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Consolidation of community banks causes headaches for bankers' banks

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Consolidation of community banks causes headaches for bankers' banks

As the number of community banks continues to shrink, bankers' banks are finding it difficult to keep customers.

In late 2018, Maryland Financial Bank, a Towson, Md.-based bankers' bank, was reported to have plans to voluntarily dissolve in 2019, subject to regulatory approval. The bank's balance sheet has been shrinking for the past three to four years, according to Chairman Richard Hook IV. The bank's main business line was buying loans from smaller banks, allowing the banks to not exceed their legal lending limits, according to Hook. But as small banks are acquired by larger banks, they end up repurchasing the loans from Maryland Financial.

"Our customers have basically disappeared with the consolidations in the industry," he said.

Bankers' banks serve community banks, buying and selling loan participations, lending money to officers, directors and employees of community banks, and providing consulting services such as loan reviews. However, the number of community banks has dropped about 35% in the last 10 years, reducing bankers' banks' income.

According to S&P Global Market Intelligence data, there are 12 bankers' banks currently in operation. For Sept. 30, 2018, these 12 banks had a median return on average assets of 0.81%, 35 basis points lower than the median for all U.S. banks and thrifts.

Jonathan Hightower, a partner at law firm Bryan Cave Leighton Paisner LLP, said that correspondent banking divisions at regional and larger banks have been able to profitably provide the same services as bankers' banks, driving down the need for bankers' banks.

Since the financial crisis, banks are also more wary of doing loan participations through bankers' banks that are outside of the local community. "Many, many banks [got] burned by buying out-of-market loan participations. They would much rather participate with a bank they know well in their local community where maybe they've got more familiarity and expertise with the credit," said Hightower.

Although Hightower thinks the remaining bankers' banks will survive and are doing good business, he said he doubts new bankers' banks will open. "I don't see a need for new bankers' banks to start up ... larger and regional banks with correspondent divisions are doing a really nice job serving that area, so I think that need is largely satisfied now."

Facing shrinking demand pool and increased competition from correspondent banks, Maryland Financial considered additional consulting services and loan review, but found the investment in new product offerings too costly. The bank tried to sell, but its deal with MFB Acquisition Corp. was terminated by the bank as it was taking too long to complete. The board decided the "realistic course" was to dissolve the bank, said Hook, the Maryland Financial chairman.

"This was a community bank that had lost its community," said Hightower.