New Charters: Here to Stay?

The late '90s' bumper crop of new banks seemed to some to be an investment play, but to date most of these fledglings are focused on what they set out to do--meet real needs for local service The banking industry's biggest story over the past decade has been mergers and consolidation. Between the end of 1990 and the third quarter of 2000, the number of commercial banks has declined by almost one-third, from 12,347 to 8,375. Offsetting this trend, however, has been a steady trend of applications for new charters--an optimistic group of bankers who believe that bigger may not be better, and that community-based institutions can still thrive in the spaces between the giants. New charters fell sharply during the first half of the 1990s, as the banking industry recovered from a major downturn. The number of new charters bottomed out in 1994, with only 50 new banks chartered nationwide. 1994 was also the year that Congress passed a nationwide branching law. Some industry analysts predicted that market forces, combined with the elimination of barriers to geographic expansion, would speed up the consolidation of the industry even more, reducing the number of banks to as few as 2,000 by the end of the decade. In 1995, the first year after the nationwide branching law, the number of mergers did hit a historical peak, rising to 609. But a strange thing happened: the number of new charters rebounded sharply, more than doubling from the previous year to 102. After that, the number of new charters grew steadily for four years; although the number declined slightly in 2000, states and the OCC still issued almost 200 new charters last year. Maybe the de novo surge wasn't so strange after all. More mergers meant more communities with fewer or no locally owned banks. It meant a growing pool of bankers cut loose from, or dissatisfied with, the surviving institution in a merger. Too often it also meant unhappy customers. The second chart on p.32 plots new charters against mergers. While at first glance the trends appear to be divergent, it is more likely that there is a lag between when a merger closes and when the forces of discontent described above, bubble to the surface and take form as a bank in formation. People have to come together, raise capital, and get regulator approval, and so forth. Few were sold off In the face of so many contrary trends in the mid-1990s, why have so many investors and bankers been willing to take their chances with new charters? A cynic might wonder whether the reason for so many new charters in 1995 was the fact that federal law changes made it easier to sell these institutions, especially across state lines. Of the 102 charters issued in 1995, 18 are now inactive. That's pretty close to the overall industry consolidation rate during the same period, which is just under 16%. But a closer look at those 18 institutions (see accompanying table) is even more instructive. Only two of these institutions have actually been acquired by unaffiliated institutions. Two remain open, but have simply changed their names. The others were holding company banks that have been merged with affiliates; most were probably chartered in order to comply with state geographic restrictions (Montana, for instance, was still a unit banking state in 1995). The vast majority of new banks chartered in 1995 continue to operate as community-based institutions, and most are thriving along with the rest of the industry. While credit quality has begun to decline across the banking industry, the FDIC's most recent statistics show this decline concentrated in the largest banks, not in the smaller, community-based start-ups. How many is too many? Nevertheless, the FDIC has expressed concern in the past year about the rates of new charters in certain parts of the country, particularly in the Atlanta, Chicago and San Francisco regions. …

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