The Secret to Increasing Wallet Share

Quick, name a bank.

Did you name your bank, or another local or national bank? It is often easier for people to think of a national bank than a local one, thanks to name recognition through advertising and branches.

But as important as top of mind awareness is, staying top of wallet is even more important. When your organization comes to both customers and prospective customer’s minds, you increase the chances at becoming their primary financial institution (PFI).

At Wallit, we define PFI as a customer having an active checking account, a debit card and direct deposit with a financial institution. There are five ways banks can accomplish this objective, increase deposit growth and boost non-interest income in a way that maintains healthy, growing customer relationships.

1. Elevate the debit card. The debit card isn’t just a payment card, method or option. It is a powerful and valuable lifestyle tool that many community banks underutilize.

At the point of sale, consumers decide whether to use a credit or debit card, based on their own needs. They make this decision multiple times each day.

I’m sure that most community bank customers that have a checking account also have that bank’s debit card in their wallet. But do they use it? Do they use a competitor’s card? Do they reach for a credit card?

2. Be Visible. Consumers have more options than ever when choosing financial services providers. So many, in fact, that consumers actively avoid marketing and advertising. Community banks have to be more visible, but not pushy.

Look for opportunities to connect your brand to things your customers value by linking it to places that your customers already think deliver value. Connect your brand to local businesses in the communities you serve, building and growing relationships with these businesses.

Promoting local businesses and providing information people need extends your bank’s reach and gets your name out there. This also borrows the brand halo of those businesses and makes your brand top of mind and top of wallet in the process.

3. Capitalize on Connections. The best businesses succeed through collaboration. Leveraging current relationships and connecting local merchants to local consumers unlocks the trapped value of your bank in the digital age.

Your bank can create a sense of belonging for members of your community, with your institution at the center. Think about it this way – Connecting buyers and sellers is far more valuable than merely connecting the bank accounts of buyers and sellers.

4. Generate Word of Mouth. Consumers will always share what they think of brands, products and services with others in their network across a wide range of communication channels. These recommendations are highly credible and relevant; they’re generally more effective than the marketing and advertising your bank currently pays for.

The best tactic to generate word of mouth is to impress current customers with a card-linked, cash back offer when they visit one of your local businesses. Your customers already have your bank’s debit card with them, making it a tool for spreading positive word of mouth, building your brand and driving revenue by offering and rewarding unique, highly personal, share-worthy experiences.

5. Experiment. Create a culture of experimentation. Start small and learn fast. Having the courage to apply new technologies and reinvent existing ways of working can improve financial performance.

Develop and improve your bank’s ability to be hyper-relevant and serve customers more effectively by sensing and addressing their changing needs. Consider starting a pilot with employees, then extending to scale with a portion of your customers.

Increasing share of wallet and becoming a primary financial institution requires intention, commitment and experimentation.

By leveraging your bank’s current strengths and investing in your debit card and merchant services programs, such as offering and marketing cash back rewards to local businesses and consumers, you can tip the scale in your favor.

Strategic Insights From Leading Bankers: Bank OZK

RankingBanking will be examined further as part of Bank Director’s Inspired By Acquire or Be Acquired virtual platform, which will include a panel discussion with Gleason and Mark Tryniski, CEO of Community Bank System. Click here to access the agenda.

Is Bank OZK misunderstood?

The $26.9 billion bank may be based in Little Rock, Arkansas — with offices primarily in the southeastern United States — but Chairman and CEO George Gleason II will quickly, but politely, correct you if you refer to Bank OZK as a community bank.

“We consider our bank a truly national bank and presence,” Gleason says, adding that in 2019, he spent 153 days outside of the bank’s headquarters traveling across the United States and internationally. “Sometimes people [comment] that we do a lot of loans outside of our area,” he adds. “I consider it absurd, because the United States is our market, and we do loans all over the United States. It’s a very balanced, diversified portfolio by product type and geography.”

Bank OZK’s unique business model positioned it to top Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP. To delve further into the bank’s performance, Bank Director Vice President of Research Emily McCormick interviewed Gleason about his views on factors impacting long-term performance, including how OZK positions itself to take advantage of opportunities in the marketplace. The interview was conducted on Oct. 26, 2020, and has been edited for brevity, clarity and flow.

EM: First off, tell me how you approach long-term performance for Bank OZK and balance that with short-term expectations.

GG: I’ve been doing this job over 41 years now, and I hope to continue to do it a number of years more. When you’ve been in a job a long time, and you expect to be in it a long time in the future, thinking about long-term performance is much easier than if you’re new to a job, and you’re in it for a very short period of time. With that said, we all live in a world where our stock price moves day to day based on short-term results, and many investors seem to be overly focused on short-term results. So, it takes a lot of discipline and a willingness to be viewed as not doing the best you can do in the short run to achieve the long-term results.

But we have always focused preeminent attention on achieving longer-term objectives, and that has paid off for us tremendously well. Probably the best example of that is our unwavering commitment to asset quality, credit quality. There have been a number of times in my 41-year career where our growth for a few quarters or even a few years has been disappointing, relative to what people thought we were capable of doing, because we held to our credit standards and our discipline, and let competitors take share from us when we thought some of those competitors were being too aggressive. That has always paid off for us in the long run, every single time.

EM: Out of the last crisis, Bank OZK participated in several FDIC deals. We’re in another, very different crisis. Are you applying some lessons that you learned through the last crisis, or through your experience in banking, to what we’re going through now?

GG: I’ve been through a lot of downturns, and the causes are always different. It may be excesses in real estate; it may be excesses in subprime mortgage finance. It may be a bust in the oil and gas industry [or] the savings and loan crisis. [N]ow you’ve got the Covid-19 pandemic-induced recession. Causes vary, but all economic downturns result in people being out of work and suffering economically, and businesses struggling and suffering, and businesses closing. Every economic downturn creates challenges for people that are in the credit business, as we are, but it also creates a lot of opportunities.

The key to being able to capitalize on the opportunities is No. 1, being appropriately disciplined in the good times so that you are not so consumed with problems in the bad times that you can’t think opportunistically. No. 2, you’ve got to have adequate capital, adequate liquidity and adequate management resources. If you have those ingredients and combination … you’re able to spend much more time in a downturn focused on capitalizing on opportunities, as opposed to mitigating your risk. That’s been an important part of our story for several decades now, is we have almost universally been able to find great opportunities in those downturns. … [W]e’re already finding some ways to benefit in this downturn. So, the causes are different, but the result is always the same: [Y]ou’ve got challenges, you’ve got opportunities and you’ve got to be ready to capitalize on those opportunities.

EM: What opportunities are you seeing now, George?

GG: Obviously in the very early days, there was some tremendous dislocation in the bond market. We had a couple of good weeks where we were able to buy things at really advantageous prices. The Fed was so aggressive in their efforts to fix the plumbing of the monetary system that they took those opportunities away literally in a matter of weeks.

We’ve seen a lot of competitors pull back from the [commercial real estate] space; that’s given us an opportunity to both gain market share and improve pricing. We have seen customers evolve [in] how they deal with our branches; it’s given us an opportunity to create some efficiencies [and] advance our rollout of some future technology, all of which have helped us accelerate our movement toward a more consumer-friendly, technology-oriented way of dealing with our customers.

And frankly, Emily, we’re so early in seeing all of the economic impacts from this recession. Some of the impacts, I think, have been pushed out several quarters by the aggressive monetary and fiscal policy actions out of Washington. I think that really good, attractive opportunities will appear in 2021 and 2022. I think we’re just getting started on seeing opportunities begin to emerge.

EM: OZK maintains high capital levels. Why do you view that as important, and how are you strategically thinking through capital?

GG: We’re operating from a position of having excess capital, and that is probably a great and appropriate thing in this environment. [We’re] certainly in an environment where you’d rather have too much capital than too little today and … I believe there are a lot of opportunities that will emerge over the next four to eight quarters where we’ll be able to put that capital to work in a very profitable manner for our shareholders. So, we feel very good about the fact that today we have one of the highest capital ratios of all of the top 100 banks.

EM: Bank OZK has seen some high-level departures in the past few years; most recently, your chief credit officer. I think sometimes that gives people pause, and I wanted to give you the opportunity to address that.

GG: The reality of that is we are very dependent upon human capital and intellect in running our business. … I have always put an emphasis on hiring, training and developing really smart people who have intense work ethics, and who love to win and want to be part of a winning team. We have an abundance of talent in our company, and we’re constantly training, grooming and improving that talent.

When you hire and develop that quantity and quality of well-trained, well-developed staff, hard-charging people who want to win and want to succeed and want to push, some of those people are going to go on and pursue other opportunities, and that is great. And because we have such an abundance of talent, we’re in a position where we can say, “Congratulations, we’re happy for you. Thank you for everything you have done for us,” and I can turn around and say, “Next man up; let’s go.” That really is our culture. So yes, we plan for people to leave. We have plans in place on how we’re going to replace people if they are not available for one reason or another, and we’ve got the depth of talent that it lets us move on without missing a beat.

EM: One more question: Bank OZK has a record of strong performance, which is why it’s included in this year’s RankingBanking study. That said, I sometimes hear whispers of doubt about what you guys are doing, perhaps due to your unique model. I’m curious about how you respond to those doubts from the financial and investment communities.

GG: We feel under-appreciated ourselves sometimes. [W]e have built an extraordinary bank with an extraordinary team of people and a great business model; maybe one of the absolute best business models in the banking industry. I think it will prove to be very durable and very profitable over a long period of time.

Because our model is so heavily involved in commercial real estate, and commercial real estate is something that is sometimes in fashion and sometimes out of fashion, I think we experience that sense of being out of step sometimes. But we do commercial real estate day-in, day-out, every day, up-cycle, down-cycle, and we do it in a way that allows us to be successful no matter which direction the CRE cycle is trending at any point in time.

I believe as this pandemic-induced recession plays out, our business model is going to prove its mettle and equip itself very well. I think that sense [of], “Wow, do we really want to own a CRE bank at this stage in the cycle?” will go away, because people will realize we’re a bank committed to consistent, high asset quality, and we’ve underwritten and will continue to underwrite our portfolios in a way that facilitates that. I think we’ll finally get the credit that my team deserves for the excellent work they’ve done.

I’m told a lot of times by investors, “You’re a great bank. We want to own you. Maybe in a couple of quarters will be the right time to buy a CRE bank.” I think that reflects a less than full understanding of the power of our franchise.

Strategic Insights From Leading Bankers: First Financial Bankshares

Few banks have built value for their shareholders like Abilene, Texas-based First Financial Bankshares.

Over the 20-year period ending June 30, 2020 — the cut-off date for institutions featured in Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP — the $10.6 billion bank generated a 2,074% total shareholder return. That figure is second only to Bank OZK in Little Rock, Arkansas, for the entire banking industry. First Financial placed sixth overall in the study and earned top honors in the Best Bank for Creating Value category. It also rated highly for its retail strategy.

“They’re one of the best banks out there,” says Brett Rabatin, head of equity research at Hovde Group. First Financial’s culture, M&A track record and competitive strategy — delivering a high level of service in small-town markets — set it apart. “A lot of banks like to say, ‘we’re relationship lenders,’ [but] this is one of the few banks where it shows up. It shows up in their loan yield, it shows up in the profitability.”

To delve further into First Financial’s performance for the RankingBanking study, Bank Director Vice President of Research Emily McCormick interviewed First Financial Chairman and CEO Scott Dueser about the bank’s customer-centric philosophy, prospective M&A opportunities and how he leverages his Texas connections. The interview was conducted on Oct. 14, 2020, and has been edited for brevity, clarity and flow.

BD: Based on my earlier reporting on First Financial and its culture, I know you have placed a strong cultural emphasis on building excellence and serving the customer. How does that differentiate First Financial from other institutions in its markets?

SD: I like to think of us as the Ritz-Carlton of banks because of what [Ritz-Carlton Hotel Co. co-founder] Horst Schulze has done for us. Horst has been outstanding, not only [in] training us [on] customer service, but also as a mentor on business and dealing with people. Horst doesn’t call it hiring people; you select people and that changes your whole attitude about it. We have a very strong team of people that work together extremely well.

I’m disappointed if somebody leaves our bank and is not extremely happy. That’s what we want to accomplish every time somebody walks in.

Our philosophy of how we do business is very important to us, and adds to the bottom line and the value of our stock. That’s the fact that we’re not in the big city, we’re in the small towns around the big city, where we can be the big fish in the little pond and be the No. 1 bank. We’re not in the big cities fighting the big boys; that takes a lot of money and a lot of time, and it’s a battle that frankly, I don’t think we can win. Why not stay in the areas [where] we do well and focus on that? That’s been our focus, along with credit quality and going after the better customers in our markets. 

BD: Covid-19 has impacted how banks serve the customer. Has anything really shifted for your bank in that regard, or do you feel like the situation is proving your strategy out in a way?

SD: It’s proven the strategy out. I will tell you the best thing that we did was we never closed our doors. We stayed open, and we came to work every day, and we learned how to work through Covid and how to serve the customer [in that environment]. We got a lot of business from it, because when customers went to their bank and found it locked, they didn’t like it. Those banks that locked their doors lost a lot of business, because 33% of the [Paycheck Protection Program] loans that we made were somebody else’s customers. To do that, we asked [those customers] for all their business, and they moved all their business. We grew about a billion dollars through the pandemic.

We made the decision not to cut hours and not to lock our doors, but to be here. We split big departments [where] half the people went home, half the people stayed here, but everybody that was customer facing had to come to work. Our goal was to make the workplace the safest place our people could be. Frankly, today we still feel like the safest place to be is here at work. We’ve kind of managed Covid, not that we haven’t gotten it. We manage it by masking and social distancing, and don’t come to work if you feel bad. We don’t want you to work [then]. That’s kind of the main rules.

I have been on the governor’s task force to reopen Texas. That has helped me tremendously, because I knew the inside scoop of how the state was fighting Covid.

BD: You also had a hand in the Texas Tech Excellence in Banking program that opened in 2020. I assume you see some indirect benefits to keeping those types of networks and communication lines open.

SD: No question. The Excellence of Banking Program was something that I took to Tech and said, “We really need to do this. It will be great for Tech. It’ll be great for the banking industry.” We were able to raise $12 million to endow that program; that’s from foundations and banks. There were about 50 banks involved in that program that gave $1,000 and above.

What’s neat about this program is it is focused [on] bringing minorities and women into banking. That’s something that we really need. We had interns from that program here this summer, and I’m very impressed with the high level of students that we have. I think all the banks that have participated are impressed with the interns that they got out of it. We are hiring people out of that program as we speak. It’s a direct benefit to the bank, but also a direct benefit to my alma mater.

BD: Looking at your past few M&A deals, First Financial does an excellent job of keeping costs down. With pricing coming down, do you see some opportunities on the horizon?

SD: I think there’ll be lots of opportunities next year. I do think Covid has made a lot of people think about whether they want to stay in the industry or not, and whether they want to keep their bank. If they don’t have people lined up to run their bank, they probably need to put it on the market. I think we’ll see a lot of banks go on the market, especially from the fact that a lot of banks missed their heyday when they could have gotten a premier price a year ago. That’s not going to happen today. Pricing is down. They’re going to say, “Hey, I’d rather take today’s price and see what happens next.”

With our price and our premium on the price, even in today’s market, we can go buy some banks that other people probably can’t, because they can’t make the deal work. With our stock price, we can make the deal work.

RankingBanking will be examined further as part of Bank Director’s Inspired By Acquire or Be Acquired virtual platform. Click here to access the agenda.

Keeping Optimism Alive

We are all in survival mode.

While the health and safety of one’s constituents takes top billing, keeping a business relevant — and viable — during these times should top the shortlist of any board’s agenda.

And while nobody has a compass to navigate these times, we at least have the means to aggregate an incredible amount of information and insight, vis-a-vis BankBEYOND.

With many fatigued from virtual conferences, we challenged ourselves to bring concise, novel ideas to a hugely influential audience. We followed Steve Jobs’ principle of design, working backward from the user’s experience to present board-level issues in new ways on BankDirector.com.

Our North Star in crafting the BankBEYOND agenda and experience: Respecting viewers’ time while surfacing issues that are both specific and relevant to their interests and responsibilities. Hence, our focus on issues that are strategic, risky and potentially expensive.

Since March, the industry has witnessed — and undergone — a rapid evolution of financial services. As a result, officers and directors must now assess the potential of their bank’s business in a post Covid-19 world. Growing a bank prudently and profitably took center stage at our Acquire or Be Acquired Conference in January; today, I suspect many boards and executives today emphasize efficiency to protect their franchise’s value. Indeed, a 50% efficiency ratio used to be the stretch goal for many banks; now, that might be closer to 35%.

Banks across the country are grappling with the tough choices they will need to make to rapidly bring those ratios down while delivering consistent service across physical and digital channels. We appreciate how so many institutions quickly embraced new technologies to solve specific business challenges, like the rollout of the Small Business Administration’s Paycheck Protection Program. In recent merger announcements, the drive to leverage technologies proved a primary catalyst for striking a deal. In fact, that’s where many efficiency gains come from.

However, boards realize that many of these technology additions can be expensive, which is why economies of scale becomes critical. We have seen how mergers can become the most expeditious way to generate meaningful economies of scale. But of course, much of the bank space is stuck in neutral at the moment when it comes to bank M&A.

We know that BankBEYOND’s audience has the responsibility for finding answers, rather than identifying barriers. We are tackling issues like:

  • Setting high-priority, short-term goals;
  • Keeping optimism and a sense of purpose alive; and
  • Weaving the best of the past eight months into everything the bank does going forward.

These are only three of the topics we’ll address with the help of various advisors and executives. Unlike a digital conference, with specific dates and watch times, we release families of videos and presentations at 8 a.m. CST. Beginning Monday, Nov. 9, we explore strategic and governance issues. The next day, we add information geared to the audit committee and risk committee. We conclude on Wednesday, Nov. 11, by sharing content developed for the compensation and nominating/governance committees.

BankBEYOND tees up the topics that allow for proactive — not reactive — change. By placing a premium on complex issues that all directors must address, we strengthen the knowledge of a bank’s board. And we rarely find a strong board at anything but a strong bank.

Strategic Planning in an Age of Uncertainty

How do you plan in an environment where the future is so uncertain?

If this was a bad joke, the answer might be “very carefully.” The real answer is more like “very nimbly.”

The Covid-19 pandemic has presented the banking industry with an almost-unprecedented set of challenges, including a deep recession and the necessity to manage a distributed work force. The variable that no one can predict is the pandemic.

Most economist agree that the U.S. economy won’t fully recover until the pandemic has been brought to heel — and that probably won’t occur until an effective vaccine has been widely distributed. Many banks are also reluctant to repatriate their remote employees in large numbers until it’s safe to do so.

Strategic planning in such a confused situation has to be different than at other times. In a webcast discussion for Bank Director’s AOBA Summer Series — a run-up to the 2021 Acquire or Be Acquired conference in January — Stephen Steinour, chairman and CEO at Huntington Bancshares in Columbus, Ohio, talked about the challenges of strategic planning today.

In an audio recording of that conversation with Editor-at-Large Jack Milligan, Steinour detailed some of the steps that Huntington has been taking through the pandemic, including processing tens of thousands of Paycheck Protection Program loans for its business customers and adapting to a virtual work arrangement for most of its employees.

Steinour also describes a new approach that Huntington’s senior management teams and board of directors is adopting toward strategic planning. Traditionally the bank has planned on a three to five-year cycle, but today’s uncertain environment requires a shorter time horizon.

“I think we’re going more into a continuous planning mode rather than a cyclical mode,” he says. “It requires us to be more nimble.”

Eliminate Customer Friction to Unlock Your Bank’s Growth

Why don’t your target customers want to join your bank? Because they’re not impressed.

Banks often sabotage their own attempts at success through their siloed, disjointed, out-of-touch and unimpressive approaches to doing business that leave small-to-medium businesses, private wealth clients, upwardly mobile millennials and even commercial customers underwhelmed by their service delivery.

Eliminating customer friction must be your guiding policy
For 10 years, the rallying cry of the C-Suite has been “invest in technology to stay relevant.” The next 10 years must be defined by a singular, focused, and undeviating devotion to eliminating the friction of doing business with your institution.

Fixing customer friction will be challenging and expensive, but it will also offer the best return for your shareholders. Your bank must organize teams around this mission. Executives need to evaluate resource and budget requests against a simple criterion: How much friction will this reduce, compared to the cost of funding it? Every budget request should be accompanied by a detailed user story, a list of friction points, and a proposed solution that describes the customer experience. Every touchpoint is an opportunity to reinforce your brand as customer-friendly or customer-hostile. Your bank should move quickly through these three steps:

  1. Get aligned. Your bank needs support from your board, your C-suite and even your investors to pivot to this focus. Once you have the buy-in and mission statements crafted, it’s time to designate the priority projects.
  2. “Shovel-ready” projects come first. Rescore projects that were previously denied funding or resources because they were too difficult to execute or didn’t cross a financial hurdle on a simple 2×2 matrix that evaluates improvement in customer experience and reduced friction vs. cost and complexity to implement. The projects in the top-right corner should be your initial list of funded initiatives.
  3. Deliver quick wins and results that measurably drive customer engagement. This will define success for the next 10 years. Re-engineer how you extend customer offers and execute pricing for standard and relationship clients. Your investment in tech will pay off if you accelerate this function.

For a fast return on investment, examine how your bank prices on base versus relationship status and rewards customer behaviors. Segmenting customers into single-service households, small to medium-size businesses, commercial, or mass-market and tying rewards or pricing adjustments to their categories can mean the difference between retaining or losing target customers. One-size-fits-all pricing, or even pricing by geography, will leave customers feeling like they do today: you don’t understand them or price according to their life stage or needs.

Aim for high-frequency iterations so you can test and learn everything before you scale it. Imagine being able to execute 100 or more micro-campaigns and evergreen trigger-based offers annually, with multivariant testing. Drill down to specific customer personas, identify specific trigger events, and act on intelligence that demonstrates to your customers that your bank understands them.

Get in the habit of defining a user story, designing a process and executing an offer or pricing schema in a sprint. I was astounded how quickly banks moved on preparing their infrastructure to administer Paycheck Protection Program loans. Imagine being able to consistently move at that speed — without the associated late nights and headaches.

Lastly, installing an agile middleware layer will unshackle your bank from the months-long cycles required to code and test customer offers and fulfillment. High-speed, cloud-based offer management that crosses business lines and delivers omni-channel offer redemption will be a game changer for your institution.

Installing a high-speed offer and pricing engine may seem like science fiction for your bank, but it’s not. It will require investments of time and money, coordinated efforts and lots of caffeine. But the results will allow your financial institution to prove success, build a model and inspire your teams to get serious about bulldozing customer friction.

The financial rewards of executing better offers, engaging more customers and delivering relevant, optimized pricing will give your bank the financial resources to remain independent while your competitors shop for merger partners.

Three Concepts that Drive Performance

The former top general in the Marine Corps, Gen. Jim Mattis, wrote in his memoirs, published last year, that “If you haven’t read hundreds of books, you are functionally illiterate, and you will be incompetent, because your personal experiences alone aren’t broad enough to sustain you.”

That’s bold. But given its source, it can’t be discounted.

“Thanks to my reading, I have never been caught flat-footed by any situation, never at a loss for how any problem has been addressed (successfully or unsuccessfully) before,” Mattis wrote in a 2003 email to a colleague. “It doesn’t give me all the answers, but it lights what is often a dark path ahead.”

In no industry is experience by proxy as important as it is in banking, thanks to a pair of peculiar dynamics. Banks use three or more times as much leverage as the typical company. They’re also exposed to the unforgiving vicissitudes of the credit cycle.

It follows that in banking, as in the military, though in an obviously less lethal context, there is little margin for error. To be a high-performing bank, your credit decisions must be right 99% of the time — a high bar to clear.

With this in mind, here are three concepts from three books that can help sharpen one’s decision-making and reduce the incidence of error.

Cognitive Dissonance
The study of behavioral finance gained traction after the financial crisis of 2008-09, which eroded confidence in the efficient market hypothesis — the assumption that markets operate best when they are most unfettered by rules and regulation.

Behavioral finance is predicated on the general rule that markets tend to produce rational outcome. More important than this rule, however, are multiple exceptions to it, called “behavioral biases,” which are so powerful that they can swallow the general rule.

The granddaddy of behavioral biases is cognitive dissonance. This is the “state of tension that occurs whenever a person holds two cognitions (ideas, attitudes, beliefs, opinions) that are psychologically inconsistent,” explained Carol Tavris and Elliot Aronson in “Mistakes Were Made (but not by me): Why We Justify Foolish Beliefs, Bad Decisions, and Hurtful Acts.”

An example is the belief that “‘Smoking is a dumb thing to do because it could kill me’ and ‘I smoke two packs a day,’” Tavris and Aronson wrote.

People don’t like hearing information that they disagree with. It’s why so many of the banks that got into trouble in the financial crisis of 2008-09 tended to minimize the ominous warnings from the risk managers, preferring instead to believe the lofty predictions of their revenue generators.

Deliberate Practice
If you want to get better at something, it helps to practice. But not all practice is equally effective.

“There are various sorts of practice that can be effective to one degree or another, but one particular form — which I named ‘deliberate practice’ back in the early 1990s — is the gold standard,” wrote Anders Ericsson in “Peak: Secrets From the New Science of Expertise.”

There is an assumption that after reaching a satisfactory skill level at something, the more you do that thing, the better you’ll be at it. But this isn’t necessarily true.

Research has shown that, generally speaking, once a person reaches that level of ‘acceptable’ performance and automaticity, the additional years of ‘practice’ don’t lead to improvement,” Ericsson explained. “If anything, the doctor or the teacher or the driver who’s been at it for twenty years is likely to be a bit worse than the one who’s been doing it for only five, and the reason is that these automated abilities generally deteriorate in the absence of deliberate efforts to improve.”

Deliberate practice has several characteristics that distinguish it from what Ericsson calls “naïve practice.” These include specific, well-defined goals; focused and intentional effort; regular feedback; and the willingness to get out of one’s comfort zone.

Level 5 Leadership
A central paradox lies at the heart of effective leadership: while leadership calls for confidence, it also demands humility.

Jim Collins encapsulates in the concept of Level 5 Leadership, which he developed in his book, “Good to Great: Why Some Companies Make the Leap and Others Don’t.”

Level 5 leaders display a powerful mixture of personal humility and indomitable will,” Collins explained. “They’re incredibly ambitious, but their ambition is first and foremost for the cause, for the organization and its purpose, not themselves.”

“The good-to-great executives were all cut from the same cloth,” he continued. “It didn’t matter whether the company was consumer or industrial, in crisis or steady state, offered services or products. It didn’t matter when the transition took place or how big the company. All the good-to-great companies had Level 5 leadership at the time of transition.”

Ultimately, there are no silver bullets to achieve exceptional performance — in banking or elsewhere — but concepts like these are fundamental building blocks that will accelerate one’s progress toward that goal.

Turning Goals from Wishes to Outcomes

Community banks should measure their goals and objectives against four tests in order to craft sustainable approaches and outcomes.

Community banks set goals: growth targets for loans or deposits, an earnings target for the security portfolio, an return on equity target for the year. But aggressive loan growth may not be a prudent idea if loan-to-asset levels are already high entering a credit downturn. Earnings targets can be dangerous if they are pursued at any cost, regardless of risk. However, in the right context, each of these can lead to good outcomes.

The first test of any useful goal is answering whether it’s a good idea.

One personal example is that about a year ago I set a new goal to lose 100 pounds. I consulted with my doctor and we agreed that it was a good idea. So then we moved to the second test of a useful goal: Is it sustainable?

As “Atomic Habits: An Easy & Proven Way to Build Good Habits & Break Bad Ones” author James Clear puts it: “You do not rise to the level of your goals, you fall to the level of your process and systems.”

What good would my weight loss goal be if it wasn’t sustainable? If the approach I took did not change my habits and instead put me through a shock program, there would be little reason to doubt that the approaches and habits that led me to create this goal would bring me back there again. The only way to pursue my goal in a sustainable fashion would changing my habits — my personal processes and systems.

Banks often pursue goals in unstainable ways as well.

Consider a bank that set a goal in June 2018 of earning $3 million annually from its $100 million securities portfolio with no more than 5 years’ duration (sometimes called a “yield bogey”). Given a choice between a 5-year bullet agency at 2.86% and a 5-year, non-call 2-year agency at 3.10%, only the latter meets or beats the goal. A 3.10% yield earns $310,000 for this portfolio.

In June 2020, the callable bond got called and was replaced by a similar length bond yielding only 40 basis points, or $40,000, for the remaining three years. The sustainable plan would have earned us $286,000 for the past two years — but also $286,000 for the next three. To make earnings sustainable, banks always need to consider multiple scenarios, a longer timeframe and potentially relaxing their rigid “bogey” that may cost them future performance.

 The third test of a useful goal is specifying action.

The late New York Governor Mario Cuomo once said, “There are only two rules for being successful: One, figure out what exactly you want to do, and two, do it.”

In my case, I didn’t do anything unsustainable. In fact, I did not do anything at all to work toward my long-term goal. When I checked my weight six months later, it should not have surprised me to see I had lost zero pounds. A goal that you do not change your habits for is not an authentic goal; it is at best a wish.

My wish had gotten exactly what you would expect: nothing. Upon realizing this, I took two material steps. It was not a matter of degree, but of specific, detailed plans. I changed my diet, joined a gym and spent $100 to fix my bicycle.

The fourth test of a useful goal is if it is based on positive changes to habits.

Banks must often do something similar to transform their objectives from wishes to authentic goals. Habits — or as we call them organizationally, processes and systems — must be elevated. A process of setting an earnings or yield bogey for the bond portfolio relied on the hope that other considerations, such as call protection and rate changes, wouldn’t come into play.

An elevated process would plan for earnings needs in multiple scenarios over a reasonable time period. Like repairing my bike, it may have required “spending” a little bit in current yield to actually reach a worthy outcome, no matter which scenario actually played out.

If your management team does not intentionally pursue positive changes to processes and systems (habits), its goals may plod along as mere wishes. As for me, six months after making changes to my habits, I have lost 50 pounds with 50 more to go. Everything changed the day I finally took the action to turn a wish into a useful goal.

Capital, Digital Initiatives Set De Novos Up for Success

In 2018, Matt Pollock and a group of business leaders and experienced bankers organized a new bank to fill a gap they saw in the Oklahoma City market. And he believes their tech-forward approach sets them apart from competing financial institutions.

“A lot of [banks] fall into the same traps in how they approach client services and products and relationships, and they just don’t do a very good job,” says Pollock, the CEO of $110 million Watermark Bank, which opened its doors in January 2019. “So, we really focused on [building] the right team, with the right model that really drives the business community.”

Few de novo banks have formed since the 2008-09 financial crisis. Of the 1,042 community banks chartered in the eight years preceding that crisis, 13% failed and another 20% were acquired or liquidated, according to a 2016 Federal Deposit Insurance Corp. study. Overall, de novo banks accounted for 27% of all failures from 2008 to 2015, and exited at double the rate of small, established banks.

De novo institutions are particularly fragile: They don’t tend to be profitable in their early years as they invest in building their business and reputation in their markets. In today’s environment, low rates pressure net interest margins, exacerbating these challenges.

With that in mind, Bank Director used FDIC data to analyze the 24 de novo banks formed from January 2017 through December 2019 to understand how they’re performing today and how they might weather the current economic downturn. We examined efficiency, through the overhead and efficiency ratios, and profitability, through return on assets and return on equity, as of Dec. 31, 2019. We also included equity capital to assets and net interest margin in the analysis. Watermark came in fifth in our ranking.  

Today’s batch of de novo banks features higher capital levels, a requirement that has dampened new bank formation. (The FDIC doesn’t set a minimum capital threshold for de novo banks; expectations vary based on the bank’s market, size, complexity, activities and business model.)

If the recession deepens, those high capital levels could come in handy as banks find it trickier to raise more capital, says Nicholas Graham, senior managing director at FinPro. “Many of the de novos that formed over the past several years, in a very general statement, have not fully leveraged their capital to date,” he says. “Therefore, they have more capital right now, all else being equal, to potentially weather this storm.”

Stringent capital requirements led some bank organizers to acquire rather than start a bank from scratch. Not so for Watermark Bank. Acquiring a charter was too expensive due to high bank valuations toward the end of the cycle, says Pollock, and an acquisition would have bogged the founders down with legacy cultural and technological issues.

So, they decided to start fresh. “Let’s build our systems and our workflows exactly how we want to do it; we’ll have to roll up our sleeves, it will take a little bit longer, probably a little bit more work but in the end, it would be a benefit,” says Pollock. “We ran a very lean operation, opened with 12 people, got up and running, and we quickly got to a break-even faster than many others.”

Prioritizing technology sets Watermark and many of its de novo peers apart from those chartered before the 2008-09 crisis. And it allowed Watermark to rise to the occasion in issuing Paycheck Protection Program loans, despite high demand and a spare staff.

“We did as many PPP loans in 10 days as we did loan transactions in our first year of operation,” says Pollock. “There was some stress, but at the end of the day we walked away and said, ‘We have good processes and procedures, we have extremely talented people, and we’re capable of leveraging our platform and our operational capabilities that we have today to a much higher level,’” he says.

Flexibility and nimbleness give de novo banks an advantage. “They’re more quickly able to adapt and add new products and services that may be more beneficial in this time of uncertainty,” says Graham.

Savvy de novos are investing in the digital infrastructure needed for modern banking, says Rick Childs, a partner at Crowe LLP. But there’s one more attribute he believes strengthens a de novo: extensive banking experience on the board and management team.

“You can skin the cat a lot of different ways in banking, but if you don’t have a lot of capital to help you weather the lean years, and if you don’t have strong management and [directors] to make sure you’re not taking unnecessary risk,” it will be hard to survive, he says. “[If] you know how to react when a difficult time comes around, then the rest will follow.”

Top Performing De Novo Banks

Rank Bank Name Asset Size (000s) NIM (3/31/2020) Overall Score
#1 The Bank of Austin $202,738 3.36% 5.8
#2 CommerceOneBank $258,590 3.34% 6.2
#3 Winter Park National Bank $418,816 2.89% 7.0
#4 Tennessee Bank & Trust $272,173 3.25% 7.7
#5 Watermark Bank $110,423 3.40% 8.0
#6 Infinity Bank $110,145 4.41% 8.6
#7 Ohio State Bank $130,519 2.22% 9.5
#8 Gulfside Bank $97,154 3.14% 10.6
#9 The Millyard Bank $23,524 1.41% 11.2
#10 Beacon Community Bank $161,029 3.05% 12.1

Source: Federal Deposit Insurance Corp.
Each bank was ranked based on profitability, efficiency, NIM and capital as of Dec. 31, 2019. The overall score reflects the average of these ranks.

Embracing a Challenging Environment to Evolve

New York University economist Paul Romer once said, “A crisis is a terrible thing to waste.”

With a nod to Dr. Romer, we believe banks have an extraordinary opportunity to embrace the challenging environment created by the Covid-19 pandemic to enhance critical housekeeping matters. Here are five areas where banks may find opportunities to declutter or reengineer policies, procedures and best practices.

Culture
One of the most obvious opportunities for banks is to focus on culture. Employees working from home has eliminated the ability to have typical office parties, barbeques and other events to build comradery. Remote and semi-remote working environments are challenging employees in many difficult ways. Fortunately, banks are finding simple, yet creative, ways to stay in contact with their employees and build culture through additional correspondence and feedback — electronic happy hours, car parades, and socially distant visits, for example. Creatively maintaining high engagement in challenging times will serve to improve communication and culture over the long term. As management consultant Peter Drucker once said, “Culture eats strategy for breakfast.”

Cybersecurity
Cybersecurity risk continues to be top of mind for bankers and regulators given the remote work brought on by Covid. Certainly, most banks’ cybersecurity risk management planning did not contemplate the immediate scale of remote work, but the extreme experience is an opportunity to drill down on underlying policies and procedures. Banking agencies have provided the general blueprint on sound risk management for cybersecurity.

This heightened risk environment provides executives with a perfect opportunity to note where their vulnerabilities may exist or be discovered, where cyberattacks focus and what works—or doesn’t —for your bank. Use the guidance provided to assess your bank’s response and resilience capabilities. Consider the overall map and configuration of your cyber architecture. Consider authentication requirements and permissions to protect against unauthorized access. Take the time to work with information technology experts to clean up access controls and response plans. This is an active situation that provides bankers the unique opportunity to learn and adapt in real time.

Compliance
Banks also face enhanced compliance originating from federal programs aimed at keeping businesses afloat. A worthy endeavor to be sure, but the rollout of some federal programs such as the Small Business Administration’s Paycheck Protection Program has far outpaced the guidance for banks tasked with implementation. The trickle of (often inconsistent) guidance on the documentation, eligibility and certification adds compliance challenges in reporting under the Bank Secrecy Act, fair lending under the Equal Credit Opportunity Act and unfair or deceptive acts and practices under the Federal Trade Commission Act, for example.

Compliance teams have an opportunity to shine at something they are already extraordinarily good at: documentation. They should document the processes and practices they deploy to demonstrate compliance, despite the uncertainty and pace at which they are expected to operate. This documentation can support real-time decision-making that may come up with regulators in the future, and can serve as a basis for improvement on future best practices and training. Compliance teams will discover new questions to ask, novel scenarios to address and gaps to fill.

Operational Planning
The best time to consider the impacts of Covid on your bank’s operations is while events and memories are fresh. Banks all over the country are experiencing what a handful of institutions may go through in the wake of a natural disaster: devastation, uncertainty and a need for banking support. This is the time to review your bank’s disaster recovery and business continuity plans, specifically including pandemic planning, to assess the plans against reality.  

To help, the Federal Financial Institutions Examination Council released an updated statement on pandemic planning suggesting actions that banks can take to potentially minimize a pandemic’s adverse effects. This is an chance to improve business continuity planning for similar future events, understanding that they may not be as deep or prolonged as the coronavirus. Exercising the plans in real time, compared to a scheduled test, can reveal helpful improvements that will only strengthen the bank.

Customer Experience
Coping with remote work and providing banking services outside of a branch provides the opportunity for banks to consider strategies around technology and financial technology partnerships. Customers have been rerouted to electronic avenues, and many seem to have embraced technology to deposit checks, access accounts online and transact business.

This evolution offers banks the opportunity to adapt and recognize the use of financial technologies. Many customers will understandably return to branches to conduct some of their business when they reopen, but may require them less. Banks may want to consider how they can satisfy future customer demand and improve the customer experience more broadly. These are just five areas where we see opportunities for banks of all levels and complexity to enhance their policies, procedures and best practices as they prepare to move forward.