WILMINGTON, Delaware — For decades, Wilmington Trust reigned as king of community banks in Delaware.
A few years after the financial crisis, after bad real estate development loans and soured mortgage securities plays soured its balance sheet, Wilmington Trust folded into the growing footprint of Buffalo, New York-based M&T Bank.
The end of Wilmington Trust — combined with the steady acquisition of smaller competitors by big banks over the years — left a vacuum in Delaware's community banking landscape.
The void has opened opportunities for the community banks still standing and tempted an out-of-state firm to expand here.
After outlasting its longtime rival, WSFS Financial Corp. gained the status of the First State's largest community bank. But the Wilmington-based institution learned in March it would have a new challenger when Bryn Mawr Trust Co. announced it would purchase MidCoast Community Bank in a $33 million all stock deal expected to close later this year.
MidCoast held about $250 million in deposits at the time of the announcement. The merger will immediately make Bryn Mawr the third-biggest community bank in the state. Privately held Artisans' Bank is currently the second-largest with 12 branches and $412 million in deposits, according to the Federal Deposit Insurance Corp.
The purchase will give Bryn Mawr five branches in Delaware. In a recent interview, Bryn Mawr chairman and CEO Ted Peters said his bank plans to eventually open new locations, with Greenville and the Middletown areas as potential additions in the near term, and invest enough in Delaware to surpass Artisans' and compete with WSFS for community banking customers.
"We want to continue to grow in Delaware," Peters said. "We're going to be in a growth strategy in Delaware. We think Delaware is a good place to grow."
With so few community banks in the state, over time, both could lure clients away from bigger competitors, banking experts said.
Most retail customers won't bother with the hassle of switching their checking accounts, but the state's remaining community banks could poach Wilmington Trust's former commercial clientele, said Matthew C. Schultheis, who tracks the community and regional banking sector for Boenning & Scattergood, a brokerage and investment research firm.
Community banks can make a more individualized assessment of a loan and take some risks based on their knowledge of the local market — which is also precisely what got Wilmington Trust into trouble. But if done properly, it allows community banks to develop new clients, Schultheis said.
Schultheis believes WSFS is well-positioned to benefit, because it has more resources than other Delaware community banks and a home-field advantage over newcomer Bryn Mawr.
"I think Delaware is a fairly parochial state," he said. "People and companies in Delaware like to do business with people and companies in Delaware. They're not stupid. If people get offered something great from someone out of state, they'll go there. But all things equal, they'd rather work with someone they know."
In 2012, WSFS added about $45 million to its commercial loan portfolio, and total core deposits for all customers grew by $318 million.
It reflects a positive development for WSFS, but it's difficult to tell how much of those gains came from people switching banks, Schultheis said.
"We're really the only community bank of size in Delaware. But I see Delaware as very competitive," WSFS CEO Mark Turner said. "We welcome the competition. It will make us all better. But we like our position in Delaware."
But Bryn Mawr believes it can make inroads with its experience and resources in wealth management and the typical community bank staple of hands-on service.
Despite some local advantages, community banks face broader challenges in the post-credit crisis environment.
Compared to multinational financial institutions, most community banks have simple business models, said Terry Jorde, executive vice president of the Independent Community Bankers Association. They take deposits and pay customers an interest rate. They then lend that money out to other customers at a higher rate.
"And the profit they make is the difference between the two rates," Jorde said.
As market forces and the Federal Reserve have driven down interest rates, the spread between those two rates has narrowed, eating into community bank income. Even WSFS, which managed to increase its rate margin by .07 percent over the past year, experienced a drop in interest revenue in the first quarter. The bank still increased net interest income profitability with expense cuts and the release of loan reserves as credit conditions improved.
Meanwhile, Bryn Mawr's net interest margin shrank .08 percent in the first quarter, but the bank still managed to grow interest revenue and net income thanks to the acquisition of new loan portfolios.
While low rates will continue to challenge the bank in the short term, Peters said Bryn Mawr is in a good position for the future because about 30 percent of its deposits are non-interest bearing. When interest rates rise — and someday they will — Bryn Mawr will have access to more cheap capital than most banks, Peters said.
Small banks also struggle to adapt to the numerous regulatory changes following the financial crisis, Jorde said. For big banks, hiring another team of lawyers or accountants to comply with new government standards requires a small investment relative to their massive profits. Community banks have to make those same investments on much tighter budgets.
"You're trying to make a small bank do the same thing as a big bank, and when you do that, you're trying to make everything standard," Turner said. "Big banks do standard well. If everything is standard, it takes away small banks' competitive advantage."
Bryn Mawr entered into Delaware because it knew it needed to grow to remain financially strong in the future, given the rising cost of doing business for banks, Peters said.
The bank has made six acquisitions in the last five years.
With all its businesses combined, Bryn Mawr has about $2 billion in assets, compared to about $4.35 billion for WSFS.
"I think banks below a billion (in assets) are going to see that pressure," Peters said. "I think you're going to see more consolidations and acquisitions across the country in community banking."
Information from: The News Journal of Wilmington, Delaware, http://www.delawareonline.com