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The Real Reason Community Banks Are Closing

Conventional wisdom holds that community banks are doomed because of rising regulatory, technological and staffing costs. When Guernsey Bancorp, a small Westerville, Ohio, institution, was recently sold to First Financial Bancorp in Cincinnati, Guernsey’s chief executive offered the merger as proof of this theory.

“The $125 million bank franchise is dead,” the bank’s CEO said. “Unless you’re a small bank and the only bank in a relatively small town, you won’t survive today.”

But according to publicly available data from the Federal Deposit Insurance Corp., the outlook for small community banks appears to be shockingly good. I pulled data from 2013 on community banks with assets between $100 million and $130 million and compared their return on assets and return on equity. Two things stood out to me when I graphed the results.

For one, a bank’s level of assets appeared to have no impact on its ROA and ROE. If it were true that smaller banks are struggling, performance would vary relative to the size of the bank. But I found that banks with $130 million in assets didn’t necessarily outperform banks with $100 million.

Even more interesting? The ROA and ROE for the top 40 percent of the banks I analyzed were better than those of Bank of America, a trillion-dollar institution. According to FDIC data, in 2013, Bank of America had an ROA of 1.13% and an ROE of 9.18%. By comparison, the top 40% of community banks with assets between $100 million and $130 million had an average ROA of 1.47% and an average ROE of 12.69%. 

The lesson here is that, when it comes to banking, size doesn’t matter. Community banks can, and do, still thrive.

Why then have so many small banks closed in recent years? Quite simply, those institutions have failed to keep up with bigger banks. Their rivals have been quick to bump up staffing and harness new technologies in order to keep up with regulatory changes and customer demands. Small banks, like any small business, need to be smarter, faster and more effective than their larger competitors.

Community banks can no longer rely on the same technologies and processes they’ve been using for the last 30 years. I’ve witnessed community banks that still rely on paper systems to manage compliance. This is nearly unfathomable when one considers that more than 16,000 pages worth of regulatory changes were issued in 2013 alone. The staffing costs to maintain systems like these will only continue to increase.

Leaders must rethink their operations and cost structures. Technology, outsourcing and other tools can be leveraged to bring costs down and allow banks to focus their scarce and expensive resources on their customers and communities.

Small banks that modernize and adapt will become champions of change. Those that don’t will become victims of it.

Andy Greenawalt is co-founder and chief executive of Continuity Control, a provider of compliance management systems for community financial institutions. He is also the president of Gnostic Ventures, a company that advises on security investments and invests in software-as-a-service companies.



(5) Comments



Comments (5)

A winning strategy and the right people to execute it matters much, much more than size.
Posted by | Saturday, June 14 2014 at 9:40AM ET
Everyone has a right to his/her opinion, but not his/her own facts. That data speaks clearly --- size matters in Retail Banking:
Posted by Serge Milman | Saturday, June 14 2014 at 12:53AM ET
Hummm. Interesting. Nothing against small community banks, especially those that service more rural or remote communities that would not otherwise have a bank. But, I would imagine that most will continue to sell out or fail. The cost of technology and compliance is hurting however, poor management will be the primary reason for the
Posted by Yaldez4FSI | Wednesday, June 11 2014 at 3:18PM ET
Andy wrote a great article. Here is what I believe to be true. "Conventional wisdom holds that a business is doomed because of leaders who do not know how to run a business." I expressed my opinion by re-writing Andy's intro. I am a big fan of Spike TV's Bar Rescue and host Jon Taffer, a bar and nightclub owner who has started, flipped, or owned over 600 bars and clubs in his career and currently owns one of the most highly respected consulting firms in the bar and nightclub industry. Watch this CNBC video interview of Jon Taffer from March 7, 2014 at The last half of the interview features commentary regarding bar owner excuses for failure. It is very apropos to Andy's article. Jon Taffer's closing quote regarding bar owner excuses for failure is priceless. Translated to banking. Banker's can turn anything into an excuse for failing: "rising regulatory, technological and staffing costs." If Jon Taffer was advising banks he would say "The fact is somebody is making money in this "rising regulatory, technological and staffing costs" environment so why not you.
Posted by dmgerbino | Wednesday, June 11 2014 at 1:00PM ET
By booking SBA loans, then selling the guaranteed-portion into the secondary market, many smaller banks have realized outsized returns over the past few years relative to banks of their size less than a decade ago.

Many more small banks should be benefitting from the relatively easy profits available in SBA loans: They need infrastructure (which isn't cheap), and the right leader and loan officers to execute; but once these folks are in-place, it's just a matter of planning the work and working the plan.

As the one of the leading banking-focused, executive search firms in the U.S., we have helped our banking clients to identify and successfully recruit several SBA teams which have quickly added to the bottom-line profits of our clients.
Posted by | Tuesday, June 10 2014 at 3:18PM ET
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