Can community banks survive now that the scourge of nationwide branching is the law of the land?
With enactment of the ReigleNeal Interstate Banking and Branching Efficiency Act of 1994, commercial banks of any size and shape will in time be able to acquire or merge with banks in most other states.
They will also be able to branch across state lines and collapse existing affiliates into a single bank charter, thereby creating a monolithic branching network.
Community bank groups in states such as Texas, Illinois, Missouri, .and others have already announced their intention to lobby their state legislatures to pass opt-out laws preempting interstate branching's expansionary impact within their borders.
Community banking associations' objections to interstate banking are founded on two fundamental premises:
First, consolidation of affiliate bank charters, presumably into one out-of-state charter, could reduce tax revenues, which might result in a more onerous tax burden for the remaining community-based institutions.
Second, it is also posited that out-of-state branches will divert deposits from small towns and rural markets, thereby restricting potential capital formation and economic growth.
Underlying these obvious concerns is the implicit fear among community bankers of competing with slick, savvy, and sophisticated multistate behemoths.
Clearly, the new law will lead to unprecedented levels of consolidation within an industry that is both fragmented and crowded with excess participants.
More than 11,000 commercial bank charters dot the nation. Minneapolis-based Norwest owns banks in more states than any other company, yet is concentrated in only 15 states, many of which are secondary markets. The nation's leader in federally insured deposits is Califormabased BankAmerica.
Yet, its market share nationally amounts to barely 4.5% of the total.
There is a justifiable rationale for the interstate banking bill, particularly in light of commercial banks' ongoing difficulties in competing with nonbanking financial intermediaries (brokerage firms, insurance companies, credit unions, etc.).
However, reports of the imminent demise of community banking as a result of this new law are, to paraphrase Mark Twain, greatly exaggerated!
To be sure, state tax code revisions will be necessary to recapture potential lost revenue should out-of-state institutions collapse affiliate charters into singular branch systems.
Not to worry! The creativity of legislative bodies to devise tax schemes-in this case to compensate for the loss of tax proceeds--should never be underestimated.
It is a virtual sure bet that state financial institution tax laws will be recrafted to reach into deep poeckets of big banks, which will likely more than offset revenue shortfalls.
The threat to local community economic developmetn posed by the intersate banking bill is also unfounded. Small-business lending is among the fastest-growing and most competitive niche market across the country.
Anecdotally, community bankser more oftne lament the intense competition from regioal and superregional institutions for small-business loans rather than big bank abdication from such markets.
The staple of community bank lending--loans in the $50,000to-$250,000 range--are increasingly vital to regional banks in today's highly competitive environment, where too many dollars chase too few customers.
Moreover, if community bankers have proven anything, it is their competitive prowess in creating and managing organizations that are often more agile and responsive to local markets than most holding company branches.
New York State's 90-plus community banks drove money center branches from most upstate communities foliowing enactment of a statewide branching law in the early 1970s.
Community banks in Ohio, competing among the best- managed and most creative superregionals in the country, also have thrived in the nearly two decades following that state's liberalization of branching statutes.
In both cases, the formulas for success were similar. The competitive strategies are as applicable to the emerging interstate banking environment as they were two decades ago. Successful banks will be those that monitor their profitability daily.
They will take great pains to identify and address their customers' financial service needs. Most importantly, they will enthusiatically embrace the opportunities presented to their organizations by a constantly changing financial-institutions environment.
The interstate branching law was advocated by large banks in order to maximize cost savings through the consolidation process. The bill is not about revenue and market share growth via de novo branching.
It is difficult to imagine how customer service capabilities will be improved if local boards of directors and executive-level decision-makers are prospectively eliminated in cost-reduction campaigns.
The insatiable quest for cost savings by holding company empires will exacerbate the current trend of depersonalization at the local branch level.
This trend, should it continue, will further expand the niche for community banks.
A recent merger of an Ohio community bank into a multistate superregional holding company branch system vividly illustrates how community banks can expect ,to benefit from the pending effects of interstate banking.
Following the merger, the former community bank clients were introduced to their new organization by a 19-page, fullsize booklet describing products, services, prices, and legal disclosures in hard-to-read six-point type.
Existing accounts were automatically converted to new product and pricing structures, with limited opportunity for customer feedback.
With no other community banks remaining in the area, alternative providers themselves were multistate superregional institutions.
Several customers called competing institutions to express an interest in transferring a full range of deposit and loan accounts due to an apparent dissatisfaction with their new bank.
With such a godsend sales opportunity, branch managers responded by mailing similarly designed brochures, pricing polices, and legal disclosures.
Few attempts were made to follow up initial inquiries, identify needs, or respond to the overt expressions of discontent with the newest competitor in town.
This is what community banks have to look forward to in the interstate branching environment.
Locally based management and decision-making can easily outperform and outsell branch personnel of multistate institutions.
It takes only a willingness to compete and persistence in selling all of the attributes inherent in traditional community banking.
