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4 more critical questions for community banks

You can’t duck these questions today, either

4 more critical questions for community banks

My previous blog—“4 issues you can’t duck anymore”—dealt with a small collection of significant issues that the board needs to address in connection with its long-term planning. Because there are any number of significant issues the board needs to address, I have identified four more for this blog.

Think about these for your bank:

1. Should we close some of our current branches?

2. Do we close down the trust department?

3. How do you make sure you retain key employees?

4. How do you attract the Millennials so your Bank continues?

1. Should we close some of our current branches?

This particular question has all kinds of questions embedded within it.

One, of course, is: Are all of our current locations profitable? 

It is very difficult for the directors to know that if the community bank does not have any kind of realistic, reliable branch profitability system.

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Mind you, I am not sure I have actually ever run into a “reliable” branch profitability system, but the board at least needs to have some basis on which to determine whether those branches are currently profitable.

Here’s another: How can we close that branch down that is the Chairman’s favorite? 

You know, the one next to his house that he insisted be built ten years ago and has never, ever been profitable? 

I like this one: What does a branch of the future look like? 

More questions:

Do we need to really have two branches half a mile away from each other just for the convenience of the people at the “north” end of town and the “south” end of town? 

What about the branch manager who happens to be the CEO’s cousin?  What happens to that individual?  Does he or she continue to maintain a job in the organization? 

These are issues that come up in every discussion of whether the bank should close branches.

As you can see, closing branches or any locations is a difficult decision for most community banks. Even though it is difficult to get a decent branch profitability number the board can point to with confidence, the difficult part is not completely financial.

 The larger issues are what I typically refer to as the social (i.e., non-financial) issues. If a branch is not profitable, do you replace it with a less-costly alternative simply to keep customers happy? 

In this day and time, do you close a branch and substitute a “souped up” ATM with a cash recycler or where the customer can do pretty much anything they can do at a branch? 

In any event, branch closing are a tough issue that the board needs to address.

2. Do we close down the trust department?

This is not the trust department that has multiple 100s of millions of dollars in assets under management. This is a trust department with $15 million of assets that the bank has had for the last 45 years.

What I often hear in connection with the discussion of closing down the trust department is that the trust department is a “loss leader” for the bank.

Generally, my retort is , “Not really, it’s just a ‘loss’.”

A small trust department that is not being marketed and has no strategic plan to grow is simply a drag on the bank.

Should you get rid of it totally? 

I say the board’s strategic decision should be either to get rid of it or grow it. The status quo is not typically an appropriate approach.

Like the closing of a non-productive branch, however, the closing of a trust department often involves social issues that the Board would rather look at. Directors often prefer that to confronting the fact that Trust  is losing $50,000 to $100,000 a year.

3. How do you make sure you retain key employees?

These days, particularly with the up-an-coming employees (i.e., the younger ones) who may have ten or 12 jobs in their career, it is very difficult to come up with an effective way to retain employees (or at least quality ones) across the organization.

The younger generation and their needs are very different from those of us who may have picked one job and kept it for 25 or 30 years.

How do you retain those key employees? 

Usually the way you retain them is to “bribe them” (a “technical term”) in some fashion so that you pay them to stay or make it so expensive that they cannot afford to leave. Fortunately with most of these plans that involve retention, they can be discretionary (i.e., given to one officer and not another), so you really do focus on the key employees.

What we are seeing most often these days as a retention tool is either restricted stock with significant risk of forfeiture or deferred compensation with a similar risk of forfeiture if the employee leaves prior to the normal retirement age.

There are also other tools to retain employees, such as employee stock ownership plans, stock options, change in control protection, employment contracts and the like. But typically, restricted stock and deferred compensation supported by bank-owned life insurance make the most sense.

4. How do you attract the Millennials so your Bank continues?

At one recent planning session I facilitated, the board and officer group considered the ten-year vision for their bank. Part of that vision was, as one officer eloquently put it, “most of our current customers will be dead by then.” 

Their difficulty was figuring out how to replace these customers, who are all older and will soon pass away, with the millennial group.

The point was made during this particular meeting that many of the millennials in their late-20s and 30s are now starting businesses and need financing and other financial services. How do you attract that younger generation of customers? 

If anybody has a silver bullet on this one, please share it with me. I have not found a bank yet that, in my opinion, has developed an effective strategy with respect to attracting millennials.

Looking ahead: Lots and lots of questions

These are just four items—food for thought—for long-term planning. As noted, there are so many issues in the current environment that there are far more than the eight items from this and the last blog that the board needs to wrestle with each time it gets together for long-term planning.

Jeff Gerrish

Jeff Gerrish is chairman of the board of Gerrish Smith Tuck Consultants, LLC, and a member of the Memphis-based law firm of Gerrish Smith Tuck, PC, Attorneys. He frequently contributes to Banking Exchange and frequently speaks at industry events.

In mid-2016 Gerrish's blog received a national bronze excellence award from the American Society of Business Publication Editors. This followed his receipt of the regional silver excellence award for the Northeastern Region from the same group.

Gerrish formerly served as regional counsel for the FDIC’s Memphis regional office and with the FDIC in Washington, D.C., where he had nationwide responsibility for litigation against directors of failed banks. Since the firm’s formation in 1988, Gerrish Smith Tuck has assisted over 2,000 community banks in all 50 states across the nation with matters such as strategic planning, mergers and acquisitions, common stock private placements, holding company formation and reorganization, and a wide variety of regulatory matters. Jeff Gerrish can be contacted at jgerrish@gerrish.com.

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