid to increase interest income. sional lawmakers on each of their respective The trading windfall helped Corbat sur- Revenue from the bank’s card business cybersecurity efforts. pass a goal for return on tangible common climbed 6% to $5.34 billion. “While I appreciate our regulators’ growing equity of 12% in 2019. But managers already sensitivity to cyber-related risks, we can and set a tougher target for this year and have must do more,” McHenry said on the House been pointing to headwinds in the market. CYBERSECURITY floor Monday. “As the Fed acknowledged in Citigroup shares rose 1.4% to $81.80 at 8:07 its most recent Financial Stability Report, cy- a.m. in early trading in New York. ber resiliency is a potential risk for financial Citigroup’s results contrast with a year ear- House passes stability that doesn’t yet fit neatly into exist- lier, when revenue from fixed-income trading ing risk frameworks. This bill will help our — the firm’s largest securities business — bills to require regulators, including the Fed, incorporate plunged amid market turmoil in a dark omen cybersecurity into those risk assessments for the industry. That time, the firm fell short more effectively.” of its full-year profitability target. more reports Both bills passed the House by voice vote With trading results weak again in mid- late Monday. q 2019, the bank set out to eliminate about 400 from bank of its staff in that division. Revenue from the © 2020 American Banker and SourceMedia, Inc. combined fixed-income and equities busi- All rights reserved. ness beat analysts’ estimates in the third regulators quarter, then trounced them in the fourth. Traders focusing on bonds, commodities By Hannah Lang and currencies generated $2.9 billion during January 14, 2020 the year’s final months, far ahead of the $2.37 WASHINGTON — The House passed a bill billion projection by analysts. That more than requiring prudential banking regulators to offset a surprise drop in the much smaller give annual testimony to the Financial Ser- equities unit. vices Committee, as well as a bill that aims In the investment banking segment, the to bolster cybersecurity at the regulators and firm leaned on strengthening capital markets the financial institutions they supervise. businesses — particularly investment-grade The Prudential Regulator Oversight Act, underwriting — to counter a drop in fees which was authored by Rep. Dean Phillips, from advising on mergers and acquisitions. D-Minn., would also require prudential The segment’s biggest contributor, debt banking regulators to submit semiannual capital markets, boosted revenue 16% to reports on supervisory and regulatory ac- $738 million. tivities. The bill was co-sponsored by Reps. The trading cuts weren’t the only person- Anthony Gonzalez, R-Ohio, Joyce Beatty, nel moves in the year’s latter months. Citi- D-Ohio, and Barry Loudermilk, R-Ga. group assigned Jane Fraser to run its consum- Unlike the Federal Reserve Board, there er bank, already in the midst of an overhaul, is no current statutory requirement for offi- when elevating her to company president cials at the Office of the Comptroller of the in October. The division’s revenue climbed Currency, the Federal Deposit Insurance

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