Community Bank Growth Formula: A Discussion With Farmer s Bank and Trust CEO Bob Burns

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1 Community Bank Growth Formula: A Discussion With Farmer s Bank and Trust CEO Burns As I continue my discussions with regional and community financial services leaders across the nation as well as in my home state of Arkansas, I am constantly encouraged by the friendly, thoughtful, wise, and intelligent people I meet. These CEOs are at the helms of their organizations at a time when the industry is changing faster than ever. Every one I have met possesses the clarity, resilience, and entrepreneurial wisdom to compete against the larger institutions and their huge marketing and technology budgets. Meet Burns Last week my discussion took me to Burns, CEO of $1.2 billion Farmer s Bank and Trust in Magnolia, AR. became CEO of Farmer s in 1983, only three years after joining the company. At that time the bank was very small and conservative (about $25 million in deposits and a $20,000 lending limit). He liked the challenge of competition and the opportunity to work against the old culture to create a bank that could survive and grow in a new regulatory environment. Since then he has built Farmer s into the 10th largest bank in the state. During our conversation we discussed the opportunities and challenges facing community banks, as well his thoughts on leadership, the future of the industry, and their recent acquisition of 1st Bank in Texarkana. I found friendly, soft-spoken, intensely knowledgeable, and very open to sharing his thoughts. He is excited by the challenges and variety of his work and its entrepreneurial nature, and enjoys his role as a leader. He is a student of people, and believes clarity and courage are the essence of leadership. While industry behemoths Wells Fargo and Bank of America are in his marketplace, is very comfortable competing against them because of the skill of his team and their ability to provide valuable services and relationships to customers. Copyright CEO Velocity,

2 Looking at the next three years, sees an industry that is consolidating, especially smaller banks, and believes a bank needs to have at least $750 million in assets to have strong enough efficiencies to grow. 5 Key Points From Our Discussion You will be able to read my entire discussion with later in this article, but for now let me summarize five key points that stood out to me from my discussion with : Size and scale realizes the increasing costs of regulatory compliance and risk management can only be overcome by size and efficiency. That was a large reason for the 1 st Bank acquisition. Specialization and market knowledge The outstanding leaders I have spoken with know their institutions can t be all things to all people, and is no exception. Farmer s clearly has a focus on mid-market businesses, has deep knowledge of the needs of those customers, and excels at delivering value to them. Clear leadership direction and communication believes his role is to set the bank s direction and speed, and to communicate those clearly to his leadership team. He appreciates good people and depends on them for the bank s success. Growth markets knows how important it is to have a strong presence in growth markets, and the acquisition of 1 st Bank in Texarkana was an example of that strategy. Relationships Business customers in particular value relationships with bankers who understand their businesses, have the expertise to add value to them, and the authority to make important decisions. has built the strength of Farmer s around this strategy. Challenge Questions to Bank CEOs (and non-bankers too!) Before we get deeper into my discussion with, I d like you to stop right now and ponder the following questions based on s five key points already discussed: 1. What is your strategy for size and scale? a. What are your greatest opportunities to increase your bank s size and generate economies of scale? b. Does everyone in your institution know what those are? c. What are you doing about them, and what is their timeframe? Copyright CEO Velocity,

3 2. What are your market specialties? a. Who do you serve better than anyone else in your marketplace? b. How do you know you serve them better? c. What are you doing to improve upon this strength? 3. How clear is your strategic direction? a. What are the three to five key objectives? b. Can everyone on your leadership team clearly articulate them? c. How are you measuring your progress? 4. Assess your physical distribution network a. Are you in growth markets? b. If some are not in growth markets, how quickly can you sell them? 5. How solid are your customer relationships? a. Who are your best customers? b. How loyal are they? c. How often do you meet to assess their needs? d. How will you build relationships with millenials? Copyright CEO Velocity,

4 Now that you ve carefully thought through those all-important questions, let s proceed with the rest of the discussion. Keep the following diagram in mind as you put together the pieces of how leads Farmer s in formulating strategy: The Farmer s Bank & Trust Formula for Strategy Development and Execution Specialize Scale Growth Mkts Results RelaBonships Clarity Details of My Discussion With Burns, CEO of Farmer s Bank & Trust, can you talk to me about the acquisition of 1 st Bank and how it will benefit Farmer s? Our merger with 1 st Bank gave us 5 new locations and will put our total assets at around $1.2 billion. We started the process in about April of 2014, and finally gained all our Copyright CEO Velocity,

5 government approvals last week. Of course there are many operational and regulatory issues to work out, and they are time consuming and challenging. This acquisition made a lot of sense for us because it is a logical extension of our existing market area. Texarkana is a growth market and only one hour from our headquarters. We already had two offices there. The city has positioned themselves well economically with their roads and interstates, healthcare system, and higher education. It s a great area for businesses to settle and grow. 1 st Bank used the same operating system as us, so there will definitely be some operational cost savings and efficiencies. All in all, the merger will be good for the longer term wealth of our shareholders and will increase our loan generation. What new leadership wrinkles does the merger bring? The easy part is the technology piece, but the real challenge is the cultural integration of the various backgrounds, work processes, and leadership styles. Solving cultural issues is 90% of the battle. Getting people to work together and play as a team is crucial. You have personality types that worked maybe 20 years together who are now in a different reporting and value structure. It s a real challenge. Fortunately they had a really good senior management team and we were able to keep almost all of them. They have a wealth of experience and will be strong contributors in our operations, lending, and finance areas. Bringing over that experience level and integrating it is a great thing. In the employee ranks some people will resist change, but you have to help them get past it. Everyone likes change as long as it isn t them. What do you see as your most crucial leadership duties? My main jobs are to set direction and the speed of travel, to give clarity to leadership, and allow everyone in a leadership role to clearly understand expectations and provide resources to achieve them. The book Blue Ocean Copyright CEO Velocity,

6 Strategy isn t specific to banking, but it has some good banking philosophy in it. My philosophy is more along the lines of getting the right people on the bus and in the right seat. Clarity and courage are essentially what leadership is about. People have to trust where you re taking them and that you have integrity. Early on there were 2 or 3 bankers who contributed to my philosophy on bank leadership. I was heavily influenced by Wayne Hartsfield, a banker in Searcy, AR. We spent a lot of time together, and I liked how he worked through problems. I also learned from the mistakes of leaders I worked with. The military also influenced my leadership. I was on active duty for six years and the rest in the reserves. I taught at the Command and General School in the military, and at the National Defense University. I had the opportunity to see many of great military leaders, and was able to work with General Scharzkopf for a while. Can you give me your perspective on leadership development within Farmer s Bank & Trust? A retired Marine Colonel once told me the military is far better at leadership development than the private sector. You don t win in every case with leadership training, and your Marine Colonel friend is totally right about military leadership training. Leadership is a big awakening for a young officer. Banking doesn t do as good a job as they should mentoring younger people. Sometimes informal mentoring works best, like having coffee with 2 or 3 people. People who are emotionally driven don t usually end up as good leaders. There s a role for emotions but they should not be the primary decision making factor. Emotional responses to people s needs in a work environment are fertile ground for lots of trouble. You have to treat people fairly and let them know what the ground rules are. There is no express elevator to the top. It is one step at a time, usually an uphill climb. It is important to assess a person s character and potential for leadership. It s important to develop, mentor, and support people with good talent. Sometimes you have to look beyond a person s leadership potential because there are successful leaders who Copyright CEO Velocity,

7 are dishonest. You have to play the authority card last. I like to coach and mentor people to success rather than use my authority card. A few personality types don t respond well to coaching, and understand a 2 by 4 better, figuratively speaking. A good leader has a toolbox full of behavior modification. Like Shakespeare said, all of us are actors, and we play the role that gets results. What gets you most excited about your company and your role in it? I really like the people I work with. I like the challenge of inspiring people to be the best they can be. That experience is like a narcotic. I definitely want to win. It s never dull. Things are always changing and new issues come up all the time. I would be bored with a repetitive job without the opportunity for original thought and entrepreneurship. I get excited by young people when the light comes on and they realize how success happens by attitudes and behavior. You must have courage to get rid of dysfunctional people. It s part of the process. What are the greatest opportunities and challenges you see for your bank & the industry in 2015? The greatest challenge is the increasing regulatory burden. It eats up so much time that could be spent with customers. There s so much more paperwork as well as increased collateral requirements from the regulations brought on by the mortgage meltdown in Community banks are still paying the price for it even though they weren t involved. It s hard to determine what regulatory shoe falls next. We spend a tremendous amount of time on this. Washington seems to see all banks the same. They don t make any distinction between community and commercial banks. One size fits all in their eyes. The second challenge is the risk management protocols related to the first challenge. Most risks in banks are fairly well isolated, but many of the risks affect more than one area of the bank. Risk management has moved to a new level where you manage it as a function and not as specific Copyright CEO Velocity,

8 events. This is a good thing in the long run, especially for cyber security, credit card fraud, social media, and electronic data. All of those remove you from the customer to some degree, so it is harder to know and appraise customers. Lots of new millenials come in and you never see them again. That s a big challenge due to new way we do business. Cyber security is a huge issue, and you have to protect your customer. It will be a continuing challenge going forward. As you said, it s a new business model. How can community and regional banks out-compete larger institutions with their expansive technology, personnel, and marketing budgets? You have to make some the assumptions that you re in a market that has growth potential and other competitors are looking for that business. Not all banks focus on exactly the same market. For example, we compete against Wells Fargo and Bank of America. They re in wealth management, but that isn t our bread and butter. We specialize in businesses with $500,000 to $10 million in sales, maybe $15 million. That s what we call middle market. Wells Fargo looks at bigger lines. You just need to find your niche and provide what they need. They need a partner who can provide money management, treasury functions, ACH, payroll, and other services besides the lending relationship. Some smaller banks focus more on consumer relationships, and we do consumer too, but our primary focus is on the middle market business. Smaller banks can t compete with us because they have lower lending limits, and most don t have the skilled commercial lenders needed to handle more complex lines of credit. In a lot of areas you don t compete against the big guys. You do a little on deposits. They tend to have deposit sales by offering higher rates, but we self-fund. We collect our own deposits and loan our own money. Smaller banks can use technology about as well as any other large bank. You just need to commit to it. It takes the right people, which can be tough, but it s doable. Copyright CEO Velocity,

9 Why is it beneficial for SMEs to bank locally as opposed to with some of the nation's largest banks? Most would tell you the experience is different, especially in the relationships. Larger banks change people more, and credit decisions are made by people you never get to see. They have relationship managers who gather all your information and send it off to a regional headquarters, which then lets the relationship manager know the result. In community banks it is more a discussion with people. Our bankers go out, visit your plant, and understand what you re doing. One of the biggest complaints we hear from business owners is not having confidence in the experience of big bank relationship managers. They feel big banks can do a good job, but they want someone they can come in and talk to, bounce some ideas off of, and have a relationship with beyond just an account. Business owners won t give you a pass just to have that. They expect the same things a big bank offers, like remote capture, treasury management, packaging small business accounts, and branding products for them, like a company logo on credit and debit cards. Trust is so important to a business owner, and you get that when they know you re the final decision maker and you re not going to run out from under them. Building this type of trust gets us a lot of business from word of mouth advertising. What are some best practices of some of your best SME clients?? It often depends on leadership. I have seen instances where the company is totally controlled by sales, and they outgrow themselves. Others are so control and process oriented that they aren t timely and their service quality is poor. The most frequent case is where you have an intelligent person with a great idea, but no experience or money. Many times we will work with the SBA to try to help that person, and maybe even encourage them to partner with 2 or 3 Copyright CEO Velocity,

10 other folks. Those are the more difficult ones. The easy clients have been in business maybe 10 years and have been through the infantile death syndrome. They know their numbers, their balance sheet, sales strategy, and can control their expenses. They have good products and stand behind them. A good example is a little company here in town that builds picnic tables. They ve been in business about 20 years and make aluminum seating for athletic facilities and banquet tables. It s a very successful business. They sell a lot to the military because they need outside furniture. The owner has good vision, communicates a strong message to the sales team, and doesn t let sales outgrow his production capabilities. He keeps all areas of his business in harmony balanced and moving together. We had a guy who wanted $150,000 to start a painting company. He was from that industry and within 3 years he was doing incredibly well. He knew the paint business backwards and forwards. So you can t get beyond people s skills and competencies. They need to have the competencies to manage the individual functional activities of a business for it to be more than a dream. These are just some of the things you must have; leadership, confidence, the desire to work hard, honesty, integrity, and willingness to stand behind products. Most see only one piece of their leadership responsibilities, the vision. You have to put it all together to be successful. What do you think the banking industry will be like in the next 3 years? Banks under $500 million in assets will have efficiency issues going forward to keep up with the costs of regulation, technology, and everything else. The ideal size is at least $750 million to keep efficiencies in your growth markets. Oftentimes bank boards are older and not as sophisticated on technology and don t want to learn. Sometimes the human element won t let them embrace the new model and Copyright CEO Velocity,

11 they will be acquired. It is difficult for a lot of the banks in small communities to compete unless they are in a niche market. They are vulnerable and many will be sold at low multiples., thanks so much for our discussion. I really admire the way you run Farmer s. You are operating on a lot of sound, forwardthinking principles, and I applaud you for that. Thank you. It was a pleasure to meet you and I enjoyed the conversation. McClymonds is a veteran leader in the financial services industry and expert at creating and executing profitable growth strategies. His company, CEO Velocity, is a strategic consulting firm that helps CEOs of financial services firms and small to mid-sized enterprises create greater customer loyalty, profits, and company value. You can reach at , scottm@ceovelocity.com Copyright CEO Velocity,