Community Bankers Face a Choice: Sell Out, Fold or Change

Barb Rehm, editor at large for American Banker, recently wrote an article on community bankers and the growing pressure to consolidate among community banks. We thought this was an excellent article on the pressures facing some of the smaller banks in our business, those that are focused on serving their communities while balancing the mounting pressures of consolidation.

At EDGE, we have helped several large banks through the FDIC acquisition and merger frenzy of the last few years. We are now seeing those same issues and pressures affecting smaller and smaller banks.

A few interesting points from her article:

  • Operating revenue often takes a back seat to banker concerns about the increasing cost of compliance or new restrictions on fee income. But at least one policymaker put the issue front and center recently. "We're at a tipping point. There is a limit to how far reductions in loan-loss provisions can boost industry earnings," FDIC Chairman Sheila Bair said when she unveiled the industry's first-quarter results. "At some point, if banks are to continue to increase their profitability, they will have to grow their revenues."
  • The trend is hitting hardest the roughly 7,000 banks with less than $1 billion in assets. As a percentage of average assets, operating revenue at these banks has fallen to 4.45% at the end of 2010 from just under 6% in 1999.  There are myriad measures of industry health and some of them, including credit quality, are improving. But nothing is more basic than operating revenue. It's net interest income plus noninterest income; so it shows how much banks are making on loans, products and services before deducting noninterest expenses and loan-loss provisions.
  • The vise squeezing banking is obvious: Fee income is getting killed at the same time that weak loan demand and low rates are crushing interest income.
  • Noninterest income isn't any prettier. It has been falling since 1999, when it hit 1.68%, and settled at 0.9% in 2010.
  • Of course the industry is now dominated by banks with more than $10 billion in assets. By number they make up just 2% of the industry, or 107 companies, but they control 78% of the assets, up from just 33% in 1990.
  • These trends are expected to continue, and even accelerate, by 2020. The largest banks will own more of the assets and the sub-$100 million crowd will continue to shrivel.
We encourage you to read the entire article here at American Banker. There are some good points that need to start being top-of-mind ideas for many banks across the country.

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