Trend of fewer small banks continues across the country

A mix of increased competition and regulations are contributing to a decades-long trend of fewer small banks across the country.

That trend was exemplified by Choice Financial Group’s recent acquisition of Great Plains National Bank, based in Belfield, N.D. That was followed by Alerus Financial’s announcement that it was acquiring Twin Cities-based Private Bank Minnesota.

Leaders of those banks said the moves will benefit customers and the communities they enter. But they also cited regulatory and economic factors that are driving a larger trend toward fewer small banks.

Choice CEO Brian Johnson said the acquisition allows Choice to extend itself into the lucrative western North Dakota market as well as southeastern North Dakota, where it can continue to work in the agriculture sector. It will also increase Choice’s assets from about $660 million to $850 million, Johnson said, and increase its presence from 10 to 15 locations, all but one of which are in North Dakota.

Great Plains’ five locations will become Choice branches by the end of April, Johnson said.

The move also helps Great Plains navigate the increasingly difficult regulatory environment that emerged after the financial crisis, Johnson said. More banks, including Choice, are devoting employees and resources to regulatory compliance, which creates more fixed costs.

Still, bank consolidation was occurring well before the financing regulations of the Dodd-Frank Act, which passed in 2011. Between 1984 and 2011, the number of banks decreased from 17,901 to 7,357, according to the Federal Deposit Insurance Corp., or FDIC.

Competition

Randy Newman has seen the trend play out throughout his career in banking.

The president and CEO of Alerus Financial said a period of deregulation in the 1980s led to some consolidation. Among those changes, according to a 2012 FDIC report, were the relaxing of rules on intrastate branching, which artificially inflated the number of banking charters “and their removal was bound to result in consolidation.”

But during that period, competition among banks grew, and some mergers and acquisitions followed, Newman said.

“Banking is much more competitive,” Newman said. “If you can’t grow in your market, then you look outside your market to grow.”

Newman added that the banking industry has become more complex over the past few years, at least partly because of the new regulations put in place by Dodd-Frank.

But, he said, regulations are “only one of several contributing factors of what is happening to the banking industry.”

“It’s really been a long-term systemic trend in banking over the last 30 years,” he added.

Alerus’ acquisition of Private Bank Minnesota won’t be complete until the second quarter of this year, and it will increase its assets to roughly $398 million in the Twin Cities market. Currently, Alerus has locations in the Twin Cities suburbs, but the acquisition will mean its entrance into downtown Minneapolis.

Newman said acquisitions are a part of Alerus’ business strategy.

“It’s nothing really new for us,” he said.

Costs

In the wake of the subprime mortgage crisis that contributed to the biggest financial downturn since the Great Depression, Congress passed new stringent regulations on the nation’s financing institutions.

But Rick Clayburgh, president and CEO of the North Dakota Bankers Association, said those regulations are being felt by small banks that had nothing to do with the financial meltdown. He said those banks may have to add staff dedicated to making sure they’re following the complex new rules imposed by Dodd-Frank, increasing fixed costs that they may find difficult to absorb.

Choice, a midsize community bank, already had staff in place to deal with those regulations when it acquired Great Plains, Johnson said.

“They didn’t have those resources available,” he said. “It’s becoming a challenging operating environment for smaller-staffed rural banks.”

Between the second quarter of 2010 and the third quarter of 2013, small banks’ share of banking assets decreased by 18.6 percent, according to researchers at the Mercatus Center at George Mason University. Some of the decrease is natural because the institutions simply outgrew their small bank status.

But a survey performed by Mercatus Center researchers found that almost 85 percent of banks with less than $10 billion in assets reported at least a 5 percent increase in compliance costs since the passage of Dodd-Frank. More than a quarter of respondents said they expected to be part of a merger or acquisition in the next five years.

Hester Peirce, a senior research fellow at the Mercatus Center, said smaller banks may choose to seek a merger or acquisition to deal with the increased cost of regulation, as well as the price of new technologies.

“It makes sense to spread it over a larger base,” she said.

Small banking

Both Newman and Johnson said even as small banks become scarcer, they’ll continue to have a role to play in their communities.

According to the FDIC, community banks hold the majority of banking deposits in rural and micropolitan counties. In North Dakota, 41 of the 88 chartered banks have less than $100 million in assets.

“A bank is a mirror of its local economy,” Newman said. “If the local economy is strong or diversified and growing, then I think a community bank has a very good chance of serving its community.”

Newman said technological advances that make it easier to do business from home or remotely are allowing well-performing small banks to compete with larger ones. But, he added, those advances have costs.

“You’ve got to invest heavily in it, and we have,” Newman said. “That again comes at a cost.”

Clayburgh said the coming years likely will see further consolidation, but he said banks will seek out those moves if they make sense for the institutions.

“I think what you’re seeing is well-thought-out or planned-out mergers and acquisitions,” he said.