The landscape of the banking industry in the United States continues to be highly concentrated when looking at asset sizes, but with the vast majority of the depository institutions continuing to be smaller institutions. As of June 30, 2019, approximately 84% of the assets held by depository institutions are held by less than 3% of U.S. banks.

85% of the banks in the United States, or 4,511 institutions, have less than $1 billion in total assets. 73% (or 3,855 institutions) have less than $500 million in total assets. 53% (or 2,799 institutions) have less than $250 million in total assets. 23% (or 1,230 institutions) have less than $100 million in total assets.

The concepts reflected above aren’t new. We showed the same thing in our Landscapes as of the end of 2016 and the end of 2017. In both of those reports, we attempted to look at the historical trends of consolidation (and that trend certainly continues). But this year, we’re taking a different tack and trying to dig deeper into the FDIC data. All of the data presented is based on the underlying data in the FDIC’s Statistics on Depository Institutions as of June 30, 2019.

As with all statistical reports, I’m well aware that all statistics can be massaged, with relatively innocuous adjustments, to tell different stories. Certainly, extremes can disrupt averages and otherwise minimize the value of the outcomes (or suggest that median or modal outcomes are more important than mean outcomes). Even if you never took a statistics class or have blocked all statistics concepts from your mind, I encourage you to check out Planet Money’s Modal American episode. The modal U.S. bank would have total assets of between $100 million and $250 million, would be taxed as a C-corporation, have a holding company and be a state-chartered, non-member bank. By comparison, the “average” bank would be $3.4 billion and the media bank would be the $228 million Bank of the Lowcountry, in Walterboro, South Carolina.

I am also reminded that no bank desires to be “average,” nor are investors generally looking for an “average” return. That said, I believe there is value in understanding what average is, and recognizing that expectations should be different for different institutions.

I have not attempted to adjust for pending mergers (or mergers completed subsequent to June 30, 2019). Except as noted below, I have also not attempted to distinguish between different banking business models, although that certainly can affect the number of branches and employees. I did remove the nine insured foreign branches, as such branches have minimal impact on the overall banking landscape and otherwise don’t report much of the financial data being analyzed to the FDIC.

Profitability

As the industry continues to consolidate, and the costs of remaining independent and the efficiencies of scale are frequently mentioned as driving forces to consolidate, it should come as no surprise that larger institutions have generally enjoyed stronger profitability during the first six months of 2019.

Digging even deeper, the profitability drop-off is the greatest as you dive into the smallest institutions, with those under $100 million averaging less than a 1% return on assets.

Capital Levels

While capital levels shouldn’t affect the asset-based return calculations, part of the explanation for the lower return on equity is most certainly higher capital levels being maintained by smaller institutions.

And once again, the smallest institutions have even higher average capital ratios, with banks under $100 million in assets averaging a 14.9% leverage ratio, a 33.4% Tier 1 risk-based capital ratio, and a 33.3% common equity tier 1 capital ratio.

These higher capital levels are also often supported by higher loan reserves, with the average allowance to total loans increasing from 1.03% for banks over $10 billion, to 1.11% for banks between $1 and $10 billion, to 1.22% for banks between $500 million and $1 billion, to 1.36% for banks under $500 million. (And with banks under $100 million having reserves equal to 1.47% of their total loans.) (Note: some of this discrepancy may be explained by purchase accounting rules, which are more likely to depress allowance figures for larger institutions – as they are more likely to have completed acquisitions.)

Structure

While the utility of a holding company remains a hot topic (at least among the people I hang out with), from a practice perspective, the vast majority of institutions of all sizes continues to have a holding company.

If one removes federal and state savings associations from the data (reflecting that a thrift holding company is different than a bank holding company), the percentages with a holding company increase further (94% for institutions from $1 to $10 billion, 92% for institutions between $500 million and $1 billion, and 84% for institutions under $500 million).

While most institutions are taxed as regular C-corporations, the absolute number of S-corporation banks with assets under $500 million exceeds the total number of banks (regardless of tax election) with assets over $500 million.

Branches

Trying to analyze the branch data is difficult, as it is strongly affected by institutions with business plans that support a particularly small number of branches, particularly with regard attempts to measure assets or employees per branch. The Adjusted Branch figure below only looks at institutions with at least 6 branches. Digging further into these numbers may be worthy of a future post.

Employees

Like total assets, employees in the banking industry are concentrated with the larger banks, although not quite as concentrated as assets. Approximately 35% of bank employees work for one of the four largest institutions, with over 75% of bank employees working for institutions with at least $10 billion in assets.

For institutions under $100 million in assets, on average they have 15 employees, necessarily meaning that each employee needs to wear a lot of hats.

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