Top Topics: How to Survive and Thrive
By Bill Poquette
There were sessions on artificial intelligence, cybersecurity, fintech, digital lending and other subjects de jour during the American Bankers Association’s National Conference for Community Bankers recently in Orlando. Also among about a dozen “Concurrent Deep Dive Sessions” were two structured along more traditional lines: “Don’t Just Maintain Independence – Thrive,” and “The Seven Secrets of Consistently High-Performing Community Banks,” both of which drew standing room only crowds of curious bankers.
The speaker who reasoned that community banks can thrive while remaining independent was Arthur Loomis, president and CEO of Northeast Capital and Advisory Inc. and the son of a community bank president. His two brothers now run that institution, The Peoples Bank in Pratt, Kan.
He was not there to speak about “today’s hot topics,” Loomis noted – cybersecurity, fintech, cross selling, compliance and regulations. In his view, these are in the “maintain” category, not “thrive,” and are embedded in daily life.
The community banker’s son turned investment banker acknowledged that some of the industry’s long-term themes will endure: spreads will continue to shrink; efficiency rates are under the gun, largely due to soaring compliance costs. The customer base is aging – but this supports profitable wealth management initiatives, he suggested.
“Great management can offset these themes,” Loomis said, “but excelling is exceedingly hard; if it was easy everyone would want to be a banker.”
Community banks should not be in mergers and acquisitions as a business, he advised. But at the same time, “size matters,” he said. Loomis cited data indicating that a $100 million bank that achieved 0.80 percent return on assets in 2015 would have needed $250 million in assets for the same ROA in 2016.
Based on projections of up to four more years of low interest rates, Loomis offered some suggestions:
— Doing nothing is unacceptable.
— Don’t take more interest rate or credit risk.
— Gather more demand deposits. They should equal 30 percent or more of total deposits, and deposit customers are the most profitable.
Among possibilities for improving efficiency, Loomis suggested fewer employees, higher productivity standards and possibly closing branches.
He urged “extreme caution” with branch closings. Large banks are divesting up to 40 percent of their offices – especially in rural or less-populated areas, Loomis pointed out, and this presents opportunities for smaller community banks. “The biggies are focusing on large communities and leaving rural markets wide open,” he said.
Meanwhile, in the secrets of high-performing banks session, Jeffrey Morris, managing director and principal of Austin Associates LLC, also addressed the issue of branch closings. He cited data indicating that banks with fewer branches are more profitable. However, he recommended branch closure testing, which asks this question: Would our bank be financially better off without one or more of our current branch facilities?
Morris indicated as he began that his “seven secrets” are not rocket science. He considered labeling the session “Seven No Brainers of Consistently High-Performing Community Banks” but decided that might undersell the session.
In what Morris calls “Backwards Break-even Analysis,” the bank determines the potential hard-dollar cost savings and calculates the percentage of core deposits that would be lost. Factors to consider in these decisions include distance to the next closest branch; prospects for growth; proximity of competition; quality and extent of loan referrals; and historical trends in growth and profitability.
Morris identified several other characteristics common to consistently high-performing banks – noting that 90 percent of them are under $1 billion in total assets. Among other things, they are “fully invested,” with loan deposit ratios of averaging 69.12 percent versus 65.92 for the typical community bank.
The high performers’ loan portfolios are more diversified, with lower commercial loans balances; more consumer and ag loans; and more 1-4 family mortgages. Morris also observed that high-performing banks have been growing at a rate slightly more than 1.5 times the rate of the average community banks. The average community bank has experienced stable growth of about 4 percent per year, compared with 6.4 percent for the high performers over the past five years, including acquisitions.
Consistent high performance is only achieved by the efficient, Morris told the community banker audience. Their efficiency ratios are 30 percent lower than the average bank; assets per employee 25 percent greater; each element of noninterest income if 15-30 percent lower; total revenue per employee is 47 percent higher; and median assets per branch is 35 percent higher.
High-performance banks are less dependent on deposit service charges as a percent of total fee income, according to Morris. They have 35 percent more mortgage loan income with gains on sales and servicing fees. They also have 44 percent more wealth management income.
One of the other deep-dive sessions focusing on technology was “The 2017 Cybersecurity Challenge.” Some helpful steps were provided in this workshop by Jared Hamilton, senior manager, cybersecurity, for Crowe Horwath.
Get serious about asset management, Hamilton advised. “It’s not fun or sexy but it is mandatory,” he said. “It is IT’s job to know what data is on what systems and why. Define roles well and make sure they are reasonable. The proliferation of data outside of IT is a real and growing issue that needs prompt action.”
Hamilton also recommended mapping data stores and flows through web and application data bases, file shares, work stations, mobile devices, the cloud, data replications and backups, vendors and USB devices.
Things to keep in mind for 2017 include these, according to Hamilton:
— Everybody is a target.
— Adapt and prepare for examinations.
— Know where your data lives.
— Assess and mitigate to a reasonable level.
— Test your controls.
— Be prepared to respond to a breach.
— There is no silver bullet. Cybersecurity must be part of your culture.
More than 700 bankers, vendors and guests attended the conference Feb. 19-23 at the JW Marriott Grande Lakes in Orlando. The exhibit hall was populated with more than 100 booths offering software, insurance programs, consulting services and a variety of other vital resources. Next year’s NCCB is flying across the Pacific to Honolulu. The conference is scheduled for Feb. 25-28 at the Hilton Hawaiian Village Waikiki Beach Resort. Aloha!
Bill Poquette is editor-in-chief of BankNews.