There was recently an article in SNL that got some traction and a number of comments on LinkedIn. The gist of it was that a $125M bank in Ohio, Bank of Guernsey, had merged with a larger bank. Nothing to write home about, but the alarmist headline declaring the demise of community banking did its job. The CEO, Robert Patrella, had been quoted as saying that, "The $125 million bank franchise is dead. Unless you're a small bank and the only bank in a relatively small town, you won't survive today." The LinkedIn comments were quite irate, but the article's major themes were familiar refrains: the cost of technology, staffing and regulations. The cries and shrieks grow louder. This got me thinking, as a fellow CEO and an economically-minded and data-driven person, about the reality of the situation. This is the great thing about the banking industry: we can go to the tale of the tape. Publicly available statistics about banks' economic performance tell the story.
So we pulled the data, and looked at banks with assets between $100M and $130M. And saw a number of interesting things. Based on the all-too-familiar headline, and the comments in the article, you'd think there would be carnage everywhere - but there wasn't. Below is a graph of the FDIC data broken into performance percentiles decending from left to right.
The first fact that jumped out was that going from the best to the rest, there was virtually no change relative to the size of the bank. If logic held, then the worst performers should all have been smaller. This wasn't the case. So the data tells us that this causality that's been a core assumption of the doomsday thinkers, is not actually present.
The next interesting fact is that the ROA and ROE of the top 40% were better than those of trillion- dollar Bank of America. Yes, you read that correctly. 40% of banks between $100M and $130M deliver Bank of America type returns. Wow! These points don't fit into the broader doom-and-gloom narrative, which may explain why they don't make headlines or aren't talked about much. But there they are.
So how do we explain the comments about the viability of small banks? These seem to be simple market realities. A small bank is, in the end, a small business. Small businesses need to compete with larger businesses to exist, we know that. Can they beat them with their size? No, of course not. They need to find another advantage - that's all. As bankers, and in our communities, we've all seen small businesses that work, and others that don't. Was it the type of business that caused the failure? Sometimes, sure, but more often than not, it was the execution. We know that small banks are viable, based on nothing more than the fact that so many of them exist. And according to the public data, there are also too many of them prospering, so we need to look for other reasons for their failure.
Small banks, like all small businesses, need to be smarter, faster and more effective than their larger competitors. When they leverage their advantage, they win, and when they don't, they fail. If the business model is viable (a bank), and the numbers show us that it isn't the size that caused the failure, we can only assume the execution was at fault. I point this out not to be mean-spirited, but to break the cycle of blame that is hurting our collective logic. Small banks can and do work - period. Can they be run the same way as they were 30 years ago? No! But what business can?! Small banks thrive when their leaders aren't afraid of change, and embrace it to their advantage. While others are changing and adapting, the doom-and-gloom crowd continues to point fingers at others, instead of looking in the mirror to see how to become a champion of change versus a victim of it.
Bankers in the lower percentiles need to wrestle with this reality, and ask themselves the hard questions. Not whether they should change, but how they can, and WHICH CHANGES will save their institution. And how quickly they can begin to act instead of react to the new world taking shape around them.
For smaller banks to survive, their leaders have rethought their operations and cost structures in light of current challenges and opportunities. They're leveraging technology and outsourcing to let them focus their scarce and expensive resources on their customers and communities. The cost of technology comes down quarterly, they understand that and are using it to their advantage. Business models that attack problems in new ways are sprouting up all around us, they're siezing them. Rethinking marketing with a national branded suite of products that community banks can offer, innovation in mobile banking and the invention of the compliance management system are just three areas of dramatic change. With the available examples and innovation, the question isn't IF small banks can survive, it's simply how.
For those who are curious, the Bank of Guernsey was in the 10th percentile with negative ROA.