The Future of Community Banking

Posted on August 19, 2012

In a recent announcement, First Virginia Community Bank announced the acquisition of 1st Commonwealth Bank, a small de novo bank started in 2009.  The transaction is pending regulatory approval and will be treated as stock for stock and the value to book was about 97%.

This will become a common trend over the next three to five years with a Wall Street projection that some 20% to 30% of banks will be merged before it is all done.

Why is this typical of what the future will hold?

First, the constant pressure of maintaining high regulatory capital ratios requires banks to reach certain efficiency ratios sooner rather than later to be profitable,

Second, the access to capital for all banks is limited, at best.  Hence, there will be a “survival of the fittest” banking industry environment with each bank striving to be the dominant bank in its market(s),

Third, to be competitive and sufficiently profitable to maintain such a position in the market, community banks must achieve a minimum asset size of around $1 billion.

What is behind the higher regulatory capital ratios?

The lingering effects of the economy and the Great Recession have made a significant impression on all banks, especially those serving their communities.  The asset devaluation of real estate (both residential and commercial) took a significant chunk out of capital and there are no expectations for a quick recovery.  Hence, many banks are in a precarious position in which the future is still unknown.

Further compounding this is a recent announcement by the Federal Reserve that suggested it would likely implement Basel III  and make its capital requirements applicable for all banks, large and small.  Simplified, Basel III sets new rules for the capital ratios based on a bank’s complexity of risk-based assets.  In the past, there were only bucketed assets … read the rest