1 out of every 2 banks open for business 2 decades ago no longer exists today

The number of community banks has declined by 34%, or over 2000 institutions, in the past 10 years.  The past 20 years saw the number of banks in the U.S. fall by 50%. 

This begs the question, what does it take to survive and thrive as a Community Bank?

Community banks play a vital role in the financial ecosystem – supporting small and mid-size businesses with their local knowledge and providing families the resources they need to thrive.  Their reduction is not just a shift in numbers; it leaves a significant void in the financial landscape, reducing access to personalized banking services and weakening the support system for local communities.

Unfortunately, if market conditions in the past 20 years were challenging, they are only getting worse: digital banks have created new competitive arenas and the Trillionaire banks continue to muscle their way into every corner of the market.  

So, what makes for a successful community bank?  What does the data tell us? 

We studied 230 banks between $3-$20B in assets over the last 5 years to analyze what factors are correlated to success and which ones are not.  

We divided the banks into top performers on both growth and returns and assessed the factors causing the largest difference between the leaders – those that maintained double digit compound growth and double digit ROE in the period, and the laggards – those stuck in the single digits for both growth and ROE.   

Strong financial results maximize value creation, reduce the risk of the bank being forced into a sale, and give banks room to maneuver for experimentation and innovation.  Even banks intent on selling benefit from strong growth and returns through better multiples and stronger bargaining power.   

This article highlights the findings of which underlying strategic and operating choices are linked to maximizing these results.

3 Factors that are NOT Linked to Winning

Three elements that one might assume are drivers:  size, geography and M&A, are in fact not correlated to success. 

1.       Size.

Typically larger banks are expected to outperform smaller ones. As banks grow, they capitalize on economies of scale and gain access to new strategic options – such as partnerships and opportunities to diversify.

Surprisingly, the facts show that the outperformers are actually a bit smaller than the laggards, with the leaders having a median of $4.3 billion in assets and laggards with $6.1B.

A nuance in the data shows that ROE actually dips right above the $10B mark, demonstrating the need to quickly adapt to the higher regulatory requirements at this level and quickly scale up to accommodate the higher oversight burden.  

2.       M&A.

One might assume that the leaders were automatically buoyed up by acquisitions.   M&A is a traditional tool to gain scale and add new capabilities in an efficient manner. 

The allure of M&A is evident: Over the five-year period, 100 banks - almost half of all the 230 banks we studied were active in acquiring.

However, simply acquiring other banks did not guarantee success: in fact, while 35% of the leading banks made acquisitions, 47% of the lagging banks acquired other banks in the period.

3.       Regional Location.  

Conventional wisdom might be that leading banks are located in high-growth markets.  The “tide that lifts all boats” is supposed to give all players in that market an additional boost to growth and performance.

However, the data actually says that underlying market growth is basically the same for leading and lagging banks. 

The winning banks have deposits located in states with a median GDP growth of 5.8% vs. the lower-performing banks reside in states with a 5.7% GDP growth.  The facts show that high-performing banks have an equal chance of being located in high-growth markets as low-growth markets.  

Two Factors that DO Drive Success

The leading banks tend to have 2 common drivers:  efficiency and targeted markets.

1.       Effective Efficiency.

Winners have a median efficiency of 55% vs. Laggards of 65%.   This is not surprising.   Low costs fuel ROE and give banks additional resources to fuel growth.

What we found to be surprising, though, is the composition of the expenses.   Winners have a higher proportion of investment in personnel, with 64% of total expenses targeted to personnel vs. 56% of expenses at lagging banks dedicated to personnel spending.   The leaders appear to over-invest in talent.  

2.       Targeted Local Markets.

The winners are disposed to disproportionately grow through concentration in MSAs (as opposed to rural areas).   Leading banks grew their MSA-based deposits at 20% per year, while laggard banks grew MSA deposits at only 13%.  Whereas growth from both leaders and laggards in non-incorporated areas grew at 10-12%.

The leading banks are winning by focusing on MSAs.  The lagging banks have about 2x the amount of sub-scale MSAs as their winning peers – which drains the branches in the true battle grounds of the resources to win. 

The Value of Strategic Commitment

Interestingly, our analysis shows that strategic commitment substantially impacts a bank’s results.   We define strategic commitment as when a bank has clarity about “where” it intends to compete and how it intends to win in the market.  That strategy will take different forms, depending on the bank, its capabilities and local market circumstances. 

For example, while pursuing inorganic growth in general is not a success driver, true commitment to M&A (as evidenced by 3+ acquisitions) looks to be one path to success.  Of the 21 banks in the study with 3 or more acquisitions, the data showed that these serial acquirers are 4 ½ times more likely to be winners than losers.  

Another illustration of strategic commitment is focus on affluent consumers and larger commercial customers.  Banks with a particular focus on larger customers (evidenced by less than 45% of deposits being FDIC insured) are 70% more likely to be winners than laggards.  Note this is related to the earlier point that leading banks have a higher proportion of personnel expense, possibly related to higher skilled staff to serve these more sophisticated customers.  On the other hand, banks with an average amount of large accounts (between 45% and 55% of deposits FDIC insured) are 64% more likely to be laggards. 

The point is that half-hearted attention to either a customer segment or approach to growth will not likely drive the desired results because the organization is not fully aligned behind it.   For example, banks with a constant stream of acquisitions learn and develop streamlined processes to acquire and integrate their targets.  Banks with a clear focus on a profitable segment can fine-tune their offering and processes to thrive with the targeted segment.

* * *

Regardless of what “cards” a bank is dealt (e.g., location, size), there are choices in the control of community banks that can drive success.   Keys to winning are making strategic choices … businesses where you can win, local markets where you can win, and being targeted in where limited resources are invested.