SANTA ROSA — The high cost of complying with burgeoning regulation will be the cause of even more bank consolidation than has occurred as a result of the recession, experts say.
Since mid-2008, what most would call the beginning of the banking crisis, the North Bay has lost 30 percent of its locally based banks.
Tamalpais Bank, Sonoma Valley Bank and Charter Oak Bank were shut down by regulators. Napa Community Bank was sold to Rabobank.
“Obviously, there have been a couple of failures in the market,” said Russell Colombo, president and chief executive officer of Bank of Marin. “There were none in these markets for many years.”
Bank of Marin is headquartered in Novato and has $1.3 billion in assets. It acquired Charter Oak in February of this year in a whole-bank purchase, which was assisted by the Federal Deposit Insurance Corp. The acquisition followed a decision by the California Department of Financial Institutions to close Charter Oak Bank and appoint the FDIC as receiver.
Mr. Colombo said he didn’t think there would be more local failures, but he does think there will be more consolidation.
This is not singular to the North Bay. Nationwide, in the same three years, 365 banks have been closed down, or one bank every three days. In the eight years previous to that, only 31 banks were closed throughout the country.
And of the 365 banks that were shut down in that time, 189 institutions acquired them, almost exactly half. These numbers do not take into account the many banks that have gone through mergers in that time that were not failing.
Mr. Colombo said he thinks that most of the future consolidation will be due to regulations becoming more stringent and the cost of compliance rising, particularly in the North Bay.
“In the North Bay, there is the people factor. The people are the biggest expense and to get the number of people with experience to lead the compliance could become a problem,” said Mr. Colombo. “Smaller banks may have one person. All of a sudden they will need three or four and they may not be able to afford the hires, if they can even find people to find out what the challenges are going to be.”
“For banks under $500 million, it will be tough to deal with regulatory oversight and compliance will be tough,” he said. “It will be costly and I think some will say they have had enough, not because they are failing but because they will not be able to make it worthwhile for the bank and its shareholders.”
In 1985, there were over 17,000 banks in the United States. In 1986, there were changes in regulations and banks were allowed to enter into interstate banking.
“We saw the bigs get bigger and the regionals acquire smaller community banks,” said Ray Byrne, president and chief executive officer of North Coast Bank.
North Coast Bank operates under parent company American River Bankshares of Sacramento, a $573 million bank.
“Today, there are approximately 7,500 banks. As a result of the Great Recession, all banks felt their problem loan portfolios grow, some worse than others. Community banks have now assessed their damages and have calculated the cost of the Dodd-Frank issues, as well as regulatory matters and possibly have toyed with the idea to look for a partner to merge operations, some as a result for survival, while others will seek to increase value and grow assets.”
The Dodd-Frank Act will impact banks both large and small, said Bill Schrader, president and chief executive officer of Exchange Bank in Santa Rosa. He said that the banking industry is already heavily regulated and the Dodd-Frank Act alone is 2,500 pages.
“We are seeing 60 new rules come out of that, which will translate to roughly 5,000 pages of legislation,” he said. “Too much regulation can be as bad as not enough regulation. Traditional main street businesses and banks should not face the same degree of complex rules and regulations as some of the Wall Street businesses. The manner of these rules and regulations significantly increase a bank’s overhead and take away what a bank should be doing in the community: Lending to local businesses. Because of this, there is a wave of consolidation that has already happened.”
“I think the industry will shrink further, possibly to fewer than 6,000 banks,” he continued. “Reasonably healthy banks look for consolidation opportunities in order to absorb the burden of these regulations. I think it will be difficult to meet the expectations and be under $500 million. There are a lot of fixed costs to run a financial institution. It is hard to spread around.”
Still, some bankers said there needs to be a place for small community banks.
“I think that is too new to rate the outcome,” Tom LeMasters, president and CEO of Bank of Napa, said. “I think we have a number of pages of legislation and we are still trying to figure out what it will mean, not to say that it is not a cause for concern.”
He said community banking is far too important to just go away.
“That is our thought process,” he said. “We are remaining vigilant and trying to remain agile.”
The North Bay’s 10 locally based banks are Westamerica, Luther Burbank Savings, Exchange Bank, Bank of Marin, First Community Bank, Summit State Bank, Circle Bank, First Federal Savings and Loan Association, Bank of Napa and AltaPacific. They range from just more than $83 million to just under $5 billion in total assets.
“We are a proponent of consolidation,” said Allen Christensen, executive vice president and chief financial officer of AltaPacific Bank. “It was part of our original business plan and is part of our current business plan. It is our strategic plan to grow by acquisition, not organically.”
AltaPacific is headquartered in Santa Rosa and has just more than $83 million in assets.
“With consolidation comes efficiencies,” he said. “The regulatory burden is huge from updating policies to training staff. Some say banks under $500 million will have a hard time.”
He said operational efficiencies and access to capital are two big reasons to consolidate, though he said there are a number of things small banks can do much better than large banks.
“Being small helps with customer response time and makes changes to the bank easier. Through growth you never want to sacrifice a high level of customer service,” Mr. Christensen said. “It is not uncommon for our CEO to be onsite with customers. And as a bank grows, it becomes more and more difficult to for that to happen.”
Aside from the regulatory issues, depending on the market a small bank will not have capital to support the largest transactions its customers may need. Small banks manage these relationships by participating loans out to other banks. This factor also, can lead to an interest in consolidation.
“There are regulations that limit how much you can lend,” said Mr. Christensen. “With the larger size and with more capital you can look at bigger deals. Though even as we grow, we still have a house limit that likely would not go much bigger than we are able to go now.”
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