Is it inevitable? Will community banks as we know them cease to exist over the next 10 years, with large, regional and multi-state banks along with credit unions left to fill the gap?
The answer is "no," community banks will survive, though perhaps not as a resounding "no" as community bankers and the customers and institutions they serve would like to hear.
Although community banks will co-exist with their larger counterparts and other financial service providers, their numbers will dwindle. The slow ramp-up of industry consolidation we have witnessed in the last 18 months will gain momentum as formerly intractable sellers finally realize that the multiples of 2x and 3x tangible book value we used to see are no longer reasonable multiples to expect in an acquisition.
In addition, mergers of equals will gain steam as smaller banks combine with their equivalent counterparts to reduce operating costs in an effort to squeeze every possible last dollar out of depressed interest rate margins.
Perhaps the biggest threat to community banks, however, is the reticence of groups to come together to organize new banks and bank regulatory agencies' overall reluctance approve new bank charters. The cycle of bank in organization, to community bank, to acquisition target, and back to bank in organization has been interrupted over the last three years with no apparent relief in sight. As a result, community banks won't die, but their numbers will slowly but surely fade away.
In approaching the question about community bank survival, one must first ask, what is a community bank and what does community banking actually mean? For these purposes, we'll define a community bank as a bank with total assets of less than $1 billion. It is somewhat arbitrary, but it's a standard that has been used frequently in national discussions about community banks as well as in guidance promulgated by the FDIC.
According to FDIC Acting Chairman Martin Gruenberg, community banks supply close to forty percent of the small loans banks make to businesses and farms, but make up a little more than ten percent of the banking assets in the country. Chairman Gruenberg, as well as many others, have also acknowledged on an ongoing basis that community banks play a critical role in providing financial services in areas which larger financial institutions do not occupy, including small towns and inner-city neighborhoods. Community banks are to Citibank and Bank of America what the "mom and pop" corner store are to Costco and Ikea.
So community banks are clearly valuable, but are they still viable? The number of new bank charters approved over the last three years has been less than 30, not counting conversions to banks. Indeed, in both 2010 and 2011, there were fewer than ten new bank charters approved as compared to 175 in 2007 alone.
Why the stagnation in new bank charters?
First, the declining quality of loan portfolios and desperate capital condition many community banks found themselves in over the last five years has served as a blot on the industry. Regulators are not currently interested in approving new bank charters when such institutions could have the same issues in a few short years time, regardless of how much capital those banks are able to raise. Indeed, regulators’ time and attention has been concentrated in examining and seizing troubled institutions, reviewing compliance with regulatory orders and overseeing capital plans and equity investments.
Second, in the absence of robust consolidation at the community bank level, the primary drivers behind new community banks---the former directors and officers of banks which have been acquired---have been "stuck" in their own institutions. There has been no need for new bank directors because these same persons are still serving as old bank directors of existing institutions.
Last, but certainly not least, there is apathy on the part of the traditional new bank charter community to start new banks. No longer is serving as a community bank director seen as a badge of honor without attendant risk. What the last five years have demonstrated through legislation and enforcement actions and, on the most troubling side, actions against failed bank directors and officers, is that one should serve as a bank director or executive officer at your own peril. Thus, directors who have served on one or more community bank boards before are hanging up their bank director shoes when their bank is acquired and not looking for a new opportunity to start all over.
Community banks are certainly here to stay, and we are all better off because of that. But without a resurgence in the chartering of new institutions, the pending wave of consolidation will slowly take its toll on the community bank industry.
Craig D. Miller is co-chair of the financial services and banking practice at law firm Manatt, Phelps & Phillips, LLP
