I was presenting to the Florida Bankers Association this week about how specialization is one of the few long-term viable paths for community banks to grow organically. One question came up from a bank CEO that went something like this:
“I am being pushed on three sides to be more conservative – my Board, my auditors, and the examiners. Sure, I’d love to add a bunch of wiz-bang ideas, but there is no way any one of them will allow it.”
The answer could be found in existing examples. I pulled up three actual banks that had ROA’s near 0.50% in 2010 and shot up to over 1.5% (one passed 4%) by the end of 2014. These were chosen randomly from banks with that kind of increase, yet as it turned out, all three of them were specialists. One $500 million bank focuses on a hat trick of Wealth Management, Trust, and a Private Bank, aiming at high net worth individuals – something quite unique for a bank this size. One is a $1.1 billion industrial bank specializing only home improvement loans through a large hardware and lumber products seller. The third is a $280 million bank in a small community “specializing” in serving their community (not new) but they do it with a deep level of engagement through an innovative community club and they converted one of their two branches into a specialized all-things-mortgage center.
These are hardly “wiz-bang.” As for the bank advisors worried about risk, in two of the example banks, they had below average credit issues, meaning less, not more, risk. In the “home improvement” bank, they had higher losses, but high enough rates to more than compensate. That’s the crux of banking, right? Not to remove risk, but to generate profit by charging more than enough to cover risk. Not sure the regulators agree.
Innovation just means being creative to serve customer needs. Differentiation means innovation that every other bank in town is not doing. Let’s face it, banks are more alike than different. Apple differentiates by building a new phone or car. Banks can do it by digging deeply into the lives of a customer segment, and then putting all their efforts toward serving it. Innovation can be as low-tech as offering in-home services for a fee to a segment of the community.
How does a bank find a specialty? It requires a strategic look at what the bank is already particularly good at doing, and at what the specific markets in their footprint particularly like. It takes a deep dive into both the bank customer base and the local communities. Often the research produces specialization options that the bank was not aware were popular. Sometimes the bank’s choice turns out not to be the popular item they thought. The best news is that once a bank gets beyond the angst of moving from an “everything bank” to a bank with two to four truly stand out specialties, there are many options.
“Regulatory Relief” needs to include some new perspectives by regulators that lands authoritatively on the ears of Boards and auditors alike that banking needs risk to survive. Regulators should demand innovation (not prevent innovation) especially for community banks to protect them from being drowned in the rising tides of technology.