With a slow economy and new regulations straining their finances, community banks say it has gotten harder for small banks to survive.
A growing number of them are looking more closely at mergers in an attempt to fight back.
While consolidation has been a trend for decades, some bankers foresee a new wave of mergers that could change the banking landscape.
A number of Charlotte-area banks are on the hunt for good deals as they try to expand through the Carolinas and beyond.
None of them is saying it’s actively looking for a buyer, but the possibility remains an option.
“A year ago, you could probably find some (banks) at $500 million to $1 billion (in assets) that thought they had a good niche. … Even at banks with good niches, you just hear less and less of that confidence,” David Gaines, chief financial officer of Charlotte-based Park Sterling Bank, said in a conference call with analysts. “You’ve got to be a much larger bank to deal with the infrastructure demands of the industry today.”
Mergers in the Charlotte market could mean fewer choices for small businesses looking for loans.
Bankers and industry experts disagree on what size a bank needs to be to feel comfortable in the post-financial meltdown era.
Not everyone agrees with the notion that a round of mergers will materialize.
“There’s no magic number,” said Paul Merski, senior vice president and chief economist at Independent Community Bankers of America. “It’s whether your bank has the revenue or the profitability to survive.”
Consolidating industry
A shrinking community banking industry has long been an issue.
The total number of banks across the United States has fallen by about 8,000 since 1984, according to FDIC data, or 55 percent.
Nearly 300 banks have disappeared since 2008.
But the economic and regulatory climate has renewed the conversation, bankers say.
“Any conference a banker goes to, it’s a topic of discussion,” said Blaine Jackson, chief financial officer of Charlotte-based NewDominion Bank.
He pegged the size banks have to be to thrive at $1 billion in assets. Once NewDominion recovers from recent losses, Jackson said, the bank hopes to expand from its current size of about $400 million in assets to $1 billion to $3 billion over several years.
Subscribers to the theory that banks have to be of a certain size have not settled on a definitive number. Some peg it as small as $300 million, and it ranges as high as $2 billion.
A major problem is the economic downturn, which hammered community banks as many faced significant losses related to the real estate bust and soured small business loans.
The result has whittled down capital reserves, and small banks’ access to new capital has diminished significantly as investors hesitate.
That has caused many merger discussions to be much more anxious, Park Sterling CEO Jim Cherry said. His bank recently crossed $1 billion in assets with the acquisition of South Carolina’s Community Capital Corp.
“There’s no mercy. There’s no margin right now in banking for people who make a mistake,” said Stan Ragalevsky, a partner at Boston-based law firm K&L Gates, who specializes in financial institutions. “If a CEO makes a couple of bad loans, that institution, the best they can hope for is a merger.”
Most bankers, however, tend to point to new federal regulations, from the Dodd-Frank financial reform law passed last summer, to privacy provisions, and to anti-money laundering requirements.
Even though smaller banks aren’t affected by a number of the new regulations, “You have to spend a lot of time and money to determine that you’re not really subject to it,” Ragalevsky said.
At a time when interest rates and margins are so small, the additional expense can make a big dent in profitability.
“Most community banks operate on a very small, very thin net interest margin,” Merski said. “Every dollar of additional expenses cuts into that.”
Opposing view
Not every banker feels like a significant wave of mergers is inevitable.
“I don’t think you need to be a billion dollars or a quarter of a billion dollars,” Carolina Premier Bank CEO John Kreighbaum said. “I certainly do not share the sentiments of some in our industry that we’re going to see a massive consolidation of banks because of regulatory reform.”
However, the Charlotte-based bank founded in 2007 is still planning to expand through acquisitions in the near future. Kreighbaum told the Observer in April that he hoped to hit $1 billion in assets in two years. It’s at about $190 million right now.
And merging isn’t necessarily the only way to go to offset some of the additional costs of complying with regulations.
“It’s premature to say it’s half a billion and we’re going to need to find a partner right away,” said Wes Sturges, CEO of Charlotte-based Bank of Commerce, which has about $153 million in assets. “Merger is one option. Efficiencies, outsourcing are others.”
And while there’s been a lot of talk about mergers, many banks are hesitant to execute deals, whether it’s because of uncertainty or because the numbers don’t work.
Kim Price, CEO of Citizens South Bank in Gastonia, said this month at a banking conference in Florida that the bank won’t move on some deals it finds attractive because executives don’t want to issue new capital to pull it off.
“A lot of banks are in a holding pattern,” Merski said. “Do you want to grow a bank’s footprint when you’re uncertain?”
Small business impact
Community banks hold more than half of the outstanding loans to small businesses, so consolidation stands to affect them the most. Several small business organizations said they hadn’t thought much about it.
But others warn that should the wave of mergers materialize, it could significantly affect the availability of credit at a time when tightening lending standards have already made it harder.
“The general opinion is that it makes it more difficult to find a bank that can lend,” said Adam Hill, executive director of Charlotte entrepreneurship incubator Packard Place. “You’re making the market of banks that can lend smaller.”
Sturges was more blunt
“It’s a clear loss of choices for the consumer,” he said. “Many people choose small banks because of the service they get there. Those options might go away.”
