Lawmakers are working to save Ohio community banking

More than a third of the rural counties in the US do not have a locally owned bank, according to a 2019 Federal Reserve report on bank consolidation. Thirty-three counties had no banking offices at all, and 122 had only one.

Kevin Morehouse has been with the First Federal Savings & Loan Association in Newark for 28 years.

“I started on check # 100 and I’m now up to over 15,000,” said Morehouse. “You were a great bank. You go in there and they know you by your first name. “

The first fret loaned Morehouse money to buy two houses and grow his business. He even appeared in a commercial for the bank. But as Morehouse built a life in Licking County, community banks across the country were in decline.

“When I started in the industry 45 years ago, there were 30,000 community banks in the country,” said Bob Palmer, president of the Community Bankers Association of Ohio. “Now there are maybe 6,000.”

In Ohio, Palmer has watched the number of locally owned banks with assets less than $ 10 billion steadily decline from about 300 in the 1990s to 210 before the Great Recession and to less than 150 today.

“There has been a tremendous increase in acquisitions,” he said. “

Large corporations found it easier to buy the growth than to build it from the core, which disproportionately affected rural communities. “

More than a third of the rural counties in the US do not have a locally owned bank, according to a 2019 Federal Reserve report on bank consolidation. Thirty-three counties had no banking offices at all, and 122 had only one.

Diane Darnes, a senior client representative at First Federal Savings in downtown Newark, shows how the bank's unique drive-up window works.  The bank, which was founded in 1934, has always had a home in Court Square in Newark.

“Rural counties that have been badly affected by store closings had higher poverty rates, lower median incomes, a higher proportion of their population with less than a college degree and a higher proportion of their population that were African American,” the report said.

Customers are increasingly turning to digital banking, but many rural residents told the Fed that issues such as lack of access to reliable cellular services and broadband internet are preventing these alternatives from filling the void.

And small businesses like Morehouse prefer community banks. Morehouse told The Dispatch he wasn’t going to switch to one

big bank when First Federal closes – and no one is suggesting – because it doesn’t want to be just another number.

“This is a worrying indicator of the Ohio banking industry, our economy, rural areas and overall competition,” said Rep. Derek Merrin, R-Monclova.

And he wants to change that.

Merrin worked for almost a year

to pass a bill that would give several tax breaks to the small Ohio banks. Tax rates for existing banks would be reduced. Another would give new banks three years to get back on their feet before they start paying taxes.

Lucas County’s legislature was initially optimistic, but Merrin brushed the tax cut for existing institutions out of House Bill 150 in January.

First Federal Savings, chartered in downtown Newark in 1934, has always had a home in Newark Courthouse Square.

“There aren’t many people who want to give banks tax cuts,” he said.

The cut would have been due to an assessment known as Financial Institutions Tax (FIT). It is a state tax based on how much capital (wealthy) institutions have. Ohio banks with equity greater than $ 1.3 billion pay tax at 0.25%, while banks with $ 200 million or less pay a tax rate of 0.80%.

The first Federal President and CEO Paul Thompson sees two problems with this structure.

“Whether an institution makes $ 1 million or $ 1, they will pay the same amount to the state of Ohio,” Thompson said. “It’s not based on income. It is based on net worth. “

The second difficulty: larger banks hold less capital than their smaller counterparts.

“Mutual institutions belong to your customers. We don’t have a supply. We don’t pay dividends, ”said Thompson. “You’re basically putting it in your fortune, and that happens to be the basis of your Ohio state tax.”

Even Zach Schiller, director of research for the liberal think tank Policy Matters Ohio, agreed, referring to the Ohio Department of Taxation’s 2018 annual report.

Major banks that would fall into FIT’s Tier 1 category paid $ 66.2 million that year. However, the smallest tier 3 banks paid a total of $ 72.4 million.

“It clearly affects the smaller banks more than the larger ones,” said Schiller. “Why should JPMorgan pay Chase less than your little community bank in Newark? Is this really for the benefit of the state of Ohio? “

Schiller added that he is not a fan of the way Merrin fixes the problem.

Merrin’s bill would eliminate the middle class and cut taxes across the board for most banks. While this would help Ohio’s smallest community banks, it would also benefit large multinational corporations.

“I also have general concern about how much tax cut will effect,” added Schiller. “There is a compromise. When we cut taxes, it’s not like a free lunch. “

However, Schiller agreed that “to the extent that community banks lend in their local communities, I believe that they matter”.

Remote banks have no roots in local communities and often rely on algorithms rather than personal relationships to assess creditworthiness, critics say.

Thompson said it was not uncommon for First Federal to fund 100% of a home loan for a young couple looking to build a home on the family farm.

“You typically don’t get a 20% down payment on a construction loan at 25,” he said. “We could get mom and dad to mortgage their homes until the kids get on their feet. It’s a safe loan and in a few years they’ll come in and we’ll get mom and dad out of liability. “

Palmer recalled making loans to farmers whose debt-to-income ratios were slightly above what was considered safe and giving the children short-term loans to purchase their tools.

“Losing a community bank in these rural areas is devastating,” said Palmer. “Even if the physical establishment survives, the charter is gone, decision making is gone. You lose that really sensitive touch to what is needed in this market. “

The first community bank he worked for in West Virginia was the third largest employer in the county until it was bought out.

“We couldn’t buy shirts for the local soccer team or contribute to the repair of the field,” said Palmer. “We have lost 34% of our employees.”

Only one new community bank has opened in Ohio since the Great Recession. The Bexley-based Ohio State Bank went live in April 2019.

According to an S&P Global Market Intelligence analysis of new bank applications that excluded withdrawn applications, no new community banks were opened nationwide from 2009 to 2012. One application was filed in 2013, two in 2014 and none in 2015.

“The regulatory environment wasn’t good for it,” said Bill Daily, the future president of a new central bank in Ohio.

The Riverside Bank of Dublin doesn’t have a grand opening date yet, but it was one of 21 young banks to file new applications in 2019 and the only one in Ohio.

“For our company, I think the timing is perfect,” said Daily.

He came up with the idea after years of frustration at being served by non-local banks. Daily started asking around and found that his friends felt the same way.

“We saw a need for the kind of on-site service we used to provide,” said Daily. “Loans are sent from the area to people who don’t know Columbus, don’t know the streets, don’t know what they’re renting out here for. It’s frustrating.”

He had once had a bank clerk say he had to check Daily ‘s assets before he could help at an ATM that had eaten his check because the bank had a set amount that people had to meet before they could get personal help .

Whether Riverside will benefit from Merrin’s bill depends on if and when it becomes law and when the Fed gives the bank the green light for its proposal.

“I think we have a fair shot. I would maybe put it at 60%, ”Merrin said. “We have to explain that we have nothing to lose because there are almost no new banks. The numbers speak for themselves. We fight for people who do not currently exist. That’s the challenge. “

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