Most Americans have gotten an earful about the too-big-to-fail banks, which created a financial tsunami that engulfed the world — only to be rewarded with a bailout by Uncle Sam.
But what about the little banks caught in the ensuing economic and regulatory backwash? Banks that wrote no dicey home loans, sold no toxic securities, never considered trading leveraged derivatives — the ones whose shareholders and customers live within an easy drive of the head office.
While the too-big banks have gotten even bigger, smaller community bankers are finding it increasingly tough to survive, in part because they must commit more of their limited resources to complying with new regulations stemming from the global near-meltdown.
Indeed, many community banks are now too small to succeed.
“Regulatory burden is absolutely a factor for many smaller banks that are looking to exit,” said Steven Gardner, president of Pacific Premier Bank in Irvine, Calif., which has acquired two failed banks and two open banks in the past two years.
“And it’s absolutely going to continue,” said Gardner, whose bank, with 13 offices and $1.6 billion in assets, is scouting more acquisitions.
It’s the latest chapter in a long decline in the number of U.S. banks. At the end of 2007, right after the financial crisis struck, the government insured 8,534 commercial banks and savings institutions — down 52 percent from 1984. As of Tuesday, the count was 6,926, down 19 percent since the crisis began.
Of the 1,608 banks that have disappeared since the financial crisis — most of them community lenders — nearly a third were shut down by regulators in the biggest rash of bank failures since the savings and loan debacle in the 1980s. The rest were attributed to consolidation as bigger banks gobbled up smaller players.
The irony is that community banks generally avoided the kind of subprime home lending that brought down the housing market and the economy. They left such risky mortgages to large national lenders. Most of the ones that failed had overdosed on loans to land developers and homebuilders during the housing boom.
Many others remain well-managed with profitable niches, analysts say. And they have shared some legacy problems from the financial crisis with larger banks, including weak loan demand in a sluggish economy and low interest rates that have pinched lending profits.
Yet small community banks, on average, remain far less profitable than larger institutions.
Many bank investors believe they can’t get a decent return from banks with less than $500 million in assets, said Irvine bank consultant Edward Carpenter, who has helped scores of small banks get started.
By this gauge, just 19 percent of banks nationally would measure up.
Carpenter — who heads a partnership that has acquired a cluster of California community banks with assets totaling $3.8 billion — said $1 billion in assets is the threshold for financial viability.
“And George Bailey thought he had issues,” Carpenter said, referring to the Depression-era banker played by Jimmy Stewart in the 1946 film “It’s a Wonderful Life.”
EFFECT OF DODD-FRANK
In reaction to the financial crisis, legislators and regulators took major steps, such as the landmark Dodd-Frank legislation in Congress, to ensure that banks would run fewer risks and have greater cushions of capital in the future. Smaller banks have been exempted from many of the new requirements, such as those requiring bigger banks to keep more reserves as a check against losses.
“I think Dodd-Frank in and of itself contains challenges,” said Scott Jarvis, head of the Washington Department of Financial Institutions, which regulates banks and credit unions statewide.
“In terms of the compliance, there’s the Secrecy Act, the Patriot Act – those have elements of reporting. All of those things do add up.”
He includes the requirements of the Consumer Financial Protection Act, which adds additional burdens for banks.
And there are additional challenges in today’s banking marketplace, Jarvis said. It’s not simply a matter of increased compliance requirements.
To compete, he said, “you have to provide more products, have a more robust Web page.
“I wouldn’t pin it on any one thing. The universe is changing in a low interest-rate environment. Some boards have gone through some pretty tough times with their institutions. The horizon to improve the bottom line is still somewhere out there.”
Out there, some bankers and potential bankers see both an end and a beginning.
“We’ve already seen some consolidation, and we would expect to see more,” Jarvis said.
But still, he said, “we’ve had a few feelers from people asking about starting new banks.”
SMALL BUT THRIVING
Small local banks that offer home loans in underserved rural areas have been allowed to make certain mortgages, such as those with balloon payments, that would come under greater scrutiny from regulators if made by banks in urban areas.
Mattawa, a city just east of the Columbia River, faced trouble last year when the one bank in town — Bank of Whitman — closed after the parent bank was purchased by Tacoma-based Columbia Bank.
Columbia initially decided to close the branch and thus leave the town unbanked.
Without a bank, the city was forced to dispatch a police officer to drive municipal cash receipts to a bank branch 30 miles away. Farm workers with paychecks cashed those checks at local groceries, gas stations or convenience stores — which caused security concerns with so much currency afloat.
Columbia later decided to repurchase the former Whitman branch from the federal liquidator, and all was soon well.
Mattawa Mayor Judy Esser said last week, “We have a Columbia Bank, and it is going wonderful. We’re very, very happy. On Friday night you can see a line out the door with people waiting.”Staff writer C.R. Roberts contributed to this report.