How do you define a successful community bank?
For some, it is a matter of size. For others, profitability and investor returns hold sway.
American Banker recently discussed this issue with a panel of community bankers at its annual Retail Banking conference in Miami. The panel was a diverse group: Jay Pelham, the president of TotalBank, a Miami institution owned by Banco Popular Espanol in Spain; Scott Goodman, the president of Enterprise Bank, a unit of publicly traded Enterprise Financial in St. Louis; and Deborah Cole, president and CEO of Citizens Savings Bank, a black-owned institution in Nashville, Tenn.
The bankers discussed the state of community banking, consolidation trends and the tug-of-war between size and specialization. Here is part 1 of an edited transcript; part 2 will follow Wednesday.
What is your view of community banking?
JAY PELHAM: You’re smaller than the big guys so you have to be a niche player or you’re not going to survive. That’s the way I see it. You’re either a scale player or a niche player in this industry now.
SCOTT GOODMAN: The definition of a community bank depends on who you are and your perspective. If you’re an investment banker or an investor, a community bank has $10 billion or less [in assets]. If you’re a client or an associate, to me it’s banks that are heavily owned in their markets and are run by people with deep ties to those markets and really serve the businesses and individuals in those communities.
DEBORAH COLE: I think community banking is still the best game in town because we service those individual customers. I agree with Jay that we have to have a niche. That is so important to take part in being as successful as we can.
Which niches are best suited for community banks, and which do you focus on?
PELHAM: I think you have to play to your strengths. I like to think of us as the 305 [area code] bank. We hire people who have been in this market a long time. We write all of our loan policies here locally. We bring knowledge, expertise and fast decision-making that maybe [is lacking with] someone who is headquartered somewhere else or has policies written somewhere else.
If I were starting a bank from scratch I might take a difference approach. But I think this works for us.
GOODMAN: We grew heavily through the era where there was a lot of consolidation, primarily in St. Louis and Kansas City … by taking a lot of talent out of the larger platforms as they came in and bought the local banks. Our niche is privately held business, and I think we’ve found that the larger banks have had a little more difficulty providing good, stable service to small and midsize businesses. So our value proposition has been to provide the expertise and technology that [customers] can find in a larger bank but delivering it in a platform that provides access to decision-makers and a quick turnaround.
We are also in some niche businesses, which in a lot of ways brings some of the expertise that the big banks have down-market [to clients] they’re not interested in serving. For instance, we offer a leveraged lending product to boutique private-equity firms. That’s a product that large banks tend to offer [larger] clients.
PELHAM: In terms of recruiting talent from larger banks, both at my current bank and the previous one, we referred to ourselves as large-bank refugees.
COLE: We’re based in the city that has now been labeled the “it” city. Nashville has been growing tremendously with the number of families coming in on a monthly basis. When I first went into banking the 1970s we had five banks in the city. Now we have 35. Our niche is serving religious organizations. We then work our consumer base through those. That’s how we’ve been able to survive.
As a community bank, you still have to provide the necessary tools for the customers … plus the service. In addition, we know that it costs us more compared to big banks to do that. But we have to key on the delivery channel and maintaining our true focus on the customer.
Is there a particular size a community bank needs to be to survive? Is there another metric to consider?
COLE: I don’t know if there’s a magic number. You hear $250 million floating out there for smaller banks. But we also have to deal with the costs to maintain that sort of size, particularly the compliance cost that is levied upon the banks. We have to be as profitable as we can be for the size that we are. And it depends on each bank’s purpose. In the future, we have other things we have to deal with, too.
GOODMAN: Hopefully regulatory issues are headed in a positive direction, but they’re still going to be there. Interest rates are heading up, but that’s not a panacea. It is as competitive as ever, and there is access to information that will preclude us from ever seeing a 4% spread environment. We’re a publicly traded institution. Our returns are compared to all other publicly traded banks in our markets. Our ownership expects top-quartile performance, so scale is critical.
PELHAM: I think the overhead from a compliance standpoint is a larger burden on a smaller bank. I think the banks that are under a billion [dollars in assets] have more overhead expense relative to their overall revenue size. You can only charge market rates for your products, so I think you have to be very thoughtful about your cost structure.
We went on a very bold initiative at the end of 2015 to completely revamp our delivery model from a staffing standpoint. Instead of looking at just efficiency, we looked at it from an effectiveness standpoint, too. We eliminated some layers of management. We tightened up the size of the staff we had in each branch. We also significantly increased authorities and decision-making ability. That’s a cultural change. You can’t just flip a switch. I think it’s the right combination if you’re looking at your human costs, your branch costs and your real estate costs for ways to be effective.
How is that working at TotalBank?
PELHAM: Our income was up 50% last year, and it should be up another 50% this year.
This will all drive more consolidation, right?
PELHAM: There will be different drivers. There’s the traditional situation where a bank is in a market already, and it acquires someone in the same market and gets some type of cost consolidation. I prefer to see things where two plus two equals five, where a company that’s really good with commercial [banking] acquires one that is really good with personal business to create something extra out of it all.
When you look at my branch network, I’m in long-term leases for almost all of my locations. You can decide to consolidate, but you’re still paying for all the real estate.
COLE: With banks with a billion [dollars in assets] and under not only do you have to look at the size but also their structure. If it’s a family-owned bank you have to look at the earnings pressure put on the institution. … And then there is a challenge for banks when it comes to the quality and quantity of talent. That becomes a challenge for banks with under a billion.
GOODMAN: Consolidation will continue to accelerate. The issue for a lot of the smaller banks is succession. The next generation either isn’t ready or isn’t interested in owning a bank. That is driving a lot of talks. As multiples have increased, those discussions have accelerated.