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Community Banking: Balance Counts


Mid-tiered community banks are realizing healthier profits than their smaller and larger banking competitors. Having an asset base between $5 billion to $10 billion seems to be the right balance when it comes to an optimal return on investment.

Mid-sized community banks are able to spread compliance costs over a larger asset base than small banks while staying small enough to avoid having to layer more costs to adjust to the increased regulatory scrutiny of a systemically important financial institution (SIFI) .

When it comes to boosting profitability for community banks, finding the right balance when it comes to assets is key.

Over the third quarter, banks with more than $5 billion but less than $10 billion in assets realized the best return on investment at 1.15 percent, according to S&P Global Market Intelligence. During that same time period, banks with assets between $1 billion and $5 billion experienced a median return on average assets of 0.96 percent, while banks with less than $1 billion in assets realized a 0.91 percent median return.

In particular, between $7 billion to $9 billion in assets appears to be the optimal range to fall within when it comes to reaping the best return and highest level of profitability.

Community banks with assets levels in this range are large enough to meet client needs yet small enough to avoid some of the Dodd-Frank Act's compliance expenses. They can spread the costs of compliance over a larger asset base compared to their smaller bank counterparts, and don't have to deal with placing caps on interchange fees.

Banks with less than $5 billion in assets seem to have a tougher time covering the costs of stringent regulatory requirements, even though their net interest margins are a bit healthier than mid-sized banks. Higher fixed costs are spread out over a smaller asset base, which can place smaller banks at a disadvantage compared to larger banking competitors. The expenses are the same for smaller banks as they are for larger mid-sized banks, but there's less capital to pay for them.

The ideal range for optimal profitability appears to be within $7 billion to $9 billion in assets.

On the other hand, large banks with more than $10 billion in assets actually realize a decline in profitability as result of the layering on of more costs in order to adjust to the increased regulations that come with an increase in assets, despite being very efficient as a result of their size.

Effects of the Dodd-Frank on Bank Profitability

Mid-tiered community banks are outpacing banks on both ends of the spectrum in sectors such as loan and deposit growth, which is resulting in higher returns on equity.

This trend began after the Dodd-Frank Act's emergence in 2010. Prior to that, bigger banks experienced higher profits than mid-tiered banks.

At first thought, it's understandable for banks to believe that size and profitability are related, and that increasing bank size can subsequently increase profitability. However, changes in regulations as a result of the Dodd-Frank and digital technology can realistically impact the size-profitability relationship.

An increase in profitability that banks experience as a result of an increase in size can wane as banks' size increases. According to the latest numbers, the greatest improvements in profitability as a result of asset size appear to occur in the mid-tiered community bank size range.

Teaming With a loan Sale Advisory Team Is the Key to Long-Term Profitability

Monitoring the balance sheet is certainly a critical factor in maximizing profitability. An important component to balance sheets is an optimal proportion of loan portfolios, as well as high-quality assets that make up such portfolios, regardless of the number of assets a bank holds.

As such, it's imperative that banks - whether small, mid-tiered, or large - partner with a seasoned loan sale advisory team with experience in managing effective loan portfolios with the right types and number of assets to ensure a healthy, diversified portfolio and an appropriate asset growth strategy.

At Garnet Capital, we have plenty of flexibility in relation to the types of assets we can show to an institution. As such, a financial institution can purchase loan assets and arrange portfolios that meet their specific investment needs, regardless of size.

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