Not certain on whether problems with getting claims filed over past weeks impacted this data. But interesting that Pennsylvania and Ohio were the two top states for initial unemployment claims during reporting week of 3/21. Not necessarily the states with COVID-19 hot spots in the news.
With this week’s U.S. level doubling again, let’s see what next week looks like for these states.
Through the end of 2019, the banking industry continues to undergo its steady state of consolidation.
For the year-ended 2019, the Banking Industry Consolidation Rate was 4.2%. This compares to an average rate of 3.6% since 1990.
The Bank Merger Rate was 4.2% during 2019. And the Bank Failure Rate was a nominal 0.1%.
New bank openings rose in 2019 - totaling 13. The De Novo Bank Replenishment Rate was 5.7%. That is, for every 100 banks that merged or failed, there were approximately 6 new banks opened to replace those banks.
And, as may be expected, the industry consolidation had its impact on the smaller sized Community Banks.
Community Banks under $100 million in Total Assets declined by 9.6% and Community Banks with Total Assets of under $250 million dropped 5.8%. Community Banks with less than $500 million in Total Assets fell 3.3%. And those Community Banks with less than $1 billion in Total Assets were down approximately 0.5%.
Beyond $1 billion in Total Assets, we started to see net growth in the number of banks. With Community Banks between $1 billion and $10 billion increasing by 2.8%.
During 2019, we saw the continuation of a four decade long trend in the reduction of banks. As we enter the new decade, we would expect this trend to continue - and at this 3.5% to +4% Banking Industry Consolidation Rate.
A small Nebraska Bank failed recently. According to newspaper reports, the failure was due to "large out-of-territory commercial loan losses" and "poor management practices" , including excess of lending limits and improper extensions of maturity dates on related-party loans. While the bank’s legal lending limit was approximately $2 million, it is not clear how much of the $5.5 million in charge-offs during Q4 2019 resulted from these related-party loans.
But there are “other” take-aways from this small bank failure:
What is “out-of-territory”? This bank was located in a county with a population of less than 1,000 people. To achieve the $100 million size, serving customers outside of this county did occur. How far away from the headquarter county is “out-of-territory”? FinTech firms are lending to parties across the country - when is their activity “out-of-territory”?
What role did agricultural lending play in this failure? This bank had over 77% of its loans related to agriculture and farmland. Did the concentration of lending coupled with the troubled state of the agricultural sector play a key role in this failure?
Over 2,500 Community Banks are headquartered and serve counties with populations of less than 50,000. And over 20 percent of these banks have agricultural concentrations of 50 percent. These concentrations are probably not created recently, but occurred historically. These concentrations are an outcome of the economies and customers of these rural markets. And many of these Community Banks serve customers in other counties where there may not be another headquartered bank.
Several states have large numbers of these rural agricultural banks, including Nebraska where this bank failure was located. Nebraska, Iowa and Kansas have more than 70 Community Banks that have agricultural concentrations greater than 50 percent. These bank management teams must be able to manage bank lending against external events (falling commodity prices, unexpected international trade wars, etc.).
Capital is one component of these management practices. Higher capital ratios are needed when loan concentrations are high due to the nature of the markets that these banks serve. 98 percent of Community Banks serving markets with populations of less than 50,000 hold strong capital positions with Leverage Ratios exceeding 9%.
But there will always be those outliers that have low capital levels while maintaining high loan concentrations. The number of these banks are small - perhaps less than 25. But these banks remain susceptible to a sustained downturn in the agricultural marketplace. And there may be an additional failure.
Q3 FDIC data indicates that the long, slow, and steady consolidation of the banking industry continues.
BankingStrategist calculates the Banking Industry Consolidation Rate to be 3.7 percent on a year-to-date basis for 2019. This level is on par with the average since 1990, but slightly lower than consolidation rates in recent years.
There were 5,256 banks and thrifts chartered at the end of Q3. For the latest four quarters:
Bank charters declined by 221, or 4.0 percent;
Twelve (12) new banks were opened; while this number is up over recent years, the De Novo Bank Replenishment Rate is only 7 percent - that is, only 7 new banks replaced each 100 banks that failed or merged. Prior to the Great Recession, the De Novo Bank Replenishment Rate averaged 32 percent.
There was a single bank failure; and
232 banks were merged.
Slow but steady.
As it has for the past several decades, the banking industry consolidation continues. Will this pace continue over the next several years. The trend would suggest that it will.
Bank failures typically do not occur in large numbers like in the late 1980’s and during the Great Recession. However, these failures are a normal occurrence but only come around on rare occasions.
Is your bank prepared? Are you ready to move on relatively short notice?
Over the past few weeks, the FDIC has closed three banks and sold the deposits and most of the loans to other banks. There will be more opportunities - perhaps in December or early 2020 as the FDIC performs year-end clean up on its very limited troubled bank list.
Are you ready?
Here are several readiness steps that you should consider taking:
If not already completed, go to the Failing Bank Acquisitions webpage of the FDIC and complete the Potential Franchise Bidder Contact Form.
Review the detailed information on the FDIC Marketing Process webpage to understand how the process for acquiring a failed bank works.
Do some additional homework on banks that have very low Tangible Equity Ratios (equity capital net of intangible assets divided by total assets). You can pull down bulk FDIC Call Report files and determine which banks have ratios below 5%. There were 11 banks at 6/30/2019 and three of these banks were closed recently.
Establish a small team to carry out several key activities: pre-bid due diligence, bid pricing and proposal, date of closing integration planning and final merger integration planning. See Merger Readiness Planning on BankingStrategist.com.
Acquisitions of a failed bank can present a unique opportunity for your bank to gain market share or to enter a new market. These opportunities do not come around often. Prepare your bank and your team so that you can seize upon such an opportunity.
Good luck and much success!