The business model is based upon the Bank’s ability to pivot upon knowledge of the market, and customer relationships. This is quantifiable at the Bank level through quality risk management, better service, and a commitment to technology.
Risk Management
Proper risk management is the key to community banking. Local directors who are knowledgeable about their communities, diverse, market aware, and understand banking are the foundation for proper risk management. This structure allows the Bank to be an integral part the community and simultaneously generate a profit. The Bank is not a hit and run player, but a participant in the community. It builds an understanding of the community resulting in quality micro risk management. So how does this translate into a successful bank?
Micro risk management creates early recognition of opportunities and detection of potential problems. Loans are the major asset category of community banks. Success is built upon growing a quality loan portfolio. A community bank’s micro risk management system is ideal for creating this loan portfolio. Local boards can know the borrowers and the local economy. They understand when specific micro markets provide an opportunity and when they are troubled. Larger out-of-state financial institutions rely on one branch manager with limited contacts and experience. Larger banks cannot pivot out of problem areas as fast community banks or identify problems as early. A quality loan portfolio is essential to profitability.
A higher quality loan portfolio reduces the need for a higher loan loss provision expense. On a $50 million loan portfolio, lowering the loan loss provision from 2.0% to 1.0% provides an additional $500,000 to the profitability of the bank. Lower loan loss provision expense combined with a lower overhead, allows the community bank to be profitable with lower asset totals and not be forced into an excessive growth scenario.
Funding costs are equally as important as loan growth. Although the Federal Reserve continues its stimulus program, eventually interest rates are going to rise and increase interest rate risk. Cross selling and individually analyzing cost structures are standard for community banks and will be implemented. Furthermore, the Bank will establish a deposit acquisition committee to evaluate current funding costs and determine methods for acquiring and retaining core deposits. These efforts will position the bank to thrive when yield curve shifts and interest rates increase.
Service
Service is being responsive, knowing your customers, and finding solutions. Our banks provide individualized financial solutions designed to assist individuals in achieving their financial goals. Decision makers are in the Bank and provide timely responses to any request. Knowledgeable and qualified staff will engage our customers and become an ally in solving their financial concerns. Utilizing today’s technology, clients will have multiple channels to contact the Bank and improve their banking experience. This opportunity exists because of the consolidation of banks and the resulting lack of commitment to local businesses and professionals. This scenario allows the Bank to compete on service and individual financial solutions. A national survey shows that 55% of small businesses that changed banking relationships did so to acquire better service, not for lower loan interest rates.[3]
Relationship
Relationship building is accomplished through several channels, the Organizers, Shareholders, Advisory Board and Senior Management. All quality relationships are built on trust and mutually beneficial outcomes. Timely-honest responses combined with loyalty from the Bank starts the relationship. Listening to both customers and stakeholders is another strategy to relationship building. The Organizers, Shareholders and Advisory Board members are in the community and hear what the community is saying about the Bank. Allowing for the feedback during Advisory Board Meetings and Shareholder communications is essential. Newsletters explaining the current situation in the Bank and identifying a customer of the month is a tremendous communication tool. Open communications build relationships. This relationship must also be beneficial to the Bank. Customers will be encouraged to house all, if not most, of their banking activity with the Bank. Community banks will pay a slightly higher interest rate on deposit but will also charge a slightly higher rate on loans. Furthermore, service charges will not be a profit center for the Bank. Thus customers benefit when they expand their banking interaction with the Bank.
Technology
Technology is a great equalizer in banking. De novo banks has access to the same technology that larger banks utilize. Third party vendors provide the technology and provide choices of various banking modules. This allows us to pick and choose which modules match our customers’ needs. The Bank can change modules and provide different services in future years.
The Bank will look like a large bank technology wise, but be committed to service and relationship building.
Service and understanding the market differentiates the Bank from the large financial institutions where decisions are made out of state, products are sold, and customers are required to fit certain parameters. This model allows for flexibility, agility and profitability at a smaller asset size.
[3] Barlow Research, First Friday Economic Plus, August 2013
