America’s banking industry is clearly not without a history—one that has seen challenges, the most recent being the Great Recession that began in earnest in 2008.
Nearly a decade later, some might argue that it’s a totally new landscape, especially from the national perspective.
Growth is in the air but so is what some might consider the opposite—consolidation that is having the effect of making the big that much bigger (and arguably more capable of surviving another downturn).
Mergers and acquisitions among community banks nationwide became more frequent during the 1990s, as they sought to reduce operating costs by achieving economies of scale and thereby increase profitability. Low interest rates for the past few years have created an additional challenge.
In Michigan, consolidation has been significant. There were 109 state-chartered banks and credit unions in 2012. Four years later, that number was just 82—a decline of more than 24 percent.
Applications for new banks are also down in Michigan, at least in part due to a tighter regulatory environment. “The regulations are dense,” notes Patrick McPharlin, director of the Michigan Department of Insurance and Banking Services. “It takes a lot of capital and patience.”
Patrick McQueen, managing director of McQueen Financial Advisors, a bank consulting firm, agrees with that assessment, citing the complexities of financial services and technology requirements as additional challenges for prospective banks, along with the interest rate environment.
“There are hurdles for approval—capital requirements and the approval process,” says the former CEO of the Private Bank and Trust who also served as commissioner of the Michigan Financial Institutions Bureau during the 1990s.
“There used to be 200 to 300 banks chartered across the country annually but the financial crisis made it a challenge to get a return on assets,” says Patrick Fehring, president and CEO of Level One, a $1.1 billion asset firm based in Farmington Hills, with 11 branches in southeast and western Michigan.
Bankers and regulators cite the high cost of government regulation as a factor in the diminishing number of banks. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010 after the financial meltdown of the great recession, imposed stringent reporting requirements on banks of all sizes.
“The regulators aren’t differentiating whether you’re a $200 million bank or a $10 billion bank and it is difficult to sustain the cost of non-revenue producing people,” explains Tim Marshall, president and CEO of Bank of Ann Arbor. While he doesn’t expect the federal legislation to be repealed, he does hold out hope that “some pieces can be lifted out to provide some breathing room, especially for mortgages.”
In the case of Level One, at least eight staff members are devoted to compliance tasks, says Fehring.
“Regulations have a role but they have to be usable and understandable,” he says, referring to the 23,000 pages in the Dodd-Frank legislation as an example of the wrong direction, even while acknowledging that it’s not entirely to blame for all the system’s woes.
McQueen would agree.
“Dodd-Frank is only one piece of the puzzle,” says McQueen. “Banks also have to cope with technology and competitive forces.”
Still, McQueen believes the system will see at least a slowdown in regulatory activity. At the same time, it won’t result in a reversal of a trend toward bank consolidation.
And the impact of bank consolidation on business?
That depends on the size of the bank system and where it’s located. Regional, super-regional and national banks such as Comerica, Chase and Bank of America are well-represented in many areas of Michigan. Chemical Bank, which is based in Midland, is the only remaining regional bank headquartered in the state. Chemical, which acquired Talmer Bancorp last year, has assets of $17.4 billion and operates 255 offices in Ohio, Indiana and Michigan.
While the largest banks may have extensive branch networks in some areas of Michigan, they may not be a good fit for smaller businesses. “The bigger banks are more centralized in their decision-making. They have someone in an iconic tower making lending decisions,” McQueen says. “Larger organizations have a challenge to serve the market because it’s their nature to tend to look inside.”
The bottom line: they may not be as responsive as small businesses might hope for or expect.
Community-based financial institutions strive to be more accessible. “It’s very important for a customer to be able to connect with a decision-maker. Our size is an advantage. We have a good team of bankers without as many layers,” says Level One’s Fehring.
Bank of Ann Arbor’s Marshall echoes that assessment.
“The community banking platform is different than the big banks. When people have a problem they can come in and talk to someone. It begins with our people. We have excellent people,” he asserts.
Staff continuity also can be an issue and those closest to community-based financial institutions claim to have better staff retention than larger, multi-branch banks, one example being Level One, which CEO Fehring says has lower staff turnover in an environment where stability and familiarity are advantages.
Some community banks in Michigan face increasing competition for business customers from credit unions, including DFCU (Dearborn Federal Credit Union), where CEO Mark Shobe says eight percent of members/retail customers are also business owners.
Asserting that bigger banks aren’t interested in small businesses with annual sales of less than $5 million, Shobe says in 2015 DFCU saw this as an under-served market and began hiring a cadre of experienced business bankers and offering business services.
“We offer good value on rates and fees and we can counsel a business when they don’t have a CFO,” he explains. Another incentive for businesses is the annual dividend that credit unions are required to pay its owners (customers), including business customers.
At DFCU, those include manufacturing companies and medical practices.
Chemical Bank, the largest bank headquartered in Michigan, says it is trying to meet the needs of large and small business customers, having last summer completed its acquisition of Talmer Bank with its $3 billion in assets and approximately 80 branches in Michigan, Ohio and Indiana.
Bank CEO David B. Ramaker says Chemical’s new size allows the bank to compete with the larger institutions in Michigan. However, he says, “Our organizational philosophy allows us to be a community bank. A significant part of the portfolio is small business.” Chemical is also an agricultural lender in Michigan.
Ramaker says acquiring Talmer Bank allowed Chemical to enter the southeastern Michigan market in a “meaningful” way. With this major expansion, Ramaker says that Chemical Bank can serve the banking needs of companies with $200 million in annual sales – entry middle market. In his view, competition isn’t really diminishing and banking services are in high demand. And while Chemical Bank (publicly traded on NASDAQ) is currently focused on integrating Talmer,
Ramaker says it has left room for Chemical to look for additional opportunities in the state, as well as in Ohio and Indiana. While financial institutions strive for “organic” growth of deposits and loans through existing staff and facilities, acquisitions provide immediate asset increases. Acquisitions also provide some economies of scale—spreading the costs of technology and regulation over a larger branch network.
From the perspective of a business customer, mergers may provide some advantages, including higher loan limits made possible by the acquiring bank’s assets.
Customers may also gain access to services such as trust or private banking that were not available at their prior financial institution. Bank of Ann Arbor, for example, plans to ramp up private banking at its newly acquired Bank of Birmingham office, Marshall says, adding that Bank of Ann Arbor has $1.2 billion in assets under trust and investment management.
Level One Bank is said to have specialized experience in financing clients, primarily manufacturing companies, that export. The bank has received multiple awards from the Small Business Administration as Export Trade Finance Bank of the Year.
While businesses located in the state’s larger population centers may still have multiple choices for financial services, despite mergers and acquisitions, those in smaller towns may not be as fortunate.
Banks in smaller communities which may not be as vibrant may have difficulty maintaining profitability, McPharlin says. “It’s difficult to grow the bank and if a community no longer has a bank, it has a dramatic impact. The community bank is where the local business goes to buy equipment or remodel its building. In less populated areas, there is no nearby town to go to for banking and economic activity declines.”
Fortunately, most Michigan-chartered financial institutions are healthy, says McPharlin. “Each year we’ve seen improvement. They have solid capital and income is returning towards previous levels. There are opportunities for banks in growing and under-served areas of Michigan,” he says.