Is there room for community banking in the restructuring financial services industry? If so, who will be the survivors and how can they continue to be profitable and maintain their independence?
The strategies available to community banks for future success are similar, whether they perceive profitability and shareholder value enhancement as their primary objective or they intend to maximize stock price for acquisition.
A high stock price is the best offense as well as the best defense. To achieve effective stock price performance, however, community banks need to make the transition from the traditional focus on charter to a true business focus and customer orientation.
The institutions need to develop strategies that build on their strengths and their competitive advantages and address the critical success factors associated with a specific line of business or target market segment.
Community banks have many strengths that may constitute an effective platform to build on.
They have well-anchored customer relationships, and many have good technical product knowledge in certain areas.
Some have effective distribution networks that can be further leveraged, and some have dominant market share if their market is defined as the small area they serve or a specific customer segment in which they concentrate.
Define Strategic Focus
It is of paramount importance that community banks decide what is their strategic focus either by market or by segment. They can neutralize the disadvantages of small size and capitalize on the advantages associated with it by defining the market creatively.
An example is Associated Bank in Milwaukee, a $200 million-asset bank that lends to small businesses in the city and has share advantages and market recognition in that segment, in the shadow of Marshall & Ilsley and First Wisconsin.
In addition to innovative market slicing, community banks can focus on a specific product, such as municipal lease finance, that will capitalize on their local identity and leverage it with strong technical expertise.
Diverse Ethnic Mix
One of the banks that is under the LaSalle super community umbrella, with $270 million of assets, does exactly that.
At the same time, LaSalle serves the diverse ethnic and economic communities in the Chicago area through eight different institutions, each dedicated to a discrete market -- blue collar, affluent, overall business, or products (mortgages).
The right product emphasis varies, depending on the leverage points. Origination of residential real estate loans, for example, leverages the branch and origination infrastructures and the underwriting capability of the institution.
Consumer finance leverages the retail franchise and could capitalize on low-cost local funding for high-margin activities. In either activity, recognition of the competitive environment and the critical success factors are critical.
Take a Darwinian View
In residential real estate portfolio lending, for example, the origination network, turnaround, service time, asset quality, funding rate and the resultant price, and the management of interest rate risk are all critical success factors.
In summary, while independence is a feasible option for community banks, it should be viewed within the context of survival of the fittest.
Strategic focus, clear commitment, and correct leveraging of resources are more important than ever to enhance profitability and maintain independence.