The Three Pillars of Success for Community Banks

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On Sept. 17, 2019, Haberfeld CEO David Furnace sat down with Lou Carlozo, editor-in-chief at BAI Banking Strategies, to discuss planning, marketing and talent management – or, The Three Pillars of Success for Community Banks.

This interview was printed as a Q&A. For this summary we’ve paraphrased Mr. Furnace’s responses. You can find the full transcript below, and the full podcast audio at 

What banks did wrong after the Great Recession

When the Great Recession hit, banks had excessive liquidity. At that time making investments to add customers and core deposits didn’t make sense to many markets. As market forces changed, however, these policies seemed shortsighted. Today, most financial institutions want to grow core customers and revenue, but not all have shown the judgment or ability to respond to the shifting marketplace.

In adapting, most community banks don’t consider one important metric: capacity. At Haberfeld we view financial institutions as businesses operating expensive factories, called branches, each with ample room to grow. If the bank operating these expensive factories were asked to lend money to another business operating at 25% capacity (or even 30% or 40%) they would be baffled. Yet, this is the how most community banks operate.

Why you want new core customers – and deposits – now

Haberfeld’s data shows that on average, one new core customer brings in about $300 to $500 a year and stays for about 8 to 10 years. Because of the excess capacity, it only costs $30 to $50 a year to service their account. In other words, most community banks could add scores of new core customers at very little cost—and make some seriously impressive revenue.

The fear remains that banks will acquire unprofitable customers in the quest for the profitable. But, if the customer is worth $300 to $500 per year, unprofitable customers are factored in. With this knowledge, banks can embrace growth, especially over time.

When circumstances change, what do you do?

To embrace this growth, banks need to embrace change. But, as the economist John Maynard Keynes said, “When facts change, I change my mind. What do you do?” A first step is to question common knowledge and use meaningful data to set up a plan. While this plan will attract unprofitable customers it’s very profitable overall.

The Three Pillars of Success for Community Banks

The foundation of profitability is built on three pillars:

  1. Setting up a strategy
  2. Reaching out to everyone with data-based outreach
  3. Managing your talent.
Pillar #1: Setting up a Strategy

Community banks are typically overshadowed by big institutions and their perceived advantages: more branches, better products and technology, less risk of failure, and more. The place of the community bank is to counter these perceptions; one way to do that is with better products suited to your market.

Banks also need to consider changing policies, especially outdated high-fee models, and interacting with customers differently. By aligning products, policies and procedures, community banks can beat the “Law of Small Numbers” and acquire far more than the typical one customer per day. It’s possible not with operational and compliance-focused training, but with effective process based training.

Pillar #2: Effective Outreach

Only when we’ve optimized our in-branch experience have we earned the right to create effective outreach. That can be a challenge. The same CEOs who are comfortable with acquisitions and new branches are the same who are hesitant to invest much in marketing.

It’s understandable because they haven’t seen the results. Branding can feel like a soft science, but with data on your side, you can create effective marketing that delivers real ROI.

Pillar #3: Managing Your Talent

In hiring, most community banks make decisions based mostly based on a candidate’s job experience. This can work, but there are tools available now that can increase our chances of getting the best people in the right roles.

After they’re hired, there are incredible tools to coach them. Training isn’t just a one-time event at the beginning of employment; it’s an ongoing intentional effort to increase morale, motivation, and excellence. With solid hiring practices and ongoing training, we can dramatically improve our talent management.

Summary by Cory Kibler

Read the full podcast transcript below

Set up your plan, reach out to everyone, and manage your talent. These three pillars of community banking success provide an inroad to growth – but silver bullets are in short supply and shortcuts don’t exist. What to do? To find out, we’ll talk with David Furnace, CEO of Haberfeld Associates.

Welcome to BAI Banking Strategies where each week we’ll focus on the key issues facing financial services leaders. We’ll bring you objective opinions and actionable insights that will help you power smart decisions. I’m your host, Lou Carlozo, the managing editor of BAI. Come on in.

Thanks very much for tuning into the podcast. We are excited to have you here with us, and on the podcast coming in from Lincoln, Nebraska, we have David Furnace. David is the Chief Executive Officer of Haberfeld Associates and is a former community bank CFO, and COO. He’s been in the banking industry for more than 30 years and ran the largest division of Alex Sheshunoff management services prior to joining Haberfeld. David serves on the Haberfeld board and is a frequent speaker at state and national association meetings. David, welcome to the podcast.

Lou, thank you so much. It’s a pleasure to be here with you

And there’s bad news – although not for either one of us. It’s when banks get that analysis back that shows they aren’t performing up to par. How do you think they can meaningfully act on something like that and why do some banks in the face of the fact still fail to act?

Well, Lou, I think fundamentally change is hard. I also think that change happens over time that bankers don’t control. So we had the great recession that negatively impacted banks and I think in that period of time, that unique period of time, banks made a lot of decisions that might have made sense in that time, but that time has changed. The banking industry has changed, profitability dynamics and the banking industry has changed. And so that requires re-evaluating some of those decisions that have been made and recognizing that we’re not playing on the same field any longer and picking up the ball to play off offense again. You particularly mentioned analysis. I think the banking industry does a lot of good analysis, but it is interesting to me that some of that analysis I think can lead to incorrect conclusions. In particular when things shift as they have. So for example, in the great recession banks, balance sheets were bloodied. They had tremendous liquidity. No one was looking to grow their customer base and gather more core deposits. That’s not the case anymore. The industry is much healthier. And so now banks need to play offense and so specifically to the analysis part, you know, banks will do branch profitability analysis or customer profitability analysis. They did that in the downturn and most community banks, you know, changed their product set to make sure they would never have an unprofitable customer again. They made a number of changes that are counterproductive to growth. And today at least most banks really want core customers in core deposits, they want to grow revenue streams and it requires change in order to do that.

You mentioned those unprofitable customers – 25% by some estimates are unprofitable. And they wouldn’t appear to be worth the effort to some banks. But there’s that silver lining that banks need to pay attention to. Explain to us what that looks like.

Well, so there is an aspect of banking that is just baked into the way the business is constructed, at least for most community banks. And there is this hidden aspect that’s never analyzed or measure, and that is capacity. Most community banks build really expensive factories that they call branches, and most will agree that they have excess capacity. In fact, most will agree they have tremendous excess capacity. If those same banks lent money to a factory running it 25 or 30 or 40% of capacity, the bank would be asking its customer, you know, what are your marginal revenues? If you can sell one more widget compared to marginal costs? In banking, largely we don’t do that. So we get account level data from a lot of community banks. So it’s a really robust dataset. Here’s what that data says to us when we analyze it. For a typical community bank, an average new customer, one above run rate – If you look at the marginal revenues from that new customer and compare it to the marginal costs across many of our clients – they would say that the next core customer that walks in the door will throw off $300-500 a year in revenue and their marginal expenses to service them are somewhere in the 30 to $50 range. That customer then stays an average of 8-10 years. And so it looks like when the business is constructed like it is – tremendous excess capacity, marginal revenues that are many multiples of marginal costs – that at a time when banks need funding and are looking to grow, taking a fundamental look at some of the decisions they’ve made makes a lot of sense.

For most community banks, what they’re able to get is more customers that look like the customers they’re currently getting. We’ve actually seen it’s very difficult for community banks to materially change the profile of those customers.

So what that means in practice is this. If a community bank is gathering customers at the rate of x and they want to make that 2x, that 25% are unprofitable. And if the bank wants to grow, a terrible thing is going to happen – and that is they’re going to double the rates of those 25% that are unprofitable. That’s very difficult for bankers to get past. What they need to realize though is that they’ll also double the quartile at the top and they’ll double the second quartile down. So the real embrace that they have to do is that growth is a good thing. We can get what our market will give us, but because of the way the business is constructed, if we get a lot more we will perform better over time.

Strategy, capacity, fixed versus marginal costs. Love it. But let’s say I’m the CEO of a bank and I come to you and I say, “David, I don’t know where to start. Help me.”

So I think the first thing is embracing that you’ve got to reexamine decisions you’ve made and change some of those – and be willing to do that. That’s very, very hard. The economist, John Maynard Keynes said, “when facts change, I change my mind. What do you do?”

It does take embracing the idea that growth is fundamentally a good and profitable thing and then you have to say if that’s true, we need a complete strategy in order to grow. So there is no silver bullet. I call it “getting rich slowly through hard work.” What you need to do is adopt a complete strategy for growth and be willing to test and throw out deeply held past beliefs and then go forward with that strategy. Deeply held beliefs might be, you know, that marketing doesn’t work. They think of marketing as an event. Marketing is not an event.

Products – we mentioned earlier, a lot of institutions have constructed product sets in ways that are effectively designed not to have another unprofitable customer. If you want to grow, you have to bring valid analysis, use data to make decisions, and accept the fact that we’re going to have a few more losses. We’re going to get a few more unprofitable customers and not let that kind of thinking get in the way of what is ultimately a very, very profitable strategy.

Offline we also talked about a concept I thought was fascinating – your three pillars that applied to success in the community banking space. Share those with us if you can.

The three pillars that we see as part of a robust growth strategy are the set-up of the strategy, cleaning the house, if you will. The second part is outreach, sending out party invitations, if you will. And then the third piece is talent management. A banks people do really make all the difference the world.

So first the set up. Typically community banks are in the shadow of a lot of big institutions and the bigs have all the advantages, right? Branches on every corner. There’s a perception that they have way better technology, a more robust product set. Certainly in the great recession, it was proven they were too big to fail while community banks were allowed to fail. So what a community bank has to do is make sure to knock down every one of those that they can. Products are a good example. If you want to grow, it’s easier to grow with good products than bad products. Very simple strategy, but it’s true. One piece of the setup is to make sure our products are addressing the market that we have.

And there are a variety of different markets there, but also that are attractive when we play offense.

Second is policies. Many banks have layered in lots of policies over time due to, you know, negative things that occurred. They took a loss five years ago when this particular event happened and they layer in yet another policy. I’d call it “barnacle scraping.” Procedures as well. The process that your frontline people go through when someone comes in – the questions that they ask and how they greet them. So when you align products, policy and procedure, then you can align sales process.

I distill this down typically into what I call the law of small numbers. If you really analyze how many core customers, a typical community bank is acquiring, it’s less than one per branch per day. Give me a break. It’s a tiny, tiny number. And by the way, if they’re going to, you know, do twice as well, that means it goes to two per branch per day. That branch manager that’s leading that team, the frontline person that they’re interacting with, the way that they respond answer questions makes a huge difference.

So if once you align products, policy and procedure, then you can put in place a very effective sales process. Now for community banks, we think that means disciplined and simple, not open-ended and going anywhere. We think the profile of people that are in frontline seats at community banks do better with a very disciplined sales process. And this of course is where the training comes in, right? A lot of lip service paid here, but training, training, training, training, those people make a lot of difference. Generally the training provided in community banks is operational and compliance focused. Very, very little true effective sales process type training.

So once we get the house in order and do all of that, then that earns us the right to do effective outreach. So many community banks have tried things before. I deal with a lot of bank CEOs on a daily basis and I’ll often tell them in particular, you know, you guys will think about growth and you’ll think about making an acquisition and that’s a big number and you’re comfortable with that. You understand it. Or you’ll think about a branching strategy and buying expensive dirt and building an expensive building on it and you understand that. But for most CEO’s growing up like they did in their careers, they won’t invest much in marketing. And I get it. It’s because they haven’t had a good tangible ROI. It’s, you know them, it feels soft and fluffy with brand awareness type things. But it is possible to do really effective marketing with a really tangible ROI. But first you have to clean the house, then you can do the marketing.

The final pillar is talent management. You know, most community banks hire kind of by the seat of the pants by  experience. Candidates that go through an interview process and we think they’ll do a good job. Well there actually tools available today that can really help community banks make sure we get the right people in the right seats. There are also tools to help coach people. Again, training’s not an event, but beyond training you’ve got to motivate people to perform well. So effective coaching and effective tracking of activities related to coaching can help improve performance dramatically in that third pillar, talent management.

Well products, policy and procedure. Here are my three P’s: a passionate, positive pro. You did it, David! This has been fantastic. On behalf of the listeners, thanks so much for being on the podcast.

Great pleasure. Thank you for having me.

David furnace is Chief Executive Officer of Haberfeld associates. You can look for David on Linkedin.

And here are three key takeaways from today’s podcast:

  1. Change is hard and it happens over time that bankers can’t necessarily control as with the great recession more than a decade ago. Since then, profit dynamics and the way banks do business has shifted. Thus it’s time to go on the offensive. And to that end, analysis is good, but watch for making incorrect conclusions, especially when the industry is much healthier today than it was previously. The wrong proactive change can be counterproductive.
  2. When assessing the unprofitable customer, remember the hidden aspect, your capacity. Account-level data from community banks shows that on the average, customers generate marginal revenues that are multiples of marginal costs. That equals $300-500 of business a year compared to $30-50 in expenses. What’s more, these customers have the potential to stay on for 10 years or more.
  3. Be willing to reexamine your decisions and change your mind. Tilting in the direction of growth with a strategic plan as opposed to a silver bullet mentality. Then go forward understanding that the road to healthy profits takes time. The watchwords here are patience and confidence.

And now Bai banking Strategies Presents “My 21 Year-Old-Self” where our podcast guest talks about what they were like at 21, life as an emerging leader, and the advice they’d give themselves today.

Talk about an early start! At age 21 David Furnace was already a young banker in college at a small community bank. Back then expense-focus was the name of the game, but the benefit of experience taught David to turn the equation around. Here’s how he reviews his learning curve and what he tell that young aspiring banker today.

When I was 21 I actually was a young banker in college and so I learned a way of thinking. And I would say a piece of that would be at my small community bank, we were very expense focused. So give performance by making sure we, you know, we really tighten up on expenses and stay super focused on expenses. When I left and went to Alex Sheshunoff Management Services, I spent a number of years there and had the privilege of working with over a thousand banks over that time. And so I got to see how high performers think. If there was one piece of advice I would give to me back when I was 21 now, it would be focused on revenues. If you get a revenue focus, if you think about growth, you need to manage expenses, but not over-focus on them. That’s how high performers become eagles.

Thanks again for tuning into our podcast. We hope to have you back with us very soon. Be sure to check out our ever growing archive of podcasts at Our producer, as always, is James Grady. Be sure to connect with me on linkedin. I’m Lou Carlozo the managing editor at BAI. We’ll see you soon. So long.

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