Travillian Tech-Forward Bank Index Profile III Many banks aspire to use technology to drive even greater results for the business. But do those aspirations ever become reality?  Last week, Travillian Next interviewed nbkc bank’s new president & CEO, Michael Bartkoski, and CFO, Eric Garretson. We learned that not only has tech changed the bank, its eliminated weaknesses that held back its performance.  As a longtime mortgage lender, nbkc has garnered strong return on assets during the mortgage refinance and purchase boom of 2020 and 2021, reporting annual ROAs of 14.8% and 4.3%, respectively. But even before the mortgage boom, in years like 2019, it put up a 6.5% ROA. Known for its tech-enabled nationwide deposit footprint, nbkc’s cost of funds has dropped by five times since 2018.  With Bartkoski beginning to lead the $1.2 billion organization as President & CEO in November 2022, taking the torch from Brian Unruh who led the Kansas City bank since 2008, the interview reveals what might be next for innovation at nbkc. We also cover how succession planning played a role in establishing technology as a key driver for the bank’s future.  The Kansas City bank was among the first technology and innovation-focused banks listed on the Travillian Tech-Forward Bank Index when we launched the index in 2020. The bank is well-known for its fintech partnerships with Betterment, Joust (acquired by ZenBusiness), and Truebill (acquired by Rocket Companies). Travillian: With technology having such an enormous impact on your bank’s performance, what changed at the bank during those years around 2018 that sent you down that path? Garretson: We share a story here about Brian Unruh from before 2018, even before we began hiring software engineers. I’m sure he had been reflecting on it for a while, but one day he told us we would no longer attend traditional banking conferences. He asked each of us to pick out a technology conference to attend as a team. A group of us attended Finovate, a conference that showcases cutting-edge banking and financial technology. Nearly all of us went to Money20/20. It was a sign of a cultural shift. We went from attending banking conferences that feature sessions about the economy or political relations – things relevant to banking but not in our control – to events that focused us on where we wanted to go. The fintech conferences were absolutely enlightening because of the firsthand experience. We could get into it and meet founders, hear what their issues were, how they wanted to work with a bank, and what their issues were working with banks. We saw that we could make quick decisions for these people as leaders of our organization and begin to work on these ideas. Travillian: When you look back, supposing you could do it again, where would you focus your time and investment from a technology standpoint to improve the business? Garretson: We have a large development team here which is pushing about 20-some people focused on engineering. For a bank of our size, that’s probably what I would do. We are now starting to build products that are not just nbkc-specific, where they could be useful to other banks. The first thing we’re trying to achieve is obviously to help our own organization be more efficient or to improve our customers’ experience. We also now see a second goal to build it in a way that can potentially be white labeled down the road. Travillian: Generally, do you believe it’s necessary to have product and engineering staff to become a tech-forward bank? When did you make that strategic turn by investing in those skill sets? Bartkoski: In a word, yes. Our fintech opportunities have followed our appetite because we’re not afraid of someone else’s name on the idea with our name on the back. Those projects expose our brand to a lot of new faces and names. A bank must have the right foundation to pull it off, though. We brought our first engineers on staff here in 2015 and 2016. In 2017, we started to unearth what fintech means to us and decided we were going to try to digitize the account opening experience. And that’s when we began looking at going nationwide rather than just being a traditional branch provider for deposit products. Our engineers’ time is about evenly split now between making the bank run smoother and then creating good experiences for customers throughout their lifecycle. When not building customer-facing tools, we’re developing for unique challenges like how we price mortgages or to improve how our systems work together. Data also is a key focus. We want to curate it and bring it together to draw insights and conclusions to solve unique challenges. Garretson: A third part is relationships with startups that want to build a product. Going all the way back to those first technology conferences, we saw that we could help entrepreneurs in banking technology. We want to be that beta bank and take on somebody who has a good idea. Then, we become customer number one and guide it from day one. We also look for an evolution beyond us for a larger audience. We’ve had at least three big successes in that regard. Travillian: How has your investment in technology played out in the bank’s performance? Technology and cost of funds are not usually the first muscles banks strengthen when they want to grow or improve their performance. Garretson: We got started in pursuing technology innovation to raise low-cost deposits because we’ve always been a high-growth bank in the home loan division, and in our bank lending portfolio. But as we grew quickly, we also had a high cost of funds. We did not really focus on growing core deposit balances at the time. We were getting high ROAs relative to industry averages, but we had a really bad interest margin and high cost of funds because we had a lot of hot money. It was CDs and money market accounts that were advertised in the Wall Street Journal, for example. Money just flowed in and out of us. We had done such a great job getting home loan customers on a nationwide basis, and we were making money doing it. We saw the opportunity to do the same thing on the deposit side. Bartkoski: We were always a low-margin and high fee income play. Because we have the mortgage business, we didn’t pivot away from that, but we saw a way to normalize margin through a lower cost of funds. Looking back to 2017 and 2018, we believed better funding would create long-term franchise value. Garretson: When you look at our numbers, that’s really what has happened. Half of our balances are non-interest. We used to dream of 25% of our funding coming from non-interest bearing; 50% seemed unreachable to us. Bartkoski: If you look at our P&L, those low-or-no cost deposits from going out to the national market with our traditional brand, and then our fintech opportunities, have created disproportionate value this year compared to when Fed Funds was at zero. It has reshaped our balance sheet. Travillian: You mentioned the leadership of Brian Unruh in strengthening the bank’s culture and investing in the capacity to become tech-focused. Mike, you would have played a key in that new direction as Chief Operating Officer who oversaw the bank’s new engineering team. Was carrying that tech torch forward a central part of the bank’s succession decisions? Bartkoski: I think it does speak to a change across the industry. Broadly speaking, if you go and you look at community banks, it has usually been a pretty similar story. The new leader started as an analyst, maybe they go through leadership training, and they become a lender who is good at sourcing business. Then they become president someday. And that can work for banks focused primarily on commercial lending. But then there’s an entire segment of the industry that is going to favor folks who know how a bank operates and that understand how technology can impact outcomes and drive wildly different outcomes. Garretson: A lot of credit goes to Brian who followed that traditional path to the CEO’s office. He recognized the value of technology, even though he did not come from that background, and he hired the right leaders for that strategic direction. Mike started out at the beginning in operations and expanded to technology operations. He has the background already to continue Brian’s vision. Bartkoski: The mortgage company really preceded the bank when you look at our history. It developed bespoke technology decades ago. Even to this day, when you look at how the mortgage industry, nbkc home loans is still a leader in terms of technology progression. Before our recent push into technology, our claim to fame was really the automation efficiencies in mortgage. Technology development is in our DNA. Travillian: Can you tell us about the transition of leadership? And what will you do now? Bartkoski:  Brian did a good job of setting up a succession planning process. We identified leaders in terms of where they were at, what their aspirations were, and what gaps they had, and we worked to move people along so that we had a few different people in the succession plan. Brian ushered folks through and kept them growing so that when he was ready, he could pull back. Chad Cronk was promoted to president of home loans in May. The two of us work together in leading the business. Brian remains with the bank as Executive Director helping to guide the strategic vision and culture moving forward. We have a straightforward business model, we raised deposits, we lend money, and we’ve got our mortgage business. Let’s be good at each one of those things. Brian, though, is a big vision guy who was quick to say: I don’t want to make these small incremental changes. I don’t want to talk about growing our commercial book by 7% year over year. We’re not going to go out and enter a hundred new markets to try and solve all our problems. There are some interesting opportunities for us as a payment facilitator, and some others for us as a credit provider in terms of lending as a service. For our traditional brand, the nationwide small business market has big opportunities for us to continue to grow as well. We’re keeping that tech focus evergreen; it will continue to have a big influence on our success.