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As regular readers know, I've speculated for some time (for example, here) that the FDIC has a not-so-hidden agenda to bring down the number of FDIC-insured banks from 8,000 to 6,000. After a speech last month, I was reminded by legal counsel for a state bank trade association that former Comptroller of the Currency Bob Clarke once publicly stated such a reduction was one of his goals. If, in fact, there is a plan at the federal regulatory level to consciously take down enough small banks to reach 6000, it appears that the regulators will be getting plenty of help from economic and other factors that are driving the downsizing engine full speed ahead.
According to a recent front page article in The American Banker (paid subscription required), experts within and without the regulatory system are telling community banks that the mantra they ought to be chanting is "grow, merge, or die."
Julie Stackhouse, the senior vice president of supervision at the Federal Reserve Bank of St. Louis, told a gathering of bankers here last week that small banks ought to consider merging with like-minded banks to gain the scale needed to keep pace with technology and handle the burden of regulatory compliance. Merging, especially for those in rural areas, could help diversify a bank's products and geography, she said.
The 200 or so Tennessee bankers at the gathering were asked to raise a hand if they were considering a merger; not a single hand went up. Of course, this may not be something a banker wants to admit in front of his rivals.
"I guarantee there were 50 banks in that room that have had that discussion recently," Sammy Stuard, the president and CEO of F&M Bank in Clarksville, said in an interview after the meeting. "If you can't raise capital, you have to do something — shrink or get out."
Philip K. Smith, the president of Gerrish McCreary Smith, a law and consulting firm in Memphis, predicted consolidation will claim 2,000 to 2,500 banks, bringing the nation's total to 6,000 or fewer.
A great deal of that consolidation will be in the form of mergers, but plenty of banks will fail.
The ever-ebullient Meredith Whitney was her usual slap-happy self.
"There are going to be a lot of banks that just die," Meredith Whitney, the chief executive of Meredith Whitney Advisory Group LLC, told the Tennessee bankers. "Some banks are too big to fail while others are too small to matter. For the teeny-tiny banks, there is no place to go."
Whitney's advice tracked Stackhouse's: "Merge with a clean, small bank, and you can raise equity. Get enough scale, and go after the big guys."
Or, you could, you know, always eat the barrel of a gun.
According to community bankers who were interviewed for the story, two of the primary "headwinds" facing community banks are the brutal costs of regulatory compliance and technology. The president of the Tennessee Bankers Association gave the opinion that the regulatory reform legislation moving through Congress might be the final straw that breaks the back of the camel called "community banking."
"There was fear for many years that large banks would be the demise of community banks. I am concerned that Congress could be the demise of community banks."
There's also the added burden of commercial real estate woes that we've been posting about recently. That burden will continue to sink many community banks who fell for the siren call of CRE lending.
As one private equity investor who has been talking with a lot of community bankers told me recently, "There are a bunch of small bank management officials who are telling me that they no longer care about the cheese, they just want out of the trap."
For those community banks that will be the survivors, and, therefore, will grow organically, through acquisitions, or both, the need for capital becomes paramount. One investment banker told the Tennessee conference that the next six months will be critical (as if the last six months weren't). The survivors need to be lining up capital. Of course, that's easier said than done, especially for small banks.
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Speaking of capital raising by community banks, we're offering readers of this blog a $50 discount off the price of either the live webinar or live webinar and playback option for next Wednesday's Bank Law Stuff webinar, "Strengthening the Balance Sheet: Practical Capital Raising Considerations for Community Banks." In order to take advantage of the discount, you must register by following this link to the special discount registration page.
If you're a reader who has already registered for the May 26th webinar and would like to receive the discount, send an e-mail to [email protected], tell her you want the Bank Lawyer's Blog discount for that webinar, and we'll make sure you get the appropriate refund or credit.
And here you thought the only benefit of reading this blog was how good it made you feel about your own levels of sanity and intelligence (as compared to those possessed by this blog's author). If enough readers take advantage of this discount, we may repeat it with select future webinars. If not, please feel free to continue to pay "the full monty."
