Where have you gone George “De Novo” Bailey? Or, maybe more appropriately with regard to the Michigan community banking space, when (if ever) does the next Bill Broucek-like banker emerge on the scene? I’ve commented in past months about both the challenges (operational,regulatory and competitive) facing community bankers and the dearth of traditional de novo activity coming out of the Great Recession. Recent discussions with long-time NBD banker and correspondent banking legend, Don Jeffrey, underscored what is common knowledge to every community banker in Michigan: their ranks have dwindled over the years, and some of the historical “back-filling” that used to occur via access to both talent and capital investment is now rapidly facing a nearly 10-year drought. Succinctly, a picture is worth a thousand words:
I’ll do the quick math for you. Statewide there are 83 counties in Michigan. There are 28 counties that do not reflect the existence of an independently-chartered bank operating within its borders. An additional 35 counties can claim the presence of only one bank charter domiciled in that county. That means that 63 of Michigan’s 83 counties, or roughly 76%, can point to one (or none) bank charters waving the county’s flag. Shifting demographics, reflecting extensive consolidation in traditionally rural communities, help explain some of this dynamic. Larger banks have been able to “service” certain communities via their branch networks, while in some instances simultaneously reducing branch count (see my earlier piece, “Our Nation Will Survive…But Will Branches?“, November 8, 2016). But we are also looking at population spheres reflecting thousands of consumers that no longer have a “local” bank to call their own, and hundreds of thousands more that can only point to a sole independent institution based within their community. Michigan once boasted the existence of more than 500 bank charters across the state, and as recently as 30 years ago the charter count still totaled approximately 350. By 1997, a mere 20 years ago, that count had been nearly cut in half, to approximately 180 charters. Ten years ago the number dwindled to approximately 150. Today, Michigan statistics reflect less than 100 bank charters headquartered here.
This is not solely a Michigan-specific dynamic at work. Nationwide, the number of bank charters has consistently shrunk for years, without any of the modest back-filling that used to occur via new bank (de novo) formation. Historically, since 2000, mergers and failures would effectively eliminate, on average, approximately 300 institutions per year. The formation of new banks during this same time frame, but pre-Financial Crisis, would bring roughly 150 institutions on average back into the fold each year. Since 2008, that “creative destruction” dynamic has all but disappeared. Since 2012, where we might have normally seen 600-700 new banks being formed during this time frame, there have been a grand total of five charters christened nationwide:
Yes, five. Across the entire country. Here in Michigan: zero. Actually, you have to go all the way back to 2009 to note the last de novos launched in the state: Ann Arbor State Bank (the aforementioned Bill Broucek) and Grand River Bank. Michigan banks launched 10, 15, and 20-plus years ago in Troy, Charlevoix, Grand Rapids, Holland, Bad Axe, Clarkston, Muskegon, Sault St. Marie, Bingham Farms, Saginaw, Kalamazoo, and Farmington Hills, to name a few communities (in addition to the “recent” Ann Arbor and Grandville shops), have survived the Financial Crisis and continue to build franchises that have become critical components of the markets they serve and support. Back-of-the-envelope, since 1990 there were more than 50 new banking charters granted in the state of Michigan. After resultant mergers and failures in the ensuing 25+ years, approximately 18 still operate today. Resilience, and clearly strong leadership, is undoubtedly part of each organization’s DNA.
It is assumed that the “price” of entry for a de novo now dictates initial capitalization of $25 – $30 million. Maybe that will begin to change (we are encouraged by the recent 147-page Department of the Treasury report on financial regulatory reform, A Financial System that Creates Economic Opportunities for Banks and Credit Unions, and will be monitoring closely to see what ultimately comes of the appropriate 80 recommendations that have been proffered). Might a more realistic, and reasonable, initial capital stake for a de novo outside of a massive metropolitan market (New York, Chicago, Dallas, Los Angeles, etc.) be on the horizon?
I harken back to excerpts from an address by FDIC Chairman Martin Gruenberg at a community banking conference in the Spring of 2016, as reflecting a more receptive, positive tone for the banking community sector, and a possible harbinger of things to come:
“The entry of new banks has helped to preserve the vitality of the community banking sector…de novo institutions fill important gaps in our local banking markets, providing credit and services to communities that may be overlooked by larger institutions…there is ample room for new banks with sound funding and well-conceived business plans to serve their local markets…it is essential that they have a clear path to approval…community banks are the very core of the U.S. financial system…they are the vehicle through which a large segment of consumers, small businesses, and communities gain access to credit and banking services.”
In closing, attached please find our monthly summary of Michigan’s financial institutions. As you and your Board take your organizations forward, please do not hesitate to reach out to me and/or my colleagues at ProBank Austin if we can be of any assistance in helping you assess the competitive landscape. Best wishes for continued success in 2017!