Banks are facing mounting challenges. Regulation and compliance have become complicated and costly. Succession planning is tricky and lending limits make it tough to serve some customers, particularly farmers.

While many tiny community banks fight to remain independent and get creative to address these challenges, others opt to sell.

“We’re choking the life out of community banking,” says David Dickinson, president of Banker’s Compliance Consulting. “The regulatory burden is so great we are seeing many mergers.”

There were 2,118 U.S. banks with less than $100 million of assets at Sept. 30, 2013 down from more than 3,000 at the end of 2008, according to the Federal Deposit Insurance Corp. Last year, roughly a third of the industry’s 230 mergers involved sellers with less than $100 million of assets, according to Keefe Bruyette & Woods.

All banks are struggling with regulation costs. But smaller banks, often ill-equipped to hire a full-time compliance officer, pay outside vendors to help them understand and implement new rules.

“There are no magic bullets out there,” says Jeffrey Gerrish of Gerrish McCreary Smith Consultants.

“Banks are not only worried about the cost of regulation but also the potential of making a mistake.”
Changes to mortgages, such as new disclosures that go into effect in August 2015, are particularly worrisome. Though there are exceptions for small lenders, some banks are exiting the business entirely.
There are thousands of pages of new regulations, so “how are small banks supposed to read all of that?” Dickinson says, adding that small banks don’t have a full-time compliance officer to keep the bank open.

The $72.5 million-asset Bank of Bennington in Nebraska uses a “committee approach” where different senior executives are put in charge of implementing new regulation, says Leslie Andersen, the bank’s chief executive. The bank ran the idea of using a committee for compliance matters by regulators who said “it sounded like a good idea for a bank our size,” she says.

“Getting ready to be compliant with all of the new regulation is the hottest fire right now,” she adds. “If executives are becoming experts on regulations, they aren’t out making loans or helping our community.”
Compliance is also making it more difficult for small banks in remote markets since compliance is viewed as one of the hardest areas to fill at rural banks, Dickinson says.

It’s also hard to find someone who has gone away to college with compliance expertise, says Bob Wray, president and chief executive of Capital Corporation. “The kids of the guy running the bank used to want to take over … but now they grow up, go to college and move away. So when dad retires there’s no one to take over the bank.”

Some smaller banks, especially those that primarily serve farmers, are also dealing with lending limits. The price of farmland has soared in the last decade, causing a rise in borrowers’ needs. As “the family farm goes away, the borrowing needs of the local customer go beyond the capability of the local bank,” Wray adds.

Some of the agricultural credits now exceed lending limits, says Douglas Duey, former owner of the $16 million-asset Eagle State Bank in Eagle, Neb., and the $51 million-asset Cass County Bank in Plattsmouth, Neb. “It’s not uncommon for good tillable farmland to sell for $9,000 to $10,000 per acre, so a purchase of farmland can require a substantial lending limit.”

All of these factors are forcing more banks to consider selling. Duey says he sold his banks because he didn’t have a successor that understood the needs of a small town community.
“That was No. 1 for me — that they would address the needs of the community,” Duey says. “These are banks that my family had owned for so many years and I had hoped that the tradition of community service would continue.”

Banks with a solid agricultural portfolio are attractive takeover targets, says Robert Edelman, president of Edelman & Co. “There is clearly an appreciation for good loans,” he says.
“Ag is considered a good place to be,” Edelman adds. “There are people who are actively interested in ag even out of what would normally be considered their core market or adjacent areas. People are willing to take a bit of a geographic leap for it.”

Bank of Bennington, a unit of BBIG Holdings, is hoping to grow through M&A, Andersen says. The bank would like to diversify its loan portfolio by buying a bank focused on agriculture in a nearby market.
“The ag economy has been going gangbusters,” Andersen says. “We know how to make ag loans and are very comfortable in a small-town environment.”

With the number of tiny banks decreasing, some people are concerned that certain communities will be left without a financial institution that can meet their needs. Community banks are required to ensure a thriving local economy and provide loans to those looking to start small businesses. For instance, Dickinson says he would have never been able to start his consulting business without receiving a loan and guidance from his local bank more than 20 years ago. Now he employs a dozen people.

“Community banks are the heart and souls of their communities,” Andersen says. “If you drive through a thriving community, especially a rural area, I guarantee you there is a thriving bank.”

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