At a time like this, there are many concerns about moving forward. Just a reminder: What will make community banks profitable post-financial crisis is the exact thing that will sustain performance post-crisis.
There is no secret to this performance. The model remains in the application of traditional, conservative community banking. This is the center of strong core earnings and a moderate to low level of risk. There is much to be learned from the banks that have succeeded during this time period!
The top 15th percentile of banks across the nation have many things in common. What they don’t have in common are geography, asset size, or charter. So what common attributes make up the traditional, conservative community banking of the top 15th percentile banks?
- High cash-type deposits
- Low net overhead
- Tax efficiency
- Low loans to assets
- Conservative loan mix
- Higher levels of capital
- And all of this while maintaining a moderate to low level of risk.
- Earnings power: While community banks nationally had a negative ROAA of -0.21% in 2009, the top 15th percentile had an ROAA of 1.48%. They had to deal with the same issues, such as credit problems and FDIC costs, but they were insulated by these characteristics.
During this recession, so much focus has been on the banks that have underperformed and/or failed. Indeed, there are many lessons to be learned. However, banks that have been successful during this time period tell their own story that can be applied to your bank going into the future.
Discuss the strategic checklist below at your next board meeting. How will your model hold up post-financial crisis?
Strategic Checklist for High Performance
- High cash-type deposits – 65% or higher
- Low net overhead – 2% or lower
- Tax efficiency – Tax rate of 20% or lower
- While identifying and maintaining a moderate to low level of risk
- Low loans to assets – Approx. 65%
- Conservative loan mix
- Higher levels of capital
- 9.5% equity to assets
- 13% or higher risk-based capital
- Consistently track and assess against high performance
- Communication at board level
- Incorporate performance items into strategic plan
- Incorporate performance items into capital plan