Unmaking the Myths Fact-Checking Community Banking By Achim Griesel and Dr. Sean Payant, Haberfeld Banking, and specifically community banking, is essential to the overall health of our country. By design, it serves as the backbone for our financial system and communities while playing a crucial role in helping individuals, businesses and governments thrive. In this highly competitive environment, community banks must continuously adapt to the changing landscape and competitive pressures. The key to success is to challenge and shatter the traditional banking myths that have been prevalent for years. Let’s explore five such myths and why they need to be shattered. 1.The Efficiency Ratio Myth: Managing expenses is the best way to improve overall efficiency. Fact: Increasing overall revenue is much more impactful. The efficiency ratio is an important metric for financial institutions (FIs) to track as it measures how efficiently FIs are using resources to generate revenue. It is often thought the best way to improve the efficiency ratio is to manage expenses by embracing technology, controlling costs and determining appropriate staffing levels. But, managing expenses is a very finite opportunity. The unlimited opportunity for FIs to improve their efficiency ratio is not on the expense side. It is on the revenue side, as illustrated in Figure 1, by comparing high-performing banks to others. Institutions should focus on growing revenue, as this will have a much bigger impact on profitability. There are two ways to accomplish this effectively: (1) growing core customers and (2) growing share of wallet. The bigger, more strategic option is in growing core customers because this also enables your FI to exponentially grow share of wallet. Figure 1 Metric Eagles Other %Variance Return on Assets 3.24% 1.01% 220% Return on Equity 32.78% 11.09% 196% Net Interest Margin 3.70% 3.22% 15% Cost of Funds 0.30% 0.29% 3% Yield on Loans 5.44% 4.77% 14% Loan/Deposit Ratio 71.62% 69.95% 2% Noninterest Income to Assets ($000 per $1M in assets) $18.07 $4.60 293% Noninterest Expense to Assets ($000 per $1M in assets) $26.81 $23.55 14% Equity Capital to Assets 10.09% 8.83% 14% Note: Data Through 9/30/22 (annualized) 21 West Virginia Banker
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