Have you noticed how consolidation in the U.S. banking industry has resulted in fewer Colorado banks? With the strength of the Colorado economy, one might assume that would lead to a growing local banking sector, but for Colorado businesses, entrepreneurs, and investors who prefer dealing with a local bank, there are fewer options due to continuing consolidation.
Nationally, the number of banks is down from 14,507 U.S. institutions 30 years ago to just 4,919 today – and shrinking. In Colorado, the consolidation is more pronounced – according to the FDIC, the number of commercial banks operating in Colorado is down from 462 in 1987 to 78 today.
While the number of total Colorado banking offices is also down since the Great Recession – from 1,645 in 2009 to 1,446 today, the three largest branch networks in the state are now all big national banks: Wells Fargo (153 branches), US Bank (152 branches), and JP Morgan Chase (112 branches).
Even among Colorado-based banks, with the recent sale of Citywide to Iowa’s Heartland, Colorado Business Bank to Bank of Oklahoma, and Guaranty Bank to Independent Banks of Texas, of the 10 largest Colorado-based banks, eight are now privately owned or owned by out-of-state banks.
Why has this 83% decline in just 30 years of the number of Colorado banks happened? Industry watchers would cite five key national and local factors:
- Re-regulation – while the Dodd-Frank re-regulation effort was supposed to help Main Street banks over Wall Street, community banks’ share of U.S. banking assets has fallen from 41% to 18% nationally. Since Q2 of 2010 when the Dodd-Frank legislation passed the Congress, community banks lost market share at a rate double the rate from Q2 2006 to Q2 2010: 12% vs. 6%.
- Capital requirements – During the Great Recession, many industry watchers thought that more capital for banks would provide a better buffer against future downturns, but they didn’t necessarily consider the cost of capital and liquidity issues for smaller banks. In 2013, the international banking capital requirements for big banks were increased and then were applied for the first time to all community banks in the US with Basel III. Many banks in Colorado and around the country failed or were forced to sell with the ever-growing regulatory burden and higher capital costs and requirements.
- Profitability – In Colorado, bank earnings have improved recently from 0.94% on assets in 2016 to 1.32% in Q2 of 2018. However, during the Great Recessions, bank earnings were wiped out, with $11 billion in industry losses in 2009. Industry earnings haven’t even doubled in aggregate from 2010 to 2017 – until recently, making the industry less attractive for investors and driving more consolidation.
- Net new banks – From 2009 to 2017, according to the FDIC, 57 banks in Colorado merged out of existence in addition to the 14 local banks that failed. Nationally there were only two new bank charters granted from 2011 to 2016. Even with a stronger economy, there have been no new bank charters in Colorado since 2010, compared with 30 and 39 new charters, respectively, in the prior two decades – creating scarcity value but a remarkable statement of the post-recession lack attractiveness of our industry to investors, again until 2017.
- Economies of scale – Nationally, according to S&P Global data, banks over $1b in assets are consistently more profitable than sub $1b institutions. In a consolidating industry, means an institution that wants to remain likely independent needs to be in that size range. In Colorado, there were only 11 banks (13% of the total) over $1 billion in assets as of June 30, with two of the four publicly traded $1 billion-plus institutions (i.e. Colorado Business Bank and Guaranty Bank) already sold to out of state banks so far this year.
Local banks are critically important for our communities and our economy. Even though we have seen so much consolidation, there are still many fine Colorado-owned banks serving the state. For business owners, individuals, families, and institutions that want to support the local economy, I know these banks would welcome your support and your banking business.
First Western Trust (Nasdaq:MYFW), is the only home grown, publicly held Colorado bank. With 13 offices in Colorado, Wyoming, Arizona and California, over $1.1 billion in total assets, and $5.5 billion in trust and investment management assets, MYFW delivers integrated wealth management on a private trust bank platform.