Is there a future for community banks?

From 2008 through today, regulators closed 22 Southwest Florida community banks. These banks only include those headquartered in the counties served by the Gulf Coast Business Review. Add banks headquartered elsewhere with offices in this geographic area, and the number is much higher. Considered to be one of the centers of the banking crisis, the Sarasota/Manatee area saw nine local community banks and an additional six with offices in these two counties closed and passed on to healthier institutions at considerable cost to the Federal Deposit Insurance Corp. fund.

In general, the immediate impact of the nine Sarasota/Manatee bank failures includes well over $100 million in losses of investment capital, more than 100 bank directors and CEOs subject to potential liability, and scores of local jobs eliminated through consolidation of services and branch closings. The ripple effect was of course much greater.

While it is too early to say a recovery is under way, conditions have improved during the past year. Surveying the number of banking choices in the Sarasota/Manatee area reveals customers have fewer choices than at any time in nearly 20 years.

Depending on your source of information, the cause varies. The mainstream media, both local and national, blame reduced regulation, poor management, lack of board oversight, insider deals and risky loans to unqualified borrowers. It became far too easy to paint the entire industry with the broad brush called “banks” as the national mortgage crisis unfolded and residential mortgage foreclosures spiraled out of control.

Banks reflect communities' health
In truth however, it took a nearly perfect storm of adverse conditions to bring about these closures. The nine community banks closed since 2008 fell victim to once-in-a-lifetime recessionary conditions triggered by unprecedented devaluation of residential and commercial real estate. These conditions created record unemployment as the local economy — dependent on construction and real estate — faltered. Consumer confidence plummeted as people braced for the worst. Non-essential spending dried up and the businesses dependent on this spending failed, leaving commercial spaces empty and owners handing these properties back to their bank.

The work force serving the construction industry quickly departed for more promising markets, leaving a glut of vacant rental properties behind. Businesses cut costs at every turn to survive and began to tap deposit balances held at local banks in order to stay afloat. Our economy was severely damaged, and the banks serving this region took the brunt of the blow.

Look back, see ahead
From the late '80s until just a few years ago, banks were organized in Sarasota and Manatee counties at the rate of generally one per year. The formula for success was tried and true. Usually spearheaded by a regional bank area executive or a local banker of high regard, an organizing group is formed with a team of successful business leaders to serve as board members. This organizing group reaches out to their colleagues and friends to form a shareholder group, capital is raised and usually in less than a year, a new community bank is opened. While the process remains the same, today the expense is considerably greater and the time frames longer.

The most successful community banks are built from the inside out, literally one customer at a time. Shareholders will bring their business to the bank they own and will refer their contacts, friends, family and suppliers to the bank. In this regard, a community bank is no different than any small business. Being at somewhat of a disadvantage in terms of product, number of locations or technology, community banks play to their strength, which is extraordinary single-point-of-contact service. While technology is changing the way we bank on a technical level, business banking is still grounded in faith, trust and chemistry. In matters beyond the routine of everyday banking, customers rarely call their “bank,” but rather they call their “banker,” and it is this unique ground-level relationship between customer and banker that ensures the future of locally organized community banks.

The continuous cycle
In the late '80s, community banking choices were few. Out-of-state banks dominated the market. Lending decisions were made out of state, terms and conditions set according to national or regional models and business customers paid the price.

Groups of local business people saw the market opportunities for local banks with community roots and organized several such banks over the next few years. As these banks prospered, acquisitions followed and in the late '90s, most had been gobbled up by out-of-state banks seeking a foothold in deposit-rich Florida. Prices were high and community bank shareholders prospered. With fewer community banks serving this market, a new and larger group of community banks emerged with seven new banks launched in 1999 and 2000. As some of these were acquired, more new banks surfaced in the time period from 2003 through 2006. And there was sufficient business to support them all.

Today, we are back at square one. Choices in community banking are few, and the sting of the economic conditions of the past five years is still felt. The stalwart nationwide banks dominate again and regionals continue to fight for market share. The new banks joining the market through the acquisition of failed community banks must convince their customers they too are local community banks.

It will take some time for the community banking industry to rebound in these two counties - or more broadly up and down the Gulf Coast. Regulations have been tightened and all banks — regardless of size — must operate under the same set of rules. The amount of reporting required is staggering, particularly for smaller banks. Analysts predict the community banks not closed by the financial crisis but nonetheless seriously injured will eventually be absorbed by larger healthier banks and as many as 100 Florida banks could disappear in the next five years.

These conditions will create a window of opportunity for organizing groups to launch new community banks in the future. It won't be tomorrow or next year. In a still reeling economy, loan demand remains soft and some further market adjustments will take place. However, the appeal of the locally organized community bank cannot be denied. The evidence is found in the success of community banks organized and opened at the outset of the recession or just before, such as Calusa National Bank, Finemark National Bank or Gateway Bank here in Sarasota — all organized in 2007 and 2008. Once the events of the last five years are further in our rear view mirror, the cycle of new banks will reemerge — not to the degree we have seen in the past — but we will have newly chartered community banks and the local business climate will be bettered as a result.

- Frank Knautz is a community banking consultant who advises banks throughout Florida on business development, brand building, public relations and crisis management.