Community banks continue to be the chief lending source for New York state”™s small businesses despite crippling challenges over the last two decades. A recent report by the state Department of Financial Services (DFS) found that though there are fewer community banks statewide, those remaining generally have managed to thrive and have gained a larger market share of small business loans in New York.
Community banks hold roughly 22 percent of all assets of Federal Deposit Insurance Corp. (FDIC) banks in New York, but make nearly 55 percent of all small business loans and almost 90 percent of small farm loans. The state”™s smallest community banks, which hold assets under $1 billion and about 6 percent of FDIC insured bank assets, account for nearly 28 percent of all small business loans and 43 percent of small farm loans in New York, according to the report.
Despite those strong ties to small business and agriculture, the number of community banks in the state ”“ institutions with less than $10 billion in assets ”“ has declined for roughly two decades. From 1992 to 2002, 100 community banks shut their doors, representing one-third of the 299 banks operating at the start of that 10-year period, according to the state report. From 2002 to 2011, another 30 banks closed across the state, a 15 percent decline.
Total assets held by the state”™s community banks dropped from $237 billion in 1992 to $166 billion in 2011, a 30 percent decrease.
Yet even as their numbers and total assets declined, community banks have been key lenders to businesses. Between 2001 and 2011, according to the DFS report, their market share of small business loans in New York rose from approximately 43 percent to nearly 56 percent. Small farm loans made by community banks increased from roughly 78 percent to close to 90 percent in the same 10-year period.
DFS analysts said that increase is due in part to the strengths of community banks: personalized service, knowledge of the communities they serve and the ability to extend loans to small businesses that typically are undesirable to larger banks.
Aggregate customer deposits at community banks have rebounded in the last decade, after tumbling from $188.5 billion in 1992 to $116.3 billion in 2001, a 38 percent decline. From 2001 to 2011, deposits rose to $130.4 billion, a 12 percent increase for the decade. Community banks hold roughly 23 percent of total bank deposit assets in New York.
State analysts said mergers account for much of the decline in numbers of banks operating in New York. Since 1992, 83 community banks have been absorbed by other banking companies, according to the DFS report.
DFS analysts also noted that costly new financial industry regulations attached to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the pending Basel III international banking agreement presented challenges to community banks.
Bank capital and risk requirements set by the Basel III accord could raise compliance costs to as much as 10 percent of operating expenses at community banks. That puts community banks at a disadvantage, the report noted, because they are smaller and lack the staff needed to handle the change or possibly the resources to support the growing compliance requirements.
“There”™s no question Dodd-Frank increased the cost of doing business, but for all banks,” said John Tolomer, president and CEO of The Westchester Bank. “Basel III right now has been put aside; it”™s certainly something that looms in our future.”
Community banks “are able to meet the needs of customers from a lending and a deposit cash management perspective,” said Tolomer. Larger competitors must also focus on far-flung markets outside New York in their business, while community banks can target a specific client base in their community, he said.
Fluctuating interest rates, coupled with advances in technology and increased compliance regulations, will continue to challenge community banks in the years ahead, according to the state report. To help navigate those challenges and spur growth in the banking business in the more restrictive regulatory environment, the Department of Financial Services in 2011 created a state Charter Advisory Board that represents the leadership of community banks in New York.
Tolomer, who serves on the advisory board, said good relations with the FDIC, Federal Reserve of New York and DFS are helpful in charting the future of community banks.
