Mike League is president and CEO of 5Star Bank, one of the few locally owned and operated banks in Colorado Springs. But 5Star could’ve been sold to an out-of-town buyer in 2015.
“If I hadn’t been able to raise $12 million in capital two years ago, there were many — both in-state and out-of-state — that were interested,” League said. “I’d probably be working for them or doing something else.”
That’s a situation other bankers have become all too familiar with as small and mid-size banks in the Springs are part of a trend that sees them being bought, merging or even shutting their doors.
“I’ve been with 5Star for more than 10 years, and it’s great we were able to make that happen,” League said.
In recent months, Pikes Peak National Bank and Peoples Bank were purchased while Stockmens Bank absorbed a small Missouri bank.
Midland States Bank, which has a branch in Denver but is headquartered in central Illinois, closed its doors in downtown Colorado Springs last month.
Brendan Zahl, president and CEO of mid-sized Peoples Bank, cited three reasons why small banks are having trouble surviving.
“One is the regulatory burden,” he said. “A close second is that many smaller banks are owned by families and the next generation may not want to continue in banking. The third reason is technology challenges.”
Rob Alexander, president and CEO of Stockmens, said it’s become increasingly difficult for small banks to prosper — especially after Dodd-Frank legislation that passed in response to the Great Recession and the failure of many banks in the U.S.
“Software technology is very expensive,” Alexander said. “And regulatory costs are worse.”
Alexander is trying to overcome some of the costs by growing his bank. By merging with First Home Bank of Mountain Grove, Mo., his assets should climb to about $330 million.
“Small banks have been $200 million or less,” Alexander said. “I do believe a new small bank in the next 10 years will have to be in the half-a-billion dollar range. My drive now is to get to $500 million.”
“I’d say $500 million or above will become the cutoff to survive,” League said, noting that 5Star has $185 million in assets.
League recently raised another $23 million in capital from about 150 existing and new shareholders and opened a Denver Tech Center branch on July 26.
“We’ll use that capital to grow and be competitive,” he said.
SHRINKING BANK NUMBERS
The trend of disappearing banks has been going on for about 25 years.
“If you look back to the early 1990s, you had almost 18,000 banks in the United States,” Zahl said. “Today there are just over 6,500. So that’s been the M.O. for two decades. It accelerated during the Great Recession as a lot of banks failed and they were consumed as a part of FDIC assist.”
Many bankers and economists — Alexander is one of them — insist the financial crisis a decade ago was ignited when the 1933 Glass-Steagall Act was repealed in 1999, leading to the marriage of big banks and investment companies. The 1933 regulations included separation of commercial and investment banking.
“Big banks failed because they took the firewall down that [President Franklin Delano Roosevelt] created to keep banks from making high-risk investments with the deposits from their customers,” Alexander said. “The government bailed them out with our tax dollars and Dodd-Frank was put in place, but that did not fix the situation. Big banks don’t want to fix the situation because they don’t want to divest from their investment companies.”
Conversely, Alexander said, “Little banks have never had access to big investment houses.”
But Dodd-Frank regulations have made it tougher on small banks.
“I think it’s getting tougher for small banks, just with regulation, with compliance, because you have to hire those positions to deal with compliance,” said UMB Community Bank President Jason Doyle, whose office is downtown but has headquarters in the Kansas City area. “That’s a large growing segment of our bank, hiring those positions. But those are non-revenue-producing positions so you hire those associates to work with compliance. But can a small bank absorb that fee? That’s tough.
“You take a smaller bank that’s one or two locations, and they have to decide whether to hire someone in sales or a commercial lender or someone to serve their customers, or do they hire someone who works in a back office that never sees customers but they have to handle compliance. Large banks can absorb that, but small banks might have a hard time absorbing that.”
Does the government prefer bigger banks?
“I wouldn’t necessarily go that far, although you sometimes wonder because of regulatory oversight,” said Zahl, chair-elect of the Colorado Bankers Association. “They still have to regulate every bank the same — it doesn’t matter whether it’s a $50 million bank or a $1 billion bank.
“We see a lot of regulatory relief efforts being conducted; obviously at the CBA we support a lot of those things,” he said. “The burden isn’t just for smaller community banks; it’s for all banks in general. And the consumer ends up paying for it.”
CHANGE CAN MEAN OPPORTUNITY
Peoples Bank was purchased by National Bank Holding Company out of Greenwood Village. Zahl said it won’t affect Peoples customers or employees, though he’ll be more involved with commercial lending.
“Change is always viewed as negative by some people,” Zahl said. “Usually change results in opportunity. The perception is oftentimes negative — mostly related to the change — but the reality is that the change and the opportunity are very positive.
“You lose some control. A guy like me, who is the CEO of the bank, has to change roles a little bit. I’ll still be heavily involved as an executive with the new bank, and on their board of directors. I’ll be an executive vice president. I will be the director of their national mortgage division and I will also be the regional president for the Colorado Springs area. I’ll still be tied to Colorado Springs and to the mortgage production that we do, which is a very strong part of our business. That’ll be my new role.”
Having a strong presence in the community is vital for smaller banks.
“We’re a community bank and we support community causes,” League said of 5Star Bank. “We understand local business that a bigger out-of-town bank might not have a feel for. Local knowledge makes for good local banking. That’s the same model that Stockmens employs.”
Alexander said catering to small business is his key to success.
“In general, the way small banks compete is by working with all the small businesses in our area,” Alexander said. “Joe’s Plumbing, for instance, can walk into Wells Fargo, but his company doesn’t fit in their box; they’ve got certain standardized programs to fit you in all around the country. … We put a lot more focus on the local community and we try to find niches the big banks don’t see or want. A big bank doesn’t want to do a loan for a rancher in Limon, because there aren’t enough of them. They want to do credit cards because 200 million people want a credit card. They look at everything as market share.
“I do a lot of [agricultural] stuff,” he said. “Other small banks in town might have their niche, whether it’s geographical or a niche in an industry.”