Small Bank Competitiveness Following Financial Reforms

Well into the first quarter of this year, Alabama banks are grappling with a continuing slow economy and a barrage of regulations rising from the rubble of the 2008 financial crisis. Banks everywhere are under pressure in an ever-changing marketplace, but the general perception is that these days are toughest on the smaller community banks — defined by the FDIC as those with assets under $1 billion.

That includes most of the 115 banks with headquarters in Alabama that must compete with the big boys at the top. At the end of 2012, the four largest banks held 89 percent of the industry’s assets in Alabama and 88 percent of the deposits. The two largest, Regions and  BBVA Compass, held almost $190 billion of the $218 billion in total Alabama bank assets.  What’s more, Wells Fargo is not based here but has a huge presence in Alabama by virtue of what used to be the Wachovia (SouthTrust) network, which Wells Fargo acquired in 2008.

Logic says there are advantages and disadvantages for both large and small banks.  Larger banks provide a wider array of services and have more financial clout, which allows them to price aggressively. Smaller banks tend to be concentrated in a local market where they have an advantage in building relationships.

No matter the size of the bank, however, they’ve all been deluged with new banking regulations. And there’s no question that “community banks are having a more difficult time dealing with the onslaught of regulatory/compliance issues, ” says Keith Leggett, a vice president and senior economist for the American Bankers Association in Washington, D.C.

“One thing community banks don’t have that larger banks do have is the luxury of spreading those compliance costs over a large base, so the burden associated with paying for regulatory costs falls disproportionately on smaller banks.”

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The amount of new regulations is borderline incomprehensible, and today’s bankers have never seen anything like it. The 828-page Dodd-Frank legislation required 398 new rules, all of which had to be written by various agencies. As of November, only half the new rules had been written, but they proved to be staggering in their magnitude. What’s more, Dodd-Frank required 87 studies that, when completed, might lead to even more regulations, according to a report at the Wharton School of Business at the University of Pennsylvania.

“What you’re looking at is the cumulative effect of regulations, ” Leggett says. “It isn’t any one regulation that’s overly onerous, but when you start looking at each regulation, and you add one on top of the other, that’s where the real cost comes into play for community banks. Many community banks have indicated they’re going to have to go out and hire new compliance people to deal with the regulations coming out of Dodd-Frank.”

As an example, Leggett cites new regulations that hone in on car loans that banks buy from automobile dealers. “Dodd-Frank acknowledges that the Consumer Financial Protection Bureau doesn’t have authority over auto dealers, but they’re using their authority with regard to the banks and applying fair lending laws to see if the auto dealers are engaged in discriminatory pricing, ” he says. “This is another burden being placed on banks, especially community banks.”

Another example: Part of Dodd-Frank, the Volcker Rule, was intended to address questionable proprietary trading among large banks; instead, it’s creating “collateral damage” to some community banks. “Some of the investments the community banks were holding and planning on holding until maturity now have to be divested by the middle of 2015, ” Leggett says. “This is going to hit community banks and cause some of them to see their net income drop, and this is just another regulatory blow for them.”

Elam Holley, president and CEO of Birmingham-based First Partners Bank, cites fewer layers of decision-making as to why community banks work well with small businesses.

But it’s far from doom and gloom for community banks in Alabama. “Overall, our climate for banking in Alabama is pretty good, ” says Elam Holley, president and CEO of Birmingham-based First Partners Bank, which was founded in 2007. “Very few banks here have (serious financial) issues, and most of our banks are profitable again following the recession. They might have some loan issues to work out, but they’re strong enough from a capital standpoint.”

Holley concedes that competing with larger banks is tough, but it does not preclude opportunities or success. “You hear that larger banks have advantages, but we have ways to overcome those or at least to go around them, ” Holley says. “The larger banks prefer the largest loans, but on the smaller loans we’re able to compete with them. And on the smaller loans, we’re a little bit more nimble. If you have a company or small business and you come to me today, and you’ve got a financial study or whatever it might be that I need to make a
decision, I can get you an answer tomorrow. Larger banks, especially those out-of-state, can’t do that. They have a lot more layers to go through, and it makes quick answers more difficult.”

Larger banks are generally believed to have an advantage in the technology area, especially in mobile and online banking. But Holley doesn’t buy that. “I have online banking, and mine is a good as theirs, ” he says. “I could already have mobile banking, but I wanted to wait and make sure all the bugs are worked out, and I wanted to see what the regulators might impose. We’re coming out with mobile banking in May, and it will do everything the larger banks’ will do.”

Says Chris Sawyer, president of the Peoples Bank of Alabama in Cullman: “Yes, the larger banks can scale their ebanking and technology investments over a larger footprint and customer base and thus their advantage is that they will be first to market with new ebanking initiatives.

“But our philosophy is to match the ‘new’ ebanking offer around the time that the regionals begin a large marketing campaign. That educates everyone’s customers and saves us a lot of money.”

Holley also downplays the importance of branch and ATM networks. “I have a large ATM network, ” he says. “My customers can use any ATM anywhere, and I don’t charge them. They don’t pay anything. I eat the fee because it’s important to me. I think we’ve been able to compete effectively. I don’t have a branch on every corner, either, but that’s not my customer base. My customer base is small businesses.”

Bibb Lamar, CEO of ServisFirst Bank in Mobile, says larger banks might have more locations and large advertising budgets that provide opportunities for them to do things en masse — which community banks normally don’t do. But smaller banks, Lamar says, are better situated to emphasize the importance of relationships.  “I think you could say a larger bank’s size is as much a disadvantage as it is an advantage, ” he says.

Lamar and others say it is not a matter of large banks vs. small banks. “I think our biggest challenge is really more of an industry challenge, ” Lamar says. “We’ve all got to be part of an improving economy, and I think quality growth is at the forefront of anything you do.”

Looking ahead, Sawyer says his bank has invested in production and support personnel, expecting growth in commercial loans, deposits and services on the heels of calling and marketing efforts. The bank also will be pushing growth in retail checking accounts. In addition, acquisition opportunities abound because of aging senior management staffs and boards in smaller banks.

“We have built the infrastructure to expand a well-balanced model of commercial, community and ebanking, ” Sawyer says.

Leggett anticipates GDP growth of 3 percent with some increase in capital expenditures. It isn’t robust, but it’s growth. The biggest challenge for community banks is the lack of investment by small businesses, which generally remain pessimistic about the economy, he says.

“There’s the key issue of creating loan demand, ” Leggett says. “One of the biggest challenges for all banks, but particularly for community banks, is how do you generate organic growth moving forward? That’s the biggest challenge for 2014 and probably will be in 2015. The ability of management to execute and the quality of management are very important.”

“Banking is becoming more complex regardless of your bank’s size, ” Sawyer says. “The key is to accept and adapt to this complexity by investing in technology, hiring and keeping the right people and staying in compliance with new regulations while keeping things simple for the customer.

“We believe ‘convenience’ is being redefined from a location-focused convenience to an ease-of-use convenience. How easy is it to do business with Peoples Bank of Alabama? That’s the question we focus on each and every day, and the answer will determine our success.”

Adds Lamar, who believes now is a great time to be in community banking: “The brick-and-mortar locations are not that important to the young people. They like the SmartPhone, and they like the plastic, that type of thing. It’s very important. We can bank anybody, but we have to be smart, have the technology available and have the people available to give the service. ”

Charlie Ingram is a freelance writer for Business Alabama. He lives in Birmingham.

text by Charlie Ingram • photos by Art Meripol

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