What are the characteristics of a high-performing community bank today?
I was recently asked that question in connection with a planning session I was facilitating for a midsize community bank. Actually, I was given a heads-up by the Chairman that he wanted me to discuss the characteristics of a high-performing community bank with the board and senior management and then see how the bank compared to those characteristics.
In my view, the characteristics of a high-performing bank include the following:
• Financial metrics
When considering whether a particular bank is high-performing, the initial considerations would be return on assets and return on equity. In my opinion, a high-performing Subchapter S bank should be at 2% return on assets and 20% return on equity. A high-performing C corporation bank should be at 1.25% of assets and approximately 12% to 14%% return on equity.
So what drives these financial metrics? What propels a bank to be high-performing financially?
Some or all of the following are part of the mix:
• A fully engaged board.
A fully engaged board is critical for a high-performing bank. This is not a board that micromanages. It is a board that provides oversight, business development, and business referrals and is interested in what is going on at the bank.
• CEO leadership.
Similar to a fully engaged board of directors, the CEO needs to not just be a manager. He or she needs to be a leader. The CEO must have a vision, then exhibit that vision and develop the other bank employees and the board of directors so they exhibit it as well.
• Heavy involvement in the community.
Every high-performance community bank that I have worked with over the years has significant community involvement. This can be in the nature of volunteer work through churches, hospitals, and the like, or simply active involvement in other entities, such as a local business, chamber, Rotary, Lion’s Club, and similar entities.
• A culture of service.
This is similar to the involvement in the community, but it takes it one step further. Service must be ingrained in the culture of the bank such that employees carry it out to the community and also let members of the community experience it very time they walk into the bank.
• A culture of compliance.
Most high-performing community banks that I have been with would have what is best described as a “culture of compliance.”
This means that while compliance is not such an overriding factor that it freezes the bank from doing any activities that benefit the customers, there is nonetheless an underlying culture that actively shows compliance is important to the bank in the way it executes on its strategic plan and vision.
• The bank is based on relationships.
Most high-performance banks do not simply engage in transactions. They engage in relationships with their customers. They build them with their customers, and they maintain them with their customers; they just do not try and do deals or acquire assets from unknown customers.
• Diversification of income stream.
Most, although not all, high-performing banks will exhibit some income stream diversification. This will involve the creation of some form of non-interest income either through fees, other lines of business, or otherwise.
• Excellent asset quality.
In order to put up the numbers I indicated above with respect to financial performance metrics, pristine asset quality is going to be required. High-performing banks are typically ones that have strong loan demand, excellent underwriting, a conservative approach to lending, and, as a result, high asset quality.
• Utilizing franchise players.
Most high-performing banks, particularly those that are expanding geographically, will do so through the use of franchise players or a lift-out of a group of franchise players from another organization. It is difficult to expand your bank geographically using people that are not from the community into which the bank is expanding. So, simply put, the definition of a community bank franchise player, in my mind, is a lender housed in the community into which the bank is desiring to move.
• Well-compensated management employees.
It goes without saying most high-performing banks will compensate their employees well and possibly have fewer of them. This is basically a high-pay, high-assets-per-employee model. It requires more of the employees you have, but it compensates accordingly.
• Significant employee ownership.
In many high-performing banks, I found a positive correlation between high performance and significant employee ownership. Employees having skin in the game, while it may not totally drive performance, will certainly help by aligning in a tangible way the employees’ interests with the company’s interests.
• Core funding.
For most high-performing banks, core deposits serve as their primary funding source. They are not using brokered deposits. They are not using Federal Home Loan Bank advances. If they are, they are doing so in nominal amounts. Their core funding comes through core deposits.
• Knowing your strengths.
Last, but not least, the characteristic that I have found most often in a high-performing bank is that it understands its competitive advantage (i.e., what it does better than anybody), and it continues to do more and more of that.
That plus may be SBA lending. It may be consumer finance. Whatever it is, once the bank understands its competitive advantage in the marketplace, then most high-performing banks will focus on that and continue to develop it.
The above list is not all the characteristics I see in high-performing banks, but it certainly covers most of the key ones. You might want to compare your bank to this list of characteristics and see how you do. It is a worthwhile exercise.