The Banking Outlook and the
Future of Community Banking
S. Scott MacDonald, Ph.D.
President and CEO, SW Graduate School of Banking Foundation
Director, Assemblies for Bank Directors
Adjunct Professor, Dept. of Finance, Cox School of Business
Southern Methodist University
scott@swgsb.org
www.swgsb.org
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The Southwestern Graduate School of Banking
Assemblies for Bank Directors
Southern Methodist University  Cox School of Business
PO Box 750214  Dallas TX 75275
Phone 214-768-2991  Fax 214-768-2992
info@swgsb.org  www.swgsb.org
S. Scott MacDonald, Ph.D.
smacdona@mail.cox.smu.edu
S. Scott MacDonald is president and CEO of the Southwestern Graduate School of
Banking (SWGSB) Foundation, director of the Assemblies for Bank Directors, and
Adjunct Professor of Finance, Cox School of Business, Southern Methodist
University. He received his B.A. degree in economics from the University of
Alabama and his Ph.D. from Texas A&M University. Dr. MacDonald is a frequent
speaker at professional programs, banker associations and banking schools. He
is the recipient of numerous teaching and research awards, and was recently
inducted into the Independent Bankers Association of Texas’ Wall of Heroes and
Legends. He is a nationally sought after strategic planning facilitator and
consultant to the financial services industry. He has served as an expert resource
witness before the Texas state Senate and is a former Chairman of the Board of
Directors of a Texas financial institution. Dr. MacDonald is the co-author of the
best selling textbook on banking, Bank Management, as well as author of
numerous articles in professional and academic journals.
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Economic Outlook
Getting Better!
But What Will be the Markets Reaction
When the Fed Ends the Party!
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Monetary Policy
Everybody is asking:
What has QE+ really done?
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What does $4.6 trillion look like anyway?
Source: Board of Governors of the Federal Reserve System, FRED Economic data,
http://research.stlouisfed.org/fred2/
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Inflation in the making?
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Long-term bull market in bonds
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The problem is, rates only have one
direction to go…
• Are you prepared for a upward movement in
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interest rates?
Are you prepared for a significant upward
movement in interest rates?
Are you prepared for a significant and rapid
upward movement in interest rates?
Are you prepared for interest rate volatility of
the likes we have not seen since the 1980’s?
What is the likelihood of any of these scenarios
occurring?
What is the true cost of being prepared or not
being prepared for any of these scenarios?
Almost forgot, are you ready for Reg Q, or the lack there of?
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The pace of the economic recovery
and a potential Fed QE reversal
could disrupt markets!
The Fed’s new word is patience!
What is the definition of patience?
“the capacity to accept or tolerate delay, trouble,
or suffering without getting angry or upset.”
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The Health of the
Financial Industry
A healthy financial industry means they are willing to
take risk, a.k.a, make loans.
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Pressure on Franchise Values
Capital requirements have increased and
there is an assault on the bank’s ability to
generate income.
 Lower returns to shareholders?
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Commercial Bank’s return on assets and equity
over time.
Is there a new path for ROE and ROA?
Source: FDIC Quarterly Banking Profile
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The Denominator!
Strategic Capital Management
is Driven by:
The bank’s ability to access capital and
the bank’s risk profile
Current and future growth plans
Loan quality / risk issues
Business Concentrations; e.g., real estate loans
Borrowed funding dependence
Policy and procedure issues
Operational controls
A strategic capital plan includes a
capital cushion and a contingency
capital strategy.
Capital management requires carefully
planned strategic growth, not growth as a
strategic plan.
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The Numerator!
New sources of income can take many forms.
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With a bank staff more knowledge of existing products and how
these products can help clients meet their financial needs.
By pricing existing products more effectively.
By stop focusing on “fees” and deliver upon the “promise” of
outstanding products and services at a reasonable price.
By examining the need for a more diversified product line and
consider the need for new income streams.
By diversifying the loan portfolio.
With greater use of technology: Help customers “self serve” and
staff gain efficiencies.
By eliminating the perceived “big bank advantage.” Deliver the
technology and remind them you just gave them your cell phone #!
By re-examining our branching strategy.
By making cost control a long run strategic objective.
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On the Net Interest Margin Side
• Community bank’s best vehicles for
generating more profit have traditionally
been:
• Residential mortgages
• Acquisition and development and construction
loans
• Commercial real estate (CRE) loans
• Where will you find grow and profit in the
future?
• How will you diversify the portfolios?
• How will you manage compliance costs going
forward, especially in residential mortgages
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Generating noninterest income
is not about charging fees, rather
it is the fundamental purpose of
community banking!
“The banking industry needs to be less about
‘fees’ and more about providing financial
solutions and exceptional products and
services at a reasonable price.”
–S. Scott MacDonald, Ph. D.
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What will the future of
community banking look like?
What will be the “optimal” size of a community
bank?
Who will be the optimal customer?
What will be the optimal portfolio?
What will be the most efficient delivery method?
Technology will require the industry to
continually re-invent itself.
How long until a disrupter impacts the industry?
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Will we have even larger banks and fewer
community banks?
Share of Industry Assets
90.0%
80.0%
70.0%
Assets > $10 Billion
Assets $1 Billion - $10 Billion
Assets $100 Million - $1 Billion
Assets < $100 Million
60.0%
50.0%
40.0%
30.0%
As our banking
institutions get
bigger and
bigger, risk to
the system gets
bigger.
20.0%
10.0%
0.0%
Source: FDIC, Quarterly Banking Profile
What will be, or is, the optimal size of
the community bank?
• First, it is not the size of the bank’s footprint
that matters as much as the quality of that
footprint.
• The best size of a community bank is a bank
with either:
a. a dominate market size or footprint in a rural
slow growth market, or;
b. a dominate presence in a defined area in an
urban market, or;
c. have enough scale and product offerings to
compete with larger banks.
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Community banks must re-invent
themselves because…
• They have little control or impact on the
payment systems.
• There is new competition from alternative
lending sources.
• The cost of doing business with brick and
mortar will eventually outweigh the benefits.
• The “cost effective” size of profitable banks in
the future will continue to increase.
• The bank’s lending niche of the future could
shrink as new competition evolves.
When will THE banking industry “disrupter” arrive?
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Impact of Technology on
the Future of Banking
Dramatic technological changes are no longer
“in the future” or “will be here soon.”
They got here a few years ago, we have just
been slow to adapt, overcome and improvise.
The banking industry is at risk of becoming
“irrelevant!”
How the bank choses to delivers services in the
future will be critical to its success.
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Technology will dramatically change the
face of banking going forward.
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Convergence of mobile and online technologies
The rise of business process management and the
need to manage big data
Goodbye email, hello message center
The 'tabletization' of banking and the user experience
Security increasingly is a moving target
Integrating toward a brave, new post-channel
integration world, all delivery channels must be
integrated
Pushing self-service products to generate revenue
Reaching the next level of mobile evolution, what will
the payment systems of the future look like?
Source: Bryan Yurcan, “8 Bank Technology Trends That Will Shape the Industry in 2012,” Bank Systems & Technology,
http://www.banktech.com/management-strategies/8-bank-technology-trends-that-will-shape/232300804?pgno=1
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Where does the bank fit in?
• Google?
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• “Here’s a business who sells what you’re looking
for.”
Amazon?
• “Buy whatever you’re looking for from us.”
Merchants?
• “Buy, Buy, Buy!!!”
Apple / ATT
• There’s an app for that!
Financial Institutions?
• “We’ll help you decide whether, when, and
where it makes sense to buy the stuff you
want...in real time.”
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Source: Lee Wetherington, ProfitStars with additions.
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Are we prepared for the next big
hack…
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Organized global threats
Easy access often means “easy access.”
Human error
Use of voice recognition, good or bad!
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The Changing Banking
Business Model
Mergers, branches, new technologies,
concentration of assets, increased
dependence on borrowed funds and a longterm decline in net interest margins.
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How will we deliver banking
services in the future?
Has the community bank been left behind in a
new technology world?
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Why do
bankers have
offices?
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A new “branching” order
• Branches—Can’t live with them, can’t live without
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them.
Many of our branches are either too big, or in the
wrong location, or not needed at all.
The need for a branch continues to declines over time.
According to SNL Financial, banks shut down about
1,407 branches in 2014.
Average branch deposits will continue to fall over time.
Competitive challenges in redefining the role of the
branch and its impact on competitiveness and
suvivorability.
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What is the purpose
of a branch?
Never forget, a branch represents an expense,
not a revenue source!
Build core deposits?
Build core loans?
Billboard to increase brand awareness?
‘cause…everybody else is doing it?
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We must strategically reassess our
branching needs and operate with more
productive branches.
Develop a branching model
to meet the needs of your bank’s customers
Re-evaluate the strategic location of existing branches
Use technology advances and reassess
the true need for a branch
The need for physical branches will continue to
decline over time.
Strategic Cost Control
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Manage What You Measure
• Understanding Dashboards and Metrics
• Reading vs. Truly Understanding Reports vs. Taking
Corrective Action
Build an expense-control culture which recognizes and rewards
employees (and others) who figure out ways to control costs
and improve profitability.
Walk the talk … if you are serious about controlling costs, then
demonstrate it with your actions and your employees will do the
same.
Penny-wise vs. pound foolish don’t be short-sighted or cut
corners … it will come back to haunt you.
Communication is critical as cost control can be scary!
Understanding your “pain points” and inefficiencies associated
with them.
Conducting “want vs. need” analysis on your current expenses
Source: Dickstein Shapiro, LLP, Strategies for Cutting Cost & Improving Profitability.
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Succession Planning
If your people are your greatest assets, what are
you doing to plan for future talent needs.
What about customer succession? What will be
your customer of the future?
Where will your future shareholders and board
members come from?
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Senior Talent Succession Planning:
How do we develop and reward our people?
• If our people are our greatest asset, what do
we do to develop them, retain them, and plan
for succession?
• You get what you plan for, work for, train for
and reward for, not what you hope for!
• Plan for succession both from free agents as
well as age.
• The age of our talent is increasing and is
problematic in the banking business and it is
often difficult to attract talented management
in smaller communities!
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Customer Succession Planning:
Capturing the Millennial’s
• They have not thought much about you, nor have
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you thought much about them.
When do think this will change, or will they
become “set in their ways” with a large bank?
They are moving into their own and are not that
profitable today, but will be very soon.
It is all about “friends and family” with this
generation.
What is your plan to captured the “next”
generation of customers?
Similar to employee succession, we need a
customer succession plan!
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Board and Shareholder Succession Planning.
• Approach board succession as a strategic
objective.
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Ensure the quality of your existing board.
Train the board and “re-engage” them.
Evaluate the overall effectiveness of the board.
Plan today for your future board member needs
• What are you doing for shareholder
succession?
• Often the loss of a major shareholder creates a
crisis for community banks.
• Evaluate your shareholder base and realize
they are critical to your future success.
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Retention Rate of Post-Crisis Core Deposit
Growth Remains Uncertain
• The retention rate (and pricing) of deposits post the
financial crisis remains a key factor in IRR models
• The near-zero rate environment means low rates
make it inexpensive for depositors to remain liquid.
• Segments of the bank’s core depositors may react
differently in an increasing interest rate environment
than they have in a low rate environment.
• There is a critical need to analyze core deposits
carefully because some may not actually be “core”
and could be much more sensitive to rising interest
rates than historical relationships may suggest.
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Much of the growth in the banking industry leading up to the
financial crisis of 2008 came through borrowed funding,
rather than core deposits.
Core deposits STILL create bank value!
Notice an
new
trend?
Assets
are our
liabilities,
while our
liabilities
are our
assets!
Source: FDIC Quarterly Banking Profile
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Loan to deposit rates have fallen, but could increase rapidly
as the economy improves and interest rates increase.
There is a numerator and a denominator to the loan / deposit ratio!
Are we going to face a liquidity crisis when rates go up?
Source: FDIC Quarterly Banking Profile
Think Strategically!
• Develop a strategy to survive a significant interest
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rate shock.
Identify and develop new sources of loan volume and
loan income.
Enhance and expand noninterest income sources.
Embrace technology and teach your customers to
self serve.
Re-evaluate your branching strategy: Go to your
customers, don’t make them come to you.
Ensure the future of the bank by planning for
succession today.
Develop a plan on how to retain core deposits as
rates go up.
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Don’t forget, out future is bright…
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"I like the dreams of the future better than the history of
the past." --Thomas Jefferson
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"The past should be culled like a box of fresh strawberries,
rinsed of debris, sweetened judiciously and served in
small portions, not very often." --Laura Palmer
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"Let the past drift away with the water." --Japanese saying
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"Concern should drive us into action and not into
depression." --Karen Horney
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"True modesty and true pride are much the same thing:
both consist in setting a just value on ourselves - neither
more nor less." --William Hazlitt
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"Until you make peace with who you are, you'll never be
content with what you have." --Doris Mortman
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