Community bankers concerned with regulation, non-bank competitors

In a new report, Idaho community banking leaders say improving economic conditions are helping their business, but increased regulations and competition is making it tough for them to survive. Walmart, financial technology companies like Square and Paypal and credit unions are all challenging Idaho banks.

A report from the Federal Reserve and the Conference of State Bank Supervisors found that community bankers nationwide and in Idaho are concerned especially about new home lending regulations, including qualified mortgages and ability-to-pay standards that need to be met for banks to sell mortgages on the secondary market. Some borrowers aren’t qualifying for loans and banks are having to add more staff to handle regulatory compliance.

Bank of Commerce CEO Tom Romrell, who attended the Fed’s meeting in St. Louis, said compliance requirements have led his bank to go from one compliance staffer before 2008 to four full-time employees now.

“It’s four times the numbers of compliance personnel just to handle and implement new compliance requirements on the bank,” said Romrell. He said smaller banks like his Idaho Falls-based bank lack the economies of scale of larger banks to handle that burden.

“Unintended consequences affected many of the smaller community and regional banks,” he said.

Idaho Department of Finance Director Gavin Gee said adding those compliance employees also prevents banks from serving their clients.

“Almost all the banks have had to add consumer compliance officers, and spend a lot of time doing that rather than going out and generating new business,” he said.

Community banking leaders in the state also said they are facing stiff competition from new and established technology companies, including payment companies like Square and Apple’s newly announced ApplePay system. Gee and Romrell also both brought up Walmart’s new checking account offering.

“To the extent that those systems catch on and become prevalent and circumvent the banking system, that hurts community banks and the traditional banking business model,” Gee said.

Romrell said community banks will compete by working with legislators to alter regulations and by offering superior products and services. He said community bankers also try to be involved in their communities, which can help them attract and keep clients.

“But it’s a tough go, as you look at a fast-changing economy,” Romrell said. However, he said the continuing improvements in Idaho’s economic conditions are helping his bank.

The Fed and CSBS report also included a survey of national bankers on their product offerings and some early effects of the qualified mortgage and ability-to-repay rules. Nearly all respondents said they wouldn’t exit or limit any of their product lines. Around 40 percent said they also wouldn’t offer new products in the next three years, while most of the new offerings revolved around online and mobile banking.

Gee said that while it has been tough for smaller banks to keep up with new technological offerings, he said over time, the price of those technological offerings should decrease. He compared it to the advent of ATMs and tele-banking, which were once prohibitively expensive but are now commonplace.

“As we go forward, community banks should not be placed at a disadvantage,” he said.

The survey found that most banks say less than 10 percent of their mortgages don’t comply with the new standards. Banks that keep their loans in their own portfolio don’t have to follow the qualified mortgage rules. The most common reasons for borrowers being rejected included a high debt-to-income ratio, inability to verify income/assets and weak or nonexistent credit history.

The national survey also found that many banks are looking at mergers and acquisitions. One in five community banks made an offer to acquire another bank, with a similar percentage saying they expect to make or receive a merger offer in the next year.