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New Year’s Resolution: A More Profitable Community Bank

By Sonny MacArthur and David Wood

With many community banks losing ground to their larger brethren, as well as new competition from the rising number of non-banks and fintechs, finding the best strategies for growth can be daunting — and not always obvious. As the new year begins, many smaller banks are now evaluating their current plans and looking for ways to not only grow, but increase their revenues in the process. Here are four key areas community banks should consider when it comes to increasing their profitability in 2019.

Streamlining and Cutting Costs

During the recession, banks learned some difficult — yet valuable — operational lessons in how to do more with fewer people and resources, and most have continued to do so in an improving economy. Because of this, many smaller banks have been left with little room to streamline operations further, but there are still some effective strategies that can help reduce costs without hurting operations.

Branch Evaluations

Reviewing the traffic, current and historical profit abilities, general operations and overall staffing costs for specific locations can allow banks to create branches that are more efficient, and ultimately more profitable. In some cases, doing so can even lead to the discovery of other distribution channels outside of the traditional branch footprint. Additionally, as more community banks adopt a “universal banker” approach with their staff — having them cross-trained on multiple roles rather than in specialized positions — they can see lower operation costs while offering more flexibility with less people.

In some cases, branch evaluations may help banks determine whether or not a current branch location is still even viable. If not, creating a disposal plan and then following through with this directive will allow bankers to more quickly shutter the facility, sell off the assets and either relocate or reduce staff to continue to drive down the cost structure.

Another area of potential cost savings is in compliance, and while there has been some recent regulatory relief, not much has trickled down to affect most banks’ bottom-lines. On the cost side, data analytics and regtech continue to dominate the conversation, as well as a shift in how bankers look at compliance. While still in the early stages for most, there has also been some activity around the idea of banks moving away from being so transaction-focused in terms of their compliance monitoring. Better leveraging of their data and more refined data analytics tools have allowed many banks to help combat the rising costs of compliance while becoming more efficient and streamlined at the same time. However, the challenge still lies in how best to capture all of the data available through their various systems — something that should be more important (or at least a higher priority) than filling in product and service gaps.

Expansion — the M&A Question

As we head into a new year, our industry continues to see consolidation through mergers and acquisitions. For the acquiring side, growth also means creating a larger asset base, which allows the institution more room to distribute its expense structure and continue to grow earnings.

One notable M&A trend on the rise is more urban banks targeting more rural markets for expansion. While these “stagnant markets” should have a stable deposit base, they are being viewed less through the lens of traditional M&A growth opportunity and more on their investment potential. Often, these more rural markets are seen as an ideal source for low cost deposits, and in today’s highly competitive climate, banks pursuing these opportunities consider it well worth the effort.

Finally, a growing number of community banks are leveraging innovative new digital platforms to extend beyond their geographic footprint and reach new markets.

New Year, New Products and Services

With competition for traditional accounts so high, some community banks are considering more specialized or niche products and service as a way to tap new market opportunities.

While not new, bankers are refocusing attention on SBA lending as a potential profit centers as SBA loans tend to be strong fee generators and selling off the guaranteed portion of the loan can bring additional revenue. What’s more, bankers can grow their SBA portfolios without the added expense of scaling up their operations as SBA-focused brokers and other similar services are available to help banks locate solid candidates and deals in their market and then further aid them in closing the loan itself. This can provide substantial profits without excessive personnel or additional resource costs.

Similarly, moving into more asset-based lending can be a very profitable strategy for community banks. Traditionally, many smaller banks have chosen to stay focused on loans primarily related to acquisition development or real estate-secured credit, so targeting these types of commercial finance can open new, previously untapped, revenue streams for them (provided they have the right people and risk management in place).

Working Together — Fintech Partnerships

Our industry has seen a surge in the number of partnerships between financial institutions and fintechs, many of which have been driven by smaller banks. These partnerships can offer community banks an attractive way to increase their revenue by allowing them to reach customers outside of their traditional market areas, or enhancing their existing customer experience, maintaining their current deposit base while opening the door for better cross-selling opportunities.

While finding new ways to drive revenue and streamline costs are both important, offering quality products and exceptional customer experiences — a strong suite for many community banks — is ultimately what will allow them to compete more effectively and grow. With factors like AI and blockchain on the horizon, poised to have dramatic impacts on the industry and banking cost structures alike, community banks will need to find a healthy balance of these strategies to succeed and thrive.

Sonny MacArthur is risk advisory partner and David Wood is audit partner at Porter Keadle Moore, an Atlanta-based accounting and advisory firm. For more information, visit www.pkm.com.

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