Correspondent Blog

In our previous article (here) we analyzed the data on community bank M&A and performance, and we concluded that there is no relationship between community bank size and profitability, as measured by return on equity (ROE).  While superficially it makes sense that bigger is better, size itself does not lead to better bank performance.  Combining…

There are many experts who claim that to achieve profitability, community banks (banks under $10B in assets) must gain scale by acquiring assets.  On the surface that seems reasonable but does scale in banking result in better performance for community banks?  The answer to that question can be analyzed both empirically and anecdotally, and we…

Banking is woefully inefficient. There is a myriad of manual processes that take place everyday in banking driving up unit economics and causing the average bank to operate with a 77+% efficiency ratio. To be competitive in the future, banks need to be operating at an efficiency ratio of below 40%. Part of the issue…

In Q2/24 the average return on assets (ROA) for community banks (under $10B in assets) was 1.08%, with an average ROE of 10.44%.  But within the community banking sector, performance varied among banks significantly.  We analyze the drivers of ROA for the community bank segment last quarter and consider what financial variables explain bank performance….

In Q2/24, the average return on equity (ROE) for the entire banking industry increased to 11.67% (from 11.11% in the previous quarter).  However, for community banks (under $10B in assets), the ROE declined to 10.44% (from 10.57% in the previous quarter).  When we analyze the causes of the decline in ROE for community banks we…

Most community bankers we talk believe they will get a boost to bank performance with declining short-term rates.  The thinking is that a lower Fed Funds rate will mitigate credit risk, spur loan demand and potentially soften competition for deposits, leading to wider NIM and more profitability.  Unfortunately, the empirical evidence shows otherwise.  While the…

Charlie Munger said, “Show me the incentive and I’ll show you the outcome.”  That is exactly what is happening in the community bank industry. Unfortunately, bank managers often give their lenders misguided loan compensation, resulting in suboptimal outcomes. In Q2/24, community banks (those under $10B in assets) were able to expand net interest margin (NIM)…

FDIC-insured “Problem Banks” list has been increasing over the past two years.  For the community banking industry (banks under $10B in assets), this is particularly troubling as the number of community banks earning negative return on equity (ROE) spiked to 237 institutions in Q1/24, or 5.71% of all community banks. Bank ROE is now a…

The average return on equity (ROE) for the banking industry declined to 11.10% in Q1/24 (a 23 percent decline in the last year). For banks under $10B in assets, ROE declined to 10.53% in Q1/24 (an 11% decline in the last year). The typical published analysis considers the industry in aggregate which conflates the challenges…

In discussing ERC (Employee Retention Credit) with banks over the last year, we discovered a common theme. Most banks have either been told they are not eligible or come to this conclusion on their own because they did not experience a decrease in revenues. Many banks performed better than expected during the pandemic due to…

Last week, Nacha held its Smarter Faster Payments Conference in Miami, a significant event for over 1,800 bankers and vendors. With 142 presentations and panels, the content was tailored to the needs of every bank interested in payments. The major themes of fraud, artificial intelligence (AI), expansion of instant payments, open banking, and regulation were…

On April 26, 2024, Republic First Bank (DBA Republic Bank) was seized by state regulators and the long running bank drama came to an end.  With the assistance of the FDIC, Fulton Financial acquired certain assets, debt and deposits of Republic Bank. This first bank failure in 2024 is reported to cost the Deposit Insurance…