At the risk of putting yet another “here’s what’s going to happen in 2019” blog post in front of you, I wanted to take some time and think about an interesting article I read on the Independent Banker’s website. You can find the article here if you’d like to read along.
According to their survey, the top six challenges facing community bank CEO’s are as follows: Increasing Loans, Keeping up with Technology, Compliance, Increasing Earnings, and Attracting/Retaining Qualified Staff. To be honest, I could not agree with the survey’s results more.
That’s the trick isn’t it? If you want to make more money as a bank, make more loans. Simple right? I am only kidding of course. As you know, there’s a great deal more to it than that. In addition, we have to consider what the next 12 months entails on a macroeconomic level. We know (as well as anyone can “know” this) that rates are likely to increase over the next 12 months but we are also looking at the prediction of a more recessionary time than we’ve seen. Also, where do we place those loan dollars? C&I, consumer real estate, small business…all present opportunities and challenges. For the community bank, small business, consumer, and consumer real estate (and I’m including investment real estate here as well) are always going to be our bread and butter. As of writing today (January 3, 2019), the 30 year mortgage rate is averaging 4.51%. Even if this were to increase 75 bps (5.26%) , this would still be among the low end of the real estate boom pre-2008. We dropped below 5.26 for a few days towards the end of June through first part of July in 2003. All the boom after that was well north of 5.26. The point: on a purely rate basis, there is an appetite for consumer real estate debt well above our current rate. (numbers used obtained from FRED-“30 Year Mortgage Rates”).
Not too long ago, we did a free webinar on the state of Small Business Lending in regards to “the big banks” and you can watch the replay here. This feeds into the C&I section as well as, according to the Fed, most of what community banks call C&I is probably more accurately labeled “small business”. That said, over the near future, small business lending is going to be a much more heated area of lending due to increased competition. The big banks are coming after our key customers using our own values and strengths. It’s not just them having a bigger war chest of cash…it’s adapting what we’ve honed as our value propositions and coming after community banks in a very efficient manner. The Fed has the data to back that assertion up and I’d really strongly advise community bankers to watch our discussion on the subject.
So, increasing loans needs to happen. Let me rephrase that…to paraphrase what a bank president used to tell me increasing good loans needs to happen. We’ve shifted our balance sheets to be asset sensitive and so now it’s time to increase the assets in more profit-driven means. It means going after the business we want and protecting the business we don’t want to lose (or rather “can’t afford to lose”).
Keeping Up With Technology:
That’s right…FinTech!!! If you want your bank to survive, you have to adopt it. No nicer way to say it. However, don’t just buy a product or throw an app together to say that you’ve got an app. It’s one thing to have an app or any other FinTech product…but it has to work well and be better than the old way of doing things. This involves incorporating “technology” (whatever that may mean to you and your customers) into the culture and not just the product menu. This means the bank executives need to be using the app (or whatever product) as well as advocating it to the employees. If the update is a back-office process, then it needs to be championed in terms of the overall success of the bank. It must be a cultural shift. Changing culture is hard. It’s easy to write a blog about it. It’s even easy to record and produce a podcast episode about it. It’s more difficult to do and I understand that 100%. That does not change the necessity of it, however.
Fortunately, there is help. I’m seeing things like The Venture Center and the ICBA teaming up to build a ThinkTech Accelerator where those with the technology meet those with the need and solutions are being delivered to community banks. I feel that it has an enormous chance of changing the community banking world. Also, I’m seeing more banks start implementing more digital strategies on the customer-facing side of the bank. I’m in the process of changing banks myself due to a move and I’m finding the process to be much smoother than I’d anticipated. (Note: the lag time is really me making sure all my ACH’s and Bill Pay Payees are moved…it’s not the bank. It’s me moving slow!!). I’m hesitant to say it this way, but, I get the impression that the fear of the big bad “FinTech” is waning. I think that in 2019, we will have figured out how to work together.
Everyone’s favorite subject…including this former lender’s! According to the survey referenced in the article, 58% of CEO’s surveyed anticipate spending the same amount of money on compliance as they did in the previous year. I’m not saying the cost is not too high, I’m saying that it is continuing to be flat. We can work around fixed costs. Compliance is what compliance is. Regulators are going to shift focal points and regulations are going to change in much the same way the sun will rise in the morning and Uncle Sam will get his money. These are immutable truths in our business. My advice would be to empower your compliance employees to work with other non-competing bank compliance employees and experts to find cost and time-effective ways of staying compliant. One of the “ah-ha” moments I’ve had over the past 12 months was the power of the collective mind. Get several people together to find a solution and it will amaze you what they will discover. 1 + 1 = 3 in this case in that the answer is greater than the sum of their parts. Every individual bank has their own compliance concerns and it would not be effective to say “Here, you need to do X for your compliance” without a lot more information. I don’t know what X means to your bank…but I do know that someone else in the banking universe has an answer for your “X” and you may be the gate keeper to their “X”. Training dollars spent on compliance are dollars well-spent.
We have already covered that haven’t we? Just increase loans! Again, sorry for the poor joke but the fundamental truth applies here. If you want to increase earnings, you increase revenue and decrease expenses. Here, cost of funds is going to be an issue. We have gone for several years with extremely low cost of funds. As rates increase, that is going to be changing. Cost of funds will still be historically low, but, it is an increasing expense nonetheless. Deposit acquisition is still a crucial part of the business both in building customer relationships and meeting funding needs effectively. However, we can’t let the lessons from the past few years be lost. Many of us have come up in banking during the past 10 years or so and understand that getting into rate battles is not necessarily the answer. Finding deposit products that have meaningful value to the customer is going to be the answer. It is going to mean increasing the marketing budget and also will mean integrating that new FinTech initiative we discussed earlier if that initiative is customer-facing. All of these functions have to be considered at the enterprise level and solutions must be integrated across the whole bank.
If it was as easy as just throwing money at this, it would not be tied with “increasing earnings” in terms of challenges on CEO’s minds. Banks are doing a good job at learning their employees but we could be doing better. We need to understand their motivations better and begin to get buy-in to the culture we are trying to establish. There is a difference between a job and a career and banks need to be training up career-minded bankers. They need to see a path. They need to feel ownership in what they do. They need to believe in something greater than themselves and in something worth holding on to. I know that sounds like consultant-speak, but it is true. We need to create an environment where lifelong employees at other banks line up to send in a resume to work at your bank. That’s attraction. That’s retention. How do we do that? Ask the people you’re trying to retain and see what they say. It may surprise you.
The good news about all of this is that Barret has you covered on all these fronts.
Lending: We have Commercial Lending Academy in April, we’ll be launching our first ever Consumer Lending courses in late January/early February, we have our Senior Lender Summit in November, and this year we are starting our Senior Lender Digital Roundtables where senior lenders can get together and talk about best practices and other industry concerns.
Technology: Our Podcast (Main Street Banking) has several excellent tech experts in our previous season that you can go back and hear. In addition to the Senior Lender Digital Roundtable, we are starting a Marketing/Social Media Digital Roundtable. As noted above, having the technology is great. Integrating the technology is crucial. But none of it matters if those that will use the technology (i.e. customers) don’t know about it. This Roundtable will be a good way to have the best and brightest working on solutions to that problem.
Compliance: We are doing our annual Compliance Summit in October this year with Terri Thomas who did an awesome job for us in 2018. In addition, we’re doing another Digital Roundtable for compliance personnel this year. Keeping up to date with regulations as well as best practices is the best way this challenge can be met.
Earnings: We have our Bank Profitability Class in March that goes over some of the metrics and “needle moving” actions bank must be taking in order to be profitable. This also includes all the other content we have designed to either save you time/money or make money.
Staff Attraction/Retention: Our HR Conference is led by the best and brightest in the banking world. In addition, we also offer some excellent training content (outside of what I’ve already mentioned) to supplement your onboarding process.
And all of that does not even touch our Graduate School held each May. Due to the graciousness of Paul W. Barret, we offer the same education and same faculty as the other outstanding graduate level banking schools at around a third of the cost to the bank and half the time out of the bank. We’d love to see you in May for Graduate School and for any of our other outstanding programming. For more information, check out our website or our social media pages on Facebook, Twitter, Instagram, and LinkedIn.
Happy New Year!
- 2019…And. Away. We. Goooooo!! - January 3, 2019
- “Back in my day…” - October 30, 2018
- “Peeking Under the Hood:” Loan Products and Underwriting. Part 4 of 4 - October 12, 2018
- “Peeking Under The Hood”: What Are You Doing and What Is Your Competition Doing? Part 3 of 4 - October 11, 2018
- “Peeking Under The Hood”: Markets and Competition. Part 2 of 4 - October 10, 2018
- “Peeking Under The Hood: A look at small business lending. Part 1 of 4 - October 9, 2018
- The Conversation Has Shifted - September 24, 2018
- Know Thyself - July 20, 2018
- Is “Customer Service” Even a Thing Anymore? - June 7, 2018
- Community Banking Month…#banklocal - April 16, 2018