It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness
~ Charles Dickens, A Tale of Two Cities
Last week there was a very interesting piece from the FDIC that was making the rounds, but I did not have a chance to get to it. I think it is important, though, and wanted to touch on it while it is still fresh. As a part of its quarterly industry update, the FDIC released this article, called "Community Banks Remain Resilient Amid Industry Consolidation." It happened to make think of what may very well be the greatest opening line of any book I have read. So, for community banks, are these the best of times, or the worst?
I hear many community bankers continuing to lament the demise of the smaller banks at the expense of the large money center banks. We have all seen the data on the decreasing number of charters, and more importantly, the growing concentration of industry assets in the hands of a few. This chart sums up all of those statistics (the definition of community bank for this chart is a little cumbersome - click here for the explanation):
In short, we as community bankers have seen our slice of the pie shrink substantially over the last 3 decades. This has caused a growing sentiment among community bankers that the future is all about gloom and doom. I hear lots of complaining about the growing regulatory burden, and the fact that the little guys "just can't compete anymore." I also hear a lot of people saying that the size threshold to be viable is somewhere around $1 billion in total assets.
I will concede that the current environment is tough, and that some of the smallest banks' days are numbered. However, to say that the community banking business model is doomed and you need at least $1 billion in assets to survive is ludicrous. The FDIC article digs a little deeper into the data, and finds some support for my doubts.
The key finding of this study is that institutions with assets between $100 million and $10 billion—most of which can be considered community banks—have increased in both number and in total assets since1985. The number of banks with assets between $100 million and $1 billion increased by 7 percent between 1985 and 2013, while the number of banks with assets between $1 billion and $10 billion increased by 5 percent. These groups of institutions also experienced growth in terms of total assets. The assets of banks between $100 million and $1 billion increased by 27 percent between 1985 and 2013, while the assets of banks between $1 billion and $10 billion grew by 4 percent.
I'll also include a couple of my favorite charts:
As the charts show, the big industry changes are happening to the very smallest and the very largest of banks. Banks with assets less than $100 million are shrinking (and seeing performance decline relative to peers), and the overwhelming majority of the industry asset growth has landed at banks with assets over $10 billion. Of course some of this is due to inflation, as $100 million just ain't what it used to be. However, the bottom line is that community banks over $100 million in assets have done quite well, and are positioned to continue that success going forward.
This article, which I recommend reading, combined with the performance statistics by asset size and direct experience with community banks leads me to a couple of takeaways:
- There might be an asset size that most banks have to target to cover the growing overhead burden, but it is not $1 billion. It looks a whole lot closer to $100 million.
- The smallest banks that do hope to prosper probably cannot do so by trying to be a generalist that is "all things to all people." Instead, they will need to find a specific niche in which they can specialize and excel.
- Community banks of all sizes are seeing a divergence in performance. There are very few that actually look like the "averages" from these studies. Instead, there are high performers and there are those lagging behind. Banking truly is getting more complex and moving at a faster speed. Bankers that embrace this fact and are seeking new strategies, better techniques, updated technology, and partnerships with the right experts are the ones that are far outpacing the averages.
Overall, I think the negativity from community bankers is overdone. Our business is recovering, and the future still looks bright. Instead of spending too much time on what is wrong and how unfair new regulations might be, those that are succeeding are embracing the change and seeking the new opportunities that will inevitably come from shifts of this magnitude. Good luck, and let us know if we can help!