Formula for Community Bank Success: What Financial Services CEOs Can Learn From First Community Bank CEO Dale Cole

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1 Formula for Community Bank Success: What Financial Services CEOs Can Learn From First Community Bank CEO Cole Leadership and strategy are two of my favorite topics, and I have been both amazed and encouraged by the leaders I have met recently in the financial services industry, particularly as they adapt their strategies to the digital era. As I meet with CEOs of small to mid-sized financial institutions regarding their leadership style and the challenges they face, I am especially interested in how they are leading their teams into the new financial services business model where they are competing against huge institutions as well as non-banks such as Wal-Mart. The financial services industry has indeed changed, and CEOs have to be more skillful than ever as they balance the new business model, regulations, and risk management. One CEO who has gained my admiration is Cole, CEO of First Community Bank in Batesville, AR. founded First Community in 1997, and has grown it into the ninth largest bank in Arkansas, with just under $1 billion in assets. Not long ago and I had a phone conversation where we discussed how he started and grew First Community Bank, his thoughts on business growth and success, the greatest challenges and opportunities facing his bank, and the industry s future. You will be able to read all the details of those dimensions of our discussion later in this article. To get right to the point, I was thoroughly impressed with, and believe he exemplifies what a leader should be entrepreneurial, intelligent, strategic, a relationship builder, and people developer. Meet Cole is a true entrepreneur and a classic American success story. After being laid off during a bank merger, he founded First Community Bank in 1997 and has grown it to 18 locations, 278 employees and almost $1 billion in assets. When I spoke with him last week I met someone brimming with enthusiasm who obviously loves his work and the people that make up what he calls the First Community professional family. He was friendly, eager to discuss his bank, and an obvious expert on people and banking. Copyright CEO Velocity,

2 I like to use the term the 3 C s of capital, culture, and community to let my clients know how to be successful, and is the embodiment of those. He has worked hard to create a company that is profitable and based on sound financial principles, a sought after place to work, and an asset to the communities it serves. During my conversation with five key points emerged: 1. He is a true entrepreneur. s entrepreneurship is exemplified by his focus on locating in growth markets to build assets rapidly, his aggressive spirit that has kept the bank expanding, and his creativity that keeps employees and customers loyal. 2. Relationships with people are his first priority. attributes much of the bank s fast growth to the focus on building relationships with customers, employees, and the communities they serve. It is a clear strength of his bank. 3. Creating a sought after place to work is profitable. s philosophy is if you treat your employees right, they will take care of you. This has proven to be a profitable strategy as it has attracted highly talented people who provide great service and low turnover. 4. Businesses need more from their banks. Being an entrepreneur, understands that business owners need more from a bank than just the financial products it sells. One recent forward-thinking idea was to start First Community s Business Resource and Solutions Division in Led by a former consultant, the division helps entrepreneurs identify the most promising opportunities for their businesses. 5. Solid financial principles are essential. has been a banker since 1974, and knows the factors that drive a bank s economic engine. He understands that a high net interest margin (NIM the difference between the rate a bank charges for loans and what it earns on investments versus what it pays in deposits) and the efficiencies that come with size are what make a bank financially healthy. To achieve an NIM above industry norms emphasizes his dependence on quality people, products, investments, and excellent service. Challenge Questions to Bank CEOs (and non-bank CEOs as well) Before we get deeper into my discussion with, I d like you to stop right now and ponder the following questions based on the five key points discussed above: 1. How entrepreneurial is your company? a. What new ways have you added value to your customers in the last year? Copyright CEO Velocity,

3 b. What phrase most describes your culture, We ve never done it that way, or Great idea, let s try it? c. Would your customers describe you as innovative or just like any other firm in your industry? 2. What priority do you place on relationships? a. Everybody says relationships are a priority. What evidence do you have that this is true in your firm? b. Can you, your executive team, and every relationship manager name the top 20 customers of your company? c. Do you have a relationship metric in your bank that is used to evaluate performance and compensation? 3. Is your bank the employer of choice in your market? a. 70% of Americans have a negative opinion of their employer. What is that percentage at your business? b. What development plans and coaching do you offer your employees? c. What do you do for your employees to make the physical environment inviting? d. Are most of your key hires from people seeking you, or do you have to find them? 4. What are you doing for business clients beyond banking services? a. Do you have business relationship managers specially trained in the needs of entrepreneurs? How frequently is their training updated? b. Would your clients describe your business relationship managers as knowledgeable and an asset to their business? Have you asked them? c. Can you name five non-banking services your business clients need that you can provide? Copyright CEO Velocity,

4 5. What are you doing to improve your margin and efficiency? a. Can you list three ways you could improve your net interest margin this year? b. Would your clients pay a higher loan rate to get the value you add? c. What ways could you drive down costs by using people, systems, and processes more effectively? 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 First Community Bank: The First Community Bank Strategy for Growth and Profitability Entrepreneurship Rela=onships Employer of Choice Offer Businesses More Higher Margins Details of My Discussion With Cole, CEO of First Community Bank, can you tell me how you got started at First Community Bank? Sure. I started my banking career March 1, 1974, and went up through the ranks of banks in Texas and Arkansas. In 1996 I was terminated when Boatmen s Bank sold to NationsBank. Copyright CEO Velocity,

5 There were 3 people in Batesville at the time who told me I should start a bank, so I decided to do it. Since then it s been a classic American entrepreneurial story, an Arkansas story. We started First Community on August 4, 1997 after I had raised $3,452,300 from 150 shareholders going door to door. No one held more than 8% of the shares. I ll never forget that amount of money. When I raised that capital I told each shareholder I wasn t going to do it better than a large bank, just differently than a large one, and we ve done just that. We started with 14 employees, and today we have 278. Right now we have $958 million assets and will exceed $1 billion in We grew from $822 million in 2013 to $940 million in We started with one location in Batesville, but now have 18 locations in Arkansas and southern Missouri. How did you build out from Batesville? We focused on expanding into areas that were growing strong. First we branched to Searcy from Batesville. We hired the right manager for Searcy, David Wood, and let him run it. We monitored it, provided counsel, and David turned it into the 2 nd largest bank in Searcy. Next we branched into Bald Knob and Cabot, then SW Missouri. We took the MO branch from $12 million to $82 million in about 6 years. Then we bought a small branch in Mountain Home and grew it from $12 million to $45 million in total assets. We moved into Jonesboro next, which is another top 10 Arkansas city. Allen Williams manages that for us, and it now has $77 million in loans and $80 million in assets. We ve become the 2 nd largest bank in the Batesville and Searcy area, and about the state s 9 th largest bank in assets. Copyright CEO Velocity,

6 To what do you attribute your fast growth. We grew because we built relationships with customers, employees, and in the community. Hiring the right people was crucial. I hired Boris Dover, a Batesville native, and he helped build the bank through his relationships. Along the way we hired six presidents from other banks. Every time the window of opportunity to hire someone great came along we hired them as long as we had a spot. Another key was expanding into markets that were growing. We focused on building a great place to work, and that helped us build relationships with customers because our employees were happy. Those relationships enabled us to take deposits provide the capital our communities needed. That s the exponential growth available in banking. Customers want to bank with successful, competent people who take good care of them, and we ve always taken care of every customer, no matter how big or small. What do you see as your most crucial leadership duties? The main thing I ve learned is to hire the right people. As I mentioned, I started with Boris Dover, who had tremendous local knowledge. He had lived in Batesville a lifetime, and is now the president. I also had to learn to let go and trust my people because I couldn t do everything. You can t manage, develop, nurture, and motivate all those employees by yourself. It is important to have the right management team in place, so when the window of opportunity opens you can take it. It is critical for all of us to be motivating and providing vision, and building excitement for our staff and community. What are the greatest opportunities and challenges you see for your bank and the industry in 2015? Copyright CEO Velocity,

7 The low rate environment we ve experienced since has been a huge challenge. If a CD customer can only earn.5% there s not much incentive for them to open an account, so our cost of funds can be more expensive. Low loan rates don t let us achieve the kind of spread we want. We try to build the company on a 4% + NIM margin. Most banks on national basis earn 3.5% to 3.8%. Rates are expected to increase mid to late 2015, but will they? Our challenge is to prepare for that in terms of asset and liability mix. We want more assets maturing than liabilities so can make more money as rates go up. We don t want to be caught with low rate long-term loans and then have to pay higher deposit rates. Other challenges are regulatory, audit, compliance, appraisal, and loan review. There s more and more of that because of the Wall Street banks that created all the problems like the toxic mortgages and sub-prime loans. Congress has put community banks in the same basket of regulations with them, and that isn t right. It increases our costs to comply with regulations, and we have to pass those costs on to the consumers Congress is trying to protect. We ll continue to take advantage of industry problems by focusing on the customer, providing higher levels of service than anyone else, and investing in the communities we serve. How can community and regional banks out-compete larger institutions with their expansive technology, personnel, and marketing budgets? Like I ve said, we ve really focused on building relationships with customers, employees, and the community, and on hiring the right people who provide excellent service to everyone, regardless of the size of their account. Bigger banks just can t do that. They don t want their people providing the same high level of service because it is too costly in their model. Hiring great people and treating them well makes them want Copyright CEO Velocity,

8 to stay, and that s where you build your consistently high levels of service. What role do community banks play in helping their local economies grow, and is that changing? Banks still provide the capital communities need to grow. Where there s a healthy, growing community you ll find successful banks and visa versa. They depend on each other. A bank is a representation of the strength of its community. In banking we get to help people fulfill their dreams by buying a house, or starting or building a business. It s our responsibility to help those businesses grow. You have to be about more than just profits; you have to invest in your communities. What are some ways community banks can best serve small and medium sized businesses (SMEs)? You have to be a resource to the businesses in your community for both capital and expertise, so in February 2014 we started a Business Resource and Solutions Division for both startups and existing businesses. We help customers and non-customers build and implement business plans. Businesses always come to us with questions, and we designed the program around what they do every day. So far we ve had an excellent reception from customers. For example, many times businesses are not turning their inventory fast enough and need some help with financial analysis. Tom Massey is the head of the division, and at this point he s providing the service for free. Tom had done consulting work for major companies across the country, but he chose First Community because he didn t want to travel any more. Tom has built networks that he calls Alliance. He s bringing the owners of those businesses together and they are Copyright CEO Velocity,

9 learning from each other as well as from outside speakers and consultants. Right now we re mostly drawing the small customer, like restaurant owners, retail furniture stores, and the Verizon store owner. The regulatory hurdle here is lender liability. We handled that by having the customer sign a disclosure and release form that the bank isn t advising them, they re just pointing out opportunities. What are you doing to ensure your bank acquires and retains the talent needed to innovate, serve customers well, and remain profitable into the future? I ll go back to what I mentioned about how important it is to hire the right people. That s where it starts. People want to work for successful companies and be associated with a winner, and winners attract more winners. We ve always focused on making First Community Bank a great place to work, and we have become the employer of choice in all our markets. That has come from building relationships with people, from building what I call the professional family of First Community. Here are a couple small examples of what we do: In our main office we have a Happy Days employee lounge. We have ice cream, a soda fountain, jukebox, booths, tables and chairs, just like the TV show Happy Days. I also buy lunch for all our employees when we hit our targets. If you take care of your employees they will take care of you. What do you think the banking industry will be like in the next 3 years? It will be forced to become more efficient, more electronic based, more digital, more automated, and we ll see more ACH transactions. We re moving away from checks and will experience more debit and ACH transactions. Copyright CEO Velocity,

10 The pathway to high performance in banking is net interest margin. You get that from having quality products and services, the right people, and quality loans and investments. All those earning assets drive the economic engine of a bank. You have to get efficiencies from people to lower costs, but you can t drive efficiency all on income or all on expenses. It as to be balanced, and crossing the $1billion hurdle helps achieve that efficiency. We re still going to need to branch but with smaller offices. People still want to be around other people. They still need to access relationships that aren t long distance. First Community is going to reach over $1 billion in assets in 2015, and our efficiencies will be greater. There is always a point that you cross on the stairs where you nurture, stop for a while, and go to the next step to build more infrastructure to take care of future growth. Those are the steps we re climbing now. The future is unlimited at First Community Bank. Employees see it and want to be part of its success., this was a great discussion and I really appreciate it. I admire your wisdom in understanding how building a great place to work is the cornerstone of creating a successful company. Than you. I enjoyed our discussion too. McClymonds is a veteran leader in the financial services industry and expert at creating and executing profitable strategies that make businesses grow. 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,