As big banks swallow smaller ones, choices dwindle

For years, an ongoing cycle has been seen of small banks being acquired or merging with other banks. Today, there seems to be a slowdown.

“There are very few small community banks left to be acquired,” said Bowman Brown, a partner at Shutts and Bowen LLP who specializes in banking matters. “The number has diminished very significantly, so that there just aren’t that many acquisition targets. Some of them are owned by other, bigger financial conglomerates and really aren’t for sale, and others that might be targets have basically put everything on hold, and so have the acquirers, because of the stress that banks have been under with the economic downturn…. The activity has dried up.”

Other professionals in the field have noticed a decline in numbers of community banks.

Due to South Florida – specifically Miami-Dade County – being a center of international trade in this hemisphere, there has always been a healthy growth in the number of community banks, said Manuel Lasaga, president of Stratinfo and clinical professor in the Finance Department at Florida International University. There was a healthy growth of banks established in the county until the 2008 recession, when roughly there were 45 community banks.

Since 2008, said Mr. Lasaga, Miami-Dade has felt a gradual, but significant, “decline to what we were about a couple of years ago about 21 banks and now I think we’re currently around 19 banks. What happened from 45 banks down to 19? Well, the blowout of the real estate marketing [in] 2008, 2010 had a lot to do with it.”

Due to this, said Mr. Lasaga, bigger healthy banks saw an opportunity. “So with that, up to the current times, buying smaller banks – particularly banks that show significant growth, or banks that basically have been around and their growth has kind of stagnated a little bit, maybe the market that they concentrate in is somewhat crowded – that then they basically would look for the other banks that will be interested in buying them or banks simply approaching other banks to merge. So definitely the trend has been that part of the decline since the last recession back in 2008 has been driven by growth and consolidation in the market.”

A large part of the economic activity in Miami-Dade and South Florida is mostly generated through small businesses, said Mr. Brown. Community and small banks are in a position to service those smaller businesses. These banks have lower lending limits than bigger banks.

“There’s a really important place for smaller community banks in this community, particularly because of the dependence of economic activity on smaller businesses, and unfortunately … there is a real consolidation in the industry, with smaller banks being acquired by larger banks,” said Mr. Brown. “Within this community, over the past two or three years, there have been a very large number of acquisitions by either what I would say is larger local banks of smaller banks.”

“Those smaller banks, just off the top of my head … I counted up about 10 or 12 that had been acquired in the last few years and basically disappeared from the marketplace,” he said. “Those banks were acquired, for the most part, by larger local banks, not community banks, quite, but maybe super community banks, and that is clearly the trend. There are some reasons for that.”

The cost of offering leading-edge technology to consumers has played a role, said Mr. Brown. The larger the bank, the more capable it is to spread the cost of the technology. As banking has become more dependent on technology, this has become a larger part of the budget for smaller banks “and I think that’s put some pressure on the earnings of smaller banks.”

Another driver is the cost of complying with federal and state regulations, said Mr. Brown, “and that would include particularly KYC – that is, Know Your Customer compliance. And that’s personnel intensive, it’s becoming more and more technology intensive, and the cost of making mistakes is very high, because the regulatory penalties are very serious.”

Director and shareholder fatigue has also impacted the conversation, said Mr. Brown. Many of these smaller community banks were set up by local management and local boards of directors; they get to the point in which they are ready to cash out and sell. “All those sell side factors, factor into the diminishing number of smaller community banks.”

Although professionals have noticed a slowdown, the process of smaller banks being acquired by larger banks is ongoing.

“It’s happening [small banks being acquired or merging] at present time, it goes through cycles,” said Tony Villamil, senior advisor and founder of The Washington Economics Group.

“There are periods where [there are] a lot of mergers and acquisitions, and then the new banks are formed, they are small and therefore they’re acquired. So it’s a process. I wouldn’t categorize it as a definitive change in the sense of it has stopped or slowed down. It’s just a continuous process of the marketplace.”

Setting up and growing a new community bank takes time, capital and a lot of talent, said Mr. Brown. “To set up a community bank and get it to the point where it might be an attractive acquisition target would normally take 10, 15, 20 years. I don’t see the supply of potential targets for acquisitions increasing. That is of course in addition to the stress on the industry now, which has really put a hold to acquisitions in the community bank space.”

Smaller banks have an important impact as they have the capability to service clients on an individual basis, said Mr. Villamil. As they grow and are acquired or merged with larger banks, new institutions surface as there is always a market niche for smaller individual attention to clients.

“It’s important to remember that smaller community banks are very important to servicing smaller businesses, and smaller businesses are really the heartbeat of the economy for Dade County and South Florida,” said Mr. Brown.

“Larger banks have higher lending limits than smaller community banks, and they’re generally more interested in making larger loans,” Mr. Brown said. “Costs are better, they spread the costs over the cost of making the loans. The absence of community banks, I do think, puts some pressure on smaller businesses, [and] makes it harder for them to find financing.”