Smaller banks facing hurdles to stay afloat
Customer loss, consolidation are threats to many in state
Small banks with less than $500 million in assets that wish to remain independent face several challenges, Julie Stackhouse, executive vice president of the Federal Reserve Bank of St. Louis, said in a recent interview focused on Arkansas banks.
Among the 96 banks in Arkansas, there are 75 with less than $500 million in assets.
The first thing to do, Stackhouse said, is to plan for the future.
“Frankly, sometimes it is daunting to plan for the future,” Stackhouse said. “But we’ve seen many success stories of banks that think about what has happened to their customer base and how they can continue to offer services to both their retail and commercial customers.”
Banks that do strategic planning should be able to remain in business for a long time, she said.
“But it requires an intentional planning effort,” Stackhouse said.
One practical way to remain independent may be to branch out, said Garland Binns, a Little Rock banking attorney.
“For those banks that are not in growth areas of Arkansas, branching into metropolitan areas is one alternative,” Binns said.
Major issues that banks face include cyber threats and the implementation of new technology into bank operations, Stackhouse said.
“On the one hand, [bankers] know their customers are demanding more technology options,” Stackhouse said. “On the other hand, they know it costs money and potentially increases their footprint from a cyber landscape standpoint. So they’re really trying to weigh what’s the right thing to do and when to do it.”
Bankers were told during the recession to improve asset quality if they wanted to be successful in the long term, Stackhouse said. Now the formula is about investments and cyber risk, she said.
Financial technology businesses and banking can be good partners in innovation, Stackhouse said.
“We see lots and lots of opportunities for partnership,” Stackhouse said. “When it gets down to smaller banks, however, small banks are less well positioned to pick and choose pieces of financial technology.”
Instead smaller banks are looking to offer customers services created by financial technology companies rather than the bank making direct investments in the technology, Stackhouse said.
Nationally, banks are consolidating at a 3 percent to 4 percent pace.
In Arkansas, banks are disappearing at a slightly faster pace. There were 118 banks in Arkansas in March 2014 compared with 96 banks in March this year.
Consolidation of banks will continue, Binns said.
“One reason is because of regulatory compliance costs to banks and the inability of banks to hire qualified management personnel in rural areas,” Binns said.
Stackhouse also expects the reduction of banks to continue.
Regulators are starting to report signs of struggle at rural community banks related to the cost of responding to regulatory requirements and to a loss of population, Stackhouse said.
Many communities are losing population and may also be losing businesses, she said.
“If you lose your customer base, it’s hard to be [a successful bank],” Stackhouse said.
Another area that contributes to fewer banks is chief executive officer and board succession, she said.
“In other words, who’s going to step in next to run the bank and be on the board,” Stackhouse said.
A final contributor to the shrinking number of banks is financial technology, she said.
“Customers are saying, ‘I don’t really want to go in your doors. I want to get that service online,’” Stackhouse said. “It’s an investment. When you are small, that’s a significant strategic decision. On the one hand, if you don’t do it, you may lose customers. And if you [do it], it may cost you on the profit side.”
But one thing helping banks is the federal tax law change, Stackhouse said.
“It has clearly been beneficial for banks across the board,” she said. “We saw improved profits in the first quarter. I don’t think that changes things forever, but certainly it is helping some banks that were really struggling with profits.”
The federal tax law, passed in December, reduced the corporate tax rate from 35 percent to 21 percent.
Arkansas’ smaller community banks improved their return on average assets — a measurement of a bank’s profitability — by 0.2 percent from March 2017 to March 2018. Nationally, similar banks improved their profitability by 0.24 percent for the same period.
Even with banks selling or merging, there still isn’t much motivation for investors to create a startup bank from scratch.
To organize a new bank in Arkansas, the required regulatory capital would be in excess of $15 million, Binns said.
“From a practical standpoint, it would be less expensive for an organizer to buy an existing bank in Arkansas with regulatory capital of less than $15 million,” Binns said. “With existing banks in Arkansas continuing to consolidate, there may not be a need for new banks.”