by Stephen Lange Ranzini

THE SALE OF United Bank & Trust to Indiana-based Old National Bancorp worth $173.1 million closed this past Thursday.  I am sad that any local community bank would opt to sell out to a mega bank.  Something is lost from the community when a community bank is bought by larger banks.  The Fitch rating agency issued a research report earlier this year that noted that smaller banks drive loan growth nationwide and the most recent year was no exception. Loans at the 25 largest mega banks were “broadly stable,” Fitch said, while loans at small banks rose 4.8 percent.  Fitch’s report noted, “We believe smaller banks have been particularly aggressive with commercial and industrial loans, which saw growth exceed 8 percent in 2013, or almost one third of the $115 billion loan book growth for small banks.” Fitch noted that commercial real estate lending at small banks rose 6 percent and their consumer loans grew 11 percent.

United Bank & Trust was healthy, so why did the board opt to sell?  With the onslaught of regulation hitting community banks, many senior bank executives are pessimistic whether or not there is a future for community banking.  As compliance rules pile up, the cost of complying is spread across each transaction.  Press reports at the time noted that the CEOs of Citibank and Goldman Sachs were smiling at the Dodd-Frank “Wall Street Reform” bill signing ceremony.  Why?  Mega banks have a competitive advantage that continues to grow because they can spread these fixed costs across a larger base of transactions.  According to a recent GOA report, regulators have finalized 48 percent of the 236 Dodd-Frank regulations that impact banks. Rules are proposed on 29 percent and no action so far on 23 percent.  According to Andy Haldane of the Bank of England, “with less than 1/3rd of the regulatory rules required by [Dodd-Frank] already in place, Dodd-Frank has yielded 8,843 pages of rulemaking.  At that rate, the new law could generate at least 29,477 total pages of rules…”  Each page of rules requires a process change at most banks.  Each process change is expensive.

When they buy smaller banks, mega banks can substantially increase the profitability of the book of business they buy by eliminating all the back office staff including those that perform compliance related tasks, so they can pay a price that gives the shareholders in the community bank a significant capital gain.  As a result the number of banks is rapidly shrinking and the pace of decline is accelerating according to a recent American Banker article.  “It took more than five years for the population to fall from 9,000 to 8,000 but just slightly more than three for it to go from 8,000 to 7,000.” A recent FDIC report notes that today there are 6,740 banks and that between 1985 and 2013, the number of banks with $25 million in assets or less dropped 96 percent and banks with between $25 million and $100 million in assets declined 77 percent.

As a society we have to decide whether or not the current path we are on is wise or not.  Do we want all financial assets controlled by a handful of giant banks (45 percent of all deposits in the U.S. and 70 percent in Michigan are controlled by the top 10 mega banks) or do we want access to capital to be controlled locally, with local decision-making?  The world of my favorite movie, “It’s A Wonderful Life,” is nearly gone and in my opinion that is a very bad development for the future of our country.  It could hurt you, too, some day if you need a loan and don’t quite fit into some lending procedure check list used by a loan credit analyst in New York City or worse yet, in Europe or India.

Stephen Lange Ranzini is a resident of downtown Ann Arbor and CEO of Ann Arbor-based University Bank.  You may contact him at ranzini@university-bank.com