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Leverage culture as a competitive advantage

According to data recently compiled by Houston-based consulting firm PDR Corp, a strong positive culture can enhance employee engagement by 30 percent, resulting in up to a 19 percent increase in operating income and a 28 percent increase in earnings growth. In order to see these results, however, the company's leaders must be intentional about fostering a culture that fits their organizational goals and strategy. As margins shrink, customers grow more demanding, and competition creeps in from outside the industry, leveraging your bank's cultural potential could be the best tool you have to increase your competitive advantage. 

Driven in large part by Silicon Valley's tech start-ups, the predominant perception of "company culture" today consists of foosball tables, smoothie bars, and endless after-hours entertainment—but those are superficial perks, not culture. "Company culture is the intangible, but very real, feeling or vibe of an organization," explained Carver Smith, partner, Baker Tilly Search & Staffing. "It's what employees experience, which may or may not be in line with a company's stated values." That disconnect between what the company says it values and what employees experience occurs most often when leadership ignores their organization's culture. "Culture either happens by design or by default," explained Steve Jones, leadership coach and consultant and a keynote speaker at the recent WBA BOLT Leadership Summit. "You're either intentional—talking about it and growing and improving it—or it just happens." Odds are, a 'culture by default' is not optimized for your institution's goals. 

Benefits of Intentional Culture

One of the most important benefits of being intentional about your bank's culture is also a prerequisite for the success of that culture. When assessing their company culture, the most valuable question for management to ask isn't "do we have a great culture?" but rather "does our culture fit our strategy?". They must be aligned in order for either one to be successful. "Culture eats strategy for lunch," said Mark Mohr, president/CEO, First Bank Financial Centre, Oconomowoc. "We can't successfully execute our strategy without a positive culture." Doug Gordon, president and CEO, WaterStone Bank, Wauwatosa, agreed. "You might be a great CEO in strategy, but you can't create the culture necessary to execute those strategies from behind a desk," he said. Both FBFC and WaterStone Bank have been awarded a "Top Workplace" by the Milwaukee Journal Sentinel for nine consecutive years, a feat only 18 companies have achieved. The Journal Sentinel compiles the list based on employee surveys, so this terrific achievement demonstrates the positive impact of culture at each institution. 

Related to achieving strategic goals, another benefit of a healthy, well-aligned company culture is a measurable positive impact on profitability. That comes, at least in part, from employees feeling empowered to push one another to perform better. "In really strong cultures, psychological safety allows employees to hold one another accountable to meet the standards of the organization," said Jones. "That's when companies really thrive." Gordon says he considers the bank's 50 percent efficiency ratio—which measures better than their peers—a sign that they're heading in the right direction. "Profitability and the success of the bank are an indicator that our culture is working," he explained, noting that WaterStone's leadership make sure employees understand they are the bank's priority. "We stress that employees come first, customers come second, and shareholders third," Gordon continued. "If we have competent, invested employees, they'll provide excellent customer service, which then leads to profits for shareholders."

Finally, culture can be a powerful tool in your HR department's arsenal with respect to recruitment and retention of top-performers. "Culture is everything when it comes to attracting and retaining quality professionals," said Jones. The primary reason is because employees who enjoy their work are more likely to actively promote opportunities to their networks. "A great culture creates employee advocacy," said Mohr. "Much of our recruiting is referrals from existing employees, and to me that's a high compliment." The key is for bank management to be strategic about forming their culture based on the kind of employee the bank needs in order to meet its goals. "Banks need to play to their strengths and determine what type of personality they really need," Smith advised. "They should ask themselves, 'do we have the culture that would appeal to our target employee?'." When a company achieves alignment between culture and the type of professionals it needs to recruit, that's where turnover drops and engagement rises, and profits along with it. 

When leveraging culture as a recruitment tool, it's important for management to follow through—that is, hire for culture as much as use it to attract quality candidates. "People want to work with people they get along with, so you should hire people who fit your culture," said Gordon. "When we're recruiting, we're looking for the most qualified candidate who fits, not necessarily just the most qualified."

Designing Your Culture (Action Steps)

How to design culture

Intentionally designing your bank's culture is a simple undertaking, but it is far from easy. "You have to put the experience before the brand," said Smith.* "You can't just say 'we're X' and have it be true. People have to experience it." To achieve that, Jones recommends creating a culture plan, just like you would a strategic plan, and following it just as diligently. "If you focus on the culture, the profits will follow after," he said. While each institution's plan will differ, there are three basic actions for executing it:

1: Lead from the top
"Listen, observe, and above all, lead by example," Smith advised. "Leaders drive the culture," Jones agreed. "Culture starts with the leaders' vision and everyone understanding that the leaders care about the people within the culture. After that, everyone down to the bottom has to understand that they own it every day." In order for any culture shift to happen, the people at the top must make it a daily priority. "I look at creating a culture where our people feel valued and can succeed as one of my most important jobs," said Mohr.

2: Communicate often
One of the most effective ways to identify and build an organizational culture is to open up communication channels. Both Gordon and Mohr say they meet with employees on a regular basis to solicit feedback and facilitate discussion specifically about the bank's culture. "I visit all of our branches at least once a month to hear what everyone has to say, because my vision might be different from what they see," said Gordon. Sometimes, a different vision can be a good thing. "So many good ideas have come from employee suggestions," Mohr said. "They're really participating in improvements we're making."

3: Adapt as needed 
"Culture is not static in any way, shape, or form," said Gordon. Whether it's reacting to exit interviews or making changes based on employee surveys, the bank's culture must be mutable. As part of that, management must be willing to make cultural adjustments as the workforce becomes more diverse. "Embrace all aspects of diversity and realize culture is not a one-size-fits-all solution," Smith advised. "Understand the differences in people as individuals, not as buckets to be 'dealt with' as is often the case with generational differences."

To make culture changes as smooth as possible, as the culture at the institution shifts, bank leadership must ensure that no employee feels left behind. "You might ostracize some staff unless you help them see the benefits of the changed culture," Smith cautioned. "Make them a part of the change management exercise, not a victim of it." He advises weighing the risk of losing those employees against the value the new culture will create. "Culture comes down to an organization's shared vision and value systems, language, and beliefs," said Jones. "It's ultimately about getting everyone to move in the same direction." 

Building Blocks of Culture
The experts interviewed for this article shared their thoughts on the key features of successful cultures. A few of the most common are: 

  • Clarity of Purpose – "This past year we updated our mission statement to 'make lives better' and that helps everyone understand our purpose." (Mohr)

  • Growth – "Personal growth is important, and we're very proud of the opportunities we present for people to advance within our organization. Employees value an organization that devotes resources to them." (Mohr)

  • Language – "Having a common language everyone understands is also important. If you go into a meeting and everyone's using acronyms and jargon you don't understand, you just become a wallflower." (Jones)

  • Psychological Safety – "People have to feel valued and safe to take risks knowing that failure won't define them." (Jones)

  • Teamwork – "Our tagline is 'one team, one vision.' We foster a culture of celebrating each other's successes rather than being jealous." (Gordon)

  • Ubiquity – "Those that do it successfully discuss it, recognize it, and celebrate it in everything that they do." (Smith)

  • Values – "Culture spreads when people are accountable to the values of the organization." (Jones)

* Smith credits his friend Will Ruch, owner of marketing firm Versant, with this idea.

Baker Tilly is a WBA Silver Associate Member.

By, Amber Seitz

The banking industry’s future is difficult to predict. Fintech, compliance, technology, branch strategy… The list of potential challenges and opportunities seems endless. Who will lead your bank through this shifting landscape of tomorrow?

Succession planning must be more than a list of names. It requires detailed planning and follow-through. “Our belief is that the purpose of long-term succession planning is to create an ideal plan for the future that takes into account all the things that are important to the bank, such as culture, philosophy, and goals,” said Executive Benefits Network (EBN) Managing Partner and Founder R. David Fritz, Jr. “The ultimate goal is to have a smooth and strong transition.” Integrated talent management and leadership development plans are essential for senior management to position key successors for success in their future roles—and to ensure they stay with the bank long enough to fill those shoes.

Common Challenges

Wisconsin banks—and the industry in general—face several challenges when it comes to successful succession planning. Foremost is the lack of young, incoming bankers. “The key challenge that banks face today is finding qualified, driven individuals that fit with the job and with the culture of the bank,” said Kevin Piette, COO at State Bank of Cross Plains and chair-elect of the 2017-2018 WBA BOLT Section Board. “You’re looking for a long-term fit so you can grow that talent.” According to Chief Operating Officer and Market President at Coulee Bank, La Crosse Mike Gargaro, current BOLT Chair, part of the solution to this problem is to do a better job of telling the story of community banking. “We need to get the stories of what community banking is about and what the jobs are like to our potential hires,” he said. “We need to be seen in the communities we serve.” This is especially important in rural parts of the state, where the pool of potential employees is much smaller. “It’s a challenge for community banks, especially in rural areas, to attract talent, but by continually advocating we can show how great our industry is,” said Piette.

Another challenge is the population differential in today’s workforce. “There’s a leadership gap, where you have Baby Boomers leaving the workforce and Millennials entering it,” explained AmyK Hutchens, founder of AmyK International, Inc. “Millennials are the fastest-promoted generation post-Industrial Revolution.” Not only are Millennials filling large shoes because there simply are not enough Gen X bankers to do so, but senior management often are unsure of how to manage these different generations in a way that encourages growth and retention.

Finally, effective succession and development planning must take place in tandem with exit strategy planning. “If the current CEO is not simultaneously preparing for his or her exit, then all the great planning and development you’ve done will get pushed down the line,” said Fritz. “The board needs to keep the CEO honest with the timeline that is agreed-upon.”

Identifying Candidates

The first step in integrating a development plan into the succession plan is to determine which key roles are likely to experience turnover in the near future (typically 3-5 years). Next, senior management must identify the individuals within the bank who may be tapped for a leadership role in the future. Note: this is different from having a “backup plan” in case of an emergency departure, though that is a useful exercise. “Know what would happen if one of your key people left suddenly,” Fritz advised. “That’s your immediate short-term succession plan. We call it the ‘lifeboat drill,’ and it’s different than the long-term plan.” A successful long-term plan requires identifying and developing key individuals.

The most fundamental quality to look for in future leaders is drive. “If you ask someone if they’re interested in leadership and they say ‘yes,’ you have to support their growth and possible advancement,” said Hutchens. “Give everyone who raises their hand to lead an opportunity to do so.” According to Piette, that “can-do attitude” is more important than trainable skills. “Most of the functional attributes you can train for, but it’s the proactivity and ability to communicate effectively that is the foundation of leadership,” he said. In some cases, proactive employees are also seen as risk-takers, says Gargaro. “Watch for someone who’s willing to step outside their norm and look at problems differently to try to come up with results that work in favor of the bank and the bank’s customers,” he advised.

An effective development plan also differentiates between necessary personality traits and trainable skills. “Good leadership is both innate and learned,” said Piette. “You need to have an inquisitive and positive personality which provides the foundation for the desire to learn and develop your leadership.” Some individuals will have a natural ability to lead, but that doesn’t mean employees who don’t exhibit that trait should not be considered for development. “There is a little bit of truth to the ‘born leader’ idea,” said Gargaro. “On the other hand, attending leadership training can bring out abilities within yourself that hadn’t been exposed previously.”

Finally, the development plan should identify the bank’s appetite for hiring outsiders versus promoting from within. Statistically, home-grown talent leads to better results. “One thing we find is that companies that promote from within often outperform those that recruit outsiders,” said Fritz. “The more you can bring people in and develop them, the better the outcome is.” In addition, a strategy centered around growing from within is more feasible for smaller and/or rural institutions. “Smaller community banks don’t always have the same opportunities,” said Gargaro. “When you can promote from within, strive to do that. They’re already in your culture and understand what your bank is about.”

However, banks should not adhere to a “grow from within” strategy if the talent just isn’t there. Sometimes recruiting outside talent is the best path forward. “I’m a firm believer that you look for the right person for a particular job,” said Piette. “Hiring from the outside can be an important opportunity for community banks because you bring in the experience and talent necessary to run your bank in the 21st century. You’re growing the people you have internally while infusing the bank with new talent to make the entire organization better.”

Development Plan Essentials

Every bank succession plan should incorporate a leadership development strategy, and that strategy should meet three essential criteria: strategic alignment, formalization, and retention. Of the three, the most critical is alignment with the bank’s overall strategic plan. “A well-designed strategic plan identifies where you want to go and what talent and skills you’ll need to get there,” Hutchens explained. “The key is alignment.” That said, no strategy should be set in stone. Allow for adjustments as circumstances change. "Adjust the plan when you have staff turnover," Gargaro advised. "You may hire someone who turns out to be a real high-performer, or maybe someone wants a career path change."

The second essential criteria for an effective leadership development plan is that it be formalized—that is, written down. “If you don’t have an organized development program, it becomes something you make a mental note of in the middle of the night,” said Fritz. “If you have it in writing and need to give monthly or quarterly reports to the board about it, you’re more likely to be actually following those plans.” The exact steps in each plan should be customized to the individual employee and their stated goals. “Find out what areas they’re interested in and create a leadership development pipeline for them,” Hutchens recommended. The goal is to close the gap between the skills they have and the skills they will need in order to be successful in a future role.

Finally, each leadership development plan must include a retention strategy, and it must be customized for each high-potential employee. “Most banks have Baby Boomers, Gen Xers, and Millennials all in the same bank, and they all have different ideas of what’s important from a compensation and retention standpoint,” said Fritz. For example, many institutions have traditional hierarchical structures where employees climb up the rungs of a ladder as they advance—this structure doesn’t appeal to every generation. “If you want to keep Millennials, turn the ladder horizontal,” Hutchens advised. “Each rung is no longer a raise and a new title, but a new project that tangibly shows them you’re investing in them.” One retention strategy that works for nearly every employee: communication. “Open and honest communication with the individual you see potential in is critical,” said Gargaro. “They need to know they’re being considered for a future leadership position.”

The need for generationally customized retention tactics directly correlates with the top challenge banks face with recruitment. “Many Millennials coming up are looking for professions other than banking,” said Piette. “We need to continually share the reasons why banking can be a fun and great, rewarding career opportunity for individuals coming out of college. That’s the heart of our industry moving forward: attracting and retaining that talent.”

When creating your bank’s leadership development plan, focus on the desired end result. “At the end of the day, leadership development and investment is about enhancing and supporting the way your people think, problem-solve, and influence others,” said Hutchens. “Change the thinking, and you’ll change the behavior and change the results.”

Seitz is WBA operations manager – senior writer.

EBN is a WBA Bronze Associate Member.

By, Ally Bates

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”

-Bill Gates

“Disruption” is one of the biggest buzzwords in banking today. Many within the industry associate it with various technological developments and the fintech companies selling them. True disruption, however, goes much deeper. Even more importantly: traditional banks are not doomed to watch helplessly as the industry they know disappears. In fact, by focusing on their customers’ wants and needs—something Wisconsin’s banks have always excelled at—community banks can continue to thrive in a disruptive world.

Defining “Disruption”

According to JP Nicols, managing director of FinTech Forge, disruption in banking occurs on three layers. The first is the experiential layer, which includes everything that directly impacts consumers, such as mobile banking and P2P payments. Second is the tactical layer, which is the digital connective tissue between customer experience and the bank’s core operations. Disruption in this layer includes technologies like open API and process reengineering. Finally, the strategic layer of disruption is home to developments such as artificial intelligence and blockchain. “Most of the disruption we have experienced so far has been in the experience layer,” Nicols said, but noted that the other layers will have more impact in the future.

Despite its pervasiveness, disruption can be difficult to define. “It doesn’t mean something new is launched and all the current players disappear,” Nicols explained. “In this day and age, no industry is invulnerable to disruption,” he continued. “Our customers’ expectations are being reshaped by technology.” Ultimately, disruption can be defined as change driven by customer expectations.

Setting New Standards

Perhaps the biggest challenge disruption presents to the banking industry is that banks are no longer only competing against other financial institutions. Instead, non-bank retailers and fintech companies are transforming their customers’ expectations, particularly in mobile banking. “The digital products are the most discussed disruptors in the banking industry,” said Kyle Manny, CPA, CGMA, senior manager, financial services at Plante Moran. “Consumers are demanding well-developed mobile banking applications as a qualification for who they’re going to bank with.” Fintech companies have been quick to develop mobile applications to meet that demand, but while they are attractive to consumers, haven’t been able to achieve scale on their own in many cases. “Fintech companies are reimagining how banking should work in a mobile world,” said David DeFazio, partner at StrategyCorps. “When you pull back the curtain, among the most successful are the ones who have partnered with banks.” DeFazio will demonstrate some of that during his presentation at the upcoming WBA Bank Executives Conference.

Even more disruptive than the fintech companies that tend to attract the most attention from the industry, giant non-bank retailers are the true impetus behind rising standards for digital services. “Where we haven’t paid enough attention is to well-funded players from other industries, such as Amazon, Walmart, and Facebook,” said Nicols. “Financial services used to exist in a unique middle zone where all competitors looked the same, and we only competed with one another. Every single line on the balance sheet now has one or more non-bank competitors.” Again, this is particularly noticeable within consumers’ expectations for the mobile experience. “Companies like Facebook, Apple, Amazon, and Starbucks are changing the way that customers expect things to work in the mobile world,” DeFazio explained. “Looking outside of our industry to see how these non-bank retailers are setting new standards for mobile payments is very important.”

Disintermediation—another buzzword—is the ultimate side-effect of this non-bank disruption. “Banks have been a trusted third party in the middle of a value network for a long time, and if we don’t need that third party anymore, for example because Amazon now offers its own financing, that’s true disintermediation,” Nicols explained. In the days before mobile wallets, PayPal, Venmo, and other digital payments disruptors, banks could count on the fact that with every purchase, their customers would reach into their wallets and pull out a debit or credit card (or checkbook) with the bank’s name and logo on it. “We were always there,” said DeFazio. “Today, that is disappearing. Sometimes consumers even forget which credit cards are attached to their mobile wallets. These companies that are outside of banking are stealing the experience from banks.”

In today’s highly digital, interconnected world, consumers also cause disruption directly. “Customers these days are far more researched than they’ve ever been before,” Manny explained. “Even within small communities, they’re walking into a business having already done research. Many have made their purchase decision before they walk in.” That includes for financial products and services, such as mortgage loans, which reduces the banking industry’s monopoly on customer relationships. For example, rather than automatically going with the bank and product recommended by their realtor, a potential customer may shop around and get a lower rate with Rocket Mortgage from QuickenLoans.

Finally, today’s regulatory environment is also capable of disrupting bank operations. “People don’t think of the regulatory environment as being a disruptor,” said Manny, explaining that some banks have chosen to exit small lines of business because of the perception of the regulatory compliance risks they present. “People who specialize in compliance and consumer protection are very difficult to attract or retain,” he said. “Companies may need to invest significant resources in employees or consultants to ensure they remain compliant, and it might not be cost-beneficial to do it.”

Keeping Up

So, what can Wisconsin banks do to keep up with today’s rapid pace of change and adapt to disruption? The first thing is to shift your mindset; see disruption as an opportunity, rather than a threat. “The natural reaction is to see disruption as a problem,” said Manny. However, he pointed out that banks have more data on their customers’ purchase habits than any vendor out there, enabling them to hyper-personalize opportunities and options for their customers. “Even if the customer gets a loan through another entity, typically the bank can see those payment transactions,” Manny explained. “If banks can find ways to better target new products and services to their customers, they can take away some of the market share that’s going to nontraditional competitors whereby they can ensure consumers understand their value proposition that is likely very different.”

Creating and communicating value within the customer experience is key. “Be the keeper of the experience,” DeFazio advised. “Try to understand and exceed the expectations of your customers.” Bank staff also need to know how to communicate that value to current and potential customers. “You have customers who are more well-versed in the competitive landscape than your front-line employees,” said Manny. “That can be a challenge if your front-line employees don’t know how to effectively differentiate your products to your customers. Make sure you understand your service model so you can empower your front-line employees to be able to react to those issues.”

It is also important for bank management to understand that, for most community institutions, they will not be able to keep up on their own. “Be willing to partner,” Nicols advised. “Banks are used to building things in-house and testing them for years before releasing them. That’s not going to be sustainable.” For many institutions, the solution will be to rely on the bank’s core provider or current technology vendor. “Form strong relationships with your core providers and other vendors,” said DeFazio. “In some cases, you’ll need to challenge your vendors to close the gap.” Some banks may also find value in partnering with a non-bank company to offer digital products/services. “Identify partners and consider joint ventures or other arrangements where you can dip your toe in the water to provide products or services in new ways,” Manny suggested. “I would encourage banks to listen and be open to those opportunities as they arise.”

Finally, the key to successful adaptation in a disruptive world is for bank leaders to become more aware of the new reality. “Our biggest challenge is that bankers understand there are disruptions happening around us, but they’re not studying them,” said DeFazio. “I challenge bank leaders to be more aware.” Attending this year’s Bank Executives Conference is one way for bank management to expand their knowledge of industry disruptors. Another is to experiment with various mobile applications and products as a consumer. “Community bank leaders need a better understanding of the competitive landscape outside of their communities,” Manny advised. “Know who your competitors are.”

The one thing banks must not do if they are to survive: nothing. “The default is to keep doing what you’ve always done, since you’re good at it,” said Nicols. “But, your plan only works well until it doesn’t. Pay attention to what’s relevant to your customers so you can continue to deliver value. The way your customers perceive value is the most important thing that’s changing.” 

Seitz is WBA operations manager – senior writer.

Plante Moran is a WBA Silver Associate Member.

By, Ally Bates

Tactical allocation of capital is an integral component of success for every financial institution, so capital planning and strategic planning should be closely tied. Just as bank management and the board must regularly review their institution's strategic plan and make adjustments, an effective capital plan should be reviewed and recalibrated at least annually. That assessment has never been more critical, as the financial services industry approaches what could be a tumultuous period. "The full rollout of the capital conservation buffer under Basel III, CECL, and a potentially completely different economic cycle will be hitting at about the same time, so banks need to be considering and planning for that now," said Nick Hahn, director of risk advisory services at RSM US LLP. "It's a bit of a perfect storm." To adequately prepare, bank management and directors should consider the following five key factors as they look back at 2017 and forward to 2018 during the capital planning process: 

1: Strategy
The bank's strategic plan is the most significant influence on the capital plan, since different strategic goals require different capital strategies. According to Jon Bruss, managing principal and CEO of Fortress Partners Capital Management, there are several situations common to our industry that drive the need for capital: growth in assets exceeding the ability of the bank to retain earnings to support the growth, asset quality problems wiping out a large block of capital, or preparation for an acquisition as a buyer are among them. "There is no one solution that works for all banks in all situations," he said. Banks dealing with rapid growth in assets driven primarily by loan growth can fund a capital shortfall with common equity or with debt issued by a bank's holding company. "Any bank that's in the market for an acquisition and doesn't have a quote symbol for its stock is going to need to make that purchase for cash," Bruss explained. There are several options bank leadership should consider for sourcing those funds. "Cash at the holding company level can be sourced with debt raised via an investment banking firm, lent by a correspondent bank or by an offering in the communities served by the bank, each approach carrying a different cost," Bruss advised. Common equity can be used to raise cash to fund that purchase, "by selling shares to members of the community or via an investment banker-assisted community offering," he continued. "That requires thoughtful planning today, because tomorrow you may be an acquirer." 

2: Unexpected Occurrences
In addition to a yearly review, sudden, unplanned-for incidences should trigger a reassessment of the bank's capital plan. "If there's an unexpected loan charge-off that impacts your capital, for example, review your plan again then," said Lee Christensen, partner, financial institutions practice at Wipfli. "That way you know if you're on track or if you need to change the way you operate in order to get back on track." A cybersecurity breach or unanticipated findings during ALM routines and/or liquidity forecasting should also trigger a review. 

3: Competition
Today's financial services industry is highly competitive, and banks need to win against more than just their peers—credit unions, farm credit lenders, and even financial technology companies are all vying for the same customers. That can lead to dangerous choices. "You can sacrifice on term, price, or structure, and for many institutions pricing has reached the bottom, so now they're making decisions to sacrifice on term or credit risk monitoring controls, which ultimately increases credit risk," Hahn explained. "Financial institutions need to be very aware of the role competition in the market has played and how that could impact credit losses going forward and, ultimately, capital." To address this risk, Hahn recommends bank leadership maintain a thorough understanding of how potential losses could impact the balance sheet. "If we see any upticks in losses, you need to understand what's driving it and know if you need to extrapolate or do broader analysis of the portfolio in general to see if it will spread," he advised. 

4: Legislation and Regulation
Looking forward to 2018 and beyond, there are several legislative and/or regulatory factors to consider when doing capital planning. First is tax reform, which Christensen says will be a big event for banks if it comes to fruition because many banks currently hold a large amount of tax-deferred assets on their books. If Congress follows through on the plan to drop the tax rate from 34 percent to 20 percent, those assets will need to be revalued. "That will be a good thing in the long run, but it may have a negative impact in year one because the offset goes into expense, which ultimately flows into capital," Christensen explained.

Another factor to consider is Basel III's phase-in. In mid-October, the Basel Committee on Banking Supervision announced a plan to break the year-long deadlock that has delayed the capital standards' implementation: setting capital floors at 72.5 percent. The measure has yet to be approved by the central bank governors and supervisors on the Basel Committee's oversight body. 

Finally, the regulatory factor looming largest over the industry: CECL. "In the year of adoption, banks will be allowed to look at their allowance as it's calculated under the old and new methods and the difference will be a one-time charge to equity," said Christensen. "We'd recommend banks preserve capital for that hit, rather than maintaining excessive allowance." However, there is still some uncertainty, as banks seem to be waiting for guidance from regulators on how to build their new models, but the regulators seem to be waiting to offer guidance until they see the models. 

5: Economic Cycle
Banks should review their capital plan more frequently during times of economic turbulence or market instability, and the next period of such agitation is on the horizon. "We're likely closer to the next recession than we are to the last one," Hahn declared. "Many institutions are making the loans that will be their next losses right now." One sector in particular where the coming downturn is apparent is in the highly cyclical agri-business arena; while not yet as severe as some previous dips, ag credits are becoming more stressed. "If and when charge-offs become necessary, the banks need to have the capital available," said Christensen. "We've gone five or six years with very minimal charge-offs. The economy has been on a relatively long upturn during that period, but it doesn't feel like it because we haven't seen the sharp incline that we had in the early 2000s."

Take Action

With these factors in mind, bank management and directors should consider the following action steps (all suggested by one or more of the experts interviewed for this article) to ensure a comprehensive, effective review of their capital plan:

  • Refer back to your original capital plan and your projections. Compare that data with what your current reports tell you.
  • Closely evaluate the 30- and 60-day reports to see if there is potential for those to extend into the 90-day past due report.
  • Adjust your approach to stress testing. Relying on probability of default—looking at what causes borrowers to default—isn't as valuable from a capital planning perspective as using loss-given testing to anticipate the bank's exposure if certain loans go bad. 
  • Understand the capital sources available to your bank in its current state and also in anticipated future states. In other words, verify that your capital plan is realistic. If your institution isn't attractive to capital markets at the time when you need capital the most, know what your alternative source of funding will be. Leveraging your third-party relationships is an important component in maintaining an accurate understanding of today's capital markets.
  • Avoid a siloed approach to reviewing capital. Other risk management exercises and models, including interest rate risk and liquidity, should all impact your capital planning process.
  • Adhere to your loan policies. Amid fierce competition and an economic expansion, it is essential for bank leadership to enforce loyalty to the bank's policies in order to prevent taking on excessive risk.

Capital planning is one of the executive team and board's most important duties, so frequent assessment and adjustment of the plan is not only a good practice from a risk management perspective, but also from a strategic perspective. 

Fortress Partners Capital Management is a WBA Associate Member. 
RSM US LLP is a WBA Gold Associate Member.
Wipfli is a WBA Silver Associate Member. 

By, Amber Seitz

As the Federal Reserve executes its strategy to slowly raise rates, net-interest margins will continue to compress. That compression makes non-interest income a key element in bank success as the primary source of earnings growth. Wisconsin banks must explore practical strategies to increase non-interest income without alienating customers or experiencing regulatory compliance violations. 

Pursue Fee Income

Since fee income is a common source of non-interest income, it is a popular first choice for many institutions. The first step in this strategy is to evaluate the bank's current fee structure. "Banks should evaluate loan fees regularly, along with new product and services fees," said Kirsten Spira, banking attorney at Boardman and Clark, LLP. "Banks may determine that their fees are below the market rate, and even a slight adjustment could improve the bottom line without losing your customer base." It's also important for management to monitor the rate at which fees are actually collected. "Management might be surprised at how often fees are waived or not collected," said Spira. "In addition to loss of revenue, this collection issue can raise compliance concerns, as well, such as fair lending, et cetera."

Of course, it is difficult to introduce or raise fees without generating a negative reaction from customers. One way to do so is to use opt-ins, according to Shane Bauer, first vice president/security officer at Bankers' Bank, Madison. "Offer different flavors of a product starting with 'free' and then charge for incremental benefits the customer values," he suggested. One example would be to offer same-day ACH as a paid upgrade to the bank's already-existing payment options. "It's the bank equivalent of Economy Plus seating," Bauer explained.

Expand or Diversify Offerings

Another popular option to generate additional non-interest income is to expand or diversify the bank's current slate of product and/or service offerings. This strategy includes options ranging from fees generated from SBA loan packaging services or secondary market sales to wealth management and trust services, or even add-on products like credit insurance, GAP and debt protection. Because there are so many options, banks must take care to select line(s) of business that match up with their customers' needs and price sensitivity. "The most important thing is offering the right variety of properly priced products," Bauer advised. "Develop products based on a demonstrable need from customers, not just based on what everyone else is doing."

Banks considering this strategy face the key decision of whether to grow their product/service line organically or find an independent company to acquire. The choice between organic growth or acquisition depends on the bank's unique circumstances and how quickly they want to grow, according to Nate Zastrow, executive vice president and CFO, First Bank Financial Centre, Oconomowoc. "For example, we knew that wealth management was an area that needed fast growth, so we found a firm to acquire," he explained. "On the other hand, we grew our mortgage lending from within, over time." 

Another popular source of non-interest income is credit card lines of business. "Card programs offer banks a variety of ways to increase fee income, from interchange fees paid to an issuer for card transactions to profitable pricing in merchant services," said Bauer. Since cards—both on the issuing and merchant side—are volume businesses, Bauer advises banks to grow their card business with the right partner to strengthen relationships. 

Trust companies can also be a good source of non-interest income, but often take a long time to reach profitability when grown organically. If this is an area where the bank has identified opportunity, finding a trust company to purchase may be a better strategy than building from the ground up.

Evaluate the Risks

As with any new strategic direction, bank leadership must carefully evaluate the risks associated with their non-interest income strategy prior to implementing it. Predictably, regulatory compliance is of the highest concern for most institutions. "The current regulatory environment does not leave much room for creativity," said Spira. "Leadership should consider the regulators and make sure the strategic plan takes into account the legal restrictions on products and fees." She recommends that bank management work closely with compliance staff and the bank's attorneys to ensure any new fees, products or services are compliant. "State and federal regulators look closely at fees and add-on products, and the CFPB has a keen eye on strategies employed for the sale of add-on products," she added. 

Not having a well-defined strategy creates massive risk with any new business endeavor, and generating non-interest income is no exception. "It's important to be clear on what you want to accomplish and have a plan for getting there," said Bauer. "Banks need to identify value-added services that customers are willing to pay for and explore ways to offer them." Proper planning allows for flexibility, as well. First Bank Financial Centre has a rolling three- to five-year strategy that is evaluated and adjusted quarterly, according to Zastrow. "If something is working we go deeper and if something isn't we scratch it and move on," he said. Because no bank can be "everything to everyone," it is important for product and service offerings to be consistent with the bank's strategic plan in pricing and delivery. 

Identifying your customers' tolerance for new or higher fees, as well as their appetite for expanded products and services is another key risk. Spira pointed out that many non-bank competitors offer consumers a wide variety of digital services at no charge, and that has transformed bank customers' expectations. "The marketplace is increasingly competitive, consisting of bank and non-bank competitors, and a customer base that expects more for less… including electronic access to all banking products and services without additional fees," she said. One way to mitigate this risk is by placing customer satisfaction at the center. "Our strategy wasn't dollar-driven," Zastrow explained. "It was more focused on delivery channel and product base, building up a complete suite of products for our customers. From that, the non-interest income grew." 

Finally, verifying that the bank has the appropriate infrastructure and staff expertise to capably deliver the new product or service is also essential. "Having the expertise is key, and that's where having the right people comes in," Zastrow said. In order to successfully offer a new fee-generating product or service, the bank must either acquire the expertise needed or grow it over time, according to Bauer. "The bank needs to be clear on what it is willing to devote in time and resources and be realistic in its expectations," he said. "Success will come from the right planning and execution, including tasking the right team internally and contracting with the right vendors where needed."

Bankers' Bank and Boardman and Clark are WBA Gold Associate Members. 

By, Amber Seitz

The accelerated pace of change in today's banking industry means that every institution must adapt in order to survive. However, while new customer demands—especially for technology products and services—are transforming the industry as a whole, the pressure points vary by market region, consumer demographics and customer behaviors. For this reason, bank leadership must look to their institution's strategic plan for guidance when determining which changes to implement. 

To Change or Not To Change?

While most institutions will find it necessary to evolve in order to thrive in today's new banking environment, every bank's market and goals are unique. "While adapting to change is critical for every bank, the pace and extent to which the bank changes should be a function of local market and strategy," said Lee Wetherington, director of strategic insight at Jack Henry & Associates. "There's not one right answer."

"Certain banks have established niches or operate in communities which are relatively insulated from many of the changes impacting the industry," explained Kyle Manny, CPA, CGMA, senior manager, financial services at Plante Moran. "Those in communities with consumers who demand innovative products and services will need to innovate in order to maintain and expand their market share." 

Different institutions also have different thresholds for risk which will impact the speed and degree of their technology changes; it's not always about keeping up with the bank up the street. "Your technology can be on the bleeding edge, but if your risk management isn't, that could be a problem," cautioned Ken Schweiger, COO at Community First Bank, Boscobel. "Many times organizations make changes for competitive reasons, and while that is often appropriate, it can also lead to strategic and other types of risk that the institution is not prepared to handle."

Like with any other high-impact decision, the board and bank management should look to their institution's overall strategic plan when making strategic technology decisions in order to ensure the new technology product or service fits holistically. "Having and updating a strategic plan is absolutely critical to determining which investments in technology should be made," said Manny. "Without that plan it is extremely difficult because banks are thrown new opportunities all the time." Wetherington cautions against the natural tendency to haphazardly go after those "shiny objects" rather than pursue innovations that fit the bank's overall strategy. "Begin with strategy," he said. "Never change for change's sake."

An initial assessment of the bank's strategic goals is the best starting point for any technology planning. "You have to decide what you want to achieve from an organizational standpoint," Schweiger advised. "Then take an inventory of where you're at and decide if you need to fill in holes in your product offerings, or if you want to advance on the curve with a market-leading product." Then, management and the board can begin evaluating specific opportunities. 

Evaluation Before Evolution

Using the strategic plan as a guide, the board and management must evaluate the wide array of technology investments available to financial institutions and select the few that will help the bank accomplish those strategic goals. That winnowing process can be difficult, and there are four elements to keep in mind during each evaluation: data, infrastructure, metrics and partnerships. 

Banks, in general, have all the high-quality data they need in order to determine which products and/or services will bring the highest return based on their current customer base. However, many institutions don't have the means or the inclination to fully leverage that information. "I recommend community banks harvest the data available to them in order to determine which investments will have the most meaningful impact to the retention and development of customer relationships," said Manny. 

It's also critical to factor in the bank's current technology capabilities based on its infrastructure. "Your technology infrastructure needs to be able to handle the new product or service, especially from a risk management perspective," said Schweiger. "A good strategic planning process should help ensure the infrastructure is in place to bring new products and services to market when the organization is ready to implement them."

Metrics are essential because they provide concrete, measurable goals and benchmarks for the success of the new offering, whether it's customer adoption rates, usage statistics or profit. "The best strategic objectives are measurable, so pursue technologies that will give you the results you're looking for," Wetherington advised. "Optimally, you want to be able to measure before and after implementation." 

As for partnerships, fintechs are no longer generating business models designed to replace banks. In fact, 60 percent of fintech venture capital goes to collaborative business models (rather than disruptive), according to Wetherington. "The real challenge is navigating the complexity of opportunity banks have in working with these new fintechs," he said. "The highest-performing banks will be those who best navigate, curate and leverage the opportunities and innovations offered by fintechs, and it starts with the strategic plan."

Smooth and Strategic

Strategic technology plan in place, the board then typically steps back and management must implement the new or updated product or service. Rolling out a new product, no matter how large or small, is a complex process. By focusing on small changes and relying on standard procedures, management can help ensure a smooth strategic change process. 

For most banks, the most appropriate strategy for change will not involve trailblazing, according to Manny. He described it using a baseball metaphor, recommending banks focus on singles rather than homeruns. "Incremental improvements to the community bank's value proposition will keep customers loyal and attract those from other institutions," Manny explained. "It's always been the community bank model to deliver excellent customer service over and above the latest technology." For this reason, even when implementing a large change—such as the launch of a new website or mobile app—focusing on smaller improvements is essential to stay ahead of the competition. "There are so many options that can differentiate you incrementally from direct competitors that the real challenge isn't putting in any one technology, it's sustaining a systematic effort to incrementally differentiate from your competitors," said Wetherington. "That's the key to long-term viability."

Putting a standard procedure in place will help manage change at the bank by ensuring that not only are all the essential operational steps followed, but also that all potential risks are recognized. "Since essentially all new product and service offerings require a several-step risk assessment today, having a well-defined process for product and service development is helpful," Schweiger explained. "Creating standard procedures and templates to facilitate things like model risk, vendor risk, and IT risk assessments as part of the product development cycle can be very helpful." 

Finally, no significant technology change at any institution will go smoothly without open and active communication between the bank and its regulator. "Be proactive in communicating your strategic plans with your regulators, especially your technology plans," Wetherington advised. "Familiarize yourself with your regulators' innovation posture and outreach. It's one thing to assume, but it's better to know."

By placing the strategic plan at the center of all technology changes, banks can evolve and thrive in today's tumultuous industry by investing in the right products for their customers and implementing those changes smoothly. Finding the right fit in technology is the only way community banks can keep up with the pace of change; technology is one more tool they can use to define their brand for their customers and their community. "There are so many options out there, the challenge is to figure out where to put your assets," said Schweiger. "You can't do everything in every market, but that doesn't matter because not every market requires the same products."

On Trend: What the Experts See
The three experts interviewed for this article shared their thoughts on top trends in the banking industry that you should pay attention to: 

"From an operational standpoint, it's very important for small community banks to consider developing a shared services arrangement," said Manny. "That could be the last frontier in cost-saving opportunities for banks."

"If we're going to stay relevant we have to make payments faster and more convenient for customers while still controlling risks," said Schweiger. "For mainstream consumers, we'll need to look more like a fintech solution than the traditional banking model."

"The advent of real-time payments will create opportunities to re-engineer existing products and services, and create new ones as well," said Wetherington. "Imagine how real-time money movement will enable banks to do things like onboard new accounts faster or offer instant loans."

Plante Moran is a WBA Silver Associate Member.

By, Amber Seitz

Maximizing the Effectiveness of Your Risk Management Practices

With two recent raises from the Federal Reserve and an anticipated two or three more on the way this year, plus an increase in regulatory scrutiny, interest rate risk should be top-of-mind for every financial institution. However, not all interest rate risk methodologies are created equal. Bank management must review their practices to ensure they incorporate interest rate risk management with the bank's overall strategic plan, address the most likely risks, and utilize their risk management tools for more than just satisfying regulatory requirements. 

Interest Rate Risk and the Strategic Plan

The first step in aligning the bank's interest rate risk practices with the strategic plan is to define an acceptable level of risk, typically dictated by the board of directors. Too little risk can be just as harmful to the bank (via lost profits) as too much risk. "Risk management isn't risk avoidance," said Marc Gall, vice president at BOK Financial Institution Advisors. "The bank takes risks all the time, so you're not trying to avoid it. You're trying to manage it." Bank management must determine whether they believe the risk profile they use accurately represents the bank's risk. "Many of the tools and approaches we've used in the past have been driven by regulatory requirements, not the bank's needs," explained Dave Koch, president and CEO of FARIN & Associates. "Reconcile the reports with what everyone actually believes the bank's risk position actually is."

The exact strategy for managing that risk will be different at every institution. "It's always important for bank managers to recognize the unique characteristics of their institution, business model, customer base and local market area," said Jeff Caughron, president and CEO of The Baker Group. "There's no cookie-cutter approach to interest rate risk strategies because every single balance sheet has its own unique considerations." Those include the mix of assets and liabilities and their rate sensitivity as well as any unusual instruments or off-balance sheet derivatives. The bottom line is: what works for one bank may not work for another, even within the same market. "There are so many nuances," said Gary J. Young, president & CEO of Young & Associates, Inc. "For every rule of thumb, there are exceptions." For example, while most Wisconsin banks will benefit from keeping interest rates as low as possible on deposit accounts, a small branch in a large market with few deposits may benefit from being extremely aggressive in raising rates. 

The Usual Suspects: Common Risks

Despite each bank needing a unique interest rate risk management strategy, they share many of the same risks. After all, the entire industry is operating under the same prolonged low-rate environment. One common risk associated with that environment is the speed at which different banks will respond to rising rates. Many risk models show all loan rates going up by the same amount at the same time, when in reality the change is much more varied. "One vulnerability is the disconnect between the reality of how loan rates move versus how they're being modeled," said Koch. At the time of this writing, the Fed has increased its rate by 75 bps, yet there has been virtually no change in non-maturity account rates. "The bank needs to establish a strategy with respect to what they're going to do when other banks raise their interest rates, because it's going to happen," said Young. "It's best to think those things through before the event occurs." 

Another, more widespread concern is the question of how funds will move between non-maturity accounts and certificates as rates rise. The ratio of non-maturity accounts to CDs is very different today than it was prior to the Great Recession and subsequent rate collapse. According to Young, the average bank's pre-recession ratio of CDs to NMAs was 60%/40%. Today, a ratio of 30%/70% is not uncommon because of the prolonged low cost of funds. That dramatic swing has caught the attention of regulators because it has massive potential for interest rate risk as the spread widens between CD rates and NMA rates and depositors begin moving their money. "Trying to get a good understanding of how price-sensitive those [deposit] accounts are and how long those funds will stay there is one of the biggest challenges today," said Gall. Of course, the entire situation is uncharted territory, so there are no guarantees. "A core deposit study will absolutely help you manage that deposit relationship better and understand how to best control those costs while still meeting the customers' needs," Koch advised. 

Another common risk is overlooking dynamic liquidity risk analysis, according to Caughron. Because liquidity has been ample for so long, banks must ensure they have the tools at their disposal to prepare for different conditions. "For banks to survive and thrive, they need solid liquidity risk tools at their disposal," said Caughron. In general, lack of effective tools can be a risk for any bank. "Proper analysis of institution-specific data is critical to effectively manage interest rate risk," Caughron explained, adding that common "old tools" like rate-sensitive GAP analysis aren't enough anymore. "These days we know that GAP is a starting point and doesn't tell the whole story," he said. "We have to ensure that we're doing deeper dives into analysis of the data characteristics of our banks."

Invalid or untested assumptions in the bank's interest rate risk models are another common area of concern. "The key thing is understanding your report model and the assumptions that go into it," said Gall. "These reports are not as cut-and-dried as financial statements." It's also important for bank management to understand the severity of risk associated with each assumption. "Nobody is going to get all of the assumptions right," Koch explained. "You need to understand which assumptions could kill you quickly so you know what you have to keep a close eye on. Accurate sensitivity testing is essential." Gall recommends running an alternate assumption scenario annually. These "what if?" scenario models can help the bank build out strategies and tactics for unlikely but highly impactful possibilities. 

Finally, a risk that is common throughout the industry is the need to adapt to change. "Demographic changes are having an impact on the behavior of depositors and borrowers," Caughron said. "Those strategies that make sense going forward may be quite different from what made sense in the past."

More Than Just a Regulatory Requirement

Perhaps the most impactful change that can be made to a bank's interest rate risk practices is to use them not only to satisfy regulatory requirements, but also to manage the bank holistically. "The banks that really use interest rate risk well are the ones who take it one step further and ask what that means about how they can improve the quality of the bank," said Young. "If interest rate risk is only ever about measuring where you are, it's not doing you much good. You're just meeting the regulatory requirement." To realize the full potential of the information gleaned during the interest rate risk management process, bank management must use that data to inform small tactical shifts that will improve the bank's performance in the future.

Costs associated with purchasing or upgrading risk management tools should be viewed as investments due to their ability to improve the bank's overall performance. "If you invest in the risk management function wisely, it will make you money," Koch assured. He also recommends placing all of the bank's risk management tools into once overall forecast, because interest rate risk, liquidity risk and credit risk are all interdependent. "That's why modeling that tries to isolate one set of risks is problematic," he explained. 

Embracing interest rate risk and ALCO management also helps the bank improve profitability because the reports can give bank management a glimpse at where their current strategies will lead, according to Gall. "The interest rate risk report is a tool to determine where the bank is headed without additional action," he explained. "But the future is not set in stone. The report isn't a forecast. It's a guide." 

BOK Financial Institution Advisors is a WBA Gold Associate Member.
The Baker Group is a WBA Bronze Associate Member. 

By, Amber Seitz

When it comes to delivery channels, the quantity over quality strategy is ineffective, Gallup research shows. In studies and surveys conducted from 2013-2016, Gallup has found that some banks have focused on aggressively expanding the number of channels they offer their customers without first researching how to choose the channels that best fit their customers and their overall strategic goals. Channel satisfaction is the key to increasing engagement and deepening the bank's relationship with its customers, and the key to channel satisfaction is identifying how and where your customers want to interact with you. 

The list of channel options for product delivery and marketing seems endless—but rather than having 500 channels and nothing good on, a strategic channel approach can effectively engage your audience. When the focus shifts from individual channels to the overall customer experience, it can be easier to identify where to focus. In general, channels can be classified as either traditional or digital and used for product delivery or marketing. Wisconsin Banker interviewed four experts to highlight current popular channels for banks to consider. 

Branches
"Branches are not dead, they're just changing from transaction centers to sales centers," said Mark Arnold, president of On the Mark Strategies. The bank branch is still a key channel because customers still want to know their banker and value the experience they have with the bank—regardless of whether that experience is online or in person, according to Sara Baker, vice president, Ladysmith Federal Savings & Loan. "Customers still demand that high-touch personal service from their community bank," said Baker. "Balancing the digital versus human touch relationships with our customers is key to the future of community banking."

Interactive Teller Machines
"Interactive teller—or video teller—machines are something every bank should study," said Jay Coakley, president of Coakley Strategic Solutions, LLC. "You can reduce delivery cost and provide great customer service, especially in a small community, by utilizing employees in one location to service customers in another location. It's great technology." These machines can help banks maintain strong service relationships even in locations where a full-scale branch is inefficient or prohibitively expensive to operate. 

Core Processors
Banks should consider the delivery channels offered through their core vendor, according to Jim Pannos, president and principal of the Pannos Marketing Agency. "Many of our clients are getting involved with their core processors to get their most recent release because there are so many more capabilities within the newer core processing platforms," he explained. 

Email 
"Don't forget the power of email," said Arnold. "Email is still a great channel to use to deliver products and services. Think about how scalable they are and how they look on mobile." For example, with the growing number of emails viewed on mobile phones, the format needs to be designed to allow readers to scroll through content easily.

Content marketing
In all digital marketing, but email especially, good content is a critical component. "Consumers today really want content and not sales pitches," said Arnold. "It's what you're saying as opposed to how you're saying it." Banks can position themselves as expert advisors by offering useful information to their customers through blogs, their website and emailed newsletters. However, Arnold cautions against too much verbosity: "People are consuming more information than they ever have before, but in smaller bites. Information you send out needs to be digestible," he said. 

Online
Technology that allows customers to access answers when the bank's doors aren't open will become increasingly important, according to Pannos. "Your bank doesn't have to be open 24 hours, but people are focused on accessing at their leisure versus when the bank is open," he said. The convenience of online banking appeals to many customers who previously performed transactions in the branch. "Consumers are not increasing the number of transactions each month," Coakley said of the growth in online and mobile transactions. "They're just interacting with the bank in a way that's more convenient for them."

Mobile
"Mobile has the strongest trend line," said Coakley. "From the studies we've done, mobile banking's trend line is going up at a steep increase while online, in-branch and phone systems are declining." However, it is important that the bank dedicate enough resources to their mobile app to make it both functional and intuitive or many customers will not adopt it as a preferred channel. "Customers expect a bank's mobile app to be vibrant, easy-to-use, and fast," Pannos explained. 

P2P Payments
Person-to-person payment applications like Vimeo are becoming the preferred tool for younger consumers, which makes these types of delivery channels a potential market for banks that choose to target younger customers. "Usage of [these apps] isn't going to shrink," said Pannos. "Banks should be aware of that as they're looking at their technology and how they're going to serve the millennial generation and Gen Z. They're looking to those types of platforms as currency."

Remote Deposit Capture
This service allows customers to deposit checks via their mobile phones by simply snapping a picture of it, and while it's becoming very popular, banks should be cautious. "It's a great service, but it can be costly, especially for smaller banks," said Pannos. Due to the diminishing number of checks being written across the industry, he advises banks to assess the overall market demand and competition for the product, as well as examine their own customer base demographics to ensure the product will assist in the bank's overall customer satisfaction and retention. 

Before Diving In…

So which channel(s) should your bank invest in? There are four main areas to consider when investigating a channel strategy upgrade: your customer base, cost, marketing and training. "It's important for banks to understand their market and their customer base," said Baker, pointing out that customer demands for a bank in metropolitan Milwaukee will be very different from those at a bank in rural northern Wisconsin. "Just because the bank down the street offers a certain product doesn't mean your bank needs to offer that same product. Ask your customers what they want before diving in." Coakley recommends defining not only what the bank's current customers want for delivery channels, but also the preferences of the bank's targeted future customers. "It's about what your current customers want and what your future customers want, and those can be two vastly different answers," he said.

While upgrading or purchasing new delivery channels can be costly, banks need to consider their options from all angles. For example, purchasing new video tellers may reduce branch overhead expenses enough to offset the initial cost. "Investing in new technology and solutions can overall reduce the cost of operations, so this is important to look at too," said Baker. Intentionally migrating your customers to digital channels can also lead to staffing changes. "Long-term reduction in FTEs pays for the new technology," Coakley explained.

Additionally, the bank must plan to market any new channels in order to optimize usage rates. "You may have great products and technology, but if you don't communicate that to your customers and your community, they won't adopt it," said Coakley. A review of the bank's current marketing channel strategies is also essential. "The very first thing every bank needs to do is conduct a marketing audit," said Arnold. "You need to look at each of your channels and how successful they are, then come back with strategic and tactical recommendations for changes." Finally, as with any major operational or product changes, the bank must offer training to its staff. "Banks need to invest in their staff, training them on ways to provide quality customer experiences at all touchpoints," Baker advised. 

Whether your bank has three delivery channels or 30, it's important that your customer experience is consistent across them. "Rather than thinking about just one channel, think about the experience," Arnold advised. So, when a customer visits a branch they experience the same level of service and style of messaging as when they visit your mobile app or website. "That's the challenge that banks face today," said Pannos. "You have to be old-fashioned in some aspects and cutting-edge in others." Because consumer preferences are so capricious, it's essential for banks to constantly reevaluate their channel strategy and adapt to what they learn. "Customers will continue to crave whatever technology is available which offers them convenience and a personal experience," said Baker. "As the technology evolves, banks too need to evolve."

By, Amber Seitz

Hint: It's not all about technology

Sometimes change is driven by a fundamental shift in the industry (think ATMs, internet banking, or today's pairing of cloud storage and mobile devices). Other times it is born from necessity, as banks fight to stay profitable in a persistent low-rate, high-regulation environment. The one certainty is change itself. The challenge for banks is to transform in a way that fits their identity rather than jump to extremes – so pump the brakes on buying that fintech startup. The best way to innovate without losing your identity is to foster a culture of innovation grounded in the bank's strategic goals, both with regard to internal processes and customer-facing technology.

Hone Internal Processes

Innovation, to have the greatest positive impact, must permeate the institution. That requires support from the top: the board of directors and CEO. "It starts with the CEO and the board including innovation discussions in their strategic planning," said David Peterson, CSO and Founder of i7Strategies. "Then, they can form a cross-functional group in the bank to work on specific innovative ideas." That cross-functional group should involve representatives from all areas of the bank. "Innovation, like serving customers, is really the job of all areas of the bank," explained Bob Giltner, Chairman, RCGILTNER Services, Inc. "Some banks establish committees or define a specific person to spearhead the effort as a way to build buy-in for the organization across functions." It's also a good strategy to look outside the bank for ideas. Jack Vonder Heide, president of Technology Briefing Centers, Inc. recommends designating a high-level bank employee as the primary researcher, and when they find an article about a bank in another state doing something innovative, to call that bank up. "They're happy to share that information as long as you're not a direct competitor," he pointed out. 

Whether an individual or a team is in charge of innovation at the institution, the first step is evaluating and updating the bank's processes. "Innovation should be directed to both customer-facing and internal operations," Peterson explained. This kind of procedural innovation involves identifying processes and procedures that occur simply because they've always occurred and streamlining them as much as possible. Giltner recommends constructing a process map for each of the bank's service processes for products and deliver channels. That typically involves placing the delivery of the product on one end of a whiteboard and the need for the product on the other end, and then filling in all of the execution steps in the middle. For example, on one side you have a customer using their checking account, and on the other a customer requesting information about the types of checking accounts the bank offers. "Innovation looks at the entire process and asks where improvements can happen," Giltner said. "Look for areas of greatest friction." Procedural innovation should be an enterprise-wide effort, too. "Banks should start encouraging innovation internally," Peterson advised. "Ask your employees to be innovative, no matter what their role is."

"Innovation does not have to use new technology," Giltner said. "Innovation can be accomplished simply by defining new processes or organizational structure." For example, before the mid-1980s, the idea of "giving away" checking accounts was anathema in banking. Later, free checking became one of the most popular methods banks use to begin relationships with new customers. "That was a huge delivery and customer service innovation that was not technologically driven at all," Giltner explained.

Team Up for Technology

When it comes to the more visible side of innovation (technology), banks have more of an upper hand in the market than many think. "If you step back for a minute and look at the data banks have, they know where and when people spend their money," said David Furnace, CEO of Haberfeld Associates. "That's an incredibly valuable data asset." That data, combined with the pre-established trusted relationship with customers, means banks are in a good position to partner with technology vendors. "The key thing banks need to see is that they have competitive advantages in fintech with a lower cost of funds and established customer relationships in comparison to non-banks," said Giltner. In other words, banks have already developed the client networks and compliance processes that lie beneath the technology and allow the industry to function.

On the other hand, fintech companies and technology vendors have the expertise and products to unlock bank data and leverage it to deepen customer relationships. "This will be an area where banks can partner with technology vendors in the future in order to leverage all of that data and make it actionable," said Furnace. If management determines that adding or updating technology to the bank's offerings is the right strategic direction to move in, partnering is a viable option. "What fintechs do is create 'shiny objects' for consumers, but because they themselves are not banks, they still have to work with banks in order to facilitate transactions," Peterson explained. "So banks can effectively compete by educating their customers on the types of services they offer, and then partnering to offer customers those shiny bits while still keeping their accounts with the bank." 

There are a wide range of benefits for banks that choose to partner with fintech companies rather than go it alone. "The rewards for community banks to focus on this and partner are very substantial," Vonder Heide explained. "You're making it possible for very small or new businesses to do business with your bank in a profitable way." Furnace says lending is also an area of opportunity for these partnerships. "Scale is difficult to achieve for some community banks, and deploying technology can allow for that scale." 

Of course, banks must weigh the risks with the rewards of all potential partnerships, particularly regulatory risk. "You have to put it together in a way that passes regulatory muster," Vonder Heide cautioned. "You also need to have a process for vetting your partners, especially considering most of them are very new." For most Wisconsin banks, however, the benefits of establishing a partnership with a fintech company outweigh the risks because of the sheer volume of resources required to initiate technological innovation solo. "Many community banks don't have the resources to go out and invent new technologies," said Furnace. "What they have is a trusted relationship with their customers." 

Take a Focused Approach

Those established customer relationships are the bedrock of community banking, and true innovation requires an approach focused on that identity. The first step in determining your bank's unique innovation ID is to define your appetite for change. "The first thing that the board of directors needs to do is decide what kind of a bank they want to be in terms of innovation," Vonder Heide advised. That means identifying where on the spectrum of innovation and implementation the bank should be. Do you want to be the first institution in town with every new product or feature? Do you want to be a fast follower, learning from other institutions' mistakes? Or do you want to hold off on change until your customers demand it? "Once you decide what type of bank you want to be, that will drive everything else," said Vonder Heide.

Next, management must determine which potential innovations to implement, because in today's banking environment no one has a lot of room to experiment. "It's tough for community banks in a time of zero interest rates, always increasing regulatory pressure and expenses," said Furnace. "It's important to choose wisely, but there are absolutely innovations that can make community banks more profitable." Winnowing down the list of possibilities should revolve around the bank's stakeholders. "Innovation should be focused on where it can make the biggest impact on the bank's stakeholders: customers, employees and shareholders," Giltner said. "Ideas should be prioritized based on the ratings of value for these stakeholders." 

To maximize value for shareholders, return on the investment must be part of the decision-making process when selecting ideas to implement. "It's trite but it's true: it has to be ROI," said Furnace. "The world of innovation is so broad, at the end of the day it has to contribute to your bottom line." To incorporate the customer perspective, Vonder Heide recommends forming an advisory group consisting of customers to help vet new ideas. "A lot of community banks make the mistake of introducing technology initiatives based on what they hear or observe from other banks," he said. "Your customer base is where you should go for technology initiatives."

Finally, don't assume cost when you're narrowing down your list of ideas to implement. Many impactful changes are also cost-effective. "The biggest fallacy right now is that innovation is a high-cost effort," said Peterson. "Particularly with branch transformation, innovation doesn't have to be expensive." It can be as simple as redecorating a branch office or removing a duplicative step from a back-office process. The most critical component of identity-centric innovation is to remember you probably won't get it 100 percent right on the first try. "You can't just decide you're going to innovate and suddenly be good at it," said Peterson. "In order to have perfected innovation in the coming years, you need to start now."

By, Amber Seitz

Building A Strong Foundation
Seven steps to integrate capital planning throughout the strategic planning process

If strategic planning lays the foundation for a financial institution’s success, then capital planning is the mortar that holds it all together. Branch and portfolio acquisitions, organic growth into new areas, and significant investments in technology are all common strategic goals that heavily impact capital. “Strategically, you need to position your balance sheet to be ready for all of these things,” said John Behringer, CPA, partner at RSM US, LLP, a WBA Gold Associate Member. To do so, everyone involved in creating or refreshing the bank’s strategic plan must keep capital top-of-mind throughout the process. “Capital should always be an overarching—if not the overarching—consideration in the strategic planning process,” said Jon Bruss, managing principal and CEO, Fortress Partners Capital Management. Though the process will vary from bank to bank, generally, there are seven key steps to achieving synergy between the bank’s capital plan and strategic plan.

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1» Identify a Capital Champion

During the bank’s strategic planning process, someone must be responsible for ensuring that capital is considered every step of the way. While the board of directors should be heavily involved, Kirk Hovde, CPA, vice president at Hovde Group, recommends starting the process with bank management. “Usually it’s easiest to start with the management team, because they’re more involved in the day-to-day operations of the bank,” he said. Though in some instances the CFO (or even CIO) may take the lead, typically integrating capital into the strategic planning process falls to the bank CEO. “The CEO must set the standards and tone for the strategic planning process,” said Bruss. “He’s ultimately responsible to the board of directors, who are in turn responsible to shareholders for the stewardship of the capital account of the bank.”

2» Weigh Shareholder Expectations

Any capital planning must include consideration of the bank’s shareholder base and their expectations with regard to ROI and share value. Strategies that will require additional or higher levels of capital need to be weighed against the possibility of diluting shareholder value. “It’s important to consider your shareholders’ appetite,” said Hovde. “You don’t want your strategic plan to pigeon-hole you into needing capital at a less-than-attractive price, because that dilutes your shareholder value.” These expectations will vary depending on the bank’s shareholder base, as well. For example, a bank with shareholders who are interested in near-term liquidity should not raise common equity as a first choice because that could dilute share value, but a closely held family bank may not have those same short-term concerns.

3» Select a Starting Point

Capital both impacts and is impacted by the bank’s other strategic goals. Therefore, management and the board must begin the planning process by selecting their starting point: capital goals or other strategic goals. “In my experience, it’s best for the board of directors and management to sit down and identify what sources of capital are readily available to them and at what cost,” said Hovde. “Your access to capital is one of the most important parts of strategic planning.” However, the capital-first strategy isn’t a one-size-fits-all solution. Behringer says that strategic planning can begin with identifying two or three primary goals for the institution, provided the board and management team recognize how capital fits into those goals. “Look at the pro forma balance sheet and come up a couple of options based on what is achievable given the restraints you have,” he recommends. Capital is a common restraint, but available resources, time and competing strategic objectives are others.

4» Assess the Budget

“The first thing any management team should look at is budgeting,” Hovde advised, cautioning bankers to be aware of its limitations, as well. “It’s a great tool, but as you get further into the future it becomes less accurate.” With that in mind, an analysis of the institution’s budget provides an excellent short-term scope of the bank’s capital needs. For example, imminent infrastructure needs or anticipated investments in technology both indicate short-term future capital needs that should be accounted for in the planning process.

5» Forecast Multiple Scenarios

To augment budgeting’s limitations, management should leverage forecasting tools that will help determine the future sources of funding needed to sustain growth. “There has to be a process of creating or forecasting the balance sheet and profit and loss statement,” said Bruss. He recommends the CFO prepare a balance sheet analysis for best-case, worst-case, and base-case scenarios for each of the strategies in order to determine what the impact on capital will be. That exercise, combined with an analysis of the balance sheet and profit and loss statement will be the best way to understand what the capital changes will be. “Having a reliable forecasting process is critical,” Behringer said, noting that the asset/liability model and economic value of equity are also important. “It helps you be ready for opportunities when you know what your options are.”

6» Measure Against Benchmarks

Regulatory requirements are the most obvious (and significant) benchmarks for banks to measure their capital plan against, as they can impact the bank’s potential for growth. “Banks should always be cognizant of where their regulatory capital levels are and how their growth will affect those,” said Hovde. “We’ve seen lots of organizations who had to slow down growth because of regulatory pressure.” However, shareholder expectations are also a key benchmark to use in order to ensure the strategic plan is leveraging the bank’s capital effectively. “Look at the common GAAP measurements that will be considered by people who want to own shares of the bank,” Bruss advised. Behringer recommended comparing the bank’s ROE to peer averages to manage what shareholder expectations and assess tolerance for deviations.

7» Consider Multiple Sources of Capital

If the board determines raising capital is the best way to achieve the bank’s strategic goals and increase shareholder value, keep in mind solutions other than raising common equity. “There is a veritable plethora of strategies to deal specifically with capital before you get to the point of needing to get an investment banker to assist in raising capital,” said Bruss. “You may need a third party to objectively look at everything the bank is doing and advise the bank on what balance sheet maneuvers can be taken without the need to go into the market to raise more capital.”

One of these options Behringer recommends is for banks to regularly evaluate if they are effectively allocating their existing capital. This requires the bank to examine if it is investing in assets for which the return is not adequately compensating them for the corresponding regulatory capital requirement. An example of this involves lines of credit extended to C&I borrowers. BASEL III requires banks to assign a 20 percent risk weighting to unfunded commitments with an original maturity date of one year or less that is not unconditionally cancellable by the bank. For unused lines of credit banks should regularly evaluate to determine if these amounts are required by the borrower and to the extent they are not at the next renewal date the notional amount of the line should be adjusted or an unused line fee charged to compensate the bank for the “use” of their capital by the borrower.

If none of those options are viable and additional capital is required, Hovde recommends initiating conversation with an investment bank to explore a variety of options. “If a bank has readily available capital around the board table, that’s a great source to turn to first,” he said. “If that’s not readily available, an investment banker can help you gain access to a broader market, and therefore better pricing.”

A general guide to follow, the steps outlined in this article will not be a fit for every institution. The capital and strategic planning process should be tailored to each individual institution and its needs, as well as the unique makeup of its directors and management team. More importantly, the most successful strategy is one that allows for adaptation, especially in today’s capricious economic and regulatory landscape. “The key is to remember this is all planning,” Behringer advised. “It will provide a framework and roadmap, but it shouldn’t necessarily dictate your actions.”

By, Amber Seitz