Hosted by: Jim Adkins, Managing Partner with Artisan Advisors
Guests:
We tapped the sharp legal minds of John Reichert and Melissa Lanska, attorneys and banking experts with Reinhart, Boerner, Van Duren’s Banking and Finance Practice - as well as our own John Hecht - for a fast-paced and wide-ranging discussion of some of the biggest challenges facing community banks today. The role of technology dependence on net interest margin, shareholder liquidity, branching and strategic planning and a little M&A to keep the discussion lively – it’s all in there. Tune in for smart, incisive and occasionally hard-to-hear advice from the front lines of the fight to keep community banks relevant.
Hosted by: Jim Adkins, Managing Partner with Artisan Advisors
Guests:
We tapped the sharp legal minds of John Reichert and Melissa Lanska, attorneys and banking experts with Reinhart, Boerner, Van Duren’s Banking and Finance Practice - as well as our own John Hecht - for a fast-paced and wide-ranging discussion of some of the biggest challenges facing community banks today. The role of technology dependence on net interest margin, shareholder liquidity, branching and strategic planning and a little M&A to keep the discussion lively – it’s all in there. Tune in for smart, incisive and occasionally hard-to-hear advice from the front lines of the fight to keep community banks relevant.
Artisan Unscripted 3
jim-adkins_1_11-11-2021_133131: Welcome to Artisan Unfiltered. I am Jim Adkins, your host for today's discussion. Today I have with me, John Riker and Melissa Lanska from law firm Reinhart, Boerner Van Duren and John Hecht from Artisan Advisors. Our discussion today will be fast-paced and cover a variety of topics important to community bankers.
We will be discussing the role of technology dependence on net interest margin, shareholder liquidity, branching and strategic planning. And if we have time, maybe a few comments on M and A. John Melissa and John welcome.
melissa-lanska_1_11-11-2021_133132: Thank you. Thank you for having us.
john-hecht_1_11-11-2021_133131: I appreciate the opportunity.
jim-adkins_1_11-11-2021_133131: Let's jump in. John Hecht you can start us off. Technology is just rampant in our industry. Things are changing faster than anybody can keep up with. Why don't you just kind of give us your initial thoughts and where we are for community bankers.
john-hecht_1_11-11-2021_133131: It is such an amazing topic. Every day, there's things that come across the wire that you scratch your head and you go, wow. The pace of change is incredibly fast. Just trying to understand and handicap the winners and the losers is a challenge in and of itself. But one of the areas that I've been kind of paying a little more attention to these days is the role of digital currencies.
And there's not a day that there's not news of something relating to Bitcoin or stable coins, Ethereum, or some other new cryptocurrency issuer. And this is a topic that if you really haven't thought about that much at this point, you really should be thinking about considering how, or if those developments are going to affect your business.
And specifically, if those new currencies are going to hit some type of a critical mass of acceptance the famous tipping point, if you will. And we're all of a sudden, this is something that it's kind of a table stakes issue, or you got to have this as part of your payments strategy solution.
And you wake up one day and you get customers that say, geez, I'm just not comfortable opening an account with your institution, if you don't offer that. Now, I don't know that we're there today, but maybe a year or two years, three years, depending on the demographic shift, that could be something that could be a serious issue.
But why should we care and what are implications, especially if it becomes an accepted medium of exchange. It's kind of the definition of money is a store of value or an effective medium of exchange. And, just looking today, Twitter, they're putting together a team called Team Crypto.
It's going to consider ways to help creators earn money or accept crypto or cryptocurrencies through decentralized applications. I read where Apple CEO, Tim Cook said earlier this week, the company is looking into digital currency. Although they wouldn't yet accept those through their Apple Pay application for product purchases yet.
But I think the fact that they're studying it and they have literally billions of dollars to throw at it should make everybody kind of think twice about, what does that mean? If you look at Bitcoin and cryptocurrencies, is that they're not circulated or controlled by a government or a nation.
If you start a Bitcoin account to store dollars or some other finance currency, you don't have to provide identifying information. It's effectively anonymous and law enforcement can't freeze a Bitcoin account, which is probably why the bad guys with ransomware like to use it.
Bitcoin in many ways was kind of the first decentralized finance, or DeFi, application. And that the Bitcoin lets you own and control value, send it anywhere around the world. And it does this by providing a way for many people who don't necessarily trust each other, agree on a ledger of accounts without that trusted intermediary, like the bank provides with its payment systems.
And clearly that gives regulators a lot of pause and is creating a lot of activity from a regulatory governmental oversight. Inter-agency report was just recently issued here on stable coins. It's highlighting a lot of their prudential concerns that they have just with digital assets in general, and market integrity, investor protection and so forth, and proponents of stable coins, which are kind of digital assets that are backed by cash or currency.
, if they become widely used by households and businesses, as a means of payment, it could literally provide faster and more efficient payment options, which can take out some of that merchant discount that a lot of retailers have to pay to accept credit cards. So that's something that could really disrupt the merchant channel and you may think about Bitcoin being a fad, and that it's going to fade, but this morning, it's trading at $66,000.
It does not appear to be losing interest. And I think you're seeing respected asset managers suggesting cryptocurrencies are a new asset class that you should be thinking about as part of your wealth management. So without going into a whole lot of depth, I would really encourage everybody out there to read that inter-agency report as a good primer on the topic and some of the issues involved.
And if you have a millennial child or children, like I do, ask their opinion. And I think you'll get a pretty good understanding of, hey, are these things legit and real? And will they be accepted? Fortunately I have two of those and at least 50% of that sample says, bring it on. So that's kind of how technology is changing and it's just something to keep your eye on digital currencies.
The US is looking at a digital currency. I think you're going to see something in a few years, and it's going to challenge the whole nature of banks’ intermediary role with money in general.
jim-adkins_1_11-11-2021_133131: It's a huge disruptor it seems like. We were talking over the last four or five years about FinTech. And that was the ultimate disruptor, but this may be the ultimate disruptor. But speaking of FinTechs, what does the group think about where we are with FinTech technology and how FinTechs and banking are working against each other, working with each other?
john-hecht_1_11-11-2021_133131: Maybe I'll just continue from a tech position and then ask John and Melissa to comment. But I've had the privilege of working with several FinTech companies here recently. And they compete with banks on one side of the balance sheet, whether it's lending or deposit gathering, but not both because obviously that would require a banking license or charter.
It's given me the advantage of really looking inside these organizations, their strategy, their vision, and where they're going. And I can tell you right now, it's right after banks' customer bases. They are targeting specific sectors. They're offering a lot of value to them and it's a very specific, targeted approach.
And I think there's several factors that are really driving their acceptance. Number one, there is a ridiculous amount of capital right out there in the markets where there's private equity, venture capital. You've heard of SPACs the special purpose acquisition corps, or blank check organizations and the valuations that the FinTechs are achieving now that are based on revenue and growth of accounts or some other metric, but it's not based on your traditional discounted cashflow earnings.
And I think because they're not limited of their capital they're able to build out these really innovative platforms. They're not making money and I'd remind everybody Amazon didn't for a long time either. And look at where they're at today.
They also have terrific technology solutions. That a lot of these are cloud-based API driven, which is application program driven, and they’re digital native, which allows them really to integrate with a lot of other systems out there. So it is a very affordable and a very flexible and a scalable solution. And what that does is it allows them to really leverage that growth and improves their unit economics.
That's what a lot of these private equity venture investors are really looking at. And I think their customer experiences too, are really superior compared to a lot of existing financial institution models. In this digital environment, they use AI - artificial intelligence - and machine learning, and it really streamlines and reduces the service component and gives a really intuitive context-based service.
It's like, Hey, how did they know I wanted to do that? And it just kind of leads you through an intuitive process that people like. It makes it easy and reduces some of the friction of why should we be paying attention to these companies? I think they're gradually kind of on the slide.
They're eroding customer loyalty and they're stealing market share at the fringes, because of the ease of use and a lot of their product features and functionality. That's very targeted to specific sectors. They're not geographically limited so they can kind of operate with fewer regulatory than a traditional banking franchise.
Their technology is cheaper. It's more flexible and they can stand up their systems much faster than your traditional core providers, which if you've ever had to implement a project, you've got to follow your vendor management and processes; these operations are throwing people, talent tech, and they pivot very quickly.
They learned from their mistakes. Their investors are very patient. And at the end of the day they have a regulatory arbitrage here that makes them attractive, but it's also starting to bring the attention of the administration and the consumer financial protection bureau. And because they want to control the whole experience, on both sides of both lending deposits, and they don't want to apply for banking licenses.
So a lot of them are beginning to partner with banks. Banks are offering what they call "Banking as a Service" or renting their core platform. And then these FinTechs build in the API or these integrations with the bank core model to pull data out. And they in essence are white labeling what they're doing to try to make it seamless at the end of the day.
And this banking as a service, is a very popular way that banks are looking at as another line of business. To lend out and, and they make fee income on it. They invest directly. So it's without having to get a banking license, they've, they've really been able to make a lot of progress. In one of my recent clients, we identified 20 to 25 different banks in the United States alone that are offering banking as a service. And it is real. It's coming to a market near you if it's not there already. And I think all of the banks out there should be really looking at your core solutions, make sure that you have a very disciplined and intentional process to understand what your current core provider is able to really do to offer integrations and how simple that is.
And at the end of the day, I'd really be thinking long and hard about extending those contracts too long to the point where they get you locked in, or they don't make it flexible or easy to add a best of breed FinTech, potentially that could help improve your customer service, help you get into a market, reduce your cost structure, you name it.
But FinTechs are here. They are encroaching on the market. And I think everybody should either look at, do you try to compete against them in traditional ways, or do you have to look at more innovative solutions. So I think FinTechs are really going to be a major competitive challenge in addition to everything else that bankers have to deal with right now.
So that's my take on it, on that side of things.
jim-adkins_1_11-11-2021_133131: John Reichert and I were talking the other day offline. And John, you had some interesting observations about digital banking and how banks have to either figure out how they're going to be offensive, defensive on that. Would you mind sharing with the audience, some of those comments, please?
john-reichert_1_11-11-2021_133132: Absolutely, Jim. I'm not the tech guy and what has helped me both understand everything that John was talking about and all the evolution, and frankly, helped a few of our banking clients, is to really break technology into two buckets. It's gotten to be so significant that on the one hand you've got your digital strategy [and I view that as your offense, right?
What is your customer-facing user experience? And John touched on a lot of that. Is it single sign-on? How clunky is it to interact between your mobile banking and your online banking and your bill pay and all the different platforms. And there is a significant spectrum of experience between all the different platforms that are out there.
I remember sitting with a particular client and they had, I think, five or six log-ins to get through your business and your consumer and your retirement. And then there was, by comparison, one of their competitors who had a single sign-on and it actually imported account data from outside the organization.
So with one sign-on, you could see everything. I think that's the digital side. And John alluded to it, know people are moving quickly. We saw a study recently that said during the pandemic. I think it was McKinsey who reported that digital adoption advanced the equivalent of five years in eight weeks.
So when you think about that, right, to the extent banks had a plan or whatever, you've got to revisit it and catch up. We've seen clients starting to have digital marketing officers. We've seen them using very active social media strategies. We have a number of people that have opened digital branches. And that is basically an online only. A branch that may well be branded something differently than the bank itself.
So there's a lot happening on offense, Jim, and then what we see and we've, you can have all day seminars on, this is what I call the more traditional IT. And that's your defense, your cyber security and what protections you have in place.
There's a huge investment required and it's continuing to evolve. The Biden administration said cybersecurity is going to be a focus. There are some regulatory proposals on it, both at the state and federal level. A nd with every passing examination, they're spending more and more time focusing on cybersecurity.
So, when you really think about it, just say "IT" now - John talked about currencies and FinTech, and then you've got all the digital strategies and then cybersecurity - that's three or four jobs under the IT umbrella.
jim-adkins_1_11-11-2021_133131: Right.
john-reichert_1_11-11-2021_133132: Then as we talk about defense, Melissa, I know you have some thoughts too, because we've talked about things like insurance and response programs.
melissa-lanska_1_11-11-2021_133132: Right. Well, and I think that before wrapping up a conversation about technology, we always like to give clients two pretty big reminders. The first is, a lot of times I think people may feel a false sense of security with their cyber security insurance policy. Right? If your defense fails you, which we hope it won't.
But if it does, you want to make sure that the policy you're paying for actually covers you. And you'd be surprised at what [you see in some of these policies, right. There can be gotcha moments or some boiler plate pieces that say, unless your bank is doing these five things with respect to wire transfers or ACH, or whatever the case may be, or your platform or authentication, we won't cover a loss.
The call that we always hate to get is the one where a bank is looking to their insurer to cover them. And, by the terms of the insurance policy, they're not covered. So we do recommend clients look at those policies in depth, obviously, upon receiving them and then also touch them from time to time, because if you change your customer facing documentation or the way that you're allowing people to conduct wire transfers or that sort of thing, you'll want to just touch the policy from time to time to make sure you remain in the confines of the policy.
Then the second reminder we always like to give is make sure you're familiar with your breach response plans and policies. I think it's one of those things that most clients we see have a very good plan on file somewhere. But, if you haven't looked at it for a few years, at the time when push comes to shove and it really matters, um, to know what's in there and to have kind of a controlled path forward, it can lead to more frazzle if you are not aware and up-to-date on what your policy is. So we do like to give those two touch points when we chat with folks to just make sure that you're covered and ready in the unfortunate event that you have some sort of a data breach.
jim-adkins_1_11-11-2021_133131: Melissa, these insurance activities, should that be part of a disaster recovery process?
melissa-lanska_1_11-11-2021_133132: I think that makes complete sense, something where it gets on the schedule. And it is a kind of an ongoing monitoring situation.
john-reichert_1_11-11-2021_133132: Well, I was just going to say Jim, before we move off the tech topic, when you work on those recovery plans or incident response plans, the other thing we say, and it always sounds like a commercial, is make sure you incorporate counsel, whoever they may be as one of the first steps, if not the first step. Because if you start with counsel, then everything that flows after that may be subject to attorney client privilege.
So if you're getting forensic exams and audits done, and we don't know what the results will be. Or, as Melissa said before, everyone's frazzled and running around, the first thing you do after you kind of break the glass and call for help, should be reach out to counsel and then they can trigger the plan and step back.
So it isn't a huge expense. We don't need to micromanage it, but too often we get the call long after things have been set in motion. And you can't put privilege back in place by that point.
jim-adkins_1_11-11-2021_133131: Very good. Well, let's move on. Let's talk a little bit about the fun stuff - making money right now. Of course, banks have always been dependent on an interest margin and probably always will for majority of the earnings, but I know that banks have been aggressively looking at other sources of income and maybe the group can talk a little bit about that.
melissa-lanska_1_11-11-2021_133132: Absolutely. I think this is a topic we've seen receive a lot more attention as of late. I think from my perspective, at least there are two paths that we see a lot more clients taking with respect to kind of moving away from dependence on a net interest margin. The first is we've seen a lot more non-bank acquisitions.
We were kind of in a whole-bank acquisition or branch acquisition mode for quite some time. And as of late, we've seen a number of clients acquire mortgage companies, investment companies, insurance companies, and these can be very interesting and lucrative deals. And so, if that's something a client's interested in, we’ll kind of walk through what makes sense for them. But from a structural perspective, you're often able to just kind of acquire the assets of the company and cherry pick what you want. From a regulatory perspective, there are typically some applications required. You can sometimes get around that depending on the structure.
Then lastly, we like to talk through the purchase price in this case because we've seen a lot of clients creatively structure purchase prices with earnouts and other things where they can essentially make these acquisitions, with the money of the target company. So it's been a very…I think there's been a marked increase in these types of transactions in the last year or two.
The other thing we've gotten a lot of questions on are kind of diversifying investments and going back to the FinTech discussion, actually, this goes to the partnership concepts, but also just kind of a more passive investment concept. You want to diversify your investments and maybe get started with some of these FinTechs or other companies.
And here, the legal analysis is not all that exciting, but there is one to be had, which is: there's always the question of if you are investing, which entity are you going to invest through? Whether that's the bank or the holding company or a subsidiary of the bank. And depending on your answer to that, there are various requirements you will want to think through or that our clients want to think through…and certain prohibitions. I mean, we've had situations where like the state of Wisconsin will say an investment is fine at the bank and the FDAC will say that it's not. And the federal will say something else at the holding company.
So, I think again, these investments can be a great idea and we've seen clients be very happy with this landscape. But from the legal standpoint, we just caution, , before you run too quickly, , chat with a lawyer or your regulator, just to make sure that everything is kind of done as it should be.
jim-adkins_1_11-11-2021_133131: Great John and John, any follow-up comments on any of them?
john-reichert_1_11-11-2021_133132: The one thing I would add or expand upon it brings it full circle again, with John's comments on FinTech, we're seeing some really interesting venture funds pop up and where there's one, there's going to be dozens and it allows banks to become some of those FinTech investors that John talked about.
Plus, you get to be because you're an investor, then you get to be part of some of the beta tests and incubators. And again, I don't know all the tech terms, but it's been pretty interesting as Melissa said; we've looked through it and the regulators are trying to get their arms around it. I think we saw the first one, two months ago and we've seen three or 4 since.
So, clearly that's going to be another path, John, where the banks say, hey, if this is happening, maybe we hedge our bet, no pun intended and try to invest through some of these funds and get a look at a lot of different things.
john-hecht_1_11-11-2021_133131: I think that's really a great idea. The only other thing I'd add to the comments on non-bank, having seen quite a few of these over the years upfront and personal, is that culture is a very, very different issue here with some of the non-banks as are some of the compensation structures.
And I think it's really important to understand the valuation dynamics of what to pay for them. Obviously, if you're buying a mortgage banking company or wanting to get into that right now, do you pay at peak value that we've just seen or do you really think about over the long run? What is it that you're really getting and how were their systems and their people, their compensation and benefits programs.
How does that all fit in with your existing organization? Those are important things, more important almost than the financial metrics is how you integrate those in and you consider their unique compensation within their industry. Understand it - go in with your eyes wide open.
melissa-lanska_1_11-11-2021_133132: I think that's a great point because I think in these deals that we've had, we've seen those discussions sometimes take the longest admittedly. So that's a really good point.
jim-adkins_1_11-11-2021_133131: Very good. Let's move on. Certainly shareholders like profits, but they also like liquidity and, in a booming stock market that we have here over the last year or so, I'm sure there are a lot of your clients are talking about liquidity of stock. Melissa, what are some of the key, interesting issues you think come to mind in regard to liquidity?
melissa-lanska_1_11-11-2021_133132: Sure. Sure. And I think that's shareholder liquidity is still one of the primary driving factors that we, for some sellers. Right. I think that we see banks that have shareholder bases that, over time, have shares that have gone to grandchildren in California or others where people really want to see a liquidity event.
And that can be a difficult thing if you don't really know what you're working with or have some of the tools. So generally I think John and I like to think of it in four buckets, of ways to create liquidity, but certainly it's not an exhaustive list. But we recommend taking a look at a matching program.
So a matching program is where a bank or a holding company , typically a holding company will have an interested list of sellers and an interested list of buyers and can kind of help matchmake, but there are certain requirements that the bank not get too involved or else be a broker. So there's some nuance there, but matching programs have been pretty successful for a number of our clients.
A second approach is a buyback program, which is a more formal resolution by the board authorizing the repurchase of X amount of shares, within X range of price. And that can help the board and management provide liquidity to certain shareholders. The third bucket we consider are tender offers.
And so a tender offer is arguably a more aggressive form. It's not as passive as the other two. And what that means is with a tender offer, you can explicitly name what offer you will have to repurchase shares and target a subset of shareholders and give them an offer letter. And, whether that be out of state shareholders, shareholders under a certain amount.
But sometimes, if the more passive shareholder liquidity programs are not working, something like a tender offer may get more attention. And then lastly, obviously there's listing, whether that be something like NASDAQ or the OTC, obviously offers a great amount of liquidity for a shareholder base.
The other thing that I would note here, just in terms of issues that we see pop up very regularly, is if you do engage in one of these repurchase programs or somehow you end up getting treasury stock and you want to sell that treasury stock, we just give a word of caution. Treasury stock is the same as if you would be issuing brand new shares of stock for the most part, from a legal securities perspective.
So before an issuer - a bank holding company - is going to go out and actually sell stock, whether that be treasury stock or other stock, just be mindful, we want clients to be mindful that there are securities regulations applying to how that should look and what disclosures should be made.
So that's another kind of issue we often see pop up with respect to shares and how to deal with liquidity.
jim-adkins_1_11-11-2021_133131: Melissa and John, I know a number of clients that have tried to be market-makers for their stock. They have a 8x11 piece of paper in their drawer and people that want to buy. And they kind of match them up. What should people know about that process? Is that a dangerous process?
Should there be a formal process for that? So that the CEO, or whoever has that list in there in their drawers is protected?
melissa-lanska_1_11-11-2021_133132: We typically recommend a fairly formal process for that. There are a variety of SEC no-action letters and other very boring things to read through that get into some of the details about what someone in that position in the middle should and shouldn't be doing in order to either be or not be a broker.
For example, if you are getting too involved in price negotiations, or helping exchange the money, you can get your hands slapped. So we typically recommend that a president, as you mentioned in that situation have kind of a formal process for how they do it. So whether that be that they provide the entire list each time or go on a rotating basis, there are options, but to your point, a more formal program is typically going to keep them out of trouble.
jim-adkins_1_11-11-2021_133131: Right.
john-reichert_1_11-11-2021_133132:, Jim, on that point, the way I look at it, we help people set up guardrails. And then they can operate within it. Right? So you don't need to call your counsel on every single deal. There's something between the desk trading that you kind of referenced and overkill.
So we have a lot of clients over the last 10 or 15 years where we've moved them along that spectrum. And they know now where the guard rails are, but they still have a program like that. And they still have a lot of success blending, one or more of those things Melissa talked about. It isn't a huge expense.
You really kind of build the chassis and get out of the way.
jim-adkins_1_11-11-2021_133131: Great. Well, let's move from liquidity. Let's talk a little branching, a lot of talk, a lot of talk about branching the in the industry. Do we need branches? Do we want branches, how do we figure that out? There's just so many things. I just want to throw out that whole topic to the group and get your thoughts on branching in general, and what are some of the important things that people should take into consideration?
melissa-lanska_1_11-11-2021_133132: So I think from our perspective, I know John H you kind of dig in the weeds here, so we'll probably defer to you on a lot of the substance. We have seen clients on both ends of the spectrum, right? On the one hand you see banks that are saying the brick and mortar model doesn't make so much sense to them anymore.
A lot of bigger banks obviously are leaving many communities. And on the other hand, we have clients that are seeing that as an opportunity and are going into these communities that have a need and no longer have a bank or credit union to serve them. So we've on the one hand we've sold a lot more branches as of late, but we've also had a number of branch establishment applications.
We’ve seen kind of both sides of the spectrum, but John H I know this is one thing you were talking at length about how you guys can help kind of think through the details. So I'll defer to you.
john-hecht_1_11-11-2021_133131: When it comes to branches and the pandemic hit, we saw many branches just overnight immediately become "irrelevant". And obviously it was a major change. I know John's earlier comment about the McKinsey study really was quite providential here with regard to how fast that technology had to shift and how community bankers responded to it.
And now, as things are opening back up and everybody's kind of looking at, hey, what is the value of our branch network and that distribution system that we maintain? It's expensive. Okay. Let's, let's be honest. I think we're seeing a lot more branches being closed than open. You're not seeing huge monstrous large footprints any longer, because I think technology in some regards is making it more efficient to operate with fewer people and some of the appliances or other technology.
I've seen banks with large networks starting to utilize ITM or intelligent teller machines. One of the client banks that I did some work with, they operated a branch with one person and you go, you can't do that. And, they were using teller cash recyclers, which basically acts like a head teller to keep track of money coming in and out of the bank.
There's clearly security issues, but it was a self-enclosed operation with drive up and other security protections that that was kind of an extreme and they had to have coverage over lunch and they had another branch in the region. But I think it just goes to show you that there are a lot of ways that you can reduce the intensity of your capital.
And your labor costs and so forth and. Just closing a branch by itself isn't always the right answer. And I think, when I look at kind of how to approach that, I think one of the things you really want to do is say, what is my branch contributing and how does each one stack up?
And I've seen a lot of analytics and profitability models over the years; some are extremely basic, I would almost say unsophisticated. Others are ridiculously complex. I had one client in particular that was actually changing the domicile branch that got credit for a customer count based on where they did their transaction of that month.
I think a lot of the analysis really is what does that, what do you use in that branch for, and how is it contributing overall? What type of business are they generating? And it's easy to track the revenue from a loan. Okay. You have interest income on the deposit side.
I think this is where a lot of branch models fall down is that they don't properly credit or value the deposits and they don't do a study of the deposits. They don't understand transaction intensity or the cost of delivery. And now with all the different channels that banks have access to now, with mobile banking, online banking, and other things [00:36:00] at their disposal that have truly reduced some of the transaction costs.
It really does allow banks to operate much more efficiently. But at the end of the day if you haven't really done a robust study and have the right metrics to really inform a decision about what you really needed - is this branch truly contributing overall. What bankers a lot of times don't even contemplate is you can shut a branch down, but it doesn't necessarily reduce any fixed costs at the support centers and other areas that that branch revenue was contributing to absorb some of that overhead.
And at the end of the day, as community banks, you have to understand how closing any one facility - if you’re thinking it's too expensive and you can't maintain it, or it doesn't make sense – you need to understand what's going to happen with the customer behavior and how the community is going to respond. And probably more than anything, you need to really be great communicators and have a really good plan in place.
And again, as a community banker myself, I've always believed in the value of face-to-face relationships and really getting out, meeting people onsite. And at the same time, I'll also tell you that bank management teams have a responsibility to the shareholders and you have to balance that and make sure that that branch is really contributing.
And if it's not, I think sometimes you have to make hard decisions or figure out a way to reduce the cost of that delivery system. And at the end of the day, it is part of your distribution or delivery system. And I think you just need to be informed and certainly getting down into the numbers and the details to the metrics to really appreciate what it's contributing or if it's not contributing.
And if you took it off and replaced it with other technology or other delivery points. What does it mean? And those are things that we can help bankers obviously to make at least a most informed decision with their eyes open.
john-reichert_1_11-11-2021_133132: John you've said a word several times there that I think is really key and I hadn't thought of that way. And that's contributing, right? When we talked earlier - Melissa talked about some clients are buying and some are divesting - if you have a $50 million or $80 million branch or $35 million branch. That may not be contributing to BMO. And BMO may say we're outta here, but you might be retained by $150 million client who says, oh, man, that would really contribute to what we're trying to do. So it's interesting. And I think that word is spot on. You can't look at a branch or a community and say, Hey, thumbs up or thumbs down.
You have to say, what is that? Whose branches, right? What does that branch contribute? So I really liked viewing it through that contribution analysis. And it explains why the big banks are abandoning so many markets because those branches just don't contribute when you're a hundred billion dollars, but it could still be a very lucrative branch for some of our clients.
john-hecht_1_11-11-2021_133131: One of the things I see when I think about simplistic branch profitability is a lot of banks like to see…I call it the peanut butter spread. They take a lot of their corporate allocation and they spread it out to these banks and there's no causal direct relationship with it.
And I like to look at contribution margin, the things that are controlled and directly responsible that are being driven through that market. Actually getting down into the account level and everything starts at the transaction levels - transactions, roll up into accounts, accounts, roll up into relationships and relationships into branches, which roll into regions and so forth.
And there's more sophisticated analysis and we have great tools today that really help us to be able to quote, measure that and understand if it's delivering a positive contribution or if it's absorbing it. And I also, over the years, I've been accused of being a bean counter early on, and I'll still take that title at times, but, it's not always about the numbers. The numbers are important, but I think you have to balance that too and understand the other qualitative issues - why that facility or branch might be important. And I might be skewed a little bit on the quantitative or numbers side, but there is a balance. It's not a one-sided equation. If we made all the numbers, I call it based on our head versus our heart.
I was taught to at least try to have some semblance of equality on that.
jim-adkins_1_11-11-2021_133131: Thanks, John. Let's talk very quickly about some strategic planning - it is the season. All good banks should be busy at work, working on their strategic plans for next year. I know that we have a number of assignments where we're helping on that.
John Reichert, as banks go forward and strategically plan for next year, what are some of the things, some of the issues that you think are important for them to take into consideration?
john-reichert_1_11-11-2021_133132: Jim, I think John and Melissa have touched on a lot of them. We don't do the traditional strategic planning. I think it's important - what is your three and five year plan? What are your economic goals? But increasingly I think there's two groups of banks. There's those that will control their destiny and those that won't, and that's what we think of as strategic planning.
So we've talked a lot about technology. Do you have your arms around some of the digital and cyber issues that we discussed? Do you have a FinTech plan? How do you diversify from net interest margin? Right. People have been seeking non-interest fee income for 30 years or longer, but the consensus seems to be that this time is different, right?
Even in a rising rate environment, it's going to be awhile before you get back to traditional net interest margins. So how do you diversify? Melissa talked about shareholder liquidity that doesn't apply to all banks, right? Some are family held, some are public, some are mutuals, but that is one of the largest things that we see is what's your plan, right?
If you really want to control your strategic future, you need to make sure that you're providing liquidity for your shareholders and that you have the runway necessary to execute your plans. John and Melissa just talked about branching and then the other two things we see in strategic planning.
Increasingly we're seeing discussions about where do you focus? Because even the biggest community banks, can't be all things to all people. And so there's this concept and John Hecht touched upon it with the FinTech discussion of segmentation and what you're seeing or what we're seeing. And I saw a chart recently, which was fascinating, right?
Your competition is no longer just other banks and credit unions. It's there are dozens, if not hundreds of competitors. Who exist solely to come after a specific line item or part of your bank, right? There are people in the payment space. There are people in the deposit space. There are what I call narrow loan lenders, right?
There are companies that don't just want to do loans. They want to do a very specific type of loan. And then there are all the other people who are out there in the operations and banking as a service. One of the stories that I think about is, we had heard of a private equity fund that raised a bunch of money to target very specific agricultural loans in the Midwest.
That, to me, illustrates this challenge more than anything. You've got your Apple Pay, or Google Pay or phones, all that stuff. But the fact that private equity people are raising hundreds of millions or billions of dollars. And saying, Hey, we want to aggressively target a very narrow part of ag lending - what's your plan for that?
How are you going to stay on top of that kind of stuff? And then the last piece: again, segmentation. I think another word for it is simply focus, right? Your competition is getting more and more focused. So I think community banks need to resist the urge to be all things to all people. And that's hard.
And then lastly, Jim, I think - and this has been around forever - I would call it the talent strategy. You're seeing the competition for talent is as hot as ever. You're seeing a lot of succession discussion or what I would call contingency planning. I know in our business, both here at the firm and through a lot of clients, we've seen with COVID some premature retirements.
So I think if you're running a bank, you want to look around and think, Hey, who are key producers? And what would we do if one of them decided to leave a little earlier than anticipated. And we're also seeing equity incentives and different kinds of creative compensation being rolled out, alternative work structures, all these different things.
And we could do an hour long podcast simply on talent lately. I think those are all the what, 5, 6, 7 different things. And none of them you notice are financial metrics or typical kind of strategic planning things. It's really, what are we doing for these five or six channels that are really evolving and shifting rapidly?
And John Hecht, I know I said we don't do it. I know you guys do offer services where you kind of help people wrestle with that, boil it down to an actionable plan. Right? We see so many clients that have paid a significant amount for a ring bound strategic plan, and they don't look at it for five years.
These are the kinds of things where there are dashboards and roadmaps - all those consultant terms - but I think that's meaningful now.
jim-adkins_1_11-11-2021_133131: That's true. Well, we're coming to the end here. I wanted to talk a little bit about M&A, but I'm going to wrap my M&A segment here into one question. I'm going to do a round table here. More M&A deals in the community bank space next year, than this year: Yes or no?
john-hecht_1_11-11-2021_133131: I'll go first. I say yes - 2022 is going to be a rough year, too, earnings wise. I think there's going to be a ton of challenges. And I think given all the technology and other things coming at banks, especially with talent and recruiting, to me banking's a relationship business and you need great talent to succeed.
I still think that's bank's greatest asset, but I think all these challenges, if you don't have the talent and a great succession plan and a talent strategy, I think it's gonna create a situation where you can't control your destiny. Like John said, so I say 2022 more M&A.
melissa-lanska_1_11-11-2021_133132: I agree. I'll keep mine short and sweet. I agree. I think it's a, yes, for many of the reasons he cited and I think, with COVID, a lot of people just slowed the dance down for a little bit to try to take stock and see what was going to happen. I know, just at least from what we are seeing personally, it seems that things are certainly heating up.
So my vote is yes.
john-reichert_1_11-11-2021_133132: I think yes. For the reasons they both said. The other two things is the buyers are comfortable that there isn't going to be this COVID credit tale. Right to Melissa's point, everybody slowed down pretty quickly and got their house in order. And I think the last six to 12 months people have said, Hey, did PPP artificially prop things up?
Or are we really okay? And the sense I've gotten, we probably saw two deals in 18 months and there's 13 or 14 now in the last month. Something's happening, Jim. So I'll take the over.
jim-adkins_1_11-11-2021_133131: Take the over. The overwhelmed. I agree with the panel. I would never disagree with a distinguished panel such as this. I agree with all of you. And so we're going to wrap up here. Thank you, John, Melissa and John, for a great discussion. If anyone wants more information on Reinhart Boerner Van Duren, check out their website@reinhartlaw.com.
And if you'd like more information on Artisan Advisors, visit artisan-advisors.com. Thank you for listening to Artisan Unfiltered. See you next time.