A Local Bank in Amish Country Flourishes Amid Dearth of Small Lenders

A Local Bank in Amish Country Flourishes Amid Dearth of Small Lenders

Bank of Bird-in-Hand is the only new bank to open in the U.S. since 2010, when the Dodd-Frank law was passed

By Ryan Tracy in the Wall Street Journal

BIRD-IN-HAND, Pa.—William O’Brien, chief loan officer at the Bank of Bird-in-Hand, closed so many loans in the bank’s first year of business that locals call him “Gelt Chappie,” or “money man” in Pennsylvania German.

Based in a rural village in the heart of Amish country, Bank of Bird-in-Hand is the only new bank to open in the U.S. since 2010, when the Dodd-Frank law was passed and enacted. An average of more than 100 new banks a year opened in the three decades before Dodd-Frank.

Bankers say the drought is a sign of new regulatory requirements in the wake of the financial crisis, which are boosting expenses and discouraging potential startups from even trying. Regulators say the profit squeeze from rock-bottom interest rates is a bigger problem.

“There was, still is, a pent-up demand for a local bank,” Mr. O’Brien says, describing a local man who manufactures mattresses for dairy cows. Though the mattresses are common in dairy barns, the man told Mr. O’Brien he had trouble getting a loan from a large bank, which didn’t understand the product.

“He never forgot that,” Mr. O’Brien says. “And that gets around.”

Bank of Bird-in-Hand caters mainly to the local Amish community, though it welcomes other customers, too. The bank doesn’t offer online banking, but its sole branch does have a drive-through window that can accommodate a horse and buggy.

Lancaster County, Pa., has abundant farms and small businesses, but larger banks often aren’t interested in business loans of less than $1 million, says Mr. O’Brien.

He says loan demand is so high that “if there would have been two of me, we could have done more” than the $60 million in loans made in the first year after Bank of Bird-in-Hand opened its doors in late 2013.

Last year, the more than 6,000 locally focused “community banks” in the U.S. increased their combined earnings by 9.1% from 2013, according to the Federal Deposit Insurance Corp. The overall U.S. banking industry suffered a profit decline because of problems at the biggest firms.

A Federal Reserve study concluded that the number of bank startups has historically tracked the Fed’s interest-rate policy, suggesting that higher rates might encourage investors to start a new crop of banks.

Earlier this month, regulators gave conditional approval for the second postcrisis bank, Primary Bank of New Hampshire.

Lawmakers are concerned about the dearth of new banks because small banks make the majority of farm and small-business loans, federal data show.

“There are many on both sides of the aisle that believe improvements [to rules impacting small banks] can and should be made,” Senate Banking Committee Chairman Richard Shelby (R., Ala.) said earlier this year.

Low interest rates are especially painful for small banks because they rely on interest income more than big banks do.

In the fourth quarter, Bank of Bird-in-Hand had a net interest margin of 1.38%, far below 3.63% for community banks overall, as it altered loan and deposit rates to seek out new customers. Net interest margin is the gap between what banks earn on loans and pay for deposits.

The new bank posted a loss of about $1.4 million in 2014, hurt by reserves set aside to cover future loan losses. Experts say profits aren’t expected right away at startup banks.

Like other banks, Bank of Bird-in-Hand has had to hire compliance experts, buy new computer systems and spend more time writing policies and regulatory reports. One of its 16 employees is dedicated full-time to regulatory compliance, despite Mr. O’Brien’s desire to hire another loan officer.

Last fall, the management team spent more than a month preparing for its first annual exam, a three-week visit from a team of about 10 FDIC and state examiners, who visited in shifts.

The examiners looked at hardware and software systems geared toward meeting regulatory requirements for loan reviews, information technology, anti-money-laundering controls and treatment of low-income borrowers, among other areas.

The bank paid for “white hat” hackers to test its cyber-security infrastructure and hired a consultant to test the bank’s sensitivity to interest rates.

Chief Executive Alan Dakey says the examiners “obviously want to see us be successful, and the attitude is constructive in their approach.”

The bank’s early success suggests there is a place for small lenders, but it is also in a position others would struggle to replicate. More than half of its borrowers are local Amish businesses. That group is known for being financially stable, conservative and disinterested in the types of technology that are threatening typical bank branches.

Instead of planning to cash out with a future merger, Bank of Bird-in-Hand’s board members have thought about the long run, attending FDIC training sessions before the bank opened.

The board has expanded to include banking experts from other parts of Pennsylvania. The original group had a storage-shed maker, accountant, concrete contractor and real-estate lawyer, all local.

The bank’s backers won regulatory approval partly by raising and contributing $17 million in initial capital, far more than would have been expected before the financial crisis hit.

“It was a serious commitment in terms of time and money,” said Nick Bybel, a Pennsylvania banking lawyer who advises Bank of Bird-in-Hand.

A recent board meeting lasted six hours. Directors discussed the bank’s finances and employee compensation. They voted on eight internal policies, including 10 pages about advertising, even though the bank had run just three newspaper ads.

When the bank’s first CEO stepped down for health reasons last fall, regulators told the bank that the successor should have prior experience as a CEO, according to people at the bank.

Regulators wouldn’t discuss Bank of Bird-in-Hand but have told lawmakers that they are trying to ease rules that impose an undue burden.

Doreen Eberley, the FDIC’s director of risk management supervision, pointed Mr. Shelby last month to data showing that capital is flowing into community banks at a rate of more than $3 billion a year.

“That’s capital that at some point will shift into [brand new] institutions as the economy continues to improve,” she said.