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What the Data Tells Us About Primacy

In this Purposeful Banker episode, we look at insights from the PrecisionLender database, as well as polls conducted with commercial bankers, to see what those findings tell us about Primacy. Why it's so vital now? Why it's so difficult for some banks to achieve? And what's the bottom-line impact of broadening relationships?


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Jim Young: Hi, and welcome to the Purposeful Banker, the podcast brought to you by PrecisionLender where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young Director of Content at PrecisionLender, joined again today by Dallas Wells, our EVP of Strategy. Today, we're returning to a topic that we spent a great deal of time on in the summer months, and that is primacy. Now back then, we talked a bit more in theoretical philosophical terms. How do you define primacy? Why does it matter? How do different parts of the bank view it? How do you set up your bank to better pursue it?
Today, we're going to put our feet a little bit more on terra ferma here and take a look at what the data tells us about primacy. Unfortunately, once again, for those of you who are frequent listeners of the Purposeful Banker who know that when it comes to this sort of stuff, Gita Thollesson usually does the heavy lifting for us, and she's done it again. She's sifted through the PrecisionLender data and pulled out the key points and she shared a good number of those in several blog posts, which we'll link to in the show notes. She also conducted some polls with bankers during our fireside chat panel discussions about primacy. So pretty much all Dallas and I have to do is kind of go through that and discuss what it all means. So Dallas, welcome back to the show.

Dallas Wells: Thank you. Appreciate that. And of course, very much appreciate Gita doing all the actual work here and then you and I can just pontificate and take credit for it.

Jim Young: I was going to go with bloviate, but pontificate works as well. Yes.

Dallas Wells: Yeah.

Jim Young: She really addressed this in sort of three steps. So let's start with the first and when she's basically asking, "Okay, well what's behind the push for primacy?" Obviously everyone wants to be the primary bank. That's not something new, but she was basically looking at it and saying, "Okay, is there data that explains why this seems to have become more urgent?" And she looked at relationships in three areas, credit only, credit relationships that added deposits and then credit relationships that added deposits and expanded into fee based accounts. So, can you kind of quickly summarize what she found and what the implications are?
Dallas Wells: Yeah, I don't think this will be a surprise to anyone, but it does put an actual number to it. And I think that's the big key that we'll talk about here is this actually puts some scale and scope to the issue that everybody's aware of. So the issue is, is that credit only relationships, so those where you only have loan business with a commercial customer.
Those relationships have gotten far less profitable over the last couple of years. So in the commercial lending world, at least, if you had only commercial loans and as long as they were decently priced, you were doing okay, those weren't going to be your top relationships ever, but you could do okay with that. And in fact, you probably, in most institutions, you have a stable of relationship managers that, that's how they operate. They're comfortable in the credit world.
That's kind of their thing. They don't bother with the organizational friction of having to do cross-selling, it's a lot of work. They get paid for loan production, they do loan production, and that was just fine. And what Gita's numbers say, first of all, is that, that's not good enough anymore. So in August of '19, the credit only relationship she looked at had a risk adjusted ROE of 10.8%. In August of '21, so two years later and post all things COVID, that number's down to 8.7. So it kind of drops below that threshold where most banks are going to say,

"Yeah, that's low but acceptable," to now, like, "Well, I don't know that we're really clearing the cost of capital there." That's a problem when we get down to those levels, given the degree of risk and the degree of the balance sheet that this is taking up. I'm the not sure that's the highest and best use of our resources there.

So that's I think the big reason for banks intuitively feeling like this is such a problem is that it is. And if you are one of those banks that has not been great at cross selling, your numbers absolutely show the results of that now, and you are probably a laggard within your peer group. So the next big takeaway, and then we'll pause there for a second, is that historically you could make up for that as long as you like, "Hey, bring deposits and we're good." And so her big point number two, there is that, and again, everyone intuitively I think is feeling this as well, deposits don't help right now. Everybody's got deposits, plenty of deposits. In fact, they're drowning in those deposits and given the low rate environment that we're in, there's not a whole lot you can do with all that extra liquidity.
And so when she compares relationships that have credit and deposits together, again, August, 2019, 12.3%. So you'll notice it is 20% more profitable, significant improvement there. But in August of '21, that number is 12.4%. So over that time, tons of deposit growth. So those relationships that had deposits, now have a lot more deposits, and it didn't really help with your profitability. So it does help to cross sell deposits, but you haven't really gained much traction from that. And the growth that you've gotten out of those relationships that you work so hard to get their deposit accounts, hasn't really gained you much over the last couple years. So credit only is not enough, and cross-selling deposits probably doesn't help you enough to make up for it. So, that's kind of the premise that Gita starts from. And I think probably the biggest takeaway from that first piece.
Jim Young: Yeah. And you basically got right to where I was going to say, which was with deposits and I sort of chuckled to myself and you're right, bankers intuitively know it, but it is also just fascinating to see that we're here, when a couple of years ago, I remember recording a podcast, which was something titled along the lines of, the Race to Add Deposits or something like that. We were really looking into how can you make sure to add deposits because that, you need that cheaper funding source and that sort of thing. And now we're at the, what are you supposed to do with all these deposits?
Dallas Wells: Yeah. And so I will say, one of the sort of truisms of this industry is that eventually deposits always do matter. So there are these periods that we go through where it's like, "Oh my gosh, what are we going to do with this?" But for executive teams that are taking a long view, which is frankly, most of them, if you're taking a long view of your institution, get the deposits when they can be gotten. And that's where a ton of franchise value will eventually reside. So this is building for the future still. And so one of the interesting things, we do the math on the back end with some of our tools here.
So we have a lot of banks saying, "Hey, when we add deposits, it actually shows the profitability of this transaction sort of in a vacuum going down, what are we supposed to do with that?" And that's one of those where you kind of have to do, sometimes you do have to put your thumb on the scale and say, "I know the that's what it says, but eventually you're going to want those deposits. So let's do what we need to do there to make it worthwhile for your bankers to get those again, while they can be gotten, move those relationships now. And eventually we will be money good on those." But that's been an interesting dynamic over the last year or so.
Jim Young: And you make an interesting point about talking about credit only, and that a lot of times that is the world that a lot of relationship managers live in. It's what they know how to sell. And it's what quite frankly is a lot easier to sell. And a lot of times it's what they get rewarded on doing is added credit only. And so I feel like to some extent, Gita is doing her best to sort of give credit-only, its fair ability to defend itself in here. And so she then looks at,
"All right, what are the situations in which credit only works?" And I remember when she was doing this, I sort of had to thought to myself of, "Why are we even asking this question? And I thought we've already kind of established credit only is not a great idea." But is that maybe not a universal thing?
Dallas Wells: Well, I think it is a universal thing and that you can count on that as kind of being a truth, but what Gita's really good at doing is looking for those sort of pockets of opportunity, so the story beneath the numbers. And so what she was looking at, one of the interesting parts that she found was by the different credit relationship sizes. So for the very largest relationships versus the very smallest ones and it, again, logically makes sense that the very largest relationships to win those, credit only, you get to get pretty skinny. Again, every bank is facing sort of the same headwinds right now, too much liquidity, really competitive credit market. And so when a bankable credit comes in with a $20 million loan request, they can shop that to any bank that they want to and have some interest in some aggressive pricing.
And so really the only way to make those larger relationships whole is to be able to cross sell them additional things. Now, the good news is, is they need lots of additional things, typically at those sizes. Smaller credits though, can work on a credit only basis. Again, they have to be well priced and you have to be very strategic. You have to be able to differentiate those, this is why we think kind of the dynamic ability to negotiate each deal on its own merits is really important. But smaller ones can work where they're profitable enough even without the cross sell. And so I think, what was interesting is that that was not universally true across all institutions. It is some banks are set up that way. So I think that's another reason why you're seeing now such a huge push into the technology investments in lending area, and specifically in the commercial lending area.
We're seeing a lot of banks, all of a sudden show up with budget where they haven't had budget before. And it's because they are pushing for efficiency here. There are pockets of opportunity, when you look at where the market is pricing, some of those smaller commercial credits, it's been squeezed out of consumer lending, it's been squeezed out of now larger commercial transactions. So there's this pocket in the middle where it looks like there's some opportunity, but you have to be able to do that business efficiently. So those banks that can, their deals look very profitable, even at credit only, those that can't, they're going to really struggle. There's just not much room for them left to go out and find acceptable margin anywhere in their customer base.
Jim Young: Right. And so I think a lot of cases they would probably argue, "Well, yeah, we get it. Credit only, not great, but that's sort of our part of our land and expand strategy." And every company that has multiple solutions, present company included, has that as part of its strategy, right? Like, "Okay, we're going to start with this, but don't worry, this is kind of step one, phase one of that." But what did Gita's data show us there about sort of, I guess, what I would say is a spoiler or a little bit of a potential downside on this?
Dallas Wells: Yeah. So this will come as no surprise to anyone who's ever managed relationship managers, sometimes getting your foot in the door, the door that gets kicked open is not always that fantastic. And so what Gita found again, that gut feel that a lot of bankers have, as Gita did the analysis on it, a whole bunch of those relationships, never actually do the expand part of that. So we get real skinny to land that first initial business, but then the cross sell never really materializes. There are some institutions that are really good at this. The majority are not very good at it. And so you can see a pretty broad based evidence of that across institutions of all sizes. This is a hard problem to solve. And so there's a lot of folks that struggle with it.
So Gita looks at, when did a relationship start as a credit only relationship, and then over time, how many of those are still credit-only relationships? So it's a little bit daunting, really. One of the windows was from 2016 to 2019. So these credits are at least two years old, could be five years old, 32% of those are still credit only, so a solid third have never become anything else. Then you go all the way back to relationships that started before 2010, 15% of those are still credit only. So again, that was a different environment, but, heck you're talking multiple cycles ago at this point. And if those have not turned into broader relationships, I don't think they're going to.
So I think that kind of points to how broad this struggle is and that you can't just assume, "Well, if we win the credit, we'll be able to win some of the other business." You have to be really in intentional about winning that other business. You actually have to have a plan. You have to have some tactics, you have to have processes and tools and you have to hold people accountable for circling back to get that business, all that stuff you have to be really purposeful about and do intentionally and not just assume it will show up. If you assume it's just going to show up the numbers, say it doesn't, it just plain doesn't move.
Jim Young: Yeah. I got to assume though. I mean, in those things, that's, that's a lot of annual check-ins or renewal conversations that are going by in which I'm assuming someone's going, "All right, great," and stamping it and moving on. So its kind of, I know I shouldn't be surprised by it, but I still sort of am surprised by it.
Dallas Wells: At that point when you're looking at a deal, again, some of those are a decade old, so that's not just a, "Well, we booked a real estate deal three years ago and it just hasn't come back around. We couldn't really put the screws to them in any way to force any action." A relationship that's been around for a solid decade, you've had ample opportunities. In fact, my guess is given the rate cycles that we've been through, they've probably come back hat in hand at asking for the opportunity to refinance a couple times. And since they're still around, you said, "Yes," and still didn't take that opportunity to say, "You bet, love to do it, but you got to bring me X, Y, and Z," and then facilitate that happening. So that is absolutely the case that you've had your chances.
And again, that's why we talk so much about renewals here. Those should not just be the rubber stamp process that they've become at most financial institutions. Those really should be true opportunities to evaluate, restructure, negotiate, look not just at that customer, but the market around you. And that's why those contracts are set up that way. That's why you go through the hassle of it is because it is an opportunity to reset yourself. And if you don't, with these banks that are rubber stamping everything, that customer that comes back for the refinances when rates are in their favor, I'm guessing they don't call you when rates move the other way and they've gotten locked into a sweet deal. They don't come back and offer to make you whole.
So you've got this one-sided optionality for your customer and as bankers who sell financial contracts for a living, giving away free options, free one sided options to your customer is a bad business plan. And that's essentially what you're doing when you don't take the contractual opportunities you have to reset things. That's how you have to start viewing these.
Jim Young: Yeah. The temptation here, we could absolutely go off into a renewals rabbit hole, a incentive plan rabbit hole, a deliver to promise rabbit hole, which is again, that's the larger conversation that Gita is sort of triggering with this data, but, we're going to stay focused here and get back onto taking a look at more of her data. And some of which I, as my habit is, is to get a little snarky once in a while. I'll call it what I sort of would say, "Captain obvious data." And one of these, she compares the ROE of credit only relationships to broaden relationships in a sample range of sample banks. I'm going to go ahead and spoil it and say the broaden ones do better, but so why is it important to show us something that bankers and even podcast hosts intuitively know?
Dallas Wells: Well, what struck me as valuable about this is you can quantify kind of the... Well there's two ways to look at it. Either the size of your opportunity there, or the size of your miss there. And again, she looked at it by different institutions. Some do well, some don't. There are some of these where I'm guessing some of these folks don't want their boss to see what these numbers look like, because it's one thing to say, "Well, yeah, we should cross sell, those customers will be more profitable." When you translate it the way she has, and it becomes dollars and cents, and you can say, "Well, gosh, we're missing out on $30 million a year on this cohort of customers, if we just got up to kind of some industry standard numbers here."
The upside there is that, well, now you can start to make a case for, "Okay, we can invest into this. We can add some headcount, we can buy some technology. We can do some of the painful process of rebuilding, somehow we do this." Because there's a $30 million or whatever your X number is there. There is a potential upside there if we get this right. And essentially we can't afford not to. So that's what bankers are I think looking for in so many of the places where they're being asked to invest. Right now everyone's struggling with the great resignation and talent issues, everybody's struggling with, "I feel like I'm being lapped in terms of technology, but I can't buy all the things, so what do I prioritize?" And what they're struggling with, what I see over and over is they're struggling to tie both of those things, the talent retention and the technology, to tie it to business outcomes.
And so that's what Gita's, I think, giving them the keys to here is, "Well, here's a business problem you can kind of get your arms around. It's a little different then maybe a change in look and feel of a mobile experience," which is probably important, but I have a really hard time quantifying that. This is one that's pretty concrete. It's nuts and bolts of, "Here's how well other banks do it. Here's how not well we're doing it. And if we invest in these things, we can get closer and we can make the money back and then some." So they can tie those things to business outcomes. Everybody then feels comfortable about locking arms and jumping into it and making the investments they need to make, to make it happen.
Jim Young: Yeah. And then sort of to add onto that, she went into one final area, which is to look really specifically at treasury management as a product to add, and sort of, again, making a business case, if the next couple ones we're going to talk about certainly making case for, "Hey, we should be looking to add treasury management whenever possible." And she starts by looking at the ROE on unused credits. And again, spoiler, they're miserable. So we don't need to dive right into that. I guess, were you surprised maybe at how miserable and then I guess, conversely, she takes a look at unused credits that also have treasury management. What did you think of those ROEs? Two part question.
Dallas Wells: Yeah. So we'll back up first and just be really explicit about how a lot of commercial groups really use those unused commitments, so what we're talking about is a revolving line of credit that has no balance outstanding, which by the way, is a whole bunch of your revolvers right now, because a good chunk of folks are flush with liquidity right now. All those deposit balances are coming from somewhere. But these banks typically a lead with, "Hey, we'll give you a $30 million revolver and then we want all your operating accounts and all your treasury management business, we want to be your bank. And we know that part of that is that you will occasionally need to draw on this revolving line of credit." So the bank's strategy is essentially, "We will extend our balance sheet to you and in exchange, we hope to generate some of this fee-based business."
So what Gita found is that, of course, the return on those unused lines of credit is terrible, it's about 2% overall. I think the more alarming thing though, is that, that really probably overstates the profitability. 94% of those have a negative of ROE. So the vast majority, you are losing money to extend that line. Again, that's okay, as long as you're doing it eyes wide open, and it's part of the strategy of, "We're extending the balance sheet so that we can make some of this stuff back."
But you better do that second part, otherwise you're just extending the balance sheet. You don't earn any spread, you don't grow your portfolio. You tie up the capital and you spend your tires and spend a bunch of overhead and you get literally no benefit from it. So those are critical, those relationships where you've got those big, unused lines of credit, those are really critical and should be at the top of your triage list of where do we go cross sell, and really pay attention to who to go after and make sure they bring the things they're supposed to bring. Those are the customers, because 94% of them you're losing money on.
Jim Young: And second part of that question then that, unused, but you add treasury management to it.
Dallas Wells: Yeah. So if you add treasury management, the ROEs go up by 4X. So these become actually some of your most profitable relationships just by adding the treasury component to that. So it sounds simple, of course you got to go get the treasury stuff. I get that the mechanics of this are hard. This is probably the most complex part of commercial banking is actually going to get the treasury management business. It's where there's the most steps, there's the most work to be done. There's the most different groups within the bank that are involved.
So again, this is why you see so much investment in the technology that aids this, as well as banks really thinking about everything from new talent to organizational structures. We've seen a number of reorgs inside of banks trying to get these groups closer together because again, what Gita's pointing out is that the returns make it worth it. You go from losing money to some of your most profitable customers and that strategy of extend balance sheet to build a customer base. When it works, it works fantastically. The execution is messy and takes concerted effort and concerted investment.
Jim Young: All right, well, that's good. And I think that sort of brings us around to the final question I had here. And this is the least scientific data, but in some ways, maybe one of the ones that opened my eyes the most, and this was a poll that Gita conducted at our fireside chat. These panels in which leading bankers are coming together to talk about primacy. And so she asked them essentially, "Does your bank have a have a primacy strategy?" And 40% of the banks that attended, answered no to that. So we've just gone through all of what we've just spent the last, I don't know, 25 minutes talking about, man, you got to expand these relationships. If you don't, it's so brutal on your ROEs. And then we have banks and these are not just any banks, these are some smart, really innovative banks telling us that actually we don't have a strategy. So I guess I'm telling you, I'm surprised. Are you surprised?
Dallas Wells: I am just because it, from a distance, it seems like, "Well, of course, this is obvious. You should have a plan for this." The reality is, the interesting part is, that number will move all over the place, probably depending on the size of institutions that you're talking to. And this is one where we find that the smaller institutions are actually a little better at having a plan for this. Everybody can sit in one room, or close to it. And it's something that one executive can kind of own both pieces and get their arms around it and get everybody rowing in the same direction. The level of coordination that this takes between all the groups that have to be involved, and especially, when you start doing things like, "Well, we have to set up ACH origination and these recurring wires that you want to do," it goes way far away from what the relationship managers that are typically sitting somewhere in the credit world and dealing with credit type issues.
These become operational things that they're not used to dealing with. And so again, in a small bank, that's somebody that's on the third floor, and I sit on the second floor. When you're talking about a larger institution, it's somebody you've never met before, who works for an executive you've never met, probably operating in a different city. So you're not even sure who to ask for help on these things. And you kind of just have to put in a ticket and it goes... The bigger the organization, the more distance there is between these functions, and so I think the harder it is to pull off.
And you also just don't have one executive leader at those institutions that can own it and say, "I have a plan for primacy." Instead it's like, "Hey, you were hired to do loans. And you were hired to do treasury management, stay in your lane, to some degree." So that 40%, again, I think it was a snapshot. Of course, accurate for the group that Gita was talking to. But it's one where I think if you are a smaller institution, you can use that to your benefit. And if you are a larger one, there's even more dollars at stake, but you've got a taller hill to climb there.
Jim Young: Yeah. All right. Well that will do it for this week's show. She's not on the podcast, but a thank you to Gita for again, pulling together the data that Dallas and I were able to discuss on the podcast. And Dallas, thanks again for coming on.
Dallas Wells: You bet. Thank you, Jim.
Jim Young: And thanks again so much for listening and now for a few friendly reminders. If you want to listen to more podcasts or check out more of our content, you can visit the resource page at or head over to our homepage to learn more about the company behind the content. If you like what you've been hearing, make sure to subscribe to the Feed in Apple Podcasts, Google Play or Stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this is Jim Young, for Dallas Wells, and you've been listening to the Purposeful Banker.