Too Small to Succeed in Banking

Conventional wisdom: The onslaught of new banking laws, regulations, and regulatory activism requires scale to absorb costs. Or, the rapid pace of technological change and the sophistication of hackers requires resources not found in small community banks.

There is truth to conventional wisdom. But with all generalities, there are exceptions. And in banking, lots of exceptions. How do I tell the $250 million in asset client that I just visited that they are too small to make it, even though they sport a 1.47% ROA? The financial institution landscape is littered with banks and credit unions like my client.

Almost two years ago I wrote that bank shareholders were changing. (see The Coming Bank Consolidation) Community bank investors used to be the local insurance agent, mortician, and family that sits next to us in church. Today, many of traditional bank investors put their money in mutual funds, and leave the investing up to fund managers. No longer does the local barber show up at our annual meetings complaining about the pastries. Instead, professional money managers call to tell us how to run the bank.

As we migrate towards greater institutional ownership, stock liquidity is becoming increasingly important. Occasionally money managers call me with their criteria for their fund. One criteria is typically float and volume. Under 10,000 shares trading volume you say…. fuggedaboutit!