What does all this mean for the businesses that depend on small banks? Most observers paint a gloomy picture, drawing a direct line between larger banks and reduced access to credit, higher service fees, and fewer handshake deals. “Very rarely do small businesses get more resources in a merger situation,” says Chris McDonnell, a vice president with banking research firm Greenwich Associates.
Undercapitalized and Overregulated
So far, bank mergers in the wake of the financial crisis have mostly centered on targets that were distressed or, like Pennington’s bank, had failed and were sold with some backing from the FDIC. Excluding the failures, the number of mergers involving banks with assets under $1 billion rose 37% last year, to 153, according to SNL Financial. That was short of the volume seen in prerecession years, but “over time, as acquirers become more comfortable with targets’ balance sheets, you will see more,” predicts analyst Fenech. Jake Lutz, a partner at law firm Troutman Sanders, agrees: “M&A activity has been mostly opportunistic, but now I’m seeing people talk about more-traditional deals.”
Some reasons for mergers depend on the region. In the Southeast, for example, banks that are reeling from the slowdown in real estate lending may be looking to replace those revenue streams through acquisition, notes Fenech. In the Northeast, which had less of a real estate boom and bust, well-capitalized banks are looking to take advantage of the times. Buffalo-based First Niagara, for example, has roughly tripled its asset size since 2008 by making three acquisitions, including the pending purchase of Connecticut-based New Alliance Bancshares.
What’s universal, though, is that new compliance and reporting burdens on banks stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act are making it more expensive for banks to stand on their own. “No matter what size a bank is, it believes it needs to be bigger to digest the cost of the increased regulatory burden that’s coming its way,” says Michael Clarke, president of Access National Bank, which is based in Reston, Virginia, and has $832 million in assets.
The Dodd-Frank Act “will have an enormous and negative impact on my bank,” Charles Maddy, CEO of Summit Community Bank in Moorefield, West Virginia, told the House Financial Services Committee at a recent hearing on the topic. “Already there are over a thousand pages of new proposed rules, and there will be many thousands more.” Among other costs associated with the legislation, the bank has “already added one new full-time member to our compliance staff, and that may not be enough,” said Maddy.
Dodd-Frank may also indirectly suck revenue from community banks by drastically lowering the interchange, or “swipe,” fees that large banks charge merchants when their customers use bank debit cards for payment, said Maddy. Although smaller banks have a “carve-out” from this mandate, they “will almost certainly be forced to adopt the same price level or risk losing business to the largest banks,” he said. “We cannot afford to offer financial services if we can’t cover the cost of doing so,” he warned.