One Bank Reworks a Key Metric for the Pandemic Era

One of the most efficient banks in the country is measuring its performance using a new metric that captures how the pandemic has changed the operating landscape.

Johnny Allison, chairman and CEO of Conway, Arkansas-based Home BancShares, debuted a new metric during bank unit Centennial Bank’s third-quarter 2020 earnings announcement that measures the bank’s performance and earnings power. The metric provides insight into how well a bank is able to convert revenue into profits; it comes at a time when bank provisions and allowances remain elevated, and generally staid earnings results are lumpier and noisier than ever.

“I love the numbers and I love to play with them,” Allison says in an interview, describing how he came up with the approach. He was looking at the third-quarter earnings table for the $16.4 billion bank and saw total revenue and pre-tax, pre-provision net revenue listed near each other.

“When I looked at those, I thought ‘[Wow], look how much we brought down pre-tax pre-provision out of the total revenue of this corporation,” he says. “That got my attention. I thought ‘I wonder what the percentage that is?’”

The non-GAAP metric is derived from two items in the earnings statement: pre-tax net income, excluding provision for credit losses and unfunded commitment expense, or PPNR, divided by total net revenue. Allison calls it “P5NR” or “profit percentage.” An efficient operator, Home BancShares converted 59.28% of its net revenue into profits before taxes and provision expense in the third quarter of 2020. It was 59.19% in the fourth quarter.

The metric has its fans.

“[P5NR] measures how much of a bank’s revenue turns into profits before taxes and provision expense,” wrote Christopher Marinac, director of research at Janney Montgomery Scott, in an October 2020 report. “We favor this new metric since it shows [how] much $1 of revenue is turned into core profits — the higher, the better.”

P5NR is related to another popular metric on the earnings report: the efficiency ratio. The ratio measures how effectively a bank spends money; the lower the ratio, the more efficient a bank is. Banks can achieve a low efficiency ratio either through keeping costs low or increasing revenue, known as positive operating leverage. Home’s third-quarter 2020 efficiency ratio was 39.56%; it was 39.64% in the fourth quarter.

Allison calls P5NR the “reverse” of the efficiency ratio because a higher number is better, but ties the figure to positive operating leverage. He says Donna Townsell, now director of investor relations, did much of the work starting in 2008 that made the bank more efficient. While the efficiency ratio is still useful, PPNR and P5NR show how much revenue a bank converts to profits, especially in an environment with high credit costs.

P5NR also speaks to the industry’s focus on bank PPNR, which the Federal Reserve defines as “net interest income plus noninterest income minus noninterest expense.” In an interview, Marinac says the metric came into focus as part of the annual stress test exercise that big banks must complete — capturing the earnings at a bank before it deducts credit costs. It’s not surprising the metric has been popular with analysts trying to look past the lumpiness of quarterly results to the underlying earnings power of a bank. Building up reserves subtracts from earnings, and releasing them can pump up earnings — both activities that can make it hard to assess the underlying revenue and profits of a bank.

Home included the figure for third and fourth quarter 2020 earnings, along with backdated calculations for previous quarters, but is cautious about leading with it. Like many bank-specific metrics, it is non-GAAP — a profit calculation that doesn’t follow a standard, required calculation for companies to disclose under generally accepted accounting principles. Allison says Home also includes the number in its monthly profit and loss statement and plans to include it in future earnings reports.

Not surprisingly, Home BancShares is touting a metric that makes the bank look good. Marinac’s report pointed out that Home Bancshares had the best P5NR of all banks early reporting during the third quarter of 2020, but says the metric still has application for other banks.

“It’s not hard to do the math. When Johnny said it, it made a ton of sense,” he says. “It makes our job easy, and it’s a simple concept that everyone should follow.”

Cloudy M&A Expectations for 2021

Due to the Covid-19 pandemic, related economic downturn and recent presidential election, 2020 was a historic year characterized by high levels of uncertainty. These circumstances resulted in a significant drop in M&A activity in the banking sector, as stock prices dropped and bankers’ focused on serving customers and supporting their staff.

Bank Director’s 2021 Bank M&A Survey, sponsored by Crowe LLP, explores this unique environment. Rick Childs, a partner at Crowe, offers his perspective on the survey results — and what they mean for 2021 — in this video.

  • Top Deal Drivers

  • Pricing Expectations

  • Looking Ahead

ESG: Walk Before You Run

Covid-19 and last year’s protests over racial injustice added to the mounting pressure corporations face to make progress on environmental, social and governance (ESG) issues — but banks may be further ahead than they believe.

“ESG took on a life of its own in 2020,” says Gayle Appelbaum, a partner at the consulting firm McLagan. Institutional investors have slowly turned up the heat on corporate America, along with community groups, proxy firms and ratings agencies, and regulators such as the Securities and Exchange Commission, which now mandates a human capital management disclosure in annual reports. Customers want to know where companies stand. Prospective employees want to know if a company shares their values. And President Joe Biden’s administration promises to focus more on social and environmental issues.

Big banks like Bank of America Corp. and JPMorgan Chase & Co. have been responding to these pressures, but now ESG is trending down through the industry. With the right approach, banks may find that these practices actually improve their operations. However, smaller community and regional banks can’t — and probably shouldn’t — merely copy the ESG practices of their larger brethren. “People have to think about what’s appropriate for their bank, given [its] size and location,” says Appelbaum. “What are they already doing that they could expand and beef up?”

That means banks shouldn’t feel pressured to go big or go home when it comes to ESG. Begin with the basics: Has your bank reduced waste by encouraging paperless statements? How many hours do employees spend volunteering in the community? “When you sit down and talk to bankers about this, it’s interesting to see [their] eyes open,” says Brandon Koeser, senior manager and financial services senior analyst at the consulting firm RSM. The pandemic shed light on how banks support their employees and communities. “The reality is, so much of what they’re doing is part of ESG.”

Robin Ferracone, CEO of the consultancy Farient Advisors, tells companies to think of ESG as a journey, one that keeps strategy at its core. “You need to walk before you run. If you try to bite [it] all off at once, you can get overwhelmed,” she says. Organizations should prioritize what’s important to their strategy and stakeholders. ESG objectives should be monitored, revisited and adjusted along the way.

Stakeholders are watching. Glacier Bancorp CEO Randall Chesler was surprised to learn just how closely in a conversation with one of the bank’s large investors two years ago.

“One of our investors asked us, ‘Have you looked at this? We see your score isn’t very good; are you aware of that? What are you going to do about it?’ And that was the first time that we started to dig into it and realized that we were being scored by ISS,” says Chesler. (Institutional Shareholder Services provides an ESG rating on companies, countries and bonds to inform investors.)

It turned out that $18.5 billion Glacier was doing a lot, particularly around the social and governance aspects of ESG. The Kalispell, Montana-based bank just wasn’t telling its story. This is a common ESG gap for community and regional banks.

Glacier worked with consultants to develop a program and put together a community and social responsibility report, which is available in the investor relations section of its website, along with other governance documents such as its code of ethics. This provided the right level of information to lift Glacier’s score. “Our benchmark was, we want to be at our peer-level scoring on ESG,” says Chesler. “[We] ended up actually better. And we continue to watch our scores.”

“Community banks have the social and governance aspects covered better than many industries because [banks are] heavily regulated,” says Joe Scott, a managing director at Kroll Bond Rating Agency. Where they likely lag, he says, is around the environment; most are just beginning to assess these risks to their business. And it’s important that banks get this right as stakeholders increasingly focus on ESG. “We’re hearing that, beyond equity and debt investors, larger depositors — particularly corporate depositors, institutional depositors, state treasurers’ officers [and] others like that — are incorporating ESG into their considerations on who they place large deposits with. That could be a theme over time— other kinds of stakeholders factoring in ESG more and more.”

How Banks Kept Customers During the Pandemic, Even Commercial Ones

Digital transformation and strategy are examined as part of Bank Director’s Inspired By Acquire or Be Acquired. Click here to access the content on BankDirector.com.

Despite closed branches and masked interactions, the coronavirus pandemic may have actually improved customers’ relationships with their banks. They have digital channels to thank.

That’s a shift from the mentality pervading the industry before the pandemic. Business lines like commercial lending seemed firmly set in the physical world: a relationship-driven process with high-touch customer service. The Paycheck Protection Program from the U.S. Small Business Administration completely uprooted that approach. Banks needed to deliver loans “as fast as possible” to their small commercial customers, says Dan O’Malley, CEO of data and loan origination platform Numerated during Bank Director’s Inspired By Acquire or Be Acquired. More than 100 banks are currently using the platform either for PPP applications or forgiveness.

The need for rapid adoption forced a number of community banks to aggressively dedicate enough resources to stand up online commercial loan applications. Sixty-five percent of respondents to Bank Director’s 2020 Technology Survey said their bank implemented or upgraded technology due to the coronavirus. Of those, 70% say their bank adopted technology to issue PPP loans. This experiment produced an important result: Business customers were all too happy to self-service their loan applications online, especially if it came from their bank of choice.

“Self-service changes in business banking will be driven by customer demand and efficiency,” O’Malley says, later adding: “Customers are willing to do the work themselves if banks provide them the tools.”

Digital capabilities like self-service platforms are one way for banks to meaningfully deepen existing relationships with commercial borrowers. Numerated found that borrowers, rather than bankers, completed 84% of PPP loan applications that were done using the company’s platform, and 94% of forgiveness applications. That is no small feat, given the complexity of the application and required calculations.

Those capabilities can carve out efficiencies by saving on data entry and input, requesting and receiving documentation, the occasional phone call and the elimination of other time-consuming processes. One regional bank that is “well known for being very relationship driven” was able to process 3,000 “self-service” PPP loan applications in a morning, O’Malley says. Standing up these systems helped community banks avoid customer attrition, or better yet, attract new customers, a topic that Bank Director magazine explored last year. Already, banks like St. Louis-based Midwest BankCentre are reaping the gains from digital investments. The $2.3 billion bank launched Rising Bank, an online-only bank, in February 2019, using fintech MANTL to open accounts online.

The impetus and inception for the online brand dates back more than three years, says President and CFO Dale Oberkfell during an Inspired By session. Midwest didn’t have a way to open accounts online, and it wanted to expand its customer base and grow deposits. It also didn’t want to replicate the branch experience of opening an account — Midwest wanted to compress the total time to three minutes or less, he says.

Creating the brand was quite an investment and undertaking. Still, Rising Bank has raised $160 million in deposits — as many deposits as 10 branches could — with only two additional employees.

“We didn’t spend the dollars we anticipated spending because of that efficiency,” Oberkfell says.

Midwest BankCentre is exploring other fintech partnerships to build out Rising Bank’s functionality and product lines. The bank is slated to add online loan portals for mortgages and home equity lines of credit — creating the potential for further growth and efficiencies while strengthening customer relationships. He adds that the bank is looking to improve efficiencies and add more tools and functionality for both customers and employees. And how are they going to fund all those technology investments?

Why, with the fees generated from PPP loans.

A Look at 2020’s Remarkably Resilient Leveraged Loan Market

What happened with the leveraged lending market last year?

Not surprisingly, leveraged loan markets tracked very closely to the broader economy and enjoyed their own K-shaped recovery in the latter half of 2020. Face-to-face businesses and the energy industry faced headwinds brought about by the pandemic, while IT, health care and pockets within manufacturing managed to thrive and even grow.

Loan volume finished the year on a strong note after cratering to a four-year low during the second quarter, due to the initial shock of the spreading pandemic. Institutional loan issuance gathered steam through the summer; by the third and fourth quarters, issuance totals were in the range of 2019’s quarterly average of $77.5 billion, according to S&P Global Market Intelligence’s Leverage Commentary and Data. Much of the demand was driven by the re-emergence and recovery of the collateralized loan obligation, or CLO, market, buoyed by investors searching for yield in the low interest rate environment.

Loans supporting buyouts and acquisitions drove the fourth-quarter tally, surging 49% from the third quarter. New buyout deals had nearly dried up amid the economic uncertainty that gripped markets in the second quarter and into the third quarter, but private equity firms clearly have regained their confidence since then. There were 33 separate leveraged buyouts priced in the loan market during the fourth quarter, a pace not seen since the third quarter of 2018. Even as merger and acquisition issuances gained pace, sponsored issuers continued to take advantage of demand with opportunistic deals.

Secondary prices fell dramatically during the initial phases of the pandemic but have also recovered to pre-pandemic levels. The average bid of the S&P/LSTA Leveraged Loan Index reached 97.17 as of Jan. 12 — its highest level since the index was at 97.29 nearly a year ago, on Jan. 26, 2020.

While default rates have increased compared to recent record lows, they ended 2020 at a modest 4.22% as measured by number of issuers. This compares over 10% during the depths of the Great Recession. Leading the charge was face-to face industries, such as retail and leisure, in addition to borrowers in the oil and gas industry.

Looking forward to 2021, analysts at Bank of America Corp., Barclays and Wells Fargo & Co. have a relatively sanguine view and are anticipating a healthy market, with a rise in overall leveraged loan issuance. Analysts at JPMorgan Chase & Co. were slightly less optimistic with a prediction of a 10% decline in gross issuance, according to S&P Global.

Based on a survey of portfolio managers, technology and health care continue to lead the sectors that are expected to outperform in 2021. Given the magnitude of the shock to the system during the first half of the year, the default cycle is expected to be relatively short.

BancAlliance believes that the loan market should be able to sustain the robustness seen in the second half of 2020 performance through 2021, as businesses have successfully adapted to the new normal, in addition to the anticipation of the vaccine rollout. To start the year, we have already seeing a flurry of activity from the lower middle market, middle market and broadly syndicated loan space across a multitude of industries and transaction types, such as buyouts, dividends and repricings. We expect this energetic output to continue.

Keeping the Digital Accelerant Going

Digital transformation and strategy are further examined as part of Bank Director’s Inspired By Acquire or Be Acquired, launched today on BankDirector.com. Click here to access the content.

The coronavirus pandemic has been an accelerant for digital bank transformations. Banks must now keep that fire going.

“There’s never been a more important time for bank executives to think strategically,” says Cornerstone Advisors cofounder Steve Williams. The pandemic accelerated digital transformation plans by about two to three years, he estimates. It will soon be up to opportunistic bankers to continue that transformation in order to better position their institutions for the future and increase shareholder value during what could be a prolonged economic recovery.

The pandemic’s impact on physical spaces like branches underscored the importance of digital channels, capabilities and products. No longer was it acceptable for institutions to tack digital offerings onto existing branch initiatives and force customers to do a cross-channel dance: Open an account or loan in the branch but service it online, for instance.

Going forward, outperformers will be the banks that successfully overhaul or transform legacy tech, expenses, buildings, organizational structures and vendor contracts into next-generation capabilities. Williams says smarter banks are led by executive teams with a focused strategy, that leverage data strategically and actively manage vendor partnerships, rather than relying on their core processors. They also attract the talent and skills that the bank will need in the future, rather than just filling the vacancies that exist today.

The first place that banks direct their energies and attention to continue their digital momentum is the legacy branch network, says Tim Reimink, a managing director at Crowe. Branches are expensive to operate, have been closed for an extended period of time and were potentially underperforming prior to the pandemic. Banks also have the data to prove that customers will continue banking with them if locations are closed, and that many are now comfortable using digital channels.

“Every single location must be evaluated,” says Crowe Senior Manager Robert Reggiannini. Executives should weigh the market opportunity, penetration and existing wallet share of small businesses and consumer customers, as well as how the branch fits in with the rest of the network. Rationalizing the network frees up capital to redeploy into digital transformation or other areas of operation that need greater investment in the post-pandemic economy.

Certainly some banks have gotten that message. It wasn’t uncommon to see banks across the country announce double-digit rationalizing efforts, often announcing they would cut 20%. In December 2020 alone, banks opened 43 branches but permanently closed 240, according to S&P Global Market Intelligence data. For the year, they opened 982 locations and closed 3,099.

Reducing the branch network will necessitate changes in how bank staff interact with customers, Reggiannini adds. Banks should not assume tellers at a branch will find the same success in the digital chat environment, call center or at in-person meetings conducted outside of the branch.

He says banks should train staff in developing the skills needed to service a customer outside of a branch and consider how they will manage and measure staff for flexibility and productivity. “Engagement with customers is going to be critical going forward,” Reggiannini says.

The branch network, and the foot traffic and relationships they used to attract, have been under pressure from digital banks, often focused on consumer and retail relationships. But Williams warns that the pandemic underlined the vulnerability of commercial relationships. Numerous fintechs competed successfully against banks in issuing Paycheck Protection Program loans from the Small Business Administration, and a number of businesses are shifting more of their relationships to payment processors like Stripe and Square.

“Disruption will come to business banking – not as fast as retail banking but it’s coming,” Williams says. “If we lose the deposit and business relationship with commercial customers, will banks be able to keep their returns? We don’t think so.”

E-signatures Move from Nice to New Normal

The coronavirus pandemic has been a pivotal catalyst within the financial services industry, as banks of all sizes adopt and launch digital tools and services at an unprecedented pace. While not a new initiative, e-signatures suddenly became a top priority for banks, as customer sought ways to complete their financial transactions and certify documents remotely. According to BAI’s August Banking Outlook research on digital banking trends during Covid-19, half of consumers use digital products more since the pandemic, and 87% indicate they plan to continue after the pandemic. Banks now realize they must implement a digital transformation strategy in order to navigate these challenging times and new consumer expectations.

However, some financial institutions still view e-signatures as a luxury — a solution that holds benefit and value but is not at the top of their list of digital priorities. To defend their market share and ensure future success, banks must embrace digital transformation and provide customers with a more personalized, engaging experience. The crucial link is e-signatures.

The coronavirus means banking customers need to be able to conduct banking business, open new accounts, obtain new loans or modify or extend existing loans while avoiding traditional in-person contact and interaction with bank staff. It has never been more important to transmute traditional, paper-based processes to the digital realm. Declines in branch visits and ATM transactions, an increased focus on touchless interactions and payments and the rapid operational migration to remote operations moved e-signatures from a nice-to-have, convenient solution to a critical tool every bank must offer to empower their customers to process daily transactions.

Adoption rates for e-signatures were on the rise prior to the pandemic, but have now taken on an even larger and more significant role, enabling banks to move transactions forward in an era of social distancing. E-signatures allow the continuation of normal banking activities in a secure environment while protecting the safety of both the customer as well as the bank employee. It’s apparent that other unexpected conditions could arise in the future that would force the same technological need. They’ve moved from a convenience offering to a banking infrastructure necessity.

Basic banking services like opening an account, arranging a line of credit and applying for a mortgage all require an exchange of documents. In the age of Covid-19, the ability to do that electronically has become mandatory. The most frequent use for of e-signatures has been with new account opening and new loan origination and closing processes. The Small Business Administration’s Paycheck Protection Program also drove a dramatic rise in e-signature requirements. Banks are leveraging e-signatures to enable daily account service and maintenance transactions such as address changes, name changes, stop payment requests, wire transfer requests and credit card disputes. E-signatures provide service convenience to customers as they move through the stages of the lending process or digital account opening.

Financial institutions are experiencing a boom in digital-first relationships with new and existing customers. Customers are requesting new account openings and loan applications online, and perhaps modifying or extending existing loans. It all must be done electronically. Additionally, the day-to-day demand of account service and maintenance transactions have only increased, and require a new solution to those daily operational activities. E-signatures are one way to place electronically fillable forms on an bank’s website or online banking center so allow customers can complete and sign the appropriate documents and submit directly to the bank. Now more than ever, e-signatures and digital transaction management are critical technologies for financial institutions.

Masks and Zoom Conferencing: What Dealmaking Looks Like During a Pandemic

M&A will be further examined as part of Bank Director’s Inspired By Acquire or Be Acquired featured on BankDirector.com. Click here to access the content.

Bank mergers and acquisitions fall apart for any number of reasons. Try doing one in a pandemic.

In March, Kenneth Mahon, CEO of $6.6 billion Dime Community Bancshares, was on the edge of announcing a major deal in the New York metropolitan area. His Brooklyn, New York-based executive team and that of $6.3 billion Bridge Bancorp in Bridgehampton, New York, had agreed to a $489 million merger of equals. Each had fully vetted the other’s balance sheets.

Then came the body bags. It was late March in New York City, which had become ground zero for one of America’s first Covid-19 death waves. Mahon remembers hearing the news that morgues were overflowing and body bags were being delivered to the city.

“We had a conversation in the next day or so about whether that was really the right time [to announce a deal],” he says.

M&A took a nose-dive in 2020, with only 112 announced deals — less than half of the announced deals from the year before, according to S&P Global Market Intelligence. That may be changing. Deal volume increased in the fourth quarter last year as stock prices improved and banks felt more comfortable about asset quality, which could lead to even more M&A ahead. But those who did get deals done during the pandemic learned a whole lot about remote consolidation and online negotiation, skills they were forced to learn quickly.

In Dime’s case, Mahon knew that putting a deal on hold is never a good thing. Rumors can spread and the news may leak, causing uncertainty among staff and impacting the value of the transaction. But this was not a good time to shake hands, in person or not. As the pandemic suspended life in New York City  midstream, so it did the bank’s announcement.

It wasn’t until July that the two institutions announced the deal, after the exchange ratio of Dime stock to Bridge stock came back to the agreed upon 0.648%. Bridge CEO Kevin O’Connor will serve as CEO of the combined institution when the deal closes, which is expected within weeks. The merged banking company will have $11 billion in assets and go by the name Dime Community Bancshares. Mahon will serve as executive chairman.

Doing a deal remotely over video conferencing software hasn’t been easy. Mahon logs onto Zoom Video Communications meetings from a 400-square-foot studio apartment in Brooklyn. What is it like to build trust with a mask concealing your face? Not easy.

Mahon says he meets in person regularly with four other executives where they sit apart in a conference room and lift the masks. “Body language is important,” he says.

Curtis Carpenter, a senior managing director at investment bank Hovde Group, is amazed at how many executives and board members are still willing to travel to meet in person, jumping on private planes or flying commercially. He mostly serves banks in the Texas and Oklahoma region. One meeting was called off when one of the attendees got Covid. But mostly, people could still get together, he says.

“Everyone would wear a mask when entering the bank and when entering the conference room. In most cases, the mask would come off,” he adds. “It’s hard to have a discussion about buying and selling and executive contracts, of such an important personal nature; you want to see the person’s face.”

Others say they got a deal done without shedding the masks. “We were following appropriate safety measures,” says Keene Turner, executive vice president and CFO of $8.4 billion Enterprise Financial Services Corp. in Clayton, Missouri, which bought Seacoast Commerce Banc Holdings in San Diego for $169 million in November 2020.

The bank had already started discussions pre-pandemic with Seacoast. Executives knew each other, having first met attending a Bank Director conference years ago, Turner says. “That familiarity was built up over time,” he says. “In this case, we were comfortable with each other already.” The bank has gathered employees, all wearing a mask, to go over processes and procedures, but most meetings are remote.

Training new employees online is tricky — and so is data conversion. “It’s kind of like baptism by fire,” says Mark Tryniski, CEO of $13 billion Community Bank System in Dewitt, New York.  “We had never done it that way.”

Tryniski says the bank used a lot of screen sharing and software collaboration tools in its merger with Steuben Trust Corp., which was completed in June 2020.

The pandemic created time delays and additional work for everybody.

Tupelo, Mississippi-based BancorpSouth Bank has managed two deal announcements during the pandemic. Dan Rollins III, chairman and CEO of the $24 billion bank, says his executive team ended up doing due diligence on a seller three times.

Several bankers say they think remote work is less efficient and that meetings take longer over video conferencing software, despite saving travel time. Most are eager to get back into the office again.

“If I had a choice, I wouldn’t choose to do a deal in a pandemic,” Mahon says. “It hasn’t been impossible. We have professionals who are getting it done.”

Increasing Customer Engagement to Exceed Expectations

The new normal produced by the pandemic has underpinned the need for change and connection.

One impacted area are the adjustments organizations are making as they rediscover the benefits of connecting with consumers, rather than simply selling them a product. These businesses are on the right track, as one thing is becoming abundantly clear in the wake of Covid-19: This is not the time to solely sell and advertise.

While advertising and selling inevitably play a big role in business operations, companies are often too focused on these two aspects and it doesn’t always pay off. Now is the time to connect, reach and engage with consumers on a deeper level. The coronavirus pandemic and economic fallout has impacted nearly all areas of consumers’ lives, and their interactions and needs from their banks and financial institutions need to change as a result.

Focusing on advertising and selling may work for some organizations, but with growing consumer expectations, this just won’t do for banks. Customers choose banks partially because of their emphasis on customer service and will be annoyed if the institution tries to advertise or sell them a product that doesn’t match their financial needs.

Connection goes beyond having the best catchphrase or the sunniest stock photo. True engagement is driven by identifying customer needs and communicating relevant solutions, peaking their interest and building connections that will last.

Right now, traditional, product-focused promotional efforts and marketing don’t work because people’s daily lives have drastically changed. Their financial situations may have been altered. A more personal approach develops connections and loyalty that will last for years.

It is more important than ever that banks use customer and business intelligence effectively to promote relevant products and services. Some institutions may need to return to their roots and their initial goal: to serve their communities and the people that live in them. This approach may sound simplistic, but it can prove challenging to achieve.

And banks, like their customers, don’t want to merely survive this health crisis, they want to thrive in these unprecedented times. It takes a shift in strategy to do so. “In a matter of weeks, digital and mobile banking technologies went from being a ‘nice to have’ to a ‘must have.’” The pandemic was even the catalyst for tech adoption at some financial institutions. With the help of data-driven communication systems, one-on-one communication is both realistic and accessible. The massive drive for digital solutions allows banks to reassess digital access to products and services. This immediate boost in digital engagement offers a huge opportunity for institutions that are implementing digital marketing plans, perhaps for the first time.

Practically applied, banks need to turn to smart technology to create a clear path to build better customer relationships and return to the longstanding values of one-on-one communication. While this may seem straightforward, using forward-thinking, innovative technology as the way to “get back to their roots” is an approach not previously imagined by many bank executives.

Utilizing a data-driven digital infrastructure allows banks to reach customers personally, uniquely and instantly. Banks need to embrace comprehensive digital outreach to touch people where they are with the services they need most. Customers still need access to financial services, even if they are avoiding branch locations and ATM lines. The solution is simple: Be the bank that communicates what options are easily accessible and available to them. Be the branch that shows that they care. With the help of an intelligent digital experience platform and the right technology, banks can automate the relevant communications, so the right messages reach the right person at the right financial time for them.

The pandemic sparked a much-needed shift: from being overly focused on advertising, selling and pushing products and services to establishing and building better customer relationships, increasing customer engagement as well as gaining consumers’ trust and loyalty for years to come. Returning to your bank’s original mission of serving the community will give you the ability to target consumers at the exact right time in their financial journey – reaching each customer’s specific needs and allowing banks to engage with their customers.

Turning to Technology as Margins Shrink

It’s a perfect storm for bank directors and their institutions: Increasing credit risk, low interest rates and the corrosive effects of the coronavirus culminating into a squeeze on their margins.

The pressure on margins comes at the same time as directors contend with a fundamental new reality: Traditional banking, as we know it, is changing. These changes, and the speed at which they occur, mean directors are wrestling with the urgent task of helping their organizations adapt to a changing environment, or risk being left behind.

As books close on 2020 with a still-uncertain outlook, the most recent release of the Federal Deposit Insurance Corp.’s Quarterly Banking Profile underlines the substantial impact of low rates. For the second straight quarter, the average net interest margin at the nation’s banks dropped to its lowest reported level.

The data shows that larger financial institutions have felt the pain brought about by this low-rate environment first. But as those in the industry know, it is often only a matter of time until smaller institutions feel the more-profound effects of the margin contraction. The Federal Reserve, after all, has said it will likely hold rates at their current levels through 2023.

In normal times, banks would respond to such challenges by cutting expenses. But these are not normal times: Such strategies will simply not provide the same long-term economic benefits. The answer lies in technology. Making strategic investments throughout an organization can streamline operations, improve margins and give customers what they want.

Survey data bears this out. Throughout the pandemic, J.D. Power has asked consumers how they plan to act when the crisis subsides. When asked in April about how in-person interactions would look with a bank or financial services provider once the crisis was over, 46% of respondents said they would go back to pre-coronavirus behaviors. But only 36% of respondents indicated that they would go back to pre-Covid behaviors when asked the same question in September. Consumers are becoming much more likely to use digital channels, like online or mobile banking.

These responses should not come as a surprise. The longer consumers and businesses live and operate in this environment, the more likely their behaviors will change, and how banks will need to interact with them.

Bank directors need to assess how their organizations will balance profitability with long-term investments to ensure that the persistent low-rate environment doesn’t become a drag on revenue that creates a more-difficult operating situation in the future.

The path forward may be long and difficult, but one thing is certain: Banks that aren’t evaluating digital and innovative options will fall behind. Here are three key areas that we’ve identified as areas of focus.

  • Technology that streamlines the back office. Simply reducing headcount solves one issue in cost management, which is why strategic investments in streamlining, innovating and enhancing back-office processes and operations will become critical to any bank’s long-term success.
  • Technology that improves top-line revenues. Top-line revenue does not grow simply by making investments in back-office technologies, which is why executives must consider solutions that maximize efforts to grow revenues. These include leveraging data to make decisions and improving the customer experience in a way that allows banks to rely less on branches for growth.
  • Technology that promotes a new working environment. As banks pivoted to a remote environment, the adoption of these technologies will lead to a radically different working environment that makes remote or alternative working arrangements an option.

While we do not expect branch banking to disappear, we do expect it to change. And while all three technology investment alternatives are reasonable options for banks to adapt and survive in tomorrow’s next normal, it is important to know that failing to appropriately invest will lead to challenges that may be far greater than what are being experienced today.