Building a Brutally Focused Strategy

Community Banking Survival Guide

Second article in a series of four

The first article of this series, “Community Banking Survival Guide: Remaining Relevant – and Winning – in a Changing World”, made the case that well-managed community banks can not only survive, but enjoy historical prosperity, despite many challenges – primarily, intense competition ranging from deep-pocketed large banks to tax-advantaged credit unions to nimble and highly-niched fintechs.   

The opportunities for these well-managed banks are two-fold:

• The customers that have the most “money in motion” actually want what community banks have to offer – a mix of physical and digital channels, superior customer experience, and personal relationships defined by higher levels of expertise, advice, and trust.
• The ability to cherry-pick some of the best customers and employees from other banks, who have been dislocated by market disruptions resulting from the impending economic downturn (i.e., credit problems at poorly managed banks) and typical fall-out from ongoing M&A

The operative phrase here, of course, is “well-managed.” The banks that leverage the opportunities available will have to be well-positioned and able to execute superbly on three dimensions:

1. Develop and execute a brutally focused strategy,
2. Win the battle for the best talent in the market, and
3. Identify the “money in motion” in your market and capture more than your share

 In this article, we will drill down into the first of these.

Economics of Scarcity

The most obvious outcome of increased competition is compression of the traditional bread and butter of community bank profitability – net interest margin. In an industry already flush with capital, tax-reform-driven retained earnings and lower regulatory capital levels have unleashed too much capital chasing too few loans, putting pressure on loan yields. Large banks, with loosened liquidity requirements and online platforms with national reach, along with ever-expanding credit unions, are driving up deposit betas.   

Managing the squeeze on profitability and growing at the same time suggest the following requirements for community banks

• Growing non-interest expense more slowly than overall growth
• Growing non-interest income to keep pace with overall growth
• Fully leveraging existing capabilities to attract, expand, and retain relationships with customers who value what you already have
• Managing capital and credit to be ready to take advantage of market disruptions caused by M&A and the inevitable economic downturn

Implicit in the above is managing and allocating scarce resources to the opportunities with the greatest potential, optimizing what you already have, doing more with less. The intensity of competition is going to reward those who make intelligent bets with their finite capital, talent, and time, and punish those who don’t.  Room for unforced errors is shrinking.

Strategy as a Living, Breathing Tool vs. Dust-Gathering Document

Gone are the days when strategy is a tri-annual exercise for the regulators and the board to justify what you’re already doing.  When a two-day retreat is followed by a boilerplate written strategic plan that is promptly put on a shelf to gather dust.  When SWOT analysis is based on the opinions of those sitting in the room rather than on the realities of the market.

A living strategy that informs and guides that decisions and actions throughout the organization, day in and out, will require

• Asking the right questions
• Basing answers on the facts
• Defining your “secret sauce”

Ask the Right Questions

The challenge for many community banks is that they continue, though many adamantly deny it, to try to be everything for everybody. And as the old adage goes, if you try to be everything for everybody, you end up being nothing meaningful to anybody.

To increase focus and to improve the precision of resources allocations, the placing of bets with cash, people, and time, these simple but critical questions need to be answered at the next strategic planning retreat:

• For whom are we trying to do what?
• Who should bank with us? Why? 
• What do we do that other guys – our competitors – don’t?
• What unmet needs can we address better than competitors on a sustainable and profitable basis?
• How will the world change in the next 5-10 years? What role can, should we be playing?
• Most importantly, if we do this, what is it that we are not going to do?

Ultimately, it all boils down to asking and answering, “Where is the intersection between our customer needs, our strengths, and our competitors’ weaknesses, and how is that likely to change in the future?”

Base Answers on the Facts

As mentioned above, it is not atypical for SWOT analysis and other planning discussion to be based on the opinions of the executives making plans rather than on the realities of the market. A Pragmatic Marketing phrase that I love is, “Your opinion, while interesting, is irrelevant.”  An exercise in frustration and futility is when bank boards and managers debate their thoughts and beliefs about an issue, instead of referencing a rich set of readily available data and facts.  

As an example, a reality of retail banking is that customer switching costs are high – i.e., it’s a pain for customers to change banks. Typically, customers don’t change banks as the result of the external stimulus of ads and promotions. (Yet at many banks, marketing programs are developed to attract these hard-to-move customers using promotions based on what's worked in the past, opinions about what another industry is doing, or deep-held personal beliefs about what makes customers tick.) Instead, customers most often make decisions to leave their banks or buy additional products, at which point they enters the pool of what I call “money in motion.”  So rather than trying to wrench customers from their current banks, the trick is to get more than your share of the money that’s already moving.

A critical first step, then, to any strategy discussion is to identify the money in motion using facts and data about your customers and the market, about who’s buying what and when, about how they feel and why, about what you’re doing and what your competitors are doing.

Assemble the facts and hard data to answer these questions: 

• How much current customer share of wallet you have – and don’t have? 
• When and why are your customers doing business with competitors?
• In the last year, what products that you offer have been bought from competitors? Why? How could you get more of that business?
• What is your attrition, by product, by household? Why do customers leave your bank? How much is preventable?

 Define Your “Secret Sauce”

At the Partnership for Banking Excellence, Alex Sheshunoff and I have conducted an analysis of the drivers of performance among the top quintile of community banks ($500M-$10B) in the 21st Century ranked by average pre-tax ROA. We have discovered that while there are many paths to high performance (e.g., efficiency ratios range from 35% to 75%), a common characteristic of most of the high performers is the focus on a particular niche or set of segments. As one of our Partnership participants put it, “We all have a ‘secret sauce,’ something that competitors can’t do or don’t want to do because it’s too hard.”

Those niches can be defined by in several ways.

Customer segments – Live Oak with its strategy of targeting on unique business segments – e.g., veterinarians, independent pharmacies – is the poster child for this approach. Though the list of potential segments is limitless, ones targeted by high-performing community banks are as varied as property managers, social services organizations, trucking firms, chicken farmers, women entrepreneurs, students, and visiting nurses’ associations.  

Product – Bank of Hemet, with its focus on financing investors in real estate leased by national “non-Amazonable” chains, uses this product strategy. Other successful product-focused strategies include SBA lending, accounts receivable financing, indirect auto lending, specialty machine financing, and bank stock loans. Note that product focus often overlaps with focus on particular customer segments.

Geography – Central Bank in Provo and Alpine Bank on the Western slopes of Colorado are great examples of the classic community bank strategy of dominating the communities they serve, with commanding market shares and reputations of being for, of, and by the community that serve as effective barriers to entry.

There are two keys here:

1. The definition of “community” in community banking has expanded beyond the idea of community as a geographic region into one where community is a group of customers with a common set of interests, where a bank with dedicated focus and expertise can develop a relationship with customers that enables a customer experience that is faster, easier, and delivers certainty and peace of mind. 
2. The “secret” in the sauce is not the segment per se (i.e., indirect auto may be right for some and wrong for others) but instead starting with the selection of the right segment for that bank based on size, growth potential, needs, and bank strengths vs. competitor weaknesses, and then tailoring services and risk management and deepening expertise to meet segment needs in a unique and hard-to-replicate manner. 

Narrow Your Focus to Win

A well-known military precept is to concentrate optimal force against your opponent’s weakest point. So it is with community banking. By narrowing its strategic focus, the well-managed community bank will put its maximum resources against the best opportunities and in so doing enable it to

• Provide the higher-level of expertise and advice your target customers trust and value.
• Identify the products, channels, interaction, and communication those customers demand; design the processes to fulfill; and invest in the technology to deliver.
• Articulate the bank’s purpose and reason in a way that will attract the top talent in the market, as that higher purpose is something the best employees crave.

Instead of trying to be everything to everyone in the geographically defined markets they serve, the successful community bank will view their “community” as a group or groups of customers whose needs they can meet better than competitors on a profitable and sustainable basis.

Rockwell Clancy is the Owner of Rockwell Clancy & Associates, Partner with the Partnership for Banking Excellence, and Board Member of the Enclave for Entrepreneurs. Available for advising bank management teams and boards. 

847-404-8783       rclancy@aol.com       www.linkedin.com/in/rockwellclancy