On the Road Again

While attending the Colorado Bankers Conference in Denver and listening to an M&A panel of bankers, the concept that “size matters” again was emphasized. This time the number suggested was $200 million. It is consistent with the last investment conference I attended where the concept of “relevance” was raised. What wasn’t specifically mentioned, but was implicit, was the concept of franchise scarcity value.

Right Size, Right Focus

At the conference, we had dinner with a local banker whose company was just under $200 million with no sale sentiment. Clearly, most smaller banks would like to grow to achieve a certain critical mass. I think critical mass is important to (i) cover basic and growing operating costs, including regulatory compliance; (ii) provide a meaningful legal (and house) lending limit; (iii) hire and retain good bankers; and (iv) offer products and services to grow non-interest income. Just as importantly, I think the term “community bank” is too broad. It implies a high level of personal service and faster responsiveness, but that is not enough. You must have a focus, a “niche” if you will, where you are really good at a few things, like SBA lending. Clearly, a community bank cannot be all things to all people.

The Future of Community Banking

Despite all the naysayers and the predictions of massive consolidation, I still think that there is a place for well-run community banks, both now and in the future. Envision with me, if you will, what the banking landscape will look like in the next three to five years. Undoubtedly, there will be some consolidation and few new banks established. Interest rates will eventually start rising, say by 2015, and interest margins will, in turn, grow. Loan demand will build and those surviving community banks with a plan, a focused business model, some capital, and persistence can be meaningful players in a smaller market. Supply and demand – it ultimately drives everything. Fewer community banks and an increasing demand for banking products and services should propel success for the survivors. Underlying all of this is the inherent franchise scarcity value of a community bank, particularly those that are well managed.

Community Banking – Part of the Fabric of Our Country

I believe it is true that community banks are part of the fabric of our country. Whether the regulators want more or less banks, customers – particularly business customers – will want responsive community banks to serve their needs. Maybe it will look a bit different – less and smaller branches, and lots of technological advances to provide convenient banking services in our “instant” environment – but it will still be a vibrant community banking community, contrary to some beliefs. My belief is that community banking will really prosper in the second half of this decade, but only time will tell.