Every bank says it's a "relationship bank," but in reality, their actual relationship profitability often looks quite different. In this Purposeful Banker episode, we share some stories from individual banks (don't worry, no real names are used), as well as ways they can improve performance.
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Jim Young: Hi, and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, director of content at PrecisionLender. I'm joined again by Dallas Wells, our EVP of strategy.
Today, we're going to be talking about relationship banking. Now I know you might hear that and think, great. We're basically talking about banking. Could we get a little more broad or a little more vague, a little more general? But that's because many of you work at banks that think of themselves and often publicly promote themselves as relationship banks. It's at the core of what you do to use a little sales and marketing jargon, it's your value prop. But what does relationship banking actually mean for you and your bank? Do you know what constitutes a good profitable relationship at your bank or what constitutes a bad one?
And do you know how to get more of the former than the latter? We started asking some of those questions ourselves recently and did a deep dive into our data and our findings are the source of a series of blog posts called profiles and profitability and will be part of the discussion in our upcoming May 11th webinar, "Understanding and Improving Your Bank's Relationship Profitability."
We'll have links to those posts and to the webinar registration page in the show notes. And the blogs and the webinar will get into the nitty gritty details that I know you all know and love, but today's podcast, we're going to take just a higher level view about relationship banking with a few interesting antidotes sprinkled in. So Dallas, let's start with that label: "Relationship Bank." How often do you come across that phrase or label in your daily interactions with banks?
Dallas Wells: I would say 100% of the time. It's one of the few universal truths that we run into. And so this particularly happens when we first start discussions with a bank. So in the sales process, that's how they almost all describe themselves. And what's interesting is it's a word that's really common, but the actions that follow it are not all that consistent. So I think that's probably what we'll get into, but the word is universal and that sentiment. Everybody wants to be a relationship bank, but how they actually go about doing that is pretty darn different.
Jim Young: Everybody's bank is a relationship bank and everybody's in an intentionally competitive market. Those are the universal truths.
Dallas Wells: Bingo. Those are the ones. Yeah.
Jim Young: And you touched on that. When you hear them say that we pride ourselves on being a relationship bank, what do you think they mean? Maybe in this case, it seems like what you're saying is that answer would be very different depending on which bank you're talking to.
Dallas Wells: Yeah. And I think what they're trying to say is, look, we're selling in essence commodity products here. So how we sell them is going to be the difference. And so everybody wants to be that trusted advisor. That's essentially the only thing you can charge a premium for is being a trusted advisor, perhaps speed and efficiency. That could be another value proposition, although that's not typically what the bank is talking about when they're saying relationship banking, but look at the websites and you can see what they're all trying to say. It's always face-to-face meetings with banker and borrower. It's never in the stuffy bank office either. It's always in a coffee shop or out on the factory floor and big smiles and handshakes. And you can tell that the banker's just truly understanding their customer and making sure they get everything they need.
That's the sentiment that they're after. And it's really about trust. It's that age old trust used to be in the name of most banks. And it wasn't just because of the trust services they offered, but because it was the important value proposition. So I think those two things go hand-in-hand, but that's really what we wanted to dig into was those are all fuzzy, vague sentiments. And they're nice. They're appealing. And you can see why banks want to sell that feeling, but what are the actual actions that you take? And what does a, as you said in the opening, what does a good relationship really look like? Because one of the things that really stands out as you dig into this is that not all relationships are good ones. That's an important thing to understand about what really drives the results at your bank.
Jim Young: Yeah. This is a bottom line industry here. So the warm and fuzzies are nice, but these relationships from the bank's end-
Dallas Wells: Yeah. They only go so far.
Jim Young: Profitable relationships. Exactly. All right. So tell our listeners about the initial research idea, what banks and data are we looking at and what questions are you asking when you're looking into the data?
Dallas Wells: Yeah. So this really started as a project for a couple clients where we were trying to answer some of these same kind of questions. And we had a couple of like-size regional banks whose final results come out in the same neighborhood, their performances are about the same, but the two data sets that we looked at were wildly different. And so that just sparked the idea that maybe we should dig into that. So we decided to stick with regional banks. They're not small community banks where everything's hyper-local, but they're also not the giant money center banks where some of the nuance can get lost just in the size and scale of the thing.
So it felt like an interesting place to find. Really, what we wanted to see was does the data show us what their strategy is? Can we clearly tell that they have some intentional approach to what they're doing? And sometimes that signal is a little hard to find. You find these threads of different strategies that you can see. And so that begs the question and the conversation we started having with some of those clients of hey, is this intentional? Is this what you meant to do? Or is some of this stuff purely accidental? And I think getting your arms around that is really important.
Yeah. And are you aware that this is how it's turning out? When you say you're a relationship bank, are you aware that this is actually what your relationships look like? All right. So by the time this podcast comes out, three of those four stories will be available at explore.precisionlender.com. Recording this one in full disclosure before the third one is officially published. So the name we have on this bank is still a workshopped name, but we like it. Let's dive in and take a closer look at them. The first one up is Deadweight Bank
. And what was the biggest stat you found when looking into their relationship profitability numbers?
Dallas Wells: Well, it was the driver of that name, which was perhaps a little harsh, but we couldn't come up with any other way to say it because the big stat that jumped out off the page was that 46% of their relationships lose money. So not are below some profitability threshold or don't meet hurdle rates, but actually have a negative sign in front of the income at the very bottom. That's got to be a little disheartening as a bank when you think about the work and effort that goes into winning those relationships and then servicing them on a daily basis, and one half of them are losing you money and you would be better off if they went away. That's pretty rough.
Jim Young: Yeah. I have to admit too, when you hear so much talk about still efficiency and wanting to get lean and that sort of thing, and just imagining the inefficiency of essentially half your daily operations are involved in losing money at your bank is ...
Dallas Wells: Yeah. And we find in this data, we find lots of banks that have these big chunks of relationships that are barely break even or they make a little bit of money, but those you can understand. It would be great if we were hitting those hurdle rates on every single deal but the reality is that you do have capital to deploy. You do have funds sitting around that need to be loaned out. And the other thing that Carl Ryden used to say a lot in talking to banks is you can't pay the electric bill with percentages, so stressing about getting a 13% ROE versus a 12% ROE on a deal, don't lose it over that if you're going to lose a $100,000 of income over a few basis points. The income still pays the bills and buys the groceries but in this case, it's not that. It is actually that you would be better off with dead capital that was just sitting there, sitting at the Fed, making nothing rather than actually losing money. So that's what was really stark about this one.
Jim Young: Yeah. Just as an aside, one of our readers wrote in and said that dead-weight was always going to be the name of their Grateful Dead cover band should they have ever started one.
Dallas Wells: That's a good one.
Jim Young: Yeah. Not bad. So I had to follow-up question on that one, which is how do you get to that point? And not to sound glib, but how do you get to a point where a large chunk of your bank and some people who's essentially their job and their network output is negative, is costing the bank money? Maybe it's not how do you get to that point, but also how are you not aware of that, maybe?
Dallas Wells: Yeah. So it's a relatively new client for us and that's how we hooked up with them is they were doing the classic thing of they were paying for volume. So if you generate new loans, you get promoted, you get a raise, you get a bonus. They had some back of the envelope guidelines, it's got to be close to market. It's got to be above some minimum nominal rate, but it was really crude and ineffective. So you look at that and you say that's the right question. Gosh, how could this happen? This happens more often than you would think, and every bank has a lot of relationships that lose money. This one just was pushing for growth. They entered some new markets, opened loan production offices, hired new teams. And those teams have to justify their existence. So they go out to put deals on the books and they just ended up really upside down in a whole lot of them.
Jim Young: Yeah. Now I won't get too stuck on this one, but I'll let you read their story. But my hunch too, is that a lot of times when it comes to big volume deals is that there's always this, maybe it's wishful thinking, but assumption that eventually we're going to expand that relationship and get all this cross sell and it's going to make the initial giving on loan pricing worthwhile.
Dallas Wells: Yeah, it's that, and it's the other thing, just to make clear here, when we talk about a bank losing money, this is a risk adjusted net income, so that is the universal standard way of looking at it. But if you don't properly measure that risk, you can end up with a deal that you think is profitable. And so the system this bank was using, it was showing these deals as profitable. Now that we recast them, they're like, oh boy. It's important. We think it's reality, but just straight accounting numbers on these sometimes, they're going to look okay. And so the lens through which you view these matters too.
Yeah. Another bank that we covered was called Surprise Bank.
And in this case, the surprise was actually a pleasant one. This bank basically bills itself in addition of course obviously to being a relationship bank, but as a CRE lending bank. That's their core competency, or at least that's what they believe it to be. But when you looked into where they generated their profits, what did you find?
Dallas Wells: So we found that big CRE lending focus generated about a third of their income and a whopping two thirds of it came from what almost looks like a separate business. And it's not. It's different enough that that's what it looks like, which is these big deposit balances, nine figure deposit balance accounts. So this bank clearly does and they do, they do some pretty sophisticated cash management, treasury services offerings for some pretty sophisticated financial customers that are doing things like clearing accounts and rates and insurance companies. And there's pretty complex payables and receivables stuff happening there with big balances and it is wildly profitable, but it's quiet. So even when this bank has their earnings calls, most of what they talk about is their real estate book and what's happening in the commercial market and the markets they're in.
And what does demand look like? And what does spreads look like? And by the way, their real estate book is a well-run book. It's profitable. It's solid. It looks better than that of most of our clients actually, but it's wrapped in this much bigger, much more profitable business that gets very little discussion out in the marketplace. Clearly the bank's paying attention to it. So it's not like this is going to sneak up on them. They're aware that this is a big part of their business, but it's just striking that the marketing stuff is about lending. If you just went out and ask people in the markets they're in, hey, what's that bank good at? Oh, they do all the real estate deals around here. And again, their own earnings calls is pretty focused on that. It's surprising that not just that real estate isn't driving it, but that real estate is almost like an accidental passenger on this bus.
Jim Young: So let me ask you that then does it really matter? And gosh, it pains me to say that as a marketing person, but does it really matter that the way they see themselves and the way they present themselves is not necessarily the way they make money? Is there a opportunity cost because of this? Is there an inefficiency in what they're doing?
Dallas Wells: Yeah, I guess that's what I would wonder is if you have this, what is clearly a core competency that works for you, why aren't you shouting it from the rooftops? Why don't the people in your markets think of you that way instead of just as the bank that does the real estate deal? So it doesn't necessarily matter. They're clearly doing well with this, but it just makes you wonder if, well, maybe could they do more? Is there more to be had here? And it almost feels like, and this is pure speculation, but it feels like they're really good at that deposit business. And so they focus so much on the real estate lending because they just want a profitable avenue to invest some of those deposit balances that they're generating. All the time and attention comes because that's where the need is and that's where they need the growth. But the long-term franchise value comes from deposits. And if you're that good at it, no need to be shy about it. I guess that would be the takeaway there.
Jim Young: Yeah. Maybe to use a parenting analogy, the deposit's the one who's the kid that doesn't really have as much, doesn't need help, walks to school, et cetera, that sort of thing. So that kid doesn't quite get as much attention as the one you really need to focus on.
Dallas Wells: That's right.
All right. Well, so the third bank here, and again, I mentioned at the time this podcast comes out, this will be published and we will have a final name on it but for right now, the name we like is Consistency Bank
. And again, I want to remind you guys is we're having a conversation about each of these, that if you really want to get deeper into it, Dallas has got some fancy charts that I know you guys all love and really see what's happening at these banks, you can check them out - the series is called "Profitability Profiles", and we have those blog posts up on explore.precisionlender.com
Anyway, third bank, consistency bank. Gosh, that feels almost like calling yourself relationship bank. "By god, we're consistent! With solid relationships! So why this name for this bank?
Dallas Wells: Well, what we're talking about there is the way that they go about actually building a true relationship. So most banks call themselves a relationship bank, but all the cross selling happens at the top end of the book. So their biggest, most profitable customers have really deep relationships and they cross sell all the things they have to them. And they may have hundreds of accounts with those relationships of all different kinds, offering all different services. But then of the other 120,000 relationships they have, the majority of them have either one deposit account or one loan account, maybe one of each. So they aren't really cross selling all that other stuff to the masses within their book. And this bank is. So they are consistently going out and actually executing on the cross sell. So they are cross selling cash management services to even compared to the other banks, relatively small customers.
So somebody who has a $50,000 term loan or a $100,000 revolver, and they will have five or six different deposit accounts. And they're generating not huge dollars, but thousands of dollars a year in profit from other stuff, ACH originations and wire fees and just all the things. So they are actually consistently executing as a relationship bank, not just from the big whales where it's obvious to do so because there's millions of dollars at stake, but picking up the pennies along the way of cross selling those profitable low use of capital products all the way down into their small business book and doing it pretty well.
Jim Young: Okay. I find myself that we don't have anything to pick at them about.
Dallas Wells: More to come. Again, the thing will be out there, go read it. We'll pick on them for something, but that's where the name came from. And that's what made them stand out.
Jim Young: I got you. All right. Well, so actually I want to swing around to, I said pick on them, but really what we're talking about here is pointing out some areas where they can get better and then offering suggestions on how to do that. And that's each one of these posts has a what you call our prescriptions section. And that's also what a good portion of the May 11th webinar's going to be about. Here are all these things going on, but here's how you can get better at that, how you can improve it. And I'm curious when you wrote these tactics and strategies, did you feel yourself saying a little bit of well, this seems pretty obvious, I feel a little bit weird putting this down on paper? And did you wonder if you wrote that some of the stuff that a banker would look at it and say on the flip side of that, well, that's great, but there's no chance we can do that at our bank?
Dallas Wells: Yeah. To me, the interesting thing about all of this is for all the complexity and sophistication that goes into banking, generally what separates performance is not the fancy pants algorithms. It is just straight execution of some simple principles. So none of the prescription stuff that we put in there is rocket surgery. It's not super complicated stuff to wrap your brain around. That doesn't make it easy to actually pull off, especially for regional banks. What we find most of them struggling with, they're like awkward teenagers. They've grown to the size where they're not quite comfortable in their bodies. And a lot of times the leadership of these banks, they came up when the bank was much smaller. And so they learned their management chops leading a team of 50 relationship managers. And now they've got 1,050.
And so the scaling of the messaging and getting everybody to row the same direction and everybody to follow the new guidelines and everybody to stop booking hotel loans when you want them to stop booking hotel loans, those things that are not difficult ideas, don't book a hotel loan, but it's actually hard to get all the bankers across all 50 different markets that you're in to stop on a dime and to do it quickly. And that's just a simple, stop doing a thing, so if you're trying to give a little more complex cross sell guidance, you got to introduce your treasury partners. I don't know who the treasury partners are. We don't all sit in the same room anymore. So these banks, if you're Citi or Wells or Bank of America, dealing with scale is what you do. That is the essence of those banks. They have entire teams that are focused on training and communication and the tooling for all of that. The regional banks usually don't have that stuff yet, but they need it.
So that's what a lot of the prescription stuff is, is it will seem basic, but what we'll talk about, and especially in the webinar, and what we'll talk about is not just the idea of the strategy, but the actual tactics for executing it. How do you actually communicate that to your bankers? How do you actually hold them accountable for those things? How do you actually follow through? Some of it's going to be boring stuff like this is how you trigger the right kind of email and introduction. And this is how you do some follow-up reporting. That's the nuts and bolts of how you get this stuff done at scale. And again, that's just infrastructure that a lot of these regional banks either don't have, or if they have it, it's messy and duct taped together. And it probably needs some based on the data at least, it needs some attention.
Jim Young: All right, let's not dance around this any further. This is a PrecisionLender webinar that we're going to be hosting. And so we're talking about these tactics and strategies for how to do that. Where does the PrecisionLender platform fit into all of this?
Dallas Wells: Yes, it will be the tool by which we can do some of those things. So the ideas will be universal, so if you're not a PrecisionLender client, you can come and I think you will get ideas and things that you can go do with whatever systems and tools you have, including if you want to hack together some spreadsheets. That's all totally viable, but for PrecisionLender clients or prospects, we'll get pretty specific on how you would actually use our tool to do this. Again, the blog posts are pretty darn agnostic. They're just talking about, I don't think we even mention or show the platform in any way. We're just talking about banks and relationships and general strategies you can use to solve some of those things. The webinar will get a lot more tactical and we'll show some things in PrecisionLender that show how we suggest to our clients they go about fixing this with the platform that we have at our disposal.
Yeah. I mentioned before about the banker that might be tempted to say that's great, but we can't do that. And maybe in some of those cases, again, at the risk of being self-serving, one of the reasons you can't do that is because you don't have a tool like PrecisionLender to help you do that which will be stuff that we'll be getting into again in that May 11 webinar
, which Dallas and Raleigh Tillman will be co-hosting. Dallas, thanks again for coming on and looking forward to the finale of this blog series as well coming next week.
Dallas Wells: Yeah. Notice how Jim sneaks in my deadlines there to keep me on task. So yes, next week we're on it.
Jim Young: All right. All right. That'll do it for this week's show. Thanks so much for listening. Now for a few friendly reminders. If you want to listen to more podcasts, check out more of our content. You can visit the resource page at precisionlender.com or head over to our homepage to learn more about the company behind the content. If you like what you've been hearing, make sure to subscribe to the feed in Apple Podcasts, Google Play, or Stitcher. We love to get ratings and feedbacks on all of the platforms. Until next time, this is Jim Young for Dallas Wells and you've been listening to Purposeful Banker.
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