Banks are disappearing across the US

The number of federally insured institutions has fallen to the lowest level since the Great Depression.

By MSN Money Partner Dec 3, 2013 1:14PM
Images: Bank Vault (© Radius Images/Jupiterimages)By Ryan Tracy, The Wall Street Journal

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 (CBSH), 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, Penn., 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.

-- Saabira Chaudhuri contributed to this article.

More from The Wall Street Journal

Dec 3, 2013 2:34PM

Aren't you all sick of hearing ALL OF CONGRESS and our President spouting what Americans want?
They have no clue and they do not listen. 
Dec 3, 2013 1:52PM

There are fewer but bigger. TBTF is now "Too Gargantuous To Fail". They stroll down Wall Street with a politician in each pocket.

Dec 3, 2013 2:55PM
There should be  fewer banks.  Banks charging fees for the privilege of having your money in their bank should be the first to go.
Dec 3, 2013 2:59PM
I do ALL my business with the credit unions. they treat us as members (as they consider us and NOT as customers) a whole lot better and the interest rates are lower and we yield more for our returns too. I don't trust nor like banks at all! No wonder banks are shrinking.  Look at banks like Wells Fargo who are taking over the monopoly of banks all over the country. They are getting too big to fail and they are ripping off their customers all the time for profit. The smaller banks are being absorbed by giants like them everyday. There were ten presidents who did not trust our banking system during their time and they were James Adams, John Madison, Thomas Jefferson, Andrew Jackson, Abraham Lincoln, James Garfield, Woodrow Wilson, Franklin D. Roosevelt and John F. Kennedy. They had plenty to say about big banks. Wished we had a president in office who had their same principles. Those days are forever behind us.
Dec 3, 2013 2:32PM
Seems to be we keep writing laws that can't be enforced or are enforced by crooks. So, how about we go back to KISS method and we would not need all of this administration crap that has no ROI.
Taxpayers should demand they put back Glass-Segal and separate the merchant banks from the investment banks and they would not need all this regulation. Banks make loans they have to keep part of it so they have some skin in the game...
Dec 3, 2013 2:28PM
Interesting, since we have lost millions of family farms too. There used to be 7 million and now we are down to 2 million. Kentucky is blowing off the tops of their mountains for coal... Our country is going somewhere, not sure where.....
Dec 3, 2013 1:45PM
They rip off their customers .... little wonder

The end is near folks


look at it this way income in the US is only like $4-5 trillion with the top ten percent earning $2-3 trillion dollars the rest of us earning only $2 trillion or so.


Pretty much the US is beyond bankrupt and Bernanke will never be able to reduce QE3 as the whole US economy would collapse. They are about ready to announce QE4 at $125 billion a month just to stablize the economy.


Get ready for the whole banking system to fail by Sept 2015.

Dec 3, 2013 3:06PM
is this supposed to convince us that the industry is more streamlined and efficient now that big has eliminated small? the corporate elite now calls all the shots in our culture, owns the government, and will continue to squeeze the working class.
Dec 3, 2013 2:37PM
so .. we can see that as the smaller banks vanish or most likely are assimilated into a few mega banks financial security will vanish because all our eggs will be in one basket again. who will catch us when we fall again ?
Dec 3, 2013 2:23PM
Dec 3, 2013 4:08PM
lol msn is gotta be the most confusing site week its " stocks are up, reasons you should buy stocks, and housing is up, buy now,and unemplyoemnt is improving, and 10 companies hiring this week and yada yada yada etc. etc. etc...then we get this " sluggish economy banks dissapearing " stuff..WELL WHICH IS IT? good economy or bad? lol a week before it was " more people buying cars since 2007 or so..and then it was more people perdicted to buy more for the holidays..then yesterday its " less americans shopped on black friday " who honestly DOES these posts?
Dec 3, 2013 3:56PM
Back in 1934, you couldn't do banking transactions from home, now most can. I don't know when the first ATM came on line but that has also changed the need for more Banks. Wells Fargo alone bought out two major Banks. The same could be likely stated for other Big Banks. So it's hardly shocking that they are less banks. These are the primary REASONS, not what the Author of this Article led out with.

Banks are disappearing, but Title Loan and Payday Loan locations have exploded. Now folks can purchase a Debit Card at almost any store. Technology has changed and so have the need for more Banks. It's not that complicated. However, the Too Big to Fail,  Too Big to Jail are still here. That's a huge Problem.

Dec 3, 2013 3:18PM
What these banks should have done is build larger, more expensive banks on every corner for people to put all that surplus cash they have laying around.  (Excuse the sarcasm.)  Banks have been about as frugal with their assets as the federal government.  Banks who treat their customers like people instead of an account number I think are doing better than most.  Over the last five years, I've seen expansion of locally-owned banks in our area.  When you go to their drive-through, you aren't inundated with sales pitches for ridiculous services you neither need nor want.  Most of these banks are getting exactly what they asked for.
Dec 3, 2013 2:12PM

WELL, If several weren't a little crooked, they might still be around....?

Others may have been over-extended, but shouldn't have been; Where were the Regulators early..?

And Credit Unions might be taking a toll on some of the smaller ones...

Of course now I'm wondering about some of the C.U.s and their consolidations..

And we know for a fact, many of the executives of larger ones, should have went to jail.

Dec 3, 2013 2:35PM
Obama loves the big banks and hates the small banks.
Dec 3, 2013 2:52PM

And how do the banks compensate?  How about charging fees for EVERYTHING!

Sadly, even if interest rates go up and banks start cashing in on loans, the precedence has been set...they will maintain collecting the fees!

Dec 3, 2013 5:18PM
"Banks are disappearing across the US"


No need for banks when 11 million have fallen out of the work force since 2009 and PayPal growing so fast.  Only 1.4 million jobs have been created under this current administration and only 470,000 were full time jobs.

Dec 3, 2013 4:12PM
Not impressed by the stats.  Losing 11,000 banks between 1984 - 2011 .... that was a time period that included two of our nation's largest banking-induced crashes -- the Savings & Loan scandal in 1988 and the 2008 bank-created Crash.  Banker greed, over-reach and failure caused thousands of banks to close or merge or get bought out.  Back when S&Ls were created, they were regulated institutions designed to under-write 30 year mortgages, car loans and small commercial loans.  But making modest and consistent profits was not sexy enough, so they pushed for de-regulation in the 1980s (a Reagan triumph) and eliminated Glass-Steagall in the 1990s (Clinton's shame) and blew up the economy, and themselves.  We need a new generation of Jimmy Stewart's who are willing to run a new kind of non-profit Building & Loan that can survive on consistent but modest profits and not serve greedy shareholders.  That's the kind of service I want out of a bank -- a safe inexpensive place on the corner that will make affordable loans based on real knowledge of the customer.
Dec 3, 2013 1:29PM
So what ?   Banks are now pseudo-government agencies offering very little differentiation.
The world is moving on to bitcoins and hard assets.  It is nice to watch government become impotent.


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