David Harris doesn’t feel the urgency to double his $51 million bank’s assets.
The founder and CEO of RelianzBank, which next month will mark its ninth year in business, doesn’t need to grow the bank just to manage the costs of increasing regulation, continued low interest rates and competition.
“The cost of operating is going up, the amount of regulation continues to increase, the amount of competition continues to increase,” Harris said. “At what level, what economies of scale, do you need to be at to be viable? It’s different for everybody.”
His optimism comes despite the fact that the number of small banks in Kansas and the U.S. continues to shrink at a significant rate.
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Between June 30, 2004, and June 30, 2014, the number of Kansas-based banks with assets less than $100 million declined 44 percent, almost twice the 24 percent rate of decline for all banks headquartered in the state in the same period, according to Federal Deposit Insurance Corp. data.
The data also showed the number of small banks in the nation declined by 54 percent in the same period, while the total number of the country’s banks dropped by 27 percent.
Among large banks – those with $100 million in assets – the number increased in Kansas in the 10-year period by 37 percent, but dropped slightly by 2.5 percent across the country, according to the FDIC.
Asset size alone is not a predictor of staying power, Harris and others industry officials said, though they do think the number of small banks in Kansas and the U.S. will continue to dwindle because of a multitude of factors.
The decline in the number of small Kansas banks is mostly a function of mergers and acquisitions, officials said. But there are reasons behind those consolidations. It’s not just about one big bank wanting to get bigger by acquiring a smaller bank.
It may be the owner of a bank wants to retire and has no children willing to take over the family bank, said Chuck Stones, president of the Kansas Bankers Association. It may be a small bank is looking to expand into another community and finds a bank there willing to merge or be acquired.
“It becomes what’s the best option out there,” Stones said. “Right now, the best option seems to be another bank.”
Chuck Marshall, a financial institutions group manager at accounting and consulting firm Kennedy and Coe, said the chief reason for bank consolidation in Kansas is the perennial issue of growing banking regulation and the costs of keeping up with it. Other added costs are information technology, IT security and managing profit margin at a time when interest rates have remained at historically low levels for nearly seven years.
“Interest rates, because they are so low, are pounding all of the profit margin out of community banks,” Marshall said.
The rising costs of regulation is a familiar refrain among bankers and an oft-cited barrier to growth and improved profit.
A study last year by the Federal Reserve Bank of Minneapolis attempted to look at the costs of regulatory compliance on banks. What it found was increased regulation does have an effect on a bank’s profitability when the bank hires one or more part-time or full-time employees to handle compliance. For example, the study said that the median reduction in return on assets – a key measure of profitability – for banks with less than $50 million in assets is 0.14 percent if they have to increase staff by one half of a person. The ROA reduction is 0.45 percent if those same banks increase staffing by two employees.
A bank with an ROA of 1 percent or higher is considered well-performing.
Steve Carr, CEO of Community Bank of Wichita and a banker for more than 40 years, said he thinks declining rural populations are a contributing factor to the decline in smaller banks, though Stones downplayed that factor.
Marshall thinks that because of all the cost pressures banks face, those small ones that survive will just get bigger.
“Maybe the new normal … is the community bank is going to be larger,” he said.
Carr, whose 15-year-old bank has two offices and $73 million in assets, said simple economics say that the bigger an institution is, the easier it is to absorb today’s costs of banking in terms of regulation and technology.
But like Harris, he doesn’t have a specific goal to hit $100 million in assets.
“Can we survive at less than $100 million?” Carr said. “Yes. We’re doing fine. But we’re also in an urban setting. We’ve grown around $6 million this year, so that’s a pretty good pace.”
So is there a specific number in terms of total assets ensuring a bank’s longevity?
“If you talk to 10 bankers you probably get maybe five different answers what the optimal size is for a bank now, and I don’t know that,” Stones said.
Stones and Carr agree that consolidation among Kansas banks will continue, and that the number with more than $100 million in assets will increase.
“You’re going to see the regional or small-bank holding companies … taking up the slack,” Carr said.
But Stones thinks some smaller banks will remain viable.
“We’ve seen the average size (of a Kansas bank) go to about $175 million,” Stones said. “The mean is still about between $50 million to $75 million. Half the banks in the state are still pretty small. There’s a natural progression of (asset) growth, but there’s going to be a lot of banks (with mean assets) less than that, too.”
The trend to big
The number of Kansas banks with assets under $100 million has been declining faster than the decline in the total number of Kansas banks between June 30, 2004 and June 30, 2014.
Banks under $100 million in assets
Banks with more than $100 million in assets
Total Kansas banks
Source: Federal Deposit Insurance Corp.