Are Community Banks Still Relevant?

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Are Community Banks Still Relevant? The commonly-accepted definition of a community bank is one with less than $10 billion in total assets. Moreover, the typical community bank has a limited number of branches within a relatively small geographic area. According to data compiled by SNL Financial, these smaller banks made more than 75% of all consumer loans in 1990, but less than 9% in 2014. Large banks have taken the lion's share of that business, and now online lenders such as Lending Club are becoming fierce competitors for this business.

Alliance With Lending Club: BankNewport is a 200-year-old mutually-owned institution with 15 branches in Rhode Island, centered on the famed old oceanside resort town of Newport, best known for the lavish summer mansions (ironically called "cottages') that America's wealthiest families built there in the late 19th century. Its own asset base, $1.3 billion, is at the low end of the spectrum for community banks. In order to re-enter the unsecured consumer lending business that it ceded many years ago to larger rivals, in February 2015 BankNewport announced an alliance with Lending Club, an online rival.

The bank has turned its client list over to Lending Club, which will solicit their business via direct mail. The bank, in return, will receive a portion of the revenues that result from any loans that result from this solicitation. Lending Club typically charges a loan origination fee of about 4%, of which a mere 0.5% will go to BankNewport.

However, the bank does virtually no auto, student or unsecured personal loans, its chief lending officer notes, since it cannot compete with larger rivals on price (i.e., the interest rate and fees charged to customers). Lending Club, meanwhile, originated $4.38 billion of consumer loans in 2014 and turned public in a December 2014 initial public offering (IPO) of stock.

In areas where BankNewport does compete, most notably in residential mortgage lending, the agreement with Lending Club prohibits the latter from soliciting business from its clients. Nonetheless, BankNewport recognizes that it runs the risk of losing clients to online banking alternatives as a result of introducing its clients to this online competitor.

This deal is similar to ones struck by Lending Club with over 200 other community banks, under the guidance of BancAlliance, an association based in Maryland. BancAlliance assists these small banks in banding together to offer products and services on a cooperative basis that they otherwise, because of their small scale, could not offer individually.

Meanwhile, BankNewport is buying $25 million worth of loans from Lending Club, in increments of $1.5 million per month. This loan portfolio is projected to earn BankNewport more than 6% per annum.

Other Viewpoints: The vice president of economics and statistics at the Credit Union National Association, an industry group representing the interests of credit unions, is skeptical of alliances such as that between community banks and Lending Club. That group, accordingly, is not looking to forge deals of this sort.

By contrast, a securities analyst at FIG Partners (a brokerage firm specializing in the community bank sector) quoted in the below-mentioned article observes that, since community banks are losing business daily, they have little choice but to make themselves relevant by offering choices to their clients, through whatever means necessary.

Source: "Lending Club's Unlikely Partners: Smaller Banks," The Wall Street Journal, June 23, 2015.