Why Do We Need Small Banks?

On today’s show we are asking the question, “Why do we need smaller banks?”

After all, other countries seem to be dominated by a smaller number of very large banks. Why not rely on big banks and get rid of all the small banks altogether?

In the wake of the great financial crisis that started in 2007 and 2008, lending in real estate virtually dried up. Part of the reason that prices fell so much is that the only buyers left in the market were cash buyers.

In a market with a surplus of sellers and zero lending, the number of buyers evaporated. It was not a real estate crisis at all. It was a lending crisis that cascaded and became a real estate crisis.

In those days I was building new apartments in Philadelphia with my partners. These were smaller buildings, student housing, duplexes, triplexes, 10 unit buildings and so on.

There was no way that we would have walked into Wells Fargo or Bank of America and asked for a commercial real estate loan. The policies being set by these lenders were national in nature and the same criteria applied regardless of location. There was no room for local special situations.

No lenders would even talk to us, except about four local lenders. These were smaller regional banks with about a dozen branches.

At first the terms seemed very difficult. In fact, we went down the financing path with one lender and at the end of 90 days, the lender declined the loan. We started a second time with another lenders and this time after 60 days, the lender declined the loan. The third lender offered a 6% interest rate and a 20 year amortization with a five year term and a pre-payment penalty that would start at 5% in year 1 of the loan, 4% in year 2, 3% in year three and so on.

That small bank was Meridian Bank. Today Meridian Bank is in five states and they’re still a small regional bank. The loan terms were not great. We were left with little residual cash flow at the end of each month. That first loan was a blanket commercial loan across four buildings. In those days, the availability of a loan was more important than the rate or the terms. We were able to return capital to our investors and ultimately we held those buildings for a decade and eventually sold them at a handsome profit. At the time, we grumbled over the loan terms. Today my partners and I are very grateful to Meridian Bank for affording us the opportunity to get any financing when nobody else would.

As real estate investors, we depend upon lenders who have intimate knowledge of the local market. Having a major bank swallow up a small bank will force assimilation. The new parent companies don’t have a history of expanding their product offering to include the newly acquired banks in their offering. The products become homogenized. If you fit within the neat and tidy box of an hourly employee buying a single family home, with three years of income history you are a potential client.

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Host: Victor Menasce

email: podcast@victorjm.com