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Plight of the Community Banks

Small institutions take a stand against big regulation

jason raish illustration

During an era when just about anyone with a bank account understands the meaning of “too big to fail,” giant banking corporations are everyday stuff. Their names loom large in business districts ranging from urban centers to rural communities, where tiny banking institutions once were the norm.

In the early 1980s, when names like Chase and Bank of America were but slivers of their eventual monolithic selves, many owners of small banks fretted that expansion by the big names represented the beginning of the end. Homespun “community banks,” they warned, would one day exist only in memory.

Decades later, community bankers are still sounding alarms.

“The decline in community banking is a troubling trend for the economy as a whole, but particularly for small businesses,” New Orleans banking executive Guy Williams said in May.

The CEO of Gulf Coast Bank and Trust Co., Williams made the comment during a news conference in which a University of New Orleans researcher released a study of banking trends that shows community banks in a state of decline.

Consolidation in the banking industry at large during the past 20 years sharply reduced the number of institutions operating in the United States and hit the community bank sector disproportionately hard, UNO Professor Kabir Hassan reported. The total number of small banks shrunk during that period by more than 50 percent, while the ranks of larger institutions decreased by about 18 percent.

The merger wave not only cleared many small-institution names from Louisiana’s banking landscape, but also swept bigger companies, including Hibernia, First National Bank of Commerce and the venerable Whitney National Bank, off the map.

In greater New Orleans today, national giants Capital One and JPMorgan Chase Bank hold more than 45 percent of all bank deposits, according to the Federal Deposit Insurance Corp.

Meanwhile, only a handful of Louisiana-based institutions – including IberiaBank Corp. and First NBC Bank Holding Co., with more than $12 billion and $3 billion, respectively – exceed the size benchmark of $1 billion in assets that the UNO study used to define community banks.

“Community banks have been getting the short end of the stick in the financial sector, and it’s only gotten worse since the financial crisis and megabank bailouts,” U.S. Sen. David Vitter, who chairs the Senate Small Business and Entrepreneurship Committee, said at the press conference.

This wave of worry among community bankers stems from growing regulatory pressures. Vitter’s reference to the financial crisis and bailouts of 2008-’09 was apt. It is in the wake of those events that federal regulators have sought new ways of preventing bankers from repeating mistakes of the past.

The federal government has heaped layer after layer of new laws on banks. Whether any of it will keep bankers from making stupid lending decisions remains to be seen. But what’s clear is that complying with all the regulations is costly.

In order to document that they’re following the letter and intent of every banking law, large institutions today employ legions of auditors and compliance officers who monitor every aspect of banking activity.

Not surprisingly, the burden of regulatory compliance is hitting community bankers particularly hard. Less able to bear the costs of hiring additional staff to deal with the regulations, many owners of small banks are putting their institutions up for sale.

The trend is one that Virginia-based banking industry Gregory Feldmann focused on in predicting last year that consolidation among banking institutions will sharply pare the ranks of small lenders. While politicians continue to debate the evils of “too big to fail,” he says, the corollary question is whether some banks are “too small to thrive.”

In comments he made last fall, Feldmann said the United States could see 300 bank mergers annually in the near term, with as many as 2,000 institution names vanishing during the next five to seven years.

More than a half-dozen mergers were completed or announced in Louisiana during the past year, according to the state Office of Financial Institutions.

Veteran New Orleans banker Kyle Waters, a former executive of Hibernia and of Omni Bank before it merged into IberiaBank, recently gave an indication of the action ahead.

Waters and a few of his colleagues formed a new consulting business whose sole purpose is to provide evaluation services to small banks that are seeking buyers and to institutions that are looking to grow by acquiring smaller ones.

He predicted that merger activity will pick up in Louisiana and along the Gulf Coast.

Meanwhile, longtime supporters of community banks hope to focus public attention on the value of such institutions to local residents and to small business development and growth.

Gulf Coast Bank and Trust Co.’s Williams urged that community bank supporters write letters to lawmakers demanding regulatory relief for small institutions.

“It is imperative that industry regulations take into account the vital role of community banks in the U.S. economy so that we can get back on the right track,” he said.
In the era of “too big to fail,” the question remains if community banks are too small to survive.
 


Against the Odds

Here are some key points from the recent University of New Orleans study entitled “National and Regional Trends in Community Banking,” by Kabir Hassan:
Average return on assets for community banks declined 8 percent, while that of larger banks grew by 10 percent.
Average net income for larger banks outpaced that of community banks by 292 percent.
The rate of asset growth in community banks was 220 percent less than in larger institutions.


 

 

 

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