Smaller Banks Do Not Seem To Be Doing Very Well

by: John M. Mason

When taking a look at the banking system as a whole, one needs to remember that the largest 25 domestically chartered commercial banks in the banking system control 56 percent of the total assets; foreign-related institutions control 16 percent; and the vast majority of the domestically chartered banks control just 28 percent.

This makes a huge difference. For example, Commercial and Industrial Loans at the 25 largest banks and those in all the rest of the domestically chartered banks rose by about 10 percent from May 2012 to May 2013. Yet the amount of business loans made at the largest 25 commercial banks was double the amount of business loans made in all the rest of the domestically chartered banks. For the largest banks, the total was $79 billion; for the rest the total was $39.9 billion.

The scale differences are huge!

It is also important to remember that the FDIC lists 6048 commercial banks in the banking system at the end of the first quarter of 2013. So, there are somewhere around 6000, less-than-large domestically chartered banks in the United States banking system.

Over the past 13-week period, according to the H-8 release of the Federal Reserve, the less-than-large commercial banks dropped almost $70 billion in total assets. Over the past 4-week period, these banks lost $10 billion.

This is not supposed to be happening to Main Street banks at this particular stage of the business cycle.

The economy is growing, although by less than 2 percent, year-over-year. According to the labor report on Friday, the economy is doing better than expected in putting people back to work. And the Federal Reserve is considering when it might slow down its security buying.

Total loans increased by a small amount over both of these periods but it is important to see where the changes are taking place.

Residential real estate loans at the less-than-large commercial banks were down by over $22 billion over the past 13 weeks! These loans were down by over $10 billion in the last 4-week period. And the residential real estate markets is supposed to be picking up? Apparently, not on Main Street.

What has picked up in the past 13-week period is commercial real estate loans. Over the past 13-week period, commercial real estate loans at "small" domestically chartered banks are up by $11 billion; and they are up by about $3 billion in the past four weeks.

One big reason for this uptick, as reported in several posts over the past year or more, is that a lot of commercial real estate loans were scheduled to come due in the 2013 to 2014 period. The question about these loans related to whether or not, given the state of the commercial real estate market, they would be renewed.

It appears as if these loans are being renewed, but not only renewed for the face amount of the loans coming due, but they are being renewed for MORE than the face amount. That is, the commercial banks are not only rolling these loans over but are helping the owners out by advancing them more money to help them survive.

This is not a sign of strength, but should be taken as a sign of how fragile the commercial banking system, especially the less-than-large commercial banks are.

Note that the largest 25 domestically chartered banks are not doing a similar amount of activity in this area. Over the past four weeks, commercial real estate loans at the largest 25 banks actually declined by a small amount. Over the past 13-week period, these loans are only up by a little more than $4 billion. From May 2012 to May 2013, these larger banks did not increase their holdings of commercial real estate loans at all!

Note, however, that residential real estate loans increased at the larges commercial banks, by $15 billion over the past 13 weeks, and by almost $30 billion from May-to-May.

I draw two conclusions from these data:

First, the commercial real estate market is not real robust. As a consequence the largest commercial banks are staying out of the area. The "smaller" banks are lending to this sector, but the reason for this is that the sector still remains "troubled" and the loans these "smaller" banks are making include money to help these borrowers make it through these tough times. Let's just hope that the economy does pick up steam or we may see these "troubled" loans turn out not-so-good in the next two to three years.

My second conclusion is that the reason why residential real estate loans have picked up at the larger banks and not at the "smaller" banks is that most of this lending is going to bigger, wealthier organizations that are taking advantage of the extraordinarily low interest rates, organizations that are buying in "bundles" to take advantage of rising home prices. For another take on this, see my post of June 4, 2013… among others.

I still believe that the commercial banking system has bunches of problems that haven't been resolved yet. My argument for this? The number of banks in the commercial banking system is still shrinking at a pace of about 200 institutions per year.

Where is the decline taking place most rapidly? In the sector of the banking industry that includes banks with less than $100 million in assets. There are only about 1,900 of these banks left and their total average size is less than $60 million. These banks really represent Main Street. But they are almost history.

The next size of banks is categorized to hold $100 million to $1.0 billion in assets. There are about 3,600 of these banks. The average size of these banks is a little less than $300 million in total assets. Quite a jump in size from their smaller competitors. But there remains plenty of trouble in this sector of the market as well.

One final note: for the first time since the Fed began quantitative easing operations, the less-than-large commercial banks actually saw their "cash assets" drop for a 13-week period. Since the banking week of March 27, the cash balances in these banks have dropped by almost $82 billion. They dropped by about $20 billion over the past four-week period. What is going on here?

I am just not real comfortable with the status of the smaller commercial banks in this country. This is just another indication to me that there are still structural problems in the United States that must be resolved if economic growth is going to become more robust. Part of the quantitative easing program seems to be for the Federal Reserve to keep the banking system sufficiently liquid so that the FDIC can either close banks or merge troubled banks with healthier banks in the smoothest way possible. Consolidating the banking system, however, does not promote an immediate bounce in economic growth.

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.