There Is the Economy, Then There Is the Challenge of Community Banking

By Bill Poquette, Editor-in-Chief

As is common when bankers gather for their annual meetings, there were touches of penetrating economic insight from the podium at the Missouri Bankers Association convention June 13-15 at Tan-Tar-A Resort in Osage Beach beside the Lake of the Ozarks.

For example, ex-cable network news anchor Bob Sellers, the opening keynote speaker, explained his theory that high interest rates prevail under tall Federal Reserve chairs such as Paul Volcker (6’ 7”), while low rates are the norm under short chairs, namely Janet Yellen (5’ 0”). Current Chairman Jerome Powell is closer to average height.

Following Sellers on the program, former CNBC chief economist Marci Rossell advised that our biggest economic problem is we don’t have any young people. “From an economic point of view,” she said, “more (people) is always better — unless they have a contagious disease.”

Actually, of course, the two leadoff presenters in their analyses of current political and economic outlooks were quite serious and enlightening, as was the balance of the MBA program, with its concentration on the essentials of community banking, such as competitive strategies, compliance and overall performance.

David Furnace, CEO of Lincoln, Neb.-based Haberfeld, noted that the firm’s data indicate that 25 percent of a community bank’s customers are unprofitable. Furnace suggested, however, that different ways of thinking and weighing the value of individual customers can help a community bank grow its customer base profitably.

Getting rid of “unprofitable” customers doesn’t work, in his view. This spreads fixed costs over fewer customers and reduces fee income. He suggested that bankers need to focus less sometimes on traditional measures such as return on assets and equity, net interest margin end efficiency ratio — “banker think” — and look at revenue per widget, revenue derived from selling one more widget, the cost of producing one more widget, and factory utilization.

Community banks have tremendous excess capacity, Furnace pointed out. They spend money on acquisitions and new branches to grow but severely underinvest in marketing to fill up the branches they already have. A key strategic opportunity Haberfeld sees, then, is for community banks to leverage the infrastructure investments they have already made (all those fixed costs) by growing.

Banks can make good money at the margins, according to Furnace. Haberfeld client data pegs average direct marginal costs at about $30-$50 per year per customer for issuing a debit card, statements, data processing, billpay and small principal writeoffs for overdrafts, for example.

If a typical community bank gets one more core customer, it derives $300-$500 per year in revenue from NSF fees and interchange income, along with potential interest income, versus $50 in costs, and the customer stays for more than eight years. “That looks very profitable to us,” Furnace told the Missouri bankers.

The overall performance of Missouri state-chartered banks was sketched out for the MBA members by Lee Keith, who has been commissioner of finance for just over a year. There were 244 state-chartered banks in Missouri as of March 31 — down five from a year earlier — plus four nationally chartered banks.

The data displayed by Keith for his presentation reflected steadily improving performance year over year by the state banks. Total loans grew from $79 billion to $85 billion, tier 1 leverage capital improved from 9.56 to 9.72 percent, return on assets reached 1.16 compared with 1.09 a year ago, net interest margin improved as well, from 3.69 to 3.74. Allowances for loan and lease losses dropped from 1.28 to 1.23, but past due loans edged up to 1.49 from 1.14 percent. From Dec. 31, 2017 to March 31, the number of problem banks dropped by two, from 13 to 11.

Keith expressed few concerns, but a couple were: “I look around the room and see a lot of grey hairs and a lot of no-hairs out there,” he said. “We need to develop these young bankers.” And when he thinks about community banks going forward, he realizes, “Without community banks there are no communities.”

The last item on the Thursday (June 14) general session program was bankers’ favorite subject: compliance. But the speaker was their favorite on the subject: Chuck Lewis, MBA vice president, compliance services, whose adroit use of humor to lighten his message keeps audiences coming back for more. Until next May, that is, when he will retire after 40-plus years working with bankers on compliance issues.

Lewis led off with a reminder about the new Uniform Interagency Consumer Compliance Rating System that was effective last year. It has a rating scale from 1-5 with a 1 or 2 rating that indicates “you’re OK,” he said, while 3 through 5 indicates “you ain’t.” There are three components: compliance, management oversight and violations/citations, of which management oversight is key.

The recently mandated customer due diligence/beneficial ownership rule was also a focus of Lewis’s remarks. The legal entities affected include corporations, LLCs, general/limited partnerships and business trusts created by state filing. Not included, according to Lewis, are financial institutions, government entities, publicly traded companies on national stock exchanges, sole proprietorships, unincorporated associations or natural persons.

He advised the bankers that the rule will most likely impact their institutions’ best, oldest-established, largest customers and directors.

The convention program also included this official business: Shaun Burke, president and CEO of Guaranty Bank in Springfield, was elected MBA chairman for 2018-2019, succeeding Rob Barrett, president of Heritage State Bank, Nevada. Anne Vieira, senior vice president/bank operations finance at Saints Avenue Bank in New London, is the new chairman-elect, and appointed by Burke as treasurer for the coming year was Cord Polen, president and CEO of Alliance Bank in Cape Girardeau.

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