Dodd-Frank Update: Regulations Problematic on Community Banks with Assets Under $1 Billion

November 5, 2013

By Bob Coleman
Editor, Coleman Report

Jon Winick, President, Clark Street Capital, gave us a concise update about how Dodd-Frank regulations are affecting community banks. Watch the short interview here on YouTube

Bob Coleman: Jon, you’re an expert on Dodd-Frank, really that community banking space. Touch on that very briefly for community bankers on the line. We hear all sorts of stuff, there’s only 40 percent that’s been written. Give us your take on what’s going on with Dodd-Frank right now and how it affects our community banks.

Jon Winick: Well, we’re about three years into Dodd-Frank and it’s being implemented very slowly. We’re about 40 percent of the way through and things that seemed pretty simple to implement like the Volcher Rule aren’t close to being implemented. So there’s been a lot of pressure from the industry. The industry’s been successful at watering down some of the rules that are coming down. It still remains to be seen what it’s all going to look like, but there definitely is a concerted effort by the banking agencies to minimize the regulatory burden for community banks, especially those under a billion in assets. You’ll notice every publication of the agencies now actually has a section where it asks about the applicability to banks under a billion in assets.

Bob Coleman: On the community bank model, are you optimistic about that model going forward, or is it going to be severe challenges for the local board of directors in management?

Jon Winick: I think they’ll always be community banks that are exceptional, but I think there are certain trends that are not favorable to community banks. I think consumers are becoming more internet-savvy, they’re using branches less, they’re more about online banking and mobile banking.

Bob Coleman: Yeah, I was going to hold up my phone, yeah, yeah.

Jon Winick: Yeah, I think the community banks are typically a little far behind the technology standpoint. Having said that, I don’t think you need to be too large to be successful. In fact, the research we’ve seen is once you’re over say a billion in assets you kind of peter out around five or six billion as far as the benefits of scale, so a five to ten billion dollar bank is just as efficient and can do just as well as any bank in the country.

Bob Coleman: Let me ask you this last question. What is the minimum level of asset size that you believe are the new regulations that a community bank must have to be sustainable?

Jon Winick: I think it depends on the market. Forget the rural markets for a second, forget the 50,000 MSAs. If you take a market like Los Angeles, Chicago, markets like that, if you’re under a billion it’s going to be very hard to generate average to above average returns from your shareholders. You’re going to be the exception, not the rule. But [crosstalk] –

Bob Coleman: Go ahead.

Jon Winick: – that are good at SBA lending that have certain niches will always outperform, they’re always going to be outliars, but you’re going to be going against the herd.

Bob Coleman: Well, I think you’ve made a couple of things and we’ll just put it on the table. Those that are exceptionally managed and those that perform well, they will have a place in the market. I don’t know if it’s a culling of the lower end, but riches and niches, if you’re a proper manager and you do well in a niche you’ll be okay. Jon Winick, President, Clark Street Capital out of Chicago. Jon, thank you for joining us. Great conversation, I enjoyed talking to you.

Jon Winick: Thanks, Bob, I appreciate it.