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What lies ahead for community banking

By Roger Beverage
OBA President and CEO

The financial crisis that erupted in 2008 continues to impact our nation's economy and, more importantly, the community bank model that has worked so well for so long in Oklahoma and a number of the other “fly-over” states.

The last two years in particular have borne witness to the most significant wave of regulatory changes for the banking industry in my lifetime and I fret about what it means for bank customers, our members and our state going forward.

Fortunately, there are not a lot of additional legislative matters being proposed at the state or federal level this year – at least so far. That's the good news. The bad news – and the problem that keeps me awake at night – is the crushing regulatory overload coming out of Washington, particularly from the new Consumer Financial Protection Bureau (CFPB).

At the Government Relations Council and the OBA board meetings earlier this month, there was discussion about the changing dynamics of community banking because of this avalanche of new rules and regulations. Community banks are caught in the cross-hairs of all of these new rules, and it's adding considerably to banker frustration and lack of productivity.

One of the (hopefully) unintended consequences of this new environment is it's causing many bankers to think about their future in terms of succession, retirement options and consolidation. But on a more macro basis, it makes me think about what's to become of the community bank model itself.

It's not just the costs and complexities caused by these various proposals that impact daily bank operations and spill over onto bank customers. There's also the reality that federal banking regulators have renewed their focus on certain key areas, like succession planning, compliance, risk management, strategic planning and operations, all of which further complicates the ability of banks to do what's most important: take care of their customers.

The November elections opened my eyes to today's new political reality, and at least one thing seems certain: the results mean accelerated regulatory activity and likely consolidation will be the norm for banking going forward.

Yes, the banking industry has always been highly regulated. I understand that. But the current regulatory environment is unprecedented, and more and more bankers tell me they are spending most of their time dealing with these new rules in some fashion rather than tending to their customers, making loans, visiting prospects and performing other activities.

At the end of the third quarter, there were 102 FDIC-insured entities out of 237 in Oklahoma that have less than $100 million in total assets. They had nearly 1,700 employees, yet they are subject to these same rules and proposals as are non-bank mortgage lenders and larger banks with armies of compliance experts and plenty of lawyers to advise them.

That kind of help just isn't there for these 102 Oklahoma banks, and for hundreds of other small community banks located across the country, but particularly concentrated here in the Heartland. They simply don't have the resources to be able to afford it.

Furthermore, my assumption that $100 million is the “proper” dividing line between “survival” and something else may be low. A number of bankers with whom I've visited think the “survivor” size may well be much larger than $100 million in total assets.

Let's say the number is $250 million instead of $100 million. That's 182 of the 237 insured financial institutions in Oklahoma who may be looking at a whole different way of operating and who may be considering their alternatives in the wake of Dodd-Frank.

Either way, my question is how in the world are these smaller community banks in Oklahoma and elsewhere going to successfully cope with this avalanche? Well, let's see – for openers they can:

  • Hire more compliance experts and lawyers. Not really a viable alternative in most instances, but let's throw it out there.
  • Strike a deal with some surrounding banks and create a consortium of some sort – sharing a common compliance staff and, perhaps, even some other common back-room functions. This “spoke and wheel” type of operation might have a county-seat “main” bank with surrounding “satellites” in the adjacent counties. As a footnote, such an arrangement might come about either through a consortium/partnership agreement, or through utilizing a merger/acquisition strategy.
  • Sign up for and be a part of the OBA's Compliance Alliance or a handful of other kinds of outside resources designed to help them cope and split the cost of doing so with other banks.
  • Sell their franchise and get out of the business altogether.
  • Other alternatives? None come readily to mind.

My other question has to do with the structure of the OBA itself. It, too, is based on a community bank model, both in terms of its overall governance as well as its requirements for representation on various committees and boards.

  • Will the current association structure in Oklahoma and several other states suffice in an environment in which the community bank model becomes less and less viable and relevant?
  • Should the OBA itself consider a “consortium” of other state bankers associations to more effectively deliver our primary features of membership, such as government relations advocacy, education and training, legal and compliance services, fraud training and investigation and public/member relations? Imagine the clout on federal banking issues we could bring to the table – particularly in the Senate – if 15 “Heartland” state bankers associations were to come together in some form over the next several years.
  • Should we “merge” with Texas, or Kansas, or Arkansas, or some combination thereof?

These are just some of the issues bankers and their trade groups should spend some quiet time contemplating over the next several months. I don't have any answers, recommendations or suggestions at this point, but we cannot simply ignore these questions as we go forward.

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