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bank loans to small businesses driving them to fintech lenders like Kabbage , which lends through an online platform . “ If I were to go to Kabbage and borrow money , it ’ s very expensive money , but I can get it right away . … But that ’ s a transaction rather than a relationship ,” says Hotchkiss .
A decade of no new banks
Several market pressures are driving the plunge in numbers . The Federal Reserve ’ s bottom-basement interest rate policy , in place since the 2008 recession , has flattened bank profits , says Randall Eslick , president and CEO of Merchants Bank . As younger people open accounts , firms also feel more pressure to consistently invest in new technology — online loan applications , automated loan underwriting , new mobile banking apps and more . Even big banks are making big-tech spends : Giant JPMorgan Chase & Co . says it ’ s shelling out $ 11 billion a year on a team of 50,000 tech developers . And when bank giants BB & T and SunTrust announced a merger in 2019 , the prime reason was to pour more money into new tech . Interest rates and tech demands “ are the primary drivers right now of bank consolidation ,” says Eslick . “ And they really result in the need for scale .”
A longtime bank executive mentions another challenge : the ongoing cost of the additional rules on reporting , capital requirements and more that began with the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act . Big banks can bear that expense , says Brian Kelley , a former bank CEO from Southern California who held senior leadership positions at numerous banks from 1977 to 2011 . The small banks , which had nothing to do with the meltdown , cannot . He left banking in 2011 but remained a shareholder in a small bank . Its leadership once calculated the portion of their overhead that was going to expenses that didn ’ t produce revenue , like the costs of complying with those rules — it was about 40 percent , he says . The institution sold two years ago .
All that means investors need far more upfront capital to start a bank . Kelley says 15 or 20 years ago , that meant an initial
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capital raise of $ 10 million , with the goal of getting to about $ 250 million in assets to start turning profits . Now the launch number is between $ 25 million and $ 50 million , and the threshold for profits is $ 1 billion , he says .
The result is not just small banks getting eaten up — almost no new ones are starting . Ryback , a California delegate to the Independent Community Bankers of America , points out that 140 banks launched in California from 2001 to 2010 . Since then , the total is three , “ and one of those has already consolidated out ,” says Ryback . One California legislator he talked to was shocked to find out that the number of banks headquartered in her district went from 20 to zero .
A more positive trend accounts for this year ’ s financial marriages too : Big banks emerged from the pandemic reporting huge profits in the first quarter because of the recovering economy . Those hot bank stocks gave bigger banks the chance to use their high valuations to acquire smaller competitors , says Carpenter .
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Will Sacramento ’ s small banks last ?
Not all acquisitions are created equal , say area bankers . The Feather River- Plumas deal is a merger of two community banks . It will allow Feather River customers to get access to a bigger lending limit — up from $ 4 million to $ 5 million to at least $ 20 million , say Morehead and Ryback . Plumas also is a preferred lender with the SBA , meaning small business customers who don ’ t qualify for conventional financing might qualify for SBA 7 ( a ) loans , which are partially guaranteed by the federal government . Meanwhile , Feather River brings over its high concentration in agricultural loans .
The SoFi-Golden Pacific deal could be part of another trend : small banks jumping at chances to partner with fintech firms . Almost two-thirds of banks and three-quarters of credit unions said those partnerships were an important part of their business strategies last year , according to a report by bank consulting firm Cornerstone Advisors .
SoFi says the Golden Pacific deal will give the bank ’ s customers a higher-tech
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September 2021 | comstocksmag . com 49 |