One of the biggest questions in banking these days is how big do you need to be to survive? I am hearing different answers — $100 million in assets, $250 million, some say $400 million. Clearly, the regulatory compliance obligation is increasing and that requires more overhead. The larger an organization, the easier it is to handle overhead costs.
Think about a bank with $100 million in assets. If it is in a good market, it might have $80 million in loans. If it manages is assets and liabilities well, it might make 4 percent on those loans, which is $3.2 million. Figure another $100,000 in income from non-interest areas, so revenue totals $3.3 million.
A $100 million bank might have 20 employees. At an average salary of $50,000 each, you end up with a $1 million payroll. Add another $300,000 for benefits and payroll taxes. That leaves $2 million for everything else. If you have $85 million in deposits, figuring 20 basis points for deposit insurance, that’s $170,000. Figure another $100,000 to be added to the loan loss reserve. There are other expenses, including building maintenance, technology contracts, legal and accounting expenses, and many, many other things. If you want to grow, you have to devote money to marketing. If you have debt on your building, that’s going to be a big expense. And if you have debt on the bank itself, you’ll have that additional expense.
My point is, you can blow through that $2 million very quickly. This example assumes a fairly efficient, well run bank. If you have more employee, operate several branches or have a CAMELS rating of 3 or higher, your expenses are going to be (much) higher. So can a $100 million bank make it? How about smaller banks?
I sure hope they can make it. Communities all over the Upper Midwest depend on their local bank, most of which have assets of $100 million or fewer. In Minnesota, for example, 235 of the state’s 405 banks have fewer than $100 million in assets. In Iowa, 173 of the state’s 363 banks have less than $100 million. In Illinois, it’s 261 of 609; in North Dakota, it’s 53 of 92; in South Dakota it’s 50 of 84, and in Nebraska it’s 142 of 226.
It is important to note that many smaller banks do just fine. In Minnesota for example, 170 of those 235 banks made money last year. An important factor, however, is the number of shareholders. If a bank is owned by a single person or family, then a little earnings goes a long way, but if earnings have to be distributed among 100 to 150 shareholders, then there’s going to be more pressure to generate earnings.
If you run a bank and have comments to add to this analysis, please leave a comment. I think this is going to be THE discussion of 2011.