Note: The focus of this article is on the current state of the banking industry and how today’s economic environment has impacted strategic planning for financial institutions. This article features information and findings from an interview with highly regarded industry attorney and consultant expert Greyson Tuck, President of the Memphis-based law firm of Gerrish Smith Tuck, PC and the consulting firm of Gerrish Smith Tuck Consultants, LLC.
6 Areas to Reinforce at Your Institution in 2023
The first quarter of 2023 ended in rather dispiriting fashion in the banking industry.
First came the closures of Silicon Valley Bank and Signature Bank in mid-March.
Shortly after, on March 23, the United States Federal Reserve increased interest rates by .25 percent to 5 percent – matching its highest since 2006. It was the ninth consecutive rate increase dating back to March of 2022.
How did we get here? And what is the current state of the industry given today’s rising rate climate?
“When compared to the last couple years, we are seeing a much more volatile and uncertain banking environment,” Gerrish Smith Tuck’s, Greyson Tuck said. “What I mean by that is, in the second half of 2020, 2021 and the first half of 2022, financial institutions were blowing and going. Everybody was thinking about mergers and acquisitions (M&As), loan demand was high, there was cash everywhere.
“There was a lot of opportunity to engage in activity, some type of activity, whether it be significant loan generation, an M&A transaction, a new mortgage program, whatever, there was just a lot going on.”
The mood changed in the second half of 2022 as inflation caught up.
“The tone went to ‘OK, this inflation is not transitory,’” Tuck said. “This inflation is instead something in which we’re going to have to make some painful moves in order to control.”
The painful moves came in the form of the aforementioned rate increases.
Here’s the positive: Tuck suggests that the rising rate environment doesn’t mean financial institutions must sit still. In fact, now’s the time to be proactive.
“It doesn’t mean we’ve got 2008 coming all over again,” Tuck said. “It’s not that. You’ve just got a lot of institutions that right now are saying, ‘we’re not sure what 2023’s going to bring. We’ve had a couple pretty good years, maybe this is a year we just need to slow things down a bit and let the averages even themselves out.’”
So, how should community-based financial institutions approach the remainder of 2023?
“In my opinion, economic uncertainty has put a much stronger focus on strategic planning for internal (improvement) rather than external (activities),” Tuck said.
He added that many institutions are using 2023 as an opportunity to examine their organization to ensure they’re structured in a way that allows them to operate most efficiently and effectively.
Tuck suggests that taking this “self-improvement” approach gives institutions the opportunity to establish, or rebuild, a sound internal structure that positions them to pursue external activities (e.g., M&As, new mortgage programs, etc.) when a “normal banking environment” resumes.
So, what are some internal improvements financial institutions can make right now?
Tuck recommends reviewing at least these 6 components.
1. Tailor your liquidity strategy to fit today’s environment.
“I think the biggest thing community banks (and credit unions) need to be thinking about right now is their liquidity,” Tuck said.
Tuck recommended that community-based financial institutions ask themselves:
- What’s my liquidity strategy in today’s volatile environment?
- What’s my deposit-generation strategy?
2. Don’t risk it! Take your risk-management practices to the next level and don’t be content.
Given the events that took place in the industry in March, Tuck said it’s no secret that “banking is completely risk management.”
How are “good” community-based financial institutions managing risk?
“What I have learned is that the really good community bankers, No. 1, understand the various different types of risk associated with the business they’re working with, and No. 2, how those risks interplay with each other,” Tuck said. “Good institutions see the entire picture and the movement between the risk, but most important, how to monitor and control the risk.”
3. Train and retain your highest-level talent.
To run any business effectively, its staff must be properly trained. It’s no different for a financial institution.
“Training is a component of it (internal improvement),” Tuck said. “We want to make sure our employees are knowledgeable and well-trained. A lot of it, too, is process and procedures.
“For example, when loan demand is at all-time highs, you’re doing everything you can just to keep up. You’re not going to have time to sit down and review all your processes ... Now’s a good time to do that.”
And why is it important to retain properly trained employees?
“Employee retention is very important because a high employee turnover makes it very difficult to establish a successful culture,” Tuck said. “If you’ve got employee churn, and every week somebody’s coming in and somebody’s leaving, how do you really form a culture around that?”
Lastly, Tuck recommends educating your employees on the value your institution provides to the community.
“Make sure your employees understand, from a corporate, social, neighborly perspective, what the institution is doing to support its local communities,” Tuck said. “There are many institutions out there that are the lifeblood of their markets. And if your institution wasn’t there, the lives of numerous people would be materially different.”
4. Don’t play from behind with tech.
If your technology is inferior, so is your institution. Mediocre technology can be the end of you, and inferior technology erases effective customer service.
So, is your tech up to date?
“Minimal friction in the provisions of (tech) products and services, to me, is the fast lane to ensuring continued relevance at financial institutions,” Tuck said.
This is particularly important if you hope to remain relevant with younger consumers.
“You’ve got the youngsters, the Gen Zs (and younger), who tend to be very digital,” Tuck said. “The relevance is, in my opinion, determined by providing the necessary products and services that financial consumers want and need in a way that is competitive, but not in a way that’s intrusive.”
5. What’s your game-changer?
No institution’s money is any greener than another’s, but all community-based financial institutions have a unique story to tell.
So, what’s your story? What’s going to draw people to your institution?
“We have to make sure if we’re not going to compete on price, then we better make sure we have a superior consumer experience,” Tuck said. “The institutions that are very successful really think about beginning to end of account opening, or a loan application, for example.
“They ask, ‘how can we make this as absolutely effective and enjoyable for the consumer as possible?’”
6. Be the contrarian.
Tuck’s final piece of advice to community-based financial institutions for internal improvement: “Think differently, act differently.”
“I think the future of community banking is strong for those that are willing to think differently and act differently going forward than they have in the past,” Tuck said. “How do we offer all of the required products and services but differentiate ourselves from everyone else who offers that product and service?”
*About Greyson Tuck: Greyson Tuck is the President of the Memphis-based law firm of Gerrish Smith Tuck, PC and the consulting firm of Gerrish Smith Tuck Consultants, LLC. Both practices are solely dedicated to community-based financial institutions. Tuck holds a bachelor’s in Accounting and Finance from the University of Tennessee and a Doctor of Law (J.D.) in Banking, Corporate Finance and Securities Law from the University of Memphis. Being the son of a community banker with a love for math at a young age played significant roles in his decision to work in the banking industry. Growing up in Knoxville and later attending the University of Tennessee, Tuck is a lifelong fan of the Volunteers.