We believe the future of community banking is dynamic and exciting! We also realize that these crystal ball-type articles often generate more questions than answers-like, "What will be the foundation for driving value in the next 10 years?" The answer: Grow core deposits while balancing risk.
Think of the cell phone 10 years ago. Today's miniaturized, multitasking models make it seem like an unwieldy dinosaur. Jay's pocket-sized cell syncs him with his company's network and allows access to e-mail and calendars. However, his cell phone's core function remains the same-to make phone calls. The same can be said of banking and the evolution of its delivery and breadth of services.
Where are we now?
To help bank management and directors answer this question, BNK Advisory Group has developed the BNKBall, a risk-weighted benchmark analysis that enables them to view their bank on a risk-versus-reward framework. Bench-mark groups can include national, state, and customized groups. Or, banks can compare their bank to another bank. For this article, we are using all banks nationally between $100 million and $5 billion.
The BNKBall boils all the "moving parts" of a bank down into one composite ranking, which is represented by a colored ball. A red ball signifies underachieving banks that we call "Potential" banks. The yellow ball represents average or "Solid" banks. High-performing or "Great" banks are represented by a green ball. Then, there is the designation of "WOW!" This is a bank in the top 15th percentile represented by an onyx ball.
The average community bank in the country has assets of $489 million. They have ROAEs of approximately 11%. Their compounded average asset growth rate over the last five years is a surprising 9.3%.
You may guess that they are a yellow ball. Overall, yes. However, their risk/reward profile may startle you. Their rewards are ranked as average, but their risk is mixed. The average bank has high credit risk, low capital risk, high liquidity risk, and moderate earnings at risk (interest rate risk). Generally, the average community bank has a moderate level of risk for an average return.
In our recently published book, The Art of Risk in Community Banks, we ask boards and management if they truly understand balancing their banks' risks. The average bank is a case in point. Its mix of high credit risk with an average return seems imbalanced. However, the average bank's other risks moderate its overall risk. We label credit risk the "mother of all risks." The average bank in the country, by our studies, is vulnerable to the fallout of an economic downturn.
Ask yourself, "What is my bank's risk/reward tradeoff? Where are we going?" Our first book, The Art of Strategic Planning in Community Banks, recommends that boards be future-focused. We tell banks to project 10 years and describe their dream bank. Many bankers argue, "No one can see that far into the future!" Banks should have tactical plans that are three years or less. However, true value creation is achieved through long-term strategic plans. For stock banks, this is share value. For mutual banks, this is to ensure future relevancy. Think of it another way. Bank branches typically take five years to season. If you build a branch every year or two, a three-year strategic plan wouldn't capture significant value creation.
If we revisit our average bank and project its compounded growth rate for the past five years out over 10 years, its assets grow to $1.19 billion. It is incredible to think the nation's average community bank could become a billion-dollar bank-incredible, but not impossible, which is why we tell banks to begin thinking like a billion-dollar bank today. Your tactical, short-term plans must focus on achieving your 10-year goal. Do not bank blindly! Realize that today's decisions impact the future shape of your bank.
Ten-year planning will create long-term shareholder value. The average bank in the nation at 1.5 times book has a share value of $37.31. If we assume that the bank reaches an asset level of $1.19 billion in 10 years while maintaining a 1.25% ROAA and 34% dividend payout ratio, the share value rises to $86.13. That is exciting considering we are talking about the average! The total return on the shares, including dividend reinvestments, would be 14%. The Dow over the last 10 years had a total return of 9.13%. This is why we believe that community banking has a dynamic and exciting future!
How do we get there?
Our strategic planning process focuses directors on understanding their business model. We challenge them to ask, "Does it need to be changed? What business model works best?"
We believe the future of community banking is in relationships. With the advent of the information age, many visionaries predicted banking would become a purely digital, computer-driven business-no more bricks and mortar. We believe that this is not the future of community banking. Certainly, community banks can have technologically advanced delivery systems to enhance the customer's experience, but the future, like the past, will depend on one-on-one relationships.