Survival of the biggest? The plight of the small community bank.

• Author: Webb, Gaylen
• Position: Business Trends

Bank of American Fork CEO Richard Beard and Lewiston State Bank CEO Anthony Hall were sitting in a conference room along with other bank CEOs, trying to get their heads around how to calculate capital requirements under Basel III--a complicated regulatory standard that is supposed to enhance banks' safety and soundness.

To Beard's right, a bank CEO said she had about 100 employees trying to figure out the impact of Basel III on her bank. Down the table on Hall's left, the CEO of a very small bank confessed, "We don't even have 100 employees. I don't know that anyone can even spell it [Basel III], let alone calculate it."

"That was when Anthony and I decided to get serious about merging our banks," says Beard. "If you can imagine a small bank trying to digest all of the written and yet-to-be written rules of the Dodd-Frank Act and the requirements of Basel III, it is just overwhelming."

The merger of Lewiston Bancorp, parent company of Lewiston State Bank in Logan, and People's Utah Bancorp, parent company of Bank of American Fork, be completed during the fourth quarter of this year, is typical of a banking consolidation process that Beard believes was largely precipitated by strangulation from the regulatory system, including the Dodd-Frank Act and Basel III standard.

In this environment, do small banks have to merge, be acquired or die? Perhaps so.

Competitive Disadvantage

"The number of banks is shrinking and fairly dramatically," Beard says. "In 1990, there were more than 12,000 banks in the country. Today there are only about 7,000, most of which are community or independent banks. Some experts predict there may only be 3,000 to 4,000 banks left after this latest round of consolidation is complete."

Beard currently serves as chair-elect on the board of Western Independent Bankers, which is concerned with the shrinking number of independent banks.

With combined assets of about $1.3 billion following the merger, he says the Bank of American Fork/Lewiston State Bank agreement will create an opportunity for the two banks to achieve greater economies of scale while preserving the community banking experience. Still, it typifies the plight of smaller banks under a one-size-fits-all regulatory environment. While the regulations are driving up costs for all banks, they are particularly hard on small banks that may not have the niche markets, broad footprints or expanded product lines to absorb the additional compliance costs.

Further, Beard...