For those steeped in Michigan’s banking history, the name, Chick Fisher, needs no explanation. The late Charles T. “Chick” Fisher was the long-time, legendary chairman and chief executive officer of the former Detroit-based NBD Bancorp, an operation that grew to nearly $48 billion in consolidated assets before announcing (less than two years after his retirement) its plans to merge with First National Bank of Chicago in 1995 (which merged with Banc One in 1998, before ultimately being purchased by what is today J.P. Morgan Chase in 2004).
Earlier in my career, I wrote a research report simply titled “Where Have You Gone, George Bailey?,” which looked at the forces shaping the dramatic shift in the number of community bank charters across Michigan and the United States. In the 20 plus years since penning that piece, the exigencies driving consolidation have not changed much and, in some cases, have simply been exacerbated: revenue pressures, an increasing regulatory burden, margin compression, technological challenges, succession issues, etc.
However, what caught my eye recently was a slide from an investor presentation made by a successful and highly-regarded financial institution-oriented fund manager, focusing initially on the dramatic decline in the number of charters within the banking sector, but also highlighting the growth of a certain asset-size segment within the industry. After reaching a level approximating 18,000 charters some 30 years ago, the number of charters in the industry has declined from more than 15,000 in 1990 to just over 6,000, down approximately 60 percent as 2015 came to a close.
At the one-time community bank level (assets totaling $100 million or less), the number of charters has dropped precipitously, from over 10,500 to roughly 1,600 between 1990 and 2015, a decline of nearly 85 percent. Staggering, but no surprise to any banker that has spent his or her career in the industry. Michigan’s drop in charters (both overall and at the smaller end of the scale) has generally mirrored this trend.
Interestingly, the aforementioned fund manager’s slide detailing these trends in industry charters also highlighted that, at the same time, the number of charters for institutions operating between $1 billion and $50 billion has modestly increased over the past 25 years, with those in the size band between $1 billion and $10 billion are up in terms of charter count by nearly 10 percent.
Again, no surprise as the consolidation wave of the past few decades has swelled the ranks of certain asset sizes with the absorption of the industry’s smaller players. Here, however, Michigan’s experience diverges as the profile within the state stands in sharp contrast to the national landscape. In a state that boasted eight prominent organizations that at their peaks each reported assets in excess of $10 billion more than 25 years ago, only one still exists today, but it has swapped the big “D” for a Dallas address instead of Detroit. See the link below for Michigan’s Banking Landscape Over the Last 25+ Years.
Today, only two Michigan-based entities top the $10 billion threshold. One is a powerful mortgage banking operation seeking to augment its franchise with a traditional commercial banking platform in order to generate consistently stable sources of revenue. The other is a mid-Michigan operation that opportunistically expanded to nearly $10 billion with a combination of organic growth coupled with sizable acquisition targets on the west side of the state, before recently joining with a predominately Southeast Michigan enterprise that aggressively capitalized on consolidation opportunities coming out of the Great Recession that propelled it seemingly overnight from a $100 million community bank to a nearly $7 billion multi-state operation. When third quarter financials are released in the coming weeks, that organization should stand as Michigan’s largest independent bank with total assets in excess of $15 billion.
When looking at the presence of more than a dozen institutions in the $1 billion to $10 billion range that dotted Michigan’s landscape roughly 25 years ago (First Michigan, Citizens, Pinnacle, Republic, Great Lakes, and D&N, to name a few) only eight exist today in that size range; four having grown organically over the past two decades, while the other four are products of de novo formation that have adroitly filled the voids left by their brethren within the past 20 years. The dearth of de novo bank activity has been another contributor to the overall decline in the number of bank charters, but that is a separate topic for another time. And, if you are curious, the number of institutions in the United States with more than $50 billion of assets totaled seven back in 1990. Today, that group measures 41 charters, including four banks which now report consolidated balance sheets that eclipse $1 trillion each.
With third quarter results slated for release in the coming weeks, it should be both interesting and insightful to gauge the implications of recent trends and the expectations for future performance as the banking sector begins to close out 2016. In addition, as required, banks in the $10 billion to $50 billion asset range will post results from their regulatory-mandated (DFAST) stress test exercises, which may also help to illuminate (hypothetically) key credit and operational risks within the sector. The resiliency of the community banking sector continues to be tested, but as I stated in that 1995 research report, “efficient, prudent execution of one’s business plan will be critical.” The statistical profile and the market summary (link below) continue to reflect modest out-performance by Michigan’s publicly-traded institutions when compared to national and regional indices.
I recognize that each of you, to varying degrees, are assessing and addressing the challenges of this “lower for longer” environment and its attendant margin pressures, the competitive conditions that continue to escalate on both sides of the balance sheet, the potential implications of CECL coming on the heels of more stringent capital requirements, the potential implications of breaching stated CRE concentration thresholds, possible succession considerations as you and your Board look to the future, and the increased regulatory burden across just about every aspect of your business.
Please do not hesitate to reach out to me and/or my colleagues at Austin Associates if we can be of any assistance as you take your organizations forward. With the third quarter earnings releases hitting the market in the coming weeks, please call me if you would like an unbiased sounding board and discreet discussion regarding your shareholder communications –any dialogue will be kept confidential, and I am happy to proffer an opinion utilizing my background within the equity research and capital markets arenas. In the interim, my best wishes for continued success.