Thoughts & Comments
What I Heard In Phoenix Last Week
At an industry conference, bankers said they're not too pleased with new government red tape

Thomas Brown  ( about me )
Posted 02/08/2011
bankstocks.com
tbrown@bankstocks.com

I’m back from Bank Director magazine’s annual “Acquire or be Acquired” conference in Phoenix last week. I wish someone from the Obama administration had been there. He’d have gotten an earful. More about that in a minute.

In any environment, “Acquire or Be Acquired” is one of the most interesting conferences of the year. It focuses on a topic near and dear to every banking executive’s heart: M&A. And given what the banking industry has endured over the past several years, M&A is especially timely now. Certainly the level of interest in the topic was high: this year’s attendance topped 700 people, breaking the previous record by over 100.  Typically, about 70% of the conference’s attendees come from institutions with fewer than $1 billion in assets. This year that percentage was much higher. Just about all the increase in attendance from last year consisted of individuals from under-$1 billion institutions.  

In any event here are my key takeaways:

1.       Bankers feel like the government is crushing them. Banking executives are angry, frustrated, and bewildered by examiners’ new, overreaching assertiveness. (This happens every cycle, by the way: regulators who were asleep on the job during the worst abuses at the cycle’s peak suddenly bring the hammer down after the crisis has passed.) Add to that the new rules and regulations about to be put in place following passage of the Dodd-Frank Act, and bankers feel they are being smothered.  

2.       Banks need to reach a new minimum size threshold if they want to compete. Complying with all these new rules, regulations, and overzealous examiners costs money. Given the new burden, very small institutions that once generated adequate returns can no longer do so. Capital requirements are going up, as well. The consensus at the conference seemed to be that a bank needs to have at least $500 million in assets to be competitive. 

One director of a $300-million bank in the West pulled me aside to tell me his institution’s regulatory tale of woe.  The FDIC recently conducted a “compliance” exam of his institution, its first at his bank in seven years. As part of the exam, the FDIC brought 17 examiners and stayed three weeks.  When the examiners were done, they issued a scathing report that required the implementation of all sorts of new procedures and reporting requirements. “I don’t know what we are going to do,” he told me. “Four years ago we could make money with just $50 million in assets, now I think he we’ll need to be many times that.”

3.       The regulators continue to wreak havoc. During the last major banking industry credit crisis, in the early 1990s, only one principle bank regulator, the OCC, significantly overreacted. Other regulators (notably the Fed, the FDIC, and state regulators) stayed relatively rational. Not this time. Now, it seems like everyone has lost his mind—and are making the banking industry’s problems worse, in the process. (By the way, I saw that President Obama spoke to the U.S. Chamber of Commerce yesterday and begged the executives there to start hiring again. A better use of his time, I bet, would be a similar speech to federal bank examiners, where he might ask them to take their feet off bankers’ necks.)

Trust me, if you attended a banking conference like the one I was at last week and listened to some of the bankers’ horror stories, you’d become more sympathetic to bankers.  They of course can’t go public with their stories of regulatory abuse—that would just earn them a new slap-down. Nor do many politicians yet have enough courage to defend the banks. It’s truly incredible: the excessive burdens wrought by bank regulators have surely held back credit creation and economic growth.

4.       Massive consolidation has started. Pressure on banks—especially small banks—seems to lately be coming from all sides. They of course face all those new regulatory costs. But in addition, loan demand is weak, and capital requirements on the rise. In many cases, fee income is under pressure, too. Faced with all this, many banks feel they need to get bigger to survive. A survey taken at the conference showed that about half the attendees believe they need to acquire other banks in order to grow over the next few years.

These profitability pressures are real. In fact, I believe the people at the conference weren’t concerned enough!  There’s no question that massive consolidation is coming to the banking industry over the next several years--particularly among institutions with less than $1 billion in assets.

The current administration and Congress say all sorts of nice things about community banks and bankers, but their actions (and those of their deputies, the regulators) have given community banks a death sentence.  It’s a shame and it’s just not fair!

What do you think? Let me know!


  Add your comment

 

 

JoeV Posted On 2/8/2011 3:20:36 PM

What a bunch of whiners. When these losers needed bailouts, the Feds were welcomed. Now they decry the scrutiny. Boo Hoo.

Anonymous Posted On 2/8/2011 3:26:38 PM

fuckin' regulators

Barry Demovsky Posted On 2/8/2011 5:11:02 PM

Why don't you send this to the White House. Maybe one of those so called experts might respond.

Chip Gjertsen /Ga Posted On 2/8/2011 5:56:04 PM

Tom, The smaller firms <1 billion will have to make a decision to grow/merge . Regulatory exam stories i hear in the Ga. market range from just odd to horrifying in scope/depth. A leading indicator of exam troubles to come are to be found on the job boards at the Fed. Junior examiner positions abound . And they want enthusiastic candidates. It is a shame because so many community banks are run well with a long term outlook that is absolutely essential to the health of the communities they serve.

Bill Posted On 2/8/2011 5:56:09 PM

Dear Tom Brown and all investment bankers: Quit bitching about over-regulation, then sending the economy into the toilet. Your whining cost 8 million jobs. But I suppose it's time for you to give yourself a raise again. Losers.

William Posted On 2/8/2011 6:43:37 PM

It is a shame that the public lumps all banks together as the bad guys in our current financial situation (case in point some of the comments below). The community banks weren't the culprits, but they receive most of the oversight excesses and abuse. Community banks are the lifeblood of small communities. If they go away through consolidation because of increased regulatory pressures on profitability, only the big banks will be left, which means less opportunity, lower quality and higher lending costs for consumers, ultimately resulting in slower economic recovery for all.

William Posted On 2/8/2011 7:08:04 PM

It is a shame that the public lumps all banks together as the bad guys in our current financial situation (case in point some of the comments below). The community banks weren't the culprits, but they receive most of the oversight excesses and abuse. Community banks are the lifeblood of small communities. If they go away through consolidation because of increased regulatory pressures on profitability, only the big banks will be left, which means less opportunity, lower quality and higher lending costs for consumers, ultimately resulting in slower economic recovery for all.

Cecil James Posted On 2/8/2011 7:26:05 PM

As usual, Tom your post is right on the mark. Too bad not all readers recognize the importance, we might actually get some change that's been needed for quite some time. This is a trend that has been playing out since the late 1988-93. The general public and elected officials have no understanding for the importance of bank diversity in the economy. They are the heart of an economy and the creation (or destruction) of money. Concentration of banks encourages creation of oligopolies (clubs) reducing competition and ultimately leading to controlled markets (think OPEC on a broad scale across all commodities - copper, steel, cotton, corn, wheat etc). Not a good prospect in the long-term if you think it through to future generations. The end game is not pretty, unless of course you are Dimon, Pandit, or Goldfein. Their seats at the table are guaranteed unless the tide changes for the better. The Regulatory structure is a revolving door, absent the lifers that embrace job security at any cost. Those are not the folks that made the mess, but we need to clear the decks of those in charge not promote them (sorry Mr Geitner).

jsc173 Posted On 2/8/2011 8:23:49 PM

Let me tell you how crazy it is. I know a bank that was truly strong-armed by their regulator to liquidate a couple of large REO properties "no matter what it takes." This message was delivered as a gotta be done by year-end or you won't want to know what will happen message. One piece of commercial land was sold off for $800,000 and a significant loss was booked. The second week of January the bank received an offer of $2.2 million from a buyer who didn't know the bank had already sold the property. This was a small bank. Their 2010 financials were negatively impacted by being intimidated into the year-end sale to "clean up the balance sheet" so the regional director of the regulator could report improved NPA ratios. That the bank missed the opportunity to book a large gain rather than a large loss was met with this response when the regulators were told -- "Really? Gee, that's too bad."

Joe V Posted On 2/8/2011 8:43:39 PM

None of you grasp the destruction of wealth fomented by the sloppy practices of Community Banks in the past. Those that went belly up and will be doing so made loans to shady developers and speculators w/o grasping the consequences. Many of these banks have poorly educated management and boards comprised of local yokels who couldn't comprehend a balance sheet but loaned money to their blowhard builder buddies from the lodge. Lots of grandkids' college money and parents' retirement plans went up in smoke as a result. Regulators are bring needed order to this chaos.

Dee W. Posted On 2/8/2011 8:52:57 PM

Tom: Almost anyone who's been in this industry for more than 15 years knows the following: 1) the senarios - problems, regulation, the overreach - is cyclical; same issues keep coming round 2) yes, compliance costs money; so let's reduce the causes for more compliance and enforcement 3) yes, regulators can abuse their authority; so have bankers 4) bank size matters until it doesn't; consolidations and de novo creation are a part of industry evolution and response to market forces What I do not see in all this "angst" within our industry is the call and commitment to educate and motivate our up-and-coming bankers, the replacements, if you will. We are not just about money exchange and storage any more. What about the grand history of FIs in stimulating the growth of this country and in others? What about the underlying value that banks and FIs create for other industries and business transactions that almost no other industry can deliver or has delivered? Let's get back to that. My simple point is this: There will always be non-ideal industry conditions. Isn't this an area of strength for us -dealing with risk and difficult times? Well, let's take these times and opportunities to do more than rail against constraints. Educate. Innovate. Adapt! There is a reason that banking continues to be one of the world's oldest industries and professions.

tom brown Posted On 2/8/2011 8:54:05 PM

Needed order to the chaos? Are you kidding me??? They are making the chaos worse!! If the regulators would have been any good they would have acted in 2005 and 2006 not OVER reacted in 2010 and 2011 hurting the good bankers and the economy.

Retired Banker Posted On 2/8/2011 9:04:58 PM

Banks do not need more regulation by incompetent government bureaucrats. The examiners are only interested in answering the pre-printed questionnaires as quickly as possible so that they can go to lunch. They are not interested in working with bankers to resolve problems. I agree with the posting that suggests sending the article to the White House.

parker Posted On 2/8/2011 9:19:30 PM

these poor guys are presiding over banks that are frail to begin with in an economy on life support - they are going to put quite a few folks out of business - no question

xbanker Posted On 2/8/2011 9:43:44 PM

The FDIC should be stripped of its supervisory role. It should be the insurer of deposits and it should be the liquidator of failed banks. Insurance companies are not supervisors because of the inherent conflicts. Further Chapter 11 works for other industries it should be more readily used by bank holding companies as a means to recapitalize. The quicker that the market can take out the weak without government interference the quicker that the economy (specifically small business) can count on banks to be a source of debt.

Waynor Rogers Posted On 2/8/2011 11:47:18 PM

Bankers have a very generous partner in the U S Government, one that effectively guarantees all of their liabilities. I only wish I had such a JV partner. During the last thirty years, roughly '82. '89, and '07, their guarantor has had to step in to make good on those liabilities, costing the taxpayers, particularly in this last evolution, not only the cost of the bank rescue, but also the peripheral fallout from the disasters in the insurance and real estate industries, half again more than the government can ever collect in revenues for the foreseeable future . It is important that it not happen again soon. They should not be surprised that more restrictive regulations, oversight, and reporting will be part of their future. The best they can hope for is a level playing field, one they all get screwed at the same rate, in the same intensity, and at the same time. Perhaps we need fewer bankers and more producers, along with less credit and stronger balance sheets. If this government intervention is enough to cause them to leave the industry and find a real job, we may all be better off in the long run. Love your notes. Keep up the good work.

Ken Lay Posted On 2/9/2011 2:34:11 AM

Too bad, bankers.

Jim C. Posted On 2/9/2011 8:01:06 AM

The parallels between today and the Bill Clinton era are strking. Some of the same OCC regulators who are in leadership poisitons today were lead examiners in the major banks in the 90's and riding them prettty hard. In response Continental Illinois and a few others dropped their National Bank charters and became state banks. The assessments paid by banks to fund the OCC's operations started to shrink. At that time the OCC was led by Gene Ludwig. Gene and Julie Williams started making calls on the CEOs of the major banks to start listening. The result was that more balance was injected into the regulatory system as the OCC saw its funding base shrinking. Maybe Obama needs to rehire Gene Ludwig.

Vincent Schimmenti  Posted On 2/9/2011 8:50:38 AM

Non Bank Lenders will grow to fill the needs of Commercial and Residential Borrowers. It is an opertunity for Investors.

JRG Posted On 2/9/2011 9:47:13 AM

Listening to anecdotal horror stories about regulators is a poor way to draw conclusions and distracts attention from the issues that community banks should be focusing on such as how does the industry develop future growth strategies and opportunities. There are always two sides to the story and you are not likely getting the real reason why a regulator would come down hard in a particular situation. The real problems facing community banks involve overcapcity and lack of revenue growth. The growth engines of the past, investment and residential real estate lending are gone so what is left for the community banks. Higher capital requirements and stricter regulatory oversight are here to stay. Instead of echoing compliants and blaming regulators give us some examples of banks that are differentating themeselves and finding new way to grow in this chanlenging environment. Turn your column into something productive.

Joe V Posted On 2/9/2011 10:17:28 AM

Sorry Tom, "They are making the chaos worse!! If the regulators would have been any good they would have acted in 2005 and 2006 not OVER reacted in 2010 and 2011 hurting the good bankers and the economy." If Bankers had been any good, they would not have created those 2005 & 2006 problems in the first place.

Jeff Marsico Posted On 2/9/2011 10:56:27 AM

Tom I agree with most of the above. However, I researched top performing financial institutions by ROA and 94% of them were under $1 billion... see post at: http://jeff-for-banks.blogspot.com/2010/10/economy-of-scale-myth-go-big-or-go-home.html But we cannot escape the step-variable cost structure of banking, where infrastructure gets built, and then the institution grows into it. I estimate that a $1 billion in asset bank would have to find 2% operating expense savings to offset the new regulatory burdens. For a $250 million bank, I estimated 5% savings. All of this will drive a lot of soul searching among the community bank ranks. ~ Jeff

elee Posted On 2/9/2011 11:29:27 AM

I might feel a bit more sympathy if they found it in their hearts to share just a few of their billions with shareholders.

Brian H Posted On 2/9/2011 2:45:17 PM

Sure yes, let's see what the regulators say when they attempt to increase their dividends or buy back stock. Their hands are totally tied in sharing that wealth.

No Banker Left Behind Posted On 2/9/2011 9:56:58 PM

Funny TB, but I just don't seem to remember a column from you in 2005-2006 pounding the table for the regulators to step in, step up, and take the banks to task for the mess they were putting themselves in. What I do recall was your arrogant disdain for those who, in real time, saw the crisis for what it was. In your world, sub prime was contained, the bad loans would "work their way through the python", and "I've seen this credit cycle before". Indeed. No, what's actually happened is that you are exhibiting signs of hindsight bias, where you now think you knew what was going on when, in fact, you were clueless. Don't let that stop you from talking your book; that's something you've always had a real talent for! Finally, I was comforted to see that "Retired Bank-Whore" threw his two cents into this comment section with his "trenchant" analysis: a regurgitation of the tired, cliche littered drivel about incompetent government officials who have the nerve to even breathe the same air as the genius (insert laughter here) bankers...........please sir, get back to your shuffleboard and walks in the mall.

Swm Posted On 2/10/2011 3:22:46 PM

They complained about regulation BEFORE the crisis, too. So did you. Nobody I know thinks we are past the worst, either. And if they think regulators are bad now, just wait until banks have to deal with the shadow inventory those same regs are letting them keep on the books at higher valuations.

KRL Posted On 2/10/2011 4:16:23 PM

As a director of a small ($70 Million) rural bank I generally agree with excessive increased regulations, but it's not only banks that are being over regulated. EPA just proposed spilling of milk should be treated the same as an oil spill! My God what will they think of next to increase the size of unnecessary government? I'm thinking the next election should not only be about excessive spending, but also about eliminating excessive unneeded regulations in all disciplines.
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