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May 03, 2017

The Dodd-Frank Act and the Effects on Community Banks

Ian McDowell, CPABy Ian McDowell, CPA | S.R. Snodgrass PC


Since enactment of the Dodd-Frank Act by President Barack Obama in July 2010, the law has dominated discussions at community banking forums, conferences, and board meetings. Has all the fuss really been warranted? Has Dodd-Frank really been that detrimental to small community banks?

One perspective on the issue can be drawn from statistics showing the virtual evaporation of all new bank start-ups since the law’s enactment. According to the Federal Deposit Insurance Corporation, there were 929 start-ups in the seven years preceding 2010 and only 17 in the seven years that followed. Granted, 2010 roughly marks the beginning of the financial system crisis, and bank start-ups in 2008 and 2009 were already sliding, but the sustained decline is remarkable. The impact of the start-up drought has been magnified by industry consolidation, which has reduced the number of commercial and savings institutions from 7,685 to 5,913 since 2010.

Community BankAnother relevant factor in determining Dodd-Frank’s impact is the real-life experiences of the individuals who run small community financial institutions. In my daily interactions with community bankers, I absorb many different perspectives on the impact of Dodd-Frank (some positive, most negative). According to the CEO of a regional $1 billion community bank, the increased regulations have “slowed the entire lending process” and “resulted in less customers qualifying for mortgages.” In particular, the regulations have heightened difficulties for self-employed people to qualify for loans. Lending to people who own small businesses in the community and need financing to support growth is a benefit to most banks, and the approval process has become daunting. The CEO referenced above adds, “[The Dodd-Frank Act] has caused us to add staff to comply, and these people are a net cost to us because they do not generate revenue.”

The CEO of another community bank ($300 million in assets) faced potential clawback of personal compensation for potentially (and unknowingly) violating lender compensation regulations. For this bank, which operates with less than 20 employees, a well-intended regulation had adverse unintended consequences because the organization didn’t permit the ability to segregate responsibilities the way a large bank would.

It sounds bad. But is it all bad? According to data extracted from SNL Financial on all domestic commercial and savings banks with total assets between $100 million and $1 billion, the average return on assets from 2010 to 2016 increased from 0.57 percent to 1.05 percent, and return on equity was up during the same period from 4.85 percent to 9.24 percent. Yes, net interest margin is compressed and the vast majority of the earnings increase has come through improvements in asset quality, but perhaps it is possible that small community banks are now fundamentally stronger and better positioned to see even greater improvements if rates continue to rise and the anticipated Financial CHOICE Act is successful at rolling back the most burdensome regulations. After all, average loan growth for these banks in 2010 was 2.89 percent, and in 2016 it was 8.46 percent.

The impacts of Dodd-Frank are very real. The increased time, resources, and cost of compliance certainly have had a negative impact on many small community banks. The growing pains have been significant, even driving many banks out of existence. However, it’s possible that the surviving banks have adapted to a new normal, and are actually stronger and better positioned for growth going forward.


Ian McDowell, CPA, is a principal in the auditing and assurance group of S.R. Snodgrass PC, a regional accounting and consulting firm specializing in services to financial institutions. He can be reached at imcdowell@srsnodgrass.com.



Save the date for our Financial Institutions Conference on Monday, Sept. 25, to hear more on the Dodd-Frank Act and other hot topics pertaining to financial institutions.



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  • Paul Giordano, CPA | May 31, 2017
    There is no doubt that Dodd Frank was over-reach and over-correction and should be repealed.  Last year saw the federal government once again placing pressure on banks to write sub-standard mortgage loans.  As a small business man myself, we have never had to provide so much data requested annually to keep well performing loans in bank compliance for ourselves and our clients.  Underwriters are asking the questions that make no sense or asking for letters from us that make no sense, of which many cannot be written since they ask about the future affects of a borrowing.  They innocently seem to be asking for us to give justification for their lending decision and at the same time seem to be accumulating data that could be later used to make us responsible for a non-performing loan.  Of course many of these requests for letters are denied since the amount of work to render such an opinion from a CPA is onerous.

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    Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.