Correspondent Blog

In Q2/24 the average return on assets (ROA) for community banks (under $10B in assets) was 1.08%, with an average ROE of 10.44%.  But within the community banking sector, performance varied among banks significantly.  We analyze the drivers of ROA for the community bank segment last quarter and consider what financial variables explain bank performance….

Most community bankers we talk believe they will get a boost to bank performance with declining short-term rates.  The thinking is that a lower Fed Funds rate will mitigate credit risk, spur loan demand and potentially soften competition for deposits, leading to wider NIM and more profitability.  Unfortunately, the empirical evidence shows otherwise.  While the…

Because of the option to add or remove deposit balances over time, deposit management is one of the more complicated endeavors in banking. Lending, by comparison, is largely a one dimensional supply vs. demand problem. Building better deposit performance is more complicated. Add a three month CD option for your customers and the duration of…

FDIC-insured “Problem Banks” list has been increasing over the past two years.  For the community banking industry (banks under $10B in assets), this is particularly troubling as the number of community banks earning negative return on equity (ROE) spiked to 237 institutions in Q1/24, or 5.71% of all community banks. Bank ROE is now a…

Bankers have been taught to diversify their loan portfolio to reduce idiosyncratic (individual borrower) risk and to stabilize earnings. The thinking is that diversification-induced lending leads to banking resiliency. We believe that while lending diversification leads banks to lend more in normal times (especially for banks over $50B in assets) and does benefit the general…

The “Three-Body Problem,” currently made popular by our new favorite author, Cixin Liu, is the concept of instability when three similar-sized celestial objects interact. The problem is currently unsolvable. Banking has a similar physics problem when management juggles strategy, risk/profitability, and customer behavior. This article will discuss the challenge of managing three potentially opposing forces…

The 2024 annual Consumer Banking Association conference (CBA Live) took place in Washington, D.C., over three days last week. Overarching topics (by word count and sentiment) include the imperative for greater consumer protection, the required more significant effort to fight fraud, rapid innovation (particularly in A.I.), and the need to keep evolving your workforce. We…

Banks consistently produce under their cost of capital. For example, at present, return on equity performance is about 12% for the average community bank. However, for the average bank, their cost of capital is between 9% and 14% depending on the bank’s equity liquidity with an average of 12.5%. Why is that? One answer is…

In our last article (HERE), we highlighted the methodology around why banks should calculate and drive value through customer profitability and product profitability. We focused mainly on customer profitability and used risk-adjusted return on capital as a proxy for profitability. In this article, we wanted a different approach to arrive at the same conclusion but…

Community banks’ use of swaps (banks’ primary tool to hedge interest rate risk on loans) has increased substantially over the last ten years. The market expects the current inverted yield curve to remain through much of 2024 (based on long-term interest rates and the expected rate cuts in 2024).  Meanwhile, community banks face net interest…

You are likely in the process of finalizing your strategic plan. The good news is that strategy matters and your team’s time and effort in refining your strategy should pay off. The question is, how much will it pay off? That answer depends on the strategy your bank is pursuing and the underlying business model…

On September 7, 2023, the FDIC released its banking profile.  This quarterly publication provides a comprehensive financial results summary for all FDIC-insured institutions (4,645 commercial banks and savings institutions insured by the FDIC).  While banks under $10B in assets comprise 97.8% of all banks by number, those same banks comprise only 14% of all banking…