A NON-BANKER’S PERSPECTIVE Attorney Robert Smith is critical of the new regulatory environment that financial institutions face and is concerned about the dwindling number of small-town banks. By Talk Business & Politics Staff Robert Smith is a partner in the Friday, Eldredge & Clark Law Firm’s Mergers & Acquisitions Practice Group. His corporate practice focuses on representing individuals, companies and financial institutions in general business, transactional, securities and regulatory matters. He has handled transactions in a variety of industries, including the banking, broadcasting, retail, manufacturing, real estate, technology and health-care industries. In the banking area, Smith advises clients on merger and acquisition transactions, branch purchases, lending, regulatory compliance and capital raising activities, including government investment programs. We recently asked him his thoughts on the effects regulations are having on the banking community as well as what kind of future he sees for smaller banks in Arkansas. TB&P: Arkansas bank profits have been consistently higher over the past several years, according to FDIC statistics, yet we continue to hear about regulatory burdens squeezing profits. How have you seen the bigger banks adapting versus the smaller banks to these regulatory burdens and is it as bad as we hear? Smith: While bank profits have been higher, it is in spite of new regulations. Banks had nowhere to go but up after the impact of 2008 and 2009. Although you could not convince Elizabeth Warren of this, it is ridiculous to say that the new regulatory environment does not disproportionately
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Attorney Robert T. Smith PHOTO BY DERO SANFORD
impact community banks as compared to their larger rivals. Over the past several years, the regulatory changes have slowed banks’ ability and willingness to make mortgage loans, in addition to the significant increase in compliance costs. It is also short sighted to see the rebound in profits and declare that community banks have successfully withstood the regulatory avalanche. I recently read that the average community bank (defined as less than $1 billion in assets) has fewer than 40 total employees. That includes everybody, tellers, secretaries, loan officers, etc. The economies of scale simply do not exist to allow those smaller institutions to maintain profitability at a level that their shareholders and potential investors will accept. The time horizon to assess the impact of this new environment has to be longer than just a few years. Your question asked how larger banks have adapted. I have observed that they are simply in a better position to address the compliance issues because they have the capacity to add personnel, training, etc. This then obviously puts enormous pressure on small banks, leading – in many cases – to the decision to sell. Arkansas is fortunate to have many well-run institutions. The larger institutions (several billion dollars plus) have looked around the Southeast region and taken advantage of acquisition opportunities. Small well-run banks have taken advantage of the opportunity to grow above the $500-million and $1-billion levels through mostly in-state acquisition.
TALK BUSINESS & POLITICS | MAY/JUNE 2015
TB&P: We’ve seen significant merger and acquisition activity in the market. What type of M&A activity do you sense we will see more of in the next year to three years? Smith: I believe the pace will continue to slow when compared to the past four to five years of activity in Arkansas. However, we will still see plenty of active interest in evaluating deals (and many behind the scenes as banks test the waters and search for acquisition partners). The Bank Director publication recently released an M&A survey indicating that around two-thirds of banks believe that the current environment for transactions is more favorable than last year. One of the factors cited was continued improvement in credit quality. While this makes the due diligence process less of a headache, many smaller institutions still have unrealistic visions of higher valuations relative to book value that will make a transaction less likely. The Federal Reserve also recently revised its policy regarding small bank holding company acquisitions that will expand financing options to more institutions. The Fed’s Small Bank Holding Company Policy Statement, adopted in 1980, has applied to holding companies with consolidated assets of $500 million and less. Institutions of that size are allowed to incur higher levels of acquisition indebtedness than permitted for larger companies. Last month, the Fed increased the asset level to $1 billion, thereby allowing more bank holding companies to debt finance up to 75% of the