Bankers: Small banks to suffer from Dodd-Frank

story by Michael Tilley and Kim Souza
mtilley@thecitywire.com

It’s likely that few, if any, Fort Smith and Northwest Arkansas area bankers would disagree with Little Rock banker French Hill who said the so-called Dodd-Frank law will in the next few years make operations more difficult for smaller community banks.

Hill, CEO of Little Rock-based Delta Trust and Bank, recently said in an interview with Talk Business that Dodd-Frank regulatory requirements place too many restrictions on local lenders and appraisers, and that the financial overhaul law intended to reform big banks is having unintended consequences on smaller ones.

Named after legislative authors U.S. Sen. Chris Dodd and U.S. Rep. Barney Frank, the “Dodd-Frank Wall Street Reform and Consumer Protection Act” was signed into law on July 21, 2010.

It was passed in response to the near collapse of several large U.S.-based banking operations in 2007-2008. Democratic leaders in Congress blamed the financial problems on a lack of federal oversight.

“Years without accountability for Wall Street and big banks brought us the worst financial crisis since the Great Depression, the loss of 8 million jobs, failed businesses, a drop in housing prices, and wiped out personal savings,” noted a summary of the legislation from the U.S. Senate banking committee.

DODD-FRANK PROVISIONS
Advocates of the law say it will prevent banks and other financial institutions from essentially creating a financial house of cards. Conservative opponents say it is overkill regulation that will make economic recovery more difficult. Liberal opponents of the bill say it goes too far in providing government security for the financial sector.

Key provisions of the Act, which are expected to be more fully articulated in 2013 and 2014, includes:
• Creation of a consumer interest “independent watchdog” housed at the Federal Reserve;
• Establishes capital requirements designed to end the “too big to fail” possibility among the big banks;
• Creates an “advance warning system” to identify systemic problems before they become big problems;
• Eliminates loopholes that allow the “exotic instruments” that helped fuel the financial meltdown in 2008; and,
• Creates new accountability and transparency rules for credit rating agencies.

The law was designed to increase examination and enforcement of banks and other financial service companies with more than $10 billion in assets. However, regulations will also increase for banks under the $10 billion level.

THE COST OF TIME
“While I don't believe we will see an elevated level of community bank failures in the next few years, the regulatory costs to operate will depress earnings. The relative burden will be much more severe on small community banks, as the additional overhead costs consume a much greater percentage of their revenues,” said Sam Sicard, president and CEO of First Bank Corp., the holding company of First National Bank of Fort Smith and the First National Bank of Rogers.

Sicard said First Bank Corp. will be able to manage the costs, but his concern is that compliance efforts will reduce the time bank officials have to create community relationships.

“Since we are a larger community bank, First National can absorb the regulatory costs and still generate an acceptable return to our shareholders. However, the bigger ‘cost’ is the amount of energy and time our bankers have to dedicate to complying with extensive regulations instead of building and strengthening relationships,” Sicard said.

‘A VERY DANGEROUS PLACE’
It is clear that Gary Head, CEO of Signature Bank of Arkansas, does not like the law.

“It is going to be much more difficult to make a profit when we have to add employees that add no revenue to comply with mountains of new regulations from Dodd-Frank,” Head said. “I am concerned that a bill (Dodd-Frank) that was not even read by the majority of the people that passed it will be interpreted by regulators that have no real background or education for any of these new rules, will be coming out to the banks and begin marshaling the regulations based on their own interpretations. We are headed for a very dangerous place that will affect all our customers.”

Head also provided historical context to his concerns that the law will harm community banks. He said such banks were the “backbone” of the economic growth fueled the Northwest Arkansas economy.

“Where would we be if we had waited on Bank of America to find Northwest Arkansas 30 years ago?” Head said in an e-mail note to The City Wire. “Community bankers have always tried to finance entrepreneurs (like Sam Walton, Don Tyson, and JB Hunt) that have been honest hard working people with more risk than will be allowed going forward. Very concerning!!! Particularly if you fashion yourself as the next successful business venture.”

IMPACT ON RURAL AMERICA
Craig Rivaldo, president of Arvest Bank in the Fort Smith region, said the impact of Dodd-Frank may not begin to surface until 2015 – but it will surface in a negative manner.

“It is hard to get comfortable with a governmental agency that is regulating your industry and has no concern about the viability of the industry’s future,” Rivaldo said.

Rivaldo shared Head’s concern about the potential loss of community banks.

“(Dodd-Frank) is going to have an enormous impact on banking, and sadly enough, could cause many community banks to sell off to much larger organizations and could ultimately have a negative impact on community banking,” Rivaldo wrote. “Banks are the economic engine to most communities, especially rural America. What will happen to these towns without their community bank?”

FEWER LOANS
Joe Edwards, president of Fort Smith-based Benefit Bank, was more moderate in his view of the Dodd-Frank impact. He said the bank – which has an office in Northwest Arkansas – has spent its more than 12-year history tackling the rise of regulations while working to keep a customer focus.

“Certainly this current economic environment creates unique challenges that make it hard on everyone to grow but our focus must be on our customers and their needs. Additional regulations, no doubt, will be forthcoming along with the normal unintended consequences, but the best way for me to deal with these unknowns remains the same answer, to maintain a focus on our customers and their needs,” Edwards said.

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Jim Patridge, president of the West/South Arkansas division for Tupelo, Miss.-based BancorpSouth, said customers of any bank will eventually feel the impact of increased regulations and the associated compliance.

“Besides the real, hard dollar costs, there are other opportunity costs felt by bank customers. Bank regulatory changes reduce credit available to bank customers, raise the cost of services and limit banking products and services,” Patridge explained.

Patridge also said the regulations are not good for economic growth.

“Like other banks in our industry, BancorpSouth is having to find ways to deal with these heightened compliance and regulatory oversight while attempting to replace lost revenue from various impacted lines of business. In the end, it means fewer loans get made, slower job growth, and a weaker economy.”

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