Community banks struggle with regulations

Bankers say the success or failure of any community bank is a direct reflection of the status of the community in which it operates.

The prosperity of the local real estate market, business community and general workforce, compared to the diversity to which each bank deals with each component, they say, usually combines to form a workable success/failure equation for the banks.

But throw in 2,300 pages of reformed national banking regulations, with the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 and its gradual implementation in 2012, along with the local Central Florida economy still struggling in all three main areas, and the equation is not so clear.

“Community banks, much more than their national counterparts, are reflective of community Main Street rather than corporate Wall Street,” said Donald McGowan, president and CEO of BankFIRST in Winter Park. “… And right now a variety of pressures are starting to weigh on community banks forming a perfect storm.”

With increased focus having to shift from lending to regulatory compliance following increased government revisions of community banking practices, some fear the pressure will be too much for local banks to withstand.

“Community banks play a vital role in our economy,” said Alex Sanchez, president of the Florida Bankers Association, “and I’m concerned that the burden is going to keep increasing… the federal government seems to be putting out more and more regulations every minute with no end in sight.”

Though they may be late to the banking crisis party of 2008 and 2009, community bank leaders say the effects of the recession have trickled down and are hitting them at the local level. Whether the banks are trying to successfully navigate through the crisis on their own, or with forced intervention and supervision of the U.S. Treasury, they say they’re doing all they can just to stay afloat.

Comping compliance

Commerce National Bank & Trust in Winter Park was issued a regulatory consent order by the U.S. Treasury Comptroller Office on Jan. 24. President Ray Colado says the bank has been operating within guidelines provided by the government to assure it makes it successfully through the remainder of the recession.

The order, he says, mandates a roadmap of instructions for his bank to follow to get in compliance with federal credit regulations. Issues with the real estate market and people increasingly walking away from their mortgages, slow judicial processes and the ever-changing and burdensome regulations, he said, led his bank to the stage of governmental intervention.

“That’s a combination that fosters issues and that’s why you’re seeing so many banks have problems,” he said. “… This is making us re-evaluate if the risk is worth the reward and investment in many instances we might not have second guessed before.”

Sanchez, with the Florida Banking Association, says these sorts of governmental orders have become more and more frequent in the last three years, as community banks are struggling to comply with regulations.

Colado says his bank is on its way to satisfying all chapters of the issued consent order, including hiring a former officer of the Comptroller of the Currency to help them navigate regulations and guide the board of directors in management, as well as additional loan personnel to oversee financial strategic planning. Customers, he said, have been alerted to the additional governmental review but should see no change in their banking experience.

“This is something that bankers all over the state and the Southeast are dealing with,” he said. “… It’s not a quick fix, but it’s something we are going to be diligent about.”

Sanchez said by making banks like Colado’s focus on compliance over lending, though maybe with good intentions, the federal government is slowly sucking the life out of one of every community’s most important economic forces — the community bank.

“The real job creators in any community are small businesses, and 40 percent of small business loans come from community banks… these banks are out there reinvesting money back into the community,” he said. “But with thousands and thousands of pages of new regulations piling up, how could any small business, banking or not, survive that?”

That’s what a new system of checks and balances to the U.S. Office of the Comptroller of the Currency was designed to address, Acting Comptroller John Walsh told the Independent Community Bankers of America. In a speech to the group in March of 2011, after the implementation of the Dodd-Frank banking reforms, he told bankers he was working with them, not against them.

“Given the extent of our commitment to community banking, it’s a matter of great concern to me when I hear, as I sometimes do, that community bankers feel the business is no longer sustainable, or — worse — that regulators, including the OCC, agree and are encouraging community banks to exit the business,” Walsh said. “This latter point is both completely untrue, and particularly troubling… I can assure you that we at the OCC believe very strongly in the future of community banks.”

To that end, Walsh said that his office is working to increase communication and feedback between banking regulators and individual banks to make the process less obstructive and more facilitative.

“I believe it will be important for all of us — banking regulators and the consumer bureau — to establish and maintain a constructive dialogue, which we are already doing,” Walsh said, adding that improving that communication will be an ongoing process that he admitted the government needs to work on.

Bruce May, president and CEO of First Colony Bank of Florida headquartered in Maitland, said operations have been navigating through choppy waters since the bank opened in 2008.

Since the burst of the housing bubble and the steadily sinking local economy, he said his bank has focused on “conservative, profitable growth,” which he says they have been able to accomplish, with 2011 being their highest earnings year yet. But getting to this point hasn’t been smooth sailing.

“Just like any small business right now, I think that there are some struggling more than others… there’s a long way to go until stable,” he said.

McGowan, with BankFIRST of Winter Park, said though his bank has faired well through the recession thus far, the timetable for total recovery, at least for community banking, keeps extending due to decreased loan growth, increasing government interference in banking business, and the mounting pressure of new federal banking regulations.

He estimates that many small community banks, in his calculations even up to a third of them, will be consolidated into larger ones in the next year unless something is done to help them deal with all of these issues, especially in monitoring the regulations.

“These three scenarios that are playing out right now are causing a lot of community banks to look at their individual viability right now,” McGowan said. “And a major factor they’re considering is whether they can keep up with compliance.”