Frontier Days on Main Street

To Alabama’s community banks, Jesse James and his gang would be a minor annoyance compared to the obstacles and issues the banks face today.

More complicated government regulations, higher capital requirements, a lagging economy, the ever-increasing cost of technology, low interest rates, more non-banking competition and the Dodd-Frank Act all have contributed to a decline in community banks and a cessation in bank formation. 

A new report by Auburn University shows that Alabama community banks have dropped from 13th in return on assets in 2006 to 40th in the third quarter of 2015.

The Auburn study, headed by James Barth, who serves as the Lowder Eminent Scholar in Finance, surveyed all 130 banks in Alabama.

“Alabama’s overall banking ranking is not held so high with respect to return on assets, ” Barth says. “As a result of the financial crisis, the depression, the regulations imposed, higher capital requirements on banks and, as it turns out, the economy has not done as great as we would have liked to have seen it do, so there just hasn’t the been the interest in establishing new banks either in Alabama or nationwide.” 

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Michael Rediker, vice president at Porter White and Company, a Birmingham investment bank that provides financial advisory and investment management services to other banks, says, bluntly, “It’s a difficult operating environment right now.”

Community banks in rural areas, says Rediker, have trouble finding people needing loans. “Somebody with good credit is being chased by everybody and his brother, ” Rediker says.  And, Rediker says, “To make a simple mortgage loan to somebody you have been dealing with for years, you’ve got to go cut down a forest, in terms of paperwork you have to do now.”

And starting a new bank is expensive. “There is a slug of capital required, ’’ Rediker says, “and management experience is an enormous component of the calculus now. They are just not going to hand it out to somebody who is green behind the ears. They are much more judicious at handing out charters, and, in combination with far fewer people looking to start a bank as an investment proposition, you’re just not seeing it at all.”

Brad Neighbors, a partner in the Birmingham office of Balch and Bingham LLP, where his focus is on financial institutions, says, “Community banks are seeing a lot of increased competition, and not only from the larger commercial banks that may offer some more advanced products and services, but also from non-bank financial services providers such as credit unions, finance companies and brokerage firms, and I think that is one of the reasons people may not be as ready to get into starting a community bank. It is a lot more difficult nowadays to be successful, but it could certainly be done.”

There also is the old Baby Boomer versus Millennials question. “The Baby Boomers are more inclined to go in a bank to see somebody in person, ” Rediker says. “But are Millennials going to use brick and mortar banks?”  

The increased cost of regulations now imposed on community banks, Barth says, “is really an impediment to anyone wanting to get into banking today. And it is not only the regulatory costs but the regulations themselves make it harder for the smaller banks, the community banks, to make a decent profit.

“Some of the banks find now that what they have to do, they have to hire one or more persons simply to deal with the regulatory costs, and that person isn’t taking in deposits or making loans, so it adds to the cost but it doesn’t add to the revenue line of the bank.”

Another overhead cost that doesn’t add to the bottom line is the cost of making sure the bank is safe from cyber attack.

“Banks are very concerned about cyber-security type issues, ” Barth says. “A small bank doesn’t want to find that someone has broken into the bank’s computers and stolen all of the customer information. If that were to happen, people would get upset and quickly decide to move to a different bank. Some banks have to hire a dedicated person just to deal with cyber-security issues and again, that person is not going to be making loans and greeting customers when they come into the bank. They are going to be in a back room trying to make sure that all the customer information is fully secure.”

Another issue, Barth says, is the competition in the non-banking financial area from business like Amazon and PayPal, and, while community banks will stay around, there will be fewer.

He expects bank numbers to fall because of mergers and acquisitions and shrinking populations in small communities.

“Community banks still need to make it about personal services, ” Rediker says.  “At the end of the day, that’s their bread and butter, they have to deliver that. The loan officer that knows your name, knows your children, knows your hobbies, it’s not going to be a different person six months down the road. As we move to a more digital world, the banks that can deliver personalized service will still prosper.” 

And, Rediker says, more mergers and acquisitions are likely on the horizon. “I can tell you anecdotally that people are talking. It hasn’t translated into a lot of deal making in Alabama, but people are starting to talk.”

Mergers, he believes, are often the best way forward, rather than acquisition.

“If you join forces with somebody who has complementary operating teams and philosophies and if it all makes sense, you can start to get scale and you can take on these regulatory issues and start doing it cost-effectively.

“There are challenges that lie ahead, but I think those that can adapt, provide good customer service and be forward thinking, there is no reason they can’t prosper.”

Bill Gerdes and Joe De Sciose are freelance contributors to Business Alabama. Gerdes is based in McCalla, De Sciose in Birmingham.


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