Community banks attempt to reverse decades of decline after COVID windfall

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With millions of new customers and their cash flow, community bank leaders believe now is their best way to start reversing decades of bank closures, consolidations and competition from the world’s largest financial institutions.

COVID-19 has been a boon to most community banks, broadly defined as those with less than $ 10 billion in assets, many of which have reported massive windfall as millions of Americans have asked for their help navigating through pandemic assistance programs such as the Paycheck Protection Program.

The new customer base has arrived at a crucial time for small banks, which have experienced a decline over the past four decades due to a combination of economic instability, inflation, deregulation that has sparked a wave of bank consolidations. in the 1980s and, in the wake of the 2008 crash, what small bankers say are unfair regulatory burdens that threaten already slim profit margins.

The result? A wave of consolidations, mergers and acquisitions that gave more influence and wealth to a handful of massive global financial institutions, and helped spur the shutdowns of around half of the country’s community banks over the course of of the past 40 years, according to a recent report from the Federal Reserve Bank of Kansas City.

The leaders of the bank hope to reverse this trend thanks to the windfall of the pandemic. “When it comes to the strength of community banks, they have never been stronger,” said Paul Merski, executive vice president of the Independent Community Bankers of America. “They are really flush with the deposits.”

Community banks provide vital financial services to small businesses, especially those owned by minorities or in rural areas. And for years that ‘personal touch’ style of banking has been enough to attract and retain customers, some of whom may be turned away by large financial institutions that are less likely than, say, a local family credit union to make exceptions. for a familiar and trustworthy face.

“Community banks are more willing to guarantee loans to creditworthy customers based on an assessment of qualitative factors that automated models fail to take into account,” said Michelle Bowman, who represents community banks on the board of governors. from the US Federal Reserve. “As community bankers are part of the fabric of their communities, they have a better understanding of the local market and the economic conditions of the region. “

The waves of deregulation of the 1980s and 1990s prompted the big banks to expand their geographic reach. As these businesses grew, their ability to offer online banking and mobile services also grew – a key draw that could not be matched by small, family-owned banks in rural Texas. .

Then, the 2008 crash and recession and a new wave of regulations pushed up the cost of doing business for banks of all sizes and, again, led to a wave of closures or mergers. In the decade that followed, only 44 new community banks were created, up from 2,000 over the previous twenty years, according to the Fed report.

Today, community banks still account for about 97% of all bank charters in the country, but hold only 40% of bank branches, 18% of loans and barely a tenth of bank assets, according to the Fed report.

Cullen Zalman, senior vice president of banking and corporate activities at Prosperity Bank USA, said the pandemic has made it clear that the days of physical and driving banking are numbered. He envisions bank branches of the future to be more like Apple stores, with cashiers replaced by specialists helping customers who seek in-person assistance as online banking services flourish.

But it doesn’t come cheap to develop and maintain things like mobile apps – especially, as Zalman noted, for the smallest of the community banks, many of which barely stay afloat.

Others are joining forces to avoid out-of-state competition. Last month, the region’s two largest community banking chains, CommunityBank of Texas and Allegiance Bank, announced one of the first major post-pandemic mergers. Both banks were inundated with thousands of pandemic-related loan applications, about half of which were from new customers, bank executives said. Company officials say retaining these customers is crucial amid heightened competition from state-owned banks such as Pittsburgh’s PNC Financial Services Group, which recently entered the Houston market. with an $ 11.6 billion acquisition of the US operations of Spanish bank BBVA.

They make a familiar speech, but still hope they will resonate after the last two years.

“Most of the employers in this country are small businesses, and they need to tell their stories and they need the capital,” said Bob Franklin, CEO of CommunityBank, who will become CEO of the combined company when the merger is finalized. next year. “They need to talk to someone who helps them through the good times and the bad, and who helps them through the tough times.”

Merski, of the Independent Community Bankers of America, remains optimistic about the prospects for community banking as the pandemic wears off.

But challenges lie ahead: “Community banking is really a function of the quality of the economy,” Merski said. “It’s a symbiotic relationship – if the economy is doing well, community banks can provide credit to this growing economy.”

The skyrocketing inflation in the country may, for now, be a boon for community banks which derive much of their income from interest rates, he said. But higher interest ultimately means fewer successful businesses, which threatens the bottom line of community banks.

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