Mississippi has 19 small banks as defined as banks with less than $100 million in assets. And while most of these small banks that serve as the economic lifeblood of many rural areas of the state didn’t participate in the risky mortgage lending practices blamed for the Great Recession, they may now be endangered by burdensome banking regulations enacted to prevent a recurrence of the problems that caused the economic meltdown.
The trend towards mergers and acquisitions resulting in banks becoming larger and larger could continue because of the high cost of complying with banking regulations, said Mississippi Banking Commissioner Jerry Wilson.
“I think the merger trend will continue because we are seeing interest margins shrinking and because of the high cost of complying with all the regulations we have, and the additional regulations that are still coming,” Wilson said. “All these regulations are very complex, and require additional staff to monitor and comply with the regulations. The bigger banks can have compliance specialists who work full-time while smaller banks’ employees have to wear several hats.”
Small banks are also squeezed because the return on assets for small banks is 25 basis points lower than the large banks, Wilson said. One of the reasons for that is the loan-to-deposit ratio in smaller banks is lower. Smaller banks have a harder time making loans as they are generally located in smaller communities with less economic activity.
“A positive for those banks, however, is that their capital ratio is higher on average,” Wilson said. “Capital is king.”
Small banks are the lifeblood of their communities by making loans, supporting economic development and serving their community in many other ways. “Our bankers have a vested interest in seeing their communities prosper,” Wilson said. “In rural Delta counties, banks are very involved in ag lending, which is the biggest economic activity in the Delta. Banks do a good job of supporting ag in those areas.”
Is there a future for small banks in the state? Wilson said yes, but they will have to control their expenses and look for new ways to generate income. It could be they will have to start charging for services that have been free. With interest margins shrinking, banks have to look at ways to generate more income.
Robert “Robbie” Barnes, CEO of PriorityOne Bank, Magee, said there is a perception that the government would like to encourage smaller banks to consolidate with other banks and reduce the number of banks in the nation. That would reduce work from a regulatory standpoint, but would it be best for the communities served?
“When they consolidate banks, they just don’t give the same focus, attention or value to the communities they serve that a community bank does,” Barnes said. “Obviously, community bank management and employees work in the community, and give back to the community in so many ways. Larger banks can’t or won’t focus on doing that.”
Barnes feels it is unfair the community banks that weren’t involved in the risky mortgage lending practices are now being placed at an unfair disadvantage with the big banks that were irresponsible. He said the heavier regulatory burdens have increased expenses considerably without providing any benefit to the customers.
“Customers are supposed to be behind regulatory changes, and that seems to be the one segment of our society penalized,” he said. “It is going to hurt the people they are trying to help. I don’t know if people making these decisions really understand the negative impact of all the regulatory changes, especially in the rural communities the community banks serve. It is difficult especially to provide mortgage lending in rural environments because of the restrictions on appraisals, and the types of comparable sales acceptable.
“If you don’t have that many sales within a certain distance or time frame, then those are not considered reasonable. Then someone who wants to buy a house can’t find financing because they can’t get an appraisal that will meet the guidelines. It is making it very tough.”
Barnes said the focus seems more towards a standardized, cookie-cutter approach, and getting away from the character-based lending that built the country. That approach appears to ignore the fact that most community banks did responsible lending before the economic downturn.
“Why fix something that is not broken?” Barnes asks.
“By and large, community banks in the U.S. and in Mississippi, in particular, do an excellent job of managing asset quality. I do believe we will see consolidation of smaller banks because they are not able to meet the burden and expense of meeting regulatory requirements and still generate enough return to shareholders to remain independent. They are going to have to be larger to achieve economies of scale.
“That is a concern of many community bankers, especially in our state.”
PriorityOne bank has assets of more than $520 million, has its own mortgage department and can remain fairly competitive. But a $100-million bank can’t afford to do that, Barnes said.
Jimmy Clayton, CEO of Planters Bank & Trust, Indianola, said the problem is every time the country has a crisis, the government responds with more regulations. He said new regulations added after the economic crisis just added to an already existing burden.
“A lot of those regulations came after 9-11,” Clayton said. “We have to do a lot of compliance on monetary transactions, keeping up with transactions that may be suspicious. Every time a crisis comes up, usually there is an overreaction in Washington. There is more regulation. What is happening now there is so much that is constantly being added to that it is overwhelming for some of the smaller institutions.”
Experts keep saying the country needs housing to come back to improve the economy. But Clayton sees the regulations on mortgages as a detriment to the housing market gaining strength.
“All these regulations do just the opposite, restrict mortgage lending and home buying,” Clayton said. “The ironic thing about all of this is the real abuse in the mortgage business was really done by non-bank lenders that were mortgage brokers. And they are gone. They put them out of business.”
Clayton said fortunately their bank is now fairly large compared to some community banks in Mississippi. It takes a certain size to cover a lot of the regulatory costs out there. That is a detriment to smaller banks.
“Mississippi still has a fair amount of banks under $100 million in assets, and it is really difficult for them to keep up and also cover additional costs just because of the size of the institution,” Claytons aid.
“That is a big issue for all banks, but it is really pretty scary for some of the very small community banks.”
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