Banking on Main StreetCommunity banks such as Hawthorn Bank (left) and CentralBank (right) in Jefferson City are leading efforts to changeburdensome regulations imposed by the Dodd-Frank Act.
Banking on Main Street
By Karen Buschmann
On High Street in Jefferson City, two banks stand directly on either side of the street facing each other.
But that’s not the only thing these local banks face—new regulations in the banking industry, imposed after the 2008 financial meltdown, stand in their way. Designed to curb the power of banks considered “too big to fail,” the Dodd-Frank Act impacts the nation’s community banks, too.
Smaller lending institutions may have less capability than large banks to hire the personnel necessary to deal with the more than 400 regulations contained in the Dodd-Frank Act, creating a detrimental impact on America’s main streets.
The oldest bank in Jefferson City, Hawthorn Bank has helped its customers through difficult times. Founded in 1865 at the end of the Civil War as the Jefferson City Savings Association, the bank survived the tumultuous period of reconstruction, two world wars, and the Depression.
Today, governmental red tape is among the challenges facing Hawthorn, according to Chairman, President, and CEO Dave Turner, who has worked at Hawthorn Bank for 34 years.
“The cost of doing business for banks has gone up greatly since the introduction of the Dodd-Frank Act in July 2011,” Turner says. “During 2012 and into 2013, we have seen a large release of regulations we now have to follow. While many of the Dodd-Frank rules are still in the implementation phase and additional regulations are due out in 2014, the cost of adding personnel and system upgrades in order to be in compliance will probably go well into six figures on an annual basis.”
Just across the street is Central Bank, its building located next to Hawthorn Bank for more than 100 years. Central Bank President Ken Littlefield, a 45-year veteran in the banking industry, also feels the grip of regulatory red tape.
“The volume and detail of new rules together with a militant enforcement mentality for minor errors and oversights add layers of cost and complexity onto our operations,” Littlefield says. “This new risk I call ‘regulatory risk’ accomplishes little and is becoming the biggest threat facing banks. The rules are being made by people who do not understand the unintended consequences of their actions.”
According to Littlefield, mortgage lending has been the major change as a result of Dodd-Frank.
“Since mortgage lending was suggested as the biggest cause of the financial crisis, it has gotten the most attention,” Littlefield says. “However, rather than fix the few issues that were at the center of controversy, the government has turned the mortgage business inside out. The latest example is the Qualified Residential Mortgage Rule, which requires a bank/lender to prove the borrower has the ability to repay a mortgage and gives the bank a safe harbor if certain lending rules are followed. The problem is that the rules will prevent many good customers from getting the best loan for them.”
As more regulations like these roll out as a result of the Dodd-Frank Act, will it force some banks to close? Both Turner and Littlefield have concerns that it could be a factor for some.
“I agree that a good number of small banks will not be able to keep up with the huge volume of regulations coming out of Washington,” Littlefield says. “Small banks will have to operate less profitably or sell to larger banks with the specialized compliance departments. These rules may not be the only reason small banks are selling, but they are a factor in the shareholders’ consideration for selling.”
These concerns have led to legislative action. Both Turner and Littlefield hold leadership positions with the Missouri Bankers Association—Turner as chairman elect and Littlefield as chairman. MBA is actively pushing to reform portions of the Dodd-Frank Act.
“Short of total repeal, there are numerous areas that need to be addressed,” says Max Cook, president of MBA. One major problem with the act is in how it approaches mortgage lending, he says.
“A lot of the mortgage-related provisions in Dodd-Frank are very onerous and shouldn’t apply to community banking,” Cook says. “It’s forcing many community banks to reevaluate whether or not they are going to be involved in mortgage lending at all. We are now finding that many are withdrawing from that marketplace and that product.”
And that makes it tough on people in those communities to find ways to finance a home, he says. Dodd-
Frank, though a well-intentioned effort to address problems that occurred during the meltdown, should never have been applied to community banks because the problems did not manifest themselves at that level, Cook says.
“The legislation and then the regulation should have been more targeted and not just thrown over the entire industry like a blanket,” he says.
While local banks have been hit disproportionately by regulations and slowing of business due to the economic downturn, Turner believes the bank’s position in the market is also their strength.
“I think community banks are more readily adaptable to the challenges of today’s business climate, which offers us opportunities to better meet and provide products and services our customers want and need,” Turner says. “With so many available options, I think now more than ever consumers are more likely to reach out to personal bankers because they know and trust them to guide them in choosing the products that are best suited for their needs.”
Hawthorn’s client list backs up that claim. Among businesses Hawthorn bank has helped throughout the years are many of Jefferson City’s corporate mainstays: Jefferson City Oil, Cowley Distributing, and Midwest Block and Brick.
Some of its clients have been doing business with the bank for more than 100 years. The bank is helping new businesses off the ground, too. Wizard Lawncare, Prison Brews, Gusto Coffee, and Simply Red SalonSpa are just a few businesses that got their start with the help of Hawthorn Bank. Littlefield agrees with the importance of the community bank and one-on-one banking relationships.
“Like most community banks, our focus is on personal customer service. Our customers can and do call me, the president of the bank, with questions, comments, and suggestions. We try to know all our customers by their first names and treat them with respect.”