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Community banks fight to keep their niche

So far this month, BlueRidge Bank has opened a new location in Towson — its first outside of Frederick — and named an executive to make inroads into Washington County with the goal of opening a branch there as well.

The moves are a rarity given the state of the banking industry, which has been hindered by increased regulation, lower loan demand and fallout from the housing crisis.

But community banks like BlueRidge, which opened in 2008, remain optimistic that customers will continue to turn to institutions that are rooted in the community, where decisions on things like mortgages and loans are made by people familiar with the community.

“There’s a tremendous need out there for a very hands-on, local approach to decision making,” said BlueRidge CEO J. Brian Gaeng. “Our business model is a high-service one, and our bank employees have an average of 30 years’ experience in the business.”

A rarity in the current state of the banking industry, BlueRidge expanded into new territory without making an acquisition. The bank also has designs to expand further with a western push into Washington County in the near future, Gaeng said.

The number of state-based community banks has dropped over the years, with most of the casualties coming by way of consolidation, acquisition and even closure by regulators. The banking industry in Maryland is dominated by larger, regional banks headquartered out of state. The top five banks in the state have more than 50 percent of the market share, based on total deposits.

“It seems like, in banking, Baltimore has been a branch town for a while,” said Gary Rever, CEO of Towson-based CFG Community Bank.

Nonetheless, the banks that have weathered the recession, mortgage woes and changes in the regulatory atmosphere remain optimistic and have been aggressive about increasing deposits and bringing in new loans.

“There is still demand and a lot of opportunities for smaller banks that are locally owned and know the communities,” Rever said.

CFG Community Bank is a three-branch commercial bank headquartered in Towson. The bank has $517 million in assets, up from $397.8 million in 2010. CFG also saw its total deposits climb — 24 percent year-to-year with $462 million as of June 30, compared to $352 million in 2010.

‘Difficult at best’

Unlike the newer BlueRidge Bank, Fairmount Bank was founded in 1879 when 29 Eastern European immigrants met on the second floor of a Baltimore bar and collected the $34 that became the bank’s first deposit. The bank’s books were kept in Czech until 1948.

Today, headquartered in Rosedale, the bank is publicly traded on the Over the Counter Bulletin Board and recently completed its acquisition of Fullerton Bank, giving it a second branch and $8.9 million in total assets.

“There are an awful lot of challenges with the current economic environment,” said President Joseph Solomon. “It’s difficult at best.”

Difficult, but not impossible.

“We have been able to grow even in these tough economic times,” Solomon said. “We’re very pleased with our performance — we’re profitable, well-capitalized and continue to earn profits in today’s regulatory and economic conditions. And that is because we’ve stuck to our strength, which is making loans in our community.”

Smaller banks that concentrate on one kind of lending, such as real estate lending, or in one specific area run the risks that lack of diversification can bring.

R. Michael Menzies, CEO of Easton Bank and Trust Company and past chairman of the Independent Community Bankers of America, said the last few years have been difficult for the bank as a real estate lender on the Eastern Shore.

“If the community is having economic trouble, then the bank will as well,” Menzies said. “That’s just the way it is.”

As a reaction to the troubles in real estate loans, federal and state regulators have been increasingly vigilant about making sure banks have enough cash on hand to cover bad loans. In Maryland, 19 banks are operating under severe regulator enforcement actions, mostly over capital concerns.

“This is probably the least favorable regulatory environment to be in,” said Bryce Rowe, an analyst with Robert W. Baird & Co. Inc. in Milwaukee, who watches the community banking sector. “It’s very, very difficult for banks, and it’s not likely to get better anytime soon.”

One change that benefited smaller banks is the Federal Deposit Insurance Corp.’s new formula for determining how much institutions pay for deposit insurance the government guarantees to protect deposits of up to $250,000. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the FDIC, starting this year, based fees on average consolidated total assets as opposed to one on total domestic deposits.

The change brings in more from larger institutions which have higher assets in investment than from smaller banks whose assets might hew closer to the amount of deposits they have.

“It saved us a fortune,” Menzies said of the change. “It saved all but four banks in Maryland a significant amount of money. And, in our case that savings meant two jobs we were able to keep.”

Looking ahead

On one positive note, community banks are seeing a continued uptick in deposits as people skittish about investing have been socking away money instead. And, with some high-visibility blunders from larger banks such as Bank of America trying to impose unpopular fees, there has been an increase in “bank local” sentiment among consumers.

“The community banks are seeing an influx of deposits because people are seeing the value of banking local,” Menzies said. “They know their customers, they work with them and don’t just plug them into a program. They are relationship-based, not transaction-based.”

Easton Bank and Trust reported total deposits of $138.4 million as of the end of June. This was an increase of $383,000 from June 2010 and $1.44 million from June 2009.

Yet with all of the challenges facing community banks, there has been a dearth of new entries into the industry. In Maryland, only one bank — BlueRidge Bank — has started from scratch since 2008. In Baltimore, Bay Bank is a new holding company formed last year to take over the assets of Bay National Bank, which failed in July 2010.

Thomas Murphy, president of community banking for EagleBank, which started in 1998 and has grown to become the third-largest bank headquartered in the state, said that trend is unlikely to change.

“It’s a tough time for a new bank to start up for sure, and I’m glad we were able to start a community bank when we did,” Murphy said. “I’m not sure if I’d have that same comfort with one starting in the last few years.”

Rowe said that in Maryland and across the country, there were just too many banks and not enough loan demand for them all to be profitable. As a result, he said he is expecting the number of banks to continue to decline.

“I wouldn’t be surprised to see the number of banks out there cut in half in a relatively short period of time,” Rowe said. “There’s likely to be a lot of consolidation.”

Nonetheless, most observers believe there will always be a niche to fill for smaller, community-based banks in the state.

“I’ve heard people joke that community banks are kind of like cockroaches in that they’re not going to go away,” Menzies said. “There’s always going to be need for community banks.”

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