You have to love the optimism of the canine mentality. For example, whenever someone comes to the door, the dog takes off to the front hoping he has visitors. Even though over the past 5Ys not one person has come to our door for him, he continues to wag his tail and remain hopeful.
As bankers, we are equally optimistic when it comes to asset growth. We love growth. Mention a 12% asset growth plan and we will start slobbering. The problem is that almost half the time, asset growth results in a lower net income than higher. In fact, in looking back at all community banks from 2004 through 2008, more assets only resulted in more net income in 53% of the cases. Now that is a little better than half, but not much. For every bank that grew the right way, there are almost as many banks that took on more of a credit risk than they should have, built overhead out faster than they should have or hurt productivity such that they added assets, but decreased earnings. Statistically, asset growth explains less than 1% of net income performance. Because of this low correlation, we submit to you that total asset growth is the wrong bone to go after.
We have nothing against growth. Profitable growth is a wonderful thing, but it is often hard to tell what profitable growth is. Adding customers, loans or deposits without a plan is pretty much a randomizing event. Unless you have a profitability system or loan pricing model to tell you if you are growing the right way, you could be going backwards. While slightly more than half the banks grow correctly, only 24% can grow assets and earnings consistently year after year. Our point this morning is that like asset size, growth is overrated as a strategic objective. Banks that choose to grow may be hurting themselves. If you consider how much time and energy is spent both at the management level and at the operating level trying to hit asset targets, we just have to tilt our head and give banks that puppy-like quizzical look.
Of course, the tail wagging part of this analysis is that high growth doesn't matter either. We took a cut at all those banks over the last 4 years that grew at a 10% pace or better and found pretty much the same result. Half the banks could handle high growth and half couldn't. This is important to keep in mind the next time your regulatory examiner is concerned over growth. High growth can be equally controlled and managed as slow growth. The rate at which a bank grows is really a function of management and the market. For any growth pattern, the trick is to grow earnings more than risk each year.
If you are looking for 2010 strategic objectives to consider, we would make an argument that customer service delivery, core deposit growth, loan mix and relationship profitability targets are all better drivers of net income. These are proven factors that are correlated to earnings. If you target asset growth again, you may just end up chasing your tail.