HONOLULU — Larger banks have unseated regulators as the bogeyman standing in the way of small banks' survival.

Compliance remains a concern, but exemptions and last-minute changes to various rules and regulations have certainly helped to ease the sting at smaller institutions. Numerous attendees at the Independent Community Bankers of America's annual conference here are expressing more frustration about the pressure they face from their bigger brethren.

Such pressure is prompting more bankers to talk about the need to gain scale — most likely through consolidation — to compete.

"I think local banks need to combine," says Robin Cummings, chief executive at the $559 million-asset Peoples Bank of Alabama in Cullman. He believes that the oft-mentioned $1 billion-asset mark is the minimum threshold for survival.

"The other day I counted the number of banks between our offices and the shopping center on the other side of town, and there were 15 banks," Cummings adds. "We've competed against each other for years but I think we've got to get these banks together."

Niche banks, including those that target certain ethnic groups, are feeling pressure from big banks such as JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC), says Alan Thian, the president and chief executive of Royal Business Bank in Los Angeles. He says that pressure is also forcing smaller Asian-American banks to sell.

"Either we acquire or we get acquired," Thian says. The $718 million-asset bank has made three acquisitions since it was formed five years ago. "Regardless of niche, you have to get to a certain size. Eventually, whether on your own or through merger, you need to get to $700 million to a $1 billion. I don't see a niche bank surviving if they are smaller than that."

Bankers consistently bemoan how their margins are getting pinched by artificially low rates. That pain has been exacerbated by the loss of larger clients to bigger banks that are offering rates and terms that the small guys are unwilling — or unable — to match, they say.

"The biggest obstacle is competing with interest rates," says Paul Patout, the president and CEO of the $359 million-asset Gulf Coast Bank in Abbeville, La. "Our loan-to-deposit ratio has gone from 90% to about 60% in five years. A lot of the larger banks in our market are doing crazy things like offering 3% fixed rates for 10 years. We can't do that."

Still, community bankers are doing what they can to maintain margins. And many are hopeful that short-term rates will eventually begin to tick up.

"You can change interest rates one basis point at a time," says Mac McClanahan, the president at the $437 million-asset Diamond Bank in Glenwood, Ark.

"That's the way we approach it on both sides of the balance sheet," McClanahan says. "We think rates will go up in mid-2015, and we want to be as ready as we can. We're doing tons of variable stuff. We're willing to give up rate to get the spread protection. We're telling our lenders they can give on rate or terms, not both. They need to keep one of those for us."

Of course, bankers aren't ignoring the influence regulators still have on their activities. Erik Thompson, the CEO at Prairie Sun Bank in Milan, Minn., says his $36 million-asset bank is heavily involved in loan participations and agricultural lending — two business lines that are drawing heavy regulatory scrutiny.

The topic of regulation was discussed during a closed-door session of larger community banks, says Ronald Geib, the president and CEO of the $816 million-asset Harleysville Savings Bank in Pennsylvania. The gist of the discussion: be mindful to avoid running afoul of regulators because they will not let up on a bank or management if a misstep is made.


Paul Davis is the community banking editor at American Banker.


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