August 21, 2017

Banks' mounting pressures closing some doors, widening others

Craig Howie, president of Bankers' Bank Northeast in Glastonbury.
Regulations and technology shape everything banks do from making loans and taking deposits, to where they locate their automated teller machines.

Pressure is mounting on Connecticut's and the nation's community banks, results of the unrelenting burden of tightened regulations while staying abreast of fast-moving, expensive mobile-banking technologies in the Internet Age.

Recent evidence of the quaking bank landscape in Connecticut and New England was Bankers' Bank Northeast's (BBN) Aug. 2 announcement of its pending $17 million stock acquisition by Pennsylvania rival, Atlantic Community Bankers Bank.

BBN serves the correspondent-banking needs of its 175 or so Connecticut community banks, and a handful of credit unions, with such services as check and wire transfers processing. As members, those institutions also are investors in BBN.

Craig Howie, BBN's president and chief executive and technology officer, said regulatory and technology pressures have sparked a raft of bank mergers nationwide and in the Northeast, making it difficult for BBN to recruit more banks as clients.

"I'm sure we're going to see the same thing in Connecticut,'' Howie told HBJ on Aug. 2, the day BBN and Atlantic Community, of suburban Harrisburg, Pa., announced their pending $17 million merger.

Later that same day, Stamford community lender Patriot National Bank announced it was acquiring much-smaller Prime Bank in Orange. Prime cited the opportunity to leverage Patriot's capital base to expand services to Prime customers.

Not all New England banks are shrinking. Larger financial institutions, notably ones with strong capital bases and in good standing with regulators, are expanding.

In March, for example, $43 billion-asset People's United Bank in Bridgeport acquired Long Island lender Suffolk County National Bank and its 28 branches for $402 million, expanding its footprint into the lucrative New York state banking market.

Two months later, Berkshire Bank, a Pittsfield, Mass., lender that entered Connecticut's northern banking market with its 2012 buyout of Hartford-based Connecticut Bank and Trust Co., announced its intent to buy a larger Massachusetts lender that would more than double Berkshire's assets to $12 billion.

Berkshire has pending a $209 million acquisition of Commerce Bancshares, of Worcester, Mass. However, Peter Samson, senior vice president in charge of Berkshire Bank's Hartford region, says the acquisition is being driven mostly "as part of our overall strategic-growth plan."

Samson acknowledges the tightened pressure on banks nationwide as a result of new or tightened regulations, particularly Dodd-Frank financial reforms passed in the wake of the 2008-09 financial crisis.

Many lenders across Connecticut and the U.S. have been critical of Dodd-Frank, which dictates more strictly how banks write mortgages and to whom, and the amount and limits on account overdraft and credit card fees, among other guidelines.

They say those rules are overly burdensome and costly, especially in a Connecticut economy not fully healed from job losses and other commercial setbacks stemming from the Great Recession.

"The regulatory compliance costs are definitely a big and growing problem,'' said Leonard Suzio, president of GeoDataVision, a Meriden regulatory-compliance consultant to small and mid-size banks. "They're much more aggressively enforced today than they were 10 years ago. All those things come together to put pressure on banks.''

Connecticut Banking Department spokesman Matt Smith says while the costs of regulation and technologies are factors, they are among myriad reasons why banks here and elsewhere are consolidating. Pursuit of new markets and leadership succession, too, are reasons, Smith said.

"The important things to note,'' he said of consolidations, "is we haven't had any adverse effects on the consumer."

Bankers say the costs of satisfying Dodd-Frank guidelines and other regulatory requirements have had a proportionately more negative impact on smaller banks.

Samson said lenders with less than $1 billion in assets are the most likely consolidation targets. Others agree.

According to a 2016 report by accounting and consulting firm KPMG, 50 percent of the 100 or so bank executives surveyed at the time said a bank must have at least $1 billion in assets in order to remain independent. Another 41 percent said banks need at least $5 billion to survive long term.

Consolidation arc

Merger and acquisition (M&A) activity within Connecticut's banking industry has been relatively stable in recent years, even following the Great Recession. From 2008 to 2015, the largest number of mergers in the state in any one year was five in 2009 and 2010.

Connecticut's banking industry remained relatively strong throughout the Great Recession, mainly because lenders here avoided much of the subprime lending that dragged down many banks nationwide.

That prevented a major M&A wave from sweeping through the state. However, the slow and consistent trickle of Connecticut bank mergers — spanning decades — has significantly consolidated the industry.

For example, at the end of March 2017, there were 42 Connecticut-based banks in the state, and just three lenders with less than $100 million in assets, according to Federal Deposit Insurance Corp. data. A decade earlier, in March 2007, there were 57 Connecticut-based banks, including eight with less than $100 million in assets, FDIC data shows.

Stretching back even a decade earlier, in March 1997, there were 84 Connecticut-based lenders, which means the state has lost 50 percent of its banks over the last two decades. Meantime, small community lenders have nearly gone extinct.

Regulations and technology

Mergers have been sparked by various factors, but expensive, yet necessary investments in technology is an increasing concern these days.

Banks are being forced to invest significant sums in mobile/online banking and other technology to sate customers' demands for more convenient financial services. In addition, they are sinking more money into protecting customer data as the threat of cyber attacks increases daily.

And banks that don't keep pace with those investments risk irrelevancy, according to the KPMG report.

"Like it or not, smaller banks will need to do a better job of everything from mobile offerings to virtual tellers," the report said. "There has been movement on these fronts, but the movement has been slow and sporadic. Laggards will soon enough realize they are far behind the competition and imperil their organizations."

By merging, banks can gain access to more capital and shrink their cost structures to stay competitive.

Another threat against smaller banks' business model of hyper-local lending and deposit-taking from commercial and household customers is the growth of online-only, nonbank competitors, including Ally Bank, Go Fund It and Lend It, according to David Mitchell, president of Florida financial services IT vendor NYMBUS, which recently opened a Glastonbury office.

"It's a perfect storm,'' he said. "The 12,000 [U.S.] banks left are healthy, but digitalization of the world we're in and consumer demand [is making it tougher for them to compete]. … The biggest competition for the banks and credit unions going forward is these nonbanks.''

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