Remember the post from August 20th entitled "The
Pack"? The theme of that post was that the community banking industry is best
viewed as a wolf pack, in which competition among members is vibrant and
important, but that the wellbeing of all of its members is a benefit, too. The
mantra from Kipling's poem I called out was:
"The strength of the Pack is the Wolf, and the strength of
the Wolf is the Pack."
Alan Crain of Kitsap Bank (Port Orchard, WA) is, as you will
likely soon realize, a strong wolf, so I asked him for some thoughts to share
for the good of the "pack" of community bankers. Here is part of our
conversation.
Me: How would you
frame the decision-making process that you, as a community banker, go through
on a day-to-day basis? Do you think it has improved over time?
Alan: I suppose there are a lot of ways to tackle tough organizational
decisions. Ultimately, I think it's important to know who we are as an
organization (current culture) and who we want to be (organizational
aspiration). Of course, strategy is also important, but I believe strategies
have to make sense and logically fit into the cultural continuum. I've found over
time that this approach helps me filter options and narrow down choices. I've
also found it helpful to talk through possibilities with other members of the
executive team as well as my direct reports. We all have our own biases and
strengths and weaknesses, so bringing in other views helps me sharpen my
decision-making. I find I get the most benefit from conversations with the people
in disagreement with me, as they often consider factors I've missed, and the
debate helps sharpen my evaluation. We learn the most when listening, but just the
act of verbalizing my (and my "opponent's) thoughts helps me hear the message
and logic more clearly. Sometimes "more clearly" means my initial thoughts are
revealed to have been clearly bad! A mentor used to advocate that as leaders,
we need to be "of both thought AND action." That phrase suggests a fine
balance: We need to be action-oriented to achieve results, but we also need to
be thoughtful in approach. We want to avoid the "Ready, fire, aim!" syndrome while
also avoiding "analysis paralysis." We all know what that's like—paralysis can
stem from fear of making a bad decision or of not having "perfect" information.
We will rarely have complete, perfect information, so we must have confidence
that we are making the best decision we can with the best information available
now. If information changes later, it
doesn't necessarily mean the original decision was a bad one. Rather, it
becomes an opportunity to evaluate whether a change of course is warranted.
That is just prudent risk management.
Me: How do you think community banks and financial institutions can remain the heartbeat of their communities in this increasingly technology driven marketplace?
Alan: "Community" has
historically meant geography, but it now can mean much more than that. A community
is really defined by shared values. The traditional requirement that community
banks must define their market and serve the community still apply, but there
is an opportunity to think more broadly about communities beyond just geography.
Technology can be a great service enabler and enhance the quality of the
relationship rather than detract from it. We can now reach and serve our
communities more deeply, directly, and efficiently than ever before. We can get
broad feedback extremely quickly through social media and digital marketing. I
see fintech firms as great potential partners to community banks: We can
leverage their scale model to deliver service offerings that we could never
achieve on our own.
Me: In a broad sense,
what can banks do to make sure they maintain their independence?
Alan: I'm reminded of an old adage in sales: "Price.
Service. Quality. Pick two." I've had the opportunity to work for, and with, a
variety of community banks throughout my career and each successful one had
carefully curated their business model around that equation. In banking, some
more common labels are "high price, high touch" or "low cost, volume-driven".
Most banks know they can't be all things to all people, so I guess what I'm
trying to say is that competition forces us to constantly sharpen and refine
our business model and value proposition, whether that's adding or improving
services or lowering costs. I don't think there is one static model that is
ideal in perpetuity. We need to have the foresight and courage to adapt to
changing conditions. I think most financial institution teams have been
impressed recently by their ability to pivot and adapt quickly as the pandemic
spread. We all got to demonstrate our entrepreneurial chops when our business models
were completely upended over the span of a couple weeks. Frankly, I think most
institutions deservedly developed a little swagger over this success.
Me: This is a little
bit micro, but what have you been doing to address the surge deposit problem so
many banks have been experiencing this summer?
Alan: Candidly? Scratching our heads! About one-third of our
surge deposit growth came from PPP customers. Another third came from two
customers with capital raises, and the remaining third came from a variety of
consumer and commercial customers. In addition to current liquidity, we expect more
whenever the PPP loans are forgiven. I'm sure "this time will be different",
but I've never stopped analyzing the expected lives of our surge deposits from
the last crisis. I'm not trying to be flip, but the surge stayed. It never
left!
It feels like déjà vu all over again! Like last time, here
we are flooded with liquidity at absolute lows in rates. We're trying to figure
our way through this just like everyone else. Using the framework you asked
about in the first question, first and foremost we want to be sure we're making
decisions that serve and benefit our customers and communities. Then, we don't
want to make a decision that could be detrimental to the bank in the long term.
Should we try to invest out the curve, to generate better earnings than fed
funds in this environment? Should we leave it in fed funds, and watch our margins
collapse? What if we're stuck here for decades, like Japan? Allocating 25% of
our assets to earn 5bp (Fed funds are essentially non-performing assets) is not
a viable business model. I don't know what the right answer is, but what I do
know is we will make the best decisions we can with the best information we
have now, not be paralyzed but also not "bet the bank." We must reserve enough
flexibility to adapt as conditions change. That is perhaps the one thing I do
know with certainty—that change is the only constant.
Final, final thought:
I can't believe summer is over. Make sure you have at least one more cookout
before it gets too cold! And don't forget the corn on the cob!
Be sure to fill out
the form below to subscribe to my weekly blog.
The testimonials in this interview may not be representative of the
experience of other clients. The testimonials are no guarantee of future
performance or success. These are not paid testimonials. We maintain all of our
endorsers may have limited applicability of experience to what clients may
generally expect to achieve. Performance results described by any endorser are
non-audited and should not be considered representative of what clients will
generally achieve with the advertised product/service in actual, albeit
variable, conditions of use.
