Posted March 2011

Does Asset Size Matter?

By The Capital Corporation, LLC

As you are aware, The Capital Corporation works with a large number of banks in the Midwest on mergers, acquisitions, divestitures and other consulting projects.  We spend a lot of our time talking to bankers, boards of directors and ownership groups about what is happening in the industry and what the future may bring.  We decided to outline some of the information that we have gathered and share it with you.  We hope you find our thoughts and opinions on the banking industry helpful to your organization.


In today’s regulatory and economic world does asset size matter?   Will you remain viable as the banking environment changes, and if not what are you going to do about it? 

The FDIC and other regulators are privately stating that you need to be a certain size to be viable based upon the new regulations that have begun impacting banks and will continue over the next several years as Dodd-Frank is implemented. 

There is not a consensus as to what size is necessary to be viable, but the lowest asset size that we have heard is 125 million, many think that the number is much higher.  A bank consultant recently told us that he and his firm (a large, well-respected accounting and consulting firm) believe the minimum size is 500 million.  Nationally the opinion of consultants, bankers and others is a billion in assets is the minimum size necessary to remain independent and competitive. 

We don’t believe that there is a standard size that applies to all institutions.  We do believe that each bank does have a minimum size which depends primarily on your location, your business plan and your capital. 

We believe that rural and small town banks that are well run can survive and thrive at a much smaller size than an institution in a more crowded urban environment.  This is based upon lower personnel costs and less competition that allow for higher margins. 

We also believe that banks with strong niche business lines that provide for good margins with limited risk allow for smaller institutions to be viable and effectively compete with larger banks. 

However, the larger the market you are in most likely the larger you will need to be to be competitive.   Personnel and occupancy costs are typically much higher in a metropolitan market.  Additionally, the more competition for loans, deposits and people typically results in lower margins.  Finally, the pricing power of the large institutions can also substantially impact a smaller bank’s margins. 

Despite your size, we know that cost of regulatory compliance continues to rise for all banks.  As costs rise your revenue must also rise to realize the same profit.  Additionally, new regulations are reducing revenue.  Changes in the overdraft charges, interchange fees, mortgage lending and other items are all reducing income.  Finally, there is an expectation that minimum capital requirements will also increase. 

Therefore, no matter what your size you need to be proactive in developing and executing a strategy to address these challenges and continue to realize a return on your investment.  Otherwise, you will erode your income and your value.  Unlike credit unions, banks are a for-profit business and must find ways to make money to remain viable. 


Size is an important factor in being competitive and profitable.  Size alone can create efficiencies that are necessary to maintain good profits.  The 5 largest institutions in Kansas all had an efficiency ratio of under 68% as of December 31, 2010. Good business plans, the ability to obtain good earning assets, strong capital and other factors can also help create efficiencies, but size can have a huge impact. 

It is hard to ignore the evidence that revenue is headed down and expenses are headed up.   But besides the direct economic impact on an individual bank, what does it mean for community banking in general?


The landscape of community banking will change as banks begin to consolidate – there will be less banks, and the surviving banks will be larger and stronger.  On average, as banks consolidate they will have a larger loan limit, more efficient operation and more locations that make it more convenient for their customers. 

We are not talking about out-of-state competitors like Bank of America and Bank of the West that community banks love to compete against.  We are talking about local bankers with good reputations, local ownership and local relationships.  To remain competitive you will need to realize some of these same advantages. 

While we don’t believe that there is one standard size that all banks need to be, we do believe that size is important and that each bank has its own minimum size – whether it be 50 million, 100 million, or 500 million -  to remain competitive and profitable. 

Additionally, we believe that there will be regulatory pressure for consolidation.  FDIC Chairwoman Sheila Bair in a recent response to a question posed by Senator Moran of Kansas stated that “… there are still over 7,000 community banks out there, but there is always consolidation that is a byproduct of a financial crisis – the stronger absorb the weak and that is what is happening here…”


Based upon the items discussed above, as well as many others, we believe that many banks will need to grow in the future.  If you agree, what are your options?

   ► If you have the capital necessary to support growth, you can grow your institution independently.  However, many markets are not growing, therefore in order to grow you must take business from another institution or reach to a market that provides growth.  Both involve increased risk. 


    ► You can acquire another bank or one or more branches.  Again, this requires excess capital to execute on this plan, and could increase risk. 


    ► You can sell.  For the next few years there may be more sellers than buyers.  If you look at the number of banks that have the capital or the ability to raise or borrow capital and can get regulatory approval to make an acquisition it is clear that there are a limited number of buyers. 


    ► You can do a merger of equals.  Because of both financial and non-financial issues a merger can be a challenge. 


We are not trying to push a specific option, but we do believe that for banks to survive and thrive they must have a plan and execute on that plan.  We are firm believers in the community bank system because of its impact on the economy and survival of small towns in the Midwest.



The next few years in banking will continue to be very difficult for the industry as a whole, but it will create great opportunities for strong organizations.  No matter where you are in the spectrum you must have a plan to move forward and devote the time, energy and thought to execution of that plan. 

Thank you for letting us share our opinion on the banking industry with you.  If you have any questions or comments, please feel free to give us a call.  We would be happy to discuss any of these issues with you.