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Battling Against the Big Guys: State Bancorp CEO Q&A

NEW YORK ( TheStreet) -- Thomas O'Brien -- president and CEO of State Bancorp (STBC) of Jericho, New York -- told TheStreet in an exclusive interview Wednesday about the challenges that led to his company's decision to merge with Valley National Bancorp (VLY - Get Report).

Valley National of Wayne, N.J. in April agreed to acquire State Bancorp in an exchange of shares valued at $222 million. SNL Financial said the deal's value was 1.9 times State Bancorp's book value, which is a healthy premium in the current environment for bank mergers.

State Bancorp president and CEO Thomas M. O'Brien.

State Bancorp's market area of Nassau and Suffolk Counties on Long Island is dominated by JPMorgan Chase (JPM - Get Report), Capital One (COF - Get Report) and Citigroup (C - Get Report), which had a combined 47% deposit market share as of June 30, 2010, according to the Federal Deposit Insurance Corp. The local institution with the largest market share in the two counties was Astoria Federal Savings -- the main subsidiary of Astoria Financial (AF - Get Report) of Lake Success -- with 8.5% of deposits, for the fourth-place market share.

Bank of America (BAC - Get Report) placed fifth, with a 6% market share, and State Bancorp's main subsidiary State Bank of Long Island was in 15th place with a 1.4% deposit market share.

In an interview with TheStreet, O'Brien discussed the challenges for community banks trying to make a decent return in the evolving regulatory environment, and the opportunities for the combed Valley National and State Bancorp on Long Island.

TheStreet: What size will a community bank need to reach, in order to remain viable?

Thomas O'Brien: A community bank's critical size will be a function of location. Consequently, in the metro area I think $5 billion in today's dollars probably gives one critical mass.

Perhaps in more rural areas of the U.S., with lower cost of living, the number might be $1 billion. Keep in mind that this is all a function of net-interest margin generating net revenue sufficient to cover operating costs and generate capital. Capital requirements are moving higher and shareholder returns are moving lower.

Smaller banks will struggle to attract capital and sustain valuations that support their balance sheets.

Community banks will continue to have a place but the number will decline and the more classic size expectation of "community" will likely move to larger size.

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