BusinessTN

Community bankers have made their living over the years off the assumption they provide better customer service—more hands on, high touch and high feel—than the large national and regional banks with their reputation, right or wrong, for overly automated systems and an inability to make decisions locally.

Large banks counter that their scope and scale enable them to offer a much more diversified set of products, helping them meet the needs of a lot more customers than a community bank—the end result being better service to a wider array of institutions.

What is not under debate is that over the past five years or so, community banks have done a great job of taking market share away from large banks. They’ve done so in part by emphasizing their customer service and in part by feeding off the healthy crumbs left behind in the aftermath of bank mergers both big and small.

According to a report by Birmingham-based Sterne Agee & Leach published in the Birmingham Business Journal, there were 163 bank mergers announced during the first nine months of 2006, 32 more than in the same period the previous year, with more than a quarter of those occurring in the southeastern United States. Simultaneously, startup banks in Tennessee and elsewhere are forming at a rapid pace—179 new in the last year alone, according to a report by investment banking firm Donnelly Penman & Partners (also published in the Journal), up from 128 in 2004. Here, too, the Southeast leads the way.

As startup banks have soaked up market share, community bank IPOs and their stocks have also soared. Nationally, a high percentage of the banks that opened around the turn of the century have produced stunning cumulative stock returns, chief among them Nashville’s own Pinnacle National Bank, up 793%.

The overall positive operating environment has made it relatively easy to raise capital. But given all the growth, some industry observers are beginning to ask the question, “Are we over-saturated in Tennessee?” And, more globally speaking, “Is the small bank boom almost over?”

Debbie Thrash, president & CEO of Community Bank & Trust, based in Ashland City, says up-and-coming but still largely rural areas of Tennessee like her home base of Cheatham County have not experienced an influx of new startups and don’t perceive over-saturation as an issue.

Generally speaking, Thrash says two yardsticks—one regulatory and one market-driven—offer the best gauge of whether or not over-saturation is occurring.

“There is always a needs assessment done by the department of financial institutions,” Thrash says. “That need is assessed before the charter is granted.”

Next, says Thrash, interest from investors drives the market. “Frankly, if you can get the capital, then apparently there is not only a need but an interest in the community,” she says. “And if there is an interest and the capital, why not?”

The situation is somewhat different in nearby Williamson County. Art Helf, chairman and CEO of Tennessee Commerce Bank, which focuses on business banking, says Williamson County had seven banks when his started six and a half years ago. “Now there are 25. Is it over? I don’t know.”

Helf points to consumers as the ultimate decision makers regarding the saturation point. “As long as customers seek to be satisfied and don’t find it, they’ll go elsewhere,” he says. “It’s like a marriage. You better treat them well enough that they don’t want to go anywhere else.”

FTN Midwest Research analyst Mark Muth, who covers the small and mid-tier Southern market, says in his opinion none of the Tennessee markets are over-saturated, yet. But Muth does offer a warning. “The industry over the last five years has been unsustainably good,” Muth says. “That will change and definitely put a damper on some of the expansion of the new bank startups. It will be much harder to find investors to fund a startup in a more difficult environment.” Things are already getting a little tighter. “Someone trying to startup today is definitely facing a much more difficult environment than they did two years ago,” Muth says. “That may cause some people to postpone their plans or maybe never even get them off the ground in the first place.”

Until then, startups keep sprouting. Anderson L. Smith, president & CEO of Jefferson Federal Bank in Morristown, says one eventual outcome he expects to see is increasing consolidation at the community bank level, such as what happened recently with Pinnacle and nearby Cavalry Banking in the Middle Tennessee market.

“Each of these startups has its own infrastructure and regulator and its own set of fixed costs,” Smith says. “Those startups need to grow. And if you can get two of them together and basically lop off one side of overhead, it is going to provide more breathing room. Size helps you compete” Given how every merger seems to leave behind fertile ground for future startups, its seems that for banking in Tennessee at least, bigger is better for all involved.