Last Wednesday, I was on a panel with Joseph Lynyak of Pillsbury Winsthrop Shaw Pittman LLP and Dr. Marsha Courchane of Charles River Associates, at the biennial conference of the Harland Financial Solutions Network of State & Federal Counsel. The topic of the panel's discussion was "Putting It All Together: A Forward Looking Discussion." Dr. Courchane gave us some distressing statistics concerning community banks, including (1) the top five banks' share of total industry assets has leapt from 33.8% at the end of 2005 to 42.6% at the end of 2010, and (2) in 2008, banks with less than $1 billion in assets had increased small business lending by $4.2 billion and single family residential lending by $17 billion, while in 2010, the same category of banks saw small business loan holdings fall by $8.9 billion and residential loan holdings fall by $19.5 billion. After she finished, I got a chance to give my view of the pressures I see on community banks and where I see the the industry headed. I'll give you the "CliffsNotes" version of my rant:
- According to the FDIC, community banks (banks with assets of $1billion and less) hold only 11% of the industry's assets, but make 40% of the small business loans. Since small businesses have traditionally accounted for the majority of new job growth, that's not great news for the economy.
- Since 2008, nearly 75% of the banks that have failed (309 out of 415 through October 21, 2011) have been community banks.
- Even prior to the creation of the Dodd-Frankenstein monster, there was a campaign by certain federal regualtors to reduce the size of the banking business. Over twenty years ago, then-Comptroller of the Currency Bob Clake was calling for the reduction of the size of the banking business, complaining that there were simply too many banks for the business to be profitable. We halved the number of banks since then. We're down from a peak of 13,000 independent banks in 1960 to around 6400 today. In the current crisis, certain voices within the federal banking agencies are again calling (soto voce this time around) for further reductions in numbers. How many is too may? Is 4000 the magic figure, or do we shoot for the Canadian Model and keep rolling until we're down to a handful?
- While current complaints about Dodd-Frank focus on its compliance costs and "diversion of human resources" costs, Dodd-Frank (and the feared CFPB it birthed) are only two negative factors that are beating down community banks. Others include:
- Overly conservative examiners, zealously fighting the last war while simultaneously hindering new lending and the resolution of existing problem credits, and, in a number of cases, rendering problematic the survival of institutions;
- Dwindling traditional sources of interest income, since (a) CRE is anathema; (b) quality small business borrowers are few and far between; (c) big banks are starting to poach small business borrowers they formerly disdained in order to deploy the cash that would otherwise stand idle; (d) historically low interest rates are expected to stay low for at least the next two years; and (e) net interest margins have shruken to the size of that portion of Charlie Sheen's brain that controls judgment.
- Restrictions on fee income, including (a) debit card interchange fees, thanks to the Durbin Amendment (and no community banker I've spoken with thinks the exemption for smaller banks will "stick" in the market place over the long haul); (b) restrictions on overdraft fee income through regulatory "guidance" and class action litigation; and (c) the prospect of the president, in league with the CFPB, using the threat of "unfair" and/or "abusive" scare tactics to beat back unpopular fees like the recently proposed monthly debit card fees that the big banks tried to "float."
In other words, for the little guys, it's hard to make a buck, and where's the light at the end of the tunnel? Oh, yeah there it is. Unfortunately, it's the headlight on a locomotive with the throttle full open and headed our way.
What's the prospect? What all the pundits have been predicting: consolidation. The big-and-rich will get bigger and richer while the number of smaller independent banks will continue to shrink. I don't see the United States ever getting to the point where the only banks that exist are The Big Five, and there will still be niches where community banks will survive. However, unless circumstances change (and that's always a possibility), the future looks bleak to me.
After my little rant finished, Joe Lynyak commented that it was obvious that "Kevin's a glass-half-full kind of guy." I had to agree that I'm a cockeyed optimist. The audience's laughter was akin to that of troops in the trenches after a long siege. And we're only part-way through this particular war.