There were more than 900 attendees at Bank Director’s Acquire or Be Acquired Conference in Phoenix this week, and zero bank regulators. So it wasn’t much of a surprise that the crowd of mostly bank directors and bank CEOs frequently bashed regulation and its enormous cost burdens. In the wake of the financial crisis and the ensuing Dodd-Frank Act, banks are ramping up their compliance departments and facing an onslaught of fines, as well as an increased focus on consumer rights and the Bank Secrecy Act.
This added burden has been most difficult for the smallest banks to handle, because they have fewer resources. I talked to one bank CEO, Joe Stewart, who owns a series of small banks in Missouri, and has sold two of them since 2013, each below $200 million in assets. He said the banks couldn’t afford to add a second compliance person to a staff of one. He pointed in particular to increased reporting requirements and disclosure standards for residential mortgage loans. “Unless you can get some regulatory relief, we can’t survive,’’ he said.
No doubt, for very small banks, regulatory costs are a much greater burden than they are for larger banks. But other factors are at play, too. When asked what factors are driving M&A in the marketplace, an audience poll revealed regulatory cost was the no. 4 most popular answer, after such factors as shareholders looking for liquidity, being too small to compete with bigger banks, and retiring leadership.
When I asked the CEO of BNC Bancorp, the parent company of Bank of North Carolina, Rick Callicutt, who has purchased eight banks in five years, what is driving banks to sell, he thought regulatory costs were part of the equation. But he also thinks banks are looking at their balance sheets and realizing they are going to make less money in a few years than they make today, and are not satisfied with that future. Some have realized that their loan portfolios are filled with fixed rate loans at seven-, 10-, and 15-year terms, and they are not going to be in a good position.
Mark Kanaly, an attorney at Alston & Bird, doesn’t think compliance costs are a huge factor in consolidation. “It’s not the determinant,’’ he said. Most often, bank leadership teams take a look at what they can realistically achieve, and don’t like what they see.
Another clue to what’s driving recent bank acquisitions is to look at the industry’s profitability as a whole. The median return on equity was just 8.7 percent in the third quarter of 2015, according to a Keefe, Bruyette & Woods analysis of the banks in their coverage universe. The average return on assets was .91 percent. Interests rates are likely to stay low for some time, continuing pressure on bank profitability.
A lot of banks simply aren’t doing that well. Regulators may be partly to blame for increased consolidation, but they aren’t the whole story.