What Are the Top 7 KPIs Metrics of a Community Bank Business?

As small business owners and artisans in the ever-evolving marketplace, understanding and measuring the performance of your community bank is essential for success. Key Performance Indicators (KPIs) provide valuable insights into the financial health and operational efficiency of your bank. But when it comes to artisan marketplaces, the KPIs that matter are unique to the industry. In this blog post, we will explore 7 industry-specific KPIs that are crucial for community banks in artisan marketplaces, offering you the knowledge and tools to make informed decisions and drive your bank's growth and success.

Net Interest Margin (NIM)

Definition

Net Interest Margin (NIM) is a key performance indicator that measures the difference between the interest income generated by a bank's assets and the interest expenses associated with its liabilities. This ratio is critical to measure because it provides insights into how effectively a community bank is generating income from its core business of lending and deposit-taking. In the business context, NIM is essential to monitor as it directly impacts the profitability and financial performance of the bank. A higher NIM indicates greater profitability and efficiency in the bank's lending and investment activities, while a lower NIM may indicate a reduced ability to generate revenue from core operations. It matters because it reflects the bank's ability to earn a return on its interest-earning assets while managing the costs associated with funding those assets.

How To Calculate

The formula for calculating NIM is:

The interest income represents the revenue earned from interest-earning assets, while interest expenses include the costs of funding those assets. Average earning assets typically include loans, securities, and other interest-earning investments. By dividing the difference between interest income and expenses by the average earning assets, the NIM ratio is derived, providing a clear indication of the bank's profitability from its core operations.

Example

For example, if a community bank has an interest income of $500,000 and interest expenses of $200,000, with average earning assets totaling $5,000,000, the calculation for NIM would be: (500,000 - 200,000) / 5,000,000 = 0.06 or 6%. This indicates that the bank's net interest margin is 6%.

Benefits and Limitations

The benefits of monitoring NIM include gaining insights into the bank's core profitability, identifying areas for improved asset-liability management, and assessing the impact of interest rate changes on earnings. However, limitations may arise due to the complexity of the banking environment, as NIM can be influenced by various factors such as competition, economic conditions, and regulatory changes, making it challenging to rely solely on this ratio for decision-making.

Industry Benchmarks

According to industry benchmarks, the average net interest margin for community banks in the US typically ranges from 3.5% to 4.5%, with exceptional performance levels reaching 5% or higher. These benchmarks provide a reference point for community banks to assess their own NIM and strive for above-average performance in the industry.

Tips and Tricks

• Implement effective asset-liability management strategies to optimize NIM.
• Stay updated on interest rate trends and adjust lending and deposit strategies accordingly.
• Explore opportunities for diversifying the bank's revenue streams beyond traditional interest income.
• Regularly review and adjust pricing strategies on loans and deposits to maximize NIM.

Loan to Deposit Ratio (LDR)

Definition

The Loan to Deposit Ratio (LDR) is a key performance indicator that measures the amount of loans a bank has relative to its deposits. It is critical to measure because it provides insight into the bank's liquidity and lending practices. A healthy LDR indicates that the bank is effectively utilizing its deposits to fund loans and investments, contributing to its profitability and growth. On the other hand, a low LDR may suggest that the bank is not maximizing its lending opportunities, while a high LDR could indicate excessive risk or over-reliance on borrowed funds.

How To Calculate

The LDR is calculated by dividing the total loans outstanding by the total deposits. The total loans outstanding refer to the sum of all outstanding loans provided by the bank, while the total deposits encompass all customer deposits, including checking, savings, and time deposits. By dividing the loans by the deposits, the LDR provides a clear picture of the bank's lending activities relative to its deposit base.

Example

For example, if a community bank has $100 million in total loans outstanding and $150 million in total deposits, the calculation of the LDR would be as follows: LDR = $100,000,000 / $150,000,000 = 0.67. This means that for every dollar in deposits, the bank has $0.67 in loans outstanding.

Benefits and Limitations

The advantage of using LDR is that it provides a clear indication of the bank's ability to transform deposits into loans, supporting lending activities and potential revenue generation. However, a limitation of LDR is that it does not consider the quality of the loans or the risk associated with them. Therefore, a high LDR may not always signify a prudent lending strategy.

Industry Benchmarks

In the US, the typical range for LDR in the banking industry is between 80% and 90%. Banks with an LDR exceeding 100% may be considered as having a high dependency on borrowed funds for lending activities. Exceptional performance levels would see an LDR closer to or slightly above 100% while maintaining strong asset quality and manageable risk levels.

Tips and Tricks

• Regularly monitor and analyze the LDR to ensure it aligns with the bank's lending strategy and risk tolerance.
• Implement strategies to attract and retain deposits to support healthy lending activities.
• Diversify lending portfolios to manage risk and optimize the utilization of deposits for loans.
• Consider the macroeconomic environment and interest rate trends when assessing the LDR.

Community Reinvestment Act (CRA) Rating

Definition

The Community Reinvestment Act (CRA) Rating is a key performance indicator that measures a bank's efforts to meet the credit needs of its entire community, including low- and moderate-income neighborhoods. This ratio is critical to measure as it reflects a bank's commitment to serving the diverse financial needs of its local community. In the business context, the CRA Rating is important because it demonstrates a bank's dedication to community development and economic stability. It also signifies the bank's ability to foster sustainable growth by addressing the financial needs of underserved populations and supporting local businesses. This KPI is critical to measure as it impacts a bank's reputation and regulatory compliance, and ultimately, its ability to thrive in its community. It matters because a strong CRA Rating can attract customers and investors who prioritize ethical and socially responsible banking practices.

How To Calculate

The formula for calculating the CRA Rating typically includes an assessment of a bank's lending, investment, and service activities in low- and moderate-income areas. Lending activities may include the number and amount of small business, mortgage, and community development loans made in these areas. Investment activities could involve the dollar amount and impact of qualified community development investments that benefit these neighborhoods. Lastly, service activities might encompass the availability and usage of financial services and branches in low- and moderate-income communities.

Example

For example, suppose a local community bank has provided $5 million in small business loans, invested $2 million in affordable housing projects, and established a new branch in a low-income neighborhood. Using the formula, the CRA Rating for this bank would be calculated as follows: CRA Rating = $5M (Lending) + $2M (Investment) + 1 (Service Activity) = $7M.

Benefits and Limitations

The main advantage of a strong CRA Rating is that it enhances a bank's reputation as a supporter of community development and facilitates access to capital from various sources. Additionally, it demonstrates the bank’s compliance with regulatory standards, which can help avoid sanctions and reputational damage. However, a limitation of the CRA Rating is that it may not fully capture the qualitative impact of a bank's community reinvestment efforts, which could lead to an incomplete assessment of its true impact on the community.

Industry Benchmarks

According to industry benchmarks, a strong CRA Rating for a community bank would typically involve a significant volume of loans and investments in low- and moderate-income neighborhoods, as well as the establishment of multiple service locations within those areas. Typical benchmarks for an above-average CRA Rating in the US context may include a minimum of $5 million in lending, $2 million in investments, and three new service activities in low- and moderate-income communities.

Tips and Tricks

- Actively engage with community organizations to identify economic development needs - Offer financial literacy programs and resources in low- and moderate-income neighborhoods - Partner with local government agencies and non-profits to maximize the impact of community reinvestment efforts - Leverage technology to expand access to banking services in underserved areas - Regularly review and update strategies to align with the changing needs of the local community.

Customer Satisfaction Index (CSI)

Definition

The Customer Satisfaction Index (CSI) is a key performance indicator that measures the level of satisfaction customers have with the products, services, and overall experience provided by the bank. This KPI is critical to measure because it directly reflects the relationship between the bank and its customers, impacting retention rates, customer loyalty, and the bank's reputation. High customer satisfaction is essential for long-term success in the banking industry, as it drives customer retention, positive word-of-mouth, and repeat business.

How To Calculate

The formula for calculating the Customer Satisfaction Index (CSI) involves dividing the total number of satisfied customers by the total number of survey respondents, and then multiplying the result by 100 to obtain the percentage. The numerator reflects the number of satisfied customers, while the denominator represents the total number of survey respondents. By expressing the ratio as a percentage, it provides a clear and measurable indication of customer satisfaction levels.

Example

For example, if a local trust community bank conducts a satisfaction survey and receives responses from 300 customers, out of which 250 express satisfaction with the bank's services, the Customer Satisfaction Index (CSI) can be calculated as follows: CSI = (250 / 300) x 100 = 83.33%

Benefits and Limitations

The main advantage of measuring CSI is that it provides valuable insights into customer perceptions, allowing the bank to identify areas for improvement and prioritize customer-centric strategies. However, a potential limitation is that CSI alone may not capture the full spectrum of customer sentiment, as it is based on a specific survey, and other factors such as customer loyalty and recommendation behavior may also impact overall satisfaction levels.

Industry Benchmarks

According to industry benchmarks, the average customer satisfaction index for community banks in the United States is approximately 82%, with top-performing banks achieving CSI scores above 90%.

Tips and Tricks

• Regularly conduct customer satisfaction surveys to gather feedback and identify areas for improvement
• Focus on personalized customer service and relationship-building to enhance satisfaction levels
• Implement customer feedback mechanisms to address issues and showcase responsiveness
• Analyze customer complaints and suggestions to drive continuous improvements
• Recognize and reward employees for delivering exceptional customer experiences

Small Business Lending Volume

Definition

Small Business Lending Volume is a key performance indicator that measures the total value of loans provided to small and medium-sized businesses by the community bank. This ratio is critical to measure because it directly reflects the bank's support for local businesses and the overall economic health of the community it serves. Small Business Lending Volume is important as it indicates the bank's ability to contribute to local economic growth and job creation, fostering a sustainable business environment.

How To Calculate

The formula for calculating Small Business Lending Volume involves summing the total value of small business loans provided by the bank over a specific period, such as a quarter or a year. This figure is vital in understanding the bank's commitment to supporting local businesses and driving economic development within the community it operates.

Example

For example, if Local Trust Community Bank provided $5 million in small business loans over the last year, the Small Business Lending Volume would be $5 million. This would reflect the bank's impact on local businesses and the community's economic development.

Benefits and Limitations

The benefit of tracking Small Business Lending Volume is that it provides a clear measure of the bank's support for local economic growth. However, a limitation is that it does not account for the performance of the loans or the credit quality of borrowers, meaning that a high Small Business Lending Volume does not necessarily indicate a healthy lending portfolio.

Industry Benchmarks

According to industry benchmarks, the average Small Business Lending Volume for community banks in the US is approximately $10 million annually. Above-average performance would be considered at $15 million, while exceptional performance would be reflected in a Small Business Lending Volume of $20 million or more within the same time frame.

Tips and Tricks

• Develop targeted marketing campaigns to attract small businesses in the community.
• Offer customized loan packages to meet the specific needs of local businesses.
• Partner with local business associations and chambers of commerce to increase visibility and engagement with small business owners.

Non-Interest Income to Total Income Ratio

Definition

The Non-Interest Income to Total Income Ratio is a key performance indicator that measures the proportion of a community bank's total income that comes from non-interest sources, such as fees, commissions, and other revenue streams. This ratio is critical to measure as it provides insight into the bank's diversification of income and the effectiveness of its non-interest income-generating activities. In the business context, this KPI is important because it helps assess the bank's ability to generate revenue beyond traditional interest-based income, which can be impacted by economic fluctuations and interest rate changes. A high ratio indicates a healthy and diversified income stream, reducing the bank's reliance on interest income, while a low ratio may suggest a need to expand non-interest income sources.

How To Calculate

The formula to calculate the Non-Interest Income to Total Income Ratio is:

Where Non-Interest Income includes all revenue from fees, commissions, and other non-interest sources, and Total Income represents the sum of all interest and non-interest income. This formula provides a clear and concise way to assess the bank's non-interest income as a percentage of its total income, allowing for a comprehensive view of the bank's revenue diversification.

Example

For example, if a community bank generates $15 million in non-interest income and has a total income of $50 million, the calculation of the Non-Interest Income to Total Income Ratio would be: (15,000,000 / 50,000,000) x 100 = 30%. This means that 30% of the bank's total income comes from non-interest sources, demonstrating a healthy level of diversification in its revenue streams.

Benefits and Limitations

The advantage of using this KPI effectively is that it provides a clear indication of the bank's reliance on non-interest income, which can be crucial for sustainable revenue generation. However, a limitation of this ratio is that it does not provide insight into the specific sources of non-interest income, and a high ratio may indicate excessive fee-based revenue, which could potentially alienate customers.

Industry Benchmarks

Industry benchmarks for the Non-Interest Income to Total Income Ratio can vary, but typical benchmarks within the US community banking sector range between 25% to 35% for average performance, 35% to 45% for above-average performance and above 45% for exceptional performance. These benchmarks indicate healthy levels of diversification in income sources for community banks.

Tips and Tricks

• Diversify non-interest income sources through innovative products and services
• Monitor fee structures to ensure they are competitive and customer-friendly
• Regularly review and optimize non-interest income-generating activities to maintain a healthy ratio

Cost per Customer Acquisition

Definition

Cost per customer acquisition is a critical Key Performance Indicator (KPI) that measures the total amount spent on acquiring a new customer. This ratio is essential to track because it directly impacts the overall profitability and success of the business. By understanding the cost associated with acquiring new customers, companies can make informed decisions about marketing strategies, sales efforts, and customer retention initiatives. Ultimately, this KPI provides insights into the efficiency and effectiveness of the company's customer acquisition processes, highlighting areas for improvement and optimization.

How To Calculate

The formula for calculating cost per customer acquisition is to divide the total cost of sales and marketing efforts by the number of new customers acquired within a specific period. This includes all costs associated with sales and marketing activities, such as advertising expenses, sales team salaries, and promotional materials. By dividing this total cost by the number of new customers, businesses can determine the average cost incurred to acquire each customer.

Example

For example, if a Local Trust Community Bank spends $50,000 on sales and marketing efforts in a quarter and acquires 200 new customers during that same period, the cost per customer acquisition would be $250 ($50,000 / 200). This means that on average, the bank spent $250 to acquire each new customer during that quarter.

Benefits and Limitations

The benefit of tracking cost per customer acquisition is that it provides insight into the efficiency and effectiveness of customer acquisition strategies. By understanding the cost associated with acquiring new customers, businesses can make informed decisions about resource allocation, budgeting, and overall marketing strategy. However, a limitation of this KPI is that it does not account for the long-term value of acquired customers or the quality of those customers, which are also important factors to consider in evaluating customer acquisition success.

Industry Benchmarks

In the banking industry, the average cost per customer acquisition typically ranges from $150 to $400. The lower end of this range reflects efficient and effective customer acquisition processes, while the higher end may indicate areas for cost optimization and improvement. Exceptional performance in this area could result in a cost per customer acquisition below $150, demonstrating highly effective customer acquisition strategies.

Tips and Tricks

• Focus on target audience: Identify and target specific customer segments to reduce acquisition costs.
• Invest in digital marketing: Utilize cost-effective digital channels for customer acquisition, such as social media and email marketing.
• Optimize sales processes: Streamline sales efforts to improve conversion rates and reduce acquisition costs.