Small banks struggle for capital as fin-tech start-ups raise piles of cash

Where have all the small banks gone? Some have been part of mergers. Low interest rates and stricter loan and capital rules have squeezed profits for others.

“Is America running out of banks?” stock analyst Fred Cannon asked in a report to clients of Keefe Bruyette & Woods on Monday morning.

Well, they aren’t making any more of them. It’s not just that more than half of U.S. banks have vanished in mergers. It’s that new bank openings have collapsed — from two a week in the 1980s, 1990s and 2010s to less than one a year, Federal Deposit Insurance Corp. data show. Low interest rates and stricter loan and capital rules have squeezed profits, leaving many small banks worth less than what their founders paid to open them.

Instead of banks, investors are pumping money into financial-technology firms: More than 1,000 fin-tech deals have attracted more than $30 billion in new investment in each of the last three years, according to the deal-trackers at KPMG.

Analyst Cannon worries that some communities that relied on banks “may not be well-served,” either by giant banks such as Wells Fargo or by fin-tech online lenders such as Wilmington-based Swift Financial — bought by PayPal Inc. last week — that typically charge high rates for their faster service and have no particular interest in most of the towns where they lend.

Lack of profit makes it tough for banks to attract investors. Consider Stonebridge, the Chester County bank that grew to half a billion dollars in loans and other assets in the mid-2000s but shrunk to just $79 million after writing down bad loans from the last recession.

Two years ago this month, a group of Lancaster County businessmen, including former Republican State Rep. Gordon Denlinger, offered to buy Stonebridge and raise more than $10 million to get the money-losing bank lending again to developers and business owners in Chester and Lancaster Counties.

They raised the money and won federal regulators’ support — but gave it back to investors and paid a $190,000 fine after the Pennsylvania Department of Banking and Securities (run by Secretary Robin Wiessmann, an appointee of Gov. Wolf) last year accused the group of selling “unregistered securities.”

The bank burned its capital base down to $5 million from $7 million during the first three months of this year. It had been $33 million in 2008. Stonebridge’s holding company remains in bankruptcy in Delaware. Bank officials won’t talk about what options are left.

Consider also United Bank of Philadelphia, which had been slowly burning through its capital and posting losses since the 1990s. United loans and other assets now total just $51 million.

United is one of the last of the Philadelphia banks that once focused on African Americans and members of immigrant groups. Its founders raised early cash in the black community, then appealed to Philadelphia’s largest banks (required by the Community Reinvestment Act of 1977 to lend in poor neighborhoods) and elected officials (who pulled dollars from the city’s underfunded pension system) to fund United. But it had a tough time finding customers.

Earlier this year, United boosted its depleted capital base by half a million dollars after Fulton Bank, of Lancaster, agreed to buy nearly 20 percent of the company. Bryn Mawr Trust Co. has purchased 10 percent more through a secondary offering, Bryn Mawr chief financial officer Michael Harrington told me. New money could keep United in business awhile longer.