Asset Size Is Irrelevant, Community Bankers Insist

Often the narrative about the future of community banking is that the smallest banks are headed for extinction because they don't have the resources to absorb the costs of complying with ever-expanding regulatory requirements.

But some community bankers flatly dismiss the notion that they need to bulk up to effectively compete with larger institutions. At a panel discussion at the American Banker Regulatory Symposium on Monday, bankers insisted that small banks can thrive regardless of their size by remaining hyperfocused on the communities they serve, while continually looking for new ways to grow revenues and control expenses.

"Community bankers are a scrappy bunch," said Jill Castilla, president and chief executive at the $252 million-asset Citizens Bank of Edmond in Oklahoma. "We know how to survive."

The bankers acknowledged that they face immense challenges, from dealing with increased regulatory scrutiny to meeting new capital requirements. H. McCall Wilson, the president and CEO of the $339 million-asset Bank of Fayette County said he also worries about losing experienced lenders who are used to making loans their way. "The rules have changed and people don't like change," he said. "The young people adapted and the older people are going to retire. We have several people who have said, 'I'm done. I can't do this anymore.' It's very frustrating."

Still, the panelists were generally bullish in the future of community banks. James Cornelsen, the CEO of the $1.2 billion-asset Old Line Bancshares in Bowie, Md., said that while small banks have trouble competing on price, they almost always win on service.

Castilla said she sees a huge opportunity in mortgage lending, for example, because many banks in her state have opted to exit the home loan business rather than worry about whether their loans comply with new rules around determining a borrower's ability to repay. Wilson said he too sees opportunities in providing mortgages that don't conform to the Consumer Financial Protection Bureau's "qualified mortgage" standards. Wilson described a meeting with CFPB Richard Cordray where Cordray encouraged the bank to "do what's right" for its customers — and that's just what he's doing.

"We've done what's right for 110 years," Wilson said. "Now we've not had an exam since [Cordray] said that," he added, jokingly.

The panelists acknowledged that small banks will always struggle to grow fee income so they advised their fellow bankers to look at ways to curb expenses. This could include re-examining "sacred cows" such as branch networks, said Castilla.

Citizens Bank of Edmond recently shuttered three unprofitable branches — all within two miles of other branches — and then added video automated teller machines so that customers who preferred to interact with a live teller could still do so. The moves have paid off handsomely. Citizens' return on equity at June 30 was 14.39%, up from 7% two years prior, and its efficiency ratio was under 72%, down from nearly 86% in 2012.

The video tellers could also wind up generating modest fee income for the bank as it licenses its technology to other banks, Castilla said.

While the bankers said that asset size is irrelevant when it comes to staying competitive, Cornelsen said it does matter to regulators. The bank has roughly tripled its asset size over the last four years and, now that it is over $1 billion of assets, it is getting more scrutiny from its examiners,

"Our business is predominantly offering plain Jane deposit products then we convert those into loans back into our market place," Cornelsen said. Regulators "feel we offer a greater risk because of our size and theoretical complexity though I don't feel like we have a theoretical complexity."

Community banks still face challenges in dealing with new regulation and capital ratios, the panelists said. At banks the size of the Bank of Fayette County, regulators have gone "beyond what is reasonable" in examining for anti-money laundering and the Bank Secrecy Act violations.

"It has gone so far out of whack," said Wilson, whose bank has one BSA officer. "The paperwork is not worth the effort we are putting into it."

Basel III should also have a "significant impact" next year, Castilla warned. The requirements for how some commercial real estate loans are treated could be detrimental to the bank and could make it more difficult for some borrowers to get financing, she added.

If smaller banks are required to meet the liquidity coverage ratio, that would be "most detrimental to the community banking industry," Cornelsen said. He fears that although this is currently a requirement for larger banks, it will eventually trickle down to smaller institutions.

"As an industry we really need to fight back on that," he added. "We need to draw a line in the sand."