Building Brick and Mortar Relationships

Mitch: Welcome to another episode of Lending Made Easy. Today's topic is an interesting one, and I think we're gonna have a really great discussion here. So in an era where, these big banks are expanding their physical footprints and acquiring branches, community banks are facing a unique challenge.

How do you stand out and thrive in this really competitive landscape? But maybe the answer really isn't about the size of your branch network, but about how you build relationships and add value in your community. So today I'm joined by Bryan Peckinpaugh and David Catalano, and we're going to explore, this idea that for community banks. The real currency is in, creating great customer experiences and adding value for your client base. 

So Bryan, David, when you start thinking about how community banks and credit unions approach building relationships in their communities. Where's the branch really fit into that strategy?

Bryan: I think at first it's critical to acknowledge that most financial institutions in the country have a collection of brick and mortar, and I'm going to lump headquarter buildings in with the branches as well, that they need to start thinking about differently, potentially. The legacy approach was one focused on the fact that consumers tend to bank based on locality.

So the, the effectiveness of a branch and what the radius is differed from, you know, year to year, obviously, but let's just for simplicity sake, say within five miles of the branch drove the activity within that branch. So that's where you, you gathered your deposits from. That's where you gathered your small businesses from, and it was all about locality. And while that is still very much the case and why we see the big, big banks continuing to build and acquire brick and mortar, it isn't the sole avenue anymore.

So you look at pure digital banks, something like a First Internet, which is an incredibly high performing bank, but they built from the ground up with the idea of, no branches. So, as an established community bank, you can't take that path. You have the brick and mortar. What are you going to do with it?

Mostly tapped out that locality advantage, especially as folks like JP Morgan or Citi or whomever, maybe coming to your town, no matter how small your town is and you know, how do I leverage what I do have with the brick and mortar to reinforce my position in the community, reinforce my particular mission, depending on what my institution is, and it'll put up those facilities for the, the clients that you serve that might be looking at how you leverage your headquarters and conference rooms and things you may have in to open it up to small businesses who may not have their own brick and mortar and they can use your conference rooms, your telecom. Tap into assets that you have that you can provide of value to maybe just current small business customers as a perk for banking with your bank, or you can use it as a potential, you know, selling tool to open it up to everybody. And use it to maybe get new relationships, Mitch, as you said, that you don't have today. 

So I think it's going beyond just thinking of branches in particular as a transaction center headquarters, as a center for the work that your F I does and thinking about it as the individual assets that are in there right. I have conference room space for some of our, our clients, they have, you know, even meeting halls like larger ones that might hold 50 people or a hundred people. I have cafeterias, I have a pretty robust telecom infrastructure, phones, video conferencing that is set up to handle a meeting room, probably better internet than maybe some businesses have in their facilities.

How can I monetize that by bringing people in? How can I host events? That bring in people that I might want to bank. So going beyond the traditional thinking of this is where we transact, or this is where we as an organization meet and using it to potentially attract new relationships to the financial institution is, I think something that everybody should look at is they try to figure out how do I do more with what I have because they are assets and we need to treat them as such.

David: I would agree. In my previous life, before I came to Baker Hill, I worked for a company. We had about 130 locations when I left, but when I started, we had 80 and I was in charge of the group that identified new locations. And we always use data to do this. And then when I moved to Baker Hill, we had an analytics business and we had clients that would like to understand branch optimization.

So we did some of the same work I did at the previous company and just looked at, okay, where are your existing customers coming from? How close are they to that branch? What kind of assets do they bring? What type of deposit balances, what type of loan balances and the type of loans and birds of a feather flock together.

So that was one of the consistent themes that apply no matter what. So if you're looking for, your best branches to be replicated, then you have to go to where the demographic is for the branches that are doing really, really well. And then why are they doing well? Why is that branch doing well? And then does that relate to the operations of the branch, meaning the manager, the relationship managers, or is it because it's sitting in the middle of a demographic hotbed for your particular basically mix of products.

So you just have to, the data will tell you what to do. If you just follow the data, that would be my approach to branch optimization. What do I like about what I have today? Where do I go to find more of that? And then I would absolutely, and we did this multiple times in my previous life is we move locations.

So if we had a, we were in town, we were in Louisville. And we decided that we had far more optimized households in a different part of town, and we would get interest from them, but they wouldn't convert to customers. We'd move the branch there. So I would be thinking about branches as places to attract within a defined area, and that defined area is you can discover that from your data and then just move that to where the demographics are that you want to attract. To me it's pretty straightforward and data driven. 

Now Bryan's talking about attracting additional small business customers or whatever type of customer you want to attract by having a facility there that they can leverage and use and what you're hoping for is that these smaller businesses that could use your high speed internet and your office space and your meeting space You know, they'll grow up to be big companies and some of them will.

And I don't mean big. I just mean a company that can borrow a good amount of money from you and deposit a good amount of money into your bank and use your cash management. And there's absolutely opportunities for that. So you could create a little incubator in your community if you wanted to. You just need to pick the right spot to do that.

People that are going to drive every day to your incubator, you know, if you're having an office space incubator, we have one in Fishers here called Launch Fishers. You can look it up on the internet, but that's a, you know, a wonderful spot to really attract a lot of businesses. But that's Fishers. That's a community that has a lot of those businesses. It's got a mayor that supports small business growth, technology growth. It's an incubator. Very specifically and intended to develop technology in that Fisher's area. So if you have a branch and you can put it inside one of those or create one of those, it's awesome. You just got to pick the spot and the data tells you where to go for sure.

Bryan: Absolutely, David, you got to definitely got to be in the right spots if you're going to build anything new, because otherwise you're to a certain extent wasting money, but

David: Speculating.

Bryan: That's an even better way to put it. But I would also, encourage people to look at where the up and coming can come from, right?

We all want the businesses that are going to take a million dollar plus loan with us, but every bank wants those and you're going to be competing heavily. What you really should invest in is how do I identify those things earlier? You know, I liken it to the push into the student lending market that banks have been underway with for, for years, because that is the predictor.

Or a predictor of the customers that I want to bank 10, 15, 20 years down the line. So if I can get them in as a customer with their student loan, once they are a successful individual, I already have a relationship that I can tap into and leverage. So how do I get those businesses early? And I love the idea of the incubator concept, David, cause that's, that would be a predictor. You know, how do I offer services to folks in those incubators. Come use our conference rooms, come use our facilities. How do I maybe bank them from a depository perspective as they're starting out to have that relationship so that when they do need the million dollar loan, I might be first in line. Coming back to the physical locations and that deposit concept that you were talking about, David, I don't know that many community banks are looking to heavily invest in new brick and mortar, but it becomes more important than ever as the bigger banks are starting to show up in the areas they haven't been in.

I go back to when I was at the acquire or be acquired conference in 2022, I think it was there was a slide that was up in the very first session and talking about the share of deposits across the stratification of financial institutions. And if we go back 15 years, 1% of the banks in the United States controlled almost 60- 70%, I think 70% of the overall deposits in the United States, whereas 99% then are controlling 30. And that's a huge delta that has only gotten worse. So if we fast forward to when that slide was up in 22, 3 percent of the banks, so slightly larger are now controlling almost 85%. of deposits in the United States. And where has that come from? It's come from the bottom. 

So the mix roughly was the banks over a hundred billion back in 2010 controlled 40% of the deposits, whereas the banks under 10 billion, which is the vast majority of the banks of the United States controlled 30%. And the remaining, you know, 20 to 30, depending on the year fell in the 10 to 100, the bigger regional and larger community banks. In 2022 when this came about and why this becomes so critical as we think about the branch and its role and function, the cannibalization of deposits into the top tier banks. So those banks over 100 billion came exclusively at the cost of the community bank. So those numbers shifted where 65% of the deposits were held by banks over a hundred billion. Those are the banks that are coming to your doorstep. Those are the banks that are building branches in locations they have not traditionally built in. To just further their collection of those deposits, further ways to serve those communities that they haven't served so they can continue to fuel their growth. And the depository share of banks under 10 billion dropped to 17%. So Almost half of the deposits that were in community banks 15 years ago have disappeared and they have gone to the bigger banks.

So, if they are coming with their brick and mortar, again, I think it's just that much more critical to think about how you double down on your role in the community. How do you double down on your vision, your mission statement, and who you are as a financial institution and tap into those assets that you have, tap into the local talent, tap into the knowledge of the markets that are being served, tap into the facilities that you have already because if I operate in Pandora, Ohio, which is a tiny little town that I didn't even know existed until we started working with a bank in Pandora, Ohio. Even if Chase builds a branch in Pandora, I still have intimately more knowledge about the town. I have not just branches, but headquarter facilities that I can tap into.

I have more assets than what a top tier bank is going to bring into the market. Not to mention my, my history in the community. And those are the things you really have to leverage and find new ways to get them out there and to capitalize on, to try to reclaim some of that share that, that has gone into the big banks, as well as the shift out of the banking sector altogether and into the FinTechs.

Mitch: I really like what you're saying there, but I think it's also about how do we be more creative, right? The old ways of doing this just aren't working, right? You can't just join the chamber of commerce, show up for the meeting every month and expect people to bring you your business. Now there is this idea of like, how do you get more creative and how do you create this kind of community hub, so to speak, I like this idea of the incubator. We see those coworking spaces pop up all over the place, especially in some, some larger cities. But how do we, as a community bank or a credit union, create that, even if it's not in a physical location, but how do I connect my business owners with each other that offer complimentary services, or maybe I do know these businesses that I, that I am banking.

That are just getting started out, but let's say I've got this other business that can provide some great services for them, whether that's, maybe I know a great web developer that we bank, let me connect those clients together and create that community aspect around my bank or my credit union that drives a lot of loyalty, right?

That way, when that Chase, that PNC, that Bank of America opens up the brick and mortar in town. No question, right? I'm not going to take my deposits there because this community bank has helped me. They've provided a lot of value that creates a lot of loyalty again to those people that are just starting out with a smaller business that are going to be a larger business down the road that are going to be borrowing a million dollars for equipment or for capital, right? 

So I think some great takeaways here. But I think the challenge ishow do we shift the mindset a little bit and think more strategically and creatively about how do we communicate our value in our community beyond just the services that we offer? I think that's a challenge for any company these days, right? But I think especially for community banks and credit unions. 

So Bryan, David. thank you guys for sharing your insights today. I think a great topic, great discussion, and some good takeaways for anyone listening. and thanks everyone out there for listening to today's episode of Lending Made Easy.