After Dodd-Frank, Those Meant To Be Protected Feel Its Bite Study Finds Community Banks Struggling By Laura Alix

March 16, 2014 Four years after the implementation of the Dodd-Frank Act, community bankers are feeling the pinch as they struggle to allocate resources and cut back products in an effort to better comply with the omnibus banking bill. That, in a nutshell, is the finding of a recent working paper out of the Mercatus Center at George Mason University. The centers Small Bank Survey questioned 200 banks in 41 states with less than $10 billion in assets each on issues ranging from regulatory and compliance activities to the Consumer Financial Protection Bureau to fees and revenues. Our findings suggest that Dodd-Frank has deeply affected small banks. They are spending more time and money on compliance and, in some cases, are shifting away from products, such as residential mortgage loans, for which the regulatory burden appears to outweigh the benefits of continued involvement, the papers authors wrote, to the surprise of exactly nobody in the Massachusetts banking community. It pretty much hit the nail on the head, remarked William Morse, the president and chief operating officer of the $430 million Mutual Bank in Whitman. Smaller banks are being forced to devote larger and larger amounts of resources to compliance. And larger banks, of course, have the luxury of having large compliance departments. We have one or two people. Its burdensome for us. Indeed, one bank that received the survey wrote back to its authors, We are too busy working on Dodd-Frank to fill out your survey. Endangered Products Ken Burns dubbed the national parks Americas best idea, said Robert M. Mahoney, president and chief executive officer of Belmont Savings Bank. I think Americas second-best idea is the 30-year, fixed-rate, pre-payable mortgage from a hometown bank. And its in jeopardy. Aside from the cost of compliance no small matter at a small bank its residential mortgage lending that community bankers are most concerned about in the post-DoddFrank era. Among the 200 community banks the Mercatus Center surveyed, residential mortgages, mortgage servicing, home equity lines of credit and overdraft protection appeared to be

in the most danger, with the greatest percentages of responding banks reporting that they had either discontinued or anticipated discontinuing those products. Though Morse is concerned about the cost of compliance, he has no plans to cut back on residential lending. Anticipating decreased competition and increased demand in that segment, Mutual Bank recently hired five new employees in its residential lending function. Community Banks: The Other 99 Percent? While Dodd-Franks supporters may have insisted that small banks were not the bills target, that the bill was meant to curtail the recklessness and excesses of Wall Street, the irony is that it may force greater consolidation within the banking industry. The Mercatus paper noted that at the end of the third quarter last year, 6,279 of the FDICs total 6,377 insured financial institutions fell below the $10 billion mark in assets. Yet those 98.5 percent of smaller banks hold just 18.6 percent of the industrys total assets, meaning that the remaining 81.4 percent of assets are concentrated among just 98 financial institutions. Thats something Dodd-Frank was supposed to avoid They rightly viewed the concentration of larger assets in a few institutions as a greater risk to the deposit insurance fund, Morse said. My opinion is that everyone gives lip service to small banks and small business, but they dont actually do much to encourage it. Michael Rubin, partner in the corporate and real estate practice groups at the Boston firm Posternak Blankstein & Lund LLP, isnt sure the federal government cares all that much about community banks. I think Dodd-Frank is going to work toward shrinking the number of banks, and I dont think the federal government or the regulators are going to be too sad, he said. I think weve been moving incrementally toward this for a number of years. Rubin, who is also the director of Southern New Hampshire-based Centrix Bank, which last week announced its sale to Boston-based Eastern Bank, pointed to the repeal of Glass-Steagall during the Clinton administration, which started pitting big investment banks against insurance comapanies against traditional banks for the same business, as the beginning of the end. The hours spent on non-revenue producing items has increased, while at the same time, profit margins have decreased, because of the pressure on interest rates, he said. Its kind of the perfect storm, or imperfect storm, if you will. And while Mahoney expressed optimism that wiser minds would eventually prevail and rein in some of Dodd-Franks provisions, others wished they could share his hope. My experience has been that regulations only go one way. They get broader and broader and more and more intense over time, Morse said. I cant think of too many

cases where regulations have been rescinded or modified to the extent where banks are required to do less.