Community banks have reached a cross-roads, and the impact will be felt throughout the U.S. The reason for this is that the engine of the U.S. economy is not on Wall Street. Rather, it is the diverse group of 6,000 community banks, which collectively provide 40 per cent of small business loans while accounting for only 10 per cent of banking assets.
Before the real estate bubble popped community banks seemed to have the wind at their backs. A booming real estate market spawned aggressive development and investment, and commercial real estate became the overwhelming profit engine at many community banks. That heavy CRE exposure has killed many banks (the FDIC Failed Bank List shows 445 failed institutions since 2008, compared with 10 failed institutions from 2003 – 2007).
The challenge for many banks now is to find profitable way to deploy capital. The Federal Reserve Bank of Atlanta outlined several of the challenges facing lenders seeking to pivot from CRE to commercial and industrial (C&I) lending:
- More complex credit administration and management
- A need for more in-depth monitoring and reporting
- Requires specialised skill sets
As community banks struggle to adjust to a new environment and seek to deploy capital in a more balanced manner, their collective struggles could provide a significant headwind to an economy barely limping through an uninspiring recovery.
About the author:
David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies, real estate investors and municipalities. He can be reached at 312-505-7238 or at [email protected].