Kevin LaCroix commented last week on the recently released FDIC Quarterly Banking Profile for Q2 2013, and had some cogent observations. While the FDIC tried to put a positive face on the statistics, namely that things aren't as bad as they have been, both the agency and LaCroix also drilled down a little deeper and what they saw is disconcerting.
The press release accompanying the report quotes the agency’s Chairman as saying “overall these results show a continuation in the recovery in the banking industry.” However, the Chairman is also quoted as saying that “industry revenue growth remains weak, reflecting narrow margins and modes loan growth.” In addition the current low interest rate environment “creates an incentive for institutions to reach for yield, which is a matter of ongoing supervisory concern.”
The number of problem institutions is down by over 40 percent from the high quarter-end number of 888 problem institutions at the end of the first quarter of 2011. The quarterly decline in the second quarter represented the ninth consecutive decline in the number of problem institutions.
One of the more noteworthy effects of the crisis in the banking sector has been the dramatic shrinkage in the number of banks. At the end of 2007, there were 8,534 banking institutions, meaning that between December 31, 2007 and June 30, 2013, 1,584 banks went out of existence, representing a decline of over 18.5%. Yet despite that substantial decrease (resulting from closures, mergers and so on), there are still 553 problem institutions in the industry, as of June 30, 2013.
With the declining number of banks, the percentage of banks that are rated as problem institutions still remains high, despite the decline in the absolute number of problem banks. The 553 problem institutions at the end of the second quarter still represent nearly eight percent of all reporting institutions (down slightly from the 8.7% of all banking institutions at the end of the first quarter of 2013). . In other words, roughly one out of twelve of every bank in the United States is still regarded by the FDIC to be a “problem institution.”
And not only that – banks are continuing to fail...While it seems likely that the number of banks that fail in 2013 will be below the 51 that failed in 2012 and a far cry from the 157 that failed in 2010, the fact is that banks are continuing to fail. Even at this late date, five years after the peak of the financial crisis.
There are two trends here, neither of them good. One is that unlike any other economic recession I have experienced in the nearly 40 years I've been practicing law, the banking industry (along with the rest of the economy) is coming out of this downturn much, much more slowly than ever before. The pain continues, and there is the unpleasant feeling among many bankers and business people in general that the recovery is fragile and could be derailed by a less-than-robust shock. We're simply not coming back from this last one like we have from all the others since the Great Depression.
The other trend is one we've been harping on for some time: the number of banks in this country is trending downward and the only questions in the mind of those of us who represent community banks is how low will the number go and how fast will the shrinkage occur. The "merger tsunami" that many have predicted has not (yet) occurred, but the pace seems to be picking up. These trends have implications not merely for banks, but those service providers, like law firms, that work with community banks. The business will shrink, and the competition for the survivors will increase. Expect not only the number of banks to decrease, but the number of bank lawyers and law firms to decrease also. Competition will be fierce, not only in terms of expertise, but in terms of pricing, as well. The expense side of the P&I statement will be as important for banking law firms as it will for their clients. As is true of most business sectors in a "free" market, those with foresight and the ability to adapt quickly will be the likely survivors.