While it's true that some small banks struggle to remain solvent, others are thriving, like First Virginia Community Bank. The $275 million bank in McLean, Va., earned a record $2 million last year and grew its loan portfolio by nearly 30% in a weak loan demand environment. 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 plans to pursue a public offering within a few years, with the hope of reaching $1 billion in assets soon thereafter.
Even in hard-hit regions like South Florida, bankers are optimistic. Charles Brown, CEO at the $145 million Insignia Bank in Sarasota, says community banks are winning back mortgage-lending business that they 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 nothing to sneeze at. All have been contending with a significant squeeze from new regulations that simultaneously undermine revenue and inflate compliance costs. Despite that, 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. But the threat from the big banks remain. 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] 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 Bank of Fayette County in Moscow, Tenn. Bank of Fayette is coming off its most profitable year ever in 2011, and Wilson is confident that it will see record earnings again this year.
He's not the only one who is bullish on community banks. Gregory Mitchell, president and CEO of First PacTrust Bancorp in Irvine, Calif., says, "For those community banks that have a strong, scalable balance sheet, a solid capital base and a capable management team, these are probably the best times to gain market share."
Why is it such a good time to be a community banker? Here are several reasons.
COMPETITION IS DWINDLING
Banks have little to fear from start-ups since regulators have essentially stopped approving new charters. Only two new banks opened in 2011. In contrast, 155 banks opened in 2007.
Given the lack of newcomers, the impact of failures and mergers has been more pronounced. More than 430 banks collapsed in the last four years, and with roughly 800 on the FDIC's watch list, experts predict the demise of dozens more before the economy recovers.
While merger-and-acquisition activity is at a trickle now, analysts believe a mass consolidation will begin soon and ultimately could slash the number of banks-now at 7,300-by a third in coming years.
"What other industry is consolidating as rapidly as the banking business?" asks Frank Sorrentino, chairman and CEO at the $730 million North Jersey Community Bank in Englewood Cliffs. "Competition is going away, and that's good news" for the surviving banks.
National and regional banks have the advantage of extensive branch networks, but are downsizing to cut costs as they contend with new caps on interchange fees, limits on proprietary trading and other direct hits to revenue. Bank of America is closing roughly 10 percent of its branches. Many are in small towns where community banks already have the dominant market share.
THE TALENT IS OUT THERE
First PacTrust grew its loan portfolio by about 15 percent in 2011 without the benefit of acquisitions because it landed experienced, well-connected lenders from competitors.
Most of this talent has come from smaller banks that have essentially stopped lending because they are either troubled or too concentrated in one area, like commercial real estate.
Sorrentino attributes the torrid loan growth at his bank-total loans rose 27 percent in 2011-in large part to superstar lenders wooed from larger competitors over the past two years.