For years, market pundits have been forecasting the inevitable demise of the traditional community bank. As consolidation continues to shrink (and re-shape) the industry, statistics reveal that organizations below $1 billion in consolidated assets now make up a smaller percentage of chartered institutions, while also controlling a smaller percentage of industry assets in the process. We share these numbers in presentations with clients and friends to underscore the ongoing shifting dynamics of the sector, while also looking to highlight the vital nature of these banks to their communities as their scarcity continues to grow.

Succinctly, 20 years ago approximately 95% of the more than 10,000 chartered banks in the United States reported assets less than $1 billion. Together they controlled approximately 20% of the market. Today, banks less than $1 billion of assets account for roughly 85% of the 5,300 chartered institutions across the country. While still a meaningful statistical representation of the industry at large, their share of banking assets has shrunk to a modest 6%. Partially fueled by the devastation wreaked during the Financial Crisis, and the “need” for some of our nation’s largest organizations to absorb the compromised operations of lethally-weakened brethren, we now have less than 150 banks (not quite 3% of the industry’s charters) controlling nearly 85% of the banking assets across the country.

When distilled further to what many have long considered the typical size-range of a traditional community bank, approximately $100 million, one will note that the shift over the decades has been even more dramatic.  Thirty years ago 70% of all chartered institutions were less than $100 million in assets. Twenty years ago, that group measured 57% of the industry. Today, those ranks have shrunk to approximately 23%, while over the past two decades their collective market share has moved from 4% to less than one-half of 1%. Less than one-half of 1%. And their ranks are no longer being replenished by traditional de novo formation, as initial capital requirements (and attendant investor expectations) coming out of the Crisis has been a key factor stunting new bank development. But that is a topic for another time.

Of late there has been much talk about the seemingly mythical status of attaining $1 billion in consolidated assets, and all the market riches and investor support that will instantly be bestowed on such heralded operations. In my more than three decades in the industry, and particularly during my years leading the bank equity research practice for a respected regional brokerage house, I have witnessed multi-billion-dollar institutions that could not string together above-average performance metrics with two hands and a flashlight, while at the same time reporting on much smaller traditional community banks that quarter-after-quarter, and seemingly year-after-year, were able to consistently knock the cover off the ball while managing prudently-run and risk-appropriate organizations in their local markets.

That said, I will not argue that the $1 billion asset threshold does seem to hold certain operational and market value benefit. “Critical mass” is an oft used, and abused, phrase in our industry to justify growth for the sake of, well, growth. Much smarter people than me over the years have emphasized the inherent usefulness and value a rationale, adaptable strategic orientation can bring to an organization that prudently charts its course of action. At the same time, I’ve also witnessed in past travels some that follow the “if you don’t know where you are going, any port will do” plan of attack. Not exactly the optimal recipe for success, but clearly a potential framework for underperformance if not outright disaster.

Bottom line, as any successful bank stock investor will attest, reaching $1 billion in assets will not instantaneously anoint you with a premium market valuation vis-à-vis your competitors if you don’t have the underlying performance metrics to support these sought-after elevated trading multiples. Interesting, and understandable, how it always, ultimately comes back around to the quality and consistency of core earnings. Deliver, and if the markets are truly efficient, you will be rewarded. But it is also clear that larger organizations typically possess the trading liquidity and market visibility (the Russell Indices immediately come to mind) that seems to potentially “accelerate” the “recognition” that comes with demonstrating solid performance.

The attached Michigan Banking Summary details the currently 32 publicly traded organizations in our state. On average they possess nearly 10% tangible equity and boast core ROA’s approximating 1.1% and core ROE’s north of 11%. Tables 3 and 4 highlight these metrics, while reflecting that approximately 2/3 of the names still operate below the $1 billion threshold. And much like the aforementioned statistical theme playing-out across the country, not one institution is currently less than $100 million of assets.

Table 5 delves into the realm of “privately-held” banks across the state. And while the number of institutions in both the public and private domains here in Michigan is slated to shrink via announced merger transactions, today the privately-, or closely held, banks currently approximate 60 charters. Only three are north of the $1 billion threshold, while 16 separate entities report less than $100 million of assets each (although that includes legal charters that continue to reside in Michigan for two large out-of-state banks). The organizations in this Table range from approximately $50 million to more than $2.3 billion, and much like their publicly traded brethren, reflect performance metrics and capital strength that often match or exceed those competitors. The community bank franchise continues to be a viable, and vital, component of the markets within which it operates. While it may be growing scarcer with each passing year, and strategic decisions will continue to chart the appropriate course for each organization, a well-run, efficient operation is no less important today than it has ever been in the industry’s history.

Service quality and customer relationships will always be a cornerstone of the industry, and traditionally a notable strength of the community banking sector. Utilizing technological advances to address shifting consumer sentiments should ideally simply better position your organization to reinforce its customer-orientation while enhancing its ability to efficiently operate and deliver its products & services to the market.

2020 promises to be another interesting year for the industry and, depending upon the direction and magnitude of potential interest rate changes and shifting economic dynamics, it will also (no surprise) possess challenges that may intensify as the year unfolds. Hard to believe that roughly a year ago the markets were convinced that the Fed would be raising rates at least twice, if not three or four times. Today, sentiment appears to signal that the Fed will be in a holding pattern with regard to rate moves unless there is a dramatic shift in the economy. Consequently, anything is possible in 2020. Conceivably we could be in the midst of a secular bull market that still has years to run. And keep in mind that such a scenario does not forestall an economic slowdown nor a market correction. The impressive march-up in the markets between 1982 and 2000 witnessed both the Crash of 1987 and the ’91 recession.

I am confident that the state’s banking organizations are up to the task. Capital levels continue to be robust; most leadership teams have been battle-tested, risk management architectures have strengthened noticeably since the Crisis, and ideally the Fed can help choreograph a more modest and short-lived economic slowdown when it surfaces somewhere down the road. Economic cycles are inevitable. Ideally, as we’ve stated in the past, they just need not be catastrophic. If you survived a storm, you won’t be bothered by the rain.

Whatever your current view – that a recession is imminent, or conversely that a recession is still further-out on the horizon – there is ample empirical evidence and anecdotal commentary to comfortably support either position. Take comfort in having weathered the Crisis and draw on those experiences to position your operation for whatever may lie around the corner.

Solid fundamentals (prudent growth, sound expense control, strong capital levels, possibly a bit of pre-slowdown reserve building, ongoing cultivation of sustainable fee income sources, etc.) should remain the focus. In my equity research days, I never lost sleep when organizations within my coverage universe stuck to their knitting and continued to display the basic blocking-and-tackling that had largely built the healthy foundation of their existing franchise value. The at-times refrain, “this time is different”, rarely proves to be. Stay focused. Stay disciplined. Remain prudently opportunistic. Protect and preserve your culture. It’s a marathon….not a sprint.

In closing, attached please find our monthly summary of Michigan’s financial institutions. As you and your Board take your organization forward, please do not hesitate to reach out to me and/or my colleagues at ProBank Austin if we can be of any assistance in helping you assess the competitive landscape.  My prayers and best wishes to you and your loved ones for a wonderful Holiday Season! I look forward to re-connecting with all of you as 2020 unfolds.