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5 Wells lessons for community banks

Some real-life observations on what can go wrong

Jeff Gerrish says that ultimately the way to stay out of trouble is to remember what you want your community bank to stand for. Jeff Gerrish says that ultimately the way to stay out of trouble is to remember what you want your community bank to stand for.

We are wrapping up a series of commentaries by our bloggers and other experts on the Wells Fargo Bank case. Jeff Gerrish, longtime banking attorney and community bank advisor, reviews what smaller institutions can learn from the travails of an industry giant.—Steve Cocheo, executive editor and digital content manager

I will not recite the facts surrounding Wells Fargo because, frankly, I assume anyone who is reading this blog is plugged into the industry and understands the mess in which Wells Fargo finds itself. In this blog, I want to discuss five lessons to be learned for community banks from the Wells Fargo mess. One involves an experience pretty close to home.

1. It takes a long time to build a reputation—and a short time to lose one.

Wells Fargo had the reputation in the industry as a “super power.” Wells put up good numbers, had great asset quality, and was a retail cross-selling machine—or so everyone thought. There was just a minor issue, that nobody really knew they were creating fictitious accounts and defrauding their customers.

My daughter was one of those customers, by the way.

She came to me about three years ago. She had opened a Wells Fargo account while she was in college, and all of a sudden realized she had a couple of other Wells Fargo accounts and a credit card that she had not asked for.

Of course, Wells was also charging her fees for the accounts. Naturally, having been in the industry for a long, long time, I told her that was simply “impossible.” Banks had controls to prevent things like that from happening.

Little did I know.

Wells Fargo spent years upon years building up its reputation as an industry powerhouse. It took about a week to destroy that reputation, cause the CEO to resign, and drop the stock price at least 10%.

What is the lesson learned for community banks?

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It is the same one. Your community bank has a stellar reputation, but one triggering event can cause a problem.

• Maybe it is one of your directors who is politically active and puts a couple of obnoxious editorial opinions in the local paper.

• Maybe it is your chief lender who every Wednesday after a round of golf and some alcohol has to be carted home from the country club.

• Maybe it is a sex scandal or gambling.

Any one of those can tank your community bank. If you have something like that going on, you need to nip it in the bud. This is a responsibility of the chairman, but that is for another blog.

2. Corporate culture starts at the top.

Part of the problem with Wells Fargo was a corporate culture that insisted on cross-selling, not necessarily providing customers what they needed.

That corporate culture can only have started at the top to be as pervasive as it was to that organization. What is your corporate culture?

In connection with long-term planning sessions for community banks, marketing and “sales culture” are always on the agenda. The comment I hear most often is “we want a sales culture, but we do not want to be like Wells Fargo.”

And that was prior to Wells Fargo’s most recent problems.

Corporate culture starts at the top with the board of directors and senior management. What do you want the corporate culture to be for your community bank?

3. Your community bank will get what it incents.

They do not call incentives incentives for nothing.

If you want an employee to take a certain action and you have a proper incentive for them to do so, they will take that action. In Wells Fargo’s case, it was to open a certain number of new accounts every single day.

I was recently with a community banker who had been a Wells Fargo employee during that time period. He said every morning they had a staff meeting where they were given their “bogey” for the day. This was the number of new accounts they were supposed to open.

They had to report in at noon regarding how many they had already opened. By the end of the day, if they had not met their quota, they were “dressed down.”

You get what you incent.

Think about that in your community bank. Look at the incentive system that is in place. You are going to get what you pay for, so it is important to understand what it is you are going to get and make sure that is what you want and is consistent with the bank’s strategic goals.

I remember a client who had an incentive system for its senior officers based on return on equity. If the return on equity was over 10%, the officers got a little bit of money in their bonus pool. If it was over 12%, they got a little bit more money. If it was over 14%, they got a little bit more money in the bonus pool.

But if it was over 16%, no more money went into the bonus pool.

I asked the CEO whether the return on equity had ever been over 16%. His response: “Why?”

In other words, he was not incented to go over 16%.

You get what you incent.

4. Apologize quickly, make amends, and move on.

No, this is not necessarily advice for the current political landscape.

But generally, when your bank has a problem, it is important to acknowledge it, take responsibility for it, apologize for it, make amends … and move on.

Wells Fargo did not do that. Management knew for years that the bank had a problem. They never even apologized for it publicly until after the CFPB and the OCC fined them a total of nearly $200 million. (Wells Fargo’s net income for fiscal year 2015 was around $23 billion, by the way).

But they never apologized, never tried to make amends, never tried to do anything, except fire 5,300 people from their own workforce.

If your bank has a problem that results in a reputational issue like Wells Fargo, address it head-on and early. Not only do the regulators not like surprises, neither does the public, your customers, or your employees.

5. Be happy you are not Wells Fargo.

Be glad yours is a community bank that deals with relationships, not transactions.

As long as they continue to deal with relationships and not transactions, and a service culture (i.e., providing the customer what they need, not what we want to sell them) instead of a sales culture, community banks will continue to thrive and avoid problems similar to Wells Fargo.

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 [email protected]

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