December 1, 2011

Fewer small banks in state

There are fewer banks in Kansas today than there were five years ago, and the decline is especially notable among the state’s smallest banks.

There are fewer banks in Kansas today than there were five years ago, and the decline is especially notable among the state’s smallest banks.

According to an analysis by The Eagle of Federal Deposit Insurance Corp. data, there are 49 fewer Kansas banks with less than $100 million in assets than in 2007. At the same time, the number of banks with more than $100 million in assets increased by 13.

The decline in smaller banks and increase in bigger banks can be partly explained by some banks that were successful at growing their assets during the period and crossing the $100 million asset threshold.

But that doesn’t account for the fact that in that five-year period, the total number of Kansas banks fell by 36, from 356 to 320. Nearly all of the banks that disappeared did so as a result of acquisition, bankers and experts said.

The decline of small banks is a trend that both bankers and industry experts said is likely to continue into the foreseeable future. That’s because there’s not just one thing driving the decline of small banks.

Some of the causes can be controlled; others cannot.

“I’m afraid that we’re not at the end of it,” said Shawn Mitchell, president of the Community Bankers Association of Kansas, whose membership largely comprises the state’s smallest banks. “We are going to see more.”

‘No longer fun’

There’s no one answer as to what is driving the decline.

Mitchell said it’s primarily an unending flow of new regulation that began with the 2008 financial crisis. Mitchell said he knows of a number of instances in which Kansas bank owners decided to sell their banks because keeping up with new and additional regulation was overwhelming.

“The comment is, ‘It’s no longer fun like it used to be,’ ” Mitchell said of bankers selling their banks and getting out of the industry.

Operating a small bank “is consistently getting harder and less attractive with all the new regulatory issues coming down from Washington,” he said. “They are making it harder and harder for a small, community bank to exist.”

He’s referring to such new regulations as requiring any officer making a home loan to be a registered mortgage lender, which includes new fees, fingerprinting and a requirement for them to have their registration number printed on business cards. That’s in addition to new appraisal standards and new Housing and Urban Development forms to fill out.

“It’s just ridiculous where they’ve taken regulation,” Mitchell said.

He said much of the new regulation was aimed at the country’s biggest banks. “But (all) banks still have to comply,” Mitchell said.

To illustrate how much bank regulation has changed in the past few decades, Chuck Marshall, a bank consultant with Kennedy and Coe, said the Truth in Lending Act, also known as Regulation Z, had about 40 parts to it when it was enacted in 1968. Today, the act has more than 400 parts to it.

“That’s not a debate about whether that’s right or wrong,” Marshall said. “It is a comment simply about how regulations follow the market and the market has gotten more complicated.”

In Marshall’s opinion, overregulation is not the root cause of small bank decline. It’s more a factor of economics.

Increased regulation does require the bank to have someone on staff to constantly monitor changes to existing regulations and the implantation of new regulations. That could mean hiring someone specifically to monitor regulation and ensure the bank’s compliance with it, or to assign those duties to an existing staff member.

But for a small bank, paying a salary just for one person to work as a regulatory compliance officer isn’t feasible.

“You can’t pay $50,000 for a compliance officer in an $8 million (asset) bank,” said Steve Carr, president of Community Bank of Wichita.

Financial feasibility

That goes to Marshall’s point: The smaller a bank is, the more difficult it is financially to operate, not only in terms of keeping up with regulation, but operating ATMs, online and mobile banking — technology-based banking services that are expected by nearly all customers nowadays.

“Banks just have to have a greater level of expertise than ever before … to provide the level of safety, security and compliance that regulators require and customers expect,” Marshall said.

And they have to be of a certain size to afford that expertise. But what is that size?

There is no magic number, Marshall and others say. The number is specific to each bank’s situation in terms of geographic location, types of customers and competition, among other factors.

Alex Williams is the president of a small bank, the Halstead Bank, which has $77 million in assets and four branches in the Wichita area. He said his bank’s answer to the question is to be at or bigger than the median size of a Kansas bank, which he said is about $75 million in assets.

But Carr said he thinks a lot of what’s driving the trend of fewer smaller banks goes to rural flight and to succession planning. The trend of young people not returning to the small Kansas towns in which they grew up affects the hundreds of Kansas banks operating in those towns.

Fewer people means fewer customers, thus little prospect for future growth. Moreover, he said, a lot of small, family-owned banks don’t have a new generation to hand off their banks to.

“I think that’s really the key element for small banks,” Carr said. “There isn’t that succession management that was there years ago.”

Carr adds that at his $63 million bank, he has a son and daughter working there and a succession plan.

Halstead’s Williams agrees that succession planning is also a factor. But he also thinks the decline of small banks “has been heightened because of economic times.”

Williams and Carr said they’re certain small banks are not headed for extinction. Though their banks may be small, they know they can do better than their much larger competitors in terms of knowing and working with their customers and providing them better service.

“That’s what I wake up to every morning and try to accomplish,” Williams said. “We’re more nimble. And at the end of the day, we’re not after the same customers as Bank of America.”

Halstead Bank isn’t trying to serve the largest companies that Bank of America and others are, he said. Instead, Halstead is after the small-business client.

“That’s why it’s been successful,” Williams said of his 129-year-old, family-owned bank. “We will remain profitable and be able to take care of our niches as long as we want to compete.”

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