Banks Get Bigger, Stronger… at a Price

As promised, we have more details of third quarter bank data this week. We mentioned last week that total assets of $17.7 trillion were up 2.5% from a year earlier and the $10 trillion loan portion of those assets is up 4%. Let’s take a closer look at those loans.

Home equity lines, which soared during and after the great recession, are down 8.6% from last year. That’s not surprising as interest rates have been climbing for two years. Credit card loans, on the other hand, are up 7.7%. These loans are also vulnerable to interest rate increases, so this increase bodes watching, especially since it doesn’t include this year’s holiday shopping.

With unemployment at just 3.7%, it could be that people are able to spend more now and are more confident charging their purchases. And it isn’t just credit card loans, all loans to individuals were up 5.5% during the year.

Loan quality improved markedly over the 12 month period. Noncurrent loans and leases, those past due 90 days or more and those in non-accrual status, are down 11.8%. Restructured loans are down 8.4% and loans past due 30 to 89 days are down 1.4%. The noncurrent loan rate is now just 1.02%, but the icing on the cake is OREO, other real estate owned (usually via repossession), which down an impressive 21%.

It isn’t just assets that are up, total deposits are growing as well, and should continue to grow as long as rates continue to rise ...and as long as the stock market continues to drop. Total deposits only increased by 0.8%, but interest-bearing deposits were up 1.8% during the third quarter. Noninterest earning deposits were down 2.3%.

While the industry may be gaining in strength, it is doing so at the expense of “true” community banks. Ten years ago there were 3,240 banks with less than $100 million in assets today there are just 1,335. This could be leaving some, particularly those in rural areas, with few (or no) banking options. In fact, according to FDIC Chairman Jelena McWilliams, “Today, 627 counties are only served by community banking offices, 122 counties have only one banking office, and 33 counties have no banking offices at all.” (American Banker 12/6/18). The 50 banks listed on page 7 are not part of the solution. These banks had the most asset growth during the 12 months ending 9/30/18, mostly via merges and acquisitions.

Charles Schwab Signature Bank for example, is the first bank listed. During the fourth calendar quarter of 2017, Nordstrom, Inc. ceased to exist and Charles Schwab Signature Bank, Henderson, NV took over its FDIC certificate number. The bank ended 2017 with $8.4 million in assets; nine months later it had $12 billion. It also has a new affiliate. In addition to 4-Star Charles Schwab Bank (established in 2003) and 4-Star Charles Schwab Signature Bank (established legally in 1991) there now exists a new 3½-Star Charles Schwab Trust Company, all out of Henderson, NV (established 2018). This entailed a series of transactions.

4-Star Nordstrom FSB, Scottsdale, AZ wanted out of the banking industry. Nordstrom, as the name suggests, was wholly owned by Nordstrom, Inc., which was registered as a Savings & Loan Holding Company headquartered out of Seattle. In October 2017, Nordstrom, Inc. submitted several applications to the OCC, culminating in the sale of the bank’s stock to Charles Schwab Co.
We wrote about the second bank on the list (4-Star MapleMark Bank, Dallas, TX) a few weeks ago. The article, entitled “How to Double Your Net Worth in 1 Year” (JRN 35:42) told a similar story to the first. The founders opted to purchase a charter rather than apply for a de novo bank charter.

The third, 4-Star Nano Bank, Murrieta, CA is another. It purchased Commerce Bank of Temecula Valley and renamed it Nano Bank on May 1st. And the list goes on like this.

The fact is, more banks are growing by means of M&A than organically, and they have been for several years. That is precisely how we have gone from 8,384 FDIC-insured banks to just 5,477 in the past decade. In the third quarter alone, 60 banks were lost to mergers. Only one de novo bank was chartered during the third quarter and only 11 new banks have opened in the U.S. since the end of 2009.

While we are seeing more interest in de novos than we have in a long time, we will be happier when there is a lot more yet. So will Ms. McWilliams. She is doing everything in her power to make the de novo application process easier and more inviting. As she said in that same article, “a pipeline of new banks is critical to the long-term health of the industry and communities across the country”. We couldn’t agree more.