Daily Management Review

Do American community banks have a chance?


A few weeks ago, Standard Financial, a bank with assets of $ 488 million and only nine branches, merged with Allegheny Valley Bancorp, an even smaller neighbor in the suburbs of Pittsburgh. The main reason for the merger, explains Standard’s director Tim Zimmerman, is the increased cost of regulation, although the competition with the PNC-based financial giant with assets of more than $ 371 billion has also played a role.

"Without the exhausting regulation that emerged after the crisis," Zimmerman asserts, "we would most likely work separately."

Standard is one of the 5,400 "community" banks of America: funded primarily by deposits, regional lenders are proud of the knowledge of their region (usually 1 to 3 counties) and personal contact with each client.

Their assets can reach $ 10 billion, but the majority is much smaller: more than 5,000 banks and savings institutions have less than $ 1 billion, and over 1,500 stop well short of $ 100 million. They make up 92% of federally insured banks.

Although "local" banks issue only 16% of all loans, they account for up to 43% of loans to small businesses.

However, the number of these banks is steadily declining, having shrunk by about a third over the last decade. More than 400 went bankrupt in the period from 2008 to 2012. Only four new banks have opened since then.

At the same time, four institutions are disappearing every week: the majority, like Allegheny Valley, joins with other financial organizations.

Despite the reduction, community banks continue to be active lobbyists. Their interests in Washington are defended by the Independent Community Bankers of America - ICBA.

Recently, Donald Trump met with their representatives in the White House. Calling them "the backbone of America's small business", the president promised to drastically reduce regulation and even cancel the law of Dodd-Frank, unloved by bankers, from 2010.

Regulation, especially mortgage lending, is the main irritant of regional bankers. Preston Kennedy, the head of the Louisiana Bank of Zachary (with assets of $ 250 million), complains that he had to increase his mortgage department from three to six people in the past five years, as well as to appoint a separate leader there.

According to Zimmerman, the process of issuing a mortgage loan has become extremely confusing and bureaucratic.

So, the borrower must sign or initialize in a typical mortgage contract in 30 places. Going through all the necessary documents will take at least a few hours, although reading even one of them can boil the brain.

It was expected that this would help clients take a more balanced decision (after the catastrophic pre-crisis boom of subprime lending), but few believe it.

Despite this, the business model of "local" banks demonstrates good results.

Over the past 12 months, according to the Federal Deposit Insurance Corporation (FDIC), the loan portfolio of community banks increased by 7.7%, which is twice as large as that of larger competitors. Net income grew by 10.4% compared to 12.7% for the whole sector. The profitability of capital was 9.2%, which is slightly below the average, notes the British magazine The Economist.

Nevertheless, fixed regulatory costs are more difficult to transfer to smaller banks than large financial institutions. Local banks also need to overcome other problems, such as the costs of providing online services, cybersecurity, succession planning, finding and retaining skilled workers, and the declining margin between lending and borrowing.

Minister of Finance Steven Mnuchin in the near future should present to Trump a report on what rules should be reviewed or even abolished.

In May, the ICBA welcomed decision of the House Financial Services Committee to approve a bill to simplify the procedure for approving a mortgage loan, although the document may still be stuck in the Senate. However, Head of Texan ValueBank, Scott Heitkamp believes that the wind of change has already blew in Washington.

source: economist.com