Community Banks Reinventing Themselves--But Can They Survive?

The Institute for Local Self-Reliance reports that two members of Seacoast Local, "a local economies non-profit that works in eastern New Hampshire and southern Maine," have developed an application that will point investors and savers in the direction of socially responsible and sustainable banks.

bank-local1.jpgThe application utilizes particular "criteria to quantify a bank’s local impact." Those criteria include "[s]mall business lending, location of headquarters, branch concentration, bank ownership, bank size, small farm lending, and speculative trading."

This is obviously a useful tool for responsible investment (which has its limits as an engineer of social justice, but is definitely a step in the right direction). Perhaps more important to observers of the community banking sector, the tool also suggests that at least some community banks would like to re-invent and market their images as being socially responsible in an era where their larger counterparts have been so obviously discredited.

But there's a larger problem facing community banks, one unlikely to be ameliorated by progressive savers and investors propping up the good guys.

There is still a dominant narrative that claims Dodd-Frank is crushing community banks. A study by the Federal Reserve and the Conference of State Bank Supervisors reports that "compliance costs for community banks represented 22 percent of their net income."

And whether or not regulations are to blame, small banks are disappearing. Regional banks are buying up smaller banks. Meanwhile, online lenders are presenting competition to small banks. A brand new story by Carrie Wells at the Baltimore Sun reports that they're vanishing in Maryland--and it's easy to find similar stories in other states (except, as we'll remind ourselves below, North Dakota).

Industry experts are trying to remain balanced and optimistic. Some of the findings of the recent 2015 Community Banking Conference were as follows:

Competitive pressures on community banks are also rising as many borrowers become more comfortable turning to nonbank lenders. These alternative lenders have begun to introduce sophisticated technologies and new underwriting methods to issue small business loans quickly and electronically. Meanwhile, more established businesses are expecting more from small banks in terms of new products, technology and customer services. However, concurrent post-crisis regulations have made community banks less flexible, especially relative to unregulated nonbank lenders.
Despite these challenges, community banks are seeing new opportunities as well. Demand is higher for Small Business Administration loans, which are profitable products for many community banks. Growing interest in unconventional, higher-margin loan products may fit well with community banks. Historically, small banks have been strong in qualitative borrower analysis and relationship lending. There are recent examples of banks partnering with alternative lenders to purchase qualifying loans originated by online platforms.

But the optimism of opening new markets doesn't jive with long-term trends. As Stacy Mitchell reported last May

In 1995, megabanks - giant banks with more than $100 billion in assets (in 2010 dollars) - controlled 17 percent of all banking assets. By 2005, their share had reached 41 percent. Today, it is a staggering 59 percent. Meanwhile, the share of the market held by community banks and credit unions - local institutions with less than $1 billion in assets - plummeted from 27 percent to 11 percent.
the decline of community banks [should be seen] in the context of a series of policy changes beginning in the 1990s that untethered banks from their communities and allowed publicly insured commercial banks to engage in risky speculation. This shift in policy allowed big banks to become giant conglomerates, gobbling up market share and their smaller competitors.

Public banks could help community banks on a number of levels, as they do in North Dakota. As we have written before:

Public banks offer unique benefits to community banks, including collateralization of deposits, protection from poaching of customers by big banks, the creation of more successful deals, and, important in light of what we've discussed above, regulatory compliance. The Bank of North Dakota, the nation's only public bank, directly supports community banks and enables them to meet regulatory requirements such as asset to loan rations and deposit to loan ratios. It makes shareholder loans to investors in those banks allowing those banks to increase their capital when needed and it can make deposits into those banks to increase their deposit base. On top of all that, it keeps community banks solvent in other ways, lessening the impact of regulatory compliance on banks' bottom lines.

We know from FDIC data in 2009 that North Dakota had almost 16 banks per 100,000 people, the most in the country. A more important figure, however, is community banks’ loan averages per capita, which was $12,000 in North Dakota, compared to only $3,000 nationally. Number of overall loans is also a significant figure, because having more banks doesn’t necessarily mean providing more loans, particularly when it’s difficult for small businesses to get them. During the last decade, banks in North Dakota with less than $1 billion in assets have averaged a stunning 434 percent more small business lending than the national average.

Short–term projections show North Dakota will suffer significantly less decline than the national average. According to the Minneapolis Federal Reserve, North Dakota may lose two banks to consolidation in 2015, but the nation as a whole will lose 317 such banks, an average of 6.34 per state. The pressure on community banks is tough right now, and North Dakota banks won't emerge completely unscathed, but its rate of loss in 2015 will be less than a third of the national average.

Now, imagine a world where the socially responsible community banks located by the great new tool developed by Seacoast Local had public banks to back them up. That would be a socially responsible world indeed.

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