Iowa offers a good example of community banks' precarious position.
The Hawkeye State is a traditional community bank stronghold, where almost nine out of every 10 branches is operated by a community bank. Institutions with less than $20 billion in assets controlled 80.65% of Iowa's retail deposits at June 30, according to the latest Federal Deposit Insurance Corp. Summary of Deposits.
But there's lingering concern that a variety of forces is slowly eating away at community banks' dominance in Iowa and other states like Kansas, Montana, Nebraska and North Dakota.
The FDIC's yearly Summary of Deposits shows that community banks' toehold on market share has slipped in nearly all those states for the past five years. In Kansas, for example, community banks' market share slipped by 446 basis points from 82.63% in 2010 to 78.17% this year.
Iowa was a partial exception to the five-year trend. Its figures rose in 2012 and 2013 because Bank of America sold off a number of branches to smaller rivals. However, community banks' market share there fell back down 34 basis points at midyear 2014 compared with a year earlier. And Iowa bankers are concerned the downhill trend will continue.
There does not appear to be one all-encompassing threat, bankers there said. Midsize banks and credit unions appear to be grabbing some of their business, and larger banks are doing so among key demographics such as younger customers.
The community bankers blame a combination of higher regulatory costs, tougher competition from credit unions and the Farm Credit System, and smaller banks falling behind on new technologies.
"We're definitely worried about the future of community banking, in light of the regulatory burden," said John Sorensen, president and chief executive of the Iowa Bankers Association.
"We've seen a bit of consolidation here to deal with the higher costs," Sorensen said. "I'm not saying consolidation is a solution we want to see, but the scale required to compete seems to be going up."
Credit unions have grown at a rapid pace in Iowa and that has taken a toll on community banks, Sorensen said.
"They have become very aggressive in commercial lending," Sorensen said. "They have made some real inroads in many of Iowa's urban areas."
QCR Holdings in Moline, Ill., competes with credit unions in all four of its markets in Iowa and Illinois and those institutions have pushed hard into commercial lending, said Doug Hultquist, president and CEO. The $2.5 billion-asset QCR operates 10 branches in Iowa.
The University of Iowa Community Credit Union has been the most aggressive competitor, Hultquist said, pointing to its assets growing 47% in two years, to $2.3 billion at June 30. The Farm Credit System has used its tax status to take agricultural loans away from community banks, Sorensen said.
"They have eroded the prime customer in many of our rural banks," Sorensen said. "Credit unions and the Farm Credit System have unfair government-provided advantages, and that's a factor that cannot be ignored."
Community banks may also be falling behind with the younger generations, which is leading to their loss of market share in Iowa, Hultquist said. Members of the millennial generation are more likely to bank with the biggest institutions, instead of community banks, he said.
Many 20-year-old and 30-year-old customers want mobile banking and other tech-savvy bank products and they perceive big banks as having more of those products, Hultquist said. To some extent, they may be right, because community banks have spent less time and effort on them because of data-security concerns, he said.
"A lot of community bankers are a little concerned to get into technology right now because of cybersecurity, because the regulators are really sensitive about cybersecurity right now," Hultquist said. "But the millennials want all that."