Where are all the new banks?

Just four commercial banks have started in the United States during the past five years. That’s a striking contrast to the previous two decades, which averaged triple-digit starts annually.

So, where have all the new bank startups gone?

Industry experts say the economic crisis of the Great Recession and the implementation of the Dodd-Frank Act played a large part, but the changing nature of the tech-reliant industry also is a factor.

“You don’t have to look too far for a cause,” said Craig Overfelt, senior vice president of the Missouri Bankers Association. “Dodd-Frank has imposed a regulatory burden on the industry, and there is significant cost to dealing with that.”

Overfelt, who handles MBA lobbying efforts at the statehouse, said the Dodd-Frank Act of 2010 is working to ensure a safer process for both lenders and consumers, but the fixed expense of compliance is too much to bear for emerging startups.

“It takes a certain size bank to handle the expense of compliance staff to monitor those regulations,” he said. “If you’re just starting out, you don’t have the capital to deal with that.”

By the numbers
Commercial banks have ridden the slippery slope of decline for the past two decades, even before the recession hit. According to data from the Federal Deposit Insurance Corp., the nation had 12,343 commercial banks to start the 1990s. More than two decades later, over half of those are gone. Numbers have steadily declined every year with year-to-date 2015 tallying 5,570 commercial banks in operation and no new starts with just four months left in the year.

“We are down in branch count; there is no doubt about that,” Overfelt said, adding some decreases can be attributed to the rise of online and mobile banking. “But overall, Missouri still has a lot of banks for the Midwest. Springfield is still the most competitive market in the state.”

The Queen City is home to the state’s last bank startup,  the 2008-launched Springfield First Community Bank. A consortium raised $2.4 million in seed money to cover salaries and other bank startup costs estimated at $850,000 and another $20 million in escrow at Great Southern Bank served as initial capital for holding company Springfield Bancshares Inc.

“We were in the middle of starting this and looked around at the recession kind of like, “Wow, look what’s going on,’” said Jan Baumgartner, a bank founder and current executive vice president. “There’s no doubt it was a little frightening, but we knew we had support of investors and loyal customers to back us.”

According to the latest FDIC data as of June 30, 2014, SFCB is the ninth largest bank in the Springfield metropolitan statistical area with deposits of $264 million. Baumgartner said, last week, the bank currently has $294 million in deposits and assets of $369.8 million.

Knowing what they know now about the recession and regulations, Baumgartner said she still would have been on board with the launch.

“The investment felt right and the people felt right,” she said, adding despite the economic downturn, the bank stayed the course and wasn’t forced to pivot in the following years.

A new kind of startup
While technology is a factor in the decline in bank charters, local bankers believe an increase in mergers and acquisitions accounts for the majority of attrition.

“It’s easier to enter a market by buying an existing charter than it is to start a new one,” said Eric McClure, president and CEO of Mid-Missouri Bank. “Following the recession, there were a lot of banks for sale – there still are – and if you had the means, they were ripe for the picking.”

McClure, who worked 28 years at the Missouri Division of Finance prior to joining Mid-Missouri, said M&A activity is a symptom of an overregulated system. According to the FDIC, the nation tallied 239 mergers last year and is on track for 74 so far this year.

Locally, consumers have watched as northwest Arkansas-based banks move into southwest Missouri. Within the last year, Simmons First National Bank purchased Springfield’s Liberty Bank, Bear State Financial is working to purchase Metropolitan National Bank, and Arvest Bank continues to expand its southwest Missouri footprint.

Since 1990, mergers peaked in 1996 at 606 total, and have fluctuated in the years following, averaging 171 annually in the last five years, according to the FDIC.

“It’s not, ‘If you build it, they will come,’ anymore,” McClure said. “Banks must be strategic about where they place their efforts.

“There is a huge resistance to new charters coming from (Washington,) D.C. Legislators aren’t interested in talking about it, but growth needs to continue. That leads to buying up what’s available.”

A 40-plus year banking veteran, Baumgartner agrees, saying the industry has fundamentally shifted under Dodd-Frank.

“This crisis was something like we’ve never seen before,” she said. “It scared people. It changed policy and procedure. I don’t think we can ever go back to the way it used to be and I don’t know that we want to.

“Startup may be a thing of the past – at least for the immediate future.”