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Community banks at the crossroads


Where once as boisterous as a superball bouncing in a bank vault, the mergers and acquisitions of community banks are expected to come in flat this year. And in an ironic twist, you could blame the M&A intermission on a strong economy.

A lengthy bull run and benefits from tax reform have pushed bank values up to near twice book (the average is 1.8)—and that’s deterring some would-be buyers, says Christopher Cole, executive vice president and senior regulatory council for the Independent Community Bankers of America (ICBA), an advocacy group. As a result, roughly 200 mergers within community banks are expected this year, compared to a historic average of 260.

That poses an interesting problem for community banks, mostly found in less populated areas. On the one hand, generations of customers have come to consider their local facility as a hometown institution where they know the bankers by name. Particularly in the Midwest, some banks have lasted a century or more—such as Citizen’s Bank of Edmond. Founded in 1901, it predates Oklahoma statehood by six years.

The staying power comes from putting accountability ahead of transactions or even competitive rates. “The customers in some of these areas aren’t so interested in the interest rates,” Cole explains. “They like the service aspect and having a relationship with a local bank. This is particularly true in the rural areas.”

Community banks “are those institutions composed of town leaders and town business people and make the kind of loans other banks may not wish to make,” says Don Andrews, a partner in law firm Reed Smith. “For that reason, towns have the kind of diversity and opportunity in business they might not otherwise have.”

But this quaint model, as in any field with small players amongst giants, faces ever-growing stressors. Back in the mid-1980s, more than 14,000 community banks did business; today, that number has since dwindled by  than 5,500—a drop of roughly 60 percent.

The consolidation equation

While Cole is thrilled that a handful of new community banks are expected to debut this year, they still make up a sliver of the total number of locations and assets.

Interstate banking and years of large bank consolidations have taken a toll, while the digital era continues to add pressure. Large banks may not always offer personalized service, but they boast ample locations and apps that make online banking a breeze from anywhere in the world, as well as well-funded advertising departments that can create memorable campaigns.

Credit unions, meanwhile, now offer commercial lending—“a touchy subject,” Cole notes—wealth management services and business lending: “They’ve changed a great deal, they’ve morphed.”

Endgame or new game?

For those reasons, not everyone expects the business model to thrive. Curtis Carpenter, principal and head of investment banking at Sheshunoff & Co. Investment Banking spoke bluntly at a conference in Phoenix earlier this year: “We have truly entered the endgame of community banking.”

He’s since dialed down the drama, though. “They are an important part of our economy,” Carpenter tells BAI. “I think—hope—we will always have them. But they’ll be fewer in number and may need some accommodations from the regulators.” Those accommodations could include lower, simpler capital requirements and exemption or exceptions from some compliance and other regulatory directives, he adds.

Andrews also points to the relief that came from the recent relaxing of the Dodd-Frank law. That measure—known formally as the Economic Growth, Regulatory Relief, and Consumer Protection Act—received less media attention for its community bank benefits than you might expect. Many pundits focused on the politics: a Republican response to legislation enacted by a Democrat, President Barack Obama   

In a joint perspective piece, Andrews explained how:  

  • For banks under $10 billion, compliance with a simplified community bank leverage ratio of 8 to 10 percent will replace all risk-based capital and leverage ratio requirements for the institution to be considered well capitalized.
  • Federal Deposit Insurance Act (FDIA) call reporting requirements will be reduced for depository institutions with assets of less than $5 billion.
  • Banks under $10 billion will be exempt from the Volcker Rule restrictions on investments.
  • The “small bank holding company” access to debt financing for acquisitions now applies to banks with $3 billion in assets, instead of $1 billion.

“Regulations need to be right sized to allow growth in this area. S.2155 was a good start, but more reforms are needed,” Andrews said. “Community banks need to practice strong risk assessment and risk management. That information needs to permeate throughout the organization and be executed by the operational teams, senior management and the board. It needs to drive the daily decision making process—from their loans to the compliance, to their business initiatives. As regulations are more right-sized, their survival is in their own hands.”

Cole says he’s optimistic about the future of community banks: “I think they’ll survive quite well. The regulators have been particularly conscious of making sure that all the banks are in good condition financially. They’re in better shape, better able to weather a recession than they have in the past.”

As for the future, stay tuned—or should you prefer, follow the bouncing ball.

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Dawn Wotapka is a communicator who lives for a great story, no matter how it is told. An Army brat who graduated from N.C. State University and N.Y.U.

If you enjoyed this article, check out our recent Executive Report: Community Banking: Tackling challenges in changing times.