Will mergers ruin Virginia’s community banks?

For a variety of reasons, an increasing number of Virginia community banks have decided to combine.

The urge to merge has resulted in fewer banks competing in the commonwealth, but bank executives and industry experts say the trend doesn’t threaten the industry (or its customers) and could continue as the economy improves.

“The decline in numbers of community banks in Virginia has been precipitous,” says Steven C. Yeakel, president and CEO of the Virginia Association of Community Banks (VACB). “We’ve had 28 mergers or announcements in the last four-and-a half years. That’s substantial.”

In April, the $450 million Kilmarnock-based Bank of Lancaster closed its merger with Petersburg-based Virginia Bancorp Inc., creating a new Virginia Commonwealth Bank (VCB), a 19-branch, $800 million financial institution based in Henrico County.

In a joint interview, VCB’s CEO, Randal R. Greene, and president, C. Frank Scott III, say their merger was designed to create a bank large enough to better target the rising number of thriving small businesses in the Richmond metro area.

In May, Richmond-based Union Bankshares Corp. agreed to buy crosstown rival Xenith Bankshares Inc. in a stock deal worth $701 million. The acquisition is expected to be completed by the beginning of next year. The combined bank would have $12 billion in assets and more than 150 branches and loan offices from Maryland across Virginia to eastern North Carolina.

(Last summer, the Virginia Beach-based Bank of Hampton Roads bought Xenith to create a larger, Richmond-based bank under the Xenith name.) 

John C. Asbury, Union’s president and chief executive officer, says that, in addition to not only giving his bank an immediate and important retail presence in the Tidewater region, the Xenith deal also would create a larger, more powerful Richmond-based commercial sales team and potentially lucrative new expertise in government contract financing in Northern Virginia and Washington, D.C.  

Other Virginia community banks recently involved in the mergers and acquisitions, either as buyers or sellers, include Portsmouth-based TowneBank, Richmond-based Franklin Federal, Chesapeake-based Monarch Bank, Tysons-based Cardinal Financial Corp., Richmond-based First Capital Bank, Reston-based Access Bank and Middleburg Bank.

Fewer but stronger?
In looking at the slew of Virginia mergers, Yeakel says the “impact on the banking community is: some good, some not so good … What is it saying about communities if there are fewer banks, less competition, fewer banks in rural areas? We certainly see that as a negative. But in terms of the health of the banks, the large number of mergers has come about for a variety of reasons. Equals are merging to gain some economies of scale, to keep their branches open and things like that, so it’s not necessarily a negative for the community or for the banks, either.”

The 2008-2009 financial crisis and recession resulted in weakened banks being rescued from collapse through mergers with stronger financial institutions.

By contrast, today’s M&A surge is partly the result of a strengthening national and regional economy, says Bruce Whitehurst, president and CEO of the Virginia Bankers Association.

“In the last year or two, the environment has become a lot more favorable for banks to consider merging because bank performance has been better, bank stocks are trading at higher levels, the currency of the buyer has gotten stronger, the attractiveness of the potential seller has gotten greater,” he says.

In explaining their need to rapidly increase in size, some banks have cited the heavy costs of federal regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act and consumers’ ongoing demands for increasingly sophisticated banking technology platforms. But something more basic may be even more important in spurring M&A activity, Whitehurst says.

“It comes down to the decision by these two institutions that the sum of the parts is greater than their individual parts, and both will have a greater opportunity to perform,” he says. “At the end of the day they are in the business of performing for the sake of their shareholders.”

Redefining the model
The $350 million Bank of Botetourt, which serves customers along the Interstate 81 corridor between Lexington and Roanoke, has seen a tenfold increase in assets without a single merger or acquisition. G. Lyn Hayth III, the bank’s president and CEO, says mergers aren’t right for every bank.

“If you open a bank in a high-growth market, like Northern Virginia or Tidewater, you have to have a large branch network,” he says. “You serve the community where there’s money to be made. We are all for-profit … You need to go to markets where you make money.”

Still unsettled is the question of whether multimillion- and multibillion- dollar acquisitions and expansions across state lines change the definition of community banking.

“I do think [the definition of community banking] is evolving, but not necessarily because of M&A,” says Yeakel of the VACB. 

“Community banking is a business model, not necessarily an asset size. It’s a way of doing business … We see community banking as localized decision making, fairly easy access to top management, nimbleness in decision making, flexibility, a real deep-rooted knowledge of local areas, expertise in small business and limited investments … Is that still the case? I think so. I really do.”

Union, according to Asbury, is still evaluating what it plans to do with its offices in Maryland, but it plans to use the Xenith offices in North Carolina to substantially increase its commercial lending business in the region around Raleigh.

Asbury thinks it is possible to grow and serve larger commercial clients while retaining the community banking skill set that made Union successful.

The merger will create a bank with “the greater capabilities in reach and resources of a regional bank while maintaining our community banking DNA, which is how people feel when they bank with us and how we respond to them. That’s our strategy. We never want to give that up,” he says.

Crossing the (state) line
On a much smaller scale, Jay Stafford, president of the $570 million Benchmark Community Bank in Lunenburg County, faces similar questions.

Stafford says some of his shareholders have asked him whether the company’s growing investments in nearby North Carolina are coming at the expense of the companies and small towns that the bank serves in Southern Virginia.

In recent years, Benchmark gained many new customers across its six-county service area after cost-cutting larger banks closed their branches. Low loan demand locally spurred the bank to open loan offices in Wake Forest and Henderson, N.C., where economic activity is greater.

“What I tell folks in our shareholder meeting is this: This is our home base … We’re going to take care of you, no problem,” he says. “The thing is: We make all the loans we can up here in Virginia, and we still have excess money … We’ve just taken excess money here and put it to work someplace else.”