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Community Banks Feel Regulatory Pinch

7 min read

The Dodd-Frank Act celebrated its fifth anniversary last week, but it’s probably safe to assume many community bankers in Arkansas didn’t feel like partying.

Dodd-Frank — officially the Dodd-Frank Wall Street Reform & Consumer Protection Act — was signed into law by President Barack Obama to tighten financial services regulations in the aftermath of the 2008 financial crisis.

Community bankers have complained that the regulations that are being implemented by Dodd-Frank are causing financial hardships on banks that were not responsible for the financial meltdown caused by “too big to fail” institutions.

Candace Franks, the Arkansas state bank commissioner, spoke earlier this year to a U.S. Senate banking committee as the chairman of the Conference of State Bank Supervisors. Franks spoke of the importance of community banks and the drawbacks of the current regulatory environment.

She called for “right-sized policy solutions,” and said community banks were “essential” to the U.S. economy. Franks said 96 Arkansas towns are serviced by only one bank, and 66 of those towns have a population of less than 1,000.

Most of the country’s banks have less than $1 billion in assets, Franks said, but are lumped in with global financial institutions. Of the 106 banks in Arkansas, nine have more than $1 billion in assets, led by Arvest Bank’s $15.8 billion.

“State regulators are concerned that an approach to regulatory relief that relies solely or primarily on asset thresholds falls short in granting small community banks real relief from regulations designed for their larger competitors,” Franks said. “True regulatory right-sizing for community banks will require a holistic approach.”

Senate Republicans last week put forth an attempt to rein in some of what they consider the unfairness of Dodd-Frank. Senate Banking Chairman Richard Shelby, R-Ala., attached a measure to a $21 billion spending bill that would give lenders more leeway in making loans and ease requirements for smaller banks.

Arkansas Sen. John Boozman is the sponsor of the GOP spending bill, passage of which is considered a long shot.

“This is the five-year anniversary of Dodd-Frank,” said Boozman, who met with representatives of community banks during a tour of northwest Arkansas earlier this year. “We are losing community banks all the time because of one-size-fits-all and the compliance costs. This is just an effort to use every tool that we’ve got in an effort to provide them with some relief.”

‘It’s Costing Us Money’

Steve Stafford is the CEO of Anstaff Bank, formerly known as First National Bank of Green Forest, and he said the compliance expense is one reason his bank is planning expansion. Anstaff, which has $423.6 million in assets, has nine branches in four northwest Arkansas counties, and the nongeographic name was selected to help it expand outside its historic base of operations.

The expansion is needed because, Stafford said, the bank must grow to keep up with the increased regulatory expenses associated with Dodd-Frank and other initiatives.

“The regulations, they just keep piling it on us,” Stafford said. “It’s costing us money. The bigger we get, the better we can afford the expertise and the personnel that we need to comply with all the regulations. The expense is what makes it so difficult on some of the smaller banks, because a lot of them have to outsource that.”

Stafford said Anstaff isn’t in a fight for survival but other small banks face the dilemma of buy or be bought.

“They just paint everybody with a broad brush and it ends up affecting all of us,” Stafford said. “What I hear from some of my banker friends, and banks that are smaller than me, is they’re tired of fighting. It’s difficult to make [the income]. Banking is changing and you’re fighting that, and then you have all these additional expenses because [of] compliance and regulations.”

Luther Guinn, deputy commissioner of the State Bank Department, said the state commission has heard from many bankers who have grown tired of the regulatory battles. Losing a bank would be a bad blow to a small community, and the commission has heard from banks about the buy-or-be-bought concerns.

“The small banks are the lifeblood of these communities,” Guinn said. “They take an active role in the communities. Banks are front and center. The scoreboards at the high school football game or baseball game are typically provided by these banks.”

Stafford became president of Anstaff in 1978 at the age of 28, and the bank has been led by a member of the Anderson or Stafford families since its founding in 1931. Being a part of the community is important to Stafford, whose son-in-law Brad King was named the bank’s fourth president earlier this year.

“Our customers are our neighbors; we went to school with them,” Stafford said. “We support the community as other community banks do. You support the community where you’re headquartered and where you operate. When they make it more difficult and those banks leave, it hurts the community.”

Martin Carpenter is the CEO and chairman of FNBC Bank of Ash Flat, which has $359.6 million in assets. Carpenter, who is also president of the Arkansas Community Bankers Association, said the continuing regulation “weighs” on small banks.

“The regulatory burden has been increasing pretty steadily for the last several years, but since the financial crisis and the implementation of Dodd-Frank, they have really gotten burdensome,” Carpenter said. “We haven’t even gotten through all the implementation yet.”

Carpenter said the over-regulation will end up hurting consumers, especially those who rely on small banks for loans and purchases. Carpenter said that in the current environment, there have been loans he and his bank have passed on.

“Loans we would have made a few years ago, we don’t make now,” Carpenter said. “We can’t afford to. The requirements are just so stringent we can’t. It takes the decision out of our hands.”

Any additional expenses incurred by banks will eventually get passed to customers, just as in any other industry, Carpenter said.

“The cost of compliance goes up for us; then the cost to the consumer has to go up somewhere in there to compensate for that,” Carpenter said. “In my opinion, everything is a little overboard right now. All of these regulations add on layers of paperwork. To get paperwork done, it takes more people and then more people to review it and make sure it is done right. It just goes on and on.”

That’s where the Arkansas State Bank Commission wants to help, Guinn said. The commission supports community banks with lobbying efforts, such as Franks’ appearance in front of the Senate committee, but also by helping them understand the new regulation requirements.

“It continues to be a real burden to our community banks,” Guinn said. “We’re hoping Sen. Shelby and other senators will be able to give our banks some relief.

“As an agency, we try to help our banks deal with regulations. With Dodd-Frank, there are still a lot of regulations to be [implemented]. We can help them navigate the process. It can be extremely aggravating.”

To say the least, said Stafford and Carpenter. Stafford said new accounting requirements could cost his bank $100,000 — no small sum to his bank — not to mention the time used to train employees and install new systems and the like.

“I shouldn’t be under the same umbrella of regulations that Citibank or Regions Bank or those bigger banks are,” Stafford said. “What affects them and what affects us is different. Congress hears a few bad stories on them and passes all these regulations. It actually makes it more difficult for us to serve the people and take care of our customers.”

Carpenter said the current regulatory environment is a classic case of solving a problem after it has happened and, to some degree, solving a problem that isn’t really a problem. Like Stafford, Carpenter said all banks are being blamed for the incompetent or negligent actions of a few banks or financial institutions.

“I’ve been in this business 42 years, and there are always a few who create a problem for the many,” Carpenter said. “The rest of us have to pay for that. That’s just the way it is. It is unfortunate that we get treated the same as a multibillion-dollar institution that is operating somewhere all over the world.

“Any time you set in to regulate to the point that whatever just happened won’t happen again, you’re probably going to go overboard. We live in an imperfect world and as far as banks go, we are in the risk management business. You can’t take all of the risks out of it.”

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