The U.S. banking industry continues to see consolidation across the board, resulting in a shrinking pool of banking options from which customers can choose.
Around 6,000 banks operate in the United States today — down by half from the 1990s and by a third from the 1930s, according to the Federal Deposit Insurance Corp. South Carolina’s bank count has also decreased by half over the past two decades to about 50 banks today (.pdf).
The recession jump-started a slew of consolidations. Industry executives said many banks made bad loans and eventually failed; other banks struggled to raise or maintain the capital they needed, resulting in mergers with other, typically larger, banking institutions.
Many community banks, especially smaller ones and those in rural areas, are consolidating or closing as they struggle to comply with federal regulations, four banking executives said. Banks typically need to hire employees to handle compliance, and some cannot afford to do so as those regulations increase in complexity and quantity, they said.
“I think we’re going to see consolidations continue, although the pace might change,” said Fleetwood Hassell, president and CEO of The Bank of South Carolina, based in Charleston. “But particularly in more rural areas, it’s going to be more and more difficult for community banks to flourish, if not survive altogether.”
David Morrow, president and CEO of CresCom Bank, which launched in Charleston in 1997, said smaller banks are especially stretched to meet regulatory demands, making it harder to give expected returns to shareholders.
While community bank profits have grown in 2017, further consolidation in the industry is leaving many banking officials calling for regulatory relief.
“The cost of compliance is high, and it remains high,” Hassell said. “We’d like to think we’ll get some regulatory relief in the near future, but that remains to be seen.”
James Chessen, chief economist for the American Bankers Association, echoed the sentiment in a statement: “The banking industry is healthy, with strong capital and high asset quality. Nonetheless, regulatory burden continues to drive consolidation, with 54 community banks being pressured to merge or sell in the first quarter.”
While mergers and acquisitions abound, fewer new banks are starting in the years since the recession. FDIC figures put the number of new banks launched in the U.S. since 2010 at fewer than 10. Charleston is about to get its first de novo bank in years, however, when Beacon Community Bank opens its doors — slated within the next year.
Though the recession accelerated the consolidation trend, Rick Callicutt, chairman for the Carolinas and Virginia for Pinnacle Financial Partners, said the existing environment of low interest rates and numerous regulations has fueled more mergers. He said many banks struggle to generate enough capital to remain open or independent.
“Bank consolidation was exacerbated by the crisis back in ’08, ’09, ’10,” Callicutt said. “The dynamics of the industry have changed significantly from the way you could run a company 20 years ago, so the dynamics behind that and the levels of capital that are required to be held by banks to continue to operate are unprecedented in the industry.”
Callicutt said he expects consolidation to continue, though possibly at a slower pace in the Southeast, given the number of regional mergers in recent years. He said the trend can benefit customers: Bigger institutions often offer more resources and have higher loan capacity.
Role of community banks
Hassell said the mission of The Bank of South Carolina has not changed much from its inception 30 years ago. The bank wants to remain independent, while continually attracting more market share in the Lowcountry. He said consolidations often bring new customers to his bank, particularly those seeking business loans.
Hassell said he sees community banks’ role of maintaining personal relationships and providing loans to small and midsize businesses as increasingly important as more mergers occur industrywide.
National banks hold the largest share of the nation’s deposits, but their business loans often do not keep pace. In 2016, for example, community banks provided loans to small businesses at more than twice the rate of larger banks, according to FDIC data.
Community banks increased small business loans by 2.2% last year, lending $6.4 billion more than in the year prior, compared with non-community banks, which increased similar loans by 0.8%, or $3.1 billion.
“I think a successful community bank ... is ingrained in the fabric of its community,” Hassell said.
A 2015 report from Harvard’s John F. Kennedy School of Government said community banks play a huge role in supporting small-business owners and farmers. Community banks account for 77% of agricultural loans in the country, the school reported.
While community banks remain important in the lending ecosystem, a diminishing market share of deposits can make it difficult to continue in a role of supporting small business.
The FDIC reports that local banks lost nearly half their share of deposits to bigger banks from 2000 to 2014; smaller banks then held around 22% of the nation’s deposits.
Opportunity in consolidations
In South Carolina, bank consolidation has mostly occurred when out-of-state banks have purchased locally owned institutions.
United Community Bank, a community bank that launched in Blairsville, Ga., in 1950, began increasing its merger efforts in 2000.
Within the past few years, the bank opened a regional headquarters in Greenville and acquired several S.C. banks — Palmetto Bank’s 25 locations along Interstate 85 in 2015, Mount Pleasant-based Tidelands Bank’s seven locations in 2016, and Horry County State Bank’s eight branches in Myrtle Beach this year.
Jimmy Tallent, chairman and CEO of United Community Banks Inc., the holding company for United Community Bank, said the latest mergers are part of a larger strategy for the financial institution.
“This transaction fits squarely in our two-step coastal South Carolina growth strategy executed in 2016,” Tallent said in a news release. “First, we placed a team of experienced, in-market lenders in Charleston. Then, we acquired Tidelands Bank with a presence in the Charleston area, Hilton Head and Myrtle Beach. Acquiring Horry County State Bank enhances our presence in the Myrtle Beach community.”
United Community Bank now has 134 offices in Georgia, North Carolina, South Carolina and Tennessee, with nearly $111 billion in assets.
Tallent said the bank’s local roots, combined with its growing footprint from consolidations, provides “the best of both worlds.”
“We operate on a personal basis. We believe in knowing the customer’s name, and we believe in having a relationship that gives us a competitive advantage, but we also have the sophistication, the technology and the size of the balance sheet so we can make the larger loans,” Tallent said.
Tallent said the bank continues to look for merger opportunities to establish a new presence or expand in existing markets, including in South Carolina. He said the diversification in geography and offerings has been a strategic move for United Community Bank.
The merger of Nashville, Tenn.-based Pinnacle Financial and North Carolina-based BNC Bancorp closed this summer, expanding Pinnacle into seven new markets in North Carolina, South Carolina and Virginia.
New S.C. markets for the bank include the Greenville-Spartanburg area and Charleston.
M. Terry Turner, Pinnacle’s president and CEO, said the BNC merger enables clients to have a community bank experience with the resources of a larger firm.
“We believe the Carolinas, Virginia and Tennessee have some of the strongest commercial banking markets in the country, with significant growth opportunities for our combined firm,” Turner said in a news release.
Callicutt, who previously served as BNC’s president and CEO, said BNC had acquired several banks in recent years, and the Pinnacle merger was a good opportunity to expand the bank’s reach in successful markets.
“Putting the two companies together and creating the synergies, building out a commercial and industrial business impetus in a market like Charleston — which we see as a great opportunity over the next 15-20 years — is really the logic behind why we did what we did,” Callicutt said.
He said the company plans to hire rapidly in South Carolina, building up to two bank locations per year in the Upstate and Lowcountry.
“We’re going to be investing heavily in South Carolina,” he said.
Morrow said CresCom Bank has watched the impact that consolidations have had on the banking industry and on customers.
Mergers often result in layoffs and a decline in community banks, which are traditionally known for lending to community businesses.
“Community banks have been the ones hardest hit,” Morrow said. “I think the fact that community banks are being acquired fairly rapidly can have a negative impact on the communities in which they serve.”
Larger banking institutions formed from mergers generally see positive returns, as their assets, footprints and employee counts grow overall. Mergers also bring more efficient and robust services to communities with more capital backing.
CresCom Bank expects to close on its acquisition of First South Bank of Washington, N.C., this fall, expanding to 60 branches and $3.6 billion in assets, up from its current 34 branches and $2.3 billion in assets.
“Larger banks can provide more services often than smaller banks that are being acquired,” said Morrow, citing larger loans or community donations as examples.
Banking executives said they expect to see consolidations continue in the industry — for small and large banks alike — as the cost of business rises to accommodate regulatory burdens, customer demand for technology and the current low interest rates.
“Consolidations accelerated substantially during and post-recession,” Tallent said. “I expect that we will continue to see consolidation in our industry.”