Pub. 1 2013 Issue 2

www.uba.org 18 In order to thrive (not just survive) in this highly-competitive environment most banks must reevaluate their business models and realign them to meet the challenges ahead. C harles Darwin, the English natu- ralist, said it best: “It is not the strongest of the species that sur- vives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” In order to thrive (not just survive) in this highly-competitive environment most banks must reevaluate their busi- ness models and realign them to meet the challenges ahead. Those that can adapt their business models quickly will move ahead of the pack and thrive in this challenging environment. As you create your strategic plan for the next few years, thoughtful consideration should be given to whether your business model is optimally aligned in creating sustainable profitable growth. This is particularly critical given the challenging times we currently face and will likely continue to face in the near to intermediate term. Success for most banks is dependent upon the ability to grow assets profit- ably. A key element of sustainable profitability is operating revenue growth, yet for more than 50 percent of commercial banks in the U.S. operating revenue as a percentage of average assets is lower today than it was in 1999, the peak year for pre-tax operating income1 as a percentage of average assets in the banking industry. As an industry, operating revenue as a per- centage of average assets has been steadily declining since 1999 with the exception of 2009 and 2010 across all asset-size banks. The decline in operating revenue reflects declines in both net interest income and noninterest income as a percentage of average assets. Our in- dustry has been aware of net interest margin pressures for well over 15 years. While banks have focused on managing expenses relative to the decline in net interest income, like swimming against the tide, there has been little sustainable ground gained in ef- ficiencies because of declining revenues. As a result, pre-tax operating income peaked more than a decade ago. Add to this operating income trend recent revenue pressures resulting from new legislation and regulations that will inhibit key sources of fee income, higher cost of doing business associated with increased regulations and advancements in technol- ogy and delivery, and need for higher levels of regulatory capital and a very challenging future emerges. Yet, for the well-positioned, adaptable bank, there is a navigable path to sustainable profitable growth. It will, however, necessitate focus, discipline and precision in execution. What is this navigable path? Primary themes will include smart asset growth funded by core deposits, diversified oper- ating revenue growth, relentless focus on right-sizing operational efficiency and pro- ductivity, capital efficiency, and keen risk management. Below is a general outline of strategies your bank should consider as you develop your strategic plan for the future. Smart Asset Growth and Capital Efficiency As business costs continue to increase, scale will become increasingly important in leveraging costs in generating revenue. While many experts are vocal about the minimum size necessary to successfully compete in the future, such growth must By Anita Gentle Newcomb President and Founder |.G. Newcomb & Co. The Community Bank of the Future: Transforming in this Decade of Change