The Future Community Bank Model – Greater Diversity of Revenues and Reduced Risk

We wonder about the future of community banking.  Times are tough right now in community banking, but we are thinking about the business model for the long-term future of community banks.  Does anybody care?  We think so.

It seems every time there is a major wave of consolidation in banking, there follows a wave of new local bank charter applications.  There is always a strong desire among local business owners, developers and city fathers to have a locally owned bank that understands the local market and its needs for financing.  When the dust settles on the current banking crisis, and the coming wave of consolidation begins to wane, it is predictable that there will be another wave of interest in starting new local banks.  The necessary capital should be available as long as a business model can be found that will produce a reasonable return on what is sure to be a higher capital requirement.  We will take up the question of how much capital is needed in a future blog.

So, if you were starting a new bank, what business model would you want to use?  One lesson we relearn every 15 or so years is that concentration of loans in any one industry or type of lending is always risky.  There is just not enough margin in many types of lending to warrant risking more than a relatively safe level of concentration.  Some community banks have found some success in the insurance business or the investment brokerage business.  One thing seems clear, diversity of assets and revenue sources will be a key part of the future model.

It has also become clear that most, not all but most, of the small banks that got into trouble after the 2008 credit and liquidity crunch had little to no local franchise.  A local franchise is a brand that your local community understands and sees as a valuable part of the community.  While money was cheap and plentiful during the nineties and the beginning of the current decade, many banks started and leveraged their capital with brokered and wholesale deposits instead of local consumer and business deposits.  The demand for loans, especially for funding local real estate projects was strong during those boom days and a small marginal spread could be made with that model.  As we know though, when the easy money dried up, that model of banking did too.

The new community banking model will require more capital and greater control of risk.  We may not know everything about a new model for community banking but we can be sure it will require a strategy of building a local franchise for deposit growth and loan diversity.  I would love to hear your thoughts, so please comment below.  Also, to discuss your bank’s future, call me at 919-644-6962 or complete a contact request at http://matthewsyoung.com/contact.htm.

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