A Small Problem

Local banks are being gobbled up at a fast clip, but there's still time to grab credit.

Three years ago, Jamie Pennington joined the legions of small-business owners who love local banks. That’s when the founder of Atlanta-based Flexible Executives moved most of her company’s money to The Bank of Sandy Springs in Sandy Springs, Georgia. The reason? The Bank of Sandy Springs agreed not to put holds on her customers’ payment checks, unlike the big bank she had been using. “As a small-business owner, we like doing business on a handshake,” says Pennington, who started her firm in 2005 to help source
part-time executives for growing businesses.

Pennington was so impressed by her new bank, in fact, that she stayed with it even when its parent company, Buckhead Community Bancorp, went on the Federal Deposit Insurance Corp. (FDIC) list of “problem” banks amid rumors of its demise. “That bank was so supportive when we started out, if they were going to survive, we wanted to keep our assets there,” she says, noting that she protected her deposits by keeping them under the $250,000 insurable maximum. “I wanted to repay the favor.”

Such loyalty couldn’t prevent Buckhead from failing, though. In December 2009, the FDIC took over the bank, which held $856 million in assets, and sold it to State Bank and Trust, a regional bank with $2.8 billion in assets. Pennington’s own assets were safe, but the allure was gone. State Bank “sent a nice letter about wanting to have a relationship with us, but almost immediately, the fees changed, service charges started piling up, and we just didn’t know anyone at that bank,” she says. Searching for another local option, Pennington moved to the Bank of North Georgia, not realizing it was owned by Synovus, an even larger southeastern bank with more than $30 billion in assets.

Now, Pennington is biding her time. “We need to find another real community bank, but I’m waiting for things to settle out before switching, to see which community banks survive,” she says.

Unfortunately, it may be a long wait. Thanks to a variety of factors, experts are predicting more and more consolidation in the banking industry — meaning that friendly local banks will become fewer and farther between. “We think there is going to be a very significant wave of M&A activity. It’s starting already,” says Joseph Fenech, a banking analyst with Sandler O’Neill. “You’ll see regional banks becoming superregional players, $5 billion banks becoming $10 billion banks, and $10 billion banks looking to become $15 billion banks.”

The consolidation will accelerate a decade-long contraction in the number of small banks (those with less than $1 billion in assets). All told, 7,657 insured institutions reported results for the fourth quarter of 2010, according to the FDIC, compared with 10,204 in 2000. The number of banks on the agency’s problem list grew from 860 to 884 during the quarter. For all of 2010, 157 insured banks failed (the most since 1992) and 197 were absorbed by mergers.

As for new banks, “it’s tougher now to form a bank than it has ever been,” says Chris Cole, senior vice president and senior regulatory counsel for the Independent Community Bankers of America. Only 11 new banks were chartered last year, he notes, compared with 190 in 2006.

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