"Who knows what the magic number is? A billion, $1.5 billion, $750 million?" said Ronald Paul, chairman of Eagle Bancorp, parent of the second-largest Maryland-based bank, with $2.96 billion in assets. "I can tell you it is getting harder and harder for the smaller bank."
These challenges have prompted some in the banking world to suggest that institutions must have at least $1 billion in assets to easily absorb these costs, remain profitable and, ultimately, keep investors happy.
About 80 banks have headquarters in Maryland, but only five have hit the billion-dollar mark. That has triggered speculation that Maryland, like other states, might be headed for a wave of mergers.
The vast majority of Maryland's banks have less than $500 million in assets, and that's where most of the consolidation will occur, said Anita G. Newcomb, a Columbia-based banking consultant. Newcomb said banks — unless they are in a rural area with little competition — must have around $500 million in assets or they will find it increasingly difficult to compete.
But for a bank of any size to "thrive in the next decade, they have to be really good at something," she said. "They have to separate themselves from the pack in some form or fashion."
Newcomb predicted that Maryland, following the national trend, could have one-third fewer banks with headquarters in the state a decade from now.
Consolidation is happening already.
The parent of Sandy Spring Bank of Olney, the state's largest institution with $3.88 billion in assets, completed the acquisition earlier this year of CommerceFirst Bancorp of Annapolis, which had $205 million in assets.
The parent companies of Bay Bank of Lutherville, with $128 million in assets, and Columbia's Carrollton Bank, with $379 million in assets, are awaiting regulatory approval to merge.
Pennsylvania-based F.N.B. Corp., with nearly $12 billion in assets, announced in October that it would acquire Annapolis Bancorp in Anne Arundel County, which has $437 million in assets.
Last month, Baltimore's Kopernik Federal Bank and Hull Federal Savings Bank completed their merger, creating a two-office bank with about $67 million in assets.
And when Old Line Bancshares concludes its acquisition of the parent company of Washington Savings Bank next year, the Bowie-based company will have more than $1.2 billion in assets. Old Line completed a merger last year with Maryland Bank and Trust, which increased Old Line's assets by about 70 percent.
"It's true that the community banks have to get larger to generate more income to pay for the additional expense of the regulatory burden, which is significant," said James W. Cornelsen, Old Line's president and CEO. But that, he added, wasn't Old Line's merger motive.
"We don't have a need to get bigger to deal with ongoing regulations and the cost of complying," Cornelsen said.
Old Line pursued these deals because they enhance the company in other ways beyond increasing assets, he said. With Washington Savings Bank, for example, Old Line gains a mortgage origination division.
More acquisitions could be in Old Line's future, Cornelsen said.
Carrollton Bancshares, which will be the holding company for Bay Bank, plans to grow partly through acquisitions. Carrollton President Bob Altieri said $1 billion in assets might be too low for banks to achieve the necessary economies of scale.
Not everyone agrees, with some arguing that well-managed small banks that serve their communities and have other factors in their favor can thrive.
"Size is the wrong metric," said Kathleen Murphy, president of the Maryland Bankers Association. "Nothing says if you are a billion-dollar bank you will be more successful than a $100 million bank."
But Murphy acknowledged that it is harder for smaller banks to deal with increasing regulations and that some have told her they are thinking of finding a partner.
Newcomb said that after one more year of low-interest rates dampening profits at their banks, shareholders and boards of directors likely will clamor for mergers, and the pace of deals could start to pick up late next year. She advises banks to begin conversations now that could lead to a marriage down the road.
"It's like dating," she said. "Get to know each other."
The parent of Frederick County Bank, with nearly $312 million in assets, is among those having such conversations.
"People are talking to each other," said Marty Lapera, president and CEO of Frederick County Bancorp. "A lot of them are banks that have been around for a long time that two or three years ago would never have thought about doing anything."
Traditionally, these banks have been able to remain independent because they were highly profitable and provided a good return for shareholders, Lapera said. But that has changed since the 2007 recession and the financial crisis that followed, which continues to dog the economic recovery.
"We have seen the writing on the wall," Lapera said. "We talk to a lot of different banks. We think this is a unique environment where a merger of equals makes sense."
Not all banks have the urge to merge.
Rick Miller, president of Woodsboro Bank, with $231 million in assets, said a bank doesn't necessarily need $1 billion in assets.
"There's a little more to it than a simple mathematical formula," said Miller, adding that a bank's market and structure play roles in its viability.
Investors in newer banks expect the institution to reach a critical mass and then sell at a profit, Miller said. But Woodsboro, a 113-year-old bank in Frederick County that is not publicly traded, has shareholders who inherited their stock from parents and grandparents. And they remain steadfast even though the bank gradually reduced its quarterly dividend from 31 cents per share in 2008 to 3 cents this year, he said.
It's not that Woodsboro is immune to the pressures today on smaller banks, Miller said, but the bank expects to remain independent.
"Our shareholder base is more understanding about the fact that at least until things change in the economy, that dividends aren't going to be quite what they were in the past," he said. "Our shareholders are in it for the long term."
Another indication of the stress community banks are under these days is the lack of startups, said banking consultant Bert Ely. No new banks were chartered in 2011 or the first half of 2012, according to the Federal Deposit Insurance Corp.
"If there is an unwillingness to get into the business, that says it's a tough business for those already in it," Ely said.
Maryland has seen a flurry of mergers before. A decade ago, the state had 139 banks based here, with 20 of them separately chartered affiliates of Mercantile-Safe Deposit & Trust Co., according to the Maryland Bankers Association.
Back then, the three biggest — Allfirst Bank, Provident Bank of Maryland and Mercantile — had their headquarters in Baltimore. The trio sold to larger out-of-state competitors.
"What we are going to see is continuing consolidation in the banking industry," Ely said.
But he adds that $1 billion is an arbitrary number, and not all small banks will have to merge.
"If a community bank is having profitability problems, and a lot of them have, they have to be open" to consolidation, Ely said. "It pains me to say this — community banks are very important to this economy — at the same time, they have to be realistic."