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September 17, 2018 EDITOR'S TAKE

The incredibly shrinking community-bank sector

Greg Bordonaro Editor

The darker side of merger-and-acquisition activity was on display with the recent announcement that Farmington Bank will shed more than a quarter of its workforce after its $544 million buyout by Bridgeport-based People's United Financial Inc. closes later this year.

The layoffs aren't surprising since most M&A deals lead to workforce consolidation as companies eliminate overlapping positions. The fact that Farmington Bank's top executives are slated to receive million-dollar payouts as part of the People's United transaction didn't help with the optics, but a larger point we should all be paying attention to is the continued decline of community banks in Connecticut and across the country.

Connecticut's banking landscape has gone through a sea change over the last few decades as small- to mid-size lenders have been bought and sold in staggering numbers.

In June of 1998, there were 76 banks in Connecticut, including 15 with assets under $100 million, according to the Federal Deposit Insurance Corp. As of June 30 this year, there were only 40 banks in the state with just two having assets under $100 million.

Meantime, the amount of assets held by Connecticut banks over that 20-year period has grown from $45.2 billion in 1998 to $112.5 billion today. That means a lot more money is being concentrated in the hands of a few lenders.

In fact, the top 10 banks in Connecticut own 85 percent of the funds deposited by Connecticut customers, FDIC data show.

Mergers and acquisitions aren't inherently a bad thing but they do risk diminishing market competition, which can stifle innovation, increase customer costs and have other negative effects. Some of the deal-making over the years may have right-sized an overbanked state, but it seems we've reached a point where the presence and influence of community banks has severely waned, and it's not a great thing for small businesses, individual customers or financial-services employment.

Is this an emergency situation? It doesn't appear so. The most recent credit availability survey by the Connecticut Business & Industry Association from last November found that 88 percent of businesses aren't having issues getting a loan or other financing.

That's a good sign. The rise of non-traditional lending, including online and other forms of financing, has certainly added to the liquidity available to commercial borrowers.

That competition is part of the reason community banks are finding it harder to survive. But non-traditional lenders don't necessarily replace small, FDIC-insured banks' charitable giving or borrowing to low- and moderate-income neighborhoods, which is required by the Community Reinvestment Act.

Another challenge the industry faces here is a slow-growing economy. The lack of new businesses opening and growing in Connecticut means fewer companies seeking loans to expand their workforce, production and/or facilities.

It also hasn't helped that state government has gained a foothold in small business lending. The Malloy administration's Small Express Program, which offers low-interest and forgivable loans and grants to employers with fewer than 100 workers, was meant to be an emergency loan program after the Great Recession, but bankers have told me privately and publicly that it has siphoned off some potential customers.

The new administration should wind down the program and/or work with community banks on a public-partnership to take it over.

And of course, the 800-pound gorilla in the room has been the Dodd-Frank Act, passed in the wake of the 2008 financial crisis to stem risky lending by Wall Street institutions.

Unfortunately, many of its rules and regulations hit community banks as well, and small-lender executives haven't been shy about voicing their displeasure of the significant compliance costs. (Keeping up with fast-moving banking technology has also been a challenge.)

In fact, Simsbury Bank President and CEO Martin J. Geitz penned an opinion piece in July arguing the Dodd-Frank Act has accelerated the rate of consolidation because smaller banks lack the scale to handle its regulatory requirements.

The numbers help back up that argument. Since June 2008, Connecticut has lost 17 banks to mergers and acquisitions, including seven lenders with less than $100 million in assets.

Geitz cheered Congress' passage of the Economic Growth, Regulatory Relief and Consumer Protection Act, which he said will ease some of those small bank regulatory burdens.

That's good news, but it still won't be a panacea for community banks' challenges.

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