Is bigger always better?

Community banks are under pressure to acquire or be acquired to reach greater scale, deal with growing compliance costs and stay competitive in a fierce market. But is merging always the right thing to do for a bank and its customers?

By Karen Epper Hoffman

To merge, or not to merge? That is the question.
It’s certainly one that many community bank executives have found themselves pondering lately. Is it worthwhile, or even possible, to go it alone in this era of unprecedented industry change? Or should they seek partnership through merger or acquisition to break into new sectors and geographies, gain greater economies of scale and become more competitive with the megabanks, nonbank fintech players and credit unions?

At first blush, the concept of whether or not to merge might seem like a simple numbers game. What would merging or acquiring bring to the table financially and logistically that your community bank could not develop on its own?

ICBA president and CEO Rebeca Romero Rainey posited and discussed these very issues in a February opinion editorial for American Banker. In it, she highlighted the technology standards that incentivize scale and regulatory pressures that are forcing more community banks to partner up. But she also shone a spotlight on why having a greater number of smaller banks matters: namely, ensuring access to financial services for a wide range of people and businesses.

“Those who encourage consolidation in the banking industry fail to recognize that the potential profits for some investors come at a significant societal cost—a loss of access to financial services for many local communities,” Romero Rainey wrote in her op-ed. “Rather than accepting that exorbitant compliance costs naturally decrease the number of community banks, we should instead look for ways to target banking regulations to avoid needlessly exacerbating consolidation.”

At a time when the banking industry is still trying to live down the failures of the subprime crisis and the financial crash of a decade ago, and regain the trust of the people, Romero Rainey points out that “community banks are not only more highly capitalized than larger institutions and therefore better equipped for economic downturns, but their local focus and accountability make them distinctly pro-consumer.”

Voices of experience
That said, the indisputable fact is that the industry trend is consolidation. Faced with pressure to keep up to date with technology and the snowballing compliance burden, along with growing competition on all sides, many small and medium-sized community banks feel they must at least consider the merger option to survive.

Douglas C. Manditch has seen this question from both sides. Currently the chairman and CEO of Empire National Bank, a $952 million-asset commercial bank located in Village of Islandia, N.Y., Manditch previously had founded another commercially focused community bank on Long Island that was acquired. This experience has informed his perspective on thoughts of merging his current institution.

“No, we have not talked at all about being acquired,” Manditch says of Empire National Bank, which celebrated its 10-year anniversary in February 2018.

His previous bank, Long Island Commercial Bank, opened in 1990 and was sold in late 2005 to New York Community Bancorp, Inc., a larger thrift that was seeking to quickly add a commercial banking arm to its operation. “They acquired us [LI Commercial] and another bank in New York City,” Manditch says.

Worthwhile investment
The deal worked out very well for the shareholders of Long Island Commercial Bank, which sold for 2.32 times its book value, according to Manditch.

“Those people who had been in it for 15 years got a 420 percent return on their investment, and the ones who [bought stock] when the bank went public in 1997 got a return of 300 percent,” he says. Most of the employees opted to stay and were kept on because they provided the commercial banking experience that the acquiring thrift had lacked.

“I see a lot of banks looking at mergers to diversify their product lines and their geography, and give them a broader talent pool. But it has to start with looking at what they have already created.”
—Louis J. Dunham,
Ardmore Banking Advisors, Inc.

On the flip side, Manditch admits that the bank’s commercial customers suffered. “Frankly, being purchased by a thrift, [that bank] did not have the commercial culture and the product” to support business customers as well as Long Island Commercial Bank had, he says.

When a merger happens, aside from a cultural and product shift, bankers point out that lending practices, customer service and markets can change radically. “Community banks will do things differently than bigger commercial banks do,” Manditch adds. “We are more aware of the communities we are based in and are usually really defined by those communities. I see customers displaced now all the time.”

As Romero Rainey and other bankers and industry experts often point out, the exploding cost of regulation is largely to blame for coaxing community banks toward mergers—more so than competitive forces or other market realities. And, with the exception of a few booming urban markets, like San Diego, New York City and Las Vegas, compliance costs have stymied the emergence of de novo banks, which are necessary to the continued growth of community banking as a whole, according to Romero Rainey.

The high cost of compliance
Indeed, community bank compliance costs have increased by nearly $1 billion in just two years to roughly $5.4 billion, or 24 percent of community bank net income, according to a recent study from the Federal Reserve and Conference of State Bank Supervisors. A full 97 percent of bank respondents to the Federal Reserve survey who had contemplated an acquisition or merger over the past 12 months said that the cost of regulatory compliance was very important, important or moderately important to their consideration.

“Washington must make meaningful reforms to banking regulations that too often fail to distinguish between large and community-based institutions,” Romero Rainey argued in her February op-ed. “Tailoring rules to the size and risk profile of regulated institutions will ease the burden on local institutions and reduce the pressure to consolidate.”

She believes, as many community bankers do, that anticipated regulatory relief “is a great place to start, with reforms to rules on regulatory capital, mortgage lending, data reporting and more. Passing reforms focused on relieving Main Street institutions from Wall Street regulations will go a long way toward preserving our diverse and decentralized banking system.”

Jonah Bank of Wyoming: Happier being smaller

Mark Zaback, president and CEO of $300 million-asset Jonah Bank of Wyoming, says his bank has yet to consider an acquisition or merger, despite being approached numerous times. “Our goal here is really to build a better Wyoming and not try to get big,” he says. It helps that the primary areas Jonah Bank serves are Casper and Cheyenne, fairly affluent and growing towns relative to the surrounding area, where credit unions are sizable rivals but bigger banks and fintechs are not.

In the dozen years since it was founded as a de novo, Jonah Bank has continued to gain customers throughout Wyoming and Colorado by employing remote deposit capture, accepting online mortgage applications and investing in other technologies that Zaback says allow the bank to compete with banks of all sizes.

Also supporting Jonah Bank’s independence is the fact that “the ownership is really not wanting to sell,” and the community bank has achieved enough scale to put adequate resources into the growing demands of compliance and sales, Zaback adds. Nonetheless, he understands the pressure many of his peers are under to scale up, including meeting the regulatory demands of the Dodd-Frank Act and particularly the Home Mortgage Disclosure Act (HMDA) rule. Jonah Bank has one full-time employee strictly dedicated to meeting the new HMDA requirements and three lending professionals vetting every mortgage.

“We do a bit of volume here, and [the recent HMDA requirements] have more than doubled the amount of data fields we need to collect,” Zaback says. While this alone is not nudging the bank toward a merger, he says this compliance dynamic is making the community bank reconsider whether it is worthwhile to keep pursuing home mortgage business.

In the meantime, many community banks may rightly surmise that they do not have the luxury of waiting on regulatory reform or better market conditions, and feel the need to at least ponder a partnership.

Louis J. Dunham, senior vice president and senior director for risk management consulting at Ardmore Banking Advisors, Inc., argues that not all mergers are created equal. He says in many cases, they can serve a useful purpose in expanding a community bank’s footprint, its product line and its employee expertise in a way that truly will serve its market.

“[Community banks] are more aware of the communities we are based in and are usually really defined by those communities. I see customers displaced now all the time.”
—Douglas C. Manditch,
Empire National Bank

“I see a lot of banks looking at mergers to diversify their product lines and their geography, and give them a broader talent pool,” Dunham says. “But it has to start with looking at what they have already created,” as well as what the bank management and shareholders may want to accomplish in the future. He adds that banks “must evaluate the target culture to make sure it’s a good fit with the acquirer’s culture.”

Needless to say, even with regulatory relief, Dunham admits that many community banks—particularly smaller and mid-sized ones—will need to look at their merger options to create better efficiencies across the board. “Their margins are definitely being squeezed,” he says, “and there’s only a couple of ways to fix that: by cutting expenses or finding partners.”

In his 52-plus years in banking on Long Island, Manditch has seen the community bank market shrink from roughly 60 independent banks in 1965 to seven today. Of those, only two are larger community banks (a few billion dollars in assets) that have been around for 90 years or more.

“It really doesn’t matter whether you’re a thrift or a commercial bank,” Manditch says. “The legacy of the financial industry is disappearing. All of us want to survive and stay independent, but it’s becoming more difficult every year because of compliance requirements and [low] interest rates, which are finally starting to rise.

“It will be helpful, I think, a couple of years down the road when things are fully repriced,” he adds. “But right now, it’s a drag.”

Considering M&A?

Attend ICBA’s Community Bank Mergers & Acquisitions seminar on June 11 and 12 at The Saint Paul Hotel in St. Paul, Minn., to learn expert tips from leaders at consulting firm Gerrish Smith Tuck Consultants and Attorneys PC. Topics will include: strategic considerations for buying and selling, valuation and contract negotiation, common mistakes of buyers and sellers, and more. Learn more and register at

Karen Epper Hoffman is a writer in Washington state.