It's the Worst Best Time Ever to be a Community Banker

The chatter about community banking these days—in the press, in political circles and even among bankers themselves—is that it is an industry in peril. Hamstrung by problem loans and too small to access the capital markets, countless community banks that not long ago had growth ambitions are shrinking their balance sheets in order to preserve capital.

While it's true many small banks are struggling to remain relevant, others are thriving, like First Virginia Community Bank. The $275 million-asset bank in McLean earned a record $2 million last year and grew its loan portfolio by nearly 30 percent—organically—at a time when loan demand is supposedly weak. Founder and CEO David Pijor says much of the growth has come at the expense of larger rivals that have become increasingly inflexible.

His four-year-old bank has not yet tapped the capital markets, but it raised $36 million from local investors and customers and has a waiting list of people ready to pony up next time it needs capital. Pijor says he has every intention of pursuing a public offering within a few years and has no doubt the bank will reach $1 billion of assets soon thereafter.

"We are very keen on community banking," Pijor says. "We see the chaos and uncertainty in the marketplace, and see it as a real opportunity to have a dialogue with potential customers about what we can offer. Business clients in particular realize that bigger is not better and, in fact, smaller and responsive is better."

It's tempting to attribute First Virginia's success to the fact that it operates in the Washington, D.C., suburbs, one of the nation's strongest banking markets. But even in hard-hit regions, like South Florida, many bankers are brimming with optimism. Charles Brown, CEO at the $145 million-asset Insignia Bank in Sarasota, says community banks are starting to win back mortgage-lending business that they had ceded to larger banks years ago. Insignia, primarily a business bank, recently lured a team of mortgage bankers away from a much larger rival, and Brown is eyeing more hires as a way to grow market share.

The challenges facing community banks are by no means easily dismissed. All have been contending with a significant squeeze from new regulations that simultaneously undermine revenue and inflate compliance costs-with the strain getting disproportionately larger the smaller the bank is.

"Dealing with regulation and compliance used to be 2 to 3 percent of a CEO's job. Now it's 15 percent at least," says Christopher Annas, chairman and CEO of Meridian Bank, in Devon, Pa. That's time the CEO can't spend wooing clients or devising strategy.

Then there's the ever-present threat from the big banks. Bank of America, JPMorgan Chase, Huntington Bancshares and others are ramping up small-business lending—community banks' bread and butter—with scores of new hires in recent months.

Community banks have no chance of competing with large banks on marketing. "Our biggest competitor is [the $25 billion-asset] First Tennessee, and they'll spend more on marketing in a year than we'll make in 10 years," says McCall Wilson, president and CEO at the $308 million-asset Bank of Fayette County in Moscow, Tenn.

Still, with every challenge comes opportunity, and there's a growing contingent in the industry that argues the competitive landscape is tilting in small banks' favor. Deposits are flooding community banks as larger competitors impose new fees and shutter branches, and while loan growth remains sluggish industrywide, smaller banks are adding loans at a faster clip.

Bank of Fayette County is coming off its most profitable year ever in 2011, and Wilson is confident that it will see record earnings again this year. Gregory Mitchell, the president and CEO at First PacTrust Bancorp in Irvine, Calif., has never been more bullish on community banks. "For those community banks that have a strong, scaleable balance sheet, a solid capital base and a capable management team," says Mitchell, "these are probably the best times I've seen in my 20-plus years in banking to gain market share."