Commercial Banking Industry Continues To Shrink

Includes: KBE
by: John M. Mason

The FDIC statistics for the commercial banking system are out for the third quarter. There were 54 fewer commercial banks in existence at the end of the third quarter than at the end of the second quarter. The FDIC only closed twelve banks during this time period.

The number of problem banks in the banking system dropped to 694, down from 732 at the end of the second quarter. Is the banking system getting healthier? This decline of 36 banks is a smaller number than the decline that took place in the banking system as a whole.

Over the past year, the banking system shrank by 184 commercial banks, the number fell by 455 in the previous twelve months. The banking system is getting smaller in terms of the number of banks, but larger in terms of the size of banks.

As of September 30, 2012 there were 6,168 commercial banks in the banking system, down 184 from September 30, 2011. But, the number of commercial banks with assets of less than $100 million dropped by 175 banks. Over the past two years, the number of banks in this size category fell by 350 banks.

Banks whose assets ranged from $100 million to less than $1 billion dropped by 17. Over the past two years the number of banks in this asset class dropped by 123.

Commercial banks with assets in excess of $1 billion rose by 8 banks. They gained 18 banks over the last two years.

In terms of assets, banks with fewer than $100 million in asset size declined by slightly more than 7.0 percent in total assets. Commercial banks within the middle range kept about the same number of total assets over the year, while those banks that were more than $1 billion in asset size grew by almost 4.5 percent during the past 12 months.

The 518 commercial banks in the United States that individually were more than $1 billion in asset size represented just about 91.0 percent of all the FDIC insured, commercial banking assets in the country.

Using Federal Reserve statistics, the largest twenty-five domestically chartered banks in the United States possessed about 67.0 percent, or about two-thirds of all the assets held by domestically chartered banks. And, this number gets larger every year. So, the other 6,143 domestically chartered commercial banks hold only about one-third of the banking assets in the United States.

In attempting to summarize these data, one can argue that small- and medium-sized commercial banks are going out of business, either by closing or being acquired. In addition, the number of problem banks in the country is not declining as fast as is the number of small- and medium-sized banks in the country. This leaves one with the impression that the bank solvency problem is not yet over.

To me, another indication of the health of the banking system is the lending performance of the different size of banks. For example, according to the FDIC data, Net Loans and Leases at all insured commercial banks rose by 4.7 percent from September 30, 2011 to September 30, 2012. However, there are substantial differences in the performances of the three bank categories.

The smallest banks, those with total assets of less than $100 million, saw their lending activity decline over the 12-month period ending September 30, 2012. Net loans and leases at these commercial banks fell by almost 10.0 percent! Their lending portfolio has even declined over the past three months.

Commercial banks in the $100 million to $1 billion category also experienced a decline in net loans and leases over the past 12 months of about 0.5 percent. These banks saw a very modest increase over the past three months.

The largest institutions did experience a healthy increase in net loans and leases over the year. The total rose by more than 6.0 percent, year-over-year.

The conclusion I draw from these data is that there are still "health" problems in the small- and medium-sized banks. Most of the problem loans remain in these small- and medium-sized banks.

If all of the problems loans are in the commercial banks whose asset size is less than $1 billion then this means that more than 12.0 percent of these banks are on the problem list. But, we know from congressional testimony over the past year or two that there may be as many as one to two times the number of banks on the problem list that are also experiencing "solvency" problems but do not meet the qualifying standards to be listed as a problem bank.

Assuming that there are about as many other small- to medium-sized banks that are experiencing "solvency" problems as there are banks that are on the problem list, this would mean that about one-fourth of the small- to medium-sized commercial banks in the country are still "troubled".

If, in the next twelve months, the FDIC continues to close one bank per week and, if the relationships of the past year continue to hold up and two banks are acquired for every one bank that is closed, there will be about 100 banks acquired during this time. This will bring the number of commercial banks in the system down to about 6,000. And, you can imagine that the amount of assets held by banks that have assets greater than $1 billion will control even more than the 91 percent that they now control.

Bottom line: the United States banking system is still adjusting from the excesses of the past fifty years. And, it is the larger banks that are benefiting at the expense of their smaller counterparts.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.