Community Banks – A Simple Formula for Thriving and Surviving






Bay Harbor Capital Advisors


The financial crisis of 2008 exacted a heavy toll on Community Banks nationwide. Certainly,  a good deal of the damage was self-inflicted, starting with balance sheets heavily skewed toward cyclical commercial and residential real estate assets and contractors’ exposure; insufficient investments in technology and new financial products; lethargic Boards and executive management, sloppy underwriting, coupled with thin capitalization. Congress’s heavy-handed prescription for these grave missteps was to apply a “one size fits all” onerous regulatory, capital and reporting burden on all banks, regardless of size, culpability, and cost. Banks that had no capital markets, no foreign branches, no synthetic hedging or, level III assets, or even foreign exchange activities were then expected to add to capital and reporting requirements, and deemed a systemically important financial institution (SIFI). The standard saying on capitalization requirement became “the old 6 is now the new “8”… or even 10.

The impact on Community Banks has been a wave of small banks’ mergers; disinvestments in products and technology; razor thin profitability that was compounded by the low interest rate environment; and restricted lending standards, since these now require costly reserve requirements. And now that the financial crisis is in the rear-view mirror and the outcry from smaller banks is being heard, the heavy restrictions are being evaluated, and gradually rolled back.

According to the FDIC, there were 5,961 FDIC-insured commercial banks in the United States as of December 31, 2014. That is a far cry from the 8,263 banks recorded to be in existence in the 1st quarter of 2000, and over 12,000 banks in the 1980s. The chart below reflects the dramatic drop in the number of large and small banks.


While Community Banks are regulated institutions that are susceptible to economic cycles, there are concrete and tangible strategies that they can deploy to navigate not only economic downturns, but the current highly charged competitive environment that is not expected to abate. Competition is no longer just from banks and finance companies, but from new disruptors: Well-financed FinTech companies offering financial services through technology platforms and using AI. What then are some of the structural mitigants and basic banking “blocking and tackling” needed to stem this continuous loss of small banks?

This is a three segment white paper that offers tried and true and actionable strategies to reposition a Community Bank toward not only long term survival, but sure-footed profitability. The nine strategies we will present and develop in the next two parts cover a Community Bank’s Organizational, Operational, and Financials levers.

  • Organizational Levers
    • Insightful and Diversified Board
    • Strong Credit and Enterprise Risk Management (“ERM”) Culture
    • Shedding Bank Holding Company Organizational Structure
  • Financial Levers
    • Large Fee Revenue Component, and Stable Deposit Stream
    • Razor-Sharp Efficiency Ratios
    • Assets and Liabilities and “Match Funding”
  • Operations Levers
    • Customer Focused Relationship Philosophy
    • Cordial Relationship with Regulators
    • Up-to-Date Technology, Systems and Relevant Competitive Product Set
    • Private Label and Outsourcing


Stop by next week to read part 2, where we will discuss best practices for board recruitment, ideal efficiency ratios, and more.

Michael Zahaby

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