These days, there’s a lot to contend with as a community bank, from changing consumer behaviors due to the pandemic to uncertainty surrounding the economy and inflation. But many of these challenges also provide opportunities for banks to get ahead, depending on what routes to profitability they choose to take.
“Sound profitability strategies will be essential over the next year as community banks cope with stagnant interest rates and rising prices,” says Noah Yosif, assistant vice president, policy research and economist at ICBA.
Luckily, there are several strategies in community banks’ toolbox for boosting profitability, even in a low interest rate environment. Here are seven factors community banks should consider as they enter budgeting season.
1. Plan to be agile
While some community banks may bide their time and take a longer-term approach to strategic planning, others find value in being agile and making planning decisions more quickly. That’s the approach Sunrise Banks in St. Paul, Minn., takes.
The $1.6 billion-asset community development financial institution sets a broad, three-year vision for itself but crafts a strategic plan for only one year at a time. And even then, that plan isn’t static. Every 90 days, the community bank reevaluates and readjusts its strategic plan based on internal and external factors. It’s a process that includes robust scenario planning to allow for better preparation for what-if situations, says CEO David Reiling.
There are any number of ongoing risks community bankers need to be prepared for, including interest‑rate risk, cybersecurity threats and changes in the competitive landscape. Reiling believes speed of adaption is key, as COVID-19 illustrated. “We have to make decisions today with much more uncertainty than we’ve ever had,” Reiling says.
The community bank has followed this successful process for about seven years. Reiling adds that bank leadership needs to be bold enough to try things out and possibly fail, which is why Sunrise Banks implemented the 90-day check-in.
This planning process takes cooperative efforts to execute successfully. A bank needs a team with diverse perspectives and unique abilities—technology, sales, lending and leadership—that is willing to work together at a heightened pace, he notes.
“You can’t just be the community bank that looks like the bank across the street. You have to give people a reason to bank with you.”—Tim Reimink, Crowe LLP
2. Build a lending niche
Becoming known in a particular segment—whether that’s small business lending, serving niche industries or something else—can be a boon for attracting and retaining customers because it distinguishes you from the competition.
“You can’t just be the community bank that looks like the bank across the street. You have to give people a reason to bank with you,” says Tim Reimink, managing director in the Crowe LLP performance consulting group in Chicago.
For example, $220 million-asset Merchants State Bank has a heavy concentration in agricultural lending, with about 78% to 80% of its loan portfolio related to farmers, ranchers, agricultural businesses or ag real estate, says Emily M. Hofer, chief financial officer of the community bank in Freeman, S.D., a rural market with about 1,300 residents.
“We live [ag], we breathe it and a lot of our lenders are farmers themselves,” she says. “That’s our competitive advantage.”
Another bank with an emphasis on ag is $870 million-asset Peoples Bank in Lubbock, Texas. This focus helped the community bank immensely during the Great Recession and the pandemic, says Jon Drake, senior executive vice president and CFO. The bank’s
institutional knowledge of the 1980s farm financial crisis’ impact across the state has served it well in its expansion efforts. “We all remember the ’80s,” he adds.
3. Change loan growth trajectory
Many community banks are reluctant to and emphatically refuse to do loans below a certain rate, even if two years ago they were making a similar spread on higher-rate loans. “It’s a psychological issue. Don’t get hung up on rates. Get hung up on spreads,” says Matthew D. Pieniazek, president and CEO of Darling Consulting Group in Newburyport, Mass.
Another issue he sees is that some banks are reluctant to do fixed-rate loans versus floating rate loans because they’re focused on the potential for rising interest rates. In reality, Pieniazek says, most banks have capacity to do fixed-rate loans; they just haven’t run the numbers. He advises community banks to start by analyzing the extent to which their core deposit base is funding fixed-rate loans. They’re likely to find that their core deposit base will exceed their existing level of fixed-rate assets, giving them excess capacity to absorb more fixed-rate lending.
Banks that don’t have this capacity or that have a firm bias against fixed-rate lending should explore the use of interest-rate swaps as a way of providing fixed-rate loans to customers, Pieniazek says.
4. Keep steady margins
Keeping margins steady amid interest-rate risk is important, Drake says. Peoples Bank tries to stick to margins in the 4% range and focus on volume instead of getting “bogged down” with what direction rates go.
Drake cautions banks not to take excess risk with the cash on their balance sheets. Peoples Bank tries to take a more cautious approach, typically deploying excess cash into shorter-duration bonds and CDs from other banks, for example, instead of trying to chase big yields or take riskier long-term positions.
“You can chase big yields, but you’d better be right, because if you’re not, there are repercussions,” Drake says.
5. Seek partnerships
Now, more than ever, community banks are competing with a broader set of competitors, which may lead some to offer additional products, services or functionality via fintech partnerships. Of course, banks need to be sure to do the due diligence regulators require—and expect supervisory oversight—but that shouldn’t preclude them from pursuing partnerships.
There are many examples of bank-fintech partnerships. Sunrise Banks, for example, is very active in this space. One of its partnerships involves providing passbook accounts and banking services via Remitly, a Seattle-based remittance startup.
6. Meet customers where they are
The pandemic proved that branches are not necessarily the place where many, if not most, customers want to bank, Reimink says. Lenders and other customer-facing bankers need to take their laptops and break free of their branch’s four walls, whether that’s meeting at a coffee shop or in the customer’s office, he adds.
A recent survey of 600 consumers by $13.2 billion-asset Provident Bank in Jersey City, N.J., found that 91% of those polled bank digitally. More than half of those consumers said the pandemic prompted this switch. While 58% reported they still visit their local bank in person, nearly half of consumers who make in-person visits said they did so to complete a transaction they couldn’t otherwise do online. One in four respondents said they visit the branch because face-to-face is their preferred way of interacting.
“Expecting to sit in a branch and have the customer come to you is competitively no longer viable,” Reimink says.
7. Double down on customers
While many observers expect rates to increase by 2023, banks are resigned to living with tight margins in the short term. In the meantime, Mark J. Schepers, president and CEO of $150 million-asset The Community Bank in Liberal, Kan., says his bank is holding down the fort by focusing on good customer service and doing its best to remain the bank of choice for its customers. Efforts are focused, he says, on giving customers ample reason to continue banking there and provide referrals. Among other things, this means quickly responding to loan requests, structuring deals fairly and employing bilingual staffers for Spanish-speaking customers.
While community banks focus on customer service and retention, they should also be sure to continue offering new products and services to their customers. In particular, community banks should continue to strive to earn a greater share of wallet from their customers, says Deborah Matthews Phillips, ICBA’s senior vice president of payments and technology policy. They can do this by optimizing their card portfolio and further motivating cardholders to designate bank-issued cards as their top-of-wallet choice.
