Industry News

Banking on Local Banks

Brian Bowling | Sunday, March 5, 2017

Tribune Review Publishing Co.

Richard Kacin started his Murrysville-based building company with a loan from a community bank.

“They helped me start in business, and they help start a lot of people in business," said the founder and president of Kacin Cos., which builds homes, commercial properties and industrial facilities.

“We're losing a lot of our community banks, which in my mind isn't good for a lot of the outlying communities," Kacin said.

While community banks hold less than 15 percent of the banking industry's assets, they account for about 46 percent of loans made to farms and small businesses, according to the Federal Deposit Insurance Corp. — which defines community banks as ones with about $1 billion or less in assets that operate in a limited geographic area and focus on holding customer's deposits and making loans.

The six banks in Westmoreland County that fit the FDIC definition and get at least a third of their deposits from the county hold about 11.5 percent of all the money deposited by county residents and business, agency figures show.

The last decade has been a “long ride" for community banks, said Bob Krizner, managing partner of the Pittsburgh office of KPMG LLC, an audit, tax and advisory firm.

More than larger banks, community banks rely on making loans for the bulk of their revenue. During and after the Great Recession, fewer people and businesses were seeking loans. At the same time, low interest rates capped how much money community banks could make on loans while new regulations increased their expenses, he said.

Banks have adapted to using new technology and cost controls to stay in business, but they've reached a point of diminishing returns, he said.

“At some point, you have to be able to do the basics of banking at a profitable level or you have problems," Krizner said.

The Great Recession, which officially lasted from late 2007 to June 2009, had less of an impact on banking in Westmoreland County than it did on the rest of the country, FDIC figures show. The county had 22 banks operating out of 143 main or branch offices at the beginning of the economic downturn and today has 20 operating out of 133 offices.

The number of banks across Pennsylvania during that span dropped from 284 to 208. Nationally, the number fell from 8,605 to 6,068.

Some banks simply went out of business, while others merged.

New hurdles

Regulations, more than low-interest rates, have been the bane of community banks, said Clem Rosenberger, president and CEO of Kittanning-based NexTier Bank.

“New community bank charters have pretty much been nonexistent for the past five years," he said. “It just doesn't happen anymore, and that's really due a lot to the regulatory environment."

Since 2005, NexTier has merged with several other local banks and is in the process of merging with Manor Bank, which will provide its first two locations in Westmoreland County.

“We see that as a market that would bring a lot of positive things to the bank," Rosenberger said. “We think we have services and staff that can support that market."

In the past two to three years, about 225 to 250 community banks have merged annually, said Chris Cole, head of the Independent Community Bankers of America.

“They haven't recovered from their pre-recession income levels," he said.

More than 400 community banks went into receivership between 2008 and 2012. They mostly failed because larger banks crashed commercial real estate markets with the collapse of the housing bubble created by subprime lending, triggering the Great Recession, Cole said.

Pennsylvania figures, which include non-community banks, show that six banks failed during that period and 52 merged.

Uneven burden

Congress in 2010 passed the Dodd-Frank Act in an attempt to rein in behavior believed to have caused the recession.

While the intent may have been good, the financial reform law imposed significant burdens on NexTier and other community banks even though they weren't involved in the speculative ventures that are the target of the act, Rosenberger said.

“I don't want to give the impression that every regulation is wrong," he said. “We need to have tailored regulations, not one-size-fits-all regulations."

While a larger bank typically spends more to comply with Dodd-Frank, compliance costs are a larger percentage of a smaller bank's total budget. Consequently, regulations have a larger impact on a community bank's bottom line.

NexTier gathers 23 pieces of information to comply with current regulations. Next year, it will start collecting 48 data points, Rosenberger said. The increase means that instead of having a bank teller or a commercial lender in the community, NexTier will have another person filling out forms, he said.

While gathering the data might make sense for a large, national bank, Rosenberger said he's “certain that they won't help NexTier better serve the community."

A brighter day

But the outlook for community banks is improving, industry experts say.

The Federal Reserve in December raised its key interest rate, and Chairwoman Janet Yellen said Friday that the Fed will likely raise rates again this month. The regulatory body has indicated it expects to raise the rate at least three times in 2017. President Trump also has made a rewrite or repeal of Dodd-Frank a key part of his agenda.

“All of that should be helpful for community banks as well as the rest of the industry," Cole said.

Banks can make money in a low-rate environment, so changing the regulation is the more important factor for NexTier and other community banks, Rosenberger said.

“Whether you like the president or not, I think there's a general enthusiasm that the regulatory burden is going to be lifted," he said.

Financing loosens

Another impact of the recession and its slow recovery was a reduction in the amount of public money available for small businesses, said James Smith, president of the Economic Growth Connection of Westmoreland.

“There's no question there's less," he said.

The good news for small businesses is that there is a lot of pent-up desire on the part of banks to lend money, said James Kunkel, executive director of the St. Vincent College Small Business Development Center.

Regulations have made it harder for businesses to qualify for loans. But once they do, banks are eager to make loans so they can earn money, he said. Investors burned by the housing bubble collapse also are eager to find safer places for their money.

“If you meet those standards, the probability of getting financing for a new venture is better," he said. “Everything that we're seeing, we're just very encouraged."

Brian Bowling is a Tribune-Review staff writer. Reach him at 724-850-1218 or

This article was licensed through Dow Jones Direct.


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