Finance blog


Insights from a Member of the Pack

September 11, 2020

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!

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