How Innovative Banks Grow Deposits


deposits-8-14-19.pngCommunity banks are under enormous pressure to grow deposits.

Post-crisis liquidity concerns have challenged firms to find low-cost funds, while mega-banks continue to gobble up market share and customers demand digital offerings. In this intense environment, some banks are looking for ways to shake up their approach to gathering deposits. But some of the most compelling opportunities — digital-only banks and banking-as-a-service — require executives to rethink their banks’ strengths, their brands and their future roles in the financial ecosystem.

Digital Bank Brands
When JPMorgan & Co. shut down its digital-only brand called Finn after just one year, some saw it as a sign that community banks shouldn’t bother trying. But Dub Sutherland, shareholder and director of San Antonio, Texas-based TransPecos Banks, argues that there are too many unknowns to make extrapolations from Chase’s decision to ditch Finn.

Sutherland’s bank, which has $224 million in assets, successfully launched a digital-only brand that caters to medical professionals: BankMD. TransPecos is using NYMBUS’ SmartLaunch solution to focus on building products that meet the particular needs of medical professionals. BankMD has its own deposit and loan tracking system, so it doesn’t affect TransPecos’ existing operations. Sutherland says most BankMD customers don’t know and don’t seem to care about the bank on the back end.

Bankers who’ve spent decades crafting their institution’s brand might bristle at the thought of divorcing a digital brand from their brick-and-mortar signage.

I think there’s a fear for those who don’t understand branding and marketing, and don’t understand the new customer. The fact that being “First National Bank of Wherever” doesn’t really carry anything in this day and age,” explains Sutherland. “I do think there are a lot of bankers who fear that they’re going to somehow dilute their brand if they go and launch a digital one.”

That should never be the case, if executed properly. Sutherland explains the digital brand should be “targeting entirely different customers that [the bank] didn’t get before. It should absolutely be accretive.”

Community banks may be able to use a digital-only offering to develop expertise that serves different, niche segments and to experiment with new technologies — without putting core deposits at risk.

Banking-as-a-service
A cohort of banks gather deposits by providing deposit accounts, debit cards and payment services to financial technology companies that, in turn, provide those offerings to customers. In this “banking-as-a-service” (BaaS) model, banks provide the plumbing, settlement and regulatory oversight that enables fintechs to offer financial products; the fintechs bring relatively lower-cost deposits from their digitally native customers.

Essentially, BaaS helps these banks get a piece of the digital deposit pie without transforming the institutions.

“These are low-cost deposits. [Banks’] don’t have to do any servicing on them, there’s no recurring costs, no KYC calls,” says Sankaet Pathak, CEO of San Francisco-based Synapse. Synapse provides banks with the application programming interfaces (APIs) they need to automate a BaaS offering. He says banks “have almost no cost” with deposit-taking in a BaaS model that uses a Synapse platform.

Similar to a digital brand, providing BaaS for fintechs means the bank’s brand takes a back seat. That was a big consideration for Reinbeck, Iowa-based Lincoln Savings Bank when it explored the BaaS model, says Mike McCrary, EVP of e-commerce and emerging technology. Lincoln Savings, which has $1.3 billion in assets, has been running its LSBX BaaS program for about five years, using technology from Q2 Open.

McCrary began his career at the bank in the marketing department, so the model was something his team seriously weighed. In the end, though, McCrary says he’s proud to be enabling fintech partners to do great things.

“It doesn’t diminish our brand, because our brand is really for us, within the places that we touch,” he says. “We definitely continue to try to maximize that and increase the value of the brand within our marketplace, but we’re able to then offer our services outside of that immediate marketplace, with these other really great [fintech] brands.”

Bankers need to grapple with whether they are comfortable putting their firms’ brand on the backburner in order to launch a digital bank or BaaS program. But regardless of how banks choose to grow deposits, the time for considering these new business models is now.

“The cost of deposits, in particular, is a challenge that creates a ‘We need to do something about this’ statement inside a board room or an ALCO committee,” says Q2 Open COO Scott McCormack. “My advice would be to consider alternative strategies sooner than later[.] The opportunity to grow deposits by building a direct bank, partnering with or enabling a fintech … is a strategy that is more compelling than it has ever been.”

Potential Technology Partners

NYMBUS SmartLaunch

SmartLaunch leverages Nymbus’ SmartCore to offer a “digital bank-in-a-box” that runs deposits, loans and payments parallel to the bank’s existing infrastructure.

Q2 Open

Its CorePro system of record helps developers easily build mobile financial services. With a single set of API calls, CorePro can also be used to develop a BaaS offering.

Synapse

BaaS APIs serve as middleware, allowing banks to offer products and services to fintechs and automate the internal Know Your Customer, Anti-Money Laundering and settlement processes for the bank.

Treasury Prime

Their APIs enabled Boston-based Radius Bank to provide BaaS support powering a new checking account called Stackin’ Cash.

Learn more about each of the technology providers in this piece by accessing their profiles in Bank Director’s FinXTech Connect platform.

2019 Mid-Year Bank M&A Outlook


merger-8-5-19.pngWhat might the second half of 2019 bring for bank mergers and acquisitions (M&A)?

The favorable drivers in the first half of 2019 — the regulatory landscape, enhanced earnings as a result of tax reform, desire for scale and efficiency, and the search for digital capabilities — will likely continue to be the catalysts for bank M&A activity in the second half of 2019. While the market has not seen a spike in the bank M&A deal volume, overall deal values continue to rise because of a few large transactions, including mergers with price tags of a $28 billion and a $3.6 billion. The following trends and drivers are expected to continue to have an impact on banking M&A activity in the second half of 2019 and beyond.

Intensifying Battle for Secured Customer Deposit Bases
U.S. banks’ deposit costs rose far more quickly than loan yields in the first quarter of 2019; further increases in deposit costs may prevent net interest margins from expanding in 2019. As the competition for deposits intensifies, buyers are increasingly looking for banks with a secured deposit base, especially those with a significant percentage. Moreover, as deposit betas accelerate — even as the Federal Open Market Committee slows rate hikes — it becomes more difficult for banks to grow deposits.

With the largest banks attempting to grow their deposit market share via organic customer growth, the regional and super regional banks are trying to develop similar presences through acquisitions. Banks that can navigate this rate environment ably should emerge as better-positioned acquirers via their stock currency, or sellers through the attractiveness of their funding base.

Favorable Regulatory Environment
Dodd-Frank regulations have eased over the past 12 months, increasing the threshold for added oversight and scrutiny from $50 billion in assets to $250 billion. Easing bank regulations and tax reforms that create surplus capital could continue driving regional and super regional consolidation. Moreover, banks with $250 billion to $700 billion in assets may continue to benefit in the second half of 2019 from a more-favorable regulatory landscape.

MOE’s Potential Change on the Competitive Landscape
There were a couple of mergers of equals (MOE) in the first half of 2019 that were welcomed by investors — an indication that the industry could be likely to see a rise in the volume of larger transactions in 2019. Regional banks that miss the MOE wave in the near term may soon find themselves without a “partner” after the initial wave of acquisitions occurs.

As the banks pressure-test their MOE strategy, the key may be to find a partner with strategic overlap to drive the synergies and justify the purchase price premium yet also provide an opportunity for growth and geographic footprint. Furthermore, unlike smaller tuck-ins, MOE requires additional strategic diligence and capabilities. This includes the ability to successfully integrate and scale capabilities, the ability to cross-sell to newly acquired segments, the ability to consolidate branches in overlapping markets and integrating divergent management processes and culture.

The Hunt for Digital Capabilities
Evolving consumer wants and the table stake needed to provide an integrated digital ecosystem are compelling many bank executives to differentiate themselves via technology and digital channels growth. Investors typically place a premium on digital-forward banks, driving up multiples for banks with efficient ecosystems of digital capabilities. The hunt for digital capabilities may provide an opportunity to not only add scale, but also transform legacy banks into agile, digital-first banks of the future.

Bank boards and executives should remain cognizant of above trends as they progress through their strategic M&A planning. Their resulting decisions — to be buyer, seller or an observer on the sidelines — may shape bank M&A activity in the second half of 2019 and into 2020.

Moreover, while the banks continue to assess the potential impact of the current expected credit loss (CECL) standard, the general market consensus is CECL may require a capital charge. As such, M&A credit due diligence should be treated as an investment in reducing future losses, even though the loan quality is currently viewed as benign. Successfully driving value from acquisitions while mitigating risks requires a focused lens on M&A strategy with the right set of tools, teams and processes to perform due diligence, execute and integrate as needed.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

Copyright © 2019 Deloitte Development LLC. All rights reserved.

What’s Trending at Acquire or Be Acquired 2019

Smart Leadership – Today’s challenges and opportunities point to one important solution: strong boards and executive teams.
Predicting The Future – Interest is growing around mergers of equals, commercial deposits and shifting team dynamics.
Board-Level Concerns – Three characteristics define the issues facing bank directors.
Spotlight on Diversity – Diverse backgrounds fuel stronger performance.
Digging into Strategic Issues – The end of the government shutdown could yield more IPOs.

“The Best Strategic Thinker in Financial Services”


strategy-7-19-19.pngThe country’s most advanced bank is run by the industry’s smartest CEO.

Co-founder Richard Fairbank is a relentless strategist who has guided Capital One Financial Corp. on an amazing, 25-year journey that began as a novel approach to designing and marketing credit cards.

Today, Capital One—the 8th largest U.S. commercial bank with $373.2 billion in assets—has transformed itself into a highly advanced fintech company with national aspirations.

The driving force behind this protean evolution has been the 68-year-old Fairbank, an intensely private man who rarely gives interviews to the press. One investor who has known him for years—Tom Brown, CEO of the hedge fund Second Curve Capital—says that Fairbank “has become reclusive, even with me.”

Brown has invested in Capital One on and off over the years, including now. He has tremendous respect for Fairbank’s acumen and considers him to be “by far, the best strategic thinker in financial services.”

I interviewed Fairbank once, in 2006, for Bank Director magazine. It was clear even then that he approaches strategy like Sun Tzu approaches war. “A strategy must begin by identifying where the market is going,” Fairbank said. “What’s the endgame and how is the company going to win?”

Fairbank said most companies are too timid in their strategic planning, and think that “it’s a bold move to change 10 percent from where they are.” Instead, he said companies should focus on how their markets are changing, how fast they’re changing, and when that transformation will be complete.

The goal is to anticipate disruptive change, rather than chase it.

“It creates a much greater sense of urgency and allows the company to make bold moves from a position of strength,” he said.

This aggressive approach to strategy can be seen throughout the company’s history, beginning in 1988 when Fairbank and a former colleague, Nigel Morris, convinced Richmond, Virginia-based Signet Financial Corp. to start a credit card division using a new, data-driven methodology. The unit grew so big so fast that it dwarfed Signet itself and was spun off in 1994 as Capital One.

The company’s evolution since then has been driven by a series of strategic acquisitions, beginning in 2005 when it bought Hibernia Corp., a regional bank headquartered in New Orleans. Back then, Capital One relied on Wall Street for its funding, and Fairbank worried that a major economic event could abruptly turn off the spigot. He sought the safety of insured deposits, which led not only to the Hibernia deal but additional regional bank acquisitions in 2006 and 2008.

Brown says those strategic moves probably insured the company’s survival when the capital markets froze up during the financial crisis. “If they hadn’t bought those banks, there are some people like myself who don’t think Capital One would be around today,” he says.

As Capital One’s credit card business continued to grow, Fairbank wanted to apply its successful data-driven strategy to other consumer loan products that were beginning to consolidate nationally. Over the last 20 years, it has become one of the largest auto lenders in the country. It has also developed a significant commercial lending business with specialties like multifamily real estate and health care.

Capital One is in the midst of another transformation, to a national digital consumer bank. The company acquired the digital banking platform ING Direct in 2011 for $9 billion and rebranded it Capital One 360. Office locations have fallen from 1,000 in 2010 to around 500, according to Sandler O’Neill, as the company refocuses its consumer banking strategy on digital.

When Fairbank assembled his regional banking franchise in the early 2000s, the U.S. deposit market was highly fragmented. In recent years, the deposit market has begun to consolidate and Capital One is well positioned to take advantage of that with its digital platform.

Today, technology is the big driver behind Capital One’s transformation. The company has moved much of its data and software development to the cloud and rebuilt its core technology platform. Indeed, it could be described as a technology company that offers financial services, including insured deposit products.

“We’ve seen enormous change in our culture and our society, but the change that took place at Capital One’s first 25 years will pale in comparison to the quarter-century that’s about to unfold,” Fairbank wrote in his 2018 shareholders letter. “And we are well positioned to thrive as technology changes everything.”

At Capital One, driving change is Fairbank’s primary job.

“The Biggest Threat to the Deposit Insurance Fund I’ve Ever Seen”


rates-6-28-19.pngA little-known rule called the national rate cap is putting community banks in a bind.

The cap tries to set a high-water mark for rates by calculating a weekly average of advertised interest rates for specific deposit products at branches, plus 75 basis points. This wasn’t a problem when interest rates were dropping or staying steady, but the higher rate environment has now inadvertently handicapped community banks as they compete for deposits.

Bankers say the rate cap, calculated and enforced by the Federal Deposit Insurance Corp., is unrealistically low compared to corresponding market rates. The difference could also make some banks appear riskier if examiners bring up deposit rates in exams.

Peoples Bank in Magnolia, Arkansas, uses wholesale funding to make loans for its low- to middle-income customers who lack deposits, says CEO Mary Fowler. The bank, which is well capitalized and has $200 million in assets, offers attractive rates to bring in and retain many of those funds.

The only problem? More than 90 percent of certificates of deposit (CDs) at Peoples Bank pay a rate that is higher than the rate cap.

“I call [these] traditional deposits, because they’re core as long as you’re paying the best rate in town. But we have to pay market rates for it,” she says.

Other banks are in a similar position, as higher rates have caused the national rate cap to lag the yield on Treasury securities of similar durations. This puts bankers like Fowler in a tough spot. They need to offer rates above the cap to attract or maintain deposits, but doing so invites skepticism from regulators. The FDIC declined to comment.

“Why would a customer get a CD from me when I can only hypothetically pay the national rate cap?” says Joseph Kiley III, president and CEO of Renton, Washington-based First Financial Northwest, a well-capitalized bank with $1.3 billion in assets. He points out that, at times, Treasuries paid more than 100 basis points above the rate cap.

National Rate Cap.png

Bankers say the cap also creates tension with examiners, who see it as a proxy for “potentially volatile” deposits. That’s because the rule, which should only apply to a small subset of thinly capitalized institutions, has become standard across the industry.

Examiners ask executives at healthy banks what they would do with these higher-rate deposits if the bank lost capital and was forced to abide by the cap, says John Popeo, a principal at the consultancy Gallatin Group. Popeo is a former FDIC regulator who helped resolve failed banks after the financial crisis, and represents institutions across the country that are well capitalized and do not have any immediate regulatory issues.

He says examiners are not threatening a regulatory downgrade but want to see how the bank would fund itself in the event it is no longer well capitalized. For some banks, the answer isn’t pretty.

The cap could lead to systemic problems if too many banks dip below well-capitalized levels during an economic downturn, as the FDIC prohibits less-than-well-capitalized banks from offering rates above the cap.

“When they pull your funding, you’re done,” Kiley says. “[Your bank is] just going to bleed to death.”

The FDIC has begun the process of changing the rate cap calculation, but Fowler worries that an economic downturn that threatens bank capital levels could come faster than regulators’ correction. She has been in banking for decades and says the rate cap is “the biggest threat to the deposit insurance fund I’ve ever seen.”

Executives from Peoples Bank wrote five comment letters on the request for proposal. Fowler points out that the FDIC calculated the cap using only Treasury yields prior to 2009, at which point it changed its approach.

In calculating the rate cap now, the FDIC uses an average of prevailing deposit rates at bank branches, but excludes credit unions, negotiated rates and special offers from the calculation. Using branches means that big banks are overrepresented, and online banks paying market-leading rates are underrepresented. Fowler says the FDIC should change this. She thinks it should compare the current approach to the old Treasury approach, and select the rate that’s higher.

Kiley questions whether a rate cap is an antiquated notion but hopes any change will account for how customers interact with banks and rate-shop in the digital age. If the rate cap continues to exist, he would prefer that the FDIC use wholesale funding rates from institutions like the Federal Home Loan Bank.

“We are living in a world where we pretend folks walk into branches and say ‘Hi’ to the teller … and wave to their money in the vault,” he says. “Everyone banks like they buy from Amazon.com. I don’t think there should be a rate cap.”

An Easy Way to Learn More About Banking


governance-5-24-18.pngEvery year when Richard Davis was the chief executive officer of U.S. Bancorp, he would travel to see Warren Buffett in Omaha, Nebraska.

“The meetings were always on the same day and always lasted exactly an hour and 15 minutes,” Davis once told me. “That wasn’t the plan. It just happened that way.”

Even though the meetings went over an hour, however, there were never people in the waiting room annoyed that the conversation went long. The tranquility was refreshing to Davis, who was accustomed to days packed with back-to-back meetings.

Buffett guards his time. He spends 80 percent of his day reading and thinking, he has said.

A student at Columbia University once asked Buffett, the chairman and CEO of Berkshire Hathaway, how to become a great investor. “Read 500 pages like this every day,” Buffett said, holding up a stack of papers. “That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

The same is true of banking, I believe.

But where should one start? What are the most important things to read if one wants to learn more about banking?

As someone who has been immersed in banking literature for nearly a decade, I recommend starting with the annual shareholder letters written by a trio of top-performing bankers.

The best known is Jamie Dimon’s annual letter written to the shareholders of JPMorgan Chase & Co.

“Jamie Dimon writes the best annual letter in corporate America,” Buffett said on CNBC in early 2012. “He thinks well. He writes extremely well. And he works a lot on the report—he’s told me that.”

In his letter this year, Dimon talks about JPMorgan’s banking philosophy. He talks about leadership. He talks about the things JPMorgan doesn’t worry about: “While we worry extensively about all of the risks we bear, we essentially do not worry about things like fluctuating markets and short-term economic reports. We simply manage through them.”

And Dimon comments extensively on an array of critical issues facing not just the banking industry, but the broader economy and society: “[I]t is clear that partisan politics is stopping collaborative policy from being implemented, particularly at the federal level. This is not some special economic malaise we are in. This is about our society. We are unwilling to compromise. We are unwilling or unable to create good policy based on deep analytics. And our government is unable to reorganize and keep pace in the new world.”

A second CEO who writes an especially insightful letter is William Demchak at Pittsburgh-based PNC Financial Services Group.

In his latest letter, Demchak delves into PNC’s retail growth strategy, outlining the bank’s expansion into new markets using a combination of physical locations, aggressive marketing and digital delivery channels.

Demchak also discusses the changes underway in banking: “It’s an amazing time in the industry—exciting, if you’ve been preparing for it, and probably terrifying if you haven’t. . . . [I]n some ways, it feels like we’re running through the woods with 5,400 other players and one big bear: retail customers and deposit consolidation. Some will be lost in the chaos; others will fall victim to bad decisions and the realization that they waited too long to start moving toward the future.”

Last but not least is the letter written by Rene Jones at M&T Bank Corp, a regional lender with $120 billion in assets based in Buffalo, New York. Of all the annual messages written by bank CEOs this year, Jones’ does the most to advance the industry’s narrative.

It’s crafted around two arguments, the first of which concerns the growing share of retail deposits held by the nation’s biggest banks. This trend isn’t simply a function of scale and technology, Jones argues. It’s also driven by demographic patterns.

“Historically, deposit growth itself is highly correlated to increased employment, income and population,” Jones writes. “The banks with the most scale have benefited from their outsized presence in the largest U.S. markets, which unlike past recoveries, have experienced a disproportionate share of the nation’s economic growth.”

Jones’ second argument concerns the need to refine the existing regulatory framework: “Regulation, like monetary policy, is a tool whose purpose is simultaneously to promote the economy while protecting those who operate within it. It is a difficult balance—especially so after significant events such as the financial crisis. The practice of implementing and adjusting regulation is both necessary and healthy, because its impacts are felt by communities large and small.”

Jones’ message will resonate with bankers, as M&T has long been an unofficial spokesman for the industry on regulatory matters, giving voice to their frustration with the sharp swing in the regulatory pendulum over the past decade.

In short, all these letters are worth the modest amount of time they take to read. They are three of the leading voices in banking today. There’s a reason someone like Warren Buffett reads what they write.

The Key To Creating A Profitable Deposit Strategy


deposit-5-6-19.pngSmall and mid-size banks can leverage technology to retain and grow their retail relationships in the face of fierce competition for deposits.

Big banks like JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. continue to lead the battle for deposits. They grew their domestic deposits by more than 180 percent, or $2.4 trillion, over the past 10 years, according to an analysis of regulatory data by The Wall Street Journal. To survive and thrive, smaller institutions will need to craft sustainable, profitable strategies to grow deposits. They should invest in technology to become more efficient, develop effective marketing strategies and leverage data and analytics to personalize products and customer experiences.

Banks can use technology to achieve efficiencies such as differentiating net new money from transfers of existing funds. This is key to growing deposits. Traditionally, banks and their legacy core systems were unable to distinguish between new deposits and existing ones. This meant that banks paid out promotional interest and rewards to customers who simply shifted money between accounts rather than made new deposits. Identifying net new money allows banks to offer promotions on qualified funds, govern it more effectively, incentivize new termed deposits and operate more efficiently.

To remain competitive, small and mid-sized banks should leverage technology to create experiences that strengthen customer retention and loyalty. One way they can do this is through micro-segmentation, which uses data to identify the interests of specific consumers to influence their behavior. Banks can use it to develop marketing campaigns that maximize the effectiveness of customer touchpoints.

Banks can then use personalization to execute on these micro-segmentation strategies. Personalized client offerings require data, a resource readily available to banks. Institutions can use data to develop a deeper understanding of consumer behaviors and personalize product offers that drive customer engagement and loyalty.

Consumers deeply valued personalization, making it critical for banks trying to attract new customers and retain existing ones. A report by The Boston Consulting Group found that 54 percent of new bank customers said a personalized experience was “either the most important or a very important factor” in their decision to move to that bank. Sixty-eight percent of survey respondents added products or services because of a personalized approach. And “among customers who had left a bank, 41 percent said that insufficient personalized treatment was a factor in their decision,” the report read.

Banks can use data and analytics to better understand consumer behavior and act on it. They can also use personalization to shift from push marketing that promotes specific products to customers to pull marketing, which draws customers to product offerings. Institutions can leverage relationship data to build attractive product bundles and targeted incentives that appeal to specific customer interests. Banks can also use technology to evaluate the effectiveness of new products and promotions, and develop marketing campaigns to cross sell specific, recommended products. This translates to more-informed offers with greater response, leading to happier customers and improved bottom lines.

Small and mid-sized banks can use micro-segmentation and personalization to increase revenue, decrease costs and provide the kind of customer experience that wins customer deposits. Building and retaining relationships in the digital era is not easy. But banks can use technology to develop marketing campaigns and personalization strategies as a way to strengthen customer loyalty and engagement.

As the competition for deposits heats up, banks will need to control deposits costs, prevent attrition and grow deposits in a profitable and sustainable way. Small and mid-size banks will need to invest in technology to optimize marketing, personalization and operational strategies so they can defend and grow their deposit balances.

The Flawed Argument Against Community Banks


deposit-4-5-19.pngA few weeks ago, The Wall Street Journal published a story that struck a nerve with community bankers.

The story traced the travails of National Bank of Delaware County, or NBDC, a $375 million asset bank based in Walton, New York, that ran into problems after buying six branches from Bank of America Corp. in 2014.

It’s not that things were going great for NBDC prior to that, because they weren’t. Like many banks in small towns, it had to contend with stiff economic and demographic headwinds.

“As in other small towns that were once vibrant, decades of economic change altered the fabric of Walton,” Rachel Louise Ensign and Coulter Jones wrote in the Journal. “The number of area farms dwindled and manufacturing jobs disappeared.”

“Being located in, and serving, an economically struggling community could bring any bank down,” wrote Ron Shevlin, director of research at Cornerstone Advisors, in a follow-up story a week later.

NBDC hoped the branches acquired from Bank of America, for a combined $1 million, would revive its fortunes. But the deal only made things worse.

The branches saddled NBDC with higher costs and $12 million in added debt. Even worse, half the acquired deposits quickly went elsewhere, provoked by a poorly executed integration as well as, ostensibly, NBDC’s antiquated technology.

“Technology is causing strains throughout the banking industry, especially among smaller rural banks that are struggling to fund the ballooning tab,” Ensign and Jones wrote. “Consumers expect digital services including depositing checks and sending money to friends, which means they don’t necessarily need a local branch nearby. This increasingly means people are choosing a big bank over a small one.”

This echoes a common refrain in banking: that smaller regional and community banks can’t compete against the multibillion-dollar technology budgets of big banks—especially JPMorgan Chase & Co., Bank of America and Wells Fargo & Co.

Community bankers took issue with the article, Shevlin noted, because it seemed to portray the story of NBDC, which was acquired in 2016 by Norwood Financial Corp., as representative of community banks more broadly.

“This is so misleading,” tweeted Andy Schornack, president of Security Bank & Trust in Glencoe, Minnesota. “Pick on one under-performing bank to represent the whole.”

“Community banks are profitable and thriving,” tweeted Tanya Duncan, senior vice president of the Massachusetts Bankers Association. “Most offer technology that makes transactions seamless.”

Schornack and Duncan are right. One doesn’t have to look far to find community banks that are thriving, with many outperforming the industry.

A textbook example is Germantown Trust and Savings Bank, a $376 million asset bank based in Breese, Illinois.

Germantown has generated a higher return on assets than the industry average in 11 of the past 12 years. The only exception was in 2013, when it generated a 1.52 percent pre-tax ROA, compared to 1.55 for the overall industry.

 Germantown-Bank-chart.png

Germantown’s performance through the financial crisis was especially impressive. While most banks reported lower earnings in 2009, with the typical bank recording a loss, Germantown experienced a surge in profitability.

Germantown has gained local market share, too. Over the past eight years, its share of deposits throughout its four-branch footprint in Clinton County, Illinois, has grown from 27.8 percent up to 29.7 percent.

This is just one example among many community banks with a similar experience. For every community bank that’s ailing, in other words, you could point to one that’s thriving.

Yet, there’s another, more fundamental issue with the prevailing narrative in banking today. Namely, the data doesn’t support the claim that the biggest and most technologically-savvy banks are gobbling up share of the national deposit marketTwitter_Logo_Blue.png

In fact, just the opposite has been true over the past five years.

Let’s start with the big three retail banks—JPMorgan Chase, Bank of America and Wells Fargo—which are spending tens of billions of dollars a year on technology.

These three banks saw their combined share of domestic deposits swell in the wake of the financial crisis, climbing from 21.7 percent in 2007 up to 33.2 percent six years later. Since 2013, however, this trend has gone in the opposite direction, falling in four of the past five years. As of 2018, the three biggest banks in the country controlled 31.8 percent of total domestic deposits, a decline of 1.4 percentage points from their peak.

 Deposit-share-chart.png

The same is true if you broaden this out to include the nine biggest commercial banks. Their combined share of domestic deposits has dropped from a high of 47.6 percent in 2013 down to 45.6 percent last year.

Given the number of branches many of these banks have shed over the past decade, it’s surprising they haven’t lost a larger share of domestic deposits. Nevertheless, it’s worth reflecting on the fact that, despite the gloomy sentiment toward community banks that’s often parroted in the press, their current and future fortunes are far from bleak.

Preserving Franchise Value



The factors that help banks maximize value—including growth and profitability—are relatively timeless, though the importance of each value driver tend to change with the operating environment. But the way a bank pursues a sale impacts its valuation. In this video, Christopher Olsen of Olsen Palmer outlines the three ways a bank can pursue a sale. He also explains why discretion is key to preserving franchise value.

  • Factors Driving Today’s Valuations
  • The “Goldilocks” Process for Selling Banks
  • The Importance of Discretion