BankBosun Podcast | Banking Risk Management | Banking Executive Podcast

BankBosun is a biweekly syndicated audio program that provides the multi-tasking bank C-suite officers ideas and solutions from key executives from all types of businesses operating in the banking ecosystem. BankBosun provides relevant ideas and solutions clearly, concisely and credibly to better enable them to navigate risk and discover reward. Kelly Coughlin is a CPA and CEO of BankBosun, a management consulting firm helping bank C Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. Kelly earned his undergraduate degree (BA) from Gonzaga University and a master’s degree in business administration (MBA) from Olin Graduate School of Business at Babson College in Wellesley, MA. Kelly lives in Edina, MN.
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Now displaying: May, 2016
May 27, 2016

Sun Tzu Helps a Bank Defeat Its Competition

by Kelly Coughlin, BankBosun CEO,


Kelly Coughlin is CEO of BankBosun, a management consulting firm helping bank C-Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C-Suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. And now your host, Kelly Coughlin.

Hi this is Kelly Coughlin. I am the CEO and program host of BankBosun. Today, I am not going to have a guest today but I’m going to introduce a screen play that I wrote, it’s titled: How Sun Tzu and a Harvard Professor Helped a Community Bank Crush its Competition.

Here is the Play Summary: The play tells about how the board of directors and shareholders of a community bank, frustrated by an ongoing loss in revenues to big banks, financial advisors and non-bank competitors, threatened Joe, the bank CEO,  to turn it around or the board will sell, merge or close the bank.

Let me start by introducing the setting: It is 2016. Main Street Community Bank is a middle market bank with $ 1billion in net capital. The bank’s board, CEO and CFO lose sleep over the Three Rs: Risk, Revenue and Regulation. His Big Bank Competitors compete against them on product and price. And they can pay their execs more compensation. The big banks drive regulatory change, partly because of their own major screw ups, and partly because of their access to and, influence of, the regulatory and legislative banking ecosystem; and partly, and perhaps simply, because they have more money to spend to buy influence and effect change.

Joe also competes with non-bank financial companies who compete on technology and mobile access making them very attractive to the millennial market.  

His wealth management and trust areas compete for deposits and investments with financial advisors, CPAs, independent brokers and wire-house brokers.

It’s a dismal setting and many are projecting and predicting that the community banking ecosystem will no longer survive, dying a slow death like travel agencies, video rental companies, and bookstores.

The board tell Joe to either fix it or they will either sell, merge or close the bank.

Let me next introduce the characters: Joe, CEO, Main Street Community Bank. Joe is accountable to his board of directors, his investor/shareholders, regulators; directly to his CFO and other officers; and indirectly to every employee at the firm. And of course, he is accountable to all current and prospective customers, both business and individuals. He gets pressure to hire and retain professionals, and even more pressure to keep tight controls on expenses.

The next main character is Sun Tzu. Sun Tzu was an ancient Chinese military general, strategist and philosopher, who is believed to have written the famous “The Art of War”.

The third main character is Michael Porter. One of the many business case studies I read in business school at Babson College in Massachusetts was written in March 1979 by Michael Porter, a very smart Harvard University professor, titled, How Competitive Forces Shape Strategy. And another one was written in January 2008, The Five Competitive Forces that Shape Strategy. I would encourage all banks C-Suite execs to read these articles. Contact me if you have any trouble locating them.

And finally, the fourth main character is me, Kelly Coughlin. I am a CPA and the CEO of BankBosun. I’m also an independent consultant for Equias Alliance. I have been working in the banking ecosystem since I was 23 years old. And that was over 20 years ago….alot over 20 years ago…ok, it was over 30 years ago. I have had senior and executive experience at PWC, Merrill Lynch, Lloyds Bank and was CEO of a financial technology and investment company for over12 years.

The Three Act Play:

The classic way to tell a story…or write a screen play… going all the way back to Aristotle I think, is to have a beginning, middle and end…or in screenplay vernacular, the Setup, the Confrontation and the Resolution.

So with that in mind, here is Act 1, The Beginning, The Setup:

  • Joe’s banks is losing customers, revenues and profits.
  • It’s not attracting millennials who are using their phone, devices and the internet.
  • It’s not attracting high net worth wealth management clients, who are using big banks, brokers and accountants.
  • It’s not attracting institutional clients of pensions and endowments, who are using independent financial advisors.
  • It’s losing loans to credit unions and non-bank financial companies.

Joe knows that if he continues to try to compete for customers on the existing playing field, because of their capital, regulatory and human resource constraints, he will lose.

Joe knows he needs a change in his business strategy and create new tactics to implement that strategy or he will fail.


Act 2, The Confrontation

Act 2 is where the playwright demonstrates a loss so painful, a failure so great, that the protagonist (Joe) must confront his reality and status quo and either continue in this miserable, wretched state or change his state and condition.

In my Act 2, change in business strategy and tactics” is the change is the confrontation. And for my play, I introduce Sun Tzu and Michael Porter.

In act 2, we have Sun Tzu meeting with Joe and sharing his ancient wisdom with ideas like:

  • You must subdue your enemy without fighting.
  • Know your enemy and know yourself and you can fight a hundred battles without disaster.
  • He will win who knows when to fight and when not to fight.
  • Attack your enemy where he is unprepared, appear where you are not expected.
  • The greatest victory is that which requires no battle.
  • If you wait by the river long enough, the bodies of your enemies will float by. I’m not really sure how relevant that one is…but for some reason I like it…

But two of my favorites are:

  • Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.


I’m going to repeat that:

  • Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.

And here’s my second favorite:

  • Avoid your competitors' strengths; and attack their weaknesses.

So the idea here is the advice and wisdom of Sun Tzu leads Joe to think clearer and more strategic about confronting his dilemma, which requires him to confront his enemy and his competition. And to avoid his enemy’s strengths and attack their weakness and change the field of battle to a location and venue where his enemy cannot effectively compete.

And then to help our protagonist identify where this field of battle is, I introduce Michael Porter with his brilliant Five Force Analysis. These forces are:

  • Threat of new entrants
  • 2nd of the Five Forces: Bargaining power of suppliers, in banking the key suppliers in my mind are human resources…the competition to retain and recruit talent
  • Bargaining power of customers. Customers certainly can drive fee income. If customers know they are key, they will demand lower fees or lower interest on loans; higher interest on deposits.
  • Direct rivals: these are other community banks that compete head on with Joe’s bank. They are most likely banks that are stuck in the old business model paradigm, that is, they haven’t met Sun Tzu, Michael Porter, or Kelly Coughlin. But these rivals ironically are NOT the most significant competitor of Joe.
  • And that leads to the fifth and final force. Substitutes. This is the biggest competitive threat. These include big banks, and other substitute providers like non-bank financial companies, internet banks, phone banks for deposits and loans; and for wealth management and trust, CPAs, brokers and financial advisors

Joe is introduced to Michael Porter, who helps him bank understand that his real competitive advantage exists in three primary areas: 1) location: he has a physical presence in his customers’ local community; 2) security: he has brand image of safety, permanence and security; and 3) service: a live person, not simply a phone contact or email contact, but a live person with whom he can speak. And while his direct rivals, other community banks in his footprint, are certainly direct competitive threats because they also share his competitive advantages; his biggest threat are other substitute competitors – big banks, internet financial companies, who do not share that competitive advantage.

Joe now begins to see his wisdom. But he fears he does not have the budget to spend on fancy and sophisticated consulting ideas.

And now we introduce our final character, Kelly Coughlin, CEO, BankBosun, that’s me. I introduce Tactical Ecosystem Marketing for Community Banks.

Kelly explains that the terms tactics and strategy are often confused. Strategy is the overall plan; tactics are the actual means used to gain an objective, the end goal. Strategy helps you understand the question “What is our goal and objective? What are we trying to accomplish?” Tactics help you answer the question, “How are we going to accomplish our goal and objective?”

Kelly describes how Tactical Ecosystem Marketing is a cost effective marketing tactic that requires Joe to do a couple basic things compete effectively with his direct rivals and substitutes on a playing field they simply cannot or will not compete:

  • Identify the ecosystem. These are business owners, accountants, lawyers and other center of influence in the bank’s footprint including customers.
  • Create multi-media content including audio podcasts to promote his role and importance in the community’s ecosystem and among its members and learn of his target customers’ individual and collective needs, and their product and service features and benefits.
  • Establish Joe as a community leader who is interested not simply in earning fees from members in the ecosystem, rather, equally interested in helping the ecosystem thrive.


Finally, Act 3: The Resolution

  • Joe meets with Kelly
  • Kelly shows Joe how he can accomplish these within a budget that his board will approve and possibly at no cost to the bank at all.
  • They create a plan to write 24 articles on some of the bank’s activities, leveraging some of the work the bank’s credit officers and investment team is already creating.
  • Kelly helps Joe create a plan to do 24 podcasts over the next 12 months and syndicate them in iTunes and Google.
  • They interview the CEOs of some of Joe’s big target customers to help better understand their needs and challenges.
  • They create some fun and entertaining videos that explain the benefits of community banking versus non-bank financials for millennials.

Joe’s bank is now thriving and he is recapturing market share. And most important of all Joe’s kids think that their dad is the smartest, coolest, most sophisticated dad in the world. Why? Because Joe’s on iTunes and Google Playstore. And they’re not. And Joe’s board of directors loves him. That’s it for now. Thanks for listening.

We want to thank you for listening to the syndicated audio program, The audio content is produced by Kelly Coughlin, Chief Executive Officer of BankBosun, LLC;  and syndicated by Seth Greene, Market Domination LLC, with the help of Kevin Boyle.

Video content is produced by The Guildmaster Studio, Keenan Bobson Boyle. The voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin.

If you like this program, please tell us. If you don’t, please tell us how we can improve it. Now, some disclaimers.

Kelly is licensed with the Minnesota State Board of Accountancy as a Certified Public Accountant.   Kelly provides bank owned life insurance portfolio and nonqualified benefit services to banks across the United States.  The views expressed here are solely those of Kelly Coughlin and his guests in their private capacity and do not in any other way represent the views of any other agent, principal, employer, employee, vendor or supplier.



May 6, 2016

Kelly interviews Peter Weinstock, Partner, Hunton & Williams, Dallas Office. They talk about bank M&A deals and minority shareholder actions to gain control of bank management. Peter Weinstock’s practice focuses on corporate and regulatory representation of financial institutions. He is Practice Group Leader of the Financial Institutions Section and has counseled institutions on more than 150 M&A transactions, as well as provided representation on securities offerings and capital planning.


Kelly Coughlin is CEO of BankBosun, a management consulting firm helping bank C-Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C-Suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. And now your host, Kelly Coughlin.

Kelly: Hi, this is Kelly Coughln from the BankBosun. Hope everybody’s doing fine. I’m going to do an interview today with a deal guy. He’s with a law firm in Dallas, Texas. We’re going to talk about the types of deals that are getting done. Are they P&A deals? Are they stock deals? There are distressed deals out there, there are strategic ones, and what is he saying in terms of M&A activity in the banking sector. With that, we’ll get Peter Weinstock on the phone, from Hunton & Williams.

Let’s talk about deals, Peter. I have kind of a basic question on general trends. In bad banking economies, it seems that we have a lot of P&A deals, where I think the seller is normally the FDIC, correct?

Peter: Right.

Kelly: We must have had a lot of those in 2008, 2009, possibly up to 2010.

Peter: Yeah, I agree. For really almost a four, four and a half year period, there were more deals sold by the FDIC than there were private sector M&A transactions.

Kelly: Then today, better economy, better banking environment, we don’t see many of those, correct?

Peter: Very few.

Kelly: Would you say that the number of P&A deals is a leading indicator, lagging indicator of economic conditions of banks in general?

Peter: Yeah, it’s certainly a lagging indicator, just like capital as a protection is a lagging indicator because what tends to happen is asset quality issues or concentration levels or interest rate risk, some of those other factors, the metrics indicating those issues are becoming problematic kick in long before capital starts declining and capital starts declining generally long before or moderately before problem banks are looking to sell or the FDIC takes over. The number of P&A transactions, which again, we’re down to very few, are more reflective of the fact that the economy seemed to turn sometime in 2012 and we’ve had now three full years of, even though it’s not a great recovery, we’ve had some recovery.

Kelly: How many P&A deals have we seen in three years?

Peter: I think we’re only up to two so far this year, where we were, in 2009 through 2011, we were having dozens and in one of those years over one hundred bank deals.

Kelly: The two this year, are they in, say, oil patch regions that are struggling economically or somewhere else?

Peter: That’s an outstanding question because the answer is, it’s not. That’s not to say that the oil patch or the commodity price areas are not under stress. Certainly, the ag economy is under some stress, but again, it gets back to your first question about lagging indicators. The banks that are failing now are banks that have been circling around the drain for a long time now. They’ve been shrinking to maintain capital ratios, but they can’t get recapitalized because of the legacy assets that they have from the downturn, so we still have a significant number of banks that are undercapitalized and unless something happens, they could fail because they have elevated problem asset levels and those problem asset levels are what would bring them down. At December 31 there were 78 banks that were still somewhere undercapitalized or only adequately capitalized, which is down from, at one point, the problem bank list was over 600, but the 78 institutions that are adequately capitalized or worst, as of year end, are ones that are suffering from the last downturn, rather than the next one.

Kelly: All right, you mentioned 78 that are undercapitalized. What’s the metric that you use?

Peter: These are banks that are not well capitalized, so they’re adequately capitalized or lower, which is they have to have a leverage ratio of 5% in order to be well capitalized. Then you have the Basel III metrics. Right now, you’re talking about a total risk-based capital ratio of under 10% and total leverage ratio of under 5% to be adequately capitalized or, in that case, undercapitalized. It’s not an incredibly high bar that they’re not able to chin, so these 78, you would think that they would be able to recapitalize themselves, but the big challenge that they have is their elevated asset quality levels.

Kelly: You have these 78 banks. Are brokers out there, investment bankers out there trying to get them to sell? You guys probably don’t do that. Lawyers don’t hustle for business like that, I don’t think, right? You’re not making cold calls?

Peter: We’re purist, man. We would never do such a thing. I’m sure that all 78 of them have been shaking the trees and have talked to anyone and everyone who they think could be an avenue for capital and for addressing their problems, but at some point, if you’ve got capital of 5 million but you have problem assets of 15 or 20 million, at some point the numbers don’t make sense for an investor and that’s why these institutions are still on the list, some of them.

Kelly: Let’s talk about the good side of the market, not the problem areas. Let’s say last year, you being a proxy for the market, how many deals were related to distressed banks and how many were for strategic acquisition reasons or market expansion?

Peter: I would tell you the vast majority of them were strategic and few were problem bank acquisitions. What I mean by strategic isn’t necessarily that the seller was in great shape and they sold for a very high price. What we’re seeing is a number of sellers are kind of giving up the ghost because in this interest rate environment, with anemic loan demand, very competitive loan pricing, there are sellers that look at their compliance costs and their IT costs and their personnel costs and they’re saying, “We’re not big enough to do a deal. We’re not big enough to survive on our own and make our shareholders a fair return, so we need to look at doing something else.”

The something else is not necessarily selling for cash and going on down the road. One of the biggest trend lines we’ve seen in the last two, three years, is the willingness of sellers to take illiquid stock, stock from a privately owned financial institution.

Kelly: In the acquiring company.

Peter: To take illiquid stock from an acquiring company, that’s another community bank like they may be, sellers are much more willing to do that than they ever have been before in my 30+ year career. I think the biggest driver of that is that on the operational standpoint, the challenges of being a bank are such that skill matters and then on the shareholder valuation standpoint, I think they recognize that this may not be the greatest pricing time to sell out, so they look at doing some kind of strategic combination to be part of a bigger, more profitable organization, even though the stock is illiquid.

Kelly: Let’s say, in those situations where you’ve got a reasonably healthy bank, they see that if they don’t do something they might be in part of the 78 again, but they might go down that way, so they’re proactive. As a part of that, they have to lock up some of their good producers, right? Their good credit officers and those things. One of the thing we do in our business is help with non-qualified plan benefits to try to use that as a way to lock in good senior management. Do you see much of that going on as part of the deal criteria?

Peter: It surprises me that more banks that are potential sales candidates don’t do more. In community bank America, it almost doesn’t matter how big you are, you’re a potential target. I’ll give you an example. One of my clients is a $5 billion bank in California and they merged with an $8 billion bank in December, they announced it. The reason is because our client, that’s $5 billion, felt that they needed to get bigger in order to compete. The $8 billion bank felt like they needed to be bigger to compete, so now they’re going to be $13 billion. If you’re not an $8 or a $5 billion bank, if you’re smaller than that, you might say to yourself, I don’t need to be bigger to survive, but my efficiency ratio sure as heck would improve if we got bigger. I would tell you that almost every bank is a candidate to be sold, they’re a candidate to buy and they’re a candidate to be sold.

KPMG did a survey in 2014 and it indicated that over 50% of the banks thought they would engage in an acquisition, but 3% of banks thought they would sell. The numbers wound up in 2015 being something like 4.4% of all the banks sold. Every bank out there, it seems, is thinking about doing an acquisition, but every bank and community bank America is a potential candidate.

A long way around to your question is because the banks are all potential merger candidates, then they really should look at putting in place protections for their employees and really locking them up, but when they’re doing that, they also need to think about not hurting shareholder value. The way you could hurt shareholder value is you provide some kind of agreement, let’s say a change in control agreement, that provides on a change in control the employee gets paid if they leave the bank. Now we hurt shareholder value because the buyer knows that they could lose that person because there’s an incentive for that person to leave. Really, it takes somebody like you to think through not just how to protect the person, not just how to lock them up, but also to do it in a way where it creates or at least preserves shareholder value because the buyer is not looking at that contract and saying that that contract harms me because I’m going to lose a valuable producer.

Your question is a good one and I would even go further and I’d say what exists gets paid. If people want agreements to be in place, they need to put them in place because if they exist they’ll get paid, where if you wait until a potential acquisition, then what’s going to happen is the acquirer is going to say, “You can do that, but if you do that it comes out of the shareholder’s purchase price,” and I don’t think you want to be negotiating those types of agreements with another person with their elbows on the table.

Kelly: I’ve got a lot of experience in other financial sectors like financial advisors and broker dealers and the common theme with them is you’ve got much more highly paid execs, but the notion that the assets go down in the elevator every day. It’s more or less the same thing with many banks and not locking them up one way or another in an acquisition, it always kind of surprises me.

Let’s talk about surprises in an acquisition landmines. It seems to me that when we’re talking about banks that are not a huge footprint, a community bank that’s got 1 to 15 branches, isn’t it a fair statement to say that more of the acquirers or interested acquirers are going to be a current competitor of that bank and doesn’t that always present a bit of a due diligence challenge or problem, where you’re going to release sensitive, confidential information to your competitor?

Peter: That is absolutely correct that that’s a possibility. The reason for that is because most financial institution mergers are driven by cost savings. Where do you get the most cost savings? In a market deal or an adjoining market deal. It is very likely the party that can pay the most is going to be an existing competitor. That absolutely presents challenges in terms of protecting your employees and your confidential information. Obviously you’re going to negotiate the heck out of the non-disclosure agreement, if that’s likely buyer, if you’re the seller.

The other thing is you’re probably going to want to hold back on when you deliver information until there is an agreement on all of the relevant terms and then the due diligence becomes more in the way of confirming diligence than it does in terms of setting the price. You’ll release some key information, including whether there’s a termination fee as a result of the transaction on your data processing agreement, changing control agreements with employees, give all of that pricing type information, but you might hold back the loan review and the customer review until the deal is essentially set.

Kelly: The customer name is withheld until the deal is a little more mature.

Peter: We’ve also done it where you redact the customer names, but in an in-market deal it doesn’t take a lot of information for the buyer to know who that player is.

Kelly: Yeah, right. Back to my other question that we started on. Surprises?

Peter: I’d say the biggest surprise to buyers is that the seller’s compliance issues could infect them. I’ll give you an example. When MB Financial was acquiring Cole Taylor, Cole Taylor had a major compliance issue and the transaction was held up for about a year, while the regulators got comfortable with the resolution of that compliance issue.

Similarly there have been a number of red-lining cases and BSA cases where the compliance issues of the target have held up the deal. I think that’s a surprise for a number of buyers because if you’re engaged in a potential transaction, you’re locked into that transaction. You’ve agreed to try to get that deal closed. If you wind up with an extended regulatory approval time period, that could prevent you, preclude you from going after a deal that becomes available six months, a year later that might be a better deal for you.

Similarly for sellers, even in cash deal, if there’s a surprise that the buyer’s compliance issues can be such a hold up and what we’ve seen is we’ve seen AML, BSA, KYC issues that have held up approval of deals for two or three years in UDAP and some other consumer compliance issues that similarly have held up deals. As a seller, you have to perform some reverse due diligence, some extensive reverse due diligence on the buyer, even in the transaction that’s a cash deal. For a lot of sellers, that’s a surprise to them.

Kelly: Do regulators hold up the deal or does the buyer intentionally hold that up?

Peter: Generally it’s the regulators because from the buyer standpoint, they become aware of the issue and they adopt a plan of remediation for the issue. It’s one thing for a private sector party to get a handle on an issue and have a plan of remediation and feel good that they can implement it. It’s a whole other thing for an agent, say, to get their arms around it in a time frame that seems reasonable. The Federal Reserve has two analysts in Washington who handle compliance issues with regard to applications.

Kelly: The buyer would just haircut the valuation. At the end of the day it’s a contingent liability, right? They would just haircut the valuation on it.

Peter: If it’s a known risk and it’s one that they have presumably priced in. If it’s not a known risk and they become aware of it, then they may go back to the seller and say, “We’ve got all of these costs related to it, we need to reduce the price,” or if it’s significant enough, they could decide to walk the transaction.

Kelly: In terms of surprises, known compliance issues and I suppose the ‘know what you don’t know,’ whatever that term is. You know those issues, it’s the unknown compliance regulatory issues. Any ideas on pre-detecting, early detection of those things?

Peter: That’s really you just have to engage in some pretty thorough diligence of the other party to really understand where the risk areas are.

Kelly: I suppose you look at their internal controls and their timely filings or substantiation and all of those things on the control structure.

Peter: You do. Something that I like looking at as a starting point for diligence is nowadays banks have to do risk assessments. Seemingly a banker can’t walk out doing a five-page risk assessment. Those risk assessments are the other party’s self-confessing, if you will, where they see their own challenges or concerns. The beauty of that for the other party is that gives them a roadmap of things to look at in diligence.

Kelly: I was director of risk management for asset management subsidiaries of Lloyd’s Bank out of London, and this was many, many years ago. Regulatory issues and compliance back then just didn’t quite get the importance. They actually did in the UK, but things have ramped up in the US quite a bit, that it’s probably more on par with what it was with the British banks back then.

Peter: If you parachuted back, if you were Mr. Peabody and you got in the Wayback Machine and went back to 2000 and you had a full-time, dedicated BSA officer, and how many banks had full-time, dedicated compliance offer and how many banks had a full-time, dedicated risk officer, and how many banks had a full-time, dedicated IT person, and you compare those numbers to the way they are now, it’s just shocking. The bigger the acquisition, the more you want to look at areas that you might not want to spend the money on if you’re a smaller institution. In a bigger deal, you absolutely want to evaluate IT exposures and make sure that there have not been or in place potential breaches.

Kelly: Why don’t you give us parting thoughts you’d like to give. Speak to both buyers and sellers.

Peter: One thing we’re seeing for banks that may not want to be a seller is there is a lot more activism. We had six private banks in the fourth quarter that had proxy sites, tender offers. One even had a TRO, a temporary restraining order, filed against them. That’s continued in the first quarter of 2016. One thing is to put in place protections and recognize that your risks can be from your existing shareholder base or people who buy in. The world’s awash in money and people out there know if they could buy stock of a bank at eight-tenths of book or book and then wrestle control of the board and get control, then the bank on the sale might be worth book and a quarter or book and a half, book seven, where they could potentially even more than double their money, buy the stock and flipping it in a control situation. We’re seeing activism creeping down into the community bank, into the private bank sector, and that’s something clearly you want to watch.

Kelly: You’re not talking political and social activism. You’re talking about business acquisition, venture capital, investment activism.

Peter: Absolutely. We’re talking shareholder activism. Then just another thing that we’ve seen on the buyer’s side is buyers tend to be most focused targets who are of sale who sent them books. We talked about some of the compliance challenges of the application process. Just because somebody sends you a book and the book says, “We’re for sale,” doesn’t mean that they’re the greatest candidate for you to buy. What you want to be careful about is being locked up on a deal in the regulatory process that is somebody who doesn’t really move the needle for you. It’s got something that obviously is worthwhile, but maybe it’s really not consistent with your strategic focus. We’ve seen potential buyers almost shift their strategic focus just because an investment banker sends them a book on a potential target.

Kelly: Two good points. I always like to finish with two things: Your favorite quote and the stupidest thing you’ve either said or done in your business life.

Peter: There are a lot of the latter. Upon the former, I like the Warren Buffet quote, which it really resonates when you’re talking about shareholder activism. He said, “I prefer to manage my business for the shareholders who want to stay in and not the ones who want to get out.” I may be paraphrasing it, but that’s the thought. I like that quote a lot because that’s actually directors of the bank. Those are the people they have a duty to.

The second one is the stupidest thing I’ve ever done in my career?

Kelly: Yes.

Peter: One thing that I learned a long time ago not to do is something that’s emotionally gratifying because in business it almost always is a bad decision. Early on in my career I would get testy with regulators and that’s never a good strategy. Gray hair and maybe even the loss of hair and some experience, I’ve learned the wisdom of working together with regulators a lot more than trying to beat them up.

Kelly: Can you recall one that you said something to?

Peter: I remember when I was a third-year lawyer, I went to a meeting with the Federal Reserve and I’m not exactly sure what I said at the point, but this person with the Federal Reserve got up and it wasn’t quite Nikita Khrushchev banging his shoe on the table, but he was animated.

Kelly: All right, Peter. Thank you very much. I appreciate your time. I wish you the best.

We want to thank you for listening to the syndicated audio program, The audio content is produced by Kelly Coughlin, Chief Executive Officer of BankBosun, LLC; and syndicated by Seth Greene, Market Domination LLC, with the help of Kevin Boyle.

Video content is produced by The Guildmaster Studio, Keenan Bobson Boyle. The voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin.

If you like this program, please tell us. If you don’t, please tell us how we can improve it. Now, some disclaimers.

   Kelly is licensed with the Minnesota State Board of Accountancy as a Certified Public Accountant.   Kelly provides bank owned life insurance portfolio and nonqualified benefit services to banks across the United States.  The views expressed here are solely those of Kelly Coughlin and his guests in their private capacity and do not in any other way represent the views of any other agent, principal, employer, employee, vendor or supplier of Kelly Coughlin.   
May 6, 2016

Kelly Coughlin interviews Wes Sierk, President and Co-Founder of Risk Management Advisors. Wes is the author of the book Taken Captive: The Secret to Capturing Your Piece of America’s Multi-Billion Dollar Insurance Industry. Wes is a recognized expert in using captive insurance strategies to manage and fund certain types of risk. Kelly Coughlin believes that such a strategy could be used to manage and fund cyber security risk. This is the first in a series of three podcasts covering captive insurance and cyber security risk management.


Kelly Coughlin is CEO of BankBosun, a management consulting firm helping bank C-Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C-Suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. And now your host, Kelly Coughlin.

Kelly: Hello this is Kelly Coughlin with the BankBosun. This is the podcast that’s the first in a series of three podcasts that are going to be related to using captive insurance strategy to manage and ensure cyber security risk and loss.

I’ve talked to many bankers over my 25-year career and I have observed in the past five years cyber security going from a concern of IT guys and techno geeks to top of mind attention and concern of CEOs, CFOs and boards of directors. In fact, I was at a conference in Kansas a while back, and a number of the sessions were on cyber security risk. I was thinking, “Well, should we go to that? Should we not go to that?” We talked to C-level execs. These sessions were all standing room only, completely filled with C-level execs.

It occurred to me that in this environment, we have potentially overpricing of all services related to the risk management of this risk including prevention, detection, hardware, software, consulting. I thought the subject of these 3 podcasts would be the transference of this risk. I think one of the areas that I detect as potentially being mis-priced is the cost of insurance, partly because the risk of loss is all over the map. We thought, “Let’s explore cyber security risk through a captive insurance enterprise.”

To help kick this series off, I am interviewing Wes Sierk, President and Cofounder of Risk Management Advisors. I came across Wes through a book that he wrote, exciting title called, Taken Captive. That sounds good so far. Here’s where it goes downhill: “The secret to capturing your piece of America’s multi-billion dollar insurance industry.”

I’m interviewing Wes remotely. He’s in Long Beach, California. Wes, you heard my introduction, and the reason you would be on this call, but let’s start with a couple of minutes on your background, how it would connect to bank cyber security risk management.

Wes: Well first of all thank you for having me on the show. I started out in the insurance business in 1993 in a division of Northwestern Mutual, which was a life insurance company called CCI, Compensation Consulting Inc. Mostly what we did there is qualified and non-qualified planning, retirement plans and deferred comp, things like that. I came across captive insurance companies in 2000. My first thought was, it was a perfect alternative to deferred comp. That’s how I got into it. My background is … I’m a researcher, so I started digging into why life insurance was all the same. It was you go to a life insurance company and you get a 45-year-old male, and you say, “How much is a million dollars of coverage?” The insurance company prints out that ledger. If you had ten agents going to the market, they would all come back with the same quote.

PNC is completely different. You actually have one broker who goes to the market for you and it’s much more of a negotiation, which leads into the pricing issues that you alluded to earlier in your call. My partner Jared and myself went on to form Risk Management Advisors in 2004 and all we’ve been doing since is just the design, implementation and management of captive insurance companies.

On a personal side, married for about 24 years, two kids, I coach baseball, and Risk Management Advisors has a Nascar team.

Kelly: Give us a definition in two sentences of captive insurance.

Wes: It’s an insurance company that a business sets up to insure their own risk. It’s pretty simple.

Kelly: It could be a bank?

Wes: Yes. Instead of them buying their general liability, their cyber, their property, all of their coverage from AIG, Zurich, Liberties of the world, they actually form their own licensed regulated insurance company and they pay those premiums to their own company. They deduct those premiums, just like they would by paying any other company.

Kelly: All right. In terms of primary motivations, my research shows that one, you’ve got access to cheap insurance rates because you’re paying them directly to your own carriers so to speak, right? You’ve got first dollar loss coverage, you can accelerate loss deductions, which appears to be a fancy term for you can over-fund the risk premium and build up tax deductible reserve. Are those the three core motivations to do this, or are there others? What’s the primary motivation to do this?

Wes: I think you hit the nail on the head. One thing it does give you, if you’re an insurance company, is it gives you access to the reinsurance marketplace.

Kelly: How much would a bank be saving? Are you talking 5% or are we talking 40%?

Wes: Well it depends on the kind of policies they’re writing and the amount of risk that they’re willing to take. One thing is, the reason why reinsurance is less expensive is because the insurance industry, insurance companies, have thousands of employees. I read somewhere that the insurance industry has three times as many employees as the US Post Office. They do a lot of the processing of paperwork and claims and things like that, so they have higher overhead. A re-insurer can get away with having 5% of the employees of an insurance company, because they only attach at a certain level whether that’s 50, 100, 250, a million, whatever. They’re not getting involved in the day-to-day operations of the insurance company and the day-to-day pay out of claims. That’s left to the insurance company level. We see, for regular insurances, I would say you could see a 30% savings over your traditional insurance.

Kelly: In the banking business we have what are called banker’s banks, and they provide banking services to banks. They don’t do anything directly with the public. So would a reinsurance company be an insurance company’s insurance company where they provide services only to another insurance company, so you cut out all of the sales process I suppose, the distribution expenses? Aren’t those the core things that are cut out plus the servicing part because they’re not dealing with million to 20 million dollar cases, they’re dealing with whatever the number is, 50 million or above, the larger ones?

Wes: You’re exactly right. Your analogy is very good. Where bankers have banker’s banks, this would be like an insurance company’s insurance company.

Kelly: If one were going to set up a captive, that entity would have to also sign up, unless they were going to absorb all of the risk themselves, which is unlikely. If they want to transfer or share some of that risk, they have to set up relationships with reinsurance companies, correct?

Wes: Correct, unless they want to take that risk themselves, which we don’t usually recommend the first couple of years.

Kelly: I suppose companies like you, this is not an infomercial for your group, but is that part of what you do, is you have these relationships and there’s probably some vetting process that you would go through to bring on a new captive client, I suppose, and introduce them and negotiate terms, etc with the reinsurance company. Is that one of the roles that your company provides?

Wes: Yes it is. Clients come to us because they want us to set up and manage their insurance company for them; deal with the departments insurance; do all of the regulatory filings and in most cases, not all cases but most cases; they’ll have us go and negotiate the reinsurance contracts for them. The good thing about reinsurance, reinsurance is always sold net of commissions, unlike an insurance policy where you pay an insurance agent, we’re just negotiating on behalf of the insurance company as a manager of the insurance company.

Kelly: That’s where the big savings comes from.

Wes: Yeah, there’s a lot of savings in that. I’m not going to begrudge brokers because brokers bring a tremendous amount of value to clients.

Kelly: There are a couple of ways to set these things up from what I can tell. You could set them up as a single parent captive or a group pooled collective type where you have a group of banks. You have a single bank, Bank A that decides, “We’re going to set this up.” It’s only one bank in there. Then you have a pooled or group approach where you have Banks A and B setting up the collective. They either do it alone or with others, like kind business I suppose, right? Is that a fair assessment?

Wes: Yeah, they either do it by themselves or they do it with other people. Then within the other people, there is many different ways they can do it.

Kelly: You know the context and setting that this call is about. It’s specific community banks, cyber security risk, captive insurance. If you had to Google this, those three terms would be in there. One other risk if you do it as a group or collective, let’s just say there are two banks in the collective – you have Bank A and B that are, let’s say they’re putting in an equal amount. Let’s say Bank A has great internal controls and risk management processes, Bank B has terrible ones. Bank B incurs all the loss and Bank A has insured it all. There part of the reason was to put in a bunch of excess premium perhaps, build up this reserve. Then you have Bank B eating up all the reserves. Is there a way that a bank can set up a hybrid of this where they could share say, the operating expenses, maybe consulting expenses, a number of things related to the entity? It could be another class of stock, something where the actual risk is only absorbed by the individual bank and ultimately a reinsurance carrier downstream.

Wes: There could be, but I wanted to go back to one point you made, which was Bank A has great internal controls and Bank B doesn’t. The issue with cyber security is many banks have good security or great security, but it’s also the luck of the draw. The person with bad security could be fine and the one with great internal controls could have that one in a million chance where somebody comes in and breaches their security or takes millions of dollars out of their company. Within the group captive there’s also cell companies. You can have a cell captive.

A cell captive is one where it basically looks at and smells like one large insurance company but each individual bank has its own cell, so they kind of wall off the assets and liabilities on a bank by bank or cell by cell limit. That could go a long way to protecting the bank. Then you go get one reinsurance treaty for all of the banks, and then you carve it off. You go get 100 million dollars of coverage and you carve it off at 5 million dollars per bank for twenty banks. The insurance companies like that because they know that if they’re writing 100 million dollars in coverage and they basically divided it at 5 million between twenty banks, they know their chance of loss is actually smaller. The frequency may be higher but the severity probably wouldn’t, and that’s where they get into the pricing. They’d much rather spread it 5 million over twenty banks, than one bank have a 20 or 25 million dollar claim.

Kelly: I accept your point that Bank A may have great controls and Bank B not, but Bank A could be hacked, right? I understand that’s a valid point, but I think in this environment what is going to happen is certainly you have the Top 10 banks, they’re the high-value targets of cyber criminals. They have the budget to always attempt to put up the adequate defenses to that. I fear what is going to happen is the less target-rich environments like community banks will, as the Top 10 banks for instance, get better at defense, then the smaller community banks are going to be the target and they don’t have the resources to fund that. It’s an expensive undertaking. where you’ve got hardware expenses, software, consulting, insurance, all of this stuff, and staff of course.

My thinking was that you set up this captive and you develop best practices. I’m going back to my PWC days in consulting, where in consulting business you’re always looking for best practices, but you develop best practices and you share the costs. You buy them properly, buy them at the right price, right terms, etc, and then you share the cost over twenty entities and not one community bank. The reality is these banks can’t afford to set up the high-level controls that a Top 10 bank can do it.

Wes: You’re exactly right. It’s the philosophy of build your ark before the flood comes. By creating their own insurance company and warehousing dollars today, because of the way the policies are written, they basically expire every 15 months. If they are the targets of cyber criminals three years from now, they would have already stockpiled a ton of money, so they can weather a claim if they have it and maybe not have to hit their reinsurance. To your point, we both know what’s happening in the cyber marketplace as far as the premium dollars in the traditional market. The reason why … it’s because insurance companies are doing the exact same thing. They’re charging exorbitant fees today because they don’t know how big this is going to be.

It reminds me of the old asbestos claims. Remember when asbestos started being a problem? All of the insurance companies started raising their rates dramatically. Then what happened was, a couple of smart insurance guys said, “You’re charging $700,000 for a million dollar general liability policy for asbestos, but if the people actually get hurt, it’s going to be a worker’s comp claim.” It’s not going to be a general liability claim, but the insurance company hadn’t thought that far ahead. They just wanted to get as many dollars in their coffers as they could in case they got hit. For cyber, you went to that conference … you’re exactly right. Five years ago it would have been just the IT people and you’d have fifteen people in the room. Now it’s actually the C-level. It’s CEO, CLO, CFO that are doing this.

Kelly: The board members are the ones that are saying, “Get to the conference. I want you there.” They’re telling their CEOs to get there.

Wes: It’s huge. It’s such a huge problem. I was just reading an FBI report on cyber crime. Their prediction is all businesses in the next five years will be spending at least 10% of their gross income on cyber for protections and hardware and software, and everything. You can’t even fathom that today, but it’s coming. Now we have passwords on top of passwords to get into password programs. They listed off that the FBI did a study and they went into the Apple iTunes store where people get the applications and they have all these password programs. 10 of the top 20 were programs that were sold that said, “Number one password protector.” They were sold and designed by organized crime, downloading these programs for their iPhone and their Androids, putting all their passwords in, all their banking information, and all that stuff was being directly fed to Russian organized crime. They don’t have to steal cartons of cigarettes anymore when they can make 20 to 30 million dollars in one financial transaction.

Kelly: Absolutely.

Wes: It’s staggering. I can see why these board members and CFOs and everyone else would be concerned about it. It’s a big issue. One of our clients was just hit with it.

Kelly: Let’s say we set up Newco captive insurance for community banks. You set up as part of this synthesis of best practices and captive insurance for cyber security. I’m going to throw in another term, “best practices.” I don’t necessarily think they’re into gouging. They just can’t efficiently price it because the risk parameters or the level of risk that they’re taking on an entity basis per entity, per insured, is all over the map. When you take in a company to join the captive … would you call them a shareholder?

Wes: Yes.

Kelly: Okay. When you take a shareholder, they have to adopt the best practices standards that the new captive insurance carrier says. Does that make sense, that would be part of the admission process?

Wes: I would say you definitely want to do that. Some insurance companies, it’s really a risk assessment for cyber preparedness. There are some insurance companies that have done a great job at this. In fact, one of them, these people developed this cyber preparedness company for Ace and Chub insurance company, as freelancers. They said, “Well we want this to make sure.” For them they realized that, “Hey, there’s a real market for this.” They basically bought company back for nothing. This was a few years ago. They’re like, “Well this isn’t going to be as big as we thought it was.” That’s all they do is analyze cyber preparedness. They give you a full report. We just had them come into ours because we have a lot of data in our stuff. We have a lot of HIPPA stuff because we run insurance companies for medical, for example. They gave us a whole big report of change this, change this, change this, and some stuff you’d never even think about. You’re like, “Whoa.” The cost to do it … I thought it was going to be very expensive but it was nothing on the scale of things.

Kelly: You just hope that they’re not owned by the Russian mob, right?

Wes: Yeah, exactly. Three of my clients had used them and the one that just got hit for cyber, their system was set up in such a way where they were instantly notified that this was happening. This was a server in Toronto. Instantly they had to switch the whole thing offline. They flew two of their internal programmers from here in California up to Toronto. They were back online in under 24 hours without an ounce of data. I’m like, “You know what? I’ve got to have your people come in and do this.” This is a company that does 100 million dollars in sales. I think everyone should be requiring this.

Kelly: I think there’s some really cool things you could do when you have many entities splitting the cost of this. I’m certainly set up best policies, procedures, all that kind of stuff. You could buy licenses. You get quantity discount, volume discounts there. There’s a lot of benefit to having a larger group in there. Even just the project team, these banks don’t have the resources to have a really good project team to do a good vendor search, for instance. That’s a costly undertaking in and of itself is, “Well what email provider should we do?” They just don’t have the resources free to do that. You threw out the 10% number. My goal would be to let’s set it up so the goal we could make that a 5% of revenue number, not 10.

Wes: Or 1%. What I was saying was, that was what the FBI’s projection of what people would be spending on their cyber stuff was. In my business, I can’t even fathom that. We spend all this money a year on hardware and software, and our business is X. If I were to extrapolate that out to say, “Well how much would we do if we did 10%?” There’s like, “There’s no way.” We could buy server hubs. We could buy everything. I guarantee you if you picked ten of your banks who listen to this, one of them is doing something great that the other nine aren’t, and so having a depository … You say, “Hey this was a great idea that this bank is doing and then you could take it over to the other one.”

Kelly: Yeah, but what happens, Wes, is that everybody is going to these conferences. They get the heck scared out of them, they come back and they talk to their IT guy and say, “You know I just went to a conference. We’ve got to start controlling this risk.” Then they look at it and realize that, “Oh this is going to cost $100,000? Oh I guess we can’t afford that.” There’s plenty of ideas out there. There are some great ideas and there is some not great ideas, but there’s loads of ideas.

Taking the idea and having the resources to actually implement is the big challenge. I believe that the captive program is a way to pull those things together buy cost-efficiently, do vendor searches efficiently. It all comes together there through that thing. Yeah, there are some tax benefits by throwing in higher premiums, that kind of thing. That’s great but I don’t think this is primarily a tax-driven … It just so happens that taxes will be favorable … favorable tax treatment. I really think it’s the cost-effective way to manage risk and to get best practices adopted in community banks throughout the country that otherwise just can’t quite afford it in their budget.

Wes: I was going to say, and you’re using double duty dollars. Right now if they buy cyber insurance from AIG, they’re not getting internal controls, they’re not getting all of this due diligence, they’re not having somebody come in. They pay them and then if there is a claim … They still on top of their premiums have to go out and do the best practices and do all of the stuff to make sure they’re secured vs. paying premiums to their own company.

Let’s say the insurance company takes 10% of all the premiums that it takes in from all the companies and then uses that to go in and install the best practices and stuff, so you’re actually using money that you would have just given to somebody else to now improve your overall business operation. We’ve had people do that with worker’s comp where, hey they can’t afford a safety guy and their worker’s comp rates have gone up, so they create their own worker’s comp company and now they use the money they were giving to Liberty and AIG and all these other companies to hire their own full-time safety person. That’s actually now just an expense of the insurance company vs them having to take money out of the bottom line of their company.

Kelly: One other thought that’s a great image that I have of you is set up this captive, you have fifty banks involved and you also fund a cyber security SWAT team comprised of Navy Seals and Rangers that are deployed in the event of some ransom war type deal, right? Then they get engaged, they’re ready to go, and then they go out and take them down.

Wes: Yeah, that’s a great idea.

Kelly: Otherwise it’s a call to the FBI and okay, they do great work, granted, but man it’d be nice to have our own team. That could be Phase 2 down the road. Anyway, let’s wrap it up. I really appreciate your time. Let me ask you this. Do you have a favorite quote?

Wes: Yeah, well I do but it’s a Ayn Rand in Atlas Shrugged they talked about Rearden Metal and it was going to be too expensive to rebuild these bridges for the trains using Rearden Metal because of the engineering. The quote was, “When men got structural steel, they didn’t use it to build steel copies of wooden bridges.”

Kelly: Good one.

Wes: I look at captives and things like that as you can use it as a powerful tool to do something in a completely different way. You don’t have to just use it for the same way you were always doing stuff. I would say that would be the first one that popped into my mind.

Kelly: What’s the stupidest thing you’ve ever done in your business career? Give people a laugh. Give people a chuckle here.

Wes: Oh, I have an album on my bookshelf. You know Bill Withers, “Lean on Me”?

Kelly: Lean on Me and “Use Me”.

Wes: I got an appointment. His wife called and wanted me to come talk about overall financial planning and stuff. I went to see him and I’m like, “I love your music. I love the movie and everything.” They’re just sitting there like uh-huh, uh-huh. The meeting didn’t go well and I left there. I had it confused with Stand by Me instead of Lean on Me. My dad found this Bill Withers album and he said, “Keep this on your bookshelf and any time you don’t know the answer, you won’t make a complete fool of yourself.”

Kelly: Oh that’s a great one! That’s very good, I love that one. All right, Wes. I appreciate your time. How can people contact you?

Wes: Yeah, my website is Risk Management Advisors. It’s and my email is I create a website that’s not branded by us, but it’s and it just has general info on captives. You were kind enough to mention my book. The book is called Taken Captive and it’s just

We want to thank you for listening to the syndicated audio program, The audio content is produced by Kelly Coughlin, Chief Executive Officer of BankBosun, LLC; and syndicated by Seth Greene, Market Domination LLC, with the help of Kevin Boyle.

Video content is produced by The Guildmaster Studio, Keenan Bobson Boyle. The voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin.

If you like this program, please tell us. If you don’t, please tell us how we can improve it. Now, some disclaimers.

   Kelly is licensed with the Minnesota State Board of Accountancy as a Certified Public Accountant.   Kelly provides bank owned life insurance portfolio and nonqualified benefit services to banks across the United States.  The views expressed here are solely those of Kelly Coughlin and his guests in their private capacity and do not in any other way represent the views of any other agent, principal, employer, employee, vendor or supplier of Kelly Coughlin.   
May 6, 2016

Kelly interviews Adam Mustafa, Invictus Consulting Group who talks about CECL and some of the challenges banks have in accounting for future credit loss.


elly Coughlin is CEO of BankBosun, a management consulting firm helping bank C-Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C-Suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. And now your host, Kelly Coughlin.

Kelly: Hi, this is Kelly Coughlin with the BankBosun. I’m going to do an interview today with Adam Mustafa, who’s one of the founders of a company called Invictus Group. There’s been so much discussion in the last couple months on this new CECL regulation that’s coming down the pike here this year some time that deals with how banks are supposed to be valuing and estimating their credit loss. I read a report that Invictus put together, a 2016 regulatory outlook. I actually did three blog posts on it, so you can go to the blog section and read those, as well, and then I’ve appended the Invictus report, as well. With that in mind, I’ll get Adam on the line. Adam, we’re going to talk about some things that are relevant to the bank industry. Why don’t you give us some background on yourself, on Invictus. I see a Mustafa name at the top of the letterhead. I assume that’s a family member.

Adam: Yes, my father and I co-founded the business, and like I tell everybody I’m the smarter, better looking version of him. I do all the work, and he gets to take all the credit. In all seriousness, we started the firm back in 2008 right after the financial crisis began. Today, our bread and butter is providing community banks with strategic advisory services that focus very heavily on using analytics to get an edge in terms of acquiring other banks, being able to analyze those banks and know those banks better than they know themselves, and using analytics also to customize their own capital requirements with their regulators in the face of increasing regulation and the implementation of Basel III.

Kelly: You were with Deloitte Touche for a while. It looked like a number of your other guys came from the banking or investment banking circles. What’s kind of been the genesis of the partners? You and your dad, where did you guys come from?

Adam: I’ve been very much an entrepreneur. I consider myself an entrepreneur first and foremost. I did work at Deloitte, and I was in their business evaluations group. I worked on Wall Street as a junior grunt earlier in my career. I’ve seen commercial banking and investment banking from a variety of different angles. My father’s background is far more impressive than mine. In many ways, a lot of the techniques we use today, my father learned from the great Walter Wriston at Citigroup. My father worked at Citibank in the late ’70s through the mid-’80s, where he was responsible for all mergers and acquisitions, including Citibank’s acquisitions of other financial institutions.

He is a disciple of Walter Wriston. Again, a lot of the techniques we use today were originated by Wriston, and we’ve just updated it for today’s times. That’s our background. We like to say we put the A back in ALCO. What we do is, on the one hand, innovative, because as soon as the 2008 crises occurred, the conventional techniques for analyzing banks all broke down. We’ve developed new analytics, but at the same time, they go back to the fundamentals of banking. You could trace their origins back to the ’60s and the ’70s when Walter Wriston was running Citibank.

Kelly: So now we get at the name Invictus and Invictus Group. Can I assume that it comes from the William Ernest Henley poem, “I am the master of my fate. I am the captain of my soul,” that type of Invictus, or is it another genesis?

Adam: Yes, sir. You hit the nail on the head. In many ways it was very much a metaphor for the times we were in, circa 2008, 2009, when we were in the depths of the financial crisis. Nobody knew exactly what was going to happen, but everybody knew that the industry was never going to be the same.

Kelly: Yeah, one of my favorite stanzas from that poem, it describes 2008 pretty well. It says, “In the fell clutch of circumstance, I have not winced nor cried aloud. Under the bludgeonings of chance, my head is bloody but unbowed.” It describes how many of us went through a very tough period. You also had some experience with the famous Jim Cramer. What was that like?

Adam: I was with him long enough to have a cup of coffee. I don’t even think he would remember my name, although he called me Ace for some odd reason. It was a great experience because he is obviously very well-known and very well respected. He’s got a method to his madness, so just being able to observe him, even though he didn’t know my name, to watch him go about his day, watch him go about his process, I learned a heck of a lot from him. I’d actually tell you what I learned was that I don’t want to be a stock picker because that job is not only very difficult but is very short-term oriented. It is very focused on what companies are going to report quarterly earnings better than what the analysts thought. It was very focused on what tomorrow’s economic indicators were. It was too short-term oriented for me. And so if nothing else, I learned that I wouldn’t make much of a stock picker.

Kelly: Let’s get right into it. I’ve known about you guys for a number of years, and I have great respect for the work that you do, but what got my attention I’d say most recently was this 2016 Regulatory Outlook. As I was pouring through that, it’s about a fifteen or twenty page report, most of which most CEOs and CFOs won’t read because it’s too long, I went through it and parsed it out into three components. One was a regulatory compliance cyber security thing. Part two was balance sheet risk management, and then part three, which was more board-level issues. Just briefly I want to skip to part two that got my attention. “Invictus research found seven hundred and fifty banks with commercial real estate concentrations above 250%. Regulatory guidance suggests banks have unhealthy concentrations.” That seems a lot.

Adam: Yeah, it’s very hypocritical when you think about it, because on the one hand, there is these concentration ratios that are essentially monitoring community banks, in terms of their exposure to commercial real estate, but at the end of the day, that’s what community banks are. They are commercial real estate lenders. That’s what nine out of ten of them do. In many cases, of course they’re going to have concentration ratios in that range. The regulators tend to use 300% as a threshold, and if a bank goes over 300%, that’s when they will examine them a lot more thoroughly, but that’s what community banks do. Community banks, they’re like any other for-profit business. They’re in business to make money, and they have to make loans to make money.

If you try to limit the number of loans they can make, then they won’t be able to make enough money, especially in this environment. And then on the other hand, if these ratios start to push them towards other forms of lending, such as C&I, then all of a sudden they don’t have expertise in C&I. It can be very dangerous making loans in areas where you don’t have an expertise in, and then the regulators will come after banks for venturing into lines of business where they may not have what they need from a skill set perspective. If they make too much of the loans that is their bread and butter, then they’re going to come under scrutiny, but if they try to diversify, they’ll come under scrutiny for getting into lines of business that they’re not familiar with. Community banks are in a very tough position.

That being said, I understand where the regulators are coming from. When you look at the carnage of the 2008 financial crisis, and you study banks that failed and got into heavy trouble, there was heavy concentration. The key is, let’s evaluate the spirit of what’s happening. The spirit of what’s happening is that regulators don’t want banks to fail, but at the same time, banks got to stick to their bread and butter. At the end of the day and we work with a lot of banks who are over that 300% threshold. At the end of the day, the regulators will be comfortable, and a community bank could have a concentration level at 500% to capital, but they have to demonstrate to the regulators that they have the toolkit from the perspective of risk management, capital management, and the sophistication to manage that type of risk.

Kelly: On this CECL business, what is the basic difference between from what banks are doing now in doing some sort of loan loss reserve? There seems to be this discussion on the life of the loan, and replacing and incurred loss approach with a lifetime expected loss estimate. It seems like, on origination, FASB and the regulators are going to say, “Okay, when you originate the loan, we want you to estimate how much you’re going to lose on this loan on origination.” When they do the loan, they’re not really expecting that they’re going to be losing on the life of the loan. Every credit they grant is estimated to be a good credit, so what is the difference here on the approach that they’re doing now, which is a basic allowance system possibly based on past results, versus this lifetime expected loss estimate?

Adam: The primary difference is that CECL is designed to be forward looking, whereas the current process for recording a loan loss reserve is backward looking. That’s the primary difference.

Kelly: Backward looking on their entire portfolio, not with that particular credit, but their overall portfolio, correct?

Adam: Yes. Let’s examine quickly how banks today calculate their loan loss reserve. It’s actually very simple, but you could then see how broken it is. By the way, I’m not advocating here for CECL, but the one thing I can tell you right now is the current way of calculating ALLL (Allowance for Loan and Lease Losses) is a joke. Let’s start with what banks do as first step. They take all of their high quality loans, they call them pass-rated loans, or loans that are currently doing fine, they put them into pools, and they will calculate how much they expect to lose off that pool, but that calculation is based off their historical loss experience. It’s backward looking from that perspective.

Then with the loans that are in trouble, they have to actually analyze those loans individually, and they will look at the collateral position of the loan. They’ll look at the borrower’s financials, and they will estimate using that data, which is also backward looking, how much reserve they need to have against those individual loans. Then you’ve got this third bucket. What CFOs will refer to is as is “qualitative factors”. Qualitative factors is the plug right now, the band aid that’s trying to bridge this gap of the ALLL being backward looking, and the idea that their own loss reserve should be forward looking. Essentially, these qualitative factors is like throwing darts at a board. The CFO or the chief credit officer will look at economic conditions locally and then add plus or minus 1, or 10, or 15% to these scorecards, and then they’ll try to use these score cards to pad their ALLL.

The irony is that this bucket, these qualitative factors, for most banks is actually representing 90 or 95% of their loan loss reserve. 90 or 95% of bank’s loan loss reserve today right now is based off throwing darts at a board. Frankly, that is not effective. The irony is, is that although studies have shown that CECL would hurt banks and would require banks to add to the reserve, we actually don’t see that. For strong, healthy banks, this bucket of qualitative factors is such a large component of their ALLL. We actually think CECL would help a lot of banks because it would demonstrate with more science and far less art how actually less risky those loans are, depending on where and when they were originated.

Kelly: Those qualitative factors that you mentioned, isn’t there a bit of an issue as to how that data is captured. Some of it is captured maybe in memory, some of it’s captured in a Word document, maybe it’s in Excel format. It’s not like there’s a standard input of this type of data, number one, and then number two, isn’t it true that much of that data is kind of subjective?

Adam: That’s exactly my point. It’s like throwing darts at a board. It’s highly subjective. It’s 99% art, 1% science at the most, and yet these qualitative factors, the number coming out of that bucket, is representing 90 to 95% of a bank’s loan loss reserve.

Kelly: Okay, but they’re still under the duty to try to compile that data, correct? That’ve got to collect it and compile, and then make some decisions based on that, right?

Adam: There’s not a lot of data, that’s the problem, for them to collect. Many of them are doing their best to try to collect local or national economic data and try to interpret that, but it is literally like throwing darts at a board. Therein lies the problem. This is why the FASB wants to replace how banks are calculating their loan loss reserves now and replace it with CECL. If you went back to 2008, and you studied what happened in the crisis, a lot of banks didn’t have enough in the reserve. When we’ve done this, if you study failed banks and you looked at their loan loss provisioning, you would see zero, zero, zero, zero, zero, and then a huge spike in one quarter, the quarter where the regulators showed up, and all of a sudden, the banks is under-capitalized and then two quarters later they fail. There was too much volatility. The ALLL itself is highly subjective, easy to manipulate, especially for larger, publicly traded banks. The current system for ALLL completely broke down in the financial crisis, which is why FASB proposed CECL.

Kelly: Wouldn’t it be true, though, that the qualitative factors that you mentioned that led to the ALLL analysis or result, those qualitative factors will help guide the CECL analysis, correct?

Adam: CECL’s going to replace that, because the regulators know, FASB knows that these qualitative factors are a joke. The qualitative factors right now is a band aid. FASB wants to improve the methodology for the reserve in instead of relying on these qualitative factors. They want to have a lot more science to the process. They want it to be far more forward looking. That’s why they want to implement CECL.

Kelly: I was under the impression, though, that some of those qualitative factors were part of the calculus of CECL, though.

Adam: The spirit of it, yes. The spirit of the qualitative factors right now in the ALLL is to basically say, “Yeah, we know when we calculate our loan loss reserve off our pooled loans and our individually impaired loans that that number’s not big enough because economic conditions could change, and economic conditions right now are fragile, albeit, we’re in this recovery driven by artificially low interest rates. We know enough to know the environment is fragile. We need to find a way to capture that in the loan loss reserve, so let’s come up with these qualitative factors to fulfill that. It’s not a great approach.

Kelly: The basic formula is something like probability of default, times exposure default, times loss of the given default, and that equals CECL. On that probability of default, therein lies the subjective element to that, correct?

Adam: Any forward looking model is going to be dependent on assumptions, and assumptions will vary in terms of how much art and science is contributing to them. The methodology you just described, it is one methodology that is being recommended for CECL compliance. It’s probably going to be the most used methodology. The key assumptions such as probability default and loss given default themselves will require some subjectivity or art to it, but there’s a lot more science that can be used in that process. That’s how we work with our clients.

Kelly: All right, so let’s move to the bigger picture here. Give us your take on this whole CECL thing. Is it a crisis? Is it something that CFO’s and CEOs and boards should put at the absolute top of the front burner? What’s your take on it?

Adam: I think CECL doesn’t need to be so complicated. I think there are vendors who stand to benefit from CECL, who are either subconsciously or consciously creating the perception that CECL’s going to be far more complicated than it really need to be.

Kelly: Both of us worked at Big 6 accounting firms in our early careers. I can picture, I was at PWC, and you were at Deloitte Touche? I mean these guys must be licking their chops at the size of some of these engagements, don’t you think, to get in there and help these banks out?

Adam: Yeah, absolutely. Take your typical community bank where it’s hard enough to make money in this environment. Our perspective on it A) this could increase my loan loss reserve, which is going to decrease my earnings and my capital, and B), the cost of putting the system in place for even doing that calculation’s going to cost me money now. From a community bank’s perspective, I completely understand the concern. That being said, let’s set the record straight. CECL hasn’t yet been passed. They’re talking about early half of this year where they’re going to make a final decision on it, although, they hinted at the end of last year it’s likely going to happen.

They also said there’s going to be a five year runway for compliance. So I don’t think community banks need to overreact to CECL. I think they need to develop a plan for CECL readiness, but I don’t think they need to rush into anything. I don’t think they need to panic about it. At the end of the day, CECL does not change the actual risk of a loan. If I make a loan to you today, the risk of that loan hasn’t gone up because of CECL. Maybe how I account for that risk has changed, but it doesn’t change the spirit of making loans. That all being said, here’s some things that community banks should be aware of. You know we talked about the life of the loan, but the other thing that community banks need to be aware of is the vintage of the loan matters.

If you have a properly built CECL model, what you will find is that the risk profile of loans made during the early part of a credit cycle will actually be very low, but if you’re making a lot of loans in the late part of a credit cycle, the risk could be very high. If you’ve got the system in place, you’ll be able to analyze that and not just have the accounting treatment reflect it, but more importantly, it will highlight your strategic decision-making, and it will help provide community banks with a sense of the risk/reward trade-off of making new loans in different environments. What we found is, the time to make new loans is in the early part of a credit cycle and not the second half of a credit cycle, and CECL will just bring that point to the surface, but it doesn’t change the actual risk profile of the loan itself.

Kelly: All right, let’s wrap it up. Do you have three to five takeaways you want to leave the bankers with?

Adam: I’m just going to leave you with one takeaway. It’s a quote that summarizes everything that we’re seeing in this environment, CECL being one aspect of it, which is, “The worst loans are made in the best of times.” The opposite of that is actually also true. A CECL model will quantify that point, but with or without CECL, that point holds true, and community banks, from a strategic planning perspective, really need to think hard about that.

Kelly: That’s a good one.

We want to thank you for listening to the syndicated audio program, The audio content is produced by Kelly Coughlin, Chief Executive Officer of BankBosun, LLC; and syndicated by Seth Greene, Market Domination LLC, with the help of Kevin Boyle.

Video content is produced by The Guildmaster Studio, Keenan Bobson Boyle. The voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin.

If you like this program, please tell us. If you don’t, please tell us how we can improve it. Now, some disclaimers.

  Kelly is licensed with the Minnesota State Board of Accountancy as a Certified Public Accountant.   Kelly provides bank owned life insurance portfolio and nonqualified benefit services to banks across the United States.  The views expressed here are solely those of Kelly Coughlin and his guests in their private capacity and do not in any other way represent the views of any other agent, principal, employer, employee, vendor or supplier of Kelly Coughlin.  
May 6, 2016

Kelly Coughlin talks to Kevin Chiappetta, CFA, Financial Institution Management Associates Corporation about bank portfolio stress testing tools that are being utilized to help banks get prepared for the new FASB rule and CECL


Kelly Coughlin is CEO of BankBosun, a management consulting firm helping bank C-Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C-Suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. And now your host, Kelly Coughlin.

Kelly: Kevin, I came across FIMAC I think, at a conference in Wichita, where I met your CEO, Greg Donner. I think Greg made a presentation there that I thought was really interesting. Let’s just start out with a little bit of just brief background, Kevin, of who you are. Then we can do a deeper dive into what FIMAC does, and what you see going on in the market today.
Kevin: I appreciate the opportunity. Living in the Milwaukee area, my wife and I are the parents of two recently grown children. We’ve got one out of college, living overseas. We’ve got one who’s in college not too far from you, up in the St. Paul area.
Kelly: You came over from your executive director from a company called Balance Sheet Solutions.
Kevin: That’s correct.
Kelly: You guys are in the space of helping banks manage their balance sheet … Both their assets and liabilities. Correct?
Kevin: That is correct. We actually are two different approaches on that. We consider ourselves a technology company. We do provide the tools to do that. There are a number of them in the market place available at different price points. Different models which accomplish the tasks with slightly different variations, but we also are the consulting side of it. We use those tools to help the financial institution understand the risk that’s inherit in that, and use that risk information to make different decisions. We also want to be able to lend the expertise that we’ve been able to accumulate over the years. Both from bank CFO positions and other consulting firms to help them understand that information. Help them build that information better.
Having the technology is fantastic. It’s helpful, but understanding how to use that technology is really where we’re kind of moving forward with our firm, helping those institutions understand what all goes into using technology to make better decisions.
Kelly: The first point of entry is technology. Give them some tools. They start to use it, and they think that it probably triggers more questions than answers, so they need help implementing it. You’ve got a consulting area that helps the bank from that point.
Kevin: Precisely.
Kelly: What are some of the different business models out there to help the bank with their ALM?
Kevin: The most basic approach that we’ve seen is the technology side.
Here’s our model. Here’s what it cost to run it. We can help you move data in and out. Here are the results. We provide that series of results in a report, and you’re off on your own.
There is some benefit to that. Obviously, it tends to be more of a low-cost entry. For those who are well-versed in that type of thing, it might be advantageous. We can see all the way up to the full consulting as we’ve described it before.
We know that there are a number of competitors in the market space that provide that as well. We see some of this provided by firms who offer other product lines. Perhaps a broker dealer could offer something like that under a different feed-based arrangement, so we see a number of different ways to pay for that service. Whether you’re paying through a soft-dollar transaction type of thing that doesn’t show up on the income statement, or more on the straight feed base.
There are probably three or four different ways, I think, that we see financial institutions using this information. Where is it coming from? Who’s running it? When we start to compare the models themselves, we get into what type of random number generator is being used to create rate paths and some of the more geeky stuff that comes along with the rate models. We can start to split hairs as to one model comparison to the next.
I think the business side of it really breaks down into a model-only on the left-hand side, and on the right-hand side, the full-in consulting. Either you are or you’re not a full service on the consulting side. You’re just merely providing the service that brings the data in and pushes the reports out.
Kelly: You certainly have plenty of brokers that are trying to jam municipals and securities into the asset side. Right? That’s one component that is somewhat of a unique approach that you guys have.
Kevin: Without a doubt. We’ve run across some of those models. I don’t want to be overly disparaging. It really cuts back to something. We want to make sure as an organization that we separate duties. We do that in a lot of different areas. Those who are responsible for money coming in versus money coming out.
To the big duties, we try to make sure that we split the risk-taking and risk-measuring. When you start to combine those two duties you open up the opportunity for one to kind of crowd out the other. When you have advice that’s given on an overall risk-management standpoint for somebody who’s being compensated for selling you risk, it doesn’t take long to see that the opportunity to create more risk than you wanted to was there.
I’m sure there are very good people doing that modeling, but when it comes down to it at the end of the day. Whether I eat or not is dependent on you buying risk and adding it to your balance sheet.
The opportunity to create an environment that looks like you can absorb more risk is clearly there. Personally, I just don’t think that you’ve done enough effort to separate those two duties to make sure that conflict of interest is removed if you’re getting the information on your risk-management and acting on that from the same place. It creates too much room to create errors either willfully or otherwise.
Kelly: In other words, if you’re going to accept the business model where brokers drive the decisions, then you better have done your preparation and homework beforehand so that you know exactly what you need. Don’t let them decide which assets sit inside the bank’s portfolio at the inherit conflict. Is that a fair statement?
Kevin: Yeah. I think that’s a spot-on statement. Clearly, to create these risk reports it requires a certain amount of judgement to go into some of the assumptions. I don’t want to get overly technical but if you look at the liability side, it requires a certain amount of assumption. You need to understand the impact of that assumption has on the result. If my main motivation is to sell risk asset, I can make an organization look more or less risky depending on what is necessary. The opportunities exist for that to happen. Any time the opportunity for that conflict of interest opens itself up, it has risk managers and organizations who are responsible for managing that risk.
I think it’s imperative that we try to close off those opportunities. Whether or not you believe they’re there. The opportunity for it to be there and anybody with a suspecting eye is going to be drawn right to that, taking that opportunity for that risk-management problem off the table. It just goes a long way in proper governing.
Kelly: All right. Another approach, that I’ve seen in the marketing out there, might be to outsource it completely to another investment management firm where they will take on the entire function. They’ll take care of finding and executing the trade. Presumably, not with their own broker, I would imagine, but in theory they could. They could be a broker dealer, they could be an investment adviser, and run the trade. Do you see much of that going on?
Kevin: Yeah. We do see some of that. Some of my background comes from that particular business model, whether with or without the dealer side. It’s not too dissimilar from the role I described earlier on our consulting side, where we spend a great deal of time getting to know the organization and working along with them.
In essence, being an outsourced CFO, or finance division if you will, we create that role and play that role within the organization. Along the lines with that business line, however, it’s imperative that you don’t simply take it off their table and say, “Go focus on lending,” or “File your table reports and everything will be fine.” It’s imperative that you become part of the organization, provide the information, the education, and help them understand what’s going on with that decision-making process.
It might seem easy, say, in February now to come up with the reports from the year end, then tell them where they are and what they can do, but along about April, May when they need to answer for an exam a process , “ Where did those numbers come from? How did you make that decision process?” I can’t think of something that would go worse in that exam process than not being able to answer a question because you just don’t know what’s going on behind the numbers that created that decision. However, we approach that.
If you don’t include management in the decision-making process, I think later on there’s going to be some difficult conversations you’re going to be having.
Kelly: Why don’t we talk about what’s going on with this new FASB ruling, the current expected credit loss that is coming out here? I believe it’s going to come out this year. Correct? What are you guys doing? What should banks be doing? What are your thoughts around that issue? It seems to be a fairly big one.
Kevin: It clearly is. It’s kind of been hovering out there for a while now. This sort of looming storm coming our way. As we look and see the discussion of the proposal, I think the proposal become more finite this year, so we get a lot better feel for how it comes out. It’s a slight shifting from the current allowance calculation where our allowances sort of reflect previous history on loan credit performance. It gets more into a projection.
From our standpoint it really works very well with the mathematics that we’ve been doing in the forecasting for interest rate risk. It may be an eyebrow-curler but I think there some really definite, clear parallel there. We’re expected to put a present value on the projected losses for a particular loan, loan portfolio, or loan type. However we want to look at that. That really kind of goes along with the same type of mathematics we run now for expected cash flow.
From our standpoint, this is more of a pivoting of how we’re going to create that projection of loan losses from a look-back historically to a forward-looking calculation. The technology that we have isn’t going to require us to make any major changes in the mathematics of it. We’re just applying it a slightly different focus. To be projecting a current value of a future cash flow, that’s kind of what our whole business is about.
While it is somewhat scary, because we still don’t know exactly what it is, and it’s going to change to focus of what we’re doing. We feel very strongly that we have the tools, and the expertise in place to help management get their arms around this forecasting process. Then, sort of tweak the way put the input into a loan-stressing calculation or a forward-looking calculation.
It’s so similar to what we’re doing now that we’re trying to take a sort-of … Let’s relax, focus on it, and apply that same thought process into the loan loss process. We think we’re going to be able to come up with a solution that’s going to be fairly well understood, fairly well put into place, and maybe less stress than we we’re thinking at the beginning, simply, because of the unknown.
Kelly: You guys aren’t currently doing that now for loan portfolios. You’re doing it for assets. You’re doing it for investments. Correct?
Kevin: Yeah. Absolutely. We’re applying that same concept to losses. What is the value of that loss? Is it the currently value of those future losses? The same discounting process that we’re going to go through. We’re just using that into a different piece of the balance sheet than we’ve had in the past. We’ll do a study so we can build an assumption built on some sort of a historic look-back as to how the depositors behave. We’ll help them understand the pre-payment speed. All the different assumptions that have to go into that technology in order to understand the behavior of the cash flows under different rate environment. We help them with that point.
I mentioned earlier that I think one of the biggest assists we’ve had right now is just bringing people up to speed into what it is we’re doing. The board can handle those responsibilities that have been squarely put into their lap, but they just don’t have the day-to-day expertise to deal with making sure that they can deal with what’s going on. When they see what comes out of that technology, they get a better feel for what went into it and what it’s telling them once they see the results.
Kelly: Okay. You guys are well-positioned, I’m thinking or at least from what I’m hearing, for this CECL ruling. Correct?
Kevin: Yeah. We’re very confident that we have the tools in place now to tackle CECL. There’s still a lot of detail that needs to be brought out and put into place, but we understand the mathematics of it very well. That’s the business we’ve been in for decades.
Just merely applying that concept here isn’t overly frightening. Again, there are detail that need to be brought out. There are certain things that we need to make sure we’re comfortable with so that we’re applying it properly to comply with the CECL guidelines. Without a doubt, we’re very confident that we have the knowledge, expertise, and the tools in place to tackle this once we get around what all the specifics are.
Consciously optimistic is the right way, I think, to put that.
Kelly: Okay. That’s great. Do you have any take-aways that you’d like to go away with?
Kevin: Sure. Let’s start with CECL because that’s what we we’re most recently discussing, and again, it’s going to bare a repeating.
We have the knowledge and the expertise in place already as banks, and institutions. We’ve been working with these concepts. We’re now applying it to a different area of the balance sheet and the balance sheet reporting. I think it’s important to know what the guidelines are, but by the same respect we want to make sure that we don’t get overly concerned with the concept of moving from a backward-looking to a forward-looking projection of losses. It’s merely applying the concepts we know into a different area.
The biggest concern that we have on CECL is more making sure we understand the guidelines behind the assumption building process and get that done. We want to make sure that we don’t step into a panic state because it’s something new.
From an interest rate standpoint, one of the things that we’re trying very, very hard is to get people to conceptualize as they get into the balance sheet management process. Not merely the interest rate reporting process.
What do we mean by that? As I’ve mentioned before, we have the technology side of our business. We do a great job of getting the information, and reporting that information. What we do with that information becomes the big next step. From the consulting side, what we’re trying to get organizations to understand is more the movement up the scale towards this modern portfolio theory.
We want to look at the balance sheet as an entire entity rather than component, as most things are done now. For instance, organizations that run an investment portfolio with a certain set of guidelines, because we don’t want risk here. We take risk elsewhere. That isn’t necessarily beneficial to the overall organization, or to the balance sheet.
We want to look at how a decision is made in a loan portfolio. It has an impact on the balance sheet. We want to understand that. A decision made in the investment portfolio has an impact on the balance sheet, and we want to understand what that is.
Understanding how things interact with each other when we’re going through the risk management process is one of our biggest challenges. Trying to evolve organizations out of the component style management into a more holistic balance sheet style management.
In order to do that, you really need how the balance sheets react to each other. In order to do that, you need to be able to break down interest rate risk reports that we’ve provided. In order to get to position, we have to take three steps backwards. We need to make sure the policies are written correctly, that the management understands what we’re doing, that the process of doing testing, stress testing, movement rates, and seeing how different decision’s reactions appear on the balance sheet.
All of those things become critical in order to look at the balance sheet management as opposed to component management. When we start using this information to make management decisions as to merely reporting what our risk profile is, that is a huge step forward in getting everybody aligned.
We’ve got Board alignment through line management alignment. Everybody understands what we’re trying to accomplish. Everybody understands how things impact, and we know that before those decisions are made. We just feel that’s a much better approach. One that if we embrace the holistic approach, the decision making process becomes more a matter at looking at the menu and picking which we want to have as opposed to hoping that things work out our way.
Kelly: Great. Very helpful. Do you have a favorite quote?
Kevin: There’s one from a business standpoint that I was told a long, long time ago. I try to remind people of the same thing. When you find yourself in a hole, the best exit strategy is to stop digging. You see how people try to manage their way out of that hole. It sounds kind of basic. Maybe a little too folksy, but it makes a whole lot of sense. Whatever put you in that spot, you need to stop doing it first. That’s our first strategy. Stop doing what put you in that world of hurt, and start trying to come up with ways to get out of it.

Kelly: That’s great.

We want to thank you for listening to the syndicated audio program, The audio content is produced by Kelly Coughlin, Chief Executive Officer of BankBosun, LLC; and syndicated by Seth Greene, Market Domination LLC, with the help of Kevin Boyle.

Video content is produced by The Guildmaster Studio, Keenan Bobson Boyle. The voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin.

If you like this program, please tell us. If you don’t, please tell us how we can improve it. Now, some disclaimers.

  Kelly is licensed with the Minnesota State Board of Accountancy as a Certified Public Accountant.   Kelly provides bank owned life insurance portfolio and nonqualified benefit services to banks across the United States.  The views expressed here are solely those of Kelly Coughlin and his guests in their private capacity and do not in any other way represent the views of any other agent, principal, employer, employee, vendor or supplier of Kelly Coughlin.  
May 6, 2016

Kelly Coughlin interviews Donald Moore about generating more revenues from trust and wealth management clients and managing risk in that business line. Moore is a former OCC examiner.


Donald Moore Jr., CEO of Bearmoor, LLC has over 20 years of experience in the asset management and fiduciary industry. He has served in senior fiduciary positions with various US Treasury agencies, as well as a leading financial services consulting firm. He began his career as a Trust Examiner with Office of the Comptroller of the Currency. He has examined over 50 trust divisions, including the lead position at two of the nation’s largest trust institutions. He has assisted in the development of national policy and guidelines at both the Comptroller’s Office and the Office of Thrift Supervision.

Kelly Coughlin is CEO of BankBosun, a management consulting firm helping bank C-Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C-Suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. And now your host, Kelly Coughlin.

Kelly: I’ve got Don Moore CEO of Bearmoor LLC. Don, how are you doing?

Don: I’m doing well, thank you Kelly, I appreciate the opportunity to chat with you today.

Kelly: Don, you’re in Boulder?

Don: I’m not quite in the Republic of Boulder, I’m a little bit closer to the Breckenridge area up in the hills of Colorado.

Kelly: You’re happy because the Broncos just won the Super Bowl, I take it.

Don: I’m slightly indifferent to the Broncos winning, although they had their ginormous parade yesterday down in Denver. Everyone’s excited that Peyton got his Super Bowl, but again, I think it was the defense that won it for him. Yeah, we’re happy here in the state. No one’s going off the edge yet.

Kelly: Let’s get right into it. Tell me what Bearmoor does. What’s your value proposition?

Don: Basically, it’s the optimization of risk-adjusted revenue from an organization’s existing fiduciary activities portfolio. It’s basically their personal trusts, their investment management accounts, their retirement accounts, foundation endowments and custody. All those off-balance-sheet activities within the fiduciary world. Again, the optimization of their risk-adjusted revenue from their existing portfolio.

Kelly: First of all, it’s banks that are in the wealth management business. They have trusts, they have wealth management capabilities, correct?

Don: Correct, a lot of organizations that are clients, their definition of wealth management differs, but it does include trusts, insurance, and private banking.

Kelly: You help those kind of banks do what?

Don: Optimize top-line revenue. What we mean by that is, I like to use a quote from Bono, the lead singer for U2, he was up at his concert and doing one of his social announcements where he was clapping his hands and he said, “Do you know, every time I clap my hands, a child in Africa dies?” And someone screamed out, “Stop clapping your hands.” We don’t focus in on expense because for the past 10 years in the industry, the industry’s been focused on nothing but expenses. The expenses have outpaced revenue growth 6 out of the last 10 years. Their focus on expenses I don’t think, has been all that fantastic. We like to say, “Well you’re already focused on expense reduction, we want to help you grow top-line revenues.” Our value proposition leads to an increase to revenue top-line.

Kelly: Before we get into how you do that, let’s talk about some personal background.


All right, I’ll start out with education. I went to school, got a degree in finance and accounting, after I graduated from that I went to work for the United States Treasury Department as an examiner with the Office of the Comptroller. The currency, the OCC, I found an opportunity to begin examining in the fiduciary world and I became a fiduciary examiner. Through that, I went to Washington, DC. For those of you in the fiduciary world that have an understanding of Regulation 9, when I was in Washington, DC I helped draft and write that regulation that now national banks follow. For most states, it’s been adopted verbatim on that.

I left there, and went over to another Treasury Department, the Office of Trust Supervision, which has now been rolled into the OCC and wrote their fiduciary training program and some of their examination procedures over there in a fellowship capacity of 18 months before leaving and going to the consulting world, and focused on consulting in the fiduciary world, and that brings us to where we are right now.

I am married to my wife Toni, we live out here in Colorado, we have four children. Hobbies; I would say right now we’re doing lots of skiing, got some good snow out here in Colorado, so that’s one of my hobbies. Do a lot of running, outdoor activities is me. That’s who I am, I’m 52 years old and I feel it every day.

Kelly: Don and I have known each other for probably 15 years, and we made a good connection when we found out you grew up in Minnesota, correct? St. Louis Park?

Don: Yeah, sure, you betcha.

Kelly: Let’s talk about the business. How do you help these banks make money? How do you help a wealth management bank make some money? I want to come up with let’s say five take-aways on how our listeners can make money through what company like yours offer.

Don: Let’s start out with, the opportunities for increasing top-line revenue within your fiduciary activities exist. They are out there. I like to use the phrase, “You’re standing on a whale, fishing for minnows,” because there’s already opportunities to increase your top-line revenue within our organization. What we mean by that is we go through and do an analysis account by account basis and identify opportunities in three phases: one, gap analysis which is, “Hey, where are you missing it?” From the standpoint of what you think you’re getting. You may have some system errors, system inaccuracies that can help you identify opportunities, that’s one phase.

Second one is competitive analysis. Where is it that you would like to beat your competition, and where is it that you actually are? We ask you what your business’s strategic plans are, we go out and do mystery shopping and competitive shopping for the organization to make sure that they understand where they are and where their competition is, and where they can go with their current level of pricing.

The third analysis is a regulatory analysis. What’s changed in regulation that allows you to either understand the regulation and generate additional revenue, or do we have some risk there? Again, gap analysis, competitive analysis, regulatory analysis to help you identify those opportunities, because they do exist. I would say that’s the first area.

Kelly: You exposed that just recently, gap analysis. You’re looking at pricing, and how competitive they might be in pricing in addition to more of a qualitative, these are the type of services they would offer?

Don: Along the lines of both, Kelly, with regards to the types of services we want to break it down so we understand the types of services they offer. Then the pricing that they have on each of those services. When we talk about pricing, we all know that there are committees, and then there are boards, and we’re talking about the board-approved pricing for these services.

Kelly: This is for wealth management services. These are the basis points. This is how much we charge for a $5,000,000 fiduciary trust account, correct?

Don: Correct. Absolutely. Those are established by, I would say, the business line which then goes to the committee and the boards approve. These are the pricing and it would include not just basis points, but it would include minimum account fees, it would include fees for ancillary services such as real estate administration, closely held business administration. Maybe there’s a tax prep fee or a tax information letter fee. Maybe there’s a stand-alone fee for extraordinary type services. All the fees charged for the services provided within wealth management on the fee schedule. We then go through and see what accounts are actually on that schedule, and what accounts are not, what accounts have customization, what accounts have discounts. It doesn’t make sense for the level of service being provided.

What’s critical with that, from a Bearmoor perspective, is what I would say would be the second take-away, which would be a risk understanding of your accounts. If you haven’t done a risk assessment on an account by account basis, it would be highly recommended that you do so. This would allow you to identify the level of risk for each account and type of account using system information. This isn’t something that’s subjective, it’s based upon system criteria that you’ve established and put risk weightings on it. Let’s say you have an account that is an irrevocable trust account with two co-trustees, five beneficiaries, some unique assets in there, and maybe it’s over $2,500,000. You would assign various risk criteria to each one of those factors. Maybe that has a higher risk than a revocable trust.

Kelly: You’re not talking about portfolio risk, you’re talking about risk of an unhappy client (other than portfolio volatility).

Don: Correct. What we’re seeing is a fair amount of, I hate to go back to the regulatory side, but a fair amount of regulators are saying, “Hey, we can risk rate loan accounts on the banking side, why can’t we individually risk rate these off-balance-sheet trust accounts from an administration standpoint, from a level of risk?” and then get some understanding about what may be some levels of capital might be for this entire portfolio. It’s not investment portfolio risk management, for lack of a better term it’s complexity rating the account.

Kelly: Give us three things that you like to look at, that might go into the calculus of that.

Don: I would say type of account.

Kelly: The fiduciary, non-fiduciary.

Don: Correct, you would have the fiduciary accounts would be those revvocable and irrevocable trusts, investment management accounts, foundation endowments, IRAs. Then the non-fiduciary lower risk would be a custody account, where you don’t have any investment management responsibilities. Another item would be the type of assets in there, so maybe less risk would be a mutual fund portfolio, that’s made up of a bunch of mutual funds to meet the account’s objective. A higher risk would be, “Hey, it’s a stand-alone investment in a large piece of commercial real estate.” High risk on that. The third thing would be type and/or number of beneficiaries. The larger the beneficiary pool, the more risk you may have because you have different competing objectives. Some of those might be income beneficiaries, others might be remainder beneficiaries, or growth beneficiaries.

Kelly: The high-risk account would be one in which there’s a fiduciary relationship to your holding assets that are perhaps individual securities and not mutual funds and the third?

Don: Number of beneficiaries.

Kelly: Number of beneficiaries. Is that because the more people you have in the equation, the more likely it is you’re going to have somebody complaining about it?

Don: More likely there’s going to be a complaint there, but more likely that there’s going to be conflicts of interest. What I mean by that conflicts of interest is those beneficiaries may all have different needs and you as the fiduciary that’s managing that account, have to take all those into consideration and make sure you treat them equitably and fairly based upon the information you have.

Kelly: Tell us how you help the bank make more money.

Don: From that account by account analysis on the gap analysis and identifying opportunities within their portfolio. Not just from a best practices from what we’ve seen over the past 15 years of doing this, but also what’s taking place within their lines of business and their strategy. Overlaying that on that analysis and saying, “Hey, here is the opportunity, and here’s how that opportunity impacts each account.”

Kelly: This is for your part one you look at the market, you look at competitors, and you say, “Oh, your competition’s charging 200 basis points, you’re only charging 150. You could charge 180,” for example.

Don: Correct. If you still want to be the low-cost provider and the lowest-cost provider is charging that 200, and you’re at 150, you could go all the way up to that 200 and charge 190, 180. Right.

Kelly: Right.

Don: Do that complete analysis. Or your minimum fee is stated to be this, we’ve done in a cost analysis of your portfolio and you’re not even covering your costs with your minimum fee. You’ve got to adjust your minimum fee.

Kelly: Don’t you think most banks know their competitor? Let’s say pricing, and their level of service, because they either get clients poached frequently, or infrequently, and if they find out why, then it’s well, his is cheaper, or better service, whatever it was. Don’t you think they know that?

Don: That’s what we thought. That’s what we were counting on, but when we started doing the mystery shopping, because we asked our clients who are their competitors, who do they want us to mystery shop. Then we also provide them all the other information that we have. That, other than the actual opportunities, was one of the most highly prized pieces of information that we provided to our clients was, “Oh, look at all this competitor information.” My business partner and I looked at each other and said, “Wow, we didn’t realize how valuable this was. We thought you guys knew it, we’re showing it to you to let you know that we know it.” You would think they would know it, but a lot of times that isn’t the case based upon the information that we were able to gather and the reaction that we get from those. I think they have an understanding of it, but once they actually see the documentation and support for that that we’re able to gather, that brings it full circle.

Kelly: I’m intrigued by, and I always have been intrigued by you being a former regulator with all due respect to your former profession, the dark side I suppose, or actually I think when you go into industry, they say you’ve gone to the dark side, I believe. However you look at it, how a former regulator can help on the revenue side is always been amusing to me. I know you do have a pretty good reputation out there, so kudos. You’ve been doing it quite a while, I believe.

Don: Yeah, I appreciate those comments. Perhaps my capitalistic views weren’t always the right forum to be a regulator, so maybe I’ve always had to get back to this side. Maybe I was on the dark side and came back to the light.

Kelly: Any more takeaways?

Don: I would say re-acceptance, and what I mean by re-acceptance is, based upon the information that you have today on your existing accounts, the level of administration, the level of responsibility, the potential problems associated with the risk audit compliance items, the regulatory issues, and the revenue that you’re making on it, would you re-accept the accounts in your portfolio today? If the answer to that is no or maybe, you need to actually go through and do this risk assessment and the revenue opportunity assessment to make sure be able to answer that question yes or these are accounts we no longer need to be a part of.

Kelly: It isn’t just no longer be part of, it may be no I wouldn’t accept it under these terms. These terms being pricing, but would you accept it at 50 basis points? No. Would you accept at 150? Yes. Isn’t that as much of a relevant question as acceptance or non-acceptance, it’s how should we price this thing?

Don: Proper pricing is critical. We have top 10 risk piece that we do and one of the top 10 risks is appropriate pricing, so you’re absolutely right. “Hey, I wouldn’t re-accept it because of the assets.” That’s one thing. I wouldn’t re-accept this because of the price and the assets. Could we price it accordingly where you would accept it? Absolutely. That’s part of the analysis we do.

Kelly: Why don’t you post on our website the top 10 risk pieces in a blog post?

Don: Absolutely, I can do that.

Kelly: That’d be nice to accompany this. That’s it for now, give us your favorite quote.

Don: It’s Milton Friedman the great economist. “The question is, do corporate executives, provided that they stay within the law, have responsibilities in their business activities, other than to make as much money for their shareholders as possible?” My answer to that is, no they do not. Basically, everyone should stay focused on generating revenue for the shareholders for where they have their fiduciary duty.

Kelly: What’s the stupidest thing you’ve said or done in your business career?

Don: This is classic me, and this took a long time to live down. This was years ago. I basically said, I used another quote when I was giving a presentation because someone asked a question with regards to revenue enhancement and I said in front of this entire group, “Life’s tough, but it’s tougher if you’re stupid.” Yep.

Kelly: Good one.

Don: I was much younger.

Kelly: Don, I enjoyed talking to you, thanks so much for your time.

We want to thank you for listening to the syndicated audio program, The audio content is produced by Kelly Coughlin, Chief Executive Officer of BankBosun, LLC; and syndicated by Seth Greene, Market Domination LLC, with the help of Kevin Boyle.

Video content is produced by The Guildmaster Studio, Keenan Bobson Boyle. The voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin.

If you like this program, please tell us. If you don’t, please tell us how we can improve it. Now, some disclaimers.

  Kelly is licensed with the Minnesota State Board of Accountancy as a Certified Public Accountant.   Kelly provides bank owned life insurance portfolio and nonqualified benefit services to banks across the United States.  The views expressed here are solely those of Kelly Coughlin and his guests in their private capacity and do not in any other way represent the views of any other agent, principal, employer, employee, vendor or supplier of Kelly Coughlin.  
May 6, 2016

Kelly talks to Dan Hill, CEO, Sensory Logic, about how the latest face recognition techniques and technology can tell you many things about people before you agree to do business with them or hire them.


Kelly Coughlin is CEO of BankBosun, a management consulting firm helping bank C-Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C-Suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. And now your host, Kelly Coughlin.
Kelly: Dan, I want to do introduce you and talk to you briefly about what you’re doing with your role as CEO of Sensory Logic, and generally get some of your background and talk about the science of what you guys are doing with this technology. My summary of it is something like you’re using technology to objectively measure 12 human emotions. They range from joy to sadness, and anxiety with the purpose of evaluating personality traits, measuring personality traits, to determine how neurotic or how normal people are for the purpose of identifying matches with whatever the goal might be to using that. Is that a reasonable estimate or summary of what you guys are doing?
Dan: We are trying to capture and quantify emotional response and that can apply to consumer’s reactions to the advertising, website, and other touch points of thanks for instance, but if you move over to the more personal side in terms of financial advisors or trying to reduce risks when looking at hedge fund managers, yes, then you start getting into the personality dimensions. Obviously for hedge funds you want to make sure that they are prudent investors and not someone given to overly large risks. There’s both a general consumer application we are talking about here, and one that’s more personnel driven.
Kelly: That sounds interesting, using technology to evaluate those things that are clearly has been in the realm of subjective interviews and personal objective evaluation is fascinating. Let’s go over a little bit of your background, Dan. Currently you’re CEO of Sensory Logic, and a little bit about what you are, who you are, and then who Sensory Logic is.
Dan: I started the company in 1998, and I got lucky. Someone I knew at IBM sent over to me an article about the breakthroughs in brain science and how much people are emotional decision makers. You may know the conservative estimation is that at least 95% of peoples’ mental activity is subconscious. A lot of what happens to us and for us is below the water line so to speak, and it’s important to access that and the emotional part of the brain sends ten times as much information to the rational part of the brain and vice versa. As to the ratio of emotional to rational in terms of the interactions it is a ten to one ratio.
Kelly: Presumably we have a rational mind that’s informing our subconscious mind, correct?
Dan: Sure, the mind is very interactive so there is an interplay back and forth, but I think the real thrust of the breakthroughs in brain science in the last 25 years aided by technology and from MRI brain scans for one thing, is that we really have to change our viewpoint. We probably have run for 300 years with Dick Hart’s assumption that we are rational beings. The famous comment, I think therefore I am. Ambrose Bierce, a contemporary of Mark Twain said, “I think therefore I am.” That’s probably a lot closer to the truth.
In the financial industry you want to go to the numbers and facial coding gives us a chance to bring numbers to something that otherwise might have seemed rather soft and squishy which is emotions. In reality there’s really two currencies in the business world. Dollars and emotions, and we’re after the second one on behalf of the first one.
Kelly: Not to be outdone with your quoting of philosophers, I will reference Aristotle who also used the concept of having, of creating habits that are natural to the human that just make it part of the unconscious, subconscious mind so that your naturally inclined to do, he felt like, the virtuous, the right thing. That took kind of integrating the conscious mind, the rational mind, with the subconscious mind. Is that consistent?
Dan: I think the metaphor that Aristotle used actually was that human beings is as if they are in a chariot, and it’s driven by two horses and one’s the rational horse and one’s the emotional horse. He was already acknowledging, obviously, the importance of emotions. I think what the neuro biology advances have suggested is that maybe the darker horse, the emotional horse, may be the stronger of the two, most likely is.
Kelly: Dan thank you, you crushed me on your quoting of Aristotle. Thanks, I appreciate that.
Dan: That wasn’t my goal, but whatever helps illuminate things for people.
Kelly: And I went to a Jesuit school! So let’s talk about your education. You have a PhD. Tell us about your education.
Dan: I do have a PhD in English literature, not psychology as some people might assume, but I’m an inquisitive learning sort of guy and really what happened is once I got this article brought forward from the IBM person, I really started on a second education. I don’t have a formal degree, but I have spent a great deal of time reading and talking to experts in neuro biology and psychology over the last 20 years to understand really one of the drivers of human nature and just to give you some feeling for the groundings here.
If you go back to Latin motivation and emotion have the same root word, move, to make something happen. That’s how essential emotions are to human behavior, and the person who first realized the importance of emotions was Charles Darwin. In his work on evolution he essentially said to himself, “Okay, emotions must give us an adaptive advantage, otherwise they would have gone away. How can I best capture emotions?” That turns out to be the face, so what we do is use facial coding to be able to bring science to bear on emotions.
Kelly: Dan, where do you live? Tell me a little bit about your personal, family life. Do you have any hobbies?
Dan: When I have the time, sure. I like to play tennis. I’m an avid movie goer. I enjoy traveling so I’ve been to about 80 countries including a year ago or so was in Botswana on a non-hunting safari. It’s whatever can broaden the horizons. There’s readings, there’s films, there’s tennis, there’s travel, obviously time with my wife, so there isn’t anything remarkable there, it’s just try to be a busy and engaged guy.
Kelly: Let’s get down to some business stuff. Tell me in fifteen words or less, roughly, what the value proposition of Sensory Logic is.
Dan: Actions speak louder than words, and there are things people can’t or won’t say, and if you can get to emotions you can get below the surface and get to the real thing.
Kelly: In terms of the banking ecosystem which is the ecosystem we are navigating through, what is the applicability or this, not necessarily your company, but this technology if you will, that value proposition, how would it benefit, how is it connected? Is it connected now, or is it an area that you guys want to be connected to. Where’s the applicability? Generally speaking.
Dan: There’s really two realms. Let’s start with the one we’ve historically been in, because I’ve run my company for 17 years, and we’ve done work for nearly half the world’s top 100 consumer facing companies, so things outside of the industrial realm and so forth. That’s plenty of things in the financial services industry. It’s a long list of banks and institutions, also in the insurance industry, as well that we’ve done work. From that point of view, obviously if you have these touch points with consumers you want to connect effectively.
I think the place you have to start is that of course, trust is the emotion of business. Trust is not an emotion you can capture through facial coding, but you can capture its opposite which is contempt. Contempt means I don’t trust you, I don’t respect you. If you’ve ever read Malcolm Gladwell’s best seller “Blink”, facial coding was the only tool described in the book for some 30 pages.
At the University of Washington in Seattle they have a love lab where couples come in who are in distressed marriages, they use facial coding to figure out whether they can save the marriage. Contempt is the most reliable indicator that the marriage will fail, so if it’s not good for a married couple you can imagine it’s not good for a company and its clients.
We use this in advertising testing and websites to understand how people are responding. There’s several varieties of information that is important. The first one is actually do you engage them. Do they emotionally respond? You don’t want to waste your advertising dollar, you don’t want to just be talking to yourself, you need to make that emotional connection. That’s one of the first things we go after.
Kelly: Put yourself in the place of a community bank CEO and they’re in the business of making business loans, by example. How does that CEO or that credit officer, how could that credit officer utilize this technology? Not your company, but the technology. How do you envision that this technology could be employed by a credit officer at a community bank in any city in the USA.
Dan: There’s actually a template here. I mentioned Charles Darwin earlier, but there’s a man named Paul Ekman, E-K-M-A-N, who’s been honored by the Smithsonian who has been cited by Time Magazine as one of the 100 most influential people on the planet. Paul worked as a colleague at the School of Medicine in San Francisco. Over the course of about 15 years he created what is called the Facial Action Coding System. He figured out from 43 muscles in the face what are the muscle movements, the action units, the activity that reveals seven core emotions which you alluded to earlier. They run from joy, the high end of happiness, through things like fear and contempt.
These muscle movements correspond to the emotions, this is relative public knowledge, also in a book of mine, and that information for a loan officer if they were to do their due diligence, and take some homework assignments, and actually study this a little bit, would give them a feel for the person across the table. There is no lie muscle in the face, it’s not that simple, but there are patterns you can look for. Obviously if the person is unusually anxious, if they show contempt, if there’s an unusual rhythm to how they’re emoting, if the emotions seem inappropriate to the conversation. There’s probably a half dozen little ways in which you can get a feel for whether the person is solid and honest, and therefore a loan risk worth taking, or ones that are passed on.
Kelly: These quantifiable and emotional metrics, I’m just going to quickly list them. Joy, and they’re more or less in a continuum here, starting with joy going down to anxiety. Joy, pleasure, satisfaction, acceptance, curiosity, alert, skepticism, dislike, contempt, frustration, sadness, anxiety. So you guys can measure these twelve emotional reactions that appear on a person’s face, convert those into a profile. The profile has to equal 100%, so it comes up with a profile. Again, back to the CEO that’s going to potentially do a loan to this business customer. It comes up with that profile and then what?
Dan: In our case we were trained directly by Dr. Ekman, so you are right. You get to a pool of 100%, so you distribute which emotions are occurring based on those muscle activities, and as to the output. Once you know the emotional profile of somebody, I would suggest, for instance, they index very high on anger, or what we call frustration, that should be of concern, because frustration obviously is an emotion about I want to hit you. I want to break through barriers to progress, I want to control my destiny. That all sounds good except the hit part, so someone who is violent or combustible, if they index high in frustration, is there a greater chance that someone is at risk? Definitely for you as a banker.
If they are really high on anxiety, why are they so anxious? What is going on here? How solid is the scheme in which the bank is taking a chance. I think particularly when you look at the negative emotions you’ve got to be careful, because we have more negative core emotions as human beings than positive ones, not because we’re negative or Dr. Ekman is negative, but rather it’s a survival technique. People hear bad news more loudly because it helps defend themselves.
You want to look at negative emotions like the two I just mentioned, also contempt. Frankly it often corresponds to a lack of honesty or a lack of connection back to you as a banker. If I had to highlight three, those are the one I would probably go to. Although I will say that someone who is overly happy, it’s a nice emotion in terms of it’s embracive, it’s accepting, but a really happy person can be sloppy with the details, so strangely enough, there, too, a banker might face a bit of a risk factor.
Kelly: You also have the external environment, for instance, that can influence a person’s behavior on that given day. Could be they just got in a fight with their wife that morning, or their favorite football team lost so they’re having a proverbial bad day. Especially if you have this human subjectively scoring this stuff. I’m intrigued by that, so you have some kind of de facto shrinks up there kind of ticking off, watching the video saying, “Oh look at that he frowned, we’re going to check off he dislikes this,” or “Look at her eyes. She looks a little sad, we’re going to mark her down a little bit for sadness.” It scares me a little bit that police interrogation might be using this.
Dan: Quite often that cat’s already out of the bag. Dr. Ekman has done training of the CIA and the FBI. We worked a bit with a company trying to automate facial coding for the TSA, so yes, this is a huge interest, obviously, to anyone involved with national security or policing matters. Whether it’s used properly, whether inaccurately, whether it’s done within the boundaries of the law. That’s really outside of our purview, that’s not how we’re trying to use facial coding, but there’s no doubt that obviously every angle of life people are looking for advantages and security, and because if you’ve never been lied to in your life, congratulations. Facial coding gets you past the lip service to behavior, to actions, as to how people respond based on what they reveal in their face. It’s going to be of interest to a lot of parties.
Kelly: From this data that these scores are measuring they are taking that data, and then scoring it. I’ve seen some stuff that talks about the big five model, ranging from extroversion, agreeableness, conscientiousness, openness, to neuroticism. Tell me about that.
Dan: I have ten US patents, most of them related to facial coding, and one of them does involve personnel. I have been at work for a few years now looking to see if we can come up with an emotional formula and algorithm so to speak, that can match these big five personality traits. I wouldn’t say we have anything definitive at this point, but I am making the effort because the one thing that bothers me about all manner of these self-reported psychology personality profiles is that it is self-reported. Self-report is a big problem.
People tell lies. Dr. Ekman has estimated the average person tells three lies per ten minutes of conversation, but the biggest lies in life are the ones we tell ourselves. I’m reasonable, but everyone else in this meeting is crazy, etc., etc. Self-reporting is rather dubious, and so yes, we are looking for a way around that to say that by picking up these muscle activities, which by the way, all have numbers to them, and I realize you might feel it’s subjective, but we’ve done coder reliability. We have been trained by Dr. Ekman, so we know which muscle movements correspond to which emotions. Studies would indicate that human coders well-trained and versed in doing this will be over 90% accurate.
Kelly: What would the goal be for this credit officer, he probably does this subconsciously anyway, but he certainly is making some judgements alright, how normal, how neurotic is this guy. Am I able to pry this data out of him and he’s in charge of sales? What’s the likelihood that this company is going to be successful if I have to pry this stuff out of him.” Same with openness, right. Agreeableness. I don’t know how you would determine conscientiousness. Does he show up to the meeting on time, and doesn’t care, I mean that’s kind of a real fuzzy one, that conscientiousness.
Dan: Actually that’s one of the traits where we have some of the inklings of an algorithm or a correspondence. You’re not going to want someone who is overly happy and blissful. I already mentioned that if you really index high in joy you tend to be a bit more of free thinker, which is great, but you can also be sloppy with the details, so that doesn’t square very well with conscientious.
Being hot-headed and having really intense anger doesn’t work, but actually the face shows eight different versions of anger, from slight annoyance to outrage. The lower grade versions of frustration can actually be helpful from a conscientiousness point of view, because one of the definitions or understandings of frustration is I want to be in control of my life and I want to make progress. If that is done in a way that is not overly combustible then you have the makings of someone who might indeed, if it’s leavened by some other emotions, be conscientious.
Kelly: Give me the three to five takeaways that a bank CEO should take from this.
Dan: One is they’re going to be making some outreach to people so let’s start on the marketing side. Presumably they’re going to have a website. It’s easy for someone inside the organization to think that their website is really clear, and I can tell you from doing usability tests for all sorts of companies on websites, that it’s often about as clear as mud. So I would say the first takeaway is they should think if their website a lot more like it’s the drive through lane of a fast food joint. That may seem demeaning to them, but these people know how at quick service restaurants to get it across to people and quickly and let them keep moving. If they look at their website from that perspective, and it doesn’t resonate, and it’s not quickly understandable, they’ve got a problem. The joke that has to be explained to you in life is never as funny as the joke you just get, so think in terms of hut, hut, hike. If the connection isn’t about that readily done, you’ve got a problem.
The second thing I would suggest is probably a lot of banks will at least, if nothing else, have some print ads or some mailers at times. We’ve discovered that if you put your company logo in the lower right hand corner which is where ad agencies love to put it, that is typically about the second to last place anybody will look at on a piece of paper. That’s bad news because we’ve found that people read quickly, they barely read at all. The banker, the CEOs, the bank may think that people are going to study my marketing material closely, read it word-by-word, not the case. Likelihood is they’re going to spend three to fifteen seconds on it. If you advertise for yourself and it’s unbranded in effect because they don’t get to the logo, then you’ve got a problem. I’d say that’s the second one.
Third one is you’re in the people business. If they come into the bank or the bank branches, we respond to nothing more strongly than other people. We can tell the difference, human beings. There is a difference between a true smile and a social smile. Social smile is clearly less authentic than the true smile. It is hard for employees to be able to manage a true smile repeatedly during the day, especially on demand, but knowing that that emotional connection with the customer is important. I sit on airplanes often for my business, and I facially code the people who are serving us in the isles, and look for those little moments where they give away weariness, or something else that’s a little off putting sometimes.
Dan: That’s three for you. I think we’ve already touched on the loan officer, so I’ve got you up to four. I guess the fifth one would be, frankly, who you hire, and taking a little more care. Not just look at their credentials, but look at their personality which is what Southwest Airlines does.
Kelly: What does Southwest airlines do, briefly?
Dan: They actually have their people look for a sense of humor. They ask them to tell little stories about themselves, or incidents, or I think even, if I’m not mistaken, at times literally play comedian for a bit, and try to tell a joke. They don’t want to hire somebody who’s just ultra serious and has no levity to them because if you have no levity you can’t be flexible, and if you can’t be flexible you can’t adjust to your customer’s needs.
Kelly: To that end, I’m going to ask you what’s the stupidest think you’ve ever said or done in your business career?
Dan: That would be numerous no doubt. I would say one is, someone asked me once if I was quote/unquote a “rebel” and that’s the way they phrased it. I simply said, “I suppose so.” That’s not the answer I should have given. The truth is I’m a reformer. I’m not interested in rebelling against something, I am interested in improving something. Whether it’s market research or in the financial sector, making sure your advertising dollar is not wasted, and that your customer service is better, I go back to my earlier quote. “There’s two currencies: dollars and emotions, and you need both of them and they interact with another.” I’m not a rebel, I’m a reformer and someone who is eager to make sure that people aren’t inefficient, don’t waste their money, make the best progress, the best connection they possibly can. If you step closer to the customer you can step ahead of the competition.
Kelly: And since you’re an English lit PhD, I’m going to see if you can identify it. If you can’t, I will think very lowly of you.
Dan: Wonderful, wonderful.
Kelly: “Arise and go now. I will arise and go now, and go to Innisfree.”
Dan: That would be Yates.
Kelly: Very good. He’s my favorite writer.
Dan: Yates is a tremendous poet. I was in Dublin a couple of years ago, there was special exhibit on Yates’ poetry, and I fell in love with all over again.
Kelly: Good for you. Now I’m uber impressed. Do you have a favorite quote?
Dan: I have so many favorite quotes. It’s probably one of them is from Groucho Marx, “Who are you going to believe, me or your own eyes?”
Kelly: Very good. Dan, I appreciate your time. CEO of Sensory Logic. How can people get hold of you?
Dan: We’ve got a website, of course. Sensory should be able to do the trick

We want to thank you for listening to the syndicated audio program, The audio content is produced by Kelly Coughlin, Chief Executive Officer of BankBosun, LLC; and syndicated by Seth Greene, Market Domination LLC, with the help of Kevin Boyle.

Video content is produced by The Guildmaster Studio, Keenan Bobson Boyle. The voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin.

If you like this program, please tell us. If you don’t, please tell us how we can improve it. Now, some disclaimers.

  Kelly is licensed with the Minnesota State Board of Accountancy as a Certified Public Accountant.   Kelly provides bank owned life insurance portfolio and nonqualified benefit services to banks across the United States.  The views expressed here are solely those of Kelly Coughlin and his guests in their private capacity and do not in any other way represent the views of any other agent, principal, employer, employee, vendor or supplier of Kelly Coughlin.  
May 6, 2016

Kelly Coughlin is interviwed by Chris Carlson. Chris is a lawyer and actor in Minneapolis and applies his Socratic method to extract from Kelly what the heck he is doing with BankBosun.

Kelly Coughlin is CEO of BankBosun, a management consulting firm helping bank C-Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C-Suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. And now your host, Kelly Coughlin.

Kelly: Hi, this is Kelly Coughlin. I’ve got my long-time friend Chris Carlson on the line. He’s CEO of Narrative Pros. Chris, are you there?

Chris: I am.

Kelly: Great. How are you doing?

Chris: I’m pretty good. How about you?

Kelly: I’m terrific. Chris and I were catching up. We haven’t talked with each other in a while, and we were catching up on what’s going on. Chris had a bunch of questions about what we’re doing at the Bank Bosun, and we thought, “Well, let’s turn this into a podcast.” Rather than me talking to Chris about what I’m doing, he’s going to ask me some questions so it will help him and the audience better understand what we’ve got going on. Chris I’m going to turn it over to you.

Chris: All right. Well, I think first up on the order of business is letting everyone else know a little bit more about who you are. I’ve known you for a while, but why don’t you let people know a little bit more about yourself.

Kelly: I’m 58, 4 daughters, 4 granddaughters, and I don’t know if you knew this, I have one grandson. Finally a male in the family.

Chris: Oh, congratulations! Finally!

Kelly: CPA. Went to Gonzaga University. My uncle is Father Bernard J. Coughlin who is President. Go Barney! He’s 92 now, and I always give him a shout-out when given the opportunity. I also got my MBA from Babson. Let’s see, I worked for PWC when it was Coopers and Lybrand, and then Lloyd’s Bank, CEO of an investment and financial technology company that I founded, managed, and sold. I don’t if I’ve touched base with you since I’ve started working with Equias Alliance as a risk consultant. They do bank-owned life insurance (BOLI) and non-qualified plan programs for banks. I don’t think we’ve really touched base since I started with them.

Chris: No. It’s interesting.

Kelly: Yes, it is.

Chris: Speaking of which, explain to me this BankBosun. Am I saying that right? I take it it’s a nautical term.

Kelly: Yeah. Technically, it’s spelled B-O-S-U-N on the website, BankBosun, but Bosun is actually spelled B-O-A-T-S-W-A-I-N, like boat swain, but it’s pronounced Bosun.

Chris: Okay.

Kelly: BankBosun, it’s a syndicated audio program, really, that’s designed to bring together executives all throughout the U.S. who are participating in what I call the bank ecosystem.

Chris: Wait. I’m not going to let off the hook here. What does a boatswain do?

Kelly: The captain of a ship needs help and guidance and support, so the boatswain helps the skipper, the captain of the ship, achieve its mission and purpose.

Chris: All right. Yeah, that’s a segue because I’m connecting the dots as we speak as I listen to you. BankBosun helps C-level execs in the way. Is that right?

Kelly: Yeah. That’s correct. We’re not dealing with ship captains. We’re dealing with bank officers, chief officers. It’s a clever play on the words C-officers, sea-level officers.

Chris: It is clever. It’s very punny. A lot of puns. That’s good though. It keeps the interest. I’m not going to let off the hook with the other fancy term which is banking ecosystem. An ecosystem, if I remember it, that’s like the jungle. Right? What do you mean by banking ecosystem?

Kelly: The jungle is one ecosystem, so technically it’s a biological community interacting within a set relationship among resources, habitats, and residents of the area. By this, I mean the residents of the banking community, so it’s all the residents of the banking community interacting among each other. The area is not defined as a physical definition like a pond or an ocean or a jungle. It’s defined as a business industry, and in this case, it’s the banking industry.

Chris: Sure. All right. What do they need? I mean, why them? I mean, given your background it makes sense.

Kelly: Why the banking ecosystem?

Chris: Yeah, why do they need particular help and why are you the one to help direct that assistance?

Kelly: Well, bankers are just fascinating, interesting people, aren’t they?

Chris: Yes, yes they are. They evidently need a lot of help.

Kelly: Well, I’ve been in the banking ecosystem, if we can keep using and then abusing and overusing that term, since I was 22. I started my career at Merrill in Seattle in the early 80’s selling mortgage-backed securities to the banks and credit unions. That was a good introduction to navigating this ecosystem. I would say that I learned a lot from that. Then I was consultant at PWC, and CEO of Lloyd’s at two asset management subsidiaries of Lloyd’s Bank, and then as a CEO of our financial technology company Global Bridge. Our primary market was banks, so I’ve been in this ecosystem, if you will, for many, many years, and I do find it interesting and fascinating. The 2008 crash, or melt down I should say, and several others that we’ve had in history, emphasize that banks are a foundation or bedrock of the economy. Frankly, they need all the help they can get. It’s good for the economy.

Chris: These bankers you’re trying to reach, I’m assuming you’re doing it through these podcasts and other high-tech, and you’re pretty comfortable that they’ll be able to get the help they need through that and not be put off by it? It’s a good way to reach them?

Kelly: Well, it’s certainly is not something that historically they’re used to and comfortable with. Historically it’s been print media, download reports, print them, stick them in your briefcase, read them when you can. Half the time you don’t read them, or if you do, you read them on the airplane and then chuck them. It’s not something that they’re used to right now, but I know as a CEO of a couple of companies in my past, that we pulled in so many different directions from different constituents whether it be board members or key customers or regulators, employees, suppliers, consultants, accountants, everybody is pulling at us and yanking at our time.

CEO’s, generally, and CFO’s, but C-level execs, they need to extract value from all these different sources of information efficiently and effectively. I really am a proponent of the multitasking concept, so the idea was, “Let’s give them some good information, bring together this ecosystem, give them some good information but in a way that they can do other things.”

Kelly: Frankly, we’re right in the middle of sporting season, football season and the World Series. I was actually down in Kansas City for the World Series. That was fun. The commercials are ridiculous in these sporting events especially football, so I figured out a way to multitask during these games. Certainly during football games you can read if you want, but also you can listen and learn too. CEO’s, you run your own company. You got a million things going on. Right? You’ve got to figure out a way to maximize the return off of that.

Chris: Absolutely. Yeah. You said earlier that you think that it’s a time when banks have a greater challenge than they’ve had in the past, and with your nautical-themed assistance, give me a sense of why now is a particularly challenging time for banks and how you’re going to be able to help us.

Kelly: Well, I like the nautical theme for the Bank Bosun. I’ve sailed for many years. I’ve lived in Seattle in the 80’s. To me skippering a boat was, where you have a lot of moving parts and people and weather and tides and currents and rocks and other boats to deal with and coast guard, the regulator, and it really served as a great metaphor for running a business, but especially a bank. I think any executive that’s been in charge of a boat knows exactly what I mean about that. When you’re out sailing in the Puget Sound or the ocean, you use whatever tools and information you can muster up to get you and your crew and your boat to the next point. There are no guide posts. There are no signs. You have to watch weather, currents, tides, all that kind of stuff. All of those principles apply to skippering a company, but especially a bank.

Chris: That makes sense. You sold me on the metaphor.

Kelly: Good.

Chris: Tell me more about where you’re at right now and what the connection is with your Bank Bosun. Are they okay with this new gig? How do they relate?

Kelly: Well, Equias is in the bank-owned life insurance space. BOLI is the acronym for that. I came across Equias and the BOLI industry when I was working on a management consulting project. I didn’t know anything about the industry or the product at that time, but after I finished the engagement I thought, “Man, I need to get into this space,” because I love the asset class, if you will. Frankly, it’s an alternative investment for banks’ portfolios. Now, it has to be surrounded by insurance and you have to make sure that insurance is a key part of it, but at the end of the day, it’s a phenomenal asset class. It transfers balance sheet risk. You get a higher return than treasuries, than municipal bonds, and that sort of thing, but I really do like the asset class. Then it has some benefits for funding non-qualified plans.

The thing that I liked about it is it reminded me of my early Merrill Lynch days selling mortgage backed securities. At the time, mortgage backed securities were a new, innovative product. They had a few more moving parts involved, and it required me to simplify the value proposition. You really need to focus on the benefits, which everybody needs to do in any business. With any product, you’ve got to focus on the benefits. I always think of the line, “People don’t want a quarter-inch drill. They want a quarter-inch hole.” Now this is, at the end of the day, a life insurance product. I also love the line by Woody Allen, “I tried to commit suicide one day by inhaling next to an insurance salesman.” There’s always some inherent bias against that. My father sold insurance, and I told that to him when I was about 22 or something. He didn’t find it that funny actually. I find it funny.

Chris: It is funny. It’s a funny line.

Kelly: Yeah, it is.

Chris: It’s funny because the word inhaling is funny.

Kelly: You’re going to probably offend somebody.

Chris: Probably, but that’s not your target market.

Kelly: They’re my colleagues.

Chris: Your friends, as it were. Speaking of friends, I haven’t wished you, my friend, a Happy New Year. We’re about a year into it here, and you see all these lists coming out, top movies, top TV shows. Why don’t you give me the top three initiatives for, BOLI, or for the banking ecosystem?

Kelly: Okay.

Chris: Pick your field.

Kelly: Well, I certainly have three, but I’m not going to tell you two of them because I wouldn’t want to tip off our competitors onto what I’ve got up my proverbial sleeve.

Chris: Okay.

Kelly: Stay tuned. News at 5.

Chris: That’s right.

Kelly: Let me hear your sales voice say that.

Chris: News at 5. Now it’s, News in 5 seconds. I asked you for the top three initiatives for 2016 and you said that you’ll give me one.

Kelly: I’ll give you one.

Chris: It’s called negotiating?

Kelly: Yeah.

Chris: Okay.

Kelly: The one that I’m intrigued by is a confluence of two things. One is cyber security risk.

Chris: All right.

Kelly: The other is risk transference of that risk. I want to explore whether it makes sense to pursue a captive insurance program for banks to underwrite cyber security risk. Setup a collective or a community to do that. I think it’s being mispriced now by insurance companies because they haven’t really identified the risk. They haven’t really identified how big the risk is, how to mitigate the risk, and then how to price it. Anytime you have unknowns like that, especially in insurance, you get over, mispricing, I should say. That’s something that intrigues me.

Chris: Yeah, it makes sense.

Kelly: Yeah. The other two I’m not going to tell you about.

Chris: Perfect! In the acting business, we call this dramatic tension, which you’ve done a good job of creating.

Kelly: Thanks!

Chris: Well it sounds interesting. It’s good stuff.

We want to thank you for listening to the syndicated audio program, The audio content is produced by Kelly Coughlin, Chief Executive Officer of BankBosun, LLC; and syndicated by Seth Greene, Market Domination LLC, with the help of Kevin Boyle.

Video content is produced by The Guildmaster Studio, Keenan Bobson Boyle. The voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin.

If you like this program, please tell us. If you don’t, please tell us how we can improve it. Now, some disclaimers

  Kelly is licensed with the Minnesota State Board of Accountancy as a Certified Public Accountant.   Kelly provides bank owned life insurance portfolio and nonqualified benefit services to banks across the United States.  The views expressed here are solely those of Kelly Coughlin and his guests in their private capacity and do not in any other way represent the views of any other agent, principal, employer, employee, vendor or supplier of Kelly Coughlin.  


May 6, 2016

Kelly talks to Chris Carlson, CEO, Narrative Pros, about what business leaders can learn from a stage and theater actor about presentations to small and large audiences.


Kelly Coughlin is CEO of BankBosun, a management consulting firm helping bank C-Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast Kelly interviews key executives in the banking ecosystem to provide bank C-Suite officers, risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. And now your host, Kelly Coughlin.
Kelly: I’ve got my friend Chris Carlson CEO of NarrativePros on the line, Chris are you there?
Chris: I’m here.
Kelly: Great, Chris and I have known each other for many, many years. Chris is an actor at the Guthrie Theater in Minneapolis He’s also a lawyer and an entrepreneur, and I’m a big fun of his. Listeners are saying, why does he have a starving actor, lawyer on here? Before we get to your connection in to the banking ecosystem. A little bit of personal background.
Chris: Minnesota residence, most of my life, three kids, I’m 46. I’ve been, as I said earlier acting professionally for 22 years. I’ve been an attorney for about as long.
Kelly: Well let’s get into why I have you on BankBosun and your connection to the banking echo system. If you recall, I asked you to give a talk at a conference my company was hosting for banks and investment managers. I think we had like six or seven speakers there over a two day period, probably eight or nine I suppose. You got the highest rankings of anybody in terms of popularity. Tell me why you think that happened and what your value proposition, if you will, to the banking industry is. What was it that resonated with these bankers in that message?
Chris: Absolutely, and I to think to answer as many of those question as efficiently as I can, it has to do with the value of genuine connections between individuals, whether that’s one on one or one to many, or many to one. The expertise that I have amassed over the years, is to how to efficiently create that. How to make that efficient, how to maximize the feedback that you get from any communication.
Kelly: What does that really mean?
Chris: Let me give you an example, bankers are smart guys. They tend to live in their heads when it comes to ideas. They believe if they have a great piece of advice, that that’s the end of their value. That I tell you to invest in stock A, because that will help you. But the real world has as much to do about that conversation and whether or not you say invest in stock A, in a way that is meaningful, whether it makes sense to them. Whether you’re rude, whether you’re cold or indifferent. The value of advice when it’s person to person, which is at the center of any banking relationship, depends on the connection between two people. It’s not whether or not I like you necessarily, but it’s I have to trust you. I have to respect you. I have to understand you absolutely. It has as much to do about that as anything.
Kelly: How I perceive you or how a customer perceives a banker. Not necessarily how he really is.
Chris: Well actually I would say that the goal is to have them perceive you as you really are, and we are many different people to many different audiences. You yourself are a father, a friend, a boxer. You will behave differently in the ring than with a client. What you need to do is harness what will be of the most value, and make the strongest connection with the audience that you’re in front of. That has to come from somewhere that’s true. One of the things that people often mistake is that acting is fake, and it actually has all to do with truth. If you see a good actor, you get them, you buy them, you connect with them. If you see a bad actor, you absolutely reject them. You don’t get it. It’s not real.
Kelly: I think what you’re saying is that you learned this in your acting career. And as a lawyer, you practice this. But you learned this through your acting training to be real. Two scenarios, one is making a one on one presentation, and another is giving a talk to 20 people. What does your advice do in those two scenarios?
Chris: My advice hopefully will encourage people to understand that their impact on their audience, whether it’s one person or 20 people, has more to do with how they say their message, and how they’re able to let people connect with them as real individuals. How they’re able to be themselves in a very genuine and authentic way, and then share the advice that they have. Far too often people, I call them left brain professionals. People who think a lot will sit in front of their computer and work on their outline in their PowerPoint and then get up and give it, without really spending much time on whether or not they’re giving it in a way that incorporates who they are. I think you, Kelly, are a good example of an effective delivery. That’s you, when I hear you talking, that’s the same Kelly that I hear when I’m having a conversation with in the coffee shop. People are drawn to that.
For a banker to have an interaction with somebody, the more genuine they can be, the more that they can focus on that individual as a human being, and also share with them, themselves as a human being. That will make the advice that they give, that much more meaningful and valuable. In many ways it’s the same thing when they stand up in front of 20 people. It‘s genuine and real and to a degree vulnerable. That has a lot to do with fear that is natural, standing in front of a group of people or a high pressure sale. Anyway that you can wrestle that fear, and you kind of say look, “This is me, and this is what I have to say and I think it would be great if you used it, or bought, but if you don’t I understand.”
That’s incredibly attractive for people to be around that kind of energy versus, “Look you really got to buy this and it’s really important to me. I don’t know what I’m going to do if you don’t, if you don’t buy this, if you don’t listen to me.” Even though it is important what the person thinks about you, or whether or not they take your advice or buy it. Showing that, gets in the way of who you are and their comfort quite honestly.
Kelly: Give me a couple of takeaways that relate to preparing for a presentation and then three or four related to the actual presentation itself, beginning, middle and end that kind of thing. We’ve got some real solid takeaways, I can put some guiding principles here.
Chris: Let’s start with the content, that’s where everyone’s comfort is, and most people will spend 100% of their preparation time working on their PowerPoint slides, and you definitely have to work on some kind of presentation, outline and some visuals do help. Number one, when it comes to the visuals, speaker support, PowerPoint, I would work as hard as you can to get rid of all the words quite honestly and just focus on graphs and charts, and pictures or visual creatures. There is a huge disconnect when somebody puts up a bunch of words on a slide, and reads them, or makes the audience read them. It’s just counterproductive and disingenuous to a live environment. You as the speaker need to be considered to be value bringer and you have to explain these things.
I would say as few words as possible on any kind of visual support. The content in what someone says, you should outline in bullet points, words or phrases, but not in complete sentences. Don’t lock yourself into phrasing them, in any particular way. Let yourself react to those ideas and explain them, and that’s come off and it’s very authentic and genuine.
Kelly: No words on slides.
Chris: No words on slides. I would join the audience in cheering if I were to see less words on slides. It’s easy to do, and I think it’s actually fear. People are insecure and they’re like, ”Ah, I got to put all these words on here.” Well take the words off and say the words to people.
Kelly: No words on the slide, that’s number one. What was number two?
Chris: Number two outline your points in a way that you can speak to them in a genuine way instead, for example, I have been involved in the banking ecosystem since I was 22. Instead of writing that out and then reading it, you might just have something that says 22. You look at it and you say, “Ever since I was 22, I’ve been working in banking.” Let those words, let you work through the thoughts, so that the words come to you at that time. You have to have good notes but it will force you to pick the words authentically and people will hear that. That’s number two. Number three is when you pick these ideas and when you explain them, pretend you’re explaining them to your 92 year old father, or your grandma next door.
In other words avoid jargon, you’ve got to be simple, direct and accessible, and I think that people who work in the idea profession tend to be complicated, inaccessible and you always want to be as clear as possible. Simplicity is not easy, it’s very difficult and working on that simplicity is an incredible investment in giving your audiences, who’s paying attention, a return of interest. They will appreciate you, summarizing things very simply and to button this third point off. Work very hard to summarize the single point that you have to make in one sentence.
Imagine that your audience is walking out the door, and they don’t have time to hear your whole speech, what would be the one thing you would want to tell them. If you complain, oh no it’s too complicated, it can’t be distilled into one sentence, I would say to you that your audience is doing that anyways. After they walk out, someone’s going to say, “What did Kelly Coughlin talk about?” “Oh, Kelly is working on this cool BankBosun thing, that it’s needed, it helps out C-suite Executives in the banking industry.” They’re summarizing what you’re saying anyways. If you jump into their shoes and try to say all right, “What is the one takeaway from this? You’re going to help them do that.
Kelly: That’s good, I recall again from that conference you spoke at. There was some prep work that you recommended.
Chris: Sure, let me focus on one of them. A lot of acting technique or approach is focused on combating the nerves and stress of performing. That we appear, genuine, authentic relaxed. One of the truths of performing in front of a bunch of people is that you are nervous. It’s human, so what we want to do is make sure that we find another truth to counteract that. The best counter measure to stress is breathing. When we’re with our friends, or when we’re relaxed, or when we’re uncomfortable and not threatened, the human being breathes from the belly, they use … we use our diaphragm to pull in breath, and when you’re very relaxed, and actually if you watch your kids when they’re sleeping, you’ll see their stomachs go up and down.
Now their stomachs are going up and down because the diaphragm is pulling in breath. When we’re nervous we tend not to breath from our diaphragm, our belly, we tend to take shallow breathes and it makes us more nervous and it changes our voice. Someone who’s really relaxed would sound like this, but if they were breathing … their voice goes up a little bit, and it gets a little breathy, and it’s just not as grounded. We can hear that, we feel that someone has a breathiness to their voice and it’s a little higher in pitch, but if you take a breath, and breathe from your diaphragm, not only does the pitch go down, but you can also project your voice further. You can talk louder.
So breathing, putting your hand on your stomach and trying to train yourself to breathe so that your stomach flops out when you breathe in, is one of the most effective counter measures to stress and to get you back into yourself, to being a relaxed confident genuine person.
Kelly: Let’s talk about, what are kind of some of the deal killers out there. The absolute be cognizant that you don’t do this.
Chris: We’ve already touched on some them. These things would be anything that disconnect you from your audience; that separate you from them. For example, number one, the minute you start reading off of the slide, you’re not being in front of an audience genuinely. You’ve turned towards the screen, you’re reading something that everyone else is perfectly capable of reading. I mean that’s just a fundamental disconnect with one audience. “Hey buddy, I can see the slide and you’re reading it for me and it doesn’t make any sense.” Another one would be reading your speech which is very similar, and that’s telling the audience, “I’m not going to talk with you. I’m not going to share with you my ideas, I’m going to read what I wrote, and you’re going to listen to it.” At which point the audience feel like, well why don’t you just give me them for the reading, so that I can read it.
Something that’s kind of fun, that I’ve uncovered, is that the average person speaks at about 150 words a minute. We can understand and we think at about 800 words a minute. That means that there is an attention gap. Every time someone starts talking over a couple of 100 words, where my mind is running circles around what you’re telling me. You always have to participate in that because if you don’t, if you don’t give them something to think about that is helping you, they’re going to think about something else.
Kelly: Well don’t the non-verbal clues fill that void to a certain extent?
Chris: They can, or they cut against it. Something that I was just doing some research on, hand gestures and body gestures. It’s fascinating, the neuro-scientists have studied it, and we use specifically our hands to make gestures, to help us think of a word, and so if we’re genuinely using our hands it’s because we’re trying to think of how to say something, but if you want someone who has prepared a hand gesture like a politician or a bad speaker. The hand gesture comes at or after what they’re trying to say, not before. In the real world, the hand gesture comes a little bit before what it is that they have to say. That’s what the hand gesture is for. When someone plans it, when someone says, “I think it would be good if I moved my hand like this.” They tend to do it in a way that’s very disconnected and fake, because we can tell that. Instinctively, they do it as you’re saying the word or phrase, or after it.
That’s an example of another disconnection with an audience where they get the sense, and it’s an unconscious sense, it’s not, “My, he moved his hands in a way that was not matching with the phrase. Therefore I think he’s fake.” We’re not aware of that consciously but unconsciously we think to ourselves, “Wow this guy is a … he’s a fake, he’s not being real with us.” It’s very common.
Kelly: Tell me about what should people do with their hands as a default, and then how should we stand? One foot, two feet, hands in the pocket, hands by the side? Give us a couple of ideas on that.
Chris: It’s hard to do, but you forget about your hands. Don’t plan any gestures, let your hands go. Just like I was suggesting with your words to jot a note, and then let the specific words you use to express that idea come out in that moment. The same thing should be with your hands. Let your hands make whatever gesture. If you’re an Italian, outspoken hand gesturing person, that’s what you have to do.
Kelly: Even if it’s a distraction I’ve been to talks where somebody will be using their hands, you end up following their hands the whole time.
Chris: I would say to you that hands gestures become distracting when they’re not connected with what they’re saying. If they’re connected with what they’re saying, you’re not even going to notice them. You become attracted when they’re not connected. If someone has a non-verbal tick, if they’re just moving their hands and it has no connection with what they’re saying, yes it becomes repetitive and it’s a distraction. It’s just like someone who says, has a verbal tick and says um, um all the time and it’s distracting because it’s getting in the way of um, um what you’re trying to say.
Kelly: What about movement on the stage?
Chris: Less is more, when you start moving around, there’s a huge temptation because of nerves, the sympathetic nervous system, the fight or flight reaction kicks in, and people want to move and I see this so frequently with inexperienced presenters. They’ll start wondering around the stage, or they’ll shift away back and forth on their feet, and that is not connected with anything they’re saying 90% of the time…99. They’re just moving because they’re full of adrenaline and they feel like they should move. But, if it’s not connected with what they’re saying, it is inherently destructive. Why is someone pacing back and forth on the stage?
It’s funny because I’ll get push back on that, people will say, “Well I’m trying to be more interesting and dynamic on the stage.” I have no problem with being interesting and dynamic, I have a problem, if it’s not connected with what you’re saying. When in doubt, you need to practice standing still because you’re going to want to move. Move if there’s a reason, move if it makes sense. For example, if you’re separating a point. In the first situation, the FED needs to do XYZ and I’m going to talk about this for a while. In the second situation, and then you can move on that, that might make sense. That’s an example, but that requires practice and planning. So I always recommend that people just stand still.
Kelly: Do you prefer microphone that is attached to you versus attached to a podium, because you’re kind of stuck and glued to the podium, but is that your preference?
Chris: Yes, a lapel or lavalier microphone allows you to forget about the microphone and that’s what you need to do with a majority of the technology that’s helping support you. Some microphone on a podium tends to trap you behind the podium, which is bad for a number of reasons. You have a temptation to lean on the podium, you’re blocked and a lot of your body language from the audience. You might have more of a tendency to look down. A lavalier microphones will allow you to just take one step to the right or left of the podium, and to find a comfortable position in front of the audience and be accessible.
Kelly: That’s terrific, I appreciate that. Chris do you have a favorite quote to finish off here? I always like to get one
Chris: Any good quote.
Kelly: Good quotes.
Chris: Good quotes. “In law, what place are tainted in corrupt but being seasoned with a gracious voice obscures the show of evil.”
Kelly: Good one, Chris I appreciate your time on this, and good luck to you with NarrativePros, and we’ll be in touch. Anybody wants to contact Chris, feel free,, is that the website?
Chris: That’s it.
Kelly: Thanks Chris

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