Patrick McHenryChairman

Washington, September 26, 2011 -

By Winthrop Quigley
Albuquerque Journal

Most of New Mexico’s smaller banks survived the 2008 financial panic and the worst recession since the 1930s in pretty good shape. They are not so sure they can survive new federal regulations put in place in response to the panic.

Thomas M. Hoenig, who is retiring as president of the Kansas City Federal Reserve Bank this month, said in an interview that half of the nation’s 7,000 banks could disappear in part because of regulations.

H. Patrick Dee, who ran First Community Bank in Albuquerque before it was absorbed by U.S. Bank (which Dee joined), estimated First Community, with $3 billion in assets, would have had to spend $500,000 a year to comply with regulations required by the Dodd-Frank banking law enacted by Congress last year and other federal responses to banking crises.

The Senate Banking Committee says Dodd-Frank will improve consumer protection, end bail-outs of too-big-to-fail banks, reduce the systemic risks “posed by large, complex companies” and exotic financial products, require more reporting from hedge funds and make credit rating agencies more accountable.

Other regulations, known as the Durbin amendment, which cut the fees banks receive when their customers use debit cards to make purchases, will reduce bank revenue and make some customers’ bank accounts unprofitable to service, said Greg Marrs, corporate president of First American Bank in Artesia.

“The lay of the land is changing very rapidly,” said Michael Martin, CEO of Lordsburg’s Western Bank. “I really don’t know what the implications are going to be.”

Martin worries about the cost of compliance. Consumer protection regulations are “well meaning,” he said. “We’re small business people. We have to understand and comply with the regulations just like Wells Fargo. We don’t have 70 attorneys on staff to figure it out.”

Most independent community banks in New Mexico have assets of less than $1 billion, compared to the $1.26 trillion in assets held at Wells Fargo. A bank’s assets consist mostly of loans.

“It’s not one law or one statute or one regulation” worrying banks, said Chris Cole, senior regulatory counsel and senior vice president of the Independent Community Bankers of America. “It’s the cumulative effect of all of them.”

Of special concern, Cole said:

♦ Risk retention rules, designed to force banks that make real estate loans to keep some portion of the loans rather than sell them to other institutions. The law is based on the idea that banks had no incentive to reduce their risk when making bad mortgage loans because they sold the loans to other financial institutions. Lawmakers hope that forcing banks to keep some of the loans they make will force them to be more careful.

There are some exceptions for some residential mortgages and for mortgage-backed securities created by Fannie Mae and Freddie Mac for as long as they are in government conservatorship.

Cole said the proposal “is not only complex, it could be restrictive” by forcing banks to require higher down payments from borrowers.

♦ Federal Reserve-proposed rules requiring mortgage lenders to make sure a customer can pay the debt before the mortgage is issued. Cole said the rules are complex and it is unclear how broadly they will be applied.

♦ The Consumer Protection Board. The Dodd-Frank law creates a new agency designed to protect consumers from the kind of financial excesses that led up to the 2008 bank crisis. “There is a lot of uncertainty about what the board will do,” Cole said.

“On top of Dodd-Frank, we’ve also had in the past two or three years this harsh examination environment,” he said. “Regulators suddenly took the medicine, so to speak, so now they’re saying, we’ll look at every commercial real estate loan, we’ll look at everything to make sure there is nothing here that shouldn’t be here.” Regulators are insisting on compliance with orders that go beyond what the rules require on grounds of a bank’s “particular risk situation,” Cole said.

“The cumulative effect of all this stuff is driving community bankers crazy,” he said. “Many of them are thinking of consolidating.”

Officials of smaller banks say that what makes them crazier is that the regulations are aimed at solving problems they didn’t create. Most of the problems that tanked the financial system, they say, occurred at the five or 10 banks that control about 80 percent of the deposits in the country. Forcing small banks to consolidate or sell out to bigger banks just makes the too-big-to-fail banks even bigger, Hoenig said.

“We’re being penalized for things none of us ever thought about doing,” said Craig Reeves, president of First National Bank of New Mexico in Clayton. Reeves said that in his town of 2,500 people there were two mortgage-origination offices that stayed busy issuing mortgages, some of which went to borrowers who were not credit worthy. They captured much of the area’s mortgage business until the housing bubble burst.

“It was frustrating as a banker,” Reeves said. “I was penalized for not lying” about the credit worthiness of potential borrowers.

“The one thing that would have made a difference for a lot of banks that had problems — First Community, for example — the thing that led to a lot of problems was an undue concentration in residential land development and residential construction,” Dee said. The problem among community banks was not mortgage loans to subprime borrowers.

The regulators were slow to react to the concentration in land development and construction, Dee said, and bank boards and managements were slow to recognize the risks they were running. “I don’t know if you can handle that with regulation, but regulators and management have to be more proactive in managing risk, especially in an up economy.”

Even while regulation is making community bankers nervous, market conditions seem to be improving from the horrible conditions that followed the late-2008 financial panic.

Martin said that in January 2009, the number of checking and debit transactions handled by Western Bank dropped 40 percent overnight. “We saw restaurants struggle. We saw retailers struggle. It wasn’t a credit availability issue. People were scared.”

Western Bank’s loan portfolio is up 8 percent over last year. “We’ve pumped up our reserves just to make sure we’re not caught off guard,” Martin said. Consumer loan demand is up and deposits are “growing very rapidly.” Western recently opened a new branch in Arizona.

“Our challenge is the drought,” Reeves said. “The drought is having a drastic effect on the northeast corner of the state.”

First National is working to find ways to keep ranch and farm borrowers on their land until drought conditions improve. “You’ve got to provide hope,” Reeves said. “You’ve got to provide help.”

Jeff Howle, CEO of Citizens Bank in Farmington, said activity is slowing in the northwest, and loan demand from the companies that service oil and gas producers is down. “It’s not drastic, but it’s off,” Howle said. Even so, he said, Citizens Bank’s earnings have been good.

Things have picked up since January. Servicing companies are replacing equipment. However, some customers haven’t drawn on their lines of credit for more than a year, he said.