Bank mergers change industry landscape in state

Bank mergers and acquisitions in Maryland–including the contest to buy 1st Mariner, the recent purchase of BCSB Bancorp and pending acquisition of OBA Bank by F.N.B. Corp. and the acquisition of Provident Bank by New York state-based M&T Bank in 2009–have changed the landscape for banking in the state, bringing new names to buildings as well as changes for customers.

What has happened in Maryland is part of a national trend, enabled by changes in federal law in the 1980s and 1990s that lifted geographic and other business restrictions imposed on banks after the Great Depression.

New banking laws enacted after the financial crisis of 2008 also have promoted consolidation.

In 2008, 95 banks were headquartered in Maryland.

Seventy-three have their headquarters in Maryland now, Maryland Bankers Association president and CEO Kathleen Murphy said.

The Interstate Banking and Branching Efficiency Act of 1994 made way for bank corporations to consolidate and to acquire banks across state lines.

The number of banks in the United States dropped sharply in its wake. In the 1980s, there were about 14,000 U.S. banks; now there are about 6,000.

Although some corporate headquarters have decamped to other states, there are still 123 FDIC-insured banks operating 1,800 branches in Maryland, Murphy said.

But a larger share of Marylanders’ banking business is handled by banks based outside Maryland.

Maryland-based banks hold about 19 percent of the state’s banking market, said Mark Kaufman, Maryland’s commissioner of financial regulation.

In 2002, Maryland-based banks held 32 percent of the state’s market, Kaufman said.

The largest net effect from bank consolidation has been a reduction in the number of small banks and an increase in large banks, according to a recent Federal Deposit Insurance Corp. study.

Yet, as the FDIC study noted, more than 90 percent of FDIC-insured institutions still operate as community banks: focusing on lending, receiving deposits and operating in a limited geographic area.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted as a response to the financial crisis of the Great Recession, put more restrictions on financial institutions, including measures that some critics say went too far by imposing one-size-fits-all regulatory burdens that small banks cannot afford.

“The regulatory changes are making it tougher for community banks to exist and be profitable,” banker-turned-lawyer William J. Thomas said.

For consumers, banking services are getting more expensive and loans are harder to come by, said Thomas, who represents commercial bankers and borrowers in credit, loan, finance and cross-border transaction matters for the Baltimore-based law firm Adelberg, Rudow, Dorf & Hendler.

Since Dodd-Frank, the cost of doing business has caused some small banks to cut back or stop making car and home loans and to end free checking.

Dodd-Frank amendments to truth-in-lending laws subject banks to the risk of being sued by borrowers and losing if the bank cannot prove that the borrower had the ability to repay the loan when it was made.

Such changes place costly burdens on community banks, Thomas said.

Some community banks are avoiding the risk and focusing more on making commercial loans, which offer more profit potential, Thomas said.

“The community banks that survive could be more competitive, but it’s inevitable that there will be more consolidation and less competition long-term,” Thomas said.

Banks have found that they need to find efficiencies and savings to counter the cost of new regulations that have taken away from focusing on building their business.

About 35 percent of the time banks spend on developing business is now spent ensuring regulatory compliance, Murphy said.

Still, Maryland continues to be a market of choice for banks because of the state’s high income and a diversified economy that remains more insulated from economic downturns than the economies of most states, Murphy said.

Maryland is a largely urban state where most businesses have access to national and regional banks.

“For those businesses that have the cash flow needed for expansion, it’s a borrowers’ market,” Murphy said, noting that some banks are more involved than others in Small Business Administration lending.

But some rural business communities, served largely by community banks, have found borrowing more difficult because of limits on how much banks can loan to one borrower, Kaufman said.

Exacerbating the problem are restrictions that drive away investment in small banks, Kaufman said, such as the rule that an investor whose investments amount to 25 percent or more of a bank’s assets make the investor liable to fix failures.

Kaufman and other state banking commissioners have advocated for relaxing some of the rules on how smaller banks can raise capital.

“As capital has consolidated, it makes it harder to fund small opportunities [and] we should be able to meet that challenge,” Kaufman said.

“The further the decision makers are removed from the local market, the harder it is,” Kaufman said. “If you talk to community clients, they’ve seen loan applications take longer.”

Murphy said bank customers should have “an open dialogue” with their bank to see if the institution can meet their needs.

“I know it’s difficult to look at changing a relationship, [but] shop around,” she said.