What is the Future of Community Banks?

Is the end of the community bank near?

According to the report, "It Takes More Than a Village Redux: The Decline of the Community Bank" from Celent, a Boston-based financial research and consulting firm, the answer may be yes.

I listened in on a web conference conducted by Bart Narter, SVP of Celent's banking group, that expounded on the report, and some of the statistics presented were shocking.

Firstly, Celent was defining community banks as those with $100 million in total assets or less. Such banks have rapidly been losing market share the past 20 years or so. In 1995, for example, the top five banks had 11 percent of the deposit share; today they have nearly 35 percent. On the other end of the spectrum, the number of banks under $100 million in assets decreased from 8,200 total in 1992 to a little more than 2,000 in 2010.

According to Narter, the viability of these smallest banks is threatened by two factors. One is that the complexity of running a bank in 2011 makes the minimum viable asset size a bank needs to operate higher than it was 20 years ago. No longer can a bank just have a branch and an ATM and call it a day. Running a bank requires a certain amount of scale, even banks with assets between $100 million and $300 million are finding themselves at a serious cost disadvantage, Narter said.

The other factor is increasing regulatory requirements. While a larger bank can afford to have a dedicated compliance staff, small community banks have to keep up with the same regulatory guidelines with far less resources to dedicate to the task.

On the other hand, Celent sees what could be termed as midsize banks -- those with more than $10 billion in assets but outside the top five -- as poised to thrive in the coming years. These banks can offer personal service while having sufficient scale to support their IT and operations infrastructure, and are likely to be a bit more efficient than the top five, with slightly less complex offerings, said Narter.

All in all, it was an informative session about a very interesting topic. Will community banks go the way of the VCR and Pet Rock? Only time will tell.

Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio