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Secrets to Steady Success

How high-performing community banks build and sustain their growth

By Kevin Tweddle

Nearly every financial institution cites maximizing shareholder value and franchise growth as two essential goals for its organization. But how can financial institutions achieve success in these two objectives? And how do the best banks outperform the competition?

In a sluggish economic recovery with constantly evolving regulations and thin margins across the industry, these questions are especially challenging for community banks. Yet, year after year, some banks consistently outperform their peers in nearly every available metric.

To understand how these high-performing community banks regularly achieve better results than their lower-performing competitors, Fiserv Inc. conducted a study that reviewed the performance metrics of more than 5,700 community banks in all asset sizes. The effort examined these banks’ risk-based capital ratios, growth rates, return on assets and return on equity over a five-year period. The results were surprising, as only 266 banks—less than 5 percent of the banks analyzed—cleared each hurdle to be classified as a Proven Performer bank.

High performers were found among all lending strategies; however, those with well-diversified lending portfolios made up the largest strategy group. Several factors distinguished the leading growth institutions. Nearly four in five leading-growth community banks were located in the Midwest or Southwest regions, operating in areas with strong local economies. Across the board, the research found that strong and growing banks fulfilled four key attributes: a low-cost foundation, revenue efficiency, above-average lending growth and high-quality loan assets.

The drive to increase shareholder value and sustain financial growth can seem like the banking industry’s search for the Holy Grail.

Strong cost foundation.
A low-cost foundation, mainly a ratio of lower cost of funds and efficient overhead management, is the single most significant influence on sustained profitability. A lower-cost foundation lessens the risk required to generate revenues, in turn creating a more stable and sustainable stream of revenue. In addition to generating more revenue than the average bank, leading-growth community banks were also efficient from a cost perspective in generating that revenue. Expenses for the best-performing banks were about 51.8 percent of total revenue, while expenses at the median-performing banks totaled 74.5 percent of revenue.

Revenue efficiency across branch networks.
Leading community banks generated strong revenue streams without a significant buildup of their branch network, allowing them to efficiently allocate resources to optimize their branch capacity without sacrificing customer convenience. High-performing banks generated $2.7 million of revenue per branch, while the median-performing banks generated about $2 million per branch.

Above-average lending growth.
 All community banks have been challenged to sustain loan growth coming out of the recession, and this has been a clear differentiator between high-performing banks and average-performing ones. While lending activity may be an indicator of stronger local economies in which top banks operate, top performers have almost triple the five-year rate of loan growth when compared to the median bank. These banks achieved a compound average growth rate of 6.09 percent, while the median-performing banks grew their lending portfolios at a 2.08 percent rate.

Asset quality.
Loan performance has dramatically improved for community banks of all sizes and degrees of financial performance, with loan-loss exposure totals falling by almost half since 2012, representing an industry-wide improvement in credit quality. The quality of loan assets was vital to the financial performance of high-performing banks, with loan-loss exposure, or nonperforming loans, decidedly lower for top banks. Loss exposure equaled 0.46 percent for the top performers, significantly better than the 1.09 percent recorded by the median-performing institutions.

The drive to increase shareholder value and sustain financial growth can seem like the banking industry’s search for the Holy Grail. There are no magic bullets, and risky strategies to rapidly boost revenue frequently lead to fleeting success, at best. To perform well in 2014 and beyond, community banks should focus on steady financial improvement with a disciplined focus on efficiency. Banks can experience sustained growth with a low-cost foundation, above-average lending growth, efficient revenue development and reduced exposure to poor-quality loan assets.

Kevin Tweddle ( is president of Bank Intelligence Solutions from Fiserv in Norcross, Ga.