Community banks are still regaining their footing, but a little-known provision in the Dodd-Frank Act could help them find opportunities once they are ready to grow again.
The law eliminated barriers to de novo interstate branching, letting banks open offices in 25 states that had once been off-limits. In an environment where growth will be challenging, the law gives banks, especially those along state borders, a way to court new business.
"It opens up a market that otherwise might not have had a market," Philip Smith, the president of Gerrish McCreary Smith, a law firm in Memphis, Tenn., said of the provision. "We no longer have imaginary lines. We can simply go where the business is."
Before the change, only thrifts were allowed to open branches anywhere outside their home states. About half the states had reciprocal agreements permitting such branching. Other states, such as Arizona, New Mexico, Arkansas, Mississippi, Georgia, Florida and New Jersey, were even more limiting, requiring banks to first buy charters to cross state lines.
"It was harder for community banks to actually follow their customers," said Buz Gorman, the general counsel at the Conference of State Bank Supervisors, which backed the measure. "Whereas the big banks tended to buy market share anyway; they didn't tend to open de novo branches."
Gorman said state-regulated banks were at a particular disadvantage, because national banks were given more leeway to set up branchlike operations, such as a loan production offices, deposit-gathering sites or automated teller machines staffed with employees, in other states.
Under the new rules, a state must allow an out-of-state bank to open a branch, to the same extent that it would allow its own state-chartered banks to open branches.
Industry observers said the provision will be most appealing to banks along state lines, especially near cities such as Memphis; St. Louis; or Savannah, Ga.
Those banks often have a tougher time serving customers, who might live on one side of the border and work on the other.
"It simply allows them to compete in whatever the relevant market is," Smith said. "If that happens to be five miles down the road in a higher growth area, but it happens to be over state lines, so be it."
CoastalStates Bank in Hilton Head, S.C., has always been interested in expanding into Savannah, Randy Dolyniuk, the $405.2 million-asset company's chief executive, said in an interview this week.
Although the demographics in its home county are strong, Savannah — just 33 miles away — is an economic hub with about $4.6 billion of deposits and 7,700 businesses. Opening new branches there was not an option, until now.
"The national banks had a little bit easier time than state banks have had, so we as state banks have always said, 'Give us the same rights as everyone else,' " Dolyniuk said. "I think the Dodd-Frank bill has definitely made some parity in getting everyone on the same playing field."
Industry observers said it could take time before banks flood regulators with applications.
While advisers say they have heard from clients inquiring about the details, few are seriously thinking about de novo branching just yet.
"Branching has kind of fallen by the wayside, any kind of branching," said Randy Dennis, the president of DD&F Consulting in Little Rock, Ark.
In many of the states where interstate branching impediments were lifted, opportunities to bid on failed banks or buy a struggling bank are still more attractive than investing in a brick-and-mortar operation.
Others simply won't be able to get regulatory approval for a revised business plan — a requirement for a bank that wants to pursue interstate branching, said James Wheeler, a partner at Morris, Manning & Martin in Atlanta.
Others still may be uncertain about what the provision actually allows, Smith said. He said some bankers are still skeptical that the new rules won't put them at a disadvantage.
"It's going to take in my opinion probably one of the big players or somebody using that power to do something," Smith said. "I think once we hear the first banks doing that and being successful, we'll see more of that developing."