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Landscape of the U.S. Banking Industry

April 7, 2017

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From 2006 through 2016, the number of insured depository institutions in the United States has fallen from 8,691 charters to 5,922, a decline of 2,769 charters or a 32% loss.  This headline loss number is worth talking about, but is neither news nor new.  The loss of charters is a frequent source of discussions around bank board rooms, stories from trade press, and chatter at banking conferences.  The number of insured charters has also been in steady decline, with at least 33 years of declining numbers.

However, a deeper dive into the numbers reveals some unexpected trends below the headline 32% loss of charters.

the-bank-accountNote:  We’ve also recorded an accompanying podcast for The Bank Account on the Truth About Industry Consolidation.  The podcast contains additional analysis to the numbers presented here, and is a useful addition, but not a substitute, to this content.  In addition to listening to this episode, we encourage you to click to subscribe to the feed on iTunes, Android, Email or MyCast. It is also now available in the iTunes and Google Play searchable podcast directories.

Links to items mentioned in the podcast, or otherwise potentially of interest on the topic:

 

State of Banking Landscape as of December 31, 2016

As of December 31, 2016, we had 5,922 institutions with $16.9 trillion in total assets.

The four largest depository institutions by asset size (JPMorgan, Wells Fargo, Bank of America and Citi) hold $6.84 trillion in assets, or 40.5% of the industry’s assets.

There are 111 additional banks that have assets greater than $10 billion, holding $6.98 trillion.  That’s 1.9% of the total charters, holding 81.9% of the aggregate assets.

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OCC Moves Forward on Fintech Bank Charters

March 16, 2017

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Amid criticism from virtually every possible constituency, on March 15, 2017, the Office of the Comptroller of the Currency (OCC) released a draft supplement  to its chartering licensing manual related to special purpose national banks leveraging financial technology, or fintech banks. As we indicated in our fintech webinar discussing the proposal last December, the OCC is proposing to apply many conventional requirements for new banks to the fintech charter. While the OCC’s approach is familiar to those of us well versed on the formation of new banks, there are a few interesting items of note to take away from the draft supplement.

  • More bank than technology firm. Potential applicants for a fintech charter should approach the project with the mindset that they are applying to become a bank using technology as a delivery channel, as opposed to becoming a technology company with banking powers. While the difference might seem like semantics, the outcome should lead potential applicants to have a risk management focus and to include directors, executives, and advisors who have experience in banking and other highly regulated industries. In order to best position a proposal for approval, both the application and the leadership team will need to speak the OCC’s language.
  • Threading the needle will not be easy. Either explicitly or implicitly in the draft supplement, the OCC requires that applicants for fintech bank charters have a satisfactory financial inclusion plan, avoid products that have “predatory, unfair, or deceptive features,” have adequate profitability, and, of course, be safe and sound. Each bank in the country strives to meet those goals, yet many of them find themselves under pressure from various constituencies to improve their performance in one or more of those areas. For potential fintech banks, can you fulfill a mission of financial inclusion while offering risk-based pricing that is consistent with safety and soundness principles without having consumer groups deem your practices as unfair? On the other hand, can you offer financial inclusion in a manner that consumer groups appreciate while achieving appropriate profitability and risk management? We think the answer to both questions can be yes, but a careful approach will be required to convince the OCC that it should be comfortable accepting the proposed bank’s approach.
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Starting a New Bank

December 5, 2016

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Starting a New Bank

December 5, 2016

Authored by: Jonathan Hightower

piggybankOn November 29, 2016, the FDIC, as part of its Community Banking Initiative, held an outreach meeting in Atlanta.  While the FDIC has indicated that it will publish a handbook regarding applications for deposit insurance in the coming weeks (which we’ll also summarize), we thought it made sense to provide a few highlights from that meeting:

Mechanics.  The mechanics of the chartering process are the same as before.

Business Plans.  As expected, there will be greater scrutiny on business plans, making sure that banks stick to their business plans post-opening, and (not expressly stated but as translated by me) ensuring that the results of the bank’s business plan do not deviate greatly from the original projections (i.e., providing for limited ability to take advantage of natural growth in the new bank’s markets or lines of business during the first three years of operations if not reflected in projections).  Approvals to deviate from one’s business plan will not be granted under most circumstances.

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The Economist Frames the Argument Against Excessive Bank Regulation (somewhat unintentionally)

April 1, 2016

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On March 26, 2016, The Economist published an article entitled “The Problem with Profits.” That article discussed the high profitability of U.S. firms and why that seemingly positive fact is actually harmful to the overall economy, mainly because those profits are not being distributed for spending by shareholders or reinvested in business growth. As a result, the economy shrinks as resources flow to these firms and remain on their balance sheets. The focus of the article was a call for increased competition, but we believe we should focus on other conclusions.

While the article gives a tip of the cap to the impact of regulation generally and bank regulation specifically, banks represent the poster child for the negative impacts of limiting the ability of domestic firms to reinvest, an impact that is not directly reflected on balance sheets or income statements.

Since the onset of “new and improved” regulation stemming from Dodd-Frank and other regulatory reforms, we are seeing are clients use their resources to

  • hold capital on their balance sheets, in some cases to protect against the anticipated negative impacts of an imaginary doomsday scenario;
  • retain “high quality liquid assets;”
  • invest in extraordinary compliance expertise and management systems; and
  • fill buckets left empty from reduced interchange fees, the impact of stress testing, and higher costs to originate mortgage loans, among other things.

As an industry, we frequently point to decreased lending to small businesses and increased consolidation as the evils of increased regulation. In our view, however, the dampening of reinvestment initiatives is much more significant for the industry and for the economy in general.

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How the New FDIC Assessment Proposal Will Impact Your Bank

September 9, 2015

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In June, the Federal Deposit Insurance Corp. (FDIC) issued a rulemaking that proposes to revise how it calculates deposit insurance assessments for banks with $10 billion in assets or less. Scheduled to become effective upon the FDIC’s reserve ratio for the deposit insurance fund (DIF) reaching a targeted level of 1.15 percent, these proposed rules provide an interesting perspective on the underwriting practices and risk forecasting of the FDIC.

The new rules broadly reflect the lessons of the recent community bank crisis and, in response, attempt to more finely tune deposit insurance assessments to reflect a bank’s risk of future failure. Unlike the current assessment rules, which reflect only the bank’s CAMELS ratings and certain simple financial ratios, the proposed assessment rates reflect the bank’s net income, non-performing loan ratios, OREO ratios, core deposit ratios, one-year asset growth, and a loan mix index. The new assessment rates are subject to caps for CAMELS 1- and 2-rated institutions and subject to floors for those institutions that are not in solid regulatory standing.

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The New Deposit Insurance Proposal

June 18, 2015

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A Quick Overview and a Note on Construction Lending

On June 16, 2015, the FDIC issued a notice of proposed rulemaking to revise its calculations for deposit insurance assessments for banks with under $10 billion in assets (excluding de novo banks and foreign branches).  The rules would go into effect the quarter after they are finalized but by their terms would not be applicable until after the designated reserve ratio of the Deposit Insurance Fund reaches 1.15%.

At almost 150 pages, there are many facets to the proposed rule that must be carefully analyzed.  At the outset, we give credit to the FDIC for attempting to fine tune deposit insurance assessments beyond the blunt instrument that they have always been.  We have long held the position that the FDIC should adopt more careful underwriting procedures, similar to private insurers, in order to better serve its function in the industry.

Under the proposal, a number of factors are used in a model to calculate a bank’s deposit insurance assessment rates:  CAMELS ratings, Leverage Ratio, net income, non-performing loan ratios, OREO Ratios, core deposit ratios, one year asset growth (excluding growth through M&A, thankfully), and a loan mix index.  All of these factors are intended to predict a bank’s risk of future failure, and all are worthy of discussion.
Putting aside our overall hesitancy to fully support faceless numerical models to draw important conclusions (anyone remember subprime lending?), we were initially drawn to the proposed implementation of the “loan mix index” as a factor for calculating deposit insurance assessment rates.  As we have previously discussed, construction lenders have recently been disadvantaged by the new HVCRE rules under the Basel III capital standards.  Once again, construction loans are the focus of regulatory scorn.

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Congress Makes Capital Requirements Easier for Small Banks

April 6, 2015

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Author’s Note: On April 9, 2015, the Federal Reserve adopted a final rule to implement the changes discussed below.  The final rule will be effective 30 days after publication in the Federal Register.

For many years, bankers have asked the question, “What size is the right size at which to sell a small community bank?”  Some offer concrete asset size thresholds, while others offer more qualitative standards. We have always believed the best answer is “whatever size allows an acquirer’s profits and capital costs to deliver a better return than yours can.” While that answer is typically greeted with a scratch of the head, a recent change in law impacts the answer to that question for smaller companies. Given a proposed regulatory change by the Federal Reserve, a growing number of small bank holding companies will soon have lower cost of capital funding options that are not available to larger organizations.

President Obama recently signed into law an act meant to enhance “the ability of community financial institutions to foster economic growth and serve their communities, boost small businesses, and increase individual savings.” The new law directs the Board of Governors of the Federal Reserve System to amend its Small Bank Holding Company Policy Statement by increasing the policy’s consolidated assets threshold from $500 million to $1 billion and to include savings and loan holding companies of the same size. By design, more community banks will qualify for the advantages of being deemed a small bank holding company.

The Federal Reserve created the “small bank holding company” designation in 1980 when it published its Policy Statement for Assessing Financial Factors in the Formation of Small One-Bank Holding Companies Pursuant to the Bank Holding Company Act. The policy statement acknowledged the difficulty of transferring ownership in a small bank, and also acknowledged that the Federal Reserve historically had allowed certain institutions to form “small one-bank holding companies” with debt levels higher than otherwise would be permitted for larger or multibank holding companies. The first version of the policy statement had a number of criteria for what constituted a small bank holding company, most importantly that the holding company’s subsidiary bank have “total assets of approximately $150 million or less.” The asset threshold has been revised on several occasions, most recently in 2006 to the current level of $500 million in consolidated assets.

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S Corp Banks Swing for the Fences, Settle for a Single

July 22, 2014

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On July 21, 2014, the FDIC issued a Financial Institutions Letter (FIL) on the impact of the capital conservation buffer restrictions under Basel III on S Corporation banks.  The guidance essentially states that, even though Basel III restricts an S Corporation bank’s ability to pay tax distributions if it does not maintain the full capital conservation buffer, the FDIC will generally approve requests to pay tax distributions if no significant safety and soundness are present.  The succinct guidance probably raises more questions than answers.  Among those questions are the following.

  • Would a bank that does not meet the capital conservation buffer requirements ever really be 1 or 2 rated and experiencing no adverse trends?
  • Does the FDIC believe Obamacare and the related net investment income tax will be repealed?  What about state income taxes?  The factor limiting the dividend request to 40% may ignore what is actually required to allow shareholders to fund their tax liabilities.
  • What is an “aggressive growth strategy?” Is it the same as an intentional growth strategy?
  • If your institution is a national bank, a Fed member bank, or a bank holding company with more than $500 million in consolidated assets, will the Fed and the OCC follow suit and issue similar guidance?

At the end of the analysis, the guidance is probably similar to the current capital rule stating that 1 rated institutions may have a leverage ratio as low as 3.0% and still be considered “adequately capitalized.”  That rule has little practical impact in that it is awfully hard to find an institution with a 3.0% leverage ratio that is 1 rated.  Similarly, we believe any institution that meets the guidelines set forth in the FIL would almost certainly have no need to make this request.  Indeed, the FIL itself seems to acknowledge that fact.

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BASEL III: The Final Rules are Here and It’s Time to Get Ready

August 14, 2013

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Over the past year, my colleagues and I have spent an untold number of hours researching, writing and speaking about the Basel III capital rules. We felt it important to help bankers focus on the proposed rules in order to help them prepare and to help facilitate an appropriate response to the proposed rules. Because the rules were in proposed form, however, many bankers, bank directors and industry participants did not focus on these capital rules, instead waiting until they were finalized. Well, we’re here.

Earlier this month, the regulatory agencies finalized their revisions to the capital and risk-weighting rules, commonly known as the Basel III rules. Even though the rules will not be effective for most banks until Jan. 1, 2015, the finalizing of these rules presents the call to action to begin the dialogue about how the new rules will impact your bank. Of course, given the fact that the final release for the rules was almost 1,000 pages long, many bankers contemplating a board presentation are left to ask, “Where should I start?” Below are a few suggested areas of focus to begin to enhance your directors’ understanding of the new rules. 

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Keys to Success in the FDIC’s Definition of Community Bank

July 10, 2013

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In a recent strategic planning meeting, a bank chairman opined that “community banking is dead.” He is not the only banker and his is not the only bank grappling with this concern. After that meeting, we solicited the input of many of our peers in the industry. Were increasing expenses and shrinking margins killing community banks? Was the ever-quickening pace of technology too much for community banks to overcome? Were the building regulatory demands insurmountable for community banks? As we asked our peers these questions, many of them gave multi-faceted answers based on different assumptions of exactly what was meant by “community bank.” 

Around the same time, the FDIC proposed its own definition of “community bank” as a part of its Community Banking Study, which was published in December 2012. This study not only defends the viability of community banks but also introduces a thought-provoking definition of exactly what constitutes a community bank. The definition includes a component related to size and a component related to core deposit gathering. It also includes components related to the number of offices and percentage of loans to assets. The focus of this article, however, is the following two criteria: 

  • simplicity of business plan; and 
  • operating within a limited geographic area.
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