Growth Imperative at Community Banks
“Without a growth strategy, you are dead in the water,” said Chuck Sulerzyski, CEO of Marietta, Ohio-based Peoples Bank. And that pretty well sums up the mood at a panel discussion I moderated at the recent BAI Retail Delivery 2012 entitled “Winning Strategies for Community Banks.”
While each of the three bank CEOs participating in the discussion serves different markets with different challenges, they all agreed on growth as the key imperative. If you want to stay in business for the long term, you’ve got to be able to grow revenue. Likewise, if you want to sell your bank, you need a growth story to warrant an attractive multiple. In the face of broad industry challenges – sluggish economic growth, limited capital, higher regulatory burden, shallow yield curve – what are these banks doing to generate that revenue growth?
They are focused on their core strengths. Community banks have a unique advantage that comes from being local: they have better market knowledge, less bureaucracy and can provide more personalized service. Success comes from leveraging these strengths and not trying to compete with larger regional and national competitors on their terms.
Peoples Bank turned size to their advantage by creating market teams that focused on deepening customer relationships. They built a disciplined relationship management process and provided standardized training to each team, which fueled dramatically higher sales of insurance and wealth management products. With 39 branches, all within reasonable reach of corporate headquarters, Peoples could create a clear focus and a consistent customer experience that is nearly impossible at banks with thousands of branches across multiple states that struggle to break down internal silos.
The results at Peoples speak for themselves: non-interest income as a percent of operating revenues more than doubled, and is 43% higher than their peer average – and this is despite broad industry declines in consumer deposit fees.
They are investing in infrastructure. Just because you are small and local doesn’t automatically mean that you know your customers. That’s why East Carolina Bank in Engelhard, North Carolina invested in customer relationship management (CRM) technology, so that it could truly deliver on the relationship banking promise. As Dwight Utz, East Carolina’s CEO said, you can’t claim to know your markets and customers better than the competition if you don’t have the information tools to do the job, along with the right relationship-building process to improve service and sales.
CRM sounds like an involved – and expensive – undertaking for a $900 million-asset bank. Yet, the cost of technology is declining and by selectively implementing only the tools that could be immediately utilized effectively, East Carolina was able to control the cost of investment and improve the return on investment. More importantly, the bank achieved better than expected payback as a result of measurable improvements in cross-sell (deeper and more profitable relationships) and customer retention.
They are keeping up with the latest delivery technology. Farm Bureau Bank serves customers nationally through a single San Antonio, Texas office and has built Internet based application and relationship management tools that, in the words of CEO Will Hileman, “I could only dream about when I worked at large banks.” But Farm Bureau Bank’s customer base is primarily rural, and up to 30% of their customers can only access the Internet by telephone dial-up service. However, this reflects an older demographic in rural markets, rather than a rural/urban issue. Rural markets have a similar technology adoption cycle compared to the general consumer population, when age is factored into the equation.
So, it is a mistake to think that the vast majority of community bank customers, even rural customers, lack sophistication in their technology usage. Hileman described how his customers utilize GPS technology to harvest their fields, have a sophisticated understanding of crop future trading and are generally technology-savvy.
Peoples’ CEO Sulerzyski described how they have embraced new distribution technologies as a “fast follower” purchasing off-the-shelf products at an affordable cost. As a result, the bank now offers mobile banking, mobile remote deposit capture, mobile bill pay and person-to-person payments – a product array comparable to its larger competitors.
They are evolving branch models and reducing branch operating expense. In general, community banks serve smaller markets and hold smaller average total branch deposits than their larger brethren. As check utilization continues to decline, and fewer customers come into branches, how can banks maintain the distribution network necessary to serve their markets?
All three CEOs agreed that community banks need to implement cost-saving technology like cash recyclers in order to better control branch labor costs. All agreed that universal staff – more likely personal bankers who could also function as tellers, rather than tellers who could sell – was the likely future operating model. And all agreed that community banks had to be just as diligent as large banks in reducing the size and expense of their retail branches.
But lest anyone think branches are doomed to extinction, Hileman offered a cautionary tale. His bank has one branch but serves customers nationwide through a centralized call center and local Farm Bureau Insurance agents. Farm Bureau Bank has conducted numerous pilot programs to test representative offices and other means of placing physical facilities in markets it serves. The key lesson: there is no problem generating loans with a very thin distribution and referral network, but most consumers remain unwilling to hand over their core checking relationship to a remote bank. As a result, Farm Bureau Bank is one of the few financial institutions that is challenged in generating deposits, with a loan-to-deposit ratio in excess of 100%.
They see opportunities for community banks to succeed. Each of these CEOs spent the majority of their careers at some of the largest financial institutions (SunTrust, KeyBank and PNC) and know only too well the resources available to large banks. From the large bank point of view, it’s about the limitations community banks have in terms of capital, skill and resources. But to these CEOs, it’s all about what they can do better. Typical comments: “The tools and data capabilities were much better than I thought we’d have at a bank our size;” “We can cut through bureaucracy and get things done, responding to niche market opportunities quickly;” and “You can really get your arms around the organization, creating the ‘one bank’ in a way that large banks cannot.”
Headwinds? Of course. But these community bankers are striving to overcome these difficulties by focusing on their growth opportunities.