Are There “Too Many Banks”?

It has been suggested that there are "Too Many Banks". It is not a new statement as it has been raised for the last several decades. Today, there are more than 5,700 banks serving communities across the U.S.

The U.S. banking system is dynamic, continuing to evolve and quite competitive. Consolidation has played a significant role. The number of banks has decreased through mergers and acquisitions and bank failures and offset by de novo bank start ups. While the number of banks has declined by 63% since 1995, total bank assets have increased 2.7 times.

These remaining banks are located in communities of all sizes.  Approximately 48 percent of banks (+2,700) are headquartered or chartered in counties with populations under 50,000. 68 percent of U.S. counties are of this size - +2,100 counties. The banking industry serves an important and vital role in these smaller, rural communities.

And the banks that serve these communities tend to be the U.S.'s Community Banks. The Community Banks - generally well under $10 billion in total assets - are headquartered in markets of all sizes, but are primarily located in counties with populations of less than 100,000. Often Community Banks are the only banking presence in these communities. Community Banks are key to support the commerce, community and economic development in the smaller markets across the U.S.

Community Banks are located across most of the states in the U.S. with a concentration in the smaller communities within each state. While banking industry consolidation has tended to focus on the metropolitan markets of the U.S., these Community Banks - in all their numbers - have remained a steadfast force within the banking industry in these smaller markets. This is not to suggest that Community Banks do not play an important competitive role in metropolitan markets - which they certainly do.

So when you hear the statement that there are "Too Many Banks", you now have some additional facts at hand for your own assessment. The number of banks will, most likely, continue to decline, but this is different from there are "Too Many Banks". From my perspective, a blanket statement cannot be made as you need to look at each and every market served. Perhaps there are not "Too Many Banks"!

Community Bankers Roll Your Capital Clocks Forward on January 1!

In a few weeks, we all get to enjoy when time "falls back" one hour (or do we?).

But, for bankers, as we near the end of the year, it will be time for them to roll forward to the next increase in minimum capital requirements. As we complete our 2018 operating plans, we need to incorporate this increase into our planning. On January 1, 2018, bankers will implement the third step in the four year phase-in of the new capital regulations with another 62.5 basis point increase in minimum capital ratios:

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Now 62.5 basis points may not sound large, but let's put this into perspective. For Community Banks with total assets of less than $1 billion - there are over 5,000 of this size, the increased capital requirements will be approximately $550 million (62.5 basis points times total risk-weighted assets of approximately $88 billion). And if this is applied to all Community Banks with total assets of less than $10 billion - over 5,600 banks, the increased capital requirements will be approximately $13.8 billion (62.5 basis points times total risk-weighted assets of approximately $2.2 trillion).

This change will not necessarily require Community Banks to raise additional capital, but the effect of the increase will be to reduce the amount of "excess" capital that they may have been holding for future loan and deposit growth, additional branching,  acquisitions or shareholder dividends. So there is an impact that needs to be incorporated both into your 2018 operating plan and into your longer range Strategic Plan and Capital Plan.

And remember - this happens one more time in 2019.

So Community Bankers, enjoy that extra hour of sleep in two weeks and get rested for your steps to finalize your 2018 operating plan.

Much continued success to all Community Bankers!

Community Bank Lending Momentum Continues.

With our recent "Bank Balance Sheet Weekly Dashboard" out, we continue to see community bank lending momentum. Over the past 4 weeks and 3 months, community bank loan growth has been 1.1% and 2.2%, respectively. For the same periods, large commercial banks experienced loan growth of 0.1% and 0.3%.

Our data is sourced from the Federal Reserve's H.8 Assets and Liabilities of Commercial Banks in the United States via the FRB St. Louis FRED economic data service. We compile and present in our comparative reporting as shown below. (Link to PDF).

Community bank loan growth distributed across all categories with strong growth in multifamily real estate, single family residential real estate mortgages, consumer loans and other loans & leases. Data continues to reflect the importance of community banks and the role that they play in the U.S., regional and local economies.

Large banks (top 100 in total assets, or approximately $14 billion and larger) experienced strong growth in commercial and industrial lending, but flat or down in all other categories.

It is noteworthy that large banks increased holdings of agency MBS and U.S. treasury and agency bonds significantly over the past 3 months. These assets have lower risk weightings under bank capital regulations and also qualify as liquid assets for the Liquidity Coverage Ratio computations required by bank regulatory agencies for large banks.

On the funding side, deposit growth was solid at both large banks and community banks. And both groups experienced declines in their borrowings (FHLBank advances and other borrowings).

Community Bank Lending Remains Strong into September.

Our "Bank Balance Sheet Weekly Dashboard" (Source: Federal Reserve H.8 reporting via FRB St. Louis FRED) continues to show strength in lending at community banks - up 6.6% year over year; large bank lending has slowed to 2% year over year.

Community bank lending activity was solid across all categories of loans with commercial real estate and consumer lending growth highest. Large bank lending growth stronger in construction and multifamily real estate and consumer loans.

Large banks continue to add to holdings of agency MBS securities; while community banks have slowed growth in this portfolio in favor of overall loan growth on balance sheet.

Large banks continue to hold nearly twice the percentage of cash balances than community banks. This supports achievement of the Liquidity Coverage Ratio. Most of these balances are held at the Fed.

On the deposit front, both community banks and large banks are experiencing continued strong growth. To support balance sheet - loan - growth, community banks have increased usage of borrowings such as FHLBank advances. Large banks have reduced borrowings modestly year over year.

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Uncertain Times for 2018 Community Bank Planning

Fall is upon us - looking forward to long weekend up on Michigan's Leelanau Peninsula. College football has begun - Go Little Giants and Go Blue!

And for Community Banks, September is the kick-off for annual planning and budgeting season. Something bankers look forward to every year!

This remains an important component of your overall annual planning cycle (strategic planning, M&A planning, technology planning and annual operating plan and budget). And while you are very familiar and experienced in leading this process, this year may be more challenging in forecasting how everything will play out than years in the recent past.

Uncertainty - and the risks that arise from that - seems to be in greater abundance today. Uncertainty on actions (or inaction) in Washington continues: Will you see regulatory relief during 2018? Will tax reform occur? What will really happen with healthcare reform - and when? Uncertainty and tension on the international front seems to be very elevated.

Uncertainty exists around the Fed and monetary policy's impact in 2018. Will the Fed increase interest rates in December? And will they increase in 2018 - and how many times? Will the commencement of the Fed's balance sheet normalization have any impact on interest rates in 2018 (and beyond)?

Uncertainty has increased across various sectors of the economy - agriculture, automotive, retail and housing are examples. And, as this economic cycle ages, there are questions as to how and when this cycle ends. Uncertainty is also elevated due to recent hurricanes, earthquakes and other natural disasters across the U.S. and the world and the rebuilding efforts and investments that will be necessary in these communities. The list goes on.

However, you still must develop and document a planning scenario for 2018 and prepare your annual plans around that scenario. And to assist you, we have created a "Base Case" scenario, including interest rate assumptions that may give you some insights as you begin to finalize your 2018 planning scenario and key assumptions. One key element -and most important - that is missing will be your own perspective on your local and regional economies, communities and customers that ultimately drive your final planning scenario, goals and objectives. This is where community bankers play such an important and impacting role.

Here is our concept for a "Base Case" 2018 Scenario for the economy and interest rates. We have incorporated a variety of publicly available economic forecasts and surveys for 2018 into the development of this scenario.

2018 PLANNING ASSUMPTIONS - A "BASE CASE" SCENARIO FOR INTEREST RATES:

National Economy: General economic conditions softening with GDP growth moderating (~2 percent GDP growth); unemployment rate leveling off (~4.4 percent) as job growth slows or levels off.

Inflation: Inflation remains low continuing into 2018 with CPI ~2 percent and core CPI slightly less.

Housing Sector: Home sales and starts continue at recent levels; Housing price appreciation is expected to slow to 5 percent or less - although this will vary dramatically by market; Mortgage originations will be slightly lower (2017 was an outstanding year).

Key Risks & Uncertainties: Impact of global economic and political events and uncertainties; Impact of Hurricanes Harvey, Irma and Maria. Uncertainty and inaction in Washington, D.C.

Federal Reserve and Monetary Policy: With the September Fed meetings complete, the Fed held federal funds unchanged and announced the commencement of their balance sheet normalization with reductions in both their U.S. Treasury bond and MBS holdings. The median forecast in the Fed's Summary of Economic Projections aligns with an interest rate hike in December 2017 and three hikes in 2018 - call it "3 & Out" just like expected this year (as a lifelong White Sox fan, I apologize if "3 & out" conjures up memories that you have suppressed!).

So with this as background, here is a concept for interest rates in 2018:

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This is a concept for where interest rates may be in 2018 and provided to further your bank's thinking, discussion and debate as you finalize your own 2018 Base Case planning scenario and key assumptions. Factor your perspectives on the national, regional and local economies and your views on interest rates into your final planning scenario.

As always, good luck and continued success in 2018!

Terry Wise

www.bankingstrategist.com