I’m back from Bank Director magazine’s annual “Acquire or be Acquired” conference in Phoenix last week. I wish someone from the Obama administration had been there. He’d have gotten an earful. More about that in a minute.
In any environment, “Acquire or Be Acquired” is one of the most interesting conferences of the year. It focuses on a topic near and dear to every banking executive’s heart: M&A. And given what the banking industry has endured over the past several years, M&A is especially timely now. Certainly the level of interest in the topic was high: this year’s attendance topped 700 people, breaking the previous record by over 100. Typically, about 70% of the conference’s attendees come from institutions with fewer than $1 billion in assets. This year that percentage was much higher. Just about all the increase in attendance from last year consisted of individuals from under-$1 billion institutions.
In any event here are my key takeaways:
1. Bankers feel like the government is crushing them. Banking executives are angry, frustrated, and bewildered by examiners’ new, overreaching assertiveness. (This happens every cycle, by the way: regulators who were asleep on the job during the worst abuses at the cycle’s peak suddenly bring the hammer down after the crisis has passed.) Add to that the new rules and regulations about to be put in place following passage of the Dodd-Frank Act, and bankers feel they are being smothered.
2. Banks need to reach a new minimum size threshold if they want to compete. Complying with all these new rules, regulations, and overzealous examiners costs money. Given the new burden, very small institutions that once generated adequate returns can no longer do so. Capital requirements are going up, as well. The consensus at the conference seemed to be that a bank needs to have at least $500 million in assets to be competitive.
One director of a $300-million bank in the West pulled me aside to tell me his institution’s regulatory tale of woe. The FDIC recently conducted a “compliance” exam of his institution, its first at his bank in seven years. As part of the exam, the FDIC brought 17 examiners and stayed three weeks. When the examiners were done, they issued a scathing report that required the implementation of all sorts of new procedures and reporting requirements. “I don’t know what we are going to do,” he told me. “Four years ago we could make money with just $50 million in assets, now I think he we’ll need to be many times that.”
3. The regulators continue to wreak havoc. During the last major banking industry credit crisis, in the early 1990s, only one principle bank regulator, the OCC, significantly overreacted. Other regulators (notably the Fed, the FDIC, and state regulators) stayed relatively rational. Not this time. Now, it seems like everyone has lost his mind-and are making the banking industry’s problems worse, in the process. (By the way, I saw that President Obama spoke to the U.S. Chamber of Commerce yesterday and begged the executives there to start hiring again. A better use of his time, I bet, would be a similar speech to federal bank examiners, where he might ask them to take their feet off bankers’ necks.)
Trust me, if you attended a banking conference like the one I was at last week and listened to some of the bankers’ horror stories, you’d become more sympathetic to bankers. They of course can’t go public with their stories of regulatory abuse-that would just earn them a new slap-down. Nor do many politicians yet have enough courage to defend the banks. It’s truly incredible: the excessive burdens wrought by bank regulators have surely held back credit creation and economic growth.
4. Massive consolidation has started. Pressure on banks-especially small banks-seems to lately be coming from all sides. They of course face all those new regulatory costs. But in addition, loan demand is weak, and capital requirements on the rise. In many cases, fee income is under pressure, too. Faced with all this, many banks feel they need to get bigger to survive. A survey taken at the conference showed that about half the attendees believe they need to acquire other banks in order to grow over the next few years.
These profitability pressures are real. In fact, I believe the people at the conference weren’t concerned enough! There’s no question that massive consolidation is coming to the banking industry over the next several years–particularly among institutions with less than $1 billion in assets.
The current administration and Congress say all sorts of nice things about community banks and bankers, but their actions (and those of their deputies, the regulators) have given community banks a death sentence. It’s a shame and it’s just not fair!
What do you think? Let me know!