Tally of U.S. Banks Sinks to Record Low
Small Lenders Are Having the Hardest Time With New Rules, Weak Economy and Low Interest Rates
The number of banking institutions in the U.S. has dwindled to its lowest level since at least the Great Depression, as a sluggish economy, stubbornly low interest rates and heightened regulation take their toll on the sector.
The number of federally insured institutions nationwide shrank to 6,891 in the third quarter after this summer falling below 7,000 for the first time since federal regulators began keeping track in 1934, according to the Federal Deposit Insurance Corp.
The decline in bank numbers, from a peak of more than 18,000, has come almost entirely in the form of exits by banks with less than $100 million in assets, with the bulk occurring between 1984 and 2011. More than 10,000 banks left the industry during that period as a result of mergers, consolidations or failures, FDIC data show. About 17% of the banks collapsed.
The consolidation could help alleviate concerns that the abundance of U.S. banks leads to difficulties in oversight or a less-efficient financial system. Meanwhile, overall bank deposits and assets have grown, despite the drop in institutions.
“Seven thousand is still an awful lot of banks,” particularly in an era where brick-and-mortar branches are becoming less profitable, said David Kemper, chief executive of Commerce Bancshares Inc., a regional bank based in Missouri. “There’s no reason why we need that many banks, especially if those smaller banks have a much lower return on capital. The small banks’ bread and butter is just not there anymore.”
Still, the falloff is raising alarms among boosters of community banks, who say such lenders—which represent the vast majority of U.S. banks—are critical to the economy because they are more likely to make small-business loans. The number of physical bank branches in the U.S. is also shrinking. From the end of 2009 through June 30 of this year, the total number of branches dropped 3.2%, according to FDIC data.
“All too often, the large banks use their models and their algorithms, and if you don’t fit in their boxes, you don’t get the loan,” said Sheila Bair, the former FDIC chairman who is now a policy adviser at the Pew Charitable Trusts think tank.
Unlike before the financial crisis, new startup banks aren’t rushing to take the place of exiting institutions. Every year from 1934 to 2009, investors in the U.S. chartered at least a few and sometimes hundreds of new banks, according to the FDIC data. The Bank of Bird-in-Hand opened in Bird-in-Hand, Pa., on Monday—it was the first new bank startup in the U.S. since December 2010.
The reticence stems from slim profits and rising regulatory costs as Washington tries to ensure banks won’t fail en masse as they did during and after the 2008 financial crisis, bankers and industry consultants say.
SNL Financial, a firm that tracks bank data, said the median loan-growth rate for banks with less than $100 million in assets was about 2% during the year ending Sept. 30, well behind the roughly 3.4%-to-7% rate for midsize banks, or those with assets as high as $10 billion.
FDIC researchers, in a study of community banks released in December 2012, found that, as net interest margins—the difference between the interest charged on loans and that paid on deposits—declined across the industry in recent years as interest rates dropped, community banks suffered more than other banks. That is because their business models—traditional lending and deposit gathering—generally rely more on interest income.
And one way small banks grow, by buying branches from other banks, is also slipping. Through mid-November, there had been only 89 sales of branches this year, down 25% from the same 2012 period, according to SNL Financial. The main reason for the drop, industry experts said, is consumers’ increasing reliance on mobile banking and automated teller machines.
The question for community banks is, “Can you be too small to succeed?” said Dorothy Saverese, chief executive of the Cape Cod Five Cent Savings Bank in Massachusetts, who also advises the FDIC on community-banking issues.
Last week, the Bank of Bird-in-Hand bucked the trend, announcing it had secured FDIC approval and would become the first federally approved startup bank in nearly three years. The challenges the bank faced in winning that approval help explain why many investors are opting not to charter new banks.
To convince regulators of their viability, the backers behind the Bird-in-Hand group raised about $17 million from investors. Brent Peters, chief executive of the Bank of Bird-in-Hand, estimated the group spent about $800,000 in preparing its application for a new charter, including consulting and legal fees, rent on a temporary office during the roughly seven-month application process and the salaries of top managers, four of whom were on the payroll one month before the bank won FDIC approval.
In its application, the bank had to lay out internal policies and procedures in detail and specify the systems in place to, for example, guard against cyberattacks. Paid consultants analyzed the local lending market and the feasibility of opening a bank there. The FDIC interviewed senior management and contacted banks competing nearby.
“You are talking perhaps anywhere from 8 to 16 inches of paper,” the bank’s attorney, Nick Bybel, said of the application.
Mr. Peters, who helped found another Pennsylvania bank in the early 1990s, said the application process this time was much more intense. “I’ve done this before, and it’s a lot different this time around,” said Mr. Peters.
Even before the financial crisis, the FDIC had begun to step up its analysis of bank applications, including testing to see how an institution would likely fare in its early years. In 2009, the agency lengthened to seven years from three years the period during which the banks it oversees face higher capital requirements and heightened scrutiny of business-plan changes.
FDIC officials say the agency’s process has always been rigorous and that it has received few applications in recent years as the economy has struggled. The lack of new banks forming is similar to “a pattern we’ve seen following previous financial crises and the recoveries that followed,” FDIC Chairman Martin Gruenberg said during a news conference last week. “We would expect to be seeing additional applications as the environment improves, and we expect to be approving them.”
David Baris, a partner at law firm BuckleySandler LLP who said he has advised more than 30 new bank startups over his career, said he has been steering clients away from starting a bank. “As a result of the FDIC’s policy, a [new] bank becomes a much-less-attractive investment, and it will be difficult to find sufficient capital.”
Even existing small banks also report higher operational costs in the postcrisis era. Expenses include investments in cybersecurity and staffing to ensure compliance with new federal rules on mortgage lending and other matters.
United Southern Bank in Kentucky is about the same size it was in 2009, but bank President Todd Mansfield said he has hired about 15 back-office workers since then to help process loans, ensure compliance with regulations and deploy information technology. “We are literally running out of space. Probably we needed to add a few [more] people, but you know labor is the most-expensive item we have on the books,” he said.
Mr. Peters said he and his partners felt starting a bank in this climate could still be profitable, in large part because the Bird-in-Hand bank will cater to a population they feel is underserved: the Amish community. The area around Bird-in-Hand, a village squeezed between farm fields in Lancaster County, Pa., had a locally owned bank in recent years, but it was snapped up by a larger competitor in 2003. Bank of Bird-in-Hand’s owners think they can provide banking services that are better tailored to the community.
While the new bank will offer online deposits and target local customers who aren’t Amish, it will also operate a courier service to accommodate customers who might not be able to drive up or log on—a nod to the fact many Amish don’t use cars or computers. The drive-through window of the bank’s one branch accommodates a horse and buggy, and there is a shelter in the parking lot to shield horses from rain.
There is now one community-bank application pending in the U.S., according to the FDIC. It is for an institution in American Samoa.