The ICBA Independent Banker had an impactful article in June of this year. It was titled ‘Secrets to Steady Success’ by Kevin Tweddle of Fiserv. Fiserv conducted a study that reviewed the performance metrics of more than 5700 community banks in all asset sizes. This study examined these banks’ risk-based capital ratios, growth rates, return on assets and return on equity over a five-year period. As Kevin Tweddle stated ‘The results were surprising, as only 266 banks, less than 5 percent of the banks analyzed were good enough to be classified as a Proven Performer bank.”
This study found that strong and growing banks fulfilled four key attributed: a low-cost foundation, revenue efficiency, above-average lending growth and high-quality loan assets.
A strong cost foundation involved efficient overhead management and is the single most significant influence on sustained profitability. 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.
It is no secret that control of noninterest expenses is an important profit driver. I have discussed this same issue with several different state level ICBA individuals, and they have stressed this is a commonality with all of their ICBA banks. The typical community bank has expense to revenue figures ranging from the mid to high 60 percent to mid to high 70 percent, and it’s all a matter of overhead.
This is where SAMCO helps the community bank. The labor it takes for appraisal order management, managing the appraiser files, and most importantly now, conducting a USPAP and Appraisal Standard review is expensive. This is a cost that cannot be passed onto the consumer due to federal regulatins, but an AMC cost CAN be passed onto the consumer. You make the same income from that mortgage loan, but at a significant cost savings.
Asset Quality was one of the other key attributes of a strong and growing bank. 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. Asset quality is enhanced by having an accurate estimate of value. Where many estimates of value fall short, and consequently become inaccurate, is in not following USPAP and Appraisal Standards. SAMCO is your first line of defense to insure your local appraiser provides that defensible and rational estimate of value.
The upshot of this study was for a community bank to perform well in 2014 and beyond, focus on steady financial improvement with a disciplined focus on efficiency.
To read more of Tweddle’s artcle go to https://independentbanker.org/2014/06/vantage-point-8/